Journal Issue

Toward monetary stability: A report on the Fund Annual Meeting

International Monetary Fund. External Relations Dept.
Published Date:
December 1975
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Robert S. Franklin and Kenneth S. Friedman

The 1975 Annual Meetings were immediately preceded by the meeting of the Interim Committee on August 31, in which agreement reached on the subjects of gold and quotas was called “a breakthrough” by Fund Managing Director H. Johannes Witteveen and “of great importance” by Interim Committee Chairman John N. Turner. Against the background of that agreement three separate but related themes dominated the discussion at the Annual Meetings. The first was the need to combat recession without aggravating inflation. The second was the immediate needs of the developing countries in the present situation. And the third was the urgency of making further progress toward reform of the international monetary system.

Inflation and recession

Most Governors clearly saw the prolonged world-wide recession and continuing inflation as a major calamity but methods of bringing about recovery from the two ills were not as evident. Mr. Richie Ryan, Governor of the Fund and the Bank for Ireland, expressed the feeling of many that “countries, large and small, have suffered from the performance of the world economy in the last two years. As yet we have inadequate assurance of the arrest of economic decline, still less of early renewal of economic expansion, and no clear vision of the future shape of the world monetary order.” Some Governors, who felt that widely used economic models might not be applicable to the present situation, generally agreed with Mr. Arthur D. Hanna, Governor of the Fund and the Bank for the Bahamas and spokesman for five Caribbean countries, that “the world economy may not merely be in a phase of a purely cyclical movement.” According to Mr. Phagna Leuam Rajasombath, Fund Governor for Laos, this unusual situation posed “extremely serious adjustment problems for the world economy.”

In its communique, issued on the eve of the 1975 Annual Meetings, the Interim Committee had called on the major industrial countries with “slack domestic demand conditions and relatively strong balance of payments positions, and which have made progress in reducing inflation, [to take the] lead in the promotion of a satisfactory rate of expansion in world trade and activity.” The Governors for the Federal Republic of Germany, Japan, and the United States, however, cited the dangers of overheating national economies and re-igniting the fires of inflation as reasons for cautious economic policies that would, in the longer term, they considered, be most beneficial to the economies of the rest of the world. As President Gerald R. Ford of the United States emphasized in his welcoming address to the Governors, “a sound healthy growing United States economy is the best lasting contribution that this nation can make to other nations.” However, a number of Governors shared the view of Mr. Hannes Androsch, Governor of the Bank for Austria, that the most important task before economic planners was “the battle against unemployment.” Mr. Denis W. Healey, Fund Governor for the United Kingdom, was almost alone in feeling that the difficulties involved in fighting both inflation and recession were “sometimes overstated.” He noted that “when output is far below capacity, the reflation of demand—providing it is properly controlled—would draw idle resources into use, and unit costs would fall quite dramatically as the spare capacity is taken up.”

Although industrial countries were asked to lead the battle against inflation and recession, Mr. C. A. Stinson, Governor of the Fund and the Bank for Fiji, emphasized that in order to achieve a “lasting solution” to the present world problems, developing countries should do everything within their own powers to direct their national resources into development programs most likely to meet their own internal needs while stepping up their own productivity. But it was obvious to most speakers that the majority of developing countries could not wait for the benefits of sound economic policy, either in their own countries or in the industrial countries, to surface, and that immediate and generous assistance was needed. Mr. Mwai Kibaki, Governor of the Fund and the Bank for Kenya, who spoke for the African Group, said, “in the face of [the present] unprecedented ‘crisis of development’ African countries have made painful adjustments.” But he emphasized that those endeavors could not by themselves bring about internal and external economic balance. “There is, therefore, a need for urgent action by the international [monetary] community to save African economies from disaster,” he added.

Fund accounts and facilities

In the present uncertain economic circumstances, many Governors believed that all the Fund’s special and regular accounts and facilities should play an even greater role than in the past in meeting members’ immediate needs. The oil facility received most comment. A number of speakers agreed with Mr. Momcilo Cemovic, Governor of the Bank for Yugoslavia, that the “positive experience” in the operation of the oil facility and the growing balance of payments needs of developing countries required its extension beyond 1975. Others referred to what they considered a lack of flexibility in the conditions for use of the facility. Col. Victor Castillo, Governor of the Fund for Bolivia, speaking for 20 countries in Latin America, noted “the diminished use” of the 1975 oil facility because of “more stringent conditions” than in 1974. This took place, he said, “at a time when the problems of developing countries have been magnified by the decline in world demand for their exports and a shrinking of the financial resources needed to spur development.”

The approval by the Fund’s Executive Board of an interest subsidy account to help developing countries to pay charges on oil facility purchases was welcomed by many Governors during the week. Even though several speakers reaffirmed their governments’ commitments to contribute to its financing, Mr. H. Johannes Witteveen, Managing Director of the Fund, noted that it was a matter of urgency to secure further contributions. The creation of the medium-term extended Fund facility indicated, in the words of Mr. Aumua Ioane, Governor of the Fund and the Bank for Western Samoa, “that the Fund is proving responsive to changing requirements of developing countries in the present situation.” Some Governors, however, felt that this facility was limited in its usefulness because of what they viewed as its stringent conditions.

The potentially important role of a special trust fund was noted by many Governors, some of whom expressed the hope that an accord could soon be reached on the precise financing arrangements. However, the Bahamas’ Governor Hanna called for greater flexibility than had been proposed to “give access to [developing] countries which now fall in the middle-income group.”

Widespread support was expressed for improving the compensatory financing facility so that, in the words of Bolivia’s Governor Castillo, “it will be possible to provide aid as the [export] shortfall occurs, and to apply it to other balance of payments items.” Governor William E. Simon of the United States went a significant step further in putting forth a proposal for a development security facility in the Fund to “replace the existing compensatory financing facility,” and he said that a detailed proposal would be submitted to the Executive Directors shortly after the Annual Meetings. In addition, Mr. Rafael Cabello de Alba, Fund Governor for Spain, asked the Fund to help deal with one of the basic problems of the developing countries—”the need to ensure stable prices for basic commodities.” To meet that problem some speakers called for improvement of the terms of the Fund’s buffer stock financing facility, including direct financing of buffer stock schemes. Tan Sri Chong Hon Nyan, Bank Governor for Malaysia, noted that the Fund had already “taken a step forward in allowing the buffer stock facility to float alongside the gold tranche,” thus permitting members to use the facility without lessening their access to other Fund facilities.

Monetary reform process

On the difficult process of reforming the international monetary system—the second major theme at the Meetings—some speakers shared the disappointment of Mr. C. Subramaniam, Fund and Bank Governor for India, “at the slow progress which is being made.” However, Governor Simon of the United States observed that “we have achieved a significant breakthrough … in resolving many of the most difficult … issues before us and in paving the way for a final comprehensive agreement.” Governors would doubtless have agreed with Mr. Witteveen’s conclusion on the final day of the Meetings that “only the issue of exchange rates—admittedly the most difficult and sensitive [of the major reform issues]—now stands in the way of an agreed package of amendments.”

The presence of a wide variety of exchange regimes produced the feeling voiced by Mr. Xenophon Zolotas, Fund Governor for Greece, that “international monetary relations give the impression of being in a state of anarchy.” Yet, although almost all the Governors who spoke on exchange matters ruled out a return to the relatively rigid Bretton Woods system, there was no general agreement on the best way of providing stability and flexibility. Many speakers, especially those from the developing countries, followed Mr. Jean-Pierre Fourcade, Fund and Bank Governor for France, who maintained that a more equitable and stable monetary order meant a return to stable but adjustable parities. “[It is] my deep conviction that generalized floating can only further dislocate the international monetary system and delay economic recovery,” he noted. On the other hand, the U.S. Governor, Mr. Simon, believed that “the basic logic of the par value system implies a world which does not now exist … we need a system that is adaptable and … appropriate for the world as it is today.” Countries must be free to choose their own exchange system, he said.

Liquidity issues

Underscoring the relationship between the recent unchecked and poorly distributed growth of liquidity, the perilous position of many developing countries, and the objectives of world monetary reform, Mr. Ahmed Zandou, Governor of the Fund for Egypt, stated that “the rapid increase in foreign exchange reserves—which have tripled in the last four years—has brought to the fore the question of controlling the growth in the volume of international liquidity coupled with the need for enhancing the role of special drawing rights.” He pointed out that oil importing, developing countries, particularly those most seriously affected, required additional reserves to counteract the “deterioration in their adverse trade balance.” One way of dealing with this nexus of problems would be, in the words of Mr. Carlos Chaves Bareiro, Governor of the Fund for Paraguay, to implement “as soon as possible a link between development financing and allocations of special drawing rights.”

The objectives of diminishing the role of gold in the international monetary system and of providing increased assistance for developing countries were seen to be related by many Governors. Mr. Hans Apel, Bank Governor for the Federal Republic of Germany, welcoming the Interim Committee’s agreement on gold, hoped that “it will soon be possible to utilize a specific portion of the Fund’s gold for the benefit of the poorest among the developing countries—as has been proposed by a number of industrial countries, including those of the European Communities … for the stabilization of [their] export earnings.” Opposition to the Interim Committee’s agreement on disposal of the Fund’s gold was limited but forcefully expressed by Mr. O. P. F. Horwood, Governor of the Fund for South Africa, who commented that “I fail to see how the cause of world financial stability at this moment of monetary history can be served by weakening the Fund’s own liquidity and divesting it of a reserve asset which commands such widespread confidence.” The fears of some developing countries were captured in India’s Governor Subramaniam’s statement that the proposed arrangement for gold would greatly diminish IMF jurisdiction in the future gold policies of industrial countries and might “have the effect of creating a massive amount of new liquidity for a small number of developed countries.”

The need to improve the characteristics of the SDR was commented on by several speakers who, like Mr. Bill Hayden, Fund and Bank Governor for Australia, felt that “the present constraints on the use of SDRs and the obligation to receive SDRs should be removed [to make them] attractive and competitive with other forms of reserve assets.” A proposal to establish a gold substitution account in the Fund was strongly supported by some speakers as a means of converting the gold of members into SDRs. Mr. Willy De Clercq, Bank Governor for Belgium, went further and called for the creation of “a similar substitution account … for reserve currencies, so as to siphon off holdings of these currencies that are in excess of their holders’ needs and may therefore constitute a menace to the stability of international monetary relations.”

Structure and role of the Fund

Many Governors spoke about the means by which the structure and role of the Fund should evolve to meet both the immediate and the longer-run needs of its members. The significant progress made by the Interim Committee on the Sixth General Review of Quotas was commended by a number of Governors; the changes in the quota structure and the distribution of voting shares would, in the words of Mr. Mohamed Ahmed Al-Gunaid, Fund Governor for the Yemen Arab Republic, be “commensurate with [the] rapidly growing economies and increasing share in world trade” of the major oil exporting countries, while maintaining the share of the developing countries in general. In addition, some speakers shared the hope of Mr. Abdullah Malikyar, Bank Governor for Afghanistan, that the comprehensive draft amendment of the Articles of Agreement “will be finalized at the earliest possible time, so that certainty and order in international economic relations can be established.”

“A productive week”

“This has been a productive week,” Mr. Witteveen was able to declare in his closing remarks. Although no clear solution was seen to the economic problems facing the world, and Governor Healey of the United Kingdom warned that any actions taken now would have no visible impact until mid-1976, progress was made on questions of gold and quotas. Furthermore, the anticipated amendment of the Articles of Agreement of the Fund would, as Canada’s Governor, Mr. Turner, noted, clear the way for the Interim Committee to devote more of its time to dealing with the “crucial questions of our age—inflation, unemployment, poverty, and the future of the Third World.”

Quoting one of his favorite poems, Japan’s Governor Ohira said, “there are always mountains further beyond the mountain before us.” Nonetheless, the wide-ranging discussion of world economic problems with particular emphasis on the plight of developing nations led Mr. Gumersindo Rodriguez, Governor of the Bank for Venezuela and Chairman of the Boards of Governors of the Bank Group to an optimistic conclusion: “The Meetings have reaffirmed the decision that man shall not be held back in his struggle to win prosperity and material well-being, the undeniable basis of social and spiritual progress.”

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