Toward orderly world economic growth; Interim Committee reaffirms Fund’s aims
In the first quarter of 1979, the Fund took further steps to enhance its ability to promote orderly world economic growth with reasonable price stability as a means of achieving a stable system of exchange rates. It also adopted several measures designed to make the special drawing right (SDR) the principal reserve asset in the world monetary system. In his speech to the Overseas Bankers Club in London on February 5, the Fund’s Managing Director, J. de Larosière, noted the active role which the Fund was expected to play in achieving these objectives, particularly the “firm surveillance which we are to exercise over members’ exchange rate policies and the monitoring of world economic developments,” so as to “make it possible for us to promote the convergence of economic trends that is necessary for the attainment of external monetary stability. Progress toward the achievement of this objective will facilitate a more rational control of the supply of international liquidity, based on the SDR as the principal reserve asset in the international monetary system. …”
At the end of its March 6–7 meeting in Washington, D.C., the Interim Committee reaffirmed these aims, expressing broad support for measures that the Fund’s Executive Board has adopted, or is actively considering, in furthering these goals. The Committee emphasized the importance of a high degree of economic cooperation and, with this objective in mind, stressed the need for the Fund to maintain active surveillance over the exchange rate and related policies of all members as a means of strengthening the adjustment process.
The Committee also welcomed the recent entry into effect of the supplementary financing facility, which will enhance the Fund’s ability to assist members facing serious payments imbalances that are large in relation to their quotas in the Fund. The Committee reiterated its view that the Fund’s Executive Board should consider the question of a subsidy account that would make it possible to alleviate the burden of these charges on low-income members using the facility.
Welcoming the Executive Board’s decisions under which SDRs can be used for making loans, settling obligations directly, and providing security in the form of pledges and transfers—subject to retransfer, the Interim Committee endorsed the intention of the Executive Board to pursue and complete as soon as possible its work on other types of operations involving the use of SDRs, particularly in swap transactions, forward operations in SDRs, and donations of SDRs. The Committee also endorsed the intention of the Executive Board to consider increasing the number of official institutions that might, as other holders, be authorized to acquire, hold, and use SDRs.
The Committee also considered a report by the Executive Board on a substitution account, to be administered by the Fund, that would accept deposits of foreign exchange from members of the Fund on a voluntary basis in exchange for an equivalent amount of SDR-denominated claims.
New guidelines on Fund conditionality issued
On March 2, 1979 the Fund’s Executive Board adopted a new set of guidelines governing member countries’ drawings of Fund resources under the credit tranches. These new guidelines, which replace a set formulated in 1968, emphasize that in member countries’ consultations under Article IV and on other occasions, the Fund will intensify its efforts to encourage these countries to adopt corrective measures that could be supported by the use of the Fund’s general resources at an early stage of their balance of payments (BOP) difficulties. The guidelines also recognize what has, in fact, been the practice with drawings made in the past two years: for countries facing serious BOP problems, often of a structural nature, the period of adjustment should extend beyond the norm of one year. Stand-by arrangements may extend up to three years in certain cases to mitigate the effect of corrective measures on real incomes and to stimulate a distribution of the burden of adjustment within the member’s economy that is socially and politically more acceptable. Longer adjustment periods have been specifically provided for in the extended Fund facility, which supports programs for up to three years, and in the supplementary financing facility.
The new guidelines recognize that adjustment measures frequently touch upon sensitive areas of fiscal, credit, incomes, and exchange rate policies, as well as on policies concerning trade and payments restrictions, and that governments are rightly concerned about the compatibility of these policies with their domestic social, political, and economic objectives and priorities. The new guidelines have made it clear that in helping member countries to devise adjustment programs, the Fund will pay due regard to these concerns and to the specific circumstances of members, including the causes of their BOP problems. Moreover, performance criteria will normally be confined to macroeconomic variables and to those factors necessary to implement specific provisions of the Fund’s Articles of Agreement or any policies adopted under them. Performance criteria may relate to other variables only in exceptional cases when they are essential for the effectiveness of the member’s program because of their macroeconomic effect.
As has been the practice in the past, the Fund’s Managing Director will recommend to the Executive Board the approval of a member’s request for a stand-by arrangement when, in his judgment, the member’s proposed program is consistent with the Fund’s provisions and policies, and he is confident that the program presented by the member will be carried out. Under certain conditions, this may require the member to adopt certain policies before the stand-by is approved.
The new guidelines provide for flexibility in those cases where a member is unable to set in advance one or more performance criteria for the entire period of the stand-by arrangement. In programs extending beyond one year, for example, provision will be made for a review in order to reach the necessary understanding with the member for the remaining period. In addition, in those exceptional cases in which an essential feature of a program cannot be formulated as a performance criterion at the beginning of a program year because of substantial uncertainties concerning major economic trends, provision will be made for a review by the Fund to evaluate the current macro-economic policies of the member and to reach new understandings if necessary.
The new guidelines also call upon the Managing Director to ensure adequate coordination in the application of policies concerning the use of the Fund’s resources in order to maintain nondiscriminatory treatment among members. The guidelines recognize that the Fund’s policies in this area, as in others, will have to evolve in the light of changing circumstances.
|January 1–March 31|
|Reserve tranche purchases||990.8||80.0||2,535.5||30.0||12.6|
|Credit tranche purchases||1,517.2||2,895.3||421.0||53.3||130.7|
|Compensatory financing purchases||2,268.5||240.5||577.7||98.8||15.9|
|Extended facility purchases||90.0||208.8||174.0||—||54.0|
|Buffer stock purchases||—||—||36.1||—||11.5|
|Oil facility purchases||2,143.4||—||—||—||—|
|General Arrangements to Borrow1||—||1,730.0||777.3||—||—|
|Supplementary financing facility||—||—||—||—||—|
|Repayment of loans|
|General Arrangements to Borrow1||—||—||1,142.1||—||—|
|Supplementary financing facility||—||—||—||—||—|
|In connection with auctions||136.5||211.1||207.1||91.9||49.4|
|Replenishment up to May 31, 1978||(136.5)||(211.1)||(91.9)||(91.9)||(—)|
Flow of transactions in the Fund’s General Resources Account
Finally, the guidelines instruct the Fund’s staff to prepare an analysis and assessment of a member’s performance under programs supported by the use of the Fund’s general resources in the credit tranches in connection with consultations under Article IV of the Fund’s Articles of Agreement and, as appropriate, in connection with further requests for the use of the Fund’s resources. From time to time, the staff will also prepare, for review by the Executive Board, studies of programs supported by stand-by arrangements. These studies will evaluate and compare the appropriateness of the programs, the effectiveness of the policy instruments, the observance of the programs, and the results achieved. Such reviews will enable the Executive Board to determine when it would be appropriate to have the next comprehensive review of conditionality.
Important speeches were made by the Managing Director of the Fund and the President of the World Bank at UNCTAD V, the fifth session of the United Nations Conference on Trade and Development, in May at Manila. The September issue of Finance & Development will report on UNCTAD V and these speeches.
Interim Committee supports study of substitution account by Board
The Interim Committee of the International Monetary System has expressed “broad support” for active consideration by the Executive Board of a substitution account in the Fund that would accept deposits of foreign exchange from members on a voluntary basis in exchange for an equivalent amount of SDR-denominated claims. Such an account would be a further step toward making the SDR the principal reserve asset in the international monetary system. The Executive Board has been asked to present its conclusions on this account to the next meeting of the Committee, which will be in October 1979 in Belgrade, Yugoslavia, just before the next Annual Meeting of the Board of Governors.
The Committee’s discussion of a substitution account was based on a report by the Fund’s Executive Board outlining several possible approaches to the scheme. The Committee held a general review of the topic and agreed on the desirability of further study by the Executive Board. The conclusions, which the Board will present in Belgrade, will cover the magnitude of the account, the liquidity, yield, and other characteristics of the contemplated SDR-denominated reserve asset, the legal aspects of the establishment and operation of the account, and other pertinent technical matters.
In a joint press conference held after the Committee’s March 7 meeting, Chairman Denis Healey, Chancellor of the Exchequer of the United Kingdom, and Fund Managing Director J. de Larosière emphasized that the substitution account should be seen “primarily as a possible reinforcement for the SDR,” and not “as a major contribution to international monetary stability at this time, or as a buttress for reserve currencies which might happen to come under pressure from time to time.” Mr. de Larosière said that there had been “two main poles” initially in the Committee’s thinking. One involved an earlier plan “to issue SDRs in proportion to quotas, against which each receiving country would deposit an amount of currency holdings in an account administered by the Fund.” The other, which now seemed preferable and had drawn considerable support, would be “to work toward a scheme of a more voluntary nature, in the sense that countries could, to the extent that they wished, deposit currency reserves in an account administered by the Fund, and receive SDR-denominated claims in exchange. …”
Mr. Healey expressed the hope that the many complex technical problems relating of the scheme could be solved and that the Executive Board would be able to submit a full report on which the Committee could reach final agreement, leading to the establishment of the account.
Aldo W. Zanzi