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Finance & Development, September 1980
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Fund activity: de Larosière outlines Fund role in present global economy; A Annual Meetings in Washington, D.C.; budgeting seminar; Fund transactions

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1980
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Fund ready for “increasing role” in recycling through “flexible and sensible use of its resources”

The Fund’s Managing Director, Mr. J. de Larosière, told the Economic and Social Council of the United Nations in an address in Geneva on July 4 that “the Fund stands ready to assume an increasing role in recycling and to make flexible and sensible use of its resources for that purpose.” He said that the recent meeting of the Interim Committee had confirmed this line of action and that the Fund will be able to lend in larger amounts than in the past “when appropriate under special circumstances, and to go beyond previously established ceilings in relation to quotas.” “Where problems of a structural nature require it,” he added, “adjustment programs will be able to extend over longer periods than have been typical in the past.” Mr. de Larosière noted that the Fund does expect that the countries to which it lends in relatively large amounts or for unusually long periods will be prepared to meet certain conditions. “This is essential both for preservation of the Fund’s revolving resources and for promotion of optimal adjustment,” he said.

Mr. de Larosière pointed out that net borrowing from the Fund by developing countries began to rise in 1979, when it amounted to US$840 million (against a net repayment of $72 million in 1978). In the first five months of 1980 the Fund’s net lending to these countries accelerated to $1,161 million. Moreover, Mr. de Larosière added, the Interim Committee has endorsed his proposal “to initiate discussions with potential lenders regarding the terms and conditions under which the Fund might borrow to increase its resources, if and when a need to do so arises.”

In his address Mr. de Larosière emphasized the massive shift in the pattern of international payments balances. The current account surplus of the oil exporting countries, which had receded to $5 billion in 1978, rose to $68 billion in 1979 and is projected to reach $115 billion in 1980. Over the same two-year period, the adverse swing in the combined balance of the industrial countries is projected to exceed $80 billion, and the aggregate deficit of the non-oil developing countries on current account is expected to rise by more than $30 billion, to $68 billion. An even larger deficit, of around $80 billion, is likely for the non-oil developing countries in 1981 because of the expected cyclical weakening of demand for their exports.

By far the most worrisome aspect of the recent shift in the distribution of current account balances, in Mr. de Larosière’s judgment, was the greatly enlarged deficit of the non-oil developing countries. “During the 1960s and 1970s, there was a progressive deterioration in the non-oil developing countries’ terms of trade. Brief relative increases in their purchasing power were quickly reversed. It is striking that both in the decade to 1972 and in the subsequent period of rising energy prices through 1979 the secular decline in their terms of trade proceeded at an average rate of 1-1 ½ per cent per annum. On a terms of trade basis, the cumulative loss incurred by the non-oil developing countries in the seven-year period 1973-79 was of the order of $80 billion.”

In this context Mr. de Larosière noted that “although much stress has rightly been laid on the effect of oil price increases on the import bills of developing countries, it should be borne in mind that oil still accounts for only about one fifth of the total imports of the non-oil developing countries. Thus, the current account deficits of the non-oil developing countries have also been raised considerably by the general inflation in countries which export manufactures. Both the import prices and the export prices of the developing countries have been heavily affected by the inflationary process, but one must recognize that the predominant effect on the current account has been negative because their imports are so much larger than their exports.” Turning to the financing of the non-oil developing countries’ deficits, he noted that these countries have borrowed large amounts to finance their development, “but an increasing portion of this borrowing has been absorbed by the rise in the cost, rather than the volume, of their imports. From 1973 through 1979, these countries obtained external financing aggregating more than $300 billion, including some $215 billion of net borrowing plus about $90 billion in aid and other forms of nondebt financing. Of these sums, somewhat more than $60 billion was added to reserves, but nearly $250 billion was used to finance current account deficits. Such financing had to cover not only the cumulative loss of $80 billion resulting from the terms of trade deterioration but also payments of interest on the outstanding debt amounting to well over $60 billion.” Against this general background, he welcomed the successful conclusion the previous week of the UN negotiations for establishment of a Common Fund to promote the stabilization of commodity prices under international agreements and added “I can assure you that the International Monetary Fund will be most pleased to cooperate in every possible way with the new Common Fund.”

Annual Meetings in Washington

The Joint Annual Meetings of the International Monetary Fund and the World Bank will be held this year in Washington, D.C. at the Sheraton Washington Hotel (formerly Sheraton Park Hotel) between September 30 and October 3. The Meetings will be chaired by Mr. Amir H. Jamal, Finance Minister of Tanzania.

The Annual Meetings will be preceded by meetings of the IMF Interim Committee on the International Monetary System on Sunday, September 28, of the Joint Bank/Fund Development Committee (Joint Ministerial Committee of the Bank and the Fund on the Transfer of Real Resources to Developing Countries) on Monday, September 29, and by various regional and other caucuses beginning Friday, September 26.

Mr. de Larosière went on to suggest, against this bleak setting, “a combination of policies that would bring improvement if applied with patience and long-sighted realism.” He warned that “prudent demand management in the industrial countries, vital though it is, will prove insufficient to restore a condition of sustainable noninflationary growth unless it is supported by measures to improve the supply side of the economy. In view of the weak gains in productivity throughout the past decade, incentives for productive investment are badly needed…. Healthy international competition can also contribute to improvement of supply conditions. To assure this contribution, however, current pressures for narrow and short-sighted protectionist measures will have to be sternly resisted.”

“A particularly crucial aspect of supply policies,” Mr. de Larosière noted, “is that relating to the development of alternative sources of energy to permit reduced dependence on oil imports. Pricing policies and investment incentives geared for this purpose deserve the highest priority,” although “special stress must continue to be placed on conservation of energy.”

Mr. de Larosière emphasized that the steadfast implementation of prudent fiscal and monetary policies “is at least as important for many non-oil developing countries as it is for the industrial countries. Maintenance of an expanding flow of imports is vital to sustained growth of domestic investment and total output in most developing countries, and the necessary financing of net imports can be obtained on a continuing basis only by countries whose economic and financial management gives foreign lenders a reasonable sense of security about the repayment of their loans.” It is for this reason, he said, that the Fund attaches such importance to an appropriate blend of adjustment and financing—depending on each country’s individual circumstances—in the approach of non-oil developing countries to their current payments problems. However, Mr. de Larosière cautioned that, “for a number of the poorest developing countries, whose economic growth is still too slow to permit servicing of external debt on prevailing market terms, the only hope for adequate financing is an increase in concessional assistance from official sources.”

Seminar on budgets and expenditure control assesses future problems

The growing complexity of economic management will produce more problems in budgeting and expenditure control in the future. This was one of the major conclusions reached at a two-week seminar on budgeting and expenditure control held by the Fund in Washington from June 9 to June 20. The Seminar was organized jointly by the Fund’s Fiscal Affairs Department and the IMF Institute. It was attended by senior officials from 24 developed and developing countries.

Among the specific areas identified by participants for special attention in the future were control of the growth of personnel, indexed expenditures, and the financial relations between government and public enterprises. Participants felt that government expenditures would have to be adjusted in order to meet economic goals. Therefore, the participants stressed the need for strengthening the budgetary techniques to be accompanied by appropriate policy changes. The importance of international technical cooperation and Fund training in budgeting and expenditure control were highlighted during the Seminar.

Summary of Fund operations in the General Resources Account, January 1, 1977–June 30, 1980(In millions of SDRs)
Transactions197719781979January 1-June 30, 1980
Total purchases3,424.63,744.31,842.81,643.1
Reserve tranche80.02,535.5147.199.7
Credit tranche2,895.3421.0853.1980.9
of which, supplementary financing(—)(—)(205.4)(509.4)
Compensatory financing240.5577.7572.0471.5
Extended facility208.8174.0233.091.0
of which, supplementary financing(—)(—)(101.5)(22.5)
Buffer stock36.137.7
Total repurchases2,936.54,845.24,215.32,147.8
Net purchases1488.1−1,100.9−2,372.5−504.7
Fund borrowing
General Arrangements to Borrow 21,730.0777.3
Oil facility
Supplementary financing facility306.9531.9
Repayment of loans
General Arrangements to Borrow 21,142.1587.9
Oil facility261.81,422.62,218.3459.1
Supplementary financing facility
Net borrowing31,468.2−1,787.42,499.372.8
Source: IMF, Treasurer’s Department.

(−) indicates net repurchases.

Includes Swiss National Bank.

(−) indicates net repayment.

Source: IMF, Treasurer’s Department.

(−) indicates net repurchases.

Includes Swiss National Bank.

(−) indicates net repayment.

Flow of Fund resources to member countries, 1977-801(In millions of SDRs)
June 30
19771978197919801977-80
Gross drawings 23,344.61,208.81,695.71,543.47,792.5
Trust Fund loans152.7652.2560.8575.91,941.6
Gold distribution 3416.9213.0202.941.4874.2
Profits of gold sales distributed to developing countries260.127.9299.7587.7
Allocations of SDRs4,032.64,033.28,065.8
Total3,914.22,334.16,519.96,493.619,261.8
Memorandum item: undrawn balances under stand-by arrangements and extended arrangements as of December 1977-June 30, 1980
2,759.23,175.11,376.03,305.9
Source: IMF, Treasurer’s Department.

Calendar years.

Excluding drawings in the reserve tranche.

Distributed in U.S. dollars converted into SDRs at the prevailing rate.

Source: IMF, Treasurer’s Department.

Calendar years.

Excluding drawings in the reserve tranche.

Distributed in U.S. dollars converted into SDRs at the prevailing rate.

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