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Finance & Development, June 1981
Article

Technical assistance from the Fund: Central Banking Department: Increasing demand for advice has shaped this important Fund activity

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1981
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P. N. Kaul

Since its inception, the principal objective of the International Monetary Fund has been to strengthen the international monetary system, ensuring thereby balanced growth of international trade, high levels of employment and real income, and full utilization of productive resources in member countries. The Fund promotes this objective by permitting its members to make use of its financial resources in times of need while encouraging members to pursue monetary, fiscal, and other policies that will contribute to the steady, stable growth of their economies. However, in developing countries, implementation of the desired policies often necessitates the complementary development of an appropriate financial infrastructure and administration.

Recognizing these needs, the Fund, soon after it commenced operations, began to offer technical assistance and advice to member countries requesting it. Over time this function has become an integral part of the Fund’s activities. Initially, technical assistance was provided on an ad hoc basis, in conjunction with the Fund’s regular consultations or by sending special teams into the field. Later on, the Fund provided its members with training facilities in financial analysis and balance of payments (BOP) concepts at its headquarters in Washington, D.C. Because of the sharp increase in Fund membership in the late 1950s and particularly the early 1960s, when numerous countries gained political independence, the prevailing arrangements for providing technical assistance required enlargement. Newly emerging member countries urgently needed a variety of technical assistance services to enable them to manage their economies more effectively. In order to meet this need, the Fund institutionalized the technical assistance program by setting up three specialized departments: the Central Banking Service—now the Central Banking Department—in 1963, and both the Fiscal Affairs Department and the IMF Institute in 1964.

This article deals with the present functions of the Central Banking Department and portrays how these have evolved, partly under the compulsion of events but largely in response to requests of member countries for new forms of assistance. Between 1964 and 1980, the number of technical experts provided by the Department to member countries has increased sharply; in addition, their areas of specialization have significantly changed. Initially, it had concentrated on providing technical assistance on such matters as the setting up of central banks and monetary authorities, banking and monetary research, accounting, bank inspection and supervision, and foreign exchange control. With the passage of time, the Department’s work has become more diversified and has developed such new facets as advising central banks about their relations with commercial banks, the development of money markets, and the adaptation and refinement of the use of monetary instruments. Thus, the principal activities of the Department now fall into three distinct but interrelated categories: (1) the assignment of experts; (2) the provision of advisory services; and (3) research work in the use of monetary instruments, financial sector development, and other associated issues. In conclusion, the article indicates how the Department’s functions will change in the future.

Assignment of experts

A principal means of providing technical assistance to member countries is borrowing experts from older, well-established central banks and assigning them to member countries whose central banks are in need of assistance. As far as possible, experts are provided according to the specifications and preferences of the member making the request. From the beginning, certain guidelines for administering this program have been followed.

First, experts are assigned only to a central bank or its equivalent, such as a currency board or monetary authority. From the vantage point of a central bank, which constitutes an important organ of a country’s policymaking apparatus and is the leader of its financial system, an expert can make an effective contribution to policy-making—an area in which many developing countries need assistance—and guide the development of the financial system along suitable lines. Where special circumstances have warranted, experts have been assigned to such multinational institutions as the Central American Monetary Council. Assistance has been provided to such organizations because the ultimate beneficiaries have been the central banks of member countries.

Second, the position of experts is well defined. The experts are generally assigned in either an executive or an advisory capacity, depending on the needs of a country. Third, the relationship between the Fund, the expert, and the host institution is also carefully defined. Though the Fund generally contributes a major share of the expert’s remuneration, with the host country’s contribution varying according to its capacity to pay, the experts are responsible to, and work solely under the direction of, the host institution. They are not regarded as employees of the Fund. Since the experts deal with the day-to-day affairs of a central bank, some of which may be sensitive, the Fund decided that the experts should owe their loyalty to the institution to which they are assigned. The Department evaluates the progress of the work done by experts, through correspondence and regular staff visits, and offers advice on technical issues when this is sought by the expert or the central bank.

Changing needs

Currently, there are about 70 experts serving in the field, under the auspices of the Department, in 45 countries. Between 1964 and 1980, the number of man-months of technical assistance provided annually has increased from 24 to 838 (the total number provided during the period was more than 10,000). Such a sharp increase was largely accounted for by the number of countries that attained self-government during the 1960s and 1970s and also by the rise in requests by individual countries for a variety of financial specialists to meet the increasing complexities and technicalities involved in running a modern financial sector.

Equally striking have been the changes in the fields of specialization that experts provide (see Table 1). At the inception of the program, specializations were divided between research and management, with the latter dominating. With the passage of time, the share of management experts in the technical assistance provided by the Department has declined (though it remains quite significant). Reasons for this decline are the growing involvement of the local staff in central banks, expanding education in developing countries, and the accumulation of experience by local management cadres. Its continuation as a major field of specialization is largely due to the emergence of new financial activities and institutions in a number of member countries that has led to requests for assistance.

Table 1.Central Banking Department: technical assistance provided by experts in specialized fields 1(In per cent)
Specialization196419701980
Accounting9.26.7
Statistics1.64.3
Research34.723.522.6
Training5.6
Management65.330.722.0
Operations5.36.9
Bank supervision13.523.1
Foreign exchange4.310.7
Organization3.32.3
Others3.01.4
100 0100.0100.0
Source: Central Banking Department, IMF.—Indicate no services were provided.

The services of experts attached to the Department measured in man-months are as follows: 1964: 24.5 man-months; 1970: 582 man-months; 1980: 838 man-months.

Source: Central Banking Department, IMF.—Indicate no services were provided.

The services of experts attached to the Department measured in man-months are as follows: 1964: 24.5 man-months; 1970: 582 man-months; 1980: 838 man-months.

Experts in research and statistics have accounted for over one fifth of the program throughout the period 1964-80. This is easy to understand, since in a large number of developing countries that gained independence, the levels of education, particularly higher education, and the experience that senior staff of central banks have in research matters have been limited. It has, therefore, been difficult to generate local researchers. Furthermore, in regard to developing research capability, “learning by doing”—which is what the Fund’s technical assistance program tries to promote—is a relatively slow process. Thus, the progress made by experts in this field may be slower than the progress that can be made in other fields of specialization.

Aside from management and research, bank supervision has recently emerged as an important specialization. In 1980, it accounted for about 23 per cent of total man-months worked by experts, almost twice its share of the 1968 total. As a country’s financial system develops and diversifies, control and supervision tend to shift to the center of financial management policies. This occurs because the operations of the established institutions, if they are to serve the social goals of the country concerned, need to be monitored and directed. Further, an increase in the number of new banks, as an economy grows and becomes more competitive, requires close vigilance by bank supervisors. What has emerged from the Department’s experience in administering its expert assistance programs over the last 16 years is the conclusion that research, management, and bank supervision will be the dominant areas in which experts will be required in the years to come.

The geographical distribution of technical assistance provided by experts is evident from the Chart. In 1980, Africa had the largest share, while Asia, Latin America and the Middle East claimed roughly equal shares. This regional distribution can be explained, in part, by the differences in the number of new central banks established in the various regions and by the differences in the degree of development of their financial infrastructures.

Central Banking Department: regional distribution of technical assistance provided by experts

(In man-months)

Source: Central Banking Department, IMF.

1 Includes Cyprus, Malta, and Turkey.

Experts selected by the Department are generally drawn from the central banks of member countries, academia, and (only occasionally) from the ranks of the Fund’s staff. By and large, however, reliance has been placed on central banks as a major source, for the obvious reason that practical experience in central banking proves very useful in assisting the host institution. In the research field, however, some academics have been found to be well suited in view of their familiarity with modern trends in banking and monetary theory.

A further aspect of the recruitment of experts is reflected in Table 2, which traces the origin of experts, who have been drawn from both developing and developed countries. The proportion of experts drawn from the former countries has increased from 28 per cent in 1969 to 43 per cent in 1980. Experience has shown that interchange of experts among developing countries has been rewarding because of the similarity of their environments, problems, and possible solutions. Considering that experts have been provided to member countries as far as possible according to the latter’s specifications and preferences, it may be surmised that commonality of experiences is at least as important in the reckoning of developing countries as their desire to imbibe the fruits of scientific progress in the developed countries.

Table 2.Central Banking Department: sources of experts providing technical assistance1
196919751980
Number of experts64991002
Developing countries184243
(28)(42)(43)
Developed countries465757
(72)(58)(57)
Number of recipient
countries263336
(100)(100)(100)
Source: Central Banking Department, IMF

Percentage distribution in parentheses.

There were 102 assignments filled by 100 experts.

Source: Central Banking Department, IMF

Percentage distribution in parentheses.

There were 102 assignments filled by 100 experts.

Judging the experts program by the yardstick of its direct usefulness to the countries for which the experts have worked, the program on the whole appears to have been successful. Experts have, with a few exceptions, adjusted to the local environment, conducted expeditiously the tasks allotted to them, and seem to have offered advice well suited to the prevailing economic and financial conditions. However, this success may be somewhat offset if the program is judged according to whether or not it has made the recipient countries self-reliant. There have been several cases where experts’ assignments, having accomplished their objectives, have been phased out. In some other cases, countries have come to rely increasingly on experts, mainly because it has not always been possible for the assigned experts to train local counterparts to take over completely from them in as short a time as desired. The causes of this phenomenon are, however, endemic to the social, economic, and political milieu in the countries receiving experts. Nevertheless, the Department can help to alleviate them, albeit modestly.

Advisory services

At the request of members, the Department provides advice on a wide range of financial subjects. It generally undertakes this function in collaboration with the area departments of the Fund, which have firsthand knowledge of the member countries, and with other departments of the Fund, as appropriate. In addition, the requests for advice may touch on areas of interest to other institutions such as the World Bank and its affiliate, the International Finance Corporation. Therefore, the Department participates in joint missions with these institutions. Such close and continuing cooperation between the various departments of the Fund on the one hand, and between the Fund and other international organizations on the other, helps to create a pool of accumulated experience, knowledge, and expertise, while avoiding overlapping of activities and consequent waste of resources.

In its early stages, the Department’s advice was sought on the establishment of new central banks and the drafting (in conjunction with the Fund’s Legal Department) of central bank statutes. This work grew to embrace other banking legislation as the financial systems of member countries expanded and became more complex. Gradually, other matters of financial development and policy were included in the scope of advisory work. Now, the Department’s advisory activities cover virtually the whole gamut of issues relating to the development of a financial sector. These issues range from the internal organization of a central bank, the reform of a country’s banking structure, the relationship between central and commercial banks, multipurpose banking, pros and cons of offshore banking to monetary unions, regional cooperation among central banks, and the establishment and operation of forward foreign exchange markets. They include the relative effectiveness of various monetary policy techniques, such as interest rates, selective credit controls, and the development of money market instruments (see Table 3).

Table 3.Central Banking Department: advisory services provided1(In per cent)
Service provided196519681970197319751980
Legislation220.038.337.635.823.129.4
Financial system315.023.428.635.820.417.5
Central bank structure,
organization, and
operations27.517.033.819.239.844.4
Central banking policies and
techniques421.37.43.2
Monetary arrangements537.55.64.8
Assessment and exploratory
missions9.23.70.7
100.0100.0100 0100.0100.0100.0
Source: Central Banking Department, IMF.—Indicate no services were provided.

The advisory services provided by the Department measured in man-months are as follows: 1965: 10 man-months; 1968: 11.75 man-months; 1970: 19.25 man-months; 1973 : 54.5 man-months; 1975: 27 man-months; 1980: 31.5 man-months.

Legislative projects are generally undertaken jointly with the Fund s Legal Department.

Including reform of financial system, capital and money markets, offshore banking, statistical reporting, and bank supervision and regulation.

Including structure of interest rates, savings mobilization, and monetary instruments and techniques.

Including studies relating to establishment of new monetary authorities.

Source: Central Banking Department, IMF.—Indicate no services were provided.

The advisory services provided by the Department measured in man-months are as follows: 1965: 10 man-months; 1968: 11.75 man-months; 1970: 19.25 man-months; 1973 : 54.5 man-months; 1975: 27 man-months; 1980: 31.5 man-months.

Legislative projects are generally undertaken jointly with the Fund s Legal Department.

Including reform of financial system, capital and money markets, offshore banking, statistical reporting, and bank supervision and regulation.

Including structure of interest rates, savings mobilization, and monetary instruments and techniques.

Including studies relating to establishment of new monetary authorities.

The provision of advisory services by the Department, measured in man-months, increased from 10 man-months in 1965 to a peak of 54.5 man-months in 1973 and has declined somewhat to 31.5 man-months in 1980. The changes in the level, as well as the relative share, of each category reflect the changes in requesting countries’ needs for this kind of assistance. On the whole, advice on legislation and studies related to financial systems and central bank structure have accounted for nearly nine tenths of the man-months of advisory service, reflecting the requesting countries’ needs in these areas. As its economy expands and its financial institutions develop, each country feels the impact of economic interdependence and the complexity of the problems involved, which leads them to seek advice promptly. Present indications are that this area of work is likely to grow in the future.

Research

With the expansion of its area of operations, the Department’s research activities have become more specialized and the range of topics covered has widened. Initially, the research was confined to studies on monetary policy techniques in developed countries. From these studies, it was hoped, countries availing themselves of technical assistance could draw lessons. Gradually, the scope of research has significantly changed to cover an array of subjects relating to the economic and financial development of developing countries.

The principle governing this research is that it should complement the Department’s advisory work. Research work is helped, particularly in its policy aspects, by insights and first-hand experience gathered during advisory missions. Without such complementary research, the advice offered to member countries would merely consist of policy prescriptions derived from preconceived theories that might or might not be appropriate for the member’s economic circumstances.

The Department’s research activities have generated studies on the problems of developing countries in a wide variety of areas. These include the financial intermediation process, efficiency and cost criteria for the banking system, the money supply process, the money demand function, selective credit controls and other allocative financial policies, the rationale and management of interest rate policies in developing countries, multipurpose banking, bank adequacy, offshore banking, concentration measures in banking, and a number of other issues relevant to financial institutions and policies. The results of the research are often used in the recommendations embodied in advisory reports. Most of the studies have been published, for the benefit of a wider readership, in established academic journals and the Fund’s quarterly journal, Staff Papers.

Future evolution

As this article indicates, the Central Banking Department has responded flexibly to the requests made by member countries. Countries have come to rely on it for technical assistance, whether it involves assigning experts, providing advice on financial policies and development, or conducting supportive research. In the process, however, the Department has come across certain lacunae in its work. One is the need to pool the whole spectrum of data on member countries’ comparative financial systems into an up-to-date data bank from which information on all countries can be extracted and used. Another gap is the inadequacy of training arrangements for central bankers in operational, as distinct from economic or theoretical, aspects of central banking. The Department will, therefore, endeavor to move, in conjunction with other departments of the Fund, in two new directions: (1) creating a data bank to meet the need of member countries, and more particularly the developing countries, for information on various facets of financial systems and instruments; and (2) devising some continuing training facilities to assist central banks in developing countries to become self-sustaining and more effective entities. By undertaking these new initiatives, the Department hopes to enhance its usefulness to all member countries, and particularly the developing ones.

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