- Michael Ainley
- Published Date:
- September 1984
Despite considerable progress toward external adjustment by debtor countries in 1983 and the first half of 1984, the demand for Fund resources may remain at a historically high level, at least through 1986. The problems related to the debt crisis are deep-rooted. They can be solved only over the medium term, in the framework of a sustained world recovery, declining international interest rates, and a dismantling of protectionist barriers. Even if these favorable developments occur, many countries face a long and difficult period of adjustment. To be successful, their efforts will have to be supported by appropriate rescheduling arrangements and by adequate new finance, both from the Fund and from other creditors, encouraged by the Fund’s “seal of approval.”
The extent of these demands on the Fund depends on a number of unpredictable factors, the chief of which are the evolution of the world economy, the changing distribution of members’ surpluses and deficits, and the availability of bank credit. If the present economic recovery becomes more widespread in 1985 and 1986; if adjustment efforts of debtor countries are sustained; and if there is renewed confidence on the part of private and official creditors, the Fund may not have to call on the GAB through 1987-88 (when the next general quota review will take place). This is possible, although not yet probable. Even if only some of these favorable developments occur, the Fund may be able to get by without the General Arrangements. As at mid-1984, the Fund’s liquidity position was much stronger than it had been for several years. Use of Fund resources appeared to be declining from recent peaks; and the maximum limits under the enlarged access policy will be further reduced in 1985.115
On the other hand, the system remains vulnerable to a number of potential shocks. The recovery is not well established in many countries and could falter. Several important debtors are delaying much-needed adjustment measures. Trade barriers pose a real threat to developing countries’ exports and debt-servicing capacities. The banks, in general, remain very cautious about providing new loans to developing countries. There could, therefore, be continuing instability, resulting in heavy demands on the Fund.
If so, the Fund may have to borrow, perhaps on a large scale, or cut back on its lending operations. If the Fund decides to borrow, there may be no realistic alternative to borrowing from the GAB. The chances of further bilateral borrowing from official sources are slim, and market borrowing by the Fund is, at present, opposed by several influential Fund members.
Whether the funds at the disposal of the GAB participants would be readily available to the Fund in such circumstances is a question that cannot be answered precisely in advance. But the indications are that the major participants would be cautious about possible activations for nonparticipants. Their conservative philosophy has already had a considerable impact on Fund policies in 1983 and 1984. Their belief that the enlarged access policy should be phased out completely by 1987 or 1988 is reflected in the successive reductions in access limits. The criteria for access in individual cases are being interpreted more strictly. There has been a marked shift away from three-year extended arrangements to one-year stand-by arrangements. Access to the special facilities has been reduced, in terms of quota, in 1984 (although it will stay the same in 1985); and use of the compensatory financing facility has become more conditional. It is also more likely that the charges for borrowing members will continue to rise following the decision in January 1984 to bring the rate of remuneration, which the Fund pays creditors for use of their quota subscriptions, closer to market levels.
At this stage, therefore, it seems likely that the General Arrangements will be available later rather than sooner, and then only in a real emergency. This is not reassuring to developing countries, particularly since they will not make the decision. Similarly, the Fund cannot know in precisely what circumstances it may call on the General Arrangements, which creates an element of uncertainty in the Fund’s resource planning.
The Fund has, however, lived with such political constraints in the past. More importantly, the radical reform of the GAB, after 20 years of inertia, shows that the major countries are prepared to support the Fund in a crisis. The Fund now has access to a substantial reserve. Whatever their drawbacks, the reformed General Arrangements should help to foster stability and confidence in the system in the period ahead.