Stand-By Arrangements and Initiative
- International Monetary Fund
- Published Date:
- January 1982
Numerous official and nonofficial experts have expressed the concern that the private provision of resources to governments for balance of payments purposes or for the augmentation of reserves may be, or has been, detrimental to broader interests of the international monetary system. These experts have attributed the prolongation of maladjustment in balances of payments and the unmanageable burden of external debt to the ease with which this financing has been obtainable. Nobody has stated this concern more vigorously than Mr. Arthur F. Burns, who, when Chairman of the U.S. Federal Reserve Board, advocated steering governments to the International Monetary Fund (“Fund”) as a solution.
The Fund approves a stand-by arrangement or an extended arrangement for the benefit of a member country (“member”) of the Fund only if the member presents to the Fund a letter of intent in which it sets forth a program of financial and economic adjustment that is likely to solve a present, or to fend off a possible, balance of payments or reserve problem. The member’s letter of intent is annexed to the stand-by or extended arrangement, and the two documents are interrelated in various ways.
The Fund’s Articles of Agreement (“Articles”) define a stand-by arrangement as “a decision of the Fund by which a member is assured that it will be able to make purchases from the General Resources Account in accordance with the terms of the decision during a specified period and up to a specified amount.”1 The purchases are of the currencies of other members or of the Fund’s holdings of the monetary reserve assets called special drawing rights (SDRs). A purchase is made in return for the purchasing member’s currency. An extended arrangement is a variant that is in use for the purposes of a particular policy of the Fund. Whenever stand-by arrangements are mentioned in this pamphlet, the reference should be understood to embrace extended arrangements also unless the context precludes this understanding.
Mr. Burns has said:
As the number of countries brought within the reach of the Fund’s influence increases—either because of the enticement of enlarged lending facilities or because an IMF “certificate of good standing” becomes essential to further borrowing from private lenders—the outlook for correction of balance-of-payments deficits would be considerably improved. But that outcome will also depend on full appreciation by private lenders of the need to avoid actions that tend to undercut Fund efforts…
The suggestions I am exploring with you for improving the adjustment process obviously will not work unless broadly shared agreement develops that international financial affairs require a “rule of law” to guide us through the troubled circumstances that now exist. Such a rule cannot be codified in detail, but it is essential that there be broad agreement that parochial concerns will be subordinated to the vital objective of working our way back to more stable conditions in international finance. And if the IMF is to play a leadership role in pursuing this objective, it is not only private parties that must avoid weakening the IMF’s efforts. Governments also—indeed governments especially—must be prepared to forgo their own quite frequent inclination to do things inconsistent with the effective pursuit of Fund objectives. There have been too many instances in which the government of a country negotiating a stabilization program with the Fund’s officials has attempted to circumvent the Fund by seeking instead a loan from another government or by exerting outside political pressure on Fund officials in an effort to make loan conditions as lenient as possible. If the rule of law in international monetary affairs is ultimately to prevail, all countries—there can be no exceptions—must fully respect the IMF’s integrity.2
There is no obligation on members to turn to the Fund at any time with a request for the use of its resources. The negotiators of the original Articles were careful to emphasize that a member’s transactions with the Fund would take place “on the initiative of such member.” This principle remains unchanged in the present Articles.3 By giving the Fund no power of initiative, it was intended to enable a member to take advantage as it saw fit of other opportunities to raise resources. The objective, however, was not only to safeguard a member’s freedom of action but also to reduce a possible strain on the Fund’s resources. There have been times when the concern of officials or others preoccupied with the functioning of the international monetary system has been that too little strain was being put on the Fund’s resources.
The absence of initiative on the part of the Fund must be understood to mean that no organ of the Fund can take a decision that a member must request the use of the Fund’s resources. Discussions with a member to explore the desirability of a request are not precluded. As long ago as February 13, 1952, the Executive Board of the Fund endorsed the Managing Director’s statement that:
The Fund itself might take the initiative in discussing with one or more members transactions which it believes suitable for the Fund and helpful to the members concerned.4
In this context, the “Fund” meant the Managing Director and staff, acting in accordance with the general policies adopted by the Executive Board.5
The statement in the early decision has been echoed by the Executive Board’s decision of March 2, 1979 on the use of its resources and stand-by arrangements.6 This decision is the most recent general statement of policy on these matters. Much of the decision deals with the programs for adjusting balances of payments that members are expected to follow in order to qualify for use of the Fund’s resources under stand-by arrangements. The word “conditionally” refers to the standards applied by the Fund in evaluating programs. A purpose of the decision as a whole is to encourage members to request stand-by arrangements. This aim is pursued not only by codifying and clarifying the Fund’s established practice but also by incorporating new elements in it that were of particular interest to developing members. One of the new elements is an explicit invitation to members in the first paragraph of the decision:
Members should be encouraged to adopt corrective measures, which could be supported by use of the Fund’s general resources in accordance with the Fund’s policies, at an early stage of their balance of payments difficulties or as a precaution against the emergence of such difficulties. The Article IV consultations are among the occasions on which the Fund would be able to discuss with members adjustment programs, including corrective measures, that would enable the Fund to approve a stand-by arrangement.7
The reference to “general resources” is to the resources of currencies and SDRs held by the Fund in the General Resources Account of the General Department. The transactions that are the subject of this pamphlet are conducted through that Account. When “resources” are mentioned, they should be understood to be the “general resources” unless it appears from the context that the word has another meaning.
In drafting the paragraph quoted above, the Executive Board was aware that if a member in difficulties delays the initiation of a corrective program, the member may be intensifying its difficulties, so that eventually more strenuous measures are needed than would have been necessary if adjustment had been undertaken at an earlier date. The severity of the measures that have been applied as the result of delay has contributed to the misleading impression that the Fund’s conditionality is intrinsically and inevitably severe. This impression has hindered prompt adjustment by delaying an approach to the Fund and has made it necessary sometimes to apply the kind of stringent measures that are mistakenly thought to be the invariable prescription of the Fund whatever a member’s circumstances might be.8
The decision of March 2, 1979 relates the initiative that can be taken to discuss a request for use of the Fund’s resources to Article IV of the Articles, which deals with exchange arrangements. Under the provisions of Article IV, the Fund consults with members, in principle annually, on their exchange rate and other policies.9 The decision states that on these occasions the Fund’s consultation mission and representatives of a member might discuss the desirability of a stand-by arrangement. The discussion would deal with “adjustment programs, including corrective measures.” The drafting of this clause deserves emphasis because it was intended to encourage requests for stand-by arrangements by conveying the message that a member might already be pursuing the policies necessary to achieve or maintain a sustainable balance of payments and reserve position. “Corrective” policies—that is, policies differing from those already in effect—are unnecessary in these circumstances. Another misapprehension is that the Fund’s prescription always urges the innovation of policies and never the maintenance of those already in operation.
Another consequence of belated requests for financial assistance is the belief that members take this step only when their situation has become desperate. Stand-by arrangements were not conceived solely or even mainly to assist members that had been overtaken by difficulties. It was understood that stand-by arrangements could be a precaution against the emergence of difficulties. Moreover, it was not necessary that future difficulties had to be inevitable or probable. The decision of February 13, 1952, which has been the source of much of the Fund’s financial practice, emphasized only the precautionary character of stand-by arrangements:
Sometimes a member may want to submit to the Fund a specific request for drawings, with adequate information as to the particular situation which prompts the request. At other times discussions between the member and the Fund may cover its general position, not with a view to any immediate drawing, but in order to ensure that it would be able to draw if, within a period of say 6 to 12 months, the need presented itself.10
A purpose of the Fund is “to give confidence to members by making the general resources … temporarily available to them….”11 Authority to invent the stand-by arrangement, in contrast to the immediate purchases that were the explicit subject matter of the Articles, was derived in large part from this purpose of the Fund. The assured availability of resources under a stand-by arrangement can provide a member with the confidence to follow present policies or to introduce corrective policies if they are necessary or if they become necessary. Not until the Second Amendment of the Articles became effective on April 1, 1978 was there a mention of stand-by arrangements in the Articles.