Chapter

Members in Balance of Payments Surplus

Author(s):
International Monetary Fund
Published Date:
January 1982
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Order in international finance is not a problem confined to members that are in difficulties because of their weak balance of payments or reserve position. The problem involves members in surplus as well, but what can be done to encourage these members to collaborate in the cause of order is less obvious than what can be done to encourage members whose difficulties compel them to seek resources. It will be recalled that the decision of March 2, 1979 reminds members of the original concept of a stand-by arrangement as a precautionary instrument.94 A member in surplus in its balance of payments and with comfortable monetary reserves is not disqualified from requesting a stand-by arrangement, although it will have no need to make purchases while it remains in that condition. It may find a stand-by arrangement useful, even if it makes no use of the Fund’s resources throughout the whole period of the arrangement, because it has received a public endorsement of its policies that may be welcomed by banks and other lenders. Stand-by arrangements approved by the Fund for these members have sometimes been called symbolic.

The public endorsement of a program as a demonstration to lenders has not been the only motive for requesting such a stand-by arrangement. A member may wish to have the policies of its monetary authorities supported so that they will be in a better position to resist pressure from sections of the government to follow policies that might disturb the economic well-being of the country. Some members in surplus have made requests for successive stand-by arrangements over a period of years because they feared that an interruption would create the mistaken impression that the member’s relations with the Fund had deteriorated.

In the past, symbolic or precautionary stand-by arrangements have had their critics who feared that purchases might be made without need, but there is no evidence of a substantial misuse of this character. In some instances, however, a need for resources has developed but members have been reluctant to obtain them under these arrangements because the members have been apprehensive that purchases would suggest a serious weakening of their position.

To give members in surplus the benefit of the Fund’s moral support when they are following unexceptionable policies, it has been suggested from time to time that the Fund might develop a form of certificate as a substitute for symbolic stand-by arrangements. According to this suggestion, the Fund would examine a member’s policies and issue a statement that the member was following policies that were consistent with the Fund’s Articles and policies. The member would be able to make whatever use of the statement that it wished. On a few occasions in the past, the Managing Director has provided a member with a letter of this kind.

A possible procedure that has been outlined to give effect to the suggestion would involve presentation to the Fund of a letter in which a member sets forth the program it was following after the same kind of consultation that precedes the approval of a stand-by arrangement. After considering the report of the Fund’s mission on its discussions with the member, the Executive Board would decide, if that was its conclusion, that the program was in conformity with the purposes and policies of the Fund. The Executive Board might even decide that the member could count on a stand-by arrangement if the member continued to observe the program and if the normal procedures for stand-by arrangements were followed. The original letter would not contain performance criteria. The quantification of elements in a program is often difficult and might deter members in surplus from engaging in the suggested practice. Performance criteria would be established, however, if later the member were to request a stand-by arrangement covering the higher credit tranches.

Proposals of this kind have not succeeded for a number of reasons. The requirement of a further negotiation and a further decision of the Fund if a stand-by arrangement were to be requested might reduce the credibility of the Fund’s initial endorsement. If, however, the Fund’s compliance with a request for a stand-by arrangement were to become routine because of a presumed moral commitment, the Fund’s conditionality might be undermined. Another objection has been that the Fund’s endorsement of a program without approving a stand-by arrangement might create the impression that the sole purpose of the endorsement was to induce potential lenders to provide their resources. In addition, there has been anxiety on the part of some officials that the practice might result in fewer requests for stand-by arrangements, which they consider a superior instrument for achieving order in international finance.

Since the Second Amendment of the Articles, the Fund’s relations with members in surplus have been treated largely as an aspect of the surveillance that the Fund must exercise under Article IV of the Articles. An objective of surveillance is a greater symmetry between the position of members in deficit that use the Fund’s resources and the position of members in surplus. Under Article IV, the Fund must oversee both the international monetary system, in order to ensure its effective operation, and the compliance of each member with its obligations regarding exchange arrangements.95 To fulfill these functions, the Fund must exercise firm surveillance over the exchange rate policies of all members.96 One of the decisions of the Fund that establish the principles and procedures for surveillance emphasizes that the principles and procedures “apply to all members whatever their exchange arrangements and whatever their balance of payments position.”97

The same decision describes certain developments that create a presumption of the need for special discussion between a member and the Managing Director on whether the member is observing the Fund’s principles for the guidance of the exchange rate policies of members. Some of these developments may have more particular relevance to members in surplus. The developments include, for example, protracted large-scale intervention in one direction in the exchange market, excessive and prolonged short-term official or quasi-official lending for balance of payments purposes, and the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital.98

At the Annual Meeting of the Fund’s Board of Governors in 1979, the Secretary of the U.S. Treasury, as Governor for the United States, made the following proposal:

Under the amended Articles, Fund surveillance—surveillance over members’ general economic policies as well as exchange rate policies—is the centerpiece of international monetary cooperation. Without effective surveillance, there is no system. The Fund has moved cautiously and prudently in implementing its surveillance procedures. Bolder action is now required …

Another possibility would be to provide that any nation with an exceptionally large payments imbalance—deficit or surplus—must submit for IMF review an analysis showing how it proposes to deal with that imbalance. Now, only those countries borrowing from the Fund have their adjustment programs subjected to such IMF scrutiny. Greater symmetry is needed.99

He repeated his proposals at the Annual Meeting in 1980.100

These proposals are different from proposals made in the past that have suggested a procedure for the endorsement of programs. The Secretary’s initiative contemplated a discussion in the Fund of a member’s analysis of its position and policies if the member had an exceptionally large surplus or deficit in its balance of payments, even though it was not intending to request a stand-by arrangement. The Fund’s endorsement of policies was not part of the proposal. In the 1980 Annual Report of the Fund, the Executive Board agreed that the Fund “should continue to monitor closely the policies of countries where exceptionally large payments imbalances occur or appear likely to occur,”101 but the Executive Board concluded that, at least for the time being, new procedures were unnecessary.

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