5 Some IMF Problems After the Committee of Twenty

Jacob Frenkel, and Morris Goldstein
Published Date:
September 1991
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Alexandre Kafka

This paper sketches the development of the Fund’s regulatory and financial functions since the abandonment of the reform efforts of the Committee of Twenty.1 It comments on possibilities today of strengthening the Fund’s influence over the policies of its members and, thereby, over the working of the international monetary system—being listened to, not necessarily obeyed. The paper eschews discussion of the choice of the global exchange rate system.2

One main conclusion is that the scope of the Fund’s regulatory powers (except over the global exchange rate system), as well as of its financial functions, has been extended. Nevertheless, the Fund has lost influence over the major countries. This is due to the end of the par value system and to the fact that these countries no longer borrow from it. The Fund’s influence over its borrowing members is substantial, if at times controversial. The Fund’s approach to financing has changed in many respects. The number of financing arrangements with the Fund has grown, including, importantly, countries qualifying for concessional finance. Moreover, the Fund has become an increasingly important catalyzer of other institutions’ lending. Nothing suggests that the Fund’s role could be usefully merged at this time into that of any other existing international financial institution. The Fund’s macroeconomic expertise justifies a separate institution. That the Fund to some extent competes in that area with other international financial institutions is neither an argument for a merger nor necessarily a disadvantage. In discussing the Fund one must remember that the term is shorthand for the governments that constitute the international financial community and, more precisely, for the governments holding—on any given decision—the necessary majority of the institution’s voting power.

The second main conclusion of the paper is that without any change in its regulatory powers it might be possible to increase the Fund’s influence through changes in its financing policies. The risks to the Fund should be tolerable. The changes could affect the Fund’s relations with major members as well as other members. They might comprise the practice of conditionality, the cost of Fund credit, and the settlement system. Also, intensified attempts to demonstrate to countries the advantages of cooperation through and with the Fund will be particularly relevant. Success in respect of major countries would undoubtedly be limited at best. Efforts would be needed to overcome at the same time the borrowers’ “adjustment fatigue” and the creditor countries’ “assistance fatigue.”

Section I of this paper discusses the remaining regulatory functions of the IMF. The financial functions of the IMF are discussed in Section II. Section III suggests some means of strengthening the Fund’s influence.

I. The Regulatory Functions of the IMF After the Collapse of the Par Value System

The IMF’s regulatory jurisdiction3 remains ample (despite loss of its legal powers over choice of the global exchange rate system). The Fund maintains its jurisdiction and surveillance over exchange rate policies for the purpose of (1) the prevention of their abuse for achieving “unfair” competitive advantage and (2) for promoting stability and the undefined concept of “a stable system of exchange rates.”4 Exchange restrictions (and aspects of trade restrictions for balance of payments purposes) continue under the jurisdiction and surveillance of the IMF. The rule that restrictions are not to be used, except temporarily, is meeting with increased support among countries of all kinds of economic structures, and irrespective of whether or not they borrow from the Fund—a very important development.

Properly to carry out its functions, under present circumstances, the Fund has extended its surveillance from exchange rates to those “fundamental” policies that are widely believed to determine exchange rates in the longer run. This extension is a natural development. Except in the case of “fundamental disequilibrium,” the par value system had required the subordination of other policies to exchange rate stability. Hence, once that system had been abandoned, a wider scope of surveillance became necessary to assure any kind of stability in the exchange area. There is, however, a distinction between those policies that proximately affect exchange rates—including intervention, where the Fund has adopted guidelines5 designed to avoid short-term abuse of exchange rates—and those policies that influence exchange rates through their effect on underlying conditions. The latter are subject to less close surveillance.6 The replacement of the par value system by mere surveillance through the Fund has had a major impact on the Fund’s influence. This is because the inherent international policy coordination of a par value system that functions has by no means been replaced by deliberate multilateral policy coordination, whether through Fund or other entities’ surveillance.

The Interim Committee (formally an advisory body to the Board of Governors of the Fund, its top authority) is de facto a new decision-making entity at ministerial level.7 Its recommendations can address all matters subject to the Articles of Agreement.8 But the Fund’s jurisdiction is too narrow for some purposes, where “cross-issue” bargaining (comprising issues beyond those under the Fund’s jurisdiction) could be helpful. To the extent this is true, the purposes of the Fund involving multilateral coordination can find support through attempts at coordination of policies in other fora. Such a forum is (or was) Working Party 3 of the Organization for Economic Cooperation and Development. The Group of Seven (as well as fora such as the Group of Three or the Group of Five) appears to have had some successes (e.g., the Plaza and Louvre Agreements); but more recently (i.e., the aftermath of the Stanhope retreat), its objectives and achievements seem to have been modest at best. In any case, the Group of Seven does not necessarily take into account the interests of the entire international financial community. And while the Managing Director of the IMF attends the multilateral surveillance meetings of the Group of Seven, he does not attend all their meetings and may, therefore, not even be able on all occasions to convey the views on the matters under discussion of the member groups not represented. It should also be noted that, since there are almost always divergences between “the majors,”9 wider representation could, on occasion, help in building an effective consensus among them, in addition to protecting the interests of the “non-majors.”

When the Committee of Twenty concluded its work, most academics—and many others—probably thought that its greatest success was its failure to reinvigorate the par value system. Today the matter is, perhaps, seen differently. In any case, however, despite its loss of jurisdiction over the choice of the global exchange rate system, the Fund retains regulatory powers over a wide area of the international monetary system. But the Fund’s influence is more than ever dependent on the material incentives it can offer members by its policies, including its ability to lend its own (and catalyze the lending of other) resources.10

II. The Financial Functions of the Fund

The purpose of the financial functions of the Fund remains11 to lend to members12 so as to give confidence to them to correct balance of payments disequilibrium without resorting to measures “destructive of… prosperity.” Due to the growth of the international capital market, the dichotomy of the membership has acquired major significance: on one hand, industrial countries plus a small if slowly growing number of others that can (again) borrow freely from that market; on the other hand, most developing countries—that depend for their finance mostly on the IMF and other official or private lenders catalyzed by the Fund. (There are, however, official lenders whose relationship with the borrower is primarily political; the Fund’s role could be subdued in such cases.13) An important development is the growing skepticism of Fund creditors on how much the Fund should lend to other members; this skepticism is also reflected in overly cautious quota increases. Among the underlying causes of this attitude, new standards of policy courage expected by Fund creditors from other countries (if not from themselves) could be noted,14 as well as the lack of decisiveness of debtor countries in tackling their problems. One may also mention the length of the debt crisis, due to its initial misdiagnosis as a mere liquidity problem; this in turn delayed debt relief as the unavoidable strategy instead of additional borrowing.

The dichotomy noted has reduced the availability to the Fund of the material incentives that previously strengthened its influence even over its most important members. The skepticism noted has had some effect on the Fund’s willingness to finance and thereby influence other members. But in this respect one must be careful to describe correctly what has occurred. There has been a considerable increase in maximum potential access to Fund credit over recent years. Yet, in the 1980s, there was no clearly rising overall trend in the volume of Fund loans (drawings) even in nominal terms though such a trend need not have been incompatible with the revolving nature of Fund drawings. We note, however, that such a trend seems to have started in 1990 (Table 1).

The Mechanics

During the period considered here, major changes occurred in the mechanics of the Fund’s financial activities.15

Table 1.Financing Under IMF Facilities, 1981–91(In billions of U.S. dollars)
(Financial Years Ending

April 30)
IMF purchases
Under credit tranche
CFF and CCFF20.901.793.891.161.380.730.842.060.311.152.81
Buffer stock financing
Loan disbursements
Under SAF0.200.590.380.600.27
Under ESAF0.340.580.54
Total purchases and
loan disbursements5.087.6610.679.966.674.814.706.113.517.489.11
Changes in gross
international financial flows
(IMF-based data)
To industrial countries1001322084135484715643863
To developing countries34114222-611-13
To others425140641232339524458
Total change in claims159183276538803560819431
Sources: International Monetary Fund, Treasurer’s Department: International Monetary Fund,Annual Report, 1991; and International Monetary Fund, International Capital Markets: Developments and Prospects, various issues.

First credit tranche, upper credit tranches, and extended Fund facility.

CCFF replaced CFF in August 1988.

First three quarters of 1990.

Includes offshore centers and some identified cross-border changes in accounts of centrally planned economies.

Sources: International Monetary Fund, Treasurer’s Department: International Monetary Fund,Annual Report, 1991; and International Monetary Fund, International Capital Markets: Developments and Prospects, various issues.

First credit tranche, upper credit tranches, and extended Fund facility.

CCFF replaced CFF in August 1988.

First three quarters of 1990.

Includes offshore centers and some identified cross-border changes in accounts of centrally planned economies.

Initially the financial function of the IMF was exercised exclusively through the “tranche policy”—that is, loans (“drawings”) and “stand-by arrangements” for medium-term general balance of payments purposes. Various (other) lending “facilities” began to be introduced in the 1960s. With one significant exception, they were addressed essentially to problems of developing countries. They can, with some imprecision, be divided into two types.

The Type I facilities comprise the compensatory financing facility (CFF), now succeeded by the compensatory and contingency financing facility (CCFF); the buffer stock financing facility, and the former oil facilities, as well as the present oil window of the CCFF (and, in a sense, emergency assistance by the Fund). They were initially designed to enable the IMF to grant assistance quickly and without negotiation of a program of adjustment where a self-reversible balance of payments problem beyond the country’s control was involved. Under these circumstances, access was practically automatic.16 The Type I facilities could thus also be used in the cases contemplated instead of a bridging credit facility, which the Fund does not possess. The Fund can deploy its tranche policy quickly, but an automatic facility can be even quicker. Only the 1974 and 1975 oil facilities were used extensively by industrial countries; they were the most automatic of all facilities.

The Type II facilities address general balance of payments problems in a more generous and slightly longer-term fashion than the tranche policy. They comprise the extended Fund facility (EFF) and—while available—the supplementary financing facility (equipped later with an interest rate subsidy), as well as the enlarged access policy; and three concessional facilities not financed from the General Resources Account, viz., the Trust Fund, and, later, the structural adjustment facility (SAF) and the enhanced structural adjustment facility (ESAF). Here, access was invariably not automatic but subject to negotiation of a program with conditionality and phasing (beyond the first credit tranche which is rarely used alone).

The different (initial) approach to Type I and Type II facilities regarding conditionality is explained by the need of the Fund to protect the revolving character of its resources and by the fact that it lends for policy purposes. Conditionality protects the Fund’s purposes and resources to the extent that this can be done by tying disbursements to observance of policies designed to re-establish a sound balance of payments (Type II); it can be dispensed with where reversal of the balance of payments problems can be expected to be automatic (Type I). Since the protection offered the Fund by conditionality makes it possible to grant access without further complications as long as the conditions are fulfilled, it is desirable that conditions of access to the Fund’s resources should be precisely defined. One consequence of this attitude is, however, that even a trivial violation of the conditions leads to interruption of disbursements. Such interruption, even if brief (see below), can prove damaging to a country’s market access.


From the early until the middle 1980s, access to both Type I and Type II facilities expanded. However, in the mid-1980s average access17 in quota terms18 under arrangements in the General Resources Account has remained essentially unchanged after a temporary increase up to 1983 (Table 2) and again in 1990 and 1991. Concessional loans (financed outside the General Resources Account), however, have been increasing in the second half of the 1980s (Table 3). It is also noteworthy that regular Fund charges have greatly increased by comparison with market rates (Table 4).

The (apparent) retrenchment in Fund General Resources Account lending after the mid-1980s followed its great expansion after the conclusion of the work of the Committee of Twenty: viz., the oil shocks of 1973 and 1979, the recession of the early 1980s, and the debt crisis; while the impact of the Middle East crisis and Eastern European restructuring appears to be leading to renewed expansion of Fund lending. Retrenchment after the earlier oil shocks was logical, but retrenchment while the debt crisis continues may appear to have been precipitate. The moment when Fund credit is to be restricted after a period of expansion cannot be determined solely on the basis of mechanical rules. From that point of view, the rise in net repurchases by countries with recent debt-servicing problems19 in the late 1980s was hardly felicitous.

Table 2.Average Annual Access Limit Under Arrangements in the General Resources Account, 1981 - September 1991(In percent of quota)
Annual Access Limit(s)

(Including Enlarged



YearAccess from 1981)AccessAccessAccess
Source: International Monetary Fund, Treasurer’s Department.

January-September 1991.

Source: International Monetary Fund, Treasurer’s Department.

January-September 1991.

Retrenchment for Type I facilities20 relied on limiting automatic access by requiring overwhelming likelihood that balance of payments “need”—a concept as important and as vague as “fundamental disequilibrium”—was determined by self-reversible circumstances. With this exception, access beyond a minimum was made conditional as under Type II facilities.21 For the latter (as for the tranche policy) prior actions, or a period of formal or informal monitoring, are also required increasingly to establish a favorable track record before access to Fund financing. Thus, effective access to Type I and Type II facilities (like access under the tranche policy) is in practice determined by use of the “case-by-case” approach. This approach is designed to preserve uniformity of treatment in the face of different circumstances—rather than equality in terms of quantifiable or otherwise precise criteria. This poses a problem: mechanical uniformity may be inappropriate, yet discretion—rightly or wrongly—can appear to be arbitrary and, therefore, prejudice potential borrowers’ confidence.

Factors Affecting the Trends

Some of the ideas and other developments that have contributed to the trend in financial assistance by the Fund have already been noted. Other suggestions have included the idea that the Fund should stress policy advice, while financing would be replaced by more rapid adjustment; at most, the Fund should catalyze outside resources rather than lend its own resources. It is not clear how any of these policies could work. Where would the resources come from, since private lenders are mostly retrenching rather than expanding while official lenders are also reticent? How persuasive vis-à-vis cofinanciers (and even borrowers) could the Fund be if it were not to risk its own resources? Are there no practical limits to speed of adjustment?

To the propensity of some member countries to retrench on the Fund’s financing, the arrears problem has contributed powerfully. Arrears to the Fund became a major problem for it only after the eruption of the debt crisis in 1982. The Fund’s attitude was, from the outset, to refuse formally to reschedule debt owed to it, although it does refinance in fact and the Articles of Agreement permit it formally to reschedule repurchases22 and to postpone payment of charges by accepting local currency.

Yet rescheduling need not discourage resumption of service to the Fund by the defaulting country. On the contrary, unless a country is defaulting “capriciously,” payment on the original terms may be felt to involve an intolerable sacrifice; then rescheduling—like “Chapter 11” under U.S. bankruptcy laws—is likely to strengthen the ability of the Fund to press a country in default to adjust its policies so as to enable it to repay although on a rescheduled basis. Rescheduling, therefore, can protect the interests of the Fund and of the rest of the international financial community, as well as those of the debtor country. This has now been recognized in practice through the adoption of the “intensified collaborative strategy” including the “rights approach.” While this approach might by some be seen as the ultimate in disguised rescheduling, it is certainly an intelligent, if belated innovation. Under it, a member country that accepts to follow a program monitored by the Fund will receive its help in obtaining bridging credits from governments or others to clear its arrears. It will then be able to conclude a financial arrangement with the Fund which will enable it to repay its bridging credits. If necessary, it may be allowed, under its monitored program, to earn “rights” to drawings larger than those otherwise available under a financial arrangement. The technique is experimental and has so far been applied only in the case of one country (but may soon be applied to a second one). The total resources made available to the first country in the first year, nevertheless, exceeded those necessary to clear the arrears by rather little. The technique is to be limited to the countries that had protracted arrears at the end of 1989. In the case of other countries cooperating with the Fund, the latter would, however, be prepared to show them sympathetic consideration in solving their arrears problem.

Table 3.IMF Arrangements in Effect as of Financial Years Ended April 30, 1953–90
Number of ArrangementsAmount Committed as of April 30

as of April 30(In millions of SDRs)
Source: International Monetary Fund, Annual Report, various issues.

Includes undisbursed amounts under SAF arrangements that were replaced by ESAF arrangements.

Source: International Monetary Fund, Annual Report, various issues.

Includes undisbursed amounts under SAF arrangements that were replaced by ESAF arrangements.

Table 4.IMF Charges, 1951-October 1991(In percent per annum)
Average Rates of Charge
On combined ordinary

and borrowed resources

On ordinary resourcesGovernment
FinancialBasicAdjusted forOn borrowedBasicAdjusted forTen-YearSix-Month
Yearsrateburden sharingresourcesrateburden sharingBondEurodollar
1990/October 19918.309.589.348.669.508.678.33
Source: International Monetary Fund

1987—90 (burden sharing began in 1987).

Source: International Monetary Fund

1987—90 (burden sharing began in 1987).

The increasing comparative cost of the Fund’s credit has already been noted. It is generally justified as necessary to encourage Fund creditors to maintain or increase their net creditor positions. But the Fund is a cooperative institution, and it may be asked whether such an institution need require its loans to be remunerated (as was not always the case) close to a Group of Five borrowing rate.23

III. How to Strengthen the Fund’s Influence

The Fund’s policy influence has been affected by the developments sketched in the two preceding sections. The main challenge is to attempt to enhance, through the Fund, the international community’s influence over the major Fund members but also over others.24

Attempts to reinvigorate the Fund’s influence, if at all feasible, must be limited, for the time being, to what can be achieved particularly through the persuasiveness with which the Fund’s technical competence endows it and through its financial functions. I am not suggesting that encouraging countries to borrow from the Fund or otherwise is a panacea.

Encouraging Access

It would be particularly important, though difficult, to encourage major countries to borrow from the Fund. As long as almost no country could feel “safe” from having to become a borrower from the Fund, one can surmise that all countries were inclined to be careful about conditions of access, rather than some being overwhelmingly interested in making access easier and others—the major countries—in making it more limited. Thus, it is for consideration whether it could be helpful if even those countries that presently are not in need of borrowing from the Fund could be induced in one way or another from time to time to do so (this would go beyond inducing members to use their reserve tranche—as the United States did once or twice in earlier times).

But how could this be accomplished? Nobody in his senses would wish to restrict international capital flows, whose availability makes many countries certain for all practical purposes to be able to escape the need to borrow from the Fund. That they may indeed wish to avoid doing so, need be no sign of a desire to follow irrational policies, but of a difference of opinion on what is the “right” policy and particularly of what is politically possible. But it may be possible to induce more members to borrow in two other ways.

The first method to induce borrowing would be a change, originally suggested by former Managing Director H. Johannes Witteveen, in the official settlement system for countries not accepting genuine free floating. Such countries would be required to settle part of their payments balances in resources borrowed from the Fund or SDRs,25 that is, in assets, the creation or use of which is subject to international control through the Fund.

Another approach would be a degree of liberalization of access to the Fund’s resources. It could mean a reduction in the rate of charge; on occasion, even an increase in the benefit of the doubt given to aspiring drawers from the Fund about the feasibility of their program or increased flexibility of maturities of drawings, as long as neither change led to excessive or excessively long net use of the Fund’s resources by members.

In these ways, use of Fund resources could become somewhat attractive even to members with ample access to the capital market. The motive why major countries might agree to create conditions that would induce or oblige them to borrow from the Fund would be their desire to strengthen the Fund for the benefit of all its members.

One industrial country member26 not requiring Fund financial assistance has employed monitoring agreements with the Fund to encourage implementation of policies against domestic pressures. It is conceivable that such agreements could, in time, become more acceptable than they are now to countries not requiring to borrow from the Fund and also strengthen the Fund’s influence27 over the major countries, if they perceived that their acceptance of such program encourages other major countries to do the same, with mutual benefit. But such a development must no doubt take considerable time, if it is at all likely.

The Practice of Conditionality

The idea of liberalizing access to the Fund’s resources brings us to possible changes in the practice of conditionality. Criticism, much of it misplaced, of the practice of conditionality is sometimes presented as the need for respect for sovereignty; it could be more convincingly based on the need to give a country as wide a latitude for decision making as possible, where this can be done while protecting the Fund’s purposes and resources. It would be conceivable to replace conditionality in part by collateral, but this is hardly likely to be of wide applicability. That conditionality could usefully be replaced by higher and varied levels of interest rates (“charges”) must be doubted; similarly for reversing the abandonment, since shortly after the Second Amendment, of interest rates rising as a function of time of net use of Fund resources. To rely purely on trust instead of performance clauses would not recommend itself to the Fund’s creditors. Nevertheless, some liberalization of conditionality, as already mentioned, would be conceivable without danger to the Fund or its creditors. Another possibility could be less frequent testing dates of Fund performance clauses. The trend has been in the opposite direction. There is no reason not to try to reverse it.

Among Fund conditions, periodic reviews as performance clauses under an arrangement with the Fund require special mention. In these reviews, countries must often come to an agreement with the Fund on whether the existing arrangement is still appropriate in the face of changing circumstances even though all its specific performance clauses may have been met. This means that one advantage of conditionality for the member country is lost, namely, assured access as long as those clauses are met. The question, therefore, arises whether members should not be given the choice to link access only to reviews or only to specific performance clauses rather than having to link them to both types. In the latter hypothesis, thought might have to be given to the formulation of these clauses—to avoid excessive imprecision as well as excessive detail.

It has also been suggested that the availability of waivers for program modifications tends to relieve many of the problems that conditionality would otherwise cause. In reality, waivers may not be particularly helpful. The mere interruption of disbursements even for a short time may undermine creditworthiness. Delays in Fund disbursements that are conditions for access to other credits can play havoc with the use of the latter. On repeated occasions it has been suggested that quantified conditions should foresee an upper and lower limit so that an infraction not exceeding the extreme limit would not lead to an interruption of disbursements. But dual limits would in practice be meaningless because the extreme limit would become the only effective one. Nor would a slight modification of this approach, which has been suggested, be helpful. Under such a modification there would be a single limit but successive, increasingly insistent and possibly more public warnings would be issued by the Fund to a country that was approaching its limit. But contact between a member country with an arrangement and the Fund is close enough so that such warnings are issued in any case privately. Public warnings could be destructive of the country’s credit.

Design of Programs

Changes in the design of programs could also be helpful in encouraging potential borrowers to come to the Fund, at an early stage of their payments problem. Thus, the Fund’s experience with Eastern Europe has drawn attention to the importance of social safety nets in the design of programs, or, in more general terms, to the need for contemplating broad political and social problems as well as economic ones. Greater emphasis on these two problems in future programs could make it more attractive for members to enter into arrangements with the Fund and thereby strengthen its influence. The members attracted by such changes might still not be the major countries, but a larger set of the nonmajors.

Another proposal is to replace performance criteria in nominal terms (e.g., the public sector borrowing requirement) by criteria in real terms (e.g., the “operational” public sector balance). Since reduction in inflation is seen as one necessary purpose of a Fund arrangement, discarding nominal criteria altogether would not make sense. Yet, the use of real criteria along with nominal ones can indicate whether policies went seriously wrong in all or only some respects. Other suggestions have been to limit conditionality to matters directly affecting the international financial community—especially the external balance—rather than extend it to instrument variables, such as the budgetary balance (real or nominal); only if external balance conditionality fails would implementation of performance criteria relating to other variables be required. This could appear attractive; but it may lead, at least, to delays in corrective action.

Other aspects of program design have come in for comment as well. The Fund is often accused of limiting its arsenal of acceptable instruments to fiscal and monetary policy—the consequence of relying more on demand than on supply policy. To switch the emphasis would require a larger Fund—on which some comments are made below—or a greater propensity of the international financial community to allow its assistance to be catalyzed by the Fund. One instrument would be greater use of contingency clauses. The Fund has, so far, not had attractive experiences with such clauses. The Fund is also accused of orthodoxy. There certainly continues to be an emphasis on sustainable budgetary and monetary policies and on “realistic” exchange rates, but the Fund has been prepared to accept various forms of “incomes policies” especially in relation to cases of so-called inertial inflation. In fact, what seems to some excessive confidence in exchange rate “anchors”—a particularly dangerous type of orthodoxy—is increasingly displayed by some—but only some—in the Fund, as a means of reversing expectations, in the direction of stability—even where the preconditions of the functioning of anchors are not in place.

Maturities and the Monetary Character of the Fund

The question of maturities also deserves additional comment. For drawings occasioned by self-reversible balance of payments needs, appropriate maturities could be established coupled with a return to the previous practice of automaticity of access or, at any rate, less conditionality than at present.

On the other hand, it may be doubted whether the length of maturities of drawings, in the Type II facilities, has been adequate for dealing with some of the balance of payments problems that these facilities are supposed to address. One could say that longer maturities transform the Fund into a development finance institution. The economist will always find it hard to distinguish between balance of payments and development financing.

Another way of looking at this matter is the question of the preservation of the “monetary character” of the Fund. This refers to the need that the counterpart of Fund lending, that is, the net creditor positions in the Fund, should be unquestionably liquid. But this danger does not exist as long as the Fund’s liquid liabilities do not exceed its liquid resources. In calculating the latter, one must consider that the Fund’s gold can be mobilized to supplement the Fund’s other assets. One must also note that the General Arrangements to Borrow (GAB) can be activated in case the Fund’s liquidity became a question as this would constitute a systemic crisis, precisely one of the situations contemplated by the GAB. If all these matters are taken into account, some further extension of Fund maturities could be contemplated without fear. It is also relevant in this context that the liquidity of credits on the Fund is less correlated with the specific purposes of loans to borrowing members than with the overall stance of their policy.

Other Problems

More recently, the Fund has taken on a possibly vast and risky new task: technical assistance to the Soviet Union and/or its successor republics. The needed resources could be found from members, from the market, or—not desirably—at the expense of borrowers or other recipients of technical assistance.

When (and if) the Fund has to give financial assistance to the U.S.S.R. or its successor republics, a major financial problem may be created. It could require, one would think, rather long-term funds. While the Articles of Agreement could be interpreted to authorize longer-term lending by the Fund even of its own resources, the Fund has so far stuck essentially to medium-term lending. It is by no means clear that avoidance of longer-term lending by the Fund, as suggested earlier, was always appropriate.

In this connection, a few more words could be said on ways of making the resources at the Fund’s disposal more flexible. Timely and more generous increases in quota could be used; the SDR mechanism could be resurrected and modified in various forms; and one might recall a proposal of the Canadian authorities at Bretton Woods, which, however, would require a change in the Articles of Agreement to give the Fund authority to compel members to lend to it up to 50 percent of quota.

I am indebted for their help to many colleagues at the Fund, including Jacques J. Polak himself.


The Committee of Twenty—the Committee of the Board of Governors of the International Monetary Fund on Reform of the International Monetary System and Related Issues—was established in 1972. Its members were governors of the Fund, ministers, or others of comparable rank. The Committee presented its final report, together with an Outline of Reform, in 1974.


Attempts to revive the par value system ended—so far—at the September 1973 meeting in Paris of the Deputies of the Committee of Twenty, that is, before the Committee’s last session in July 1974. There is increased sympathy for “stable but adjustable” rates as an instrument to achieve monetary stability.

On the remaining functions of the Fund, see especially Peter B. Kenen, Financing, Adjustment and the International Monetary Fund (Washington: Brookings Institution, 1986).


Designed to promote the purposes of the Fund, as set out especially in Article I of the IMF’s Articles of Agreement. Article IV mentions “sound economic growth” as an “essential purpose.”


Article IV.


See International Monetary Fund, Selected Decisions of the International Monetary Fund and Selected Documents, Sixteenth Issue (Washington, 1991), p. 9, et seq.


Fiancois Gianviti, “The International Monetary Fund and External Debt,” Recueil des Cours, Vol. 215, 1989-III (Dordrecht: Nijhoff), pp. 205—86, at p. 266, et seq.


Its creation was recommended by the Committee of Twenty, whose structure the former copies. The Articles also contemplate its replacement by a Council formally empowered to make decisions.


Including those pertaining to the Executive Board, the usual decision-making body of the Fund. The Council foreseen in Schedule D, but never established, would exercise de jure the Interim Committee’s de facto powers. It is preferable (not only speaking as an Executive Director from a developing country) that the Council should not have come into existence. Jurisdictional disagreements between the Executive Board and the Council could occur; strictly speaking, such disagreements between the former and the Interim Committee are impossible. Open disagreements could be very disruptive and could, moreover, be reflected in a disruption of the relationship between management and the Executive Board. Nor would it be practical to attribute to the Council a different jurisdiction than to the Executive Board. Since the Council would make decisions by voting, rather than by consensus, as the Interim Committee, the influence on the forum of the developing country members would be smaller.


Joseph Gold, “The Group of Five in International Monetary Arrangements,” Contemporary Problems of International Law: Essays in Honour of Georg Schwarzenberger on his Eightieth Birthday, ed. by Bin Cheng and E.D. Brown (London: Stevens and Sons, 1988), pp. 86–115.


This latter statement must be carefully defined, however. As noted earlier, the major countries today voluntarily follow certain of the policies advocated by the Fund—for example, with respect to restrictions—that they did not do to the same extent before 1973.


As defined in Article I(v).


Temporarily, under adequate safeguards.


For example, the recent loan of the European Community to Greece, which did not wish to submit to a Fund arrangement.


However, as already suggested above, in earlier years of the Fund’s existence, differences of view between the Fund and countries with potential creditor positions in it on one hand and potential borrowers from the Fund on the other hand frequently arose from differences in perception of the effect of economic policies; this is now less common.


Access to the Fund’s resources under the tranche policy requires a waiver if it implies that the Fund’s holdings of any currency would exceed 200 percent of quota—that is, access to Fund resources without waiver and includingthe reserve tranche is limited to 125 percent of quota and Fund net lending to 100 percent of quota. But it has become mucheasier to obtain waivers. Anticipating developments commented on below, access to Fund credit in addition to purchases that “float” above the credit tranches can reach 440 percent of quota in case ofneed and has no specified limit in exceptional circumstances.

In the early days of the Fund, stand-by arrangements were sometimes as short as six months. The maturity of Fund loans was initially limited to three-five years, but has since been extended; ordinary resources can be lent for four-ten years, ([a-z]+) borrowed by the IMF for four-ten years, with repayments on a linear schedule. The purpose of these extensions was to accommodate particularly the least developed countries where more complicated and time-consuming measures—including structural ones—may have to be adopted to bring about the most effective and least painful adjustment. Although equal disbursements (drawings) per period are the rule, front- and back-loading are not unknown.

Conditionality was present from a very early period onward. The initial distinction was between the gold (we would now say, reserve) tranche, the first credit tranche, and the upper credit tranches. Access to the gold tranche was practically (though not formally) automatic (the member’s request was given the “overwhelming benefitof the doubt”) but subject to repurchase. Access to the reserve tranche has now become formally automatic and exempt from repurchase. Among the upper credit tranches, there is no formal distinction but the size of access is, in practice, certainly taken into account in determining the strength of conditionality (see below). Initially, phasing—disbursement (“drawing”) in installments—was not required to be present in all stand-by arrangements. The change came after the 1967 stand-by arrangement with the United Kingdom, where the rule was established that all stand-by arrangements beyond the first credit tranche had to be phased. But even the so-far sacrosanct rule that the first credit tranche is to be exempt from phasing and, therefore, from the usual sanction against violation of understandings has recently been questioned. It should be understood that phasing is neither an absolute nor the only guarantee of implementation ofaccepted conditions by borrowers. In its absence, countries must consider that deviations will affect access under future arrangements; it does not, in any case, protect against deviations from agreed conditions after drawing and conditionally. Hence, one of the developments over time in the tranche policy has been “prior conditions”—that is, policy action required of countries before approval of the stand-by (or other) arrangement.

A second development has been the requirement, as a performance clause, of consultations during the stand-by (or other)arrangement; this entitles the Fund to require a change in the other performance clauses if it is not satisfied that the existing ones remain adequate. Moreover, the financial assistance of the Fund was on occasion given through genuine “stand-by arrangements”—that is, arrangements under which disbursements were not made upon conclusion of the arrangement but only if—and when—a balance of payments need developed subsequently. More recently, there has been increased interest in monitoring agreements, where no financial arrangement is involved. This type of relationship reflects the Fund’s “catalytic” role in promoting financing from other lenders for countries without independent access to the international capital market. It may also avoid conflict that could arise when commercial banks’ new money agreements with debtor countries would otherwise require pari passu disbursements of Fund resources and bank “new money.”


Subject only to an undertaking to collaborate with the Fund on solving any contemporaneous balance of payments problemsnot of a nature to disappear automatically. When access to the CFF was first increased, it was made subject, beyond a first tranche, to a requirement that the borrower had in the past collaborated with the Fund.

The CFF, established after abandonment of UN attempts to create a grant facility with similar purpose, ([a-z]+) the first of three facilities available to supply finance to members suffering from reversible export revenue reductions independent of the member’s control. This facility, like the other Type I facilities, was outside the traditional tranche policy; it “floated” against the reserve as well as the credit tranches, permitting the drawing on the compensatory facility while leaving the reserve and first credit tranches intact and available, if the member country so desired. In several other respects also, it represented a fundamental change in Fund practices. The facility was destined for primary producing (rather than all member) countries although this was not a formal limitation.

The buffer stock financing facility, a Type I facility similar to the CFF, was established for the financing of member countries’ contributions to international buffer stocks. The oil facility was a temporary special facility for countries facing the effects of the first oil shock, which was used by industrial and developing countries in equal proportions. It is significant that it was the least conditional of all facilities. The recent “oil element” of the CCFF is a modest copy of the oil facility.


As regards the CFF, a distinction was explicitly established between those cases where the export shortfall was clearly the result of events outside the control of the shortfall country and those where there might also be othercauses. In the latter case, access either because of export shortfalls or because of increases in cereal import costs was—beyond certain limits—made subject to additional conditions (e.g., adoption of a program supported by a financial arrangement with the Fund) with all their complications and delays of negotiation, implying an interruption—in principle—of drawings in cases even of trivial noncompliance.


A similar statement applies in nominal terms.


International Monetary Fund, World Economic Outlook, May 1991 (Washington), Table A44.


Though access limits were maintained at their previous maximums in nominal terms; since those limits were based on average quota increases, they reduced nominal maximum access in terms of quota for countries whose quotas hadincreased less than the average. Also, average quota increases did not match increases in any of the usual comparators, for example, inflation.


A major change in the CFF occurred when it was joined with a new contingency financing facility into a combined compensatory and contingency financing facility (CCFF). As distinct from the compensatory facility, the contingency facility was designed to be attached to stand-by and extended arrangements to compensate unexpected future exchange revenue needs. The facility, however, is extraordinarily complicated (despite a recent attempt at simplification).


Instead of rescheduling, the Fund applies a succession of exhortations to a country in arrears, but during this period is not paid. Even if it could apply the ultimate sanction of compulsory withdrawal (which requires an 85 percent majority of the voting power), it has no means of exacting payment of amortizations (repurchases), though it may impose extra charges on other members to offset arrears of interest payments (charges).

Repurchases can be explicitly rescheduled. Charges can be paid in local currency and, therefore, rescheduled until the local currency debt of the member country has to be repurchased.


The Fund has not recently used its power to graduate charges according to the time loans remained outstanding.


See John H. Williams, “The Adequacy of Existing Currency Mechanisms Under Varying Circumstances,” American Economic Review, Papers and Proceedings (Evanston, Illinois), Vol. 27 (March 1937), pp. 151–68, and “Currency Stabilization: The Keynes and White Plans,” Foreign Affairs (New York), Vol. 21 (July 1943), pp. 645–58.

Re-establishment of the par value system might contribute to meeting the main challenge mentioned, if it comprised the major countries. There can presently be no realistic expectation of such a development. It is also difficult to see how a “tripolar” system could significantly and realistically differ from the “system” we have today—nor what it could contribute to meeting the main challenge; apparently, it wouid be less binding or organized than the late Professor Williams’ “key currency” proposal and perhaps no more so than the Tripartite Agreement of the late 1930s. (United States, Annual Report of the Secretary of the Treasury on the State of the Finances, for the Fiscal Year Ended June 30, 1937 (Washington: U.S. Government Printing Office, 1938), pp. 258–62.)


It may not be essentia] for this purpose to change the Articles of Agreement.

A system that—with modification—might meet this problem has been described in the report of the Technical Group on Intervention and Settlement, Documents of the Committee of Twenty (Washington: International Monetary Fund, 1974), p. 112, et seq.




Particular problems in recent years have been three oil problems (1973–74, 1979 and, again, recently) and the debt problem. We have already made some comments on both. They have thrown up a number of complications.

At the beginning of the debt crisis, there was a genuine threat to the banking system in some countries. The Fund by offering its own resources was able to prevail upon banks to reschedule debts on a large scale although for short periods, but this was the wrong solution in the light of the nature of the crisis as it subsequently revealed itself. At present there are again threats to banks in one or two countries, but the debt problem of developing countries is not any more the major problem they are facing.

Involvement with countries in respect to their commercial bank debt has created a considerable number of complications both for the Fund and for countries and banks themselves. It is natural for the Fund to wish to avoid becoming directly involved in negotiations between banks and member countries, but the Fund nevertheless has to take a view in all those cases where financing assurances do not cover all of a country’s credit needs. In those cases, the Fund has gradually accepted to disburse despite the fact that a country may continue to accumulate arrears when an agreement with the banks that would seem sensible to the international financial community represented by the Fund cannot be arrived at. In such a situation, however, the question arises whether closer involvement by the Fund would not impress upon the negotiations an outcome that could often be more helpful than it is at present. In some cases, the Fund has been placed into an embarrassing situation by the insistence of banks on certain conditions precedent to drawings from them which would force the Fund to go beyond what it conceives to be a correct measure of balance of payments needs in making available its own financial assistance. On the other hand, the Fund has sometimes had an excessively narrow conception of a country’s balance of payments needs that should include the need to finance enhancements to be offered to banks. Moreover, the Fund has sometimes found it necessary to agree to larger drawings because earlier decisions had limited loans for a type of enhancement (set asides) to a proportion of drawings, though augmentation, reserved for collateral-ization of debt-service reduction, is related not to drawings but to quotas. These problems are illustrations of what we have earlier called unnecessary complications in the Fund’s policies.

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