Interim Report and First Outline of Reform of the Committee of Twenty
- International Monetary Fund
- Published Date:
- February 1996
The ad hoc Committee on Reform of the International Monetary System and Related Issues (Committee of Twenty) began deliberations in September 1972. In September 1973 the Chairman of the Committee, Mr. AH Wardhana of Indonesia, submitted to the Fund’s Board of Governors an interim report to which he attached a First Outline of Reform that had been prepared by the Chairman and Vice-Chairmen of the Deputies of the Committee of Twenty. The report and the Outline are reproduced as (A) below.
In September 1973, the Board of Governors adopted a resolution which took note of the interim report and urged the Committee to complete its work as soon as possible. The resolution appears as (B) below.
(A) Report to the Board of Governors of the International Monetary Fund by the Chairman of the Committee on Reform of the International Monetary System and Related Issues
(September 24, 1973)
On July 26, 1972, the Board of Governors adopted Resolution 27-10 which established the Committee and instructed it to advise and report to the Board of Governors with respect to all aspects of reform of the international monetary system. During the past year the Committee has met four times, most recently on September 23, 1973, and has been assisted by the Deputies who have worked intensively on the various aspects of reform. I attach a First Outline of Reform which has been prepared by the Chairman and Vice-Chairmen of the Deputies and which, in my view, reflects the stage reached in the Committee’s discussions. This Outline covers the main aspects of monetary reform. It does not distinguish between those matters which would have to be dealt with by amendment of the Articles of Agreement of the Fund and those which might be incorporated in a code of conduct outside the Articles. It does not cover questions concerning the quota structure and possible changes in the General Account, which fall to be considered at a later stage; and it makes only a few references to questions of the structure of the Fund, on which discussion is not far advanced.
As is apparent from the Outline, much has been achieved but much remains to be done.
The general shape of the reformed system has been defined and significant progress has been made on some important issues. Arrangements for adjustment and convertibility are to be effective in avoiding the protracted imbalances which led to the breakdown of the Bretton Woods system; symmetrical in relation to all member countries, large or small, developed or developing, in surplus or in deficit; and consistent with each other and with the volume of global liquidity. The SDR is to become the principal reserve asset of the reformed system, with the role of gold and of reserve currencies being reduced. Economic development and the flow of real resources from developed to developing countries are to be promoted.
On the other hand, important issues have not yet been resolved; and further consideration and study must be given to many matters, including the operational provisions of the reformed system. This position reflects the complex and difficult nature of international monetary reform which involves changes in the patterns of countries’ behavior that have persisted for many years. Moreover, agreement on particular issues reached during the process of discussion must be dependent on final agreement of the whole range of issues of reform; and agreement of principle in particular areas must be dependent on satisfactory settlement of the operational provisions in those areas.
The Committee intends to continue its efforts to arrive as soon as possible at final recommendations for a reform of the international monetary system. In view of the urgency of completing this task, the Committee intends to settle the issues of reform by July 31, 1974, in good time for the Annual Meeting which is to be held in Washington in September 1974. To this end the Committee plans to meet in January and to hold a further meeting in the spring. The Committee has also given instructions to the Deputies to work further on the various aspects of monetary reform, giving attention to the related issues. In particular the Deputies have been asked, in cooperation with the Executive Board of the Fund, to continue their work on future arrangements for adjustment and convertibility, including the details of a reserve indicator structure and of a possible multicurrency intervention system, and to study and advise the Committee further on unresolved issues in the fields of primary reserve assets, consolidation and management of currency reserves, and the link and credit facilities in favor of developing countries, as well as the more general question of how to promote the flow of real resources from developed to developing countries.
First Outline of Reform
This First Outline of Reform, which is forwarded to the Board of Governors under cover of a Report by the Chairman of the Committee on Reform of the International Monetary System and Related Issues, has been prepared by the Chairman and Vice-Chairmen of the Deputies. It reflects in the view of the Chairman of the Committee the stage reached in the Committee’s discussions. It records agreement on some issues, and disagreement on others to which further consideration will have to be given. In a number of cases it records suggestions which are not generally accepted or points to the need for further detailed study. Where agreement is recorded, it is subject, particularly in the fields of adjustment and convertibility, to further agreement on operational provisions as well as to eventual agreement on the reform as a whole.
1. It is generally agreed that there is need for a reformed world monetary order, based on cooperation and consultation within the framework of a strengthened International Monetary Fund, that will encourage the growth of world trade and employment, promote economic development, and help to avoid both inflation and deflation. The main features of the international monetary reform should include:
(a) an effective and symmetrical adjustment process, including better functioning of the exchange rate mechanism, with the exchange rate regine based on stable but adjustable par values and floating rates recognized as providing a useful technique in particular situations;
(b) cooperation in dealing with disequilibrating capital flows;
(c) the introduction of an appropriate degree and form of convertibility for the settlement of imbalances, with symmetrical obligations on all countries;
(d) better international management of global liquidity, with the SDR becoming the principal reserve asset and the role of gold and of reserve currencies being reduced;
(e) consistency between arrangements for adjustment, convertibility, and global liquidity;
(f) the promotion of the flow of real resources to developing countries.
2. It is recognized that the attainment of the purposes of the reform depends also upon arrangements for international trade, capital, investment, and development assistance including the access of developing countries to markets in developed countries; and it is agreed that the principles which govern the international monetary reform and arrangements in these related areas must be consistent.
3. There shall be a better working of the adjustment process in which adequate methods to assure timely and effective balance of payments adjustment by both surplus and deficit countries will be assisted by improved international consultation in the Fund, including the use of objective indicators. Countries will take such prompt and adequate adjustment action, domestic or external, as may be needed to avoid protracted payments imbalances. Countries should direct their policies to keeping their official reserves within limits which would be internationally agreed from time to time in the Fund and which would be consistent with the volume of global liquidity. For this purpose a reserve indicator structure should be established, subject to a more detailed study of the operational provisions involved. In choosing among different forms of adjustment action, countries should take into account repercussions on other countries as well as internal considerations.
4. In connection with adjustment it is envisaged that the Fund will introduce new procedures, involving special meetings, at regular intervals, of a Fund consultative body at an appropriate level (“the consultative body”). It has been suggested that the consultative body might be the resident Executive Board or, alternatively, a body to which constituencies could or would send representatives from capitals. In these special meetings
(a) the world payments situation would be surveyed in relation both to the general working of the adjustment process and to developments affecting global liquidity. These surveys would allow for periodic consideration of balance of payments aims and for a review of the aggregate flow of real resources to developing countries and its financing; and
(b) particular cases of imbalance that individually or collectively have significant international repercussions, as determined by criteria to be established, would be examined.
5. A country would become subject to examination under paragraph 4(b) if either
(a) there had been a disproportionate movement in its official reserves; or
(b) in the judgment of the Managing Director, following informal soundings among Executive Directors, there was prima facie evidence that the country was facing significant imbalance, even though this was not indicated by a disproportionate movement in the country’s official reserves.
6. In the process of examination under paragraph 4(b), representatives of the country examined would be expected to comment on the country’s economic prospects, including particularly its basic balance of payments position and prospects, on its external objectives, and on what domestic or external action, if any, it had taken or intended to take. An assessment by the consultative body would establish whether there was a need for adjustment. In making this assessment, the consultative body would take account of all relevant considerations, including the factors mentioned above; it would examine the consistency of the country’s reserve and current account aims and policies with those of other countries, and would attach major importance to disproportionate movements of reserves. Account would be taken of the special characteristics of developing countries that make it difficult for them to achieve prompt adjustment without seriously damaging their long-term development programs. Following an assessment the consultative body would, where appropriate, call upon the country concerned to adopt or reinforce policies to correct its imbalance. A country in choosing between different forms of policy should take account of views expressed in the course of the examination on the form and size of policy action.
7. The Fund will continue to hold annual consultations with member countries. In the course of these consultations the Fund would, inter alia, assess the country’s payments performance on the same basis as in paragraph 6 and taking into account all the factors mentioned there, and would, where appropriate, call upon the country concerned to adopt or reinforce policies to correct its imbalance if it had not been so called upon in a preceding special meeting.
8. It is agreed that in the revised adjustment procedures, as also in relation to convertibility, separate arrangements will need to be made for a limited number of countries with large reserves deriving from depletable resources and with small populations, e.g., certain oil producing countries.
9. Provision will be made for graduated pressures to be applied to both surplus and deficit countries in cases of large and persistent imbalance. Proposals have been made for both financial pressures and other pressures. Further study will be needed of these proposals. In particular, it is not agreed how financial pressures should be activated and whether or not there should be other pressures as described in paragraph 11.
10. It has been suggested that pressures would start with financial pressures of a mild form, such as penalty rates of interest on net creditor or net debtor positions in the Fund. A more severe financial pressure which has been suggested is that, if a country’s reserves rise to a predetermined point, that country would lose the right to convert further accruals of currency balances, and would be required to deposit such further accruals with the Fund at progressively increasing negative interest rates. There will be further consideration of these possible forms of financial pressures, including the question of penalty or negative interest rates in the case of the more severe pressure mentioned above. There will also be further consideration of the basis on which financial pressures might be activated. Such pressures could be activated by a positive decision of the Fund, at an appropriate level, following a finding that the country had failed to take adequate corrective measures after it had been called upon to do so. It is not agreed whether or not they could be activiated on the basis of a disproportionate movement in a country’s reserves, either presumptively (i.e., unless the Fund decides that pressures are unwarranted), or—in the case of the more severe pressure mentioned above—automatically.
11. It has been suggested that, for cases of more extreme imbalance, other pressures should be available, such as the publication of a Fund report on the position of the country concerned, and trade or other current account restrictions against countries in persistent large surplus. If there were to be pressures of this sort, they would be activated by a positive decision of the Fund following a finding that the country had failed to take adequate corrective measures after it had been called upon to do so; the authority to activate these pressures would rest ultimately, either directly or upon appeal, with a Committee of Fund Governors.
The Exchange Rate Mechanism
12. In the reformed system exchange rates will continue to be a matter for international concern and consultation. Competitive depreciation or undervaluation will be avoided. The exchange rate mechanism will remain based on stable but adjustable par values, and countries should not make inappropriate par value changes. On the other hand, countries should, whether in surplus or deficit, make appropriate par value changes promptly. Changes in par values will continue to be subject to Fund approval. Further consideration will be given to whether or not there should be simplified procedures, under appropriate safeguards, for small par value changes.
13. Countries may adopt floating rates in particular situations, subject to Fund authorization, surveillance, and review. Authorization to float will relieve a country of its obligation to observe the margins mentioned in paragraph 14. There will be further study of the possibility both of defining in advance particular situations in which countries might adopt floating rates and of developing a code of conduct, to be observed both by countries with floating rates and by other countries in relation to a floating currency which would be designed to ensure consistency with international payments equilibrium. This study will cover the question of whether Fund authorization to float should depend upon a judgment in each particular case or whether it should be readily granted to countries undertaking to observe such a code of conduct or other agreed rules.
14. Except when authorized to adopt floating rates, countries will maintain the market exchange rates for their currencies within agreed maximum margins in relation to their parities. It is agreed that it would be desirable that there should be a symmetrical system in which the maximum margins for all currencies, including intervention currencies, should be the same, and should be 2¼ per cent on either side of parity. There will be further study of how symmetry can be achieved. An appropriate Fund body should be empowered to change the agreed maximum margins on a qualified majority.
15. A detailed examination will be made of the practicality and desirability of establishing a system of multicurrency intervention in which countries whose currencies are widely traded in exchange markets might participate. The object of such a system would be to promote greater symmetry among participating countries with regard to exchange rate policy and intervention and settlement obligations; and it would make possible the establishment of symmetrical margins as mentioned in paragraph 14. Attention will be paid to the implications of such a system for nonparticipating countries.
16. There will be a strong presumption against the use of controls on current account transactions or payments for balance of payments purposes. In this connection arrangements will be made for continuing close coordination between the Fund and gatt. Countries will not use controls over capital transactions for the purpose of maintaining inappropriate exchange rates or, more generally, of avoiding appropriate adjustment action.
17. Wherever possible developing countries will be exempted from controls imposed by other countries, particularly from import controls and controls over outward long-term investment. The special circumstances of developing countries will be taken into account by the Fund in assessing controls which these countries feel it necessary to apply.
Disequilibrating Capital Flows
18. Countries will cooperate in actions designed to limit disequilibrating capital flows and in arrangements to finance and offset them. Actions that countries might choose to adopt could include a more satisfactory degree of harmonization of monetary policies, subject to the requirements of domestic demand management; prompt adjustment of inappropriate par values, use of wider margins, and the adoption of floating rates in particular situations; and the use of administrative controls, including dual exchange markets and fiscal incentives. There should be improved consultation in the Fund on actions designed to limit disequilibrating capital flows, with the following objectives: first, to increase their effectiveness and to minimize harmful effects on third countries; and secondly, to avoid unnecessary proliferation and escalation of controls and the additional flows which might be prompted by anticipation thereof.
19. Insofar as countries use controls to limit disequilibrating capital flows, they should avoid an excessive degree of administrative restriction which could damage trade and beneficial capital flows and should not retain controls longer than needed. Such controls should be applied without discrimination except as stated in paragraph 17; in this connection there will be further consideration of the special position of countries which maintain close financial ties.
20. It is agreed that the basic objectives to be accommodated in the reformed convertibility system should be symmetry of obligations on all countries including those whose currencies are held in official reserves; the better management of global reserves and the avoidance of uncontrolled growth of reserve currency balances; adequate elasticity; and as much freedom for countries to choose the composition of their reserves as is consistent with the overall objectives of the reform.
21. All countries maintaining par values will settle in reserve assets those official balances of their currencies which are presented to them for conversion. It is not agreed whether, beyond this, there should be more mandatory settlement arrangements in which countries whose currencies are held in official reserves would settle imbalances fully in reserve assets, with some accompanying limitation on other countries’ accumulation of reserve currency holdings. It is, however, agreed that the amount of international liquidity and, in particular, the aggregate volume of official currency holdings should be kept under international surveillance and management, taking into account any necessary increase over time in official currency holdings in relation to the growth of international transactions.
22. There will be further consideration of the mechanism for settlements including consideration of whether there should be direct settlement between countries or whether it should be wholly or partly centralized in the Fund. There will also be further consideration of means, including a possible substitution facility as envisaged in paragraph 31, to protect the system from any net conversion of the overhang of existing reserve currency balances.
23. It is generally recognized that there is a need for some elasticity within the settlement system, particularly to finance disequilibrating capital flows, and that provision for such elasticity should be consistent with other aspects of the reform. There will be further consideration of the appropriate degree and form of elasticity, which it has been suggested might
(i) be limited to credit facilities, including Fund credit and official bilateral short-term credit, under international surveillance;
(ii) include, in addition to (i), a provision that the right of member countries to present currency balances for conversion into reserve assets would be suspended when their primary reserves exceeded a predetermined level and that the settlement obligation of the issuer would be correspondingly suspended; or
(iii) include, in addition to (i), provision for relaxation of the normal convertibility obligations by a collective decision in the Fund.
24. Provision could be made, if necessary, to permit the introduction of convertibility by stages.
Primary Reserve Assets
25. The SDR will become the principal reserve asset and the role of gold and reserve currencies will be reduced. The SDR will also be the numeraire in terms of which par values will be expressed.
26. Allocation of SDRs will be such as to ensure that the volume of global reserves is adequate in conformity with the adjustment and settlement systems. There will be further discussion of appropriate procedures for determination of global reserve needs and for decision-making on SDR allocation and cancellation.
27. The effective yield on the SDR should be high enough to make it attractive to acquire and hold but not so high as to make countries reluctant to use the SDR when in deficit. For this purpose, it has been suggested that the value of the SDR in transactions against currencies should be maintained equal to an average of a group of currencies and that the SDR should carry an average market interest rate. Alternatively, it has been suggested that the value of the SDR in transactions against currencies should be maintained equal to an average of a group of strong currencies and that the SDR should carry an interest rate lower than an average market interest rate. Another suggested alternative is that the value of the SDR in transactions against currencies should be maintained by the balance of revaluations and devaluations of currencies in general and that the SDR should carry a low or zero rate of interest.
28. Further thought will be given to the question of a possible provision to permit the Fund uniformly to change the value of the SDR in transactions against currencies in a manner appropriate to the alternative adopted under paragraph 27.
29. In the light of the agreed objective that the SDR should become the principal reserve asset, consideration will be given to revising the rules governing its use with a view to relaxing existing constraints. The suggestions for relaxation that have been made include
(i) Abolition of the limits on acceptance obligations and the reconstitution obligations.
(ii) Some relaxation of the requirement of need for the use of SDRs.
(iii) Authority for willing partners to enter into transactions in SDRs without designation by the Fund.
(iv) Authorization for the General Account to accept or use SDRs in all transactions and operations in which it can accept or use gold or currencies.
(v) Authorization for the Fund to designate any international or regional institution of an official and financial character as a holder of SDRs.
(vi) Authorization for the Fund to permit additional types of transactions and operations in SDRs.
(vii) Authorization for the Fund to modify the provisions on opting out of decisions to allocate SDRs.
Consideration will be given to other aspects of the SDR, including its name, with a view to promoting public understanding.
30. Appropriate arrangements will be made for gold in the reformed system in the light of the agreed objective that the SDR should become the principal reserve asset. Under one alternative, monetary authorities, including the Fund, would be free to sell, but not to buy, gold in the market at the market price; they would not undertake transactions with each other at a price different from the official price, which would be retained and would not be subject to a uniform increase. Under another alternative, the official price of gold would be abolished and monetary authorities, including the Fund, would be free to deal in gold with one another at a market-related price and to sell gold in the market. Another alternative would modify the preceding one by authorizing monetary authorities also to buy gold in the market.
Consolidation and Management of Currency Reserves
31. In order to facilitate a resumption of general convertibility, provision will be made for consolidation of outstanding reserve currency balances at the outset of the reform, provided that satisfactory terms can be agreed. This consolidation could take the form of
(a) bilateral funding in amounts and on terms to be agreed between holders and issuers; and/or
(b) substitution into SDRs through a facility in the Fund, on the basis of terms to be negotiated.
Provision could also be made for continuing voluntary substitution of reserve currency balances through this facility, under rules to be agreed, and for amortization of currency balances placed in the facility.
32. Further consideration will be given to the question whether any profits or losses resulting from the operation of a substitution facility such as is envisaged in paragraph 31 should accrue to the issuers of currency balances held in the facility or to the Fund.
33. Countries will cooperate in the management of their currency reserves so as to avoid disequilibrating movements of official funds. Among the possible provisions for achieving this objective, the following have been suggested:
(i) A country whose currency is held in official reserves should be able to require other countries to limit or convert into other reserve assets further increases in their holdings of its currency.
(ii) Countries should periodically choose the composition of their currency reserves and should undertake not to change it without prior consultation with the Fund.
(iii) Countries should not add to their currency reserve placements outside the territory of the country of issue except within limits to be agreed with the Fund.
The Link and Credit Facilities in Favor of Developing Countries
34. In the light of the agreed objective to promote economic development, the reformed monetary system will contain arrangements to promote an increasing flow of real resources from the developed to developing countries. If these arrangements were to include a link between development assistance and SDR allocation, this could take one of the following forms:
(a) A link would be established between development finance and SDR allocation, the total volume of which will be determined exclusively on the basis of global liquidity needs. This link would take the form of the direct distribution to developing countries of a larger proportion of SDR allocations than they would receive on the basis of their share in Fund quotas. Link resources so allocated would be distributed to all developing countries in such a way as to be relatively favorable to the least developed countries.
(b) A link would be established between development finance and SDR allocation, the total volume of which will be determined exclusively on the basis of global liquidity needs. This link would take the form of direct allocation to international and regional development finance institutions of a predetermined share of SDR allocations. Link resources distributed to development finance institutions would be disbursed to developing countries on the basis of development need and in such a way as to be relatively favorable to the least developed countries. The use of link funds by development finance institutions, including their distribution and terms, would reflect the nature and purpose of these resources.
35. A detailed examination will be made of proposals for establishing a new facility in the Fund to provide longer-term balance of payments finance for developing countries.
(B) Reform of the International Monetary System
September 28, 1973)
Resolution No. 28-5 of the Board of Governors
Whereas the Chairman of the ad hoc Committee of the Board of Governors on Reform of the International Monetary System and Related Issues, established pursuant to Board of Governors Resolution No. 27-10, has submitted a Report on the present status of its work and a First Outline of Reform; and
Whereas, as stated in the said Report, the Committee, assisted by its Deputies, has defined the general shape of the reformed system, has made significant progress on some important issues, and intends to continue its efforts to arrive as soon as possible at final recommendations for a reform of the international monetary system;
Now, therefore, the Board of Governors hereby resolves that:
1. The Report of the Chairman of the Committee is noted, and the Committee is commended for its efforts; and
2. The Committee is urged to complete, as soon as possible, its task in accordance with Paragraph 2 of Resolution No. 27-10.