II Developments in Exchange Systems

International Monetary Fund
Published Date:
January 1989
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As noted in Section I, the Fund’s Articles of Agreement state broad aims for members’ exchange rate policies and arrangements. However, each member selects its own regime, while the Fund is enjoined to “exercise firm surveillance” over these policies (Article IV). The Fund, in a document entitled “Surveillance Over Exchange Rate Policies” issued in 1977,6 gives members further guidance in setting exchange rate policies; broadly, members should avoid manipulating exchange rates or the international monetary system, they should intervene in the market if necessary to counter disorderly conditions, and when they do so, they should take into account the interests of other members.

Choice of Exchange Arrangements

As an aid to the Fund’s surveillance, members are required to notify the Fund of their exchange rate regimes and any changes in classification or arrangements, such as changes in the composition of currency baskets or exchange rates. (See Box 1 for details on exchange rate classifications.) The Fund’s Executive Board is thus specifically informed at the time of any exchange rate change of pegged currencies, and generally of any discrete change in the rate of a more flexibly managed currency that is greater than 10 percent in nominal terms. All currency changes (or stability) and relative price movements that result in a change of the real effective exchange rate of more than 10 percent since the preceding examination of the member’s policies by the Executive Board are also individually brought to the Board’s attention. The Fund judges whether a member’s exchange rate policies are consistent with its basic obligations “to assure orderly exchange arrangements and to promote a stable system of exchange rates,” and any issues arising out of its assessment can be discussed with the authorities, normally in the context of regular annual Article IV consultations with the member, or in association with the use by the member of the Fund’s resources.

The exchange arrangements adopted by members since 1973 cover a broad spectrum of degrees of flexibility, from single-currency pegs to a freely floating system. Most countries have adopted arrangements that fall clearly into one or another of the major categories of the present classification system adopted by the Fund in 1982, and countries with dual markets usually have one market that is clearly more important than the other, which allows accurate classification by major market. The exchange rate arrangements of the Fund’s member countries in March 1989 are shown in Table 1.

Table 1.Exchange Rate Arrangements as of March 31, 19891
Flexibility Limited Vis-à-Vis a Single Currency or Group of CurrenciesMore Flexible
PeggedAdjusted according to a set of indicatorsOther managed floatingIndependently floating
Single currency2Currency compositeSingle currencyCooperative arrangements3
U.S. dollarFrench francOtherSDROther

Antigua and Barbuda

Bahamas, The4





El Salvador4












St. Kitts and Nevis

St. Lucia

St. Vincent

Sierra Leone



Syrian Arab Rep.4

Trinidad and Tobago


Viet Nam4

Yemen Arab Rep.

Yemen, People’s Democratic Rep.

Burkina Faso


Central African Rep.




Côte d’Ivoire

Equatorial Guinea





Bhutan (Indian rupee)

Kiribati (Australian dollar)

Lesotho4 (South

African rand)

Swaziland (South African rand)

Tonga (Australian dollar)

Iran, Islamic Rep. of









Cape Verde
















Papua New Guinea



Sao Tome and Principe

Solomon Islands






Western Samoa



Saudi Arabia5

United Arab Emirates5




Germany, Fed. Rep. of










China, People’s Rep. of4

Costa Rica4

Dominican Republic










Lao People’s Dem. Rep.







Sri Lanka






Gambia, The


Japan Lebanon


New Zealand




South Africa4


United Kingdom

United States




The exchange rate classifications used by the Fund are basically distinguished by the degree of exchange rate flexibility that the category reflects. Thus, single-currency and composite pegs and limited flexibility arrangements reflect margins for fluctuations of less than the equivalent of 2.25 percent around the peg. “Cooperative Arrangements” cover at present only the countries participating in the European Monetary System (EMS); all but one of these countries maintain 2.25 percent margins with respect to their cross rates based on the central rates expressed in terms of the European Currency Unit (ECU).

The “More Flexible” category covers exchange rates that have arrangements leading to a variance greater than would generally be obtained with margins of more than ±2.25 percent. This residual group is subclassified on the basis of the extent to which the authorities intervene in the setting of exchange rates. For currencies in the “Independently Floating” category, the authorities allow the exchange rate to move continuously to reflect market forces; if they intervene at all, they do so only to influence, not to neutralize, the speed of exchange rate movements. If the authorities set the rate for a specified short interval (usually one day or one week) and stand ready to buy and sell foreign exchange at the specified rate to maintain the exchange rate unchanged at these intervals against a set of indicators, the currency is subclassified as “Adjusted According to a Set of Indicators.” The remaining members fall into “Other Managed Floating.”

Box 1.Definitions of Exchange Rate Classifications

Peg: Single Currency. The country pegs to a major currency—usually the U.S. dollar or the French franc—with infrequent adjustment of the parity. About one half of all developing countries have single-currency pegs.

Peg: Currency Composite. A composite is usually formed by the currencies of major trading partners to make the pegged currency more stable than if a single-currency peg were used. Currency weights may be based on trade, services, or major capital flows. About one fourth of all developing countries have composite pegs.

Flexibility Limited vis-à-vis Single Currency. The value of the currency is maintained with certain margins of the peg. This system currently applies to four Middle Eastern countries.

Flexibility Limited: Cooperative Arrangements. This applies to countries in the exchange rate mechanism (ERM) of the European Monetary System (EMS) and is a cross between a peg and a float; EMS currencies are pegged to each other, but float otherwise.

More Flexible: Adjusted to Indicator. The currency is adjusted more or less automatically to changes in selected indicators. A common indicator is the real effective exchange rate that reflects inflation-adjusted changes in the currency vis-à-vis major trading partners. Another indicator is a preannounced change.

More Flexible: Managed Float. The central bank sets the rate, but varies it frequently. Indicators for adjusting the rate are broadly judgmental, including, for example, the payments position, reserves, or parallel market developments, and adjustments are not automatic.

More Flexible: Independent Float. Rates are market-determined. Most developed countries have floats—partial for the EMS countries—but the number of developing countries included in this category has been increasing in recent years.

The experience with floating the major currencies has shown considerable variability of both long- and short-run exchange rates.7 As a measure of short-run variability, the changes in the average annual nominal effective exchange rate of the U.S. dollar were almost nine times greater under floating rates than during the last decade of adjustable par values, and about four times greater in real effective terms. Variability has been broadly unchanged on balance since 1980. In principle, there are costs associated with exchange rate variability because it discourages trade, increases uncertainty of investment decisions, and generally makes policymaking difficult—empirically, the evidence is as yet mixed. Although forward cover of sufficiently long maturity has been available to cover risks associated with trade, it has not been available in long enough maturities and at a low enough cost to offset the uncertainties for longer-term investment decisions.8 Thus, an argument often cited for fixed or managed regimes is that they allow smoothing of the exchange rate in the face of exogenous shocks, given that a floating exchange rate will reflect reversible events and therefore be more volatile. However, the practical difficulty in managing an exchange rate to smooth volatility is in deciding which shocks are reversible and the degree to which they are reversible. For example, is the present level of oil prices permanent and therefore what the oil exporter’s exchange rate should adjust to, or is it temporary? The mixed experience with buffer stock schemes for stabilizing international commodities prices suggests that prediction of such price movements is problematic.

Another argument that used to be given for the use of fixed or managed exchange rates in developing countries in particular was that the option of floating was not open to those countries because of institutional weaknesses. However, some 19 developing countries have adopted floating auction or interbank exchange markets during this decade. Where these markets have been permitted to operate without untoward official intervention, they have operated efficiently in the face of considerable seasonality in the balance of payments, and even in countries where there are only one or two commercial banks. Trading among customers themselves has often served as a natural check against collusion or the exercise of monopoly power by the banking system.

Although Fund members have been able to choose between the prospects for greater policy effectiveness under floating, and those for greater financial stability under fixed rates, it has been difficult to determine how much flexibility or fixity is best. Here, various practical considerations have played a role, depending on the type of regime. In the most extreme form of single-currency peg, the currency of another country is used in circulation. Presently, Kiribati, Panama, and Liberia are the only Fund members that use other currencies in this way—the Australian dollar in Kiribati and the U.S. dollar in the other two cases (Panama also circulates government checks, and Liberia circulates its own coins, but not bank notes). The drawbacks are a loss of seigniorage and independence of monetary policies, but for a very small country these might be compensated for by reduced administrative costs and, perhaps, greater financial stability. The next most rigid form of peg is a one-to-one parity with a currency peg. These are relatively rare, because different inflation rates have necessitated adjustments over time to the original exchange rate of the currency. The only Fund members to have such a peg at present are The Bahamas and Tonga; although until the mid-1980s, the currencies of the Dominican Republic and Guatemala were at parity with the U.S. dollar.

Changes in Fund members’ arrangements for their currencies during this decade have shown a distinct tendency to move toward more flexible arrangements and away from single-currency pegs, continuing a trend that began in the mid-1970s. A major development has been that, by the end of 1988, 18 countries maintained independent floats for their currencies, compared with 10 in early 1982, and the number of currencies in the managed float category was also somewhat higher.

This trend away from fixed rates nevertheless masks a reversal in the direction of changes by developing countries within that period, particularly since 1986. Between 1982 and 1986, the majority of the classification changes reflected greater flexibility, and the bulk of these changes were clear shifts in policy. Twenty-three were shifts from currency pegs either to managed floats or floats, whereas only eight were changes from more flexible arrangements to pegs. This trend continued a pattern established between 1976 and 1981, when 19 classification changes were from pegs to more flexible arrangements, whereas there were only 2 adoptions (and retentions) of single-currency pegs. The trend in the adoption of composites has, however, been reversed. Since 1986, ten countries have moved from more flexible arrangements to pegs (seven of them dollar pegs), compared with four countries moving in the opposite direction.

A single-currency peg has been the most frequently used exchange arrangement by developing countries, over one half of which have such an arrangement. This type of peg has the merit of being easy to administer, and is generally chosen by countries that have a large share of foreign exchange transactions in the currency chosen as the peg. With single-currency pegs, however, the exchange rate continues to move; different inflation rates cause adjustments vis-à-vis the currency pegs, and, by definition, the peg means the currency floats with the peg vis-à-vis other currencies. If a country has geographically diversified transactions, a single-currency peg could lead to increased uncertainty.

Part of the reason for the recent move back to pegs may lie in the evolution of the exchange rates of the pegs concerned. The shift has reflected a desire to follow the depreciations of the dollar, but not the appreciations. The nominal effective exchange rate of the U.S. dollar depreciated by some 37 percent between early 1985 and end-1988. During 1984, only 1 country adopted a dollar peg. Over the next three years, 12 countries did so, whereas during 1988, when the dollar essentially stabilized, only 1 country (Ecuador) shifted to a dollar peg. Depreciations against the dollar peg also eased in the years of the steep fall of the dollar. Compared with 15 depreciations against the dollar peg in 1984 when the dollar was appreciating, and 16 during 1988, there were only 5 and 8 depreciations in 1985 and 1986, respectively.9

Another aspect of the recent trend toward flexibility is that it has been accounted for almost entirely by changes in the developing countries. Only four industrial countries changed exchange rate regimes between 1982 and 1988, and three of these were changes among forms of flexible arrangements, from managed floating to independently floating (the countries involved were Australia in 1983, New Zealand in 1985, and Spain in 1988).

The eight industrial countries in the “Cooperative Arrangements” category are the EMS currency group, which have adopted this regime as part of a broader effort to coordinate macropolicies. This category differs from a single-currency peg in that arrangements exist to harmonize monetary policy within the region, and there are active floating markets for determining the value of each EMS currency against those outside the EMS arrangements. With single-currency pegging, harmonization does not usually exist between the financial policies of the pegger and the country to whose currency it is pegged, and active markets do not exist for that currency vis-à-vis the other currencies against which it floats de facto. The cooperative arrangements have correspondingly less potential than other pegging arrangements for overvaluation or undervaluation of exchange rates.

As noted above, an increasing number of developing countries have begun to operate managed or independently floating systems for their exchange rates. In 1982, 8 developing countries, 5 of them in Latin America, adopted these arrangements, and over the next five years, there were 22 more shifts to more flexible arrangements by developing countries. By early 1986, of the 36 countries in the floating categories, 28 were developing, compared with 20 out of 28 in early 1982. Since then, however, 9 developing countries have changed from either a float or a managed float to a more restrictive peg.

An important characteristic of these more flexible arrangements in the developing world is that an increasing number of them have been market-determined—often in the context of Fund programs. In mid-1982 Uganda adopted a secondary auction market for foreign exchange; Uruguay changed to a floating system in late 1982; and in 1984, Jamaica, Uganda, the Philippines, and Zaïre unified and floated their currencies. They were followed in the next year by Bolivia, the Dominican Republic, and Zambia; and in 1986 The Gambia, Ghana, Guinea, Nigeria, and Sierra Leone turned to floating. In the past two years, despite the generally less flexible stance of arrangements, four countries have floated their rates—Maldives in 1987, Spain in 1988, and Paraguay and Venezuela in early 1989.

A recent study of the rise in the use of floating by developing countries shows that most turned to floating at a time of increasing external payments difficulties and increasing arrears when reserves were no longer available to support the fixed rate, extensive illegal markets were siphoning off scarce foreign exchange, and capital flight was a major problem.10 One important motivation has been to increase export competitiveness and reduce recourse to protective measures for domestic industries in a general effort to create incentives for more efficient production. But other reasons have been political, including a desire on the part of the authorities to relinquish direct responsibility for devaluing the exchange rate. The experience with these arrangements, though limited, shows that the exchange rate in these countries generally moved with the money supply and inflation rates, but volatility has generally been less pronounced following the one-shot adjustment at the commencement of floating. Moreover, far from exacerbating inflation, after a brief initial price adjustment (generally less than implied by the share of imports and the magnitude of the depreciation), the float has been associated with less inflation. The experience of these countries, many of them small and with the undeveloped financial institutions noted in the literature, suggests that floating in these countries, if supported by appropriate domestic policies, can be an effective tool for adjustment.

The overall effect of these changes in exchange arrangements since 1982 in developing countries is shown in Charts 2 and 3. As noted earlier, the general trend in developing countries toward freer rates is still clear, although it has slowed since 1986. Most of the changes in pegged arrangements occurred in the dollar peg; by end-1987, the number of currencies pegged to the U.S. dollar had returned to the end-1981 level of 38, after falling to 31 in mid-1985 in the aftermath of the long appreciation of the dollar. The 1982 level reflected the steady decline in the number of dollar pegs recorded since 1975, when 47 currencies had followed the dollar.

Chart 2.Exchange Rate Classifications of Developing Countries, 1975–88

(In number of countries)

Note: See Table 1 (p. 6) for countries in each classification in 1988.

1The classification of the more flexible currencies was changed in 1981.

Chart 3.Single-Currency and Composite Pegs, 1982–88

(In number of countries)

Note: See Table 1 (p. 6) for countries in each classification in 1988.

1Including those pegged to the French franc.

2Index 1985 = 100.

Changes in the number of currencies pegged to composites are less striking, but also reflect important shifts. These peggers consist mainly of small countries, often new Fund members, seeking to reduce the fluctuations inherent in single-currency pegs. SDR pegs have declined steadily, falling by almost half since 1982, and only eight developing countries now use this peg, despite its ease of computation. This contrasts with a near-tripling of the number of currencies pegging to the SDR between 1975 and 1981.

A qualitative sense of the significance of the trend toward more flexible arrangements can be conveyed by the degree that world trade is affected by countries adopting different arrangements. For instance, the 80 percent increase in the numbers of countries with floating regimes since 1982 is reflected in an increase of about 4 percentage points in their share of global trade. Moreover, there has been no reversal in this share since 1986; the share of world trade represented by managed or independently floating currencies rose steadily from 33 percent in 1982 to 36 percent in 1986 and to 37 percent in 1988. Similarly, the 56 countries that pegged their currencies to single currencies at the end of 1988 represented only about 2 percent of world trade. In terms of the importance of these groups in the Fund’s membership, the countries with single-currency pegs declined from 47 percent at the end of 1981 to 36 percent in 1988 (the share of SDR pegs falling from 11 percent to 5 percent), while the share of countries with independent floating arrangements rose from 7 percent to 12 percent.

During 1988, 10 reclassifications of their exchange rates were reported to the Fund by member countries, compared with 14 changes in classifications reported in 1987. Although two of them (Spain, in the first quarter of the year, from a managed float to a float) were clearly in the direction of more flexibility, the rest were all toward less flexibility. Three countries shifted from a managed floating arrangement either to a peg to a currency composite (Western Samoa and Iceland), or to a dollar peg (Ecuador), and two countries shifted from a float to a managed float (the Dominican Republic and Guinea). Three countries (Vanuatu, Somalia, and Zambia) changed from either a dollar or an SDR peg to another currency composite peg.

Exchange Rate Developments

Industrial countries.

During 1988, a bottoming-out occurred in the depreciation of the U.S. dollar vis-à-vis most of its main trading partners that had been observed since early 1985 (see Charts 4, 5, and 6). No trend in the direction of the dollar was clear during the year, but its level at the end of 1988 in nominal effective terms was about 40 percent below its peak in February 1985. (All references to nominal effective rates in this section refer to the measure used in the Appendix, which is derived from the Fund’s Multilateral Exchange Rate Model (MERM).) The real effective rate of the dollar at the end of 1988 was almost back to its pre-Louvre Accord rate of early 1987.

Chart 4.Nominal Effective Exchange Rates of Industrial Countries With Independently Floating Exchange Arrangements, 1982–88

(MERM Index, 1982 = 100)

Chart 5.Real Effective Exchange Rates of Industrial Countries With Independently Floating Arrangements, 1982–88

(MERM Index, 1982 = 100)

Chart 6.Nominal Effective Exchange Rates of Industrial Countries With Cooperative Arrangements, 1982–88

(MERM Index, 1982 = 100)

The value of the dollar had fallen steadily during 1987 in nominal effective terms. The currencies of all the industrial countries that either floated their exchange rates or belonged to the Exchange Rate Mechanism (ERM) of the EMS had appreciated against the dollar, and all but three of these (the Australian dollar, the Canadian dollar, and the Italian lira) had also appreciated in nominal effective terms. Between the first quarter of 1985 and the last quarter of 1987, the real effective rate of the dollar depreciated by 38 percent. Its real value was lower than at any time over the last 40 years. Both the Japanese yen and the deutsche mark appreciated strongly in real terms between early 1985 and late 1987—the yen by 27 percent, and the deutsche mark by 19 percent.

In 1988, this trend ceased. In spite of a peak in midyear, with two low periods in April and December, the nominal effective exchange rate of the dollar showed no clear direction, while the real rate depreciated by 0.6 percent. The major currency that appreciated most in nominal effective terms during the year was the Japanese yen, although among the other currencies, both the Canadian and the Australian dollars appreciated far more strongly (Chart 5). In real effective terms, exchange rate movements were relatively similar to nominal changes. The yen, the pound, and the Canadian and Australian dollars appreciated, with the Australian dollar showing the largest increase of 21 percent.

The EMS currencies generally depreciated during 1988, both in effective terms (Chart 6) and against the dollar, although within a fairly narrow range. The deutsche mark was particularly weak, depreciating by 4 percent in effective terms, and by 11 percent against the dollar. The value of the dollar vis-à-vis the yen at the end of 1988 was close to its low level of the end of 1987. Between December 1987 and December 1988, the ERM currencies depreciated in nominal terms by between 10 percent and 12 percent against the dollar. The changes in the nominal effective rates of these currencies were also fairly uniform, ranging between about 3 percent (for the Belgian-Luxembourg franc) and about 5 percent (for the Danish krone). Real effective changes in ERM currencies during 1988 were also generally in the form of small depreciations ranging between—0.7 percent (for the Luxembourg franc) and—6.5 percent (for the Belgian franc).

There was no realignment of the ERM currencies during 1988 (the last realignment was on January 12, 1987). The stable relationships in the system were associated with a general decline in inflation rates and the convergence of interest rates. Differentials in inflation rates among members were about 2 percentage points by the end of the year, with the Netherlands showing the lowest rate of price increase over the fourth quarter of 1987. Excluding Italy, short-term interest rates differed at most by about 3 percentage points among ERM members by the fourth quarter of the year.

Firm political commitment to monetary coordination seemed to lie behind this stability among the ERM currencies and was reflected in official statements and reported intervention in foreign exchange markets. There were also agreements to coordinate interest rate decisions more closely, to make more flexible use of existing fluctuation margins, and to make more short-term finance available for intervention.

The exchange rate changes of industrial countries during 1988 took place against a background of policy coordination in the industrial countries aimed partly at exchange rate stability. (Chart 7 shows indicators of official intervention and exchange rate variability since the mid-1970s.) Under the Louvre Accord of February 1987, the major industrial countries had recognized the importance of underlying fiscal and structural policies in reducing external imbalances and had agreed to work toward greater stability in exchange rates. The chart indicates that this commitment was followed also by a sharp increase in official intervention. Pressure on the dollar picked up in late 1987, there was a depreciation of close to 7 percent between November and December, and in December the Group of Seven major industrial countries reaffirmed the basic objectives of the Louvre Accord.

Chart 7.Industrial Countries: Indicators of Exchange Rate Variability and Official Foreign Exchange Market Intervention, 1976–88

(Index, 1980 = 100)

Source: Fund staff estimates.

1For each individual country, currency variability in any year is measured by the average monthly percentage change of its exchange rate in terms of the SDR. The measure of average currency variability shown here is the trade-weighted average of the individual country variability measures, expressed as an index.

2Sum of means of monthly total absolute changes in gross foreign exchange reserves, expressed as an index.

During the first quarter of 1988, when the dollar depreciated somewhat (by 10 percent in MERM effective terms over the first quarter of 1987) the Group of Seven, at a meeting in Washington in April, “welcomed the additional evidence that the correction of imbalances is underway, as well as the increased stability in exchange rates.” They went on to express “their determination to continue to coordinate economic policies to strengthen the underlying fundamentals and thereby reinforce the conditions for exchange rate stability.” Similar language was used at the Toronto economic summit in June, where the Heads of State or Government of the Group of Seven endorsed the conclusion that “either excessive fluctuation of exchange rates, a further decline of the dollar, or a rise in the dollar to an extent that becomes destabilizing to the adjustment process, could be counterproductive by damaging growth prospects in the world economy.” The statement by the Group of Seven at the Annual Meetings of the World Bank and the Fund in Berlin (West) in September 1988 restated the same objectives.

Developing countries.11

A comparison of average movements of currencies of developing countries in different exchange rate classifications shows that all categories, except for the French franc peggers, have depreciated significantly since 1982 in the face of widespread balance of payments difficulties. Taking average exchange rates measured in nominal and real effective terms (the latter to account for relative changes in trading partners’ prices or costs), Charts 8 and 9 show, as might be expected, that currencies in the more flexible classifications have depreciated the most to cope with widespread balance of payments difficulties in this period. This is partly because countries adopting floating arrangements for the first time have always had large initial currency depreciations, reflecting their difficult payments situations. This was the experience of all the countries that have adopted floating: Jamaica, the Philippines, Uganda, and Zaïre in 1984; Bolivia, the Dominican Republic, and Zambia in 1985; The Gambia, Sierra Leone, Ghana, and Nigeria in 1986; and Maldives in 1987. In real terms, the more flexible currencies have stabilized over the past year.

Chart 8.Developing Countries: Average Nominal Effective Exchange Rates by Regime, 1982–88

(Indices, 1982 = 100)

Chart 9.Developing Countries: Average Real Effective Exchange Rates by Regime, 1982–88

(Indices, 1982 = 100)

Note: The data exclude the following countries for which real effective exchange rate information was not available: Afghanistan, Algeria, Belize, Benin, Bhutan, Chad, Comoros, Djibouti, Equatorial Guinea, Guinea, Guinea-Bissau, Islamic Republic of Iran, Iraq, Democratic Kampuchea, Lao People’s Democratic Republic, Lebanon, Libya, Maldives, Mozambique, Oman, Qatar, Sao Tome and Principe, Syria, United Arab Emirates, Viet Nam, Yemen Arab Republic, and Yemen People’s Democratic Republic.

The greater long-run stability of the currencies in the single-currency pegs reflects the fact that they have had fewer and smaller adjustments than the more flexible group. The nonfranc peggers are dominated by the group pegging to the U.S. dollar, and these predictably followed the dollar’s appreciation until the first quarter of 1985 and its subsequent depreciation and stabilization during 1988. In real terms, since the United States has been relatively successful in containing inflation, currencies pegging to the dollar have depreciated less than their nominal rates since 1985 and, during the past year, have appreciated somewhat.

The discrete changes in the exchange rates of the currencies of developing countries that maintained pegged arrangements during 1988 moved in a narrower range than during 1987, and all involved depreciations against their pegs (see Table 2). In 1987 the range had been between an 11.6 percent appreciation (for the Romanian leu against a composite peg) and a 92 percent depreciation (for the Vietnamese dong against the U.S. dollar); last year, the range varied between a depreciation of 0.9 percent (for the Somali shilling against a composite peg in September) and a depreciation of 87.5 percent (for the Nicaraguan córdoba against the U.S. dollar, in June). In general, currencies pegged to the U.S. dollar had larger depreciations than those pegged to other composites.

Table 2.Discrete Exchange Rate Changes of Pegged Currencies, 1988
Country (Currency/Peg)Date of

Domestic Currency

Units per

Currency Peg


(Depreciation (–))1
Old RateNew Rate
Burundi (franc/SDR)February 25161.0177.1–9.1
Ecuador (sucre/US$)2August 30250.0390.0–35.9
Guatemala (quetzal/US$)June 232.502.703–7.4
Hungary (forint/other comp.)July 1950.706654.3071–6.64
Iceland (króna/other comp.)September 2846.7948.145–2.8
Israel (sheqel/other comp.)December 27160.0168.0–4.84
Lao People’s Dem. Rep. (kip/US$)July 21350.0400.0–12.5
Malawi (kwacha/other comp.)January 162.09382.4619–14.94
Mozambique (metical/US$)January 1400.0450.0–11.1
July 1450.0580.0–22.4
October 15580.0620.0–6.6
Nicaragua (córdoba/US$)June 1510.0680.0–87.5
August 3180.0180.0–55.6
September 30180.0320.0–43.8
November 2320.0550.0–41.8
November 24550.0920.0–40.2
Paraguay (guarani/US$)July 1240.0/320.07400.0–40.0

Peru (inti/US$)November 22250.08500.0–50.0
Poland (zloty/other comp.)9January 1–December 31320.0502.55–36.34
Sao Tome and Principe (dobra/other comp.)July 1678.91100.0–21.14
Somalia (shilling/other comp.)10August 6180.0215.0–16.3
August 13215.0225.0–4.4
September 10225.0227.0–0.9
September 30227.0247.0–8.1
Tanzania (shilling/other comp.)November 498.0120.0–18.3
Trinidad and Tobago (dollar/US$)August 173.604.25–15.3
Uganda (shilling/US$)July 160.0150.0–60.0
December 2150.0165.0–9.1
Zambia (kwacha/SDR)November 98.010.0–20.04

The frequency with which exchange rates pegged to the U.S. dollar were devalued against the dollar in 1988 (a year of relative stability for the dollar) picked up over the number of devaluations in 1987, and was close to the number of adjustments in the years of dollar appreciation. There were 5 devaluations against the dollar in 1987, and 16 in 1988, compared with 15 in 1984 just before the dollar peaked. The sizes of the 1988 devaluations were also similar—ranging between 7 percent and 88 percent, compared with a range of between 2 percent and 2.75 percent in 1984.

Changes in the official exchange rates of the currencies that are pegged generally underestimate the degree of actual flexibility in their exchange systems. Several of the countries with pegged arrangements maintain official dual systems for certain transactions. As mentioned earlier, although the historical trend has been toward a reduction in these systems, 26 countries still maintained multiple systems in 1988, usually with a free secondary market. Apart from officially recognized parallel markets, available information shows that 24 of the countries with pegs also had unofficial parallel markets. Rates in these markets in 1988 ranged from 12 percent to 99 percent more depreciated than the officially pegged rate. Most of the countries with data available on unofficial parallel markets operated pegs to the U.S. dollar. The average depreciation in these markets in 1988 was more than 50 percent over the official rate. Although it is difficult to ascertain the significance of these alternative rates—since this depends on the degree of official control over transactions and the importance for economic activity of those transactions covered by the unofficial system—it is clear that they met a need for greater flexibility.

The more flexible currencies in the developing country group also moved more narrowly vis-à-vis the U.S. dollar in 1988 than in the previous year; most changes in 1988 fell into the 1–25 percent depreciation range, whereas over 60 percent of the currency changes in 1987 were outside this range (see Table 3). As in 1987, the majority of the currency changes in this group were depreciations against the dollar, but the fact that they depreciated, on average, less than in 1987 may reflect the reversal in the dollar’s effective depreciation that occurred during 1988. Two currencies—the Singapore dollar and the Korean won—appreciated against the dollar for the second successive year (in fact, 1988 was the third year of appreciation for the won).

Table 3.Changes in “More Flexible” Currencies(December 31, 1987–December 31, 1988)
Currency Units

per U.S. Dollar1

(End of Period)


Depreciation (–)
Dec. 31,

Dec. 31,

Argentina (austral)3.750013.325–71.8
Bolivia (boliviano)2.21002.45–9.8
Brazil (cruzado)72.25765.30–90.5
Chile (peso)238.14247.20–3.6
China (yuan)3.72213.7221
Colombia (peso)263.7335.86–21.5
Costa Rica (colon)69.380.0–13.4
Dominican Republic (peso)4.96006.41–22.6
Egypt (pound)2.192.330–6.0
Gambia, The (dalasi)6.43876.6591–3.3
Ghana (cedi)176.0229.885–23.4
Greece (drachma)125.93148.10–15.1
Guinea (franc)440.000550.000–20.0
Guinea-Bissau (peso)851.701,363.58–37.5
India (rupee)12.877214.9489–14.1
Indonesia (rupiah)1,650.01,731.0–5.1
Jamaica (dollar)5.505.48+ 0.5
Korea (won)792.30684.1+ 16.0
Lebanon (pound)455.0530.0–14.6
Madagascar (franc)1,234.271,526.43–19.1
Maldives (rufiyaa)9.39508.57+ 10.0
Mauritania (ouguiya)71.600075.73–5.5
Mexico (peso)2,209.72,281.0–3.1
Morocco (dirham)7.80038.2106–5.0
Nigeria (naira)4.14135.353–22.6
Pakistan (rupee)17.4518.65–6.4
Philippines (peso)20.8021.336–2.5
Portugal (escudo)129.865146.371–11.3
Singapore (dollar)1.99851.9462+ 2.7
South Africa (rand)1.92992.3777–19.0
Sri Lanka (rupee)30.76333.03–7.0
Tunisia (dinar)0.77790.8985–13.4
Turkey (lira)1,020.901,814.80–43.7
Uruguay (new peso)281.0451.0–37.7
Yugoslavia (dinar)1,244.005,210.76–76.1
Zaïre (Zaïre)131.5274.0–52.0
Note: Exchange rates shown are midpoints of buying and selling rates.

Multiple Exchange Rates

Multiple exchange rates result from official action when the authorities control foreign exchange payments in such a way as to create different exchange rates for different types of transaction, transactor, or currency. (In practice, rates are defined to be multiple when because of official action they differ by a spread of more than 2 percent, excluding normal transactions costs.) These practices fall into three main categories: a dual or multiple exchange market system applying to broad categories of goods, usually created by the authorities controlling the transactions channeled into the official market; a separate exchange rate for a limited number of specified transactions; and taxes (or subsidies) that accrue to (or are paid by) the monetary authorities on the value of some exchange transactions. Box 2 gives examples of these three types of foreign exchange restrictions. (See also footnote 4 in Table 1, p. 6, for instances of such practices.)

In April 1984 and February 1985 the Executive Board reviewed the Fund’s experience with and policies on multiple exchange rate regimes. The main conclusion of these reviews was that multiple rate systems are costly in terms of efficiency and resource allocation and they have not proven conducive to medium-term balance of payments adjustment.12

Box 2.Examples of Multiple Exchange Practices

Dual or Multiple Market System. Multiple markets usually comprise an official market in which the supply and demand for foreign exchange are controlled and a free financial market that handles all other transactions. The free rate is almost always more depreciated than the official rate. Less selective in their impact than the imposition of individual rates for given transactions, multiple markets typically penalize broad categories of suppliers of foreign exchange to the official market—typically exporters—and subsidize groups of purchasers—often the government or key pressure groups.

Fixed Exchange Rate on Given Transactions. Specific foreign exchange transactions can either be subsidized or penalized by the authorities, forcing the purchase or sale of exchange at an over- or undervalued rate for the local currency. This practice is often used to hold down official expenditures on the servicing of government-guaranteed debt, to encourage migrant labor to repatriate foreign earnings, or to penalize profit remittances abroad by foreign companies or payments abroad by residents.

Taxes/Subsidies on the Value of Transactions. Similar in impact to fixing the exchange rate for given transactions and equally selective, these practices typically target current account transactions. Examples include export bonuses or subsidies, mandatory advance import deposits (which pay no interest), taxes on remittances abroad, and taxes on sales of exchange by commercial banks. Although the central bank generally benefits from multiple exchange rate practices, the budget reaps the rewards of taxes on foreign transactions.

The Fund’s policies stated on the occasion of the 1984/85 discussions were based on the experience of its membership with multiple exchange rates. Most countries that have adopted multiple currency practices did so at a time of external payments difficulties. The underlying reason for a country to avoid the uniform exchange rate change—normally a devaluation—that would be part of a systematic approach to solving the problem is usually the belief that it will be politically and socially costly. Some countries believe a uniform devaluation would undermine growth prospects and complicate economic management by causing inflation; others believe that it would undermine social priorities by raising the costs of essential food imports; and yet others believe that development prospects would be endangered by higher costs for imported inputs for certain industries.

Multiple rates are thus used to address payments difficulties by attempting to relieve the pressure on different elements of the external accounts, generally imports and some important invisibles payments, or to provide additional incentives for exports. Table 4 gives summary statistics on the coverage of multiple systems at present, which indicates that the aims of the systems have changed little since the 1984/85 review.

Table 4.Features of Multiple Exchange Rate Systems, 1983–88(Number of countries)
Separate rate for capital and some invisibles353734363937
More than one rate for imports252323283329
More than one rate for exports252528253229
Import rate different from export rate282828333633
Source: International Monetary Fund, AREAER, various issues.

In some instances, using a dual rate as a temporary device to find a realistic level for a proposed unified exchange rate has been an effective transitional policy tool. In several countries dual markets were established when the authorities intended to unify the fixed official rate with various other rates, official and unofficial, that existed but were uncertain about the correct level for the new rate. The movement of the exchange rate in the free secondary market served to indicate the appropriate level for the unified rate in most situations, although speculation in other cases led to a greater depreciation in the parallel market than was warranted by economic conditions. The Fund’s policies in the area of multiple exchange rates have remained flexible, pragmatic, and responsive to each country’s particular circumstances. The most important judgment in the Fund’s decision to approve multiple exchange rate systems under its Article VIII relates to their temporary character. Approval of these practices is based on the existence of a well-conceived plan designed to bring about the unification of exchange rates over a specific and appropriately brief period of time. The development of such a plan and firm intentions to eliminate multiple rates are normally expected from a member undertaking an adjustment program supported by the use of Fund resources.

The plan usually consists of successive reductions in exchange rate spreads or shifts in the transactions undertaken in the various exchange markets. In cases where no arrangement entailing the use of Fund resources is in effect, Fund approval of multiple exchange rates has been granted when there are firm indications of measures and conditions considered likely to ensure their temporary nature. A particular form of multiple exchange rate has recently been reviewed in the Fund—namely, official guarantee schemes for private sector borrowers.13 These schemes typically take the form of exchange subsidies or subsidized forward cover facilities on officially regulated terms for designated purposes, such as rescheduled liabilities. Most of these schemes entail forward premiums that do not reflect market conditions, and they entail losses unless the central bank can cover its position by simultaneously buying spot or forward exchange. Because few developing countries have forward foreign exchange markets that are sufficiently developed to cover these risks, losses are common. The Fund has therefore increasingly promoted and encouraged the development of market-determined forward facilities.

It is difficult to compare changes in the degree of complexity of multiple exchange systems in a given country over different periods and also to compare restrictiveness among countries. Not only are there many types of exchange practices, but their scope and incidence can vary widely and can be difficult to measure. The implementation of exchange market segmentation can also have a crucial effect on how distorting it is, yet this is often almost impossible to assess.

The incidence of multiple rates among the Fund’s member countries has generally declined since the 1950s. In the mid-1950s, some two thirds of all members had these regimes, representing about a third of their total trade (Chart 10). In June 1957 the Fund adopted an important decision urging members to simplify their exchange rate structures; it also undertook to assist members in their efforts to do so, providing technical assistance where appropriate. In the late 1950s and early 1960s, these efforts, together with the establishment of convertibility among major countries and an improvement in the international trade situation, contributed to a substantial simplification of exchange rate systems in both developed and developing countries. Progress in simplifying developing countries’ systems was, however, mixed thereafter, with increased use of multiple rates in the late 1960s, and again in the early 1980s, as the developing world faced widespread balance of payments difficulties. Since 1986 there have again been sharp reductions in the incidence of multiple rates. By end-1988 about one third of the Fund’s membership operated multiple rate regimes, and the importance in world trade of countries with more than one exchange rate has declined more steadily and rapidly. In the industrial countries, now that the spread between the financial rate and the official rate in Belgium and Luxembourg has become virtually nonexistent, countries with multiple rate systems represent only about 10 percent of total trade.

Chart 10.Fund Members With Multiple Exchange Rates, 1955–88

(In percentages)

1As a percent of total exports of the membership of the Fund.

The numbers of countries using the exchange system either to liberalize or restrict foreign exchange transactions can provide an overall sense of whether countries are making less or more use of exchange controls as a tool to manage their external accounts. These numbers should, however, be interpreted with care: they may reflect controls that are transitional in a country with a program for liberalizing transactions in sequence; a practice that may appear restrictive may not be, such as the adoption of a new exchange rate that is market-determined; and a unification that may appear to free transactions may not do so if the new rate is highly regulated or restricted to a few categories of foreign exchange activities. Nevertheless, a brief review of some general indicators of the number and scope of multiple exchange rate systems over the past few years can provide a context for assessing more recent developments.

Chart 11 shows that the number of countries simplifying their exchange rate systems has been steadily rising since 1980. Although liberalization reached a peak in 1983 and 1986 and has since moderated, there are still more countries liberalizing exchange practices than in 1980 and still more liberalizations than restrictions. The number of countries resorting to restrictive exchange rate measures rose to a peak in 1981 and again after the debt crisis in 1983 and has generally fallen since then. As noted above, the recent trend toward liberalization is clearer when the share of trade of the countries easing their exchange rate systems is taken into account. In 1987, countries adopting freer exchange arrangements reflected over 9 percent of developing country trade, and over 10.5 percent in 1988.

Chart 11.Changes in Multiple Exchange Rates 1980–88

(In number of countries)

The countries adopting more restrictive regimes were much less important in trade, representing only about 2.75 percent in 1987 and 0.5 percent in 1988. Among the group simplifying their practices were several large developing countries, including Argentina, Brazil, and Nigeria in 1987; Paraguay, Turkey, and Venezuela joined the group in 1988 and the first quarter of 1989. All these simplifications involved the introduction of market-determined rates into the system or the extension of their coverage. Argentina introduced a more market-related rate in 1987 and expanded its scope in 1988; Brazil added a free rate for tourist transactions in 1988; Nigeria unified its official rate under an auction system in 1987; and in 1988 Venezuela expanded the coverage of its nonpreferential rates (unifying along with Paraguay in early 1989), and Turkey freed the rates in large transactions.

The significance for adjustment policies of the remaining multiple rate systems still in use has, however, risen since the early part of the decade. As noted earlier, during the 1970s about half the countries with exchange restrictions had minor but more complex practices, such as taxes or subsidies on specific exchange transactions or broken cross rates; however, during the 1980s, countries have tended to adopt dual-rate systems that affect large volumes of transactions rather than resorting to relatively minor practices. Nevertheless, the shifts to these systems have generally proven to be temporary. Although few of the countries adopting multiple exchange rates since 1983 have adopted limited and simple forms, the developing countries that have recently adopted or expanded complex forms of multiple rate systems have since relinquished them. Thus, although Bolivia, Venezuela, and Guatemala created multiple markets in 1984, Bolivia unified in 1985, Guatemala in mid-1988, and Venezuela in early 1989. In 1985 Guinea, Honduras, Zambia, and South Africa established new markets; only Honduras and South Africa still have them. Ghana and Nigeria created new markets in 1986, and Sudan and Ecuador did so in 1988.

Changes in the transactions affected by different rates reflect the sources of the payments difficulty faced by the country. After the debt crisis of 1982, Chile, Venezuela, and Zaïre channeled public service payments on debt contracted earlier via a preferential exchange rate, Guatemala followed suit in 1984, and Paraguay in 1985. Most of these rates have since been eliminated. Over the past two years, most of the adoption or expansion of multiple rates has been aimed at managing the trade account, either to meet urgent payments needs, or to stimulate exports. In 1987 Sudan established an “own-resource” scheme that permitted importers to use their own foreign exchange to finance imports of certain inputs and essential consumer goods.

Other countries simplified their systems to provide incentives to exports, moved some or all export proceeds to a free or more depreciated rate, and reduced subsidies on imports by shifting most import payments to the same rate. In 1988 Argentina and Venezuela followed this approach; Sudan included private transfers and 30 percent of export receipts in the commercial market but retained the large majority of imports and public invisibles at the official rate; and Peru shifted imports to more depreciated rates.

Some changes affected invisibles. Both Lao People’s Democratic Republic and Viet Nam reduced distortions on some payments in 1988: Viet Nam shifted transactions by international organizations, and Lao People’s Democratic Republic shifted aid and transactions by public enterprises to more depreciated rates. Venezuela also opened the free market to investors involved in debt-conversion schemes for financing investment in the export sector.

The multiple rates that were simplified during 1987 and 1988 were also accompanied by a fall in the spreads between the most appreciated and most depreciated levels. A lower spread can suggest less acute distortions, and, if the average rate is closer to the market rate, reflects a move toward a more appropriate exchange system. On the basis of available information, the general tendency of spreads in countries with multiple exchange markets has been to fall. Several countries, too, added new rates that were market-related; although this increased the spread, the impact was to bring average rates closer to market levels.

One characteristic of recent changes in exchange rate practices is a tendency for countries to introduce marketrelated rates into their exchange systems in an effort to improve their external accounts and reduce price distortions. In a number of countries, the exchange rate has been unified at a market rate, as occurred in Trinidad and Tobago and Guatemala in 1988. Several other countries have introduced or expanded the scope of a more marketrelated rate over the past two years. In 1987 Argentina introduced a more market-related exchange rate for transactions previously covered in the parallel markets; Sudan unified the dual exchange market at a somewhat more market-related rate; and in 1988 Brazil introduced a new free rate for tourist transactions, and Ghana introduced foreign exchange bureaus that transact in foreign exchange at freely determined rates. Other countries have expanded the scope of their market rates. In 1987 Somalia, Ghana, Nigeria, and Guinea expanded the coverage of their auction markets, and Guyana established a second foreign exchange window to bring parallel market transactions into the organized market. Several other countries expanded the categories of goods transacted at market rates in 1988, including Argentina, Venezuela, and Paraguay.

Similarly, most of the changes that aimed to discourage external flows focused mainly on the current account. In 1988 Sudan re-established a dual market (in addition to the own-resource market); the commercial market has a rate that is, in principle, market-related and covers foreign exchange inflows from private transfers and 30 percent of export proceeds. The pegged official rate (164 percent more appreciated than the commercial rate when the markets were created) is applied to the remainder of export proceeds, government loans and grants, some invisibles, and most imports. Ecuador also shifted all private transactions, investment and profit remittances, to the regulated market (where the rate was about 50 percent more appreciated than that in the free market) Ecuador also imposed further specific limits on imports.

Other countries have used specific taxes or subsidies or other administrative measures to provide more targeted incentives: in 1988 Peru increased the share of export earnings that exporters were allowed to retain to 30 percent; the Yemen Arab Republic reduced its import deposit requirements and eased import licensing; and Nicaragua reduced import taxes and eliminated differential surrender requirements for exports and invisibles.

International Monetary Fund, Selected Decisions of the International Monetary Fund, Thirteenth Issue (Washington, 1987), pp. 9–14.

See Reports of the Group of Ten and Group of Twenty-Four, published as appendices to Andrew Crockett and Morris Goldstein, Strengthening the International Monetary System: Exchange Rates, Surveillance, and Objective Indicators, Occasional Paper No. 50 (Washington: International Monetary Fund, 1987).

See Peter J. Quirk and others, Policies for Developing Forward Foreign Exchange Markets, Occasional Paper No. 60 (Washington: International Monetary Fund, 1988).

In several member countries, owing in part to political sensitivities, the authorities have declared a peg to a currency unit that in practice they do not adhere to closely. Four oil exporting countries are pegged to the SDR, but in practice limit the flexibility of their exchange rate on a shortrun basis against the U.S. dollar (the “quasi-peg”).

See Peter J. Quirk and others, Floating Exchange Rates in Developing Countries: Experience with Auction and Interbank Markets, Occasional Paper No. 53 (Washington: International Monetary Fund, 1987).

Countries also made changes in their exchange arrangements that affected neither their classification nor their quoted exchange rates. These included changes in the coverage of secondary exchange markets and surrender requirements and institutional change (such as expanding the institutions authorized to make foreign exchange transactions). One country, Nicaragua, changed its currency, the córdoba, which was replaced by a new córdoba worth 1,000 times the value of the old córdoba.

For more details of the 1984—85 Fund review, see International Monetary Fund, AREAER, 1985.

See Quirk and others (1988).

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