I Overview and Major Trends
- International Monetary Fund
- Published Date:
- January 1992
Every year the IMF publishes the Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER)1 based on information provided by member countries. This biennial report, entitled Developments in International Exchange and Payments Systems, which analyzes and summarizes the last two editions of the AREAER, covers developments in members’ exchange and payments systems during 1989 and 19902 and follows up on a similar report issued in 1989.3 Quantitative trade measures and other restrictions and policies affecting international trade in goods and services are treated in a separate report on international trade policy.4
The IMF’s Responsibilities for Maintaining a Multilateral Payments System
Several of the six stated purposes of the IMF, which are set out in Article I of the Articles of Agreement, directly concern the IMF’s role in maintaining an open, multilateral payments system. Among them are “to promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation”; “to assist in the establishment of a multilateral system of payments … and in the elimination of foreign exchange restrictions which hamper the growth of world trade”; and to make the general resources of the IMF temporarily available to members under adequate safeguards, to enable them “to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” In other words, the manner in which each country determines the domestic currency price of foreign exchange and the availability and use of foreign exchange to carry out international transactions are of primary interest to the IMF.
Each member country undertakes to collaborate with the IMF and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. Since the IMF was established in 1944, these obligations have evolved, but they have so far principally involved the type of exchange arrangement member countries can maintain, procedures for reporting to the IMF, and the IMF’s role in exercising firm surveillance over members’ exchange rate policies. These obligations and the manner in which they are carried out are the subject of this chapter and of Chapter II.5 Chapters III and IV focus on the degree to which members’ currencies are convertible into one another. They examine the practical application of members’ general obligations under Article VIII to avoid restrictions on payments and transfers for current international transactions and discriminatory currency practices and members’ practices with regard to capital flows, over which the IMF has no jurisdiction but which, nevertheless, are part of its concern under Article I.
Main Trends in 1989–90
Despite a slowdown in the growth of world output to an average of 2.7 percent a year in 1989–90 from 3.9 percent a year in the preceding five years and an accompanying slowdown in the growth of world trade (Chart 1), the trend toward liberalization in international payments and transfers has continued. In large part, this stems from a growing recognition that the restrictions involved are an inefficient and counterproductive way to achieve their intended objectives—to limit outflows of foreign exchange, protect certain classes of imports or exports, or even raise tax revenue. The most dramatic changes occurred in Eastern Europe, where countries moved rapidly to establish currency convertibility as part of fundamental economic reform. Developing countries, in general, brought their exchange systems more in line with market principles, continuing and even accelerating a process observed throughout the 1980s, notably in 1987–88. The industrial countries achieved significant progress in liberalizing payments and transfers for current international transactions, which were already virtually free in the majority of them.
Chart 1.Volume of World Trade and Output, 1960–90
Sources: General Agreement on Tariffs and Trade; and IMF, World Economic Outlook.
Developments in Exchange Systems
Changes in IMF members’ arrangements for determining the domestic currency price of foreign exchange have shown a tendency to move toward more flexible arrangements and away from single currency pegs, continuing the trend observed in 1987–88. By the end of 1990, 25 countries maintained independent floats of their currencies, compared with 8 at the end of 1982 and 18 at the end of 1988. This tendency has become particularly apparent in developing countries.
The industrial countries, in contrast, have tended to move toward more pegged exchange arrangements since 1987–88. There has been further movement toward a tripolar system among the industrial countries in Europe, Japan, and the United States, with attempts to coordinate policies so as to maintain a degree of nominal exchange rate stability. Countries within Europe have created an enlarged monetary zone extending even beyond the present Economic Community (EC) to encompass directly member countries of the European Free Trade Association (EFTA)6 in a European Economic Area (EEA). Several Nordic countries have taken concrete steps to peg their currencies to the European Currency Unit (ECU). A European monetary zone may already be said to extend in practice to the 14 African countries whose currencies are pegged to the French franc in the franc zone arrangements7 as well as more recently, and less formally, to certain countries in Central and Eastern Europe.
In developing countries, moves toward more flexible exchange rate arrangements and liberalization of exchange controls often occurred in the context of comprehensive macroeconomic adjustment programs supported by the IMF. These programs featured a broad range of policy actions, including an increasing emphasis on structural reforms aimed at improving resource allocation and enhancing the supply response of the economy. Reforms typically included trade liberalization and reform of the tax, public enterprise, and financial systems. Problems in industry and agriculture were also addressed, often in conjunction with programs supported by World Bank loans. A review of conditionality by the IMF’s Executive Board observed that all but 9 of 44 programs supported by an IMF arrangement during 1985–88 provided for some degree of exchange rate flexibility.
The incidence of multiple exchange rates among the IMF’s member countries generally declined during the 1980s. Since the 1970s, however, countries have tended to adopt or expand forms of multiple rate systems that affect a large volume of transactions channeled through separate exchange markets rather than resort to practices confined to only a few types of transactions on the buying or selling side. These systems in most cases were intended to be transitory. However, a large number of multiple rate schemes remain, many of which represent a step toward greater exchange rate realism—that is, which approximate market-determined solutions. In many countries, previously illegal or repressed parallel exchange markets were incorporated into the official exchange system, leading in some cases to a marked narrowing of the range of rates between the official market and the former parallel market. These operations, where supported by appropriate fiscal and monetary policies, led to the marginalization or even elimination of the parallel exchange market in some countries. Nevertheless, informal, or indeed illegal, parallel exchange markets remain in a large number of developing countries, although there is evidence that their relative significance has declined.
Developments in Restrictive Measures
With respect to restrictive systems, the trend toward liberalization of nontrade current and capital transactions continues, primarily because it is seen as ineffective, even counterproductive, to try to control such financial flows. This trend contrasts with trade where it appears that some major participants have been awaiting the outcome of the Uruguay Round before further reducing restrictions. There also appears to be a close link between the adoption of more market-oriented exchange rates and the lifting of restrictions, especially when supported by appropriate fiscal and monetary policies.
Two recent developments are noteworthy. One is the remarkable transformation occurring in the formerly centrally planned economies, especially in Eastern Europe, where current payments restrictions have been significantly lifted and a large degree of currency convertibility established, and bilateral payments arrangements have been broadly dismantled. The elimination of restrictive arrangements with their inherent discriminatory features—many of which were terminated at the end of 1990 or in the early months of 1991—represents an important step toward the universality of multilateral payments regimes.
The second development is the liberalization of capital movements in a number of developing and industrial countries. In many cases, notably in Latin America, these liberalization measures, affecting inward and outward direct investment, portfolio flows, and even financial credits in some instances, occurred in regions where capital flows and other external financial operations had been subject to pervasive, although often ineffective, controls. The dismantling of capital controls—in conjunction with the liberalization of trade and payments and transfers for current international transactions—represents a significant step toward integrating these countries into the world economy. In the EC, liberalization efforts accelerated sharply in 1989 and were sustained in 1990 as the deadline for a unified capital market approached. Japan also enacted a series of measures easing the regulatory framework for commercial banks’ foreign exchange dealings and restrictions on portfolio investment.
The report is prepared in accordance with Article XIV of the IMF’s Articles of Agreement. It contains descriptions of the exchange and payments system of each member country and of a few territories, which are submitted by the authorities. The 1991 report was published in August 1991 and describes developments in 1990.
In addition, exchange rate developments in industrial countries for part of 1991 are briefly reviewed.
International Monetary Fund, Developments in International Exchange and Trade Systems, World Economic and Financial Surveys (Washington, 1989).
Margaret R. Kelly and Joslin M. Landell-Mills, Issues and Developments in International Trade, World Economic and Financial Surveys (Washington: International Monetary Fund, forthcoming).
The exercise of bilateral surveillance, principally through the annual Article IV consultation process, and multilateral surveillance, principally in the form of the World Economic Outlook, are not treated explicitly in the present report.
Austria, Finland, Iceland, Norway, Sweden, and Switzerland. Liechtenstein, which maintains a currency union with Switzerland, is an associate member.
This includes the seven countries comprising the West African Monetary Union, the six member countries of the Central African Monetary Area, and Comoros, which is not formally a member of the CFA franc zone but which maintains an exchange arrangement with France that is similar to those of the CFA franc countries.