Chapter

II Developments in Exchange Systems

Author(s):
International Monetary Fund
Published Date:
January 1992
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To enable the IMF to exercise firm surveillance over the exchange rate policies of its membership, each member country is obliged to notify the IMF of its exchange arrangements within 30 days of becoming a member and promptly thereafter of any subsequent changes (see Box 1 for details on exchange rate classifications). In 1978, notification procedures were established under the amended Articles of Agreement consistent with prompt review by the Executive Board of decisions involving substantive changes in exchange rate policies; these are reflected in the Procedures for Surveillance.8 The procedures for such notification are to be applied, for example, whenever a member takes official action to establish a new form of exchange arrangement, change the level of a peg, switch the peg to another currency or currency composite, or implement a change in a currency composite other than one occurring from the mere updating of currency weights. Members maintaining more flexible exchange arrangements are also expected to notify the IMF whenever they make a significant decision that affects their exchange arrangements. Whenever a member’s real effective exchange rate moves by more than 10 percent—the result of either nominal exchange rate or relative price changes—from the date of the preceding examination of its policies by the Executive Board, the member must also notify the Board. The IMF judges whether a member’s exchange rate policies are consistent with its obligation “to assure orderly exchange arrangements to promote a stable system of exchange rates”; the IMF can discuss with the authorities any issue arising out of such an assessment, normally in the context of regular Article IV consultations with the member, or in association with the member’s use of IMF resources.

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 third of all developing countries have single currency pegs.)

Peg: Currency Composite. A composite is formed using 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 country specific and reflect the geographical distribution of trade, services, or capital flows. They can also be standardized, such as the SDR and the ECU.

Flexibility Limited vis-à-vis Single Currency. The value of the currency is maintained within certain margins of the peg. (This system 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 of individual EMS currencies to each other and a float of all these currencies jointly vis-à-vis non-EMS currencies.

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. Some industrial countries have floats—except for the EMS countries—but the number of developing countries included in this category has been increasing in recent years.

Choice of Exchange Arrangements

The exchange arrangements countries have adopted since 19739 cover a broad spectrum, ranging, by degree of flexibility, from single currency pegs to free floats. Most countries have adopted arrangements that fall clearly into one or another of the major categories of the classification system adopted by the IMF in 1982, and countries with dual markets usually have one market that is clearly more important than the other, which allows for the classification of at least the major market. The exchange rate arrangements of the IMF’s member countries at the end of December 1991 are shown in Table 1.

Table 1.Exchange Rate Arrangements as of December 31, 19911
Flexibility Limited Vis-à-Vis a Single Currency or Group of CurrenciesMore Flexible
PeggedAdjusted according to a set of indicatorsOther managed floatingIndependently floating
Single currencyCurrency compositeSingle currency2Cooperative arrangements3
U.S. dollarFrench francOtherSDROther
Angola4

Antigua and Barbuda

Argentina

The Bahamas4

Barbados

Belize



Djibouti

Dominica

Ethiopia

Grenada



Iraq4

Liberia

Mongolia4

Nicaragua4

Oman



Panama

St. Kitts and Nevis

St. Lucia

St. Vincent and the Grenadines

Sudan4



Suriname

Syrian Arab Rep.4

Trinidad and Tobago

Yemen
Benin

Burkina Faso

Cameroon

Central African Rep.

Chad



Comoros

Congo

Côte d’Ivoire

Equatorial Guinea

Gabon



Mali

Niger

Senegal

Togo
Bhutan (Indian rupee) Lesotho4 (South African rand) Swaziland (South African rand) Yugoslavia (deutsche mark)Burundi

Iran, Islamic

Rep. of4

Libyan Arab

Jamahiriya8

Myanmar



Rwanda

Seychelles
Albania4, 5

Algeria

Austria

Bangladesh

Botswana



Cape Verde

Cyprus

Czechoslovakia

Fiji

Finland9



Hungary

Iceland10

Jordan

Kenya4

Kuwait



Malawi

Malaysia10

Malta

Mauritius

Morocco13



Nepal

Norway14

Papua

New Guinea Solomon

Islands Sweden16



Tanzania

Thailand

Tonga

Uganda4

Vanuatu



Western Samoa

Zimbabwe
Bahrain6

Qatar6

Saudi Arabia6

United Arab Emirates6

Belgium

Denmark

France

Germany, Fed. Rep. of

Ireland



Italy

Luxembourg

Netherlands

Spain

United Kingdom
Chile4, 7

Colombia

Madagascar

Mozambique4

Zambia4

China, People's Rep. of4

Costa Rica Ecuador4

Egypt Greece

Guinea

Guinea-Bissau

Honduras

India7

Indonesia



Israel11

Korea

Lao People's Dem. Rep.

Maldives

Mauritania



Mexico

Pakistan

Poland

Portugal

Romania

Sao Tome and Principe

Singapore

Somalia4

Sri Lanka

Tunisia



Turkey

Viet Nam
Afganistan4

Australia

Bolivia

Brazil4

Bulgaria



Canada

Dominican Rep.

El Salvador

The Gambia

Ghana



Guatemala

Guyana

Haiti

Jamaica

Japan



Kiribati12

Lebanon

Namibia4, 15

New Zealand

Nigeria4



Paraguay

Peru

Philippines

Sierra Leone

South Africa4



United States

Uruguay

Venezuela

Zaire

Current information relating to Cambodia is unavailable.

In all countries listed in this column, the U.S. dollar was the currency against which exchange rates showed limited flexibility.

This category consists of countries participating in the exchange rate mechanism of the European Monetary System. In each case, the exchange rate is maintained within a margin of 2.25 percent around the bilateral central rates against other participating currencies, with the exception of Spain and the United Kingdom, in which case the exchange rate is maintained within a margin of 6 percent.

Member maintains exchange arrangements involving more than one exchange market. The arrangement shown is that maintained in the major market.

The basic exchange rate of the lek is pegged to the ECU.

Exchange rates are determined on the basis of a fixed relationship to the SDR, within margins of up to ±7.25 percent. However, because of the maintenance of a relatively stable relationship with the U.S. dollar, these margins are not always observed.

The exchange rate is maintained within margins of ±5 percent on either side of a weighted composite of the currencies of the main trading partners.

The exchange rate is maintained within margins of ±7.5 percent.

The exchange rate, which is pegged to the ECU, is maintained within margins of ±3.0 percent.

The exchange rate is maintained within margins of ±2.25 percent.

The exchange rate is maintained within margins of ±5.0 percent.

The currency of Kiribati is the Australian dollar.

The exchange rate is maintained within margins of ±3.0 percent.

The exchange rate, which is pegged to the ECU, is maintained within margins of ±2.25 percent.

The currency of Namibia is the South African rand, pending issuance of Namibia’s own national currency.

The exchange rate, which is pegged to the ECU, is maintained within margins of ±1.5 percent.

Current information relating to Cambodia is unavailable.

In all countries listed in this column, the U.S. dollar was the currency against which exchange rates showed limited flexibility.

This category consists of countries participating in the exchange rate mechanism of the European Monetary System. In each case, the exchange rate is maintained within a margin of 2.25 percent around the bilateral central rates against other participating currencies, with the exception of Spain and the United Kingdom, in which case the exchange rate is maintained within a margin of 6 percent.

Member maintains exchange arrangements involving more than one exchange market. The arrangement shown is that maintained in the major market.

The basic exchange rate of the lek is pegged to the ECU.

Exchange rates are determined on the basis of a fixed relationship to the SDR, within margins of up to ±7.25 percent. However, because of the maintenance of a relatively stable relationship with the U.S. dollar, these margins are not always observed.

The exchange rate is maintained within margins of ±5 percent on either side of a weighted composite of the currencies of the main trading partners.

The exchange rate is maintained within margins of ±7.5 percent.

The exchange rate, which is pegged to the ECU, is maintained within margins of ±3.0 percent.

The exchange rate is maintained within margins of ±2.25 percent.

The exchange rate is maintained within margins of ±5.0 percent.

The currency of Kiribati is the Australian dollar.

The exchange rate is maintained within margins of ±3.0 percent.

The exchange rate, which is pegged to the ECU, is maintained within margins of ±2.25 percent.

The currency of Namibia is the South African rand, pending issuance of Namibia’s own national currency.

The exchange rate, which is pegged to the ECU, is maintained within margins of ±1.5 percent.

The exchange rate classifications used by the IMF are basically distinguished by the degree of exchange rate flexibility allowed under the exchange arrangement adopted by each member. 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. Currently, only the countries participating in the exchange rate mechanism (ERM) of the European Monetary System (EMS) have adopted “Cooperative Arrangements”; all but two of them maintain margins of 2.25 percent with respect to their cross rates based on the central rates expressed in terms of the ECU.

The “More Flexible” category covers countries whose arrangements lead to a variance greater than would generally be obtained with margins of more than ±2.25 percent. This residual group is sub-classified 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 usually allow the exchange rate to move so as to reflect market forces. If they intervene at all, they do so only to influence, not to neutralize, the direction 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 during these intervals against a set of indicators, the currency is subclassified as “Adjusted According to a Set of Indicators.” The remaining members fall into the category “Other Managed Floating.”

At times, however, observed exchange rate behavior differs from that which is implied by the policy pronouncements of authorities and, therefore, from the stated classification. Some countries in the pegged categories, for example, exhibit a relatively high degree of exchange rate variability, particularly when the frequency of adjustment is taken into account, as a result of discrete adjustments. In other words, periods of exchange rate stability are interrupted by occasional discrete adjustments that, when viewed over a longer period, suggest a degree of variability that can exceed that of some countries classified as maintaining more flexible arrangements. During 1990, the currencies of the Dominican Republic and Guyana, which were classified as pegged to the U.S. dollar, had a higher level of variability than those of Greece, Mauritania, Tunisia, and Turkey, which were classified as floating.

Conversely, the currency of a country maintaining a (nominal) policy of exchange rate flexibility can display stability in terms of another currency or group of currencies. Thus, the currencies of Honduras, Indonesia, and Korea, which were classified as floating, showed the same overall level of variability as currencies pegged to the U.S. dollar. Such discrepancies serve to highlight inconsistencies between the classification of members’ exchange rate arrangements and observed exchange rate developments.

Although IMF members have been able to choose between the apparent advantages of monetary independence under floating rates and those of greater price stability under pegged rates, they have often found it difficult to determine the optimal level of exchange rate flexibility. 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, Liberia, Namibia, and Panama are the only IMF members that use other currencies in this way—the Australian dollar in Kiribati, the South African rand in Namibia, and the U.S. dollar in the other two cases. (Panama also circulates its own government checks and its own contractional coins, while Liberia circulates its own coins, but not bank notes.) The drawbacks are the loss of seigniorage and independence of monetary policies, which, for a very small country, might be offset by reduced administrative costs and, perhaps, greater financial stability. The next most rigid form of peg is a one-to-one parity with the currency of peg. These are relatively rare, because different inflation rates have necessitated adjustments over time to the original exchange rate of the currency. The only IMF members to have such a peg at present are The Bahamas, Belgium-Luxembourg,10 Bhutan, Lesotho, and Swaziland, although, until the mid-1980s, the currencies of the Dominican Republic and Guatemala were at parity with the U.S. dollar. Of these, Lesotho and Swaziland, along with Namibia and South Africa, comprise the Common Monetary Area, a single exchange control territory.

By definition, members of currency unions peg their currencies to each other at par. Thus, the seven countries comprising the West African Monetary Union11 maintain pegged arrangements with the common currency, the CFA franc, which is fixed in terms of the French franc at the rate of CFAF 50 = Fl. The CFA franc is issued by the Banque centrale des Etats de l’Afrique de l’Ouest. The CFA franc is also issued at the same fixed exchange rate by the Banque des Etats de l’Afrique Centrale to the six member countries of the Central African Monetary Area,12 in which the CFA franc is also the common currency.13 Similarly, eight Caribbean countries14 maintain fixed exchange arrangements and use a common currency, the Eastern Caribbean dollar, which is issued by the Eastern Caribbean Central Bank and is pegged to the U.S. dollar at the rate of EC$2.70 = US$1.

A single currency peg has been the exchange arrangement most frequently used by developing countries, of which over one third currently 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 real or nominal trade-weighted exchange rate continues to fluctuate; different inflation rates cause adjustments vis-à-vis the currency pegs, and, by definition, the currency floats with the currency of the peg vis-à-vis other currencies. If a country has geographically diversified transactions, a single currency peg could lead to increased uncertainty as to the domestic currency value of many or most of these international transactions. On the other hand, a peg to a strong currency, by tying the prices of tradable goods to world levels, may provide an anchor against inflation.

The ten industrial countries in the “Cooperative Arrangements” category comprise the EMS currency group; they have adopted this regime as part of a broader effort to coordinate macroeconomic policies. This category differs from a single currency peg in that arrangements exist to coordinate monetary policy within the region, and there are active foreign exchange 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. The cooperative arrangements have correspondingly less potential than other pegging arrangements for overvaluation or undervaluation of exchange rates.

The members of the EFTA have recently been solidifying their exchange rate relationships with the EMS in a less formal context (see discussion on exchange rate developments below). In addition, the member countries of the EC and those of EFTA continue to negotiate on the establishment of a common market—the European Economic Area or EEA—among their 380 million inhabitants. The EEA would extend the EC’s planned internal market to the EFTA countries, allowing for the unrestricted movement of goods, services, capital, and labor among the member countries.

Changes in IMF members’ exchange arrangements since 1982 have shown an overall tendency to move away from single currency pegs toward more flexible arrangements, continuing a trend that began in the mid-1970s (Chart 2). This trend was partially reversed in 1988: only two of the ten reclassifications reported to the IMF by member countries (Spain and Viet Nam) were clearly in the direction of more flexibility.15 However, the trend resumed in 1989–90. By the end of 1990, 25 countries maintained independent floats for their currencies compared with 8 at the end of 1982 and 18 at the end of 1988.

Chart 2.Exchange Rate Classifications, 1982–90

(In number of countries)

Source: IMF, AREAER(various issues).

Of 28 reclassifications during 1989–90,16 almost one half involved shifts from some form of pegged arrangement (that is, pegged to a single currency or currency composite (including the ECU and the SDR)) to a managed or independent float (Table 2). Two countries moved from a managed float to an independent float (Argentina and El Salvador),17 two from adjusting according to a set of indicators to a managed or independent float (Brazil and Portugal), and two from some form of peg to adjusting according to a set of indicators (Mozambique and Zambia). Thus, almost two thirds of the 28 members that changed their exchange arrangements elected to adopt more flexible arrangements. The remaining nine countries instituted more rigid arrangements, primarily shifting from a managed or independent float to a pegging arrangement. In terms of the importance of these groups in the IMF’s membership, the countries with single currency pegs declined from 33 percent at the end of 1988 to 26 percent at the end of 1990 (the share of SDR pegs falling to 4 percent from 5 percent), while the share of countries with independent floating arrangements rose to 16 percent from 11 percent.

Table 2Summary of Exchange Rate Arrangements Maintained by Members, January 1, 1989 to September 30, 1991(At end of quarter)
Classification Status198919901991
IIIIIIIVIIIIIIIVIIIIII
Pegged to:
U.S. dollar32323232301281251251262524
French franc1414141414141414141414
Other currency55555566555
SDR87777766666
Other composite31323234331341341341343433
Flexibility limited vis-à-vis a single currency44444444444
Cooperative arrangements899999910101010
Adjusted according to a set of indicators55554455555
Managed floating2525262224222424232324
Independently floating1817171921232625272829
Total2, 3150150151151151150153153153154154
Source: IMF staff estimates.

In light of the communication received from the Polish authorities in February 1991, Poland’s exchange rate arrangement has been reclassified retroactively from the category “Pegged: Other Composite” to the category “Pegged: U.S. Dollar,” with effect from January 1990.

Excluding Cambodia, for which no current information is available.

Effective May 22, 1990, the Yemen Arab Republic and the People’s Democratic Republic of Yemen merged as the Republic of Yemen.

Source: IMF staff estimates.

In light of the communication received from the Polish authorities in February 1991, Poland’s exchange rate arrangement has been reclassified retroactively from the category “Pegged: Other Composite” to the category “Pegged: U.S. Dollar,” with effect from January 1990.

Excluding Cambodia, for which no current information is available.

Effective May 22, 1990, the Yemen Arab Republic and the People’s Democratic Republic of Yemen merged as the Republic of Yemen.

In a number of developing countries, changes toward a more flexible arrangement were part of a comprehensive reform of their exchange systems during 1989–90 rather than the result of isolated measures. Typically, they involved the introduction of a secondary exchange market in which the exchange rate is determined by market forces; occasionally, it was the result of unification of multiple exchange markets at a substantially depreciated market-determined rate. In cases where the bulk of foreign exchange transactions was allocated to the exchange market at a more flexible rate, a reclassification to the “More Flexible”category was undertaken. To a greater or lesser degree, this was true of Argentina, El Salvador, Guatemala, and Jordan in 1989, and Brazil, El Salvador, Honduras, Jamaica, Sierra Leone, Somalia, and Zambia in 1990. The common theme underlying these exchange system reforms was the desire to move to a more market-determined system—often in the context of programs supported by the IMF. Some countries, such as El Salvador (1989), Guyana, and Zambia, formally introduced a dual exchange rate, usually in the context of an already existing parallel market and a shift of transactions from the more appreciated official rate to the parallel market rate. The dual exchange rate system was generally seen as an intermediate step to full unification. In Argentina, El Salvador (1990), and Jamaica, the move to a more market-determined system took the form of unification of multiple exchange markets, usually involving a substantial depreciation of the currency. Finally, in other countries with multiple rates, such as Ecuador, Nicaragua, and Somalia, the pace of devaluation of the official rate was increased with the aim of reducing the spread between the official and the freely determined parallel rates and their possible eventual unification. Most of the changes in pegged arrangements occurred in the dollar peg; by the end of 1990, the number of currencies pegged to the U.S. dollar had fallen to 25, compared with 38 in 1988.

Considerably fewer measures affecting exchange arrangements were taken by industrial countries during 1989–90. In June 1989, Spain joined the ERM of the EMS with the result that its currency arrangement was changed from “Independently Floating” to“Cooperative Arrangement.” In March 1990, the two-tier market system in the Belgian-Luxembourg Economic Union, which had been in place since 1955, was eliminated. In October of the same year, the United Kingdom decided to participate in the ERM of the EMS, and its currency arrangement was changed accordingly.

The developing countries have tended toward more flexible exchange rate arrangements for two reasons. First, domestic rates of inflation accelerated sharply during the 1980s, particularly in Africa, Europe, and the Western Hemisphere. To avoid a deterioration in external competitiveness, these countries were obliged to depreciate their currencies, with a number of them systematically linking the nominal exchange rate to domestic inflation. Second, the uncertainty associated with fluctuations in the bilateral exchange rates of the major currencies has encouraged many countries to adopt a basket peg to mitigate the effects of those fluctuations on their economies.

For the industrial countries, the move toward fixed exchange rate systems stems from the conviction that they foster greater “discipline” in domestic monetary and fiscal policies and thereby contribute to price stability. Countries without strong anti-inflationary credibility can peg to the currency of a country that has an established reputation for price stability as a means of disciplining both the authorities and the private sector. Also responsible for greater fixity of exchange rate arrangements in industrial countries has been greater economic integration, as evidenced by the EC, where monetary, economic, and political integration has proceeded rapidly.18

Exchange Rate Developments

Industrial Countries

Exchange rate trends in the larger industrial countries in 1989–90 can be interpreted as reflecting relative movements in national interest rates, which can, in turn, be associated with official and/or market reaction to macroeconomic developments. A noteworthy feature of these developments in general has been the lower degree of synchronization in the level of economic activity in these countries. The major industrial countries have been in different cyclical positions over the past few years, and their policy adjustments have consequently been staggered.

Broadly speaking, the economies of Canada, the United Kingdom, and the United States experienced economic downturns with effect from mid- to late 1990, with interest rates declining as inflationary pressures eased. At the same time, demand in Germany and Japan remained buoyant, forcing upward pressure on interest rates as authorities sought to pre-empt inflation. The economies of France and Italy experienced more moderate growth rates, with interest rate developments constrained by consideration of acceptable short-term interest rate differentials within the framework of the ERM of the EMS.19

Since early 1985, the dollar has depreciated vis-à-vis most of its main trading partners. This trend was interrupted only briefly in 1988, when the U.S. federal funds’ rate rose sharply over much of the year. Subsequently, in response to accumulated evidence of a weakening in domestic activity, downward adjustments in short-term interest rates were begun in 1989. During 1989–90, interest rates rose concomitantly in Germany and Japan. The Bundesbank was reacting to concerns regarding strong domestic demand and a generally expansionary fiscal stance resulting from direct tax cuts in 1990 associated with the larger tax reform being undertaken and to additional expenditures associated with unification. The Bank of Japan raised interest rates in mid-1989 in an attempt to dampen domestic demand. This stance contributed to a weakening of the Tokyo stock market throughout 1990, which led to a rise in equity yields and strengthened the yen on the foreign exchange markets after a period of what was generally perceived to be excessively depreciated levels of the yen exchange rate. Between early 1989 and early 1991, the short-term interest rate differential against the U.S. dollar changed in favor of yen-and deutsche mark-denominated assets by more than 6 percentage points; in favor of assets denominated in other European currencies by 4–5 percentage points; and in favor of Canadian dollar assets by 2 percentage points.

The substantial shift in relative interest rates against dollar-denominated assets led to a further depreciation of the U.S. dollar vis-à-vis its trading partners in 1989–90 (Charts 3 and 4). In nominal effective terms, the dollar depreciated by 10 percent in 1989–90. Its decline was interrupted only briefly at the time of the Middle East conflict. Following the cessation of hostilities in late February 1991, the dollar appreciated somewhat, reflecting upward revisions in market expectations of economic activity and interest rates in the United States.20 The real effective rate of the dollar depreciated by 14 percent in 1989–90 to the lowest level of the past forty years. The yen depreciated relative to the deutsche mark in 1989, then reversed direction as it appreciated more rapidly than the mark against the U.S. dollar. Between January 1990 and March 1991, the yen and the mark appreciated (in nominal terms) by 5.8 percent and 5.6 percent, respectively, against the U.S. dollar.

Chart 3.Nominal Effective Exchange Rates of Industrial Countries with Independently Floating Arrangements, 1982–901

(Index, 1982= 100)

Source: IMF, Information Notice System.

1Nominal effective exchange rates for Australia, Canada, Japan, and New Zealand are based on a basket of currencies of their trading partners; the U.S. rate is based on a basket of currencies of 16 industrial countries.

Chart 4.Real Effective Exchange Rates of Industrial Countries with Independently Floating Arrangements, 1982–901

(Index, 1982 = 100)

Source: IMF, Information Notice System.

1Real effective exchange rates for Australia, Canada, Japan, and New Zealand are based on a basket of currencies of their trading partners; the U.S. rate is based on a basket of currencies of 16 industrial countries.

Currencies of the members of the EMS appreciated in terms of the U.S. dollar throughout the period under review, with some fluctuations (Chart 5). Through 1989 and the first half of 1990, the currencies of Italy and Spain had been subject to upward pressure owing to their relatively high nominal interest rates (despite relatively high inflation rates in these countries). Their strength reflected increased market confidence in the durability of existing parities in the ERM. The French franc was also strong during this period largely because France maintained a low inflation rate, and its strength reflected market confidence in the appropriateness of eliminating remaining capital controls in early 1990.

Chart 5.Nominal Effective Exchange Rates of Industrial Countries with Cooperative Arrangements, 1982–90

(Index, 1982 = 100)

Source: IMF, Information Notice System.

1Spain joined the EMS on June 19, 1989.

2The United Kingdom joined the EMS on October 8, 1990.

In August 1990, this pattern changed. The lira fell from the top of the narrow band and depreciated against the deutsche mark by about 2 percent as short-term interest rates in Italy fell while those in Germany rose. The French franc depreciated from late October such that, by the end of 1990, the deutsche mark was near the top of the band, the French franc was at the bottom, and the lira had recovered to the middle. The pound sterling, which had been falling throughout 1989, appreciated through the summer of 1990. It fell subsequently, owing to speculation that the lack of convergence of inflation rates would block its entry into the ERM of the EMS. The U.K. authorities decided to participate in the ERM from October 8, 1990 (at a central rate of DM 2.95), and the pound sterling rose briefly then fell below its central rate at the end of October and remained below that rate.

In the first half of 1991, the French franc weakened within the exchange rate bands of the ERM in part because of the reduction in official interest rates in late 1990 and early 1991, while interest rate differentials brought the Italian lira and the Spanish peseta to the top of the narrow and wide bands, respectively. The deutsche mark fell to the center of the narrow band because of the appreciation of the U.S. dollar and the sharp deterioration in the German current account. Between the first quarter of 1989 and the first quarter of 1991, the ERM currencies appreciated in nominal terms by between 9 percent and 21 percent against the U.S. dollar. The changes in the nominal effective rates of these currencies were more uniform during the period, ranging between about 1 percent (for the Italian lira) and about 8 percent (for the Irish pound). Real effective changes in the ERM also generally took the form of appreciations ranging between .003 percent (for the Belgian franc) and 12.4 percent (for the Spanish peseta).

The members of the European Free Trade Association continued to pursue the policy of maintaining a close relationship in terms of exchange rate movements vis-à-vis the EMS. While all of these countries, except Switzerland, which is not currently a member of the IMF,21 are officially pegged to currency composites, the exchange rates have been moving closely with the deutsche mark for the past several years. Several EFTA countries have recently taken additional unilateral steps toward monetary integration with the EC. In October 1990, Norway linked the krone to the ECU with a fluctuation margin of ±2.25 percent. Subsequently, in May 1991, Sweden tied its currency to the ECU within a band of ±1.5 percent, and Finland followed in June 1991 within a band of ±3 percent.22 The link to the ECU should, in time, ease the passage of EFTA countries to full membership in the EC, which is the stated objective of Sweden and Austria.23

Developing Countries

A comparison of average movements of currencies of developing countries in different exchange rate classifications shows that all categories, except those pegged to the French franc, have depreciated significantly in nominal terms since 1982. This trend continued in 1989–90, mainly because of balance of payments difficulties, which, for the most part, result from serious macroeconomic imbalances in a significant number of countries, as well as unfavorable external conditions, including a less rapid expansion of world trade, declining prices for non-oil commodities, and continuing high interest rates. However, the aggregate current account deficit of the developing countries fell from $14 billion in 1988 to $8 billion in 1990, or to less than 1 percent of their exports of goods and services. Charts 6 and 7 show the average exchange rate measures in nominal and real effective terms. As might be expected, the currencies in the more flexible classifications have depreciated the most to cope with widespread balance of payments difficulties during this period. This is partly because countries that adopt floating arrangements for the first time have always had large initial currency depreciations, which reflect delays in adjustment and difficult payments situations. Thus, in July 1989, when El Salvador adopted a more flexible arrangement, its currency, the colón, depreciated by 21 percent. Similarly, the lempira depreciated by more than 50 percent (based on the official exchange rate) when Honduras implemented liberalization measures in March 1990 and began to effect nearly all foreign exchange transactions in an interbank exchange market. In real terms, the more flexible currencies showed less fluctuation (than in nominal terms) during 1987–89; they subsequently appreciated, partly reflecting rising prices, which outstripped nominal devaluations in such high-inflation countries as Argentina, Brazil, and Peru.

Chart 6.Developing Countries: Average Nominal Effective Exchange Rates by Regime, 1982–90

(Index, 1982 = 100)

Source: IMF, Information Notice System.

Chart 7.Developing Countries: Average Real Effective Exchange Rates by Regime, 1982–90

(Index, 1982 = 100)

Source: IMF, Information Notice System.

Overall, however, the currencies in the single currency pegs continue to enjoy greater long-term stability. The majority of single currency peggers are pegged to the U.S. dollar; the dominance of this group reflects the traditional importance of the U.S. dollar in trade and its role as an intervention currency. Predictably, these currencies followed the dollar’s appreciation until the first quarter of 1985 and its subsequent depreciation through 1990. Since the United States has been relatively more successful in containing inflation, currencies pegging to the dollar have depreciated less in real terms than in nominal terms since 1985.

A total of 86 developing countries (over one half the IMF’s membership) applied exchange arrangements involving a peg to another single currency or to a currency composite (including the ECU and the SDR) at the end of 1990. The exchange rates at which these currencies are fixed were occasionally adjusted, usually in light of developments and/or intentions regarding external competitiveness. Thirty-two of these countries effected such adjustments in the period under review, some of them doing so on more than one occasion (Table 3). Of the 32, all but 1 country devalued. In foreign currency terms, these devaluations ranged from less than 1 percent (Sudanese pound on March 13, 1989) to 86 percent (Nicaragua’s córdoba during the second quarter of 1990). Revaluations were effected by the authorities of Malta (5.9 percent on December 31, 1989), Poland (0.6 percent on June 30, 1989), and Sudan (8.3 percent on February 13, 1989).

Table 3Discrete Exchange Rate Changes of Pegged Currencies, 1989–90
Country (currency/peg)Date of ChangeDomestic Currency Units per Currency PegPercentage Change (Depreciation (−))1
Old rateNew rate
Algeria (dinar/other composite)2QIV 19909.512.2−22.1
Bangladesh (taka/other composite)3/9032.2733.88−4.8
4/9033.8834.22−1.0
5/9034.2234.90−1.9
8/9034.9035.59−1.9
9/9035.5935.69−0.3
11/9035.6935.79−0.3
Botswana (pula/other composite)9/30/901.841.89−2.6
Burundi (Burundi franc/SDR)311/23/89201.00221.09−9.1
12/1–29/89221.09232.14−4.8
Czechoslovakia (koruna/other composite)41/8/909.317.045.3
12/28/9024.028.0−14.3
Dominican Rep. (peso/U.S. dollar)3/10/906.337.30−13.3
Guatemala (quetzal/U.S. dollar)58/12/892.702.78−2.9
Guyana (dollar/U.S. dollar)4/1/8910.033.0−69.7
6/15/9033.045.0−26.7
Hungary (forint/other composite)3/21/8954.10056.947−4.9
4/14/89656.90060.486−5.9
12/5/8960.564.0−5.5
Iceland (krona/other composite)1/3/89
2/7/89
5/10/89
Israel (sheqel/other composite)1/3/89
6/22/89
3/2/90
9/10/90
Jamaica (dollar/U.S. dollar)52/1/906.57.0−7.1
Malawi (kwacha/other composite)3/26/902.73752.9340−6.7
Malta (lira/other composite)712/31/890.360.345.9
Mozambique (metical/other composite)5QI 1990814.5924.1−11.9
Nicaragua (córdoba/U.S. dollar)83/31/89920.06,000.0−84.7
6/30/896,000.020,000.0−70.0
9/30/8920,000.022,000.0−9.1
12/31/8922,700.038,500.0−41.0
Mid-March 199038,150.046,380.0−17.7
QII 199046,380.0340,000.0−86.4
9/30/90340,000.01,180,000.0−71.2
12/31/901,180,000.03,000,000.0−60.7
Papua New Guinea (kina/other composite)1/9/900.8620.958−10.0
Peru (inti/U.S. dollar)53/1/89500.01,220.0−59.0
6/30/8991,200.02,045.0−41.3
9/30/892,395.404,123.21−42.0
12/31/894,267.95,261.4−18.9
3/31/905,261.411,225.4−53.1
6/30/9011,225.433,721.0−66.7
Poland (zloty/other composite)103/31/89502.60572.55−12.2
6/30/89850.0844.60.6
9/30/89844.61,800.0−53.1
12/31/891,800.06,500.0−72.3
1/1/906,500.09,500.0−31.6
Yemen, P.D.R. (dinar/U.S. dollar)115/4/900.3450.462−25.3
Romania (leu/other composite)2/1/90128.7421.00−58.4
2/1/9014.221.0−32.2
11/1/9021.035.0−40.0
Rwanda (franc/SDR)11/9/90102.71171.18−40.0
Sao Tome & Principe (dobra/other composite)2/24/89100.0120.0−16.7
9/89120.0128.4−6.5
6/7/90140.1150.7−7.0
Sierra Leone (leone/U.S. dollar)54/1/8945.065.0−30.8
1/15/9065.0120.0−45.8
Somalia (shilling/other composite)56/30/89489.0
9/30/89489.0582.0−16.0
3/31/90930.01,160.0−19.8
6/30/901,299.01,572.0−17.4
Sudan (pound/U.S. dollar)131/15/8911.812.0−1.7
2/6/8912.013.0−7.7
2/13/8913.012.08.3
3/13/8912.012.1−0.8
Tanzania (shilling/U.S. dollar)12/3/89157.4190.0−17.2
12/31/89190.0192.3−1.2
Uganda (shilling/U.S. dollar)3/7/89165.0200.0−17.5
10/24/89200.0340.0−41.2
8/31/90440.0450.0−2.2
9/21/90450.0480.0−6.3
11/12/90480.0510.0−5.9
12/21/90510.0540.0−5.6
Viet Nam (dong/U.S. dollar)512/18/893,900.04,300.0−9.3
Yemen Arab Rep. (rial/U.S. dollar)2/19/909.7612.01−18.7
Yugoslavia (dinar/deutsche mark)51/1/917.09.0−22.2
Zambia (kwacha/SDR)6/30/8910.8016.08−32.8
9/12/8916.1016.86−4.6
10/9/8916.9017.59−4.2
12/31/8917.621.5−18.2
Source: IMF staff estimates.

In terms of currency peg; in the case of “other composite,” in terms of U.S. dollar.

The currency was gradually depreciated over the period.

In November 1989, the Burundi authorities decided to devalue the franc by 15 percent in local currency terms, 10 percent initially, and a further 5 percent during December.

On January 8, 1990, the authorities unified the commercial and noncommercial rates and established a tourist rate; the table above shows only developments in the commercial rate. On October 9, 1990, the tourist rate was depreciated by 14 percent. On October 15, 1990, the commercial/noncommercial rate was depreciated by 35 percent. On December 28, 1990, the commercial/noncommercial and tourist rates were unified; the table shows developments in the commercial/noncommercial rate.

Countries whose exchange rate arrangement was reclassified in 1989–90.

Effective September 1, 1989, exchange rate of the forint against the transferable ruble was adjusted from Ft 29 = TR 1 to Ft 27.5 = TR 1, representing an appreciation of 5.5 percent in terms of the transferable ruble.

Effective December 1, 1989, Malta changed the number of currencies in the basket to three (U.S. dollar, pound sterling, ECU) from ten and updated the trade weights to reflect 1986–88 average flows.

Frequency of devaluation higher then once per quarter; weekly devaluations were not uncommon.

Peru abandoned its schedule of preannounced adjustments and replaced it with weekly devaluations in April and biweekly adjustments in May. Effective June 8, a system of daily devaluations of about 1 percent each business day was introduced.

During 1989, there were more than twenty discrete adjustments of the exchange rate. The table shows only end-of-quarter data.

The authorities of Yemen Arab Republic and Yemen, P.D.R. informed the IMF that effective May 4, 1990, both the Yemeni rial and the Yemeni dinar had been made legal tender in both sectors of their territories as a prelude to unification of the two countries on May 22, 1990. The Yemeni rial and the Yemeni dinar would be fully convertible into each other at the rate of YRls 26 = YD 1. The exchange rate of the rial was unchanged at YRls 12.01 = US$1.

Effective February 1, 1990, Romania unified the commercial and noncommercial rates at Lei 21 = US$1. Commercial and noncommercial rates on January 29 were Lei 14.23 = US$1 and Lei 8.74 = US$1, respectively.

Changes refer to commercial banks’ buying rate; official exchange rate remained unchanged at LSd 4.5 = US$1.

Source: IMF staff estimates.

In terms of currency peg; in the case of “other composite,” in terms of U.S. dollar.

The currency was gradually depreciated over the period.

In November 1989, the Burundi authorities decided to devalue the franc by 15 percent in local currency terms, 10 percent initially, and a further 5 percent during December.

On January 8, 1990, the authorities unified the commercial and noncommercial rates and established a tourist rate; the table above shows only developments in the commercial rate. On October 9, 1990, the tourist rate was depreciated by 14 percent. On October 15, 1990, the commercial/noncommercial rate was depreciated by 35 percent. On December 28, 1990, the commercial/noncommercial and tourist rates were unified; the table shows developments in the commercial/noncommercial rate.

Countries whose exchange rate arrangement was reclassified in 1989–90.

Effective September 1, 1989, exchange rate of the forint against the transferable ruble was adjusted from Ft 29 = TR 1 to Ft 27.5 = TR 1, representing an appreciation of 5.5 percent in terms of the transferable ruble.

Effective December 1, 1989, Malta changed the number of currencies in the basket to three (U.S. dollar, pound sterling, ECU) from ten and updated the trade weights to reflect 1986–88 average flows.

Frequency of devaluation higher then once per quarter; weekly devaluations were not uncommon.

Peru abandoned its schedule of preannounced adjustments and replaced it with weekly devaluations in April and biweekly adjustments in May. Effective June 8, a system of daily devaluations of about 1 percent each business day was introduced.

During 1989, there were more than twenty discrete adjustments of the exchange rate. The table shows only end-of-quarter data.

The authorities of Yemen Arab Republic and Yemen, P.D.R. informed the IMF that effective May 4, 1990, both the Yemeni rial and the Yemeni dinar had been made legal tender in both sectors of their territories as a prelude to unification of the two countries on May 22, 1990. The Yemeni rial and the Yemeni dinar would be fully convertible into each other at the rate of YRls 26 = YD 1. The exchange rate of the rial was unchanged at YRls 12.01 = US$1.

Effective February 1, 1990, Romania unified the commercial and noncommercial rates at Lei 21 = US$1. Commercial and noncommercial rates on January 29 were Lei 14.23 = US$1 and Lei 8.74 = US$1, respectively.

Changes refer to commercial banks’ buying rate; official exchange rate remained unchanged at LSd 4.5 = US$1.

The frequency with which exchange rates pegged to the U.S. dollar were devalued against the dollar in 1990 remained unchanged relative to 1988 and 1989. Fifteen currencies devalued against the dollar in 1989 and 1990, compared with 16 in 1988. The sizes of the 1990 devaluations were also similar to those of the previous two years—ranging from 2 percent to 86 percent—compared with a narrow range of between 2 percent and 2.75 percent in 1984 just before the dollar peaked.

Changes in the exchange rates of developing countries that maintain more flexible exchange arrangements involved depreciations in 1989–90, with the exception of the Malagasy franc, which appreciated by 4.1 percent, the Singapore dollar, which appreciated by 11.6 percent, and the Tunisian dinar, which appreciated by 7.4 percent (Table 4). Depreciations ranged from 2.7 percent (Mauritanian ouguiya) to over 99 percent (Argentine austral, Brazilian new cruzado, and Peruvian inti). The unweighted average depreciation among developing countries with flexible exchange rate arrangements was 33.4 percent. The authorities of Brazil effected currency reforms twice in the period under review: on January 16, 1989, the cruzado was replaced by the new cruzado at the rate of Cz$l,000 = NCz$1.0. The second reform took effect on March 15, 1990, with the replacement of the new cruzado by the cruzeiro, at the rate of NCz$21.0 = Cr$1.03.

Table 4Changes in “More Flexible” Currencies in Developing Countries, December 31, 1988–December 31, 1990
Currency Units per U.S.

Dollar1 (End of Period)
Percentage Change

(Depreciation (−))
Dec. 31, 1988Dec. 31, 1990
Argentina (austral)13.375,585.0−99.8
Bolivia (boliviano)2.453.4−27.9
Brazil (cruzado)0.765177.06−99.6
Chile (peso)247.2337.1−26.7
China (yuan)3.72215.2221−28.7
Colombia (peso)335.86568.7−40.9
Costa Rica (colón)79.5103.55−23.2
Ecuador (sucre)432.5878.2−50.8
Egypt (pound)0.72.0−65.0
El Salvador (colón)5.008.11−38.4
Gambia, The (dalasi)6.65917.4946−11.1
Ghana (cedi)229.885344.83−33.3
Guatemala (quetzal)2.7055.02−46.1
Guinea (franc)550.0680.0−19.1
Guinea-Bissau (peso)1,363.582,508.62−45.6
Honduras (lempira)2.05.3−62.3
India (rupee)14.948918.0732−17.3
Indonesia (rupiah)1,731.01,901.0−8.9
Jamaica (dollar)5.488.03−31.8
Korea (won)684.1716.4−4.5
Lao People’s Dem. Rep. (kip)452.5695.5−34.9
Lebanon (pound)530.0842.0−37.1
Madagascar (franc)1,526.431,465.834.1
Maldives (rufiyaa)8.5259.62−11.4
Mauritania (ouguiya)75.7377.84−2.7
Mexico (peso)2,281.02,945.4−22.6
Mozambique (metical)626.21,038.15−39.7
Namibia (South African rand)2.3782.562−7.2
Nigeria (naira)5.3539.01−40.6
Pakistan (rupee)18.6521.9548−15.1
Paraguay (guaraní)550.01,253.0−56.1
Peru (inti)500.0516,923.0−99.9
Philippines (peso)21.33628.00−23.8
Sierra Leone (leone)39.06188.67−79.3
Singapore (dollar)1.94621.744511.6
Somalia (shilling)270.01,298.5−79.2
South Africa (rand)2.37772.5625−7.2
Sri Lanka (rupee)33.0340.24−17.9
Tunisia (dinar)0.89850.83687.4
Turkey (lira)1,814.82,930.1−38.1
Uruguay (new peso)451.01,581.0−71.5
Venezuela (bolívar)14.550.38−71.2
Viet Nam (dong)900.06,500.0−86.2
Zaïre (zaïre)274.02,000.0−86.3
Zambia (kwacha)10.042.75−76.6
Source: IMF, International Financial Statistics, various issues.Note: Exchange rates shown are midpoints of buying and selling rates.

For those countries that maintain multiple rates, the rate shown is either that quoted by the authorities as the official rate or that used most widely in the country’s international transactions.

Source: IMF, International Financial Statistics, various issues.Note: Exchange rates shown are midpoints of buying and selling rates.

For those countries that maintain multiple rates, the rate shown is either that quoted by the authorities as the official rate or that used most widely in the country’s international transactions.

Multiple Exchange Rates

Introduction and Definition

Multiple exchange rates result from market segmentation caused by structural imperfections or by the authorities’ controlling foreign exchange payments in such a way as to segregate exchange transactions based upon different types of transaction, transactor, or currency. Multiple exchange rates are used not only to achieve balance of payments objectives by manipulating the exchange market but also as a method of taxation or subsidization. As in the case of all taxes or subsidies, multiple rates simultaneously influence the distribution of income and the pattern of production and consumption and will, therefore, have budgetary, monetary, and balance of payments consequences. Multiple rates distort domestic prices and output and make it more difficult for the authorities to resist pressure for special treatment of a given commodity or class of economic agents. The intervention creates what has been termed by-product distortions; that is, the attempt to correct a given domestic market imperfection creates, as a by-product, new, and possibly more serious, distortions elsewhere in the economy. These distortions require examination when multiple rates are used to influence resource allocation.

The IMF’s Treatment of Multiple Currency Practices

Multiple currency practices are subject to the IMF’s jurisdiction under Article VIII, Section 3. Action by a member or its fiscal agencies that, of itself, gives rise to a spread of more than 2 percent between buying and selling rates for spot exchange transactions between the member’s currency and that of any other member would be considered a multiple currency practice.24 For the purposes of analysis, multiple currency practices may be classified in four main categories: a dual or multiple exchange market system applying to broad categories of transactions; a separate exchange rate for specified transactions; taxes (or subsidies) that accrue to (or are paid by) the monetary or fiscal authorities on the value of specified exchange transactions; and excessive spreads between buying and selling rates for foreign exchange. Box 2 gives examples of these four types of foreign exchange restrictions. (See also footnote 4 in Table 1 for instances of such practices.)

Box 2.Examples of Multiple Currency Practices

Dual or Multiple Market System. Multiple markets usually comprise an official market in which the supply of and demand for foreign exchange associated with certain specified transactions are controlled and a free 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—usually exporters—and subsidize groups of purchasers—often the government or key pressure groups.

Fixed Exchange Rate on Given Transactions. Specific foreign exchange transactions can be either subsidized or penalized by the authorities, forcing the purchase or sale of exchange at an over- or undervalued exchange rate. 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 of foreign companies or travel 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 or less than market rates of interest), taxes on remittances abroad, and taxes on sales of exchange by commercial banks.

Excessive Spreads. Multiple currency practices result when the central bank prescribes buying and selling rates for spot foreign exchange transactions with a spread of more than 2 percent of their midpoint rate.

In April 1984 and February 1985, the Executive Board reviewed the IMF’s experience with, and policies on, multiple currency practices. Its main conclusion was to reaffirm the view that multiple rate systems are not only costly in terms of efficiency and resource allocation but also have not proven conducive to medium-term balance of payments adjustment.25

The IMF’s policies stated on the occasion of the 1984–85 discussions were based on the experience of its membership with multiple currency practices. Most countries that adopted measures that gave rise to multiple currency practices did so at a time of external payments difficulties. The reason for a country to avoid a uniform change of the exchange rate—normally a devaluation—as part of a systematic approach to solving the problem is usually the belief that it will be politically and socially costly. Some believe a uniform devaluation would undermine growth prospects and cause inflation; others believe that it would subvert social priorities by raising the costs of essential imports; and yet others believe that development prospects would be endangered by higher costs for imported inputs for priority sectors.

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. Several countries established dual markets when the authorities intended to unify the fixed official rate with various other rates, official and unofficial, but were uncertain about the appropriate 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 some countries led to a greater depreciation in the parallel market than was warranted by economic conditions.

The IMF’s policies with regard to multiple currency practices have remained flexible and responsive to each country’s particular circumstances. An important consideration in the determination of whether to approve multiple currency practices under Article VIII relates to their temporary character.26 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 unify the exchange market are normally expected from a member undertaking an adjustment program supported by the use of IMF resources. The plan usually consists of successive reductions in the dispersion of exchange rates through devaluation of the more appreciated rate or shifts of the transactions undertaken in the various exchange markets.

Multiple Exchange Rate Developments

The number of countries using multiple exchange rates either to liberalize or to restrict foreign exchange transactions can provide an overall sense of the extent to which countries are using the exchange system as a tool to manage their external accounts. These numbers may, however, be misleading: they may be the result of transitional measures in a country with a program for liberalizing transactions in sequence. A practice that appears restrictive may not be, such as the adoption of a new exchange rate that is market-determined. Instead of proceeding with a uniform devaluation to correct an external imbalance, the authorities may decide to establish—often as a transitional measure—a dual (or multiple) exchange rate system where certain essential imports and specified export transactions, including, in some cases, capital transactions, are assigned to be a legal secondary (parallel) market.27, 28 Thus, it is difficult to compare changes in the degree of complexity of multiple exchange rate systems in a given country over different periods and also to compare the degree of restrictiveness among countries. Not only are there many types of exchange practice, 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 number of countries with multiple exchange rates in 1989–90 averaged 42, compared with 44 in 1987–88. Moreover, the share in trade of members with multiple exchange rates has fallen (see below). This trend toward a decrease in the multiple rates among the IMF’s member countries has been evident since the 1950s, although, during certain periods, the incidence of multiple rates increased. In the early 1950s, the world dollar shortage, and problems of bilateralism and inconvertibility that stemmed from it, led to increased use of multiple currency practices by industrial and developing country members. Some two thirds of the membership was engaging in such practices in 1955, although these countries’ share in international trade tended to be relatively small. Weighted by trade, the incidence was about one third of the membership. In June 1957,29 the IMF 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 industrial countries and an improvement in the international trade situation, helped to simplify exchange rate systems in both industrial and developing countries. However, progress in simplifying developing countries’ systems was mixed thereafter, and the use of multiple rates increased in the late 1960s (particularly in the form of advance import deposit requirements accompanied by import surcharges due to the increasing misalignment of exchange rates) and again in the early 1980s (in response to widespread balance of payments difficulties in the wake of the second round of oil price increases) (Chart 8). Since 1986, there have been renewed reductions in the incidence of multiple rates. In 1986, 46 countries operated some form of multiple rate regime; their number fell to 44 in 1988 and to 41 (or one fourth of the IMF’s membership) in 1990 (Table 5). The importance in world trade of countries with more than one exchange rate has declined more rapidly. In 1990, countries with multiple rate systems represented only about 8 percent of total trade, compared with 13 percent in 1986 and 1988. If Brazil, China, and Mexico are excluded, the countries with multiple rate systems would represent less than 4 percent of total trade in 1990. Appendix I summarizes the multiple exchange rates maintained by members as of the end of 1990.

Chart 8.IMF Members with Multiple Exchange Rates, 1966–90

(In percent)

Sources: IMF, AREAER (various issues), and Direction of Trade Statistics.

1 As a percentage of total exports of the membership of the IMF.

Table 5Features of Multiple Exchange Rate Systems, 1983–90(Number of countries)
Feature19831984198519861987198819891990
Separate rate for some capital and some invisibles3537343639373536
More than one rate for imports2523232833292830
More than one rate for exports2525282532292828
Import rate different from export rate2828283336333433
Memorandum item: One or more features4342414644444241
Source: IMF, AREAER, various issues.
Source: IMF, AREAER, various issues.

During the 1970s, about half the countries with multiple exchange rates had minor forms of restrictive payments practices, such as simple forms of advance import deposit schemes or taxes or subsidies on specific exchange transactions. Since then, countries have tended to adopt more complex practices, such as separate exchange markets, that affect a large volume of transactions and that have a greater significance for adjustment policies. The shifts to these systems, however, have generally proven to be temporary. Although few of the countries that have adopted multiple exchange rates since 1983 have adopted simple forms, the developing countries that have recently adopted or expanded complex forms of multiple rate systems have since relinquished them. Thus, although Bolivia, Guatemala, and Venezuela created multiple exchange rates in 1984 and Peru in 1985, Bolivia unified in 1985, Guatemala in 1988, and Peru and Venezuela in 1990. Mozambique, Uganda, and Zambia created new markets in 198991, while Bulgaria, Ghana, and Guyana unified their exchange systems during this period.

International Monetary Fund, Selected Decisions of the International Monetary Fund, Sixteenth Issue (Washington, 1991), pp. 8–18.

From the time the IMF was established until 1973, the international monetary system was based on par values—the original Bretton Woods system. With a few exceptions, member countries maintained a par value for their currencies in terms of gold, either directly or indirectly through a peg to the U.S. dollar.

In the context of the Belgium-Luxembourg Economic Union, established in 1955.

Benin, Burkina Faso, Côote d’Ivoire, Mali, Niger, Senegal, and Togo.

Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea, and Gabon.

In addition, while the Comoros is not formally a member of the CFA franc zone, its exchange arrangements with France are very similar to those of the CFA franc countries.

Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.

Part of the reason for the move back to pegs in 1988 may lie in the evolution of the exchange rates of the pegs concerned. Exchange rate fluctuations of the major currencies create uncertainty and encourage a move toward more flexible arrangements in developing countries. The temporary stabilization of the U.S. dollar in 1988 might have reduced this uncertainty and encouraged member countries to move to pegs.

Fourteen in each year. In addition, there were four initial classifications, as Angola joined the IMF in 1989, and Bulgaria, Czechoslovakia, and Namibia joined in 1990.

El Salvador moved from a peg to a managed float in 1989 and from a managed float to an independent float in 1990.

For greater details on the economic factors responsible for the tendency of the developing countries to adopt more flexible exchange rate arrangements and of the industrial countries to move toward more pegged exchange rate arrangements, see Bijan Aghevli, Mohsin Khan, and Peter Montiel, Exchange Rate Policy in Developing Countries: Some Analytical Issues, Occasional Paper No. 78 (Washington: International Monetary Fund, 1991); and Jacob Frenkel, Morris Goldstein, and Paul Masson, Characteristics of a Successful Exchange Rate System, Occasional Paper No. 82 (Washington: International Monetary Fund, 1991).

See International Monetary Fund, World Economic Outlook, October (Washington, 1991).

The rise of the U.S. dollar may, in part, have also reflected official policy pronouncements relating to exchange rates, and actual or potential official intervention in foreign exchange markets. The statement following the meeting of the finance ministers and governors of the Group of Seven (G-7) industrial countries on January 21, 1991 noted that the ministers and governors “agreed to strengthen cooperation and to monitor developments in exchange markets,” and that they were “prepared to respond as appropriate to maintain stability in international financial markets.”

Liechtenstein is also not a member of the IMF.

In November 1991, the Finnish authorities devalued the markka by 12.3 percent.

The Austrian authorities aim at maintaining a stable relationship between the schilling and the currencies participating in the EMS without assuming any formal obligations.

In addition, action by a member or its fiscal agencies that results in midpoint spot exchange rates of other members’ currencies against its own currency in a relationship that differs by more than 1 percent from the midpoint spot exchange rates for these currencies in their principal markets would give rise to a multiple currency practice.

For more details of the 1984–85 review, see International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions (Washington, 1985).

In addition, for approval to be granted, the measure must be introduced or maintained for balance of payments reasons, and it must not discriminate between IMF members.

The existence of a parallel or secondary market, where certain current transactions take place at a floating exchange rate that is more depreciated than the rate in the official market, is evidence of the inappropriateness of the official exchange rate. A parallel market exists in about seventy member countries where access to the official exchange market is restricted. A distinction may be made between legal and illegal parallel markets. Parallel markets to which transactions are relegated by a member or its fiscal agencies may result in multiple currency practices subject to prior approval by the IMF.

For example, Argentina announced, in early December 1989, a package of emergency economic measures aimed at bringing inflation under control. These measures included a 35 percent devaluation of the austral in the official market and the introduction of a freely floating exchange rate for capital transactions and certain current invisible transactions. Subsequently, in late December, the authorities announced the unification of the dual exchange market under a freely floating arrangement. El Salvador adopted a dual exchange rate system in mid-July 1989. In addition to the fixed exchange rate market, a bank exchange rate market was introduced where the exchange rate was market-determined. In June 1990, the exchange rate system was unified under the bank rate. Finally, the authorities of Guyana announced in March 1990 the de facto legalization of the foreign currency transactions that formerly took place in the parallel market. While the legalization of the parallel market gave rise to a multiple currency practice, it also allowed the authorized dealers and commercial banks to deal in foreign currency at freely determined rates and shifted transactions relating to nontraditional exports and nonessential imports and services from the official to the new free market.

Executive Board Decision No. 649–(57/33), June 26, 1957, in Selected Decisions (1991).

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