IV Developments in Bilateral Payments Arrangements and CMEA Reform
- International Monetary Fund
- Published Date:
- January 1992
While there has been a renewed interest in regionalism, particularly in the context of difficulties in concluding the Uruguay Round of multilateral trade negotiation, this chapter focuses primarily on bilateral payments and recent reform efforts in Eastern Europe. An IMF study39 on developments in regional trade arrangements concludes that, beyond a certain threshold, the proliferation of arrangements may undercut the multilateral trade system and render it inoperative and that—if the Uruguay Round fails—the risk will increase that the trade system will gravitate toward preferential trading blocs aligned around the EC, the United States, and Japan (the triad). Such developments, if accompanied by a “fortress mentality” that results in an increase in protection, would adversely affect world welfare.
Among IMF members, bilateralism in payments agreements has declined in importance in recent years as more currencies have become convertible, at least for current transactions, and as financial markets have become more integrated. This globalization of payments streams took place despite the increasing number and importance of regional trade arrangements. While these opposing trends seem striking at first sight, they underline the fact that limitations on the transferability of payments in the form of bilateral payments agreements severely distort the free flow of resources, leading to higher economic costs and lower political gains than a set of common trade restrictions. As of the end of 1990, such agreements between two IMF members and between an IMF member and nonmembers totaled 85 and 40, respectively. In 1989, the corresponding numbers were 79 and 51, and, in 1988, 69 and 72, respectively. These figures are not comparable, however, as four countries joined the IMF in 1989–90. Among these four new members, two (Bulgaria and Czechoslovakia) had a total of 32 bilateral payments agreements with other IMF members and non-IMF members in 1990. Based on the 1988 membership, there were 51 bilateral payments agreements between IMF members and 72 agreements between IMF members and nonmembers in 1990. Hence, the overall tendency toward a liberalization in payments arrangements continued in 1989–90.
The recent economic changes in Eastern Europe are likely to have further repercussions in the area of payments regulations. In a 1989 publication,40 the IMF staff noted that the majority of bilateral payments agreements in effect in 1988 were maintained between IMF members and nonmembers and that these were “… difficult to terminate without far-reaching changes in the state trading practices of non-Fund members, particularly in Eastern Europe.” In 1990, the political upheaval in Eastern Europe brought about fundamental political and economic changes, including steps toward the abolition of central planning and state trading. The greater openness and the dismantling of controls over trade and payments eliminate the need and justification for most bilateral payments arrangements and should eventually lead to the formal abolition of a number of them. As the reform process is still in an early stage, the exact nature of trading relations between members of the former Council for Mutual Economic Assistance (CMEA) and with other countries is still evolving, but the initial steps taken indicate the potential for a far-reaching change from bilateralism to multilateralism.41
In 1990, Bulgaria and Czechoslovakia—both members of the CMEA—joined the IMF. Two other CMEA members, Hungary and Poland, had joined in the 1980s, and Romania has been a member since 1972.42 Trade and payments arrangements in the CMEA and between individual CMEA countries and other countries remained very restricted. Among the remaining bilateral payments arrangements, those involving a CMEA member constituted the largest proportion worldwide.43 The recent reform efforts in Eastern Europe have now led to the effective dissolution of the trading arrangements of the CMEA.44 While the exact nature of the emerging trade relations is not yet clear, the introduction of convertible currency trade at world market prices in January 1991 indicates a major move toward world market integration. Since then, a number of trade agreements with indicative commodity lists and bilateral clearing arrangements with swing limits have been concluded between most Eastern European countries and the former U.S.S.R. or its individual republics.
The IMF’s Treatment of Bilateral Payments Arrangements
When the IMF was established, most currencies were not convertible, and a major part of trade took place in the framework of bilateral agreements, which was one way to alleviate the shortage of convertible currency. Recognizing the limitations arising from the lack of convertible currency, the IMF initially acknowledged a possible temporary justification for certain bilateral agreements, even though discriminatory payments restrictions and currency arrangements are incompatible with the IMF’s basic objectives. However, bilateralism was expected to be a passing phenomenon, decreasing in volume and importance as countries made their currencies convertible. To ensure that bilateral arrangements were indeed limited, in time and scope, to cases where a clear need could be established and where they would not conflict with the IMF’s purpose as specified in Article I(iv),45 bilateral arrangements were subject to the IMF’s jurisdiction under Article VIII, Section 2(a) (on the avoidance of restrictions on current payments) and Article VIII, Section 3 (on the avoidance of multiple currency practices and discriminatory currency arrangements). On several occasions, the Executive Board reaffirmed that surveillance over bilateral arrangements that involved exchange restrictions and represented limitations on a multilateral system of payments was an integral part of its policy on restrictions. The stated aim of the policy was the elimination of foreign exchange restrictions and the earliest possible establishment of a multilateral system of payments in respect of current transactions between members. The IMF’s policy on the elimination of bilateral payments arrangements was to consult regularly with the member countries concerned on their need to retain existing bilateral arrangements or their ability to facilitate the reduction of bilateral arrangements by other countries. This policy has been implemented in the course of regular Article IV consultations with member countries as well as in the context of members’ recourse to use of IMF resources.
Under Article XI, Section 2, members retain the right to impose restrictions on exchange transactions with nonmembers or with persons in their territories unless “the Fund finds such restrictions prejudice the interests of members and are contrary to the interests of the Fund.” In practice, bilateral payments arrangements have dominated the conduct of trade with nonmember countries that have centrally planned economies. Although progress in abolishing these arrangements has been limited, recent events and membership are likely to lead to the official elimination of bilateral payments arrangements.
Historically, bilateral payments arrangements have taken a variety of forms, and each arrangement must be examined closely to determine whether or not it embodies features that would be subject to IMF approval under Article VIII, Sections 2(a) or 3. The IMF usually considers the following two elements essential features of bilateral payments arrangements:
the existence of at least one bilateral payments account between the two countries concerned, and
agreement between the countries that some or all of the current receipts by one partner from the other shall be used exclusively for current or capital payments to the latter.
The limitations on the transferability of balances in bilateral accounts give rise to a restriction on the making of current payments under Article VIII, Section 2(a) if, through governmental action by the parties to the agreement, balances in bilateral accounts are not freely transferable into other currencies 46Even when the balances in the bilateral accounts are allowed to be transferred into another currency, if the period between such transfers is judged unduly long (that is, more than 90 days), an exchange restriction within the meaning of Article VIII, Section 2(a) is involved. Bilateral payments arrangements may involve multiple currency practices subject to Article VIII, Section 3 if the credit balances in the clearing accounts are not remunerated at the prevailing representative interest rate in the market, or if settlement of balances in another currency is effected at a special exchange rate or at an exchange rate whose cross rate differentials exceed 1 percent.
The following section will recapitulate the main features of the original CMEA to serve as a point of departure for an evaluation of the possible path and the progress already achieved by way of integration of the new IMF members into the world of multilateral trade and payments.
Major Features of the CMEA Arrangement
The CMEA was formed in 1949 and, after several enlargements, it included in 1990 Bulgaria, Cuba, Czechoslovakia, the German Democratic Republic, Hungary, Mongolia, Poland, Romania, and Viet Nam as full members. Yugoslavia was an associate member, and a number of other countries maintained looser associations with the group.47 For the past four decades, until its abolition and the introduction of convertible currency trade on January 1, 1991, the arrangement governed all regional trade and payments48 as part of an attempt to create a socialist integration system. Since the member countries’ national economies operated on production plans, the CMEA cannot be compared to any of the more familiar concepts of regional economic integration, such as customs unions, free trade areas, or common markets. The arrangement operated under the following main principles:49
Bilateral Clearing. The core function of the CMEA was to set rules for planning and implementing bilateral trade agreements and to provide the institutional framework for settling bilateral accounts. These bilateral trading agreements among CMEA members were negotiated as part of each member’s five-year planning exercise and implemented under annual protocols. Bilateral trade was further broken down into a number of sub-balances that had to be cleared independently. Actual transactions were recorded and cleared through clearing accounts held with the International Bank for Economic Cooperation (IBEC) in Moscow and were denominated in transferable rubles (TRs), the CMEA unit of account. Transferable rubles were not convertible.
Exchange Rates. The transferable ruble was used widely among CMEA countries, in particular to express prices and denominate transactions and bilateral balances within the IBEC. Transactions settled in transferable rubles included most intra-CMEA commodity trade, services, credits, consolidated and converted balances of past noncommercial transactions, and certain other transactions. Owing to the lack of commodity and currency convertibility of transferable ruble balances, huge deviations in cross rates could emerge without arbitrage possibilities (Table 6). Furthermore, because of the planned nature of trade, exchange rates could deviate substantially from more market-determined rates50 without affecting trade volumes.
to the Soviet
Units of national currency per ruble.
Dollars per transferable ruble as quoted by the IBEC.
End of May 1990.
Units of national currency per ruble.
Dollars per transferable ruble as quoted by the IBEC.
End of May 1990.
Trade Prices. Since trade quantities were determined in bilateral negotiations, prices were accounting items and did not play an important role in determining trade flows. Prices charged were based on the “Bucharest formula”51 and did not reflect domestic relative prices or relative scarcities of goods. The foreign trade organizations (FTOs) used domestic prices in all dealings with domestic enterprises, and a complex mechanism of “price equalization” (operating through taxes, subsidies, and different exchange rates) was put in place to neutralize intercountry price differences. All differences between domestic and converted border prices were thus ultimately absorbed by the budget.
Trade Balances. The lack of commodity and currency convertibility of the transferable ruble turned bilateral surpluses into involuntary trade credits. Each CMEA country therefore sought to balance trade bilaterally in all subcategories with every other CMEA member. This process involved extensive microeconomic planning, using export and import quotas and licenses as instruments. Trade balances under the system could not be influenced by exchange rate changes.
Bilateral and Multilateral Aspects. The CMEA was not a true multilateral body because all decisions of the Council of Ministers, the highest CMEA decision-making organ, became legally binding only after they were embedded in bilateral agreements. Some common institutions52 and a number of multilateral cooperation agreements, however, were put in place to support the long-run goal of socialist integration and regional autarchy. Most important among the multilateral cooperation agreements were treaties institutionalizing some form of horizontal specialization in the production of final products, such as machine building, radio engineering, electronics, and the chemical industry. Trade under such multilateral agreements was in some fields quite important—it amounted, for example, to 42.5 percent of all exports of machinery in 1987. Other forms of multilateral cooperation were directed toward shared research in science and technology and shared exploration of natural resources.
Country-Specific Features: Intra-CMEA Issues and Other Bilateral Agreements
In the relations among CMEA members, bilateral agreements predominated, allowing for some variation across countries in the framework for intraregional trade, payments, and exchange rate regulations. Most CMEA countries also maintained bilateral trade and payments arrangements with countries outside the region. In fact, the 1989 IMF survey on bilateral trade and payments practices showed that most such bilateral arrangements recorded involved developing countries on one side and Eastern European CMEA countries on the other.53 The following section will examine the salient features of each member country’s relations with the CMEA group as well as summarize its bilateral trade and payments relations with non-CMEA trading partners.54
In 1990, Bulgaria exported 58.7 percent of its total exports and imported 55.8 percent of its total imports under intergovernmental treaties governing CMEA trade. To fulfill its contractual obligations, Bulgaria’s exports to the CMEA had to be subsidized substantially (by an estimated 526 million lev in 1990, equivalent to about 1.2 percent of GDP).
At the end of 1990, Bulgaria also had bilateral payments agreements with Albania, Bangladesh, Brazil, Cambodia, China, Ethiopia, Finland, Ghana, Greece, Guinea, Islamic Republic of Iran, Democratic People’s Republic of Korea, Lao People’s Democratic Republic, Malta, Mozambique, Nicaragua, Pakistan, Tanzania, and Tunisia. Transactions are generally settled through clearing accounts, and imbalances must usually be settled at the conclusion of annual and multiannual arrangements, in commodities during the six months after the end of agreement periods and thereafter in convertible currency.
In 1989, Czechoslovakia exported 53.8 percent of its total exports and imported 61.7 percent of its total imports under intergovernmental treaties with other CMEA countries. It had planned targets for imports from the transferable ruble area and “obligatory” exports to the nonconvertible area. In 1990, obligatory exports amounted to 40 percent of all exports to the nonconvertible area. Export subsidies to the convertible currency area were more generous than for intra-CMEA trade.
At the end of 1990, Czechoslovakia had bilateral payments agreements with Afghanistan, Albania, Bangladesh, Cambodia, China, India, Islamic Republic of Iran, Democratic People’s Republic of Korea, Lao People’s Democratic Republic, Pakistan, and Yugoslavia.55 It signed a bilateral trade agreement with the United States in 1990.56
In 1990, Hungary exported 34.3 percent of its total exports to the CMEA region and received 32.5 percent of its imports from the CMEA. In contrast to early liberalization movements in trade with the convertible currency area, Hungary’s trade with the CMEA remained closely monitored and was mostly conducted through a central allocation of quotas to enterprises, where the quota represented a delivery obligation. This trade occurred at fixed prices, and an elaborate system of taxes and subsidies was applied to ensure that the profits of enterprises in transferable ruble trade were similar to those in convertible currency trade. The trade surplus with the CMEA was to be limited by strict enforcement of export quotas, and foreign exchange receipts from CMEA trade that exceeded quota were not convertible through the banking system, although they could be auctioned to potential importers from the CMEA. In 1988, approximately 15 percent of Hungary’s trade with the CMEA was conducted through enterprise-level decision making rather than under centrally negotiated quotas. However, it is not known how much of this trade was financed through the auction market.
At the end of December 1990, Hungary maintained bilateral payments agreements with Albania, Brazil, Cambodia, China, Colombia, Ecuador, Democratic People’s Republic of Korea, and Lao People’s Democratic Republic. It also had trade agreements with bilateral payments features for certain commodities with Afghanistan, Bangladesh, and Pakistan.
In 1990, 25.3 percent of all Polish exports were directed to the CMEA area, declining sharply from 35.1 percent in 1989. On the import side, 28.6 percent of the goods originated from the CMEA, down from 31.9 percent in 1989. Trade with the nonconvertible currency area remained closely monitored, and both imports and exports to the nonconvertible currency area required licenses that specified the volume and the value of permissible trade. Export licenses were used to limit exports to the amount specified under bilateral agreements and to ensure compliance with quota requirements. There is evidence that exports to the former Soviet Union have been limited by Poland’s reluctance to grant appropriate licenses. In 1990, intra-CMEA trade started shifting toward settlement in convertible currencies, with 32.9 percent of all exports to, and 42.4 percent of all imports from, the CMEA being paid in convertible currency.
At the end of December 1989, Poland maintained bilateral payments arrangements with Albania, Bangladesh, Brazil, Cambodia, China, Colombia, Ecuador, India, Islamic Republic of Iran, Democratic People’s Republic of Korea, Lao People’s Democratic Republic, Lebanon, and Nepal. Poland also had trade agreements with bilateral payments features for certain commodities with Argentina, Bangladesh, Malta, Pakistan, and Yugoslavia. Bilateral agreements with non-CMEA members accounted for 5 percent of total trade with such countries, compared with a peak of almost 8 percent in 1986. During 1990, most bilateral payments agreements with countries other than the CMEA were effectively terminated,57 and the largest part of all new trade is being freely settled in convertible currencies; in some cases, however, trade under pre-existing contracts will continue under the old clearing arrangements.58
In 1990, Romania sold 42.0 percent of its exports to the CMEA market and obtained 42.3 percent of total imports from the CMEA. For transactions with the CMEA, there were separate exchange rates for commercial transactions and for nontrade transactions.
In 1990, Romania maintained bilateral payments agreements with Albania, Brazil, China, Ghana, India, Islamic Republic of Iran, and the Democratic People’s Republic of Korea. In addition, certain commercial transactions with Turkey are settled through a clearing account denominated in U.S. dollars.
Although Yugoslavia was an associate member of the CMEA only, in many respects it interacted with the group in the same manner as the full members. Targets were set for trade with the nonconvertible area. In order to combat unanticipated surpluses in nonconvertible currency trade, the dinar’s automatic convertibility into or from nonconvertible currencies was lifted. Enterprises whose exports exceeded quarterly targets were therefore no longer credited automatically with the dinar equivalent of their exports, but instead were issued a “transferable claim,” which was to be settled on a first-come, first-served basis once the claims under the clearing arrangement were in line with the targets. In 1990, Yugoslavia sold 29.1 percent of its exports to, and received about 24 percent of its imports from, the CMEA.
On December 31, 1990, Yugoslavia had payments agreements requiring denomination of transactions in U.S. dollars with Albania, Czechoslovakia, Mongolia, and the former U.S.S.R.59
Impact of CMEA Reform
It is not yet possible to gauge the impact of the dissolution of the CMEA on the number and jurisdictional nature of bilateral agreements because trade agreements and trade practices for intra- and interregional exchange are still evolving. In this transitional period, it is difficult to take stock of the exact number of arrangements still in force. However, all arrangements upheld by all other IMF members with the former Eastern European CMEA countries, which were previously excluded from IMF jurisdiction under Article XI, Section 2, have become subject to approval under Article VIII with respect to those other members if the agreement came into effect after they became members of the IMF.
According to the list of agreements above and assuming that non-CMEA members have not altered their trade and payments practices with the Eastern European countries, there would be 36 such bilateral arrangements now under IMF surveillance and jurisdiction.60 In assessing those arrangements, the IMF will henceforth apply the same criteria used for other bilateral arrangements and, depending on individual circumstances, will encourage the removal of any restrictive features as early as possible. Bilateral arrangements among the Eastern European countries—including all trading arrangements still in force from the old CMEA arrangement—can be retained under Article XIV insofar as they were in place at the time of IMF membership; otherwise, they would be subject to approval under Article VIII.
Kelly and Landell-Mills (forthcoming).
International Monetary Fund, Developments in International Exchange and Trade Systems (1989), Chapter 4.
Most important in that respect is the transition to trade at world market prices in convertible currency from January 1991 (except for certain transactions committed in 1990 that could be settled in transferable rubles until March 31, 1991), which means the complete abolition of all intra-group bilateral trade agreements and the dissolution of the CMEA settlement mechanism. The countries’ intention to integrate into world markets is also reflected in their decision to seek membership in the IMF and to seek cooperation with other multilateral institutions, such as the EC.
Yugoslavia, an associate member of the CMEA, is a founding member of the IMF.
See International Monetary Fund, Developments in International Exchange and Trade Systems (1989), page 32.
The exact nature and institutional setup of a new Eastern European trading agreement is still unknown. The March 1991 CMEA meeting in Moscow failed to formally dissolve the CMEA, leaving open the debate about a reformed setup for trading relations.
To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions that hamper the growth of world trade.
Bilateral arrangements between private entities, freely entered into, fall outside the jurisdiction of the IMF.
For the purpose of this chapter, we will concentrate on the six Eastern European former CMEA countries.
The quantitative importance of intraregional CMEA (including the former U.S.S.R.) trade varies from country to country. A quantification for the countries considered here is given in the next section.
For a detailed description of the CMEA, see Martin Schrenk, The CMEA System of Trade and Payments: Today and Tomorrow, SPR Discussion Paper No. 5 (Washington: World Bank, January 1990); and Martin Schrenk, “Whither COMECON?,” Finance and Development (September 1990), pp. 28–31.
Approximated here by the parallel market rate. Because this rate includes a risk premium, one would expect a true market rate to be somewhat less depreciated.
Essentially a five-year moving average of world market prices, converted into TRs at the official CMEA exchange rate. Except for basic commodities, quality differences among goods led to complications with the formula. Furthermore, both the bargaining power of individual countries and cross rates to the TR differed, thereby leading to deviations from the reference basis and between pairs of countries.
The most important were the IBEC, which managed the intraregional clearing of trade and payments, and the International Investment Bank (IIB), which was responsible for financing joint projects and undertook some borrowing in convertible currency.
International Monetary Fund, Developments in International Exchange and Trade Systems (1989).
Data reflect the latest available figures, obtained from the respective country authorities. They include exports to and imports from Bulgaria, Czechoslovakia, the former German Democratic Republic, Hungary, Poland, Romania, and the former U.S.S.R.
A bilateral payments agreement with Finland was terminated on March 31, 1990.
Since January 1, 1991, most of those bilateral agreements have been abolished. The remaining treaties are with Afghanistan, Albania, India, and Islamic Republic of Iran.
The agreements effectively terminated were those with Bangladesh, Brazil, China, Egypt, Greece, India, the Islamic Republic of Iran, Malta, Nepal, and Pakistan.
Refers to an arrangement with Lebanon and a contract of Elektrim, a government-owned foreign trade organization, with Turkey. In the case of China, Egypt, Greece, India, and the Islamic Republic of Iran, outstanding balances may still be settled under the bilateral agreement.
With effect from January 1, 1991, all transactions have been made in convertible currencies; agreements to that effect have been finalized with all of these countries except Czechoslovakia.
This would be a maximum number for such arrangements. Realistically, one can assume that some of the bilateral arrangements formerly maintained between IMF members and CMEA countries were the only possible way to gain market access and will be abolished during the reform process.