The Fund is entrusted with a wide array of responsibilities over the functioning of the international monetary system. It fulfills this oversight role by providing a forum for member countries to consult and examine matters of global economic interest, as well as economic policies of individual countries. Central to the purposes and operations of the Fund is its mandate under the Articles of Agreement to “exercise firm surveillance over the exchange rate policies of countries” and to adopt “specific principles for the guidance of all members with respect to those policies.” The Fund carries out this mandate by examining international monetary issues and by analyzing all aspects of member countries’ macroeconomic and related structural policies since these policies taken together determine the way member countries conduct their exchange rate policies.


The Fund is entrusted with a wide array of responsibilities over the functioning of the international monetary system. It fulfills this oversight role by providing a forum for member countries to consult and examine matters of global economic interest, as well as economic policies of individual countries. Central to the purposes and operations of the Fund is its mandate under the Articles of Agreement to “exercise firm surveillance over the exchange rate policies of countries” and to adopt “specific principles for the guidance of all members with respect to those policies.” The Fund carries out this mandate by examining international monetary issues and by analyzing all aspects of member countries’ macroeconomic and related structural policies since these policies taken together determine the way member countries conduct their exchange rate policies.

This section describes the ways in which the Fund responded to the key issues facing the world economy, as well as individual member countries, during the financial year 1993/94. The first part of this section provides an overview of the Fund’s surveillance responsibilities, followed by summaries of Article IV consultations with selected member countries. The second part summarizes the Board’s discussion of approaches to assessing the consistency of exchange rates with economic fundamentals. The third part of the section focuses on Board discussions pertaining to another important function of the Fund, namely, the responsibility to monitor developments in the field of international liquidity and to manage the SDR system. As requested by the Interim Committee in April 1993, the Board discussions addressed the question of an SDR allocation, taking into account both the long-term global need for a supplement to existing reserve assets and the potential economic and monetary effects of an allocation. Directors also expressed their views on a related matter—the issue of an apparent inequity in the distribution of SDR allocations—and considered the situation of members that had never received an allocation of SDRs or had not participated in all allocations of SDRs.

Fund surveillance of the global monetary system aims at promoting the balanced growth of world trade and an orderly and stable system of exchange rates. At the individual country level it encourages countries to adopt appropriate economic policies consistent with the member’s obligations under the Articles of Agreement—taking proper account of the views of the international community—so as to provide the basis for sustained, noninflationary economic growth. The exercise of surveillance can help to identify issues and problems in a timely manner so that suitable corrective measures may be adopted and, in this way, periods of tension avoided.

The momentous changes that have taken place in the world economy over the past few years have made it particularly critical for the Fund to carry out its surveillance responsibilities in an effective manner. Noteworthy among these developments are, first, the rapid growth and internationalization of private capital markets that have made the international monetary system more vulnerable to macroeconomic imbalances among industrial countries and to any inconsistencies that may develop between exchange rates and macro-economic fundamentals; second, the major moves toward regional and monetary integration in many parts of the world, including in the context of economic and monetary union in Europe; and, third, the implementation of current account convertibility and market-oriented reform in a large number of countries. These unprecedented changes have been mirrored in increased responsibilities for the Fund: membership in the Fund has grown rapidly, making it a universal institution, and the Fund is assisting a record number of countries with policy advice, financial assistance, and technical assistance and training.

The principles and procedures of Fund surveillance are described in a document “Surveillance Over Exchange Rate Policies,” which was approved by the Executive Board in 1977 (see Annual Report, 1977, pages 107109). This document establishes principles both for the conduct of members’ exchange rate policies and for the Fund’s surveillance over those policies. The Board is required to review them at two-year intervals—or more frequently if the need arises—to see whether any modifications might be appropriate. The latest such review was carried out in January 1993, and the Board agreed that the principles of surveillance remained broadly appropriate. A summary of Directors’ discussions of the review appeared in the 1993 Annual Report. At that time, there was overall support for improving the Fund’s conduct of its surveillance responsibilities, including practical steps for adapting existing procedures to make surveillance more continuous, flexible, and relevant. The Interim Committee at its meeting in April 1993 endorsed the Board’s views and stressed the importance of the Fund’s effective surveillance over members’ exchange rate policies. Again, at its meeting in April 1994, the Interim Committee reiterated its support for the intensification of the Fund’s surveillance activities.

The Fund carries out its surveillance responsibilities mainly in two ways: through regular—usually annual—bilateral consultations with individual member countries, which are known as Article IV consultations since they are mandated by ArticleIV of the Fund’s Articles of Agreement, and multilateral discussions held in the context of the World Economic Outlook reviews, usually conducted twice a year.

Article IV consultations focus on a systematic review of economic developments and policies in the member country concerned and how these policies have affected the exchange rate and the balance of payments. Relevant structural policies are also examined if these are germane to macroeconomic developments and policies. In recent years, surveillance has taken more account of such topics as regional, social (poverty), industrial, labor market, and environmental issues if these have significant implications for macroeconomic policies and performance (Box 5 discusses the Fund’s concern for environmental issues).

Assessments in the context of Article IV consultations provide a comprehensive analysis of recent and prospective domestic and external developments and their effect on the international community. The World Economic Outlook discussions provide the Board with a framework for reviewing members’ policies from a multilateral perspective, for a systemic monitoring and analysis of the global economic situation, and for assessing prospects for the international economy under various policy assumptions.

To increase the continuity and flexibility of surveillance, Directors also discuss a wide range of country and systemic matters in the course of World Economic and Market Development sessions. These meetings, which are informal and confidential, are held about every six weeks and complement the World Economic-Outlook discussions and Article IV consultations. The sessions help to identify emerging trends and underlying tensions as early as possible and provide an opportunity for Fund staff and Directors to address a broad range of policy issues. In this way, important policy issues can be brought to the attention of the Board in a timely manner, filling an important gap between the World Economic Outlook discussions and Article IV consultations.

The Managing Director and other senior Fund staff periodically attend meetings of the Group of Seven industrial countries on matters affecting the functioning of the international monetary system. Such participation serves to strengthen the multilateral surveillance process.

As several Directors noted at the time of the January 1993 review of surveillance, ultimately it is the quality and relevance of the staff’s analysis that are most important for the effectiveness of the Fund’s surveillance role. The operational work of the Fund is supported by research carried out by Fund staff on a wide range of economic and monetary topics. Developments in the international economy and the changing circumstances of member countries are important factors governing the Fund’s research activities (see Box 6 for an overview). In the same vein, the availability of basic data is vital for the comprehensive analysis of economic policies and developments. Box 7 discusses some developments in statistical issues and methodologies over the past year.

The Fund and the Environment

The Fund’s staff has improved its understanding of the interaction between macroeconomic policies and the environment in recent years. In this work, the staff draws on the expertise of institutions with environmental competence and responsibilities, such as the World Bank and the Organization for Economic Cooperation and Development. In November 1993, the staff reported to the Board on the progress that had been made in this area. In addition, the Fund hosted a two-and-a-half-day conference in May 1993 on the relationship between macroeconomic policies and the environment that brought together Fund staff, academics, and 20 leading environmentalists representing nongovernmental organizations from a wide range of countries.

Although some aspects of the relationship between the macro-economy and the environment remain ambiguous, on balance, macroeconomic stabilization appears to be supportive of environmental protection. Current research has shown that disciplined macroeconomic policies are necessary for environmentally sustainable development: macro-economic instability is often associated with severe price distortions that lead to environmental damage and, in any case, countries in these circumstances are unlikely to have the necessary financial resources to protect the environment. Macroeconomic stabilization programs, by adjusting prices to market levels, or by reducing high or variable inflation, often encourage the preservation of natural and environmental resources. To the extent that the Fund promotes macroeconomic stability, it thereby helps the environment. However, macro-economic stability is not sufficient for environmentally sustainable development. A lack of environmental policies, poorly defined property rights, or failures in markets for environmental resources gives rise to the possibility that macroeconomic policy measures could have environmentally harmful effects. In these circumstances, it is important to use complementary environmental policies to eliminate the harmful distortion.

Currently, the Fund’s work in the environment area is following four courses of action. First, the staff—when the national authorities so wish—integrate the financial and fiscal implications of national environmental action plans into their policy discussions. Second, Fund staff continue to examine the links between the macroeconomy and the environment and to work with the World Bank on economic policies that are supportive of both macroeconomic and environmental objectives. Third, staff continue to participate in analytical work relating to the preparation of environmentally oriented national accounts being carried out at the United Nations (UN) and other agencies. Fourth, the Fund is cooperating with the UN Commission on Sustainable Development and is monitoring the commitments made by signatories to Agenda 21, particularly with regard to macroeconomic policies that are adopted in the name of sustainable development.

In recent years, in step with developments in the world economy, the Fund has increasingly taken regional considerations into account in its conduct of surveillance. Regional issues are considered in the course of Article IV consultation discussions if the influences of a country on the region or the influences of the region (or of a regional institution) on a country are germane to the analysis. Regional developments generally deal with cross-country comparisons of macroeconomic variables such as price developments, interest rate developments, and the size of government sectors. Regional developments are also considered, as appropriate, in cases where both goods and capital move relatively freely across open borders or where there is full convertibility between countries.

Research in the Fund

The key role of research in the Fund, as reiterated in the Board’s discussion of research activities in the Fund held in December 1993, is to provide the intellectual basis for, and establish the credibility of, the Fund’s economic policy analysis and advice. The main objectives of research in the Fund are to further the staff’s understanding of policy and operational issues of relevance to the institution, and to improve the analytical quality of the work prepared for management and the Board and of the advice provided to member countries.

Directors welcomed the activities of the Interdepartmental Working Group on Fund Policy Advice, which was established in 1989 to serve as a forum for identifying country-related, analytical, and policy issues and strengthening research collaboration on these issues so as to enhance the effectiveness of the Fund’s policy advice.

One of the major research activities of the Fund is the World Economic Outlook. This global survey of economic prospects and policies is an integral element of the Fund’s ongoing surveillance of economic developments and policies in its member countries and of the international economic system. The survey is the product of a comprehensive interdepartmental review, coordinated in the Research Department.

The Research Department is specifically charged with undertaking policy-oriented research relevant to the work of the Fund and coordinating the projections and analyses contained in the World Economic Outlook. Other departments contribute importantly to the Fund’s overall research in such areas as country-specific and regional issues and developments in the international monetary and financial systems.

Research programs are also directed toward improving technical assistance provided to countries; supporting the development and implementation of the Fund’s financial policies and operations; and providing up-to-date international statistical standards.

Directors generally supported the existing decentralized approach to research, under which it is the responsibility of the Board, management, and staff to identify topics meriting research. But, to a large extent, it is then up to the departments to take the initiative to design research projects and carry them out.

The scope of research in the Fund is defined by the purposes and functions of the institution. In recent years, research has been focused on

  • the international monetary and financial system;

  • international capital markets;

  • inflation and stabilization policy in developing countries;

  • structural issues, including policies for sustained growth, labor markets and unemployment, and trade policy and reform;

  • economies in transition from centrally planned to market-based systems, including price and trade liberalization, privatization, and reform of state enterprises;

  • fiscal issues, including social safety nets, the environment, and military spending;

  • financial sector reform; and

  • exchange rate behavior.

In addition, the Fund does substantial research on a wide range of macroeconomic issues in developing countries.

Research is typically undertaken in response to specific operational or policy issues identified by Fund management, or to those that have arisen in Board meetings, in mission-related work, and in interdepartmental meetings. Research projects may also be generated by an assigned operational task—for example, the establishment of improved data bases—or from departmental initiatives in response to emerging analytical and policy issues.

In order to encourage innovation and ensure quality control, the Fund makes much of its research output widely available to the public and encourages staff interaction with academia and other research organizations through conferences, seminars, and joint research efforts with other institutions, such as the World Bank and the Organization for Economic Cooperation and Development. Some Directors considered that even more effort was needed to broaden the Fund’s knowledge of research undertaken in universities and other institutions and to ensure better coordination with other institutions, including the World Bank. In this context, several Directors welcomed the Visiting Scholars Program, which brings to the Fund leading members of the economics profession from around the world to assist the staff in conducting research on Fund-related issues.

The Fund’s primary research documents and publications include the World Economic Outlook, which is published twice a year, International Capital Markets, and other studies in the World Economic and Financial Surveys; Occasional Papers; and Working Papers. Directors welcomed the recently launched Papers on Policy Analysis and Assessment, a series of brief, nontechnical studies of policy design and research, as a useful step toward making some of the Fund’s thinking on policy issues more readily understood and accessible to a broader audience of policymakers. Periodic publications include Staff Papers, Finance & Development (published jointly with the World Bank), the IMF Survey, and books and pamphlets, (See Appendix III for a list of publications issued during the financial year.)

In Article IV consultations with individual member countries of the European Union, economic policies of a member are frequently discussed in the framework of economic developments and policies of other members of the Union. In order to remain apprised of developments in the European Union, the Fund staff has also held informal discussions with the European Commission and the European Monetary Institute.

Reports on some African countries usually cover some aspects of regional issues such as those in the context of, say, the Central African Monetary Area, the Common Monetary Agreement, the West African Monetary Union, and the CFA franc zone or cross-border trade and payments initiatives in Eastern and Southern Africa. In the Middle East region, the relationship between a country and, for instance, the Gulf Cooperation Council, may be discussed. Other examples include discussions on regional integration, such as the North American Free Trade Agreement, or proposals for regional integration, such as an Association of South East Asian Nations Free Trade Area.

In the past year, the economic programs of two countries-Bangladesh and The Gambia-were monitored by the Board under the revised guidelines for enhanced surveillance. Under enhanced surveillance,3 there is a closer relationship between the Fund and a member country than is customary in Article IV consultations but less close than under Fund arrangements. Enhanced surveillance procedures were initiallyestablished in 1985 to facilitate some members’ multiyear rescheduling arrangements with commercial banks and were revised at the time of the 1993 surveillance review. The main features of the revised procedures are as follows.

Statistical Issues—1993 System of National Accounts’ Harmonization with the Fund’s Statistical Manuals

The Fund, the European Union, the Organization for Economic Cooperation and Development, the United Nations, and the World Bank have jointly published a revision of the System of National Accounts (1993 SNA). The new SNA represents a major advance in national accounting over the previous version, which was published in 1968, and reflects many of the economic concerns and changes in economic structures that have occurred over the past twenty-five years. Development of the 1993 SNA involved unprecedented cooperation over the last decade by staff from the five organizations and input from experts in more than 50 countries in all stages of economic development.

The 1993 SNA is expected to become the key conceptual framework for national accounts in almost all countries. Many developed and developing economies have already established timetables for conversion of their existing national accounts to the new SNA. It will be the basis of the system that will be used by all members of the European Union. The United States, which has used its own system of National Income and Product Accounts, has also decided to adopt the new SNA. It will be particularly useful for countries in transition to market-oriented economies to replace their existing System of Material Balances.

The Fund has played an active role in the development of the new SNA. The two main objectives of the Fund’s involvement were improvement of national accounting in Fund member countries and harmonization of national accounts with the other key statistical systems (including balance of payments, government finance, and monetary and financial statistics) for which the Fund has major responsibility. The Fund will assist in implementing the new system through technical assistance and training, and a new course on national accounts will be offered at the IMF Institute in November 1995. Harmonization with other related statistical systems benefits both compilers and users of these data.

In September 1993, the Fund published the fifth edition of the Balance of Payments Manual. One of the major achievements of this revision was the almost complete harmonization of balance of payments concepts and measures with the relevant SNA concepts and measures. Work is currently being carried out on revision of the Manual on Government Finance Statistics and on development of a new Manual on Monetary and Financial Statistics. In both cases, harmonization with the new SNA is a major guiding principle. When this work is completed, compilers and users of the major systems of macroeconomic statistics will benefit substantially from the greater harmonization and integration.

Committee on Balance of Payments Statistics

The IMF Committee on Balance of Payments Statistics completed its first year of operation in 1993. This standing Committee, composed of senior balance of payments compilers from industrial and developing countries and representatives from international organizations, was formed in 1992 to oversee the implementation of recommendations contained in two Fund Working Party reports,1 foster greater coordination of data collection among countries, and assist the Fund’s Statistics Department in keeping pace with the statistical consequences of the changing international environment. In its first year, the Committee focused its program of work on selected capital account statistics, namely, nonbank claims on nonresident banks and portfolio investment. The global balance of payments statistics published by the Fund reveal large discrepancies in these types of capital flows. The Committee’s program of work is described in detail in its first Annual Report, which was published in April 1994.

1IMF, Report on the World Current Account Discrepancy (Washington, 1987) and Report on the Measurement of International Capital Flows (Washington, 1992).

A member would request the Fund to monitor its macro-economic and structural policies, usually at the time of the Article IV consultation. The Board would approve the request on a case-by-case basis, taking into account, among other things, the member’s track record of adjustment and the strength of its quantified economic policy program. Approval to apply the procedure would not. however, signal Fund endorsement of the member’s program or its implementation. Approval would remain in effect until the time of the next Article IV consultation with the member (or for a 12-month period), when the member could ask for a further application of the procedures. A mid-term review by the Board of the program’s progress would be required, irrespective of actual performance under the member’s program.

Enhanced surveillance procedures could be used in several types of situation. For instance, the procedures could include cases in which a member could ask for monitoring to help secure external financial support, particularly if it had a good record of economic performance and was no longer using Fund resources. Another use could be in some cases in which there was no direct link to efforts at mobilizing external support, but a member that has a strong track record of performance could request the procedures with a view to boosting domestic and external confidence in its adjustment policies.

Directors, in December 1993, approved Bangladesh’s request that its program for 1993/94 be monitored under the enhanced surveillance procedure. Approval was based on the authorities’ good track record under Fund arrangements and was seen as a means of providing confidence to donors that Bangladesh would continue to pursue sound economic policies. Directors observed that the program for 1993/94 would allow for a consolidation of the macroeconomic gains of earlier years and, with full implementation, achieve progress in a range of important structural areas. The mid-term review of the program took place in April 1994.

Also in December 1993, Directors approved a request by The Gambia that its 1993/94 program be monitored under enhanced surveillance procedures for the period through June 1994. The Gambia had maintained a good track record of successful reforms under the Fund’s enhanced structural adjustment facility through 1991 and subsequently under the authorities’ 1992/93 program.

However, economic growth had faltered because of poor weather, which had been followed by a severe disruption of re-export trade owing to regional developments. Directors commended the authorities for their speedy and decisive response to those exogenous shocks, as evidenced by the measures taken to reduce government expenditures, improve the revenue effort, and help contain demand pressures.

At the time of the 1993 review on surveillance, Directors expressed concern that the temporary shift in Article IV consultation.cycles (introduced in 1991-92 to cope with the additional workload emanating from the unprecedented challenge of absorbing a large number of new members into the Fund) and the bicyclic consultation procedures,4 had led to gaps in surveillance that could have adverse effects on its effectiveness. The Board also noted that the savings in staff and Board time expected when the bicyclic procedure had first been introduced had not been achieved. In addition, concerns were expressed that there had been undue delays in some instances in holding consultations with certain members.

Against this background, the Board agreed in May 1993 to terminate the bicyclic consultation procedure and to shift members under the procedure to the 12-month consultation cycle. The Board also, at that time, agreed to new procedures for conducting Article IV consultation. Under the new procedures, a comprehensive discussion by the Board of Article IV staff reports would take place each year for most countries and, at a minimum, every two years. However, in those cases where a report was not seen as raising any significant issues in the context of the Fund’s surveillance responsibilities and there was broad agreement with the staff report, a summary Board discussion could be held which would be expected to be limited mainly to an endorsement of the main thrust of the staff appraisal. In these cases, the consultation would be concluded by a “short-form” summing up.

Acceptance of Article VIII

The Fund assists in the establishment of a multilateral system of payments in respect to current transactions between members and in the elimination of foreign exchange restrictions that hamper the growth of trade. Accordingly, Article VIII, Sections 2(a) and 3 prohibit members, except with the approval of the Fund, from imposing restrictions on the making of payments and transfers for current international transactions or from engaging in multiple currency practices or discriminatory currency arrangements.

About half of the countries have not yet accepted the obligations of Article VIII and are availing themselves of transitional arrangements under Article XIV, which permits them, without seeking Fund approval, to continue to maintain the restrictions on international payments and transfers in effect on the date of their membership in the Fund. When a country accepts the obligations of Article VIII, it may no longer avail itself of the transitional arrangements of Article XIV.

Historically, Fund members have been slow to accept the obligations of Article VIII and have accepted at a rate of less than two members a year since the Fund’s start of financial operations in 1947. In early 1993, the staff intensified its efforts to encourage members to accept the obligations of Article VIII. As a result, 13 more members had accepted Article VIII status by the end of April 1994, bringing the total of members accepting these obligations to 89.

The new Article VIII members are Bangladesh, Barbados, The Gambia, Ghana, Grenada, Israel, Lebanon, Mauritius, Micronesia, Morocco, Sri Lanka, Trinidad and Tobago, Tunisia, and Uganda, A complete list of Article VIII members with their dates of acceptance can be found in Article VIII, Appendix II, Table II.16

Table II.16

Exchange Arrangements as of March 31, 1994

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In all countries listed in tins column. The U.S dollar was the currency against which exchange rates showed limited fexibility.

This category consisit of countries participating in the exchange rate mechanism of the European Monetary System. In each case, the exchange rale is maintained with in a margin of 15 percent around the bilateral central rales against other participating currencies, with the exception of Germany and the Netherlands in which case the exchange rate is maintained within a margin of 2.25 percent.

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

The exchange rate is maintained within margins of ±25 percent.

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 ±10 percent on either side of a weighted composite of the currencies of the main Trading partners.

Country uses peg currency as legal lender.

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

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

The exchange rate is maintained within margins of ±5 percent.

The exchange arrangement shown relates to the rate determined at the auctions, which is used tor most transactions. The official exchange rate is still pegged to the U.S dollar.

The exchange rale is maintained within margins of ±3 percent.

Following the termination of the bicyclic consultation procedure in May 1993,169 countries—out of a total Fund membership of 179—are currently on the 12-month consultation cycle. Nine members are on the longer 18- or 24-month consultation cycles.

In the past year, considerable progress was made in another area of Fund surveillance, namely, the move by members to adopt current account convertibility and accept the obligations of Article VIII (see Box 8). During the surveillance review, Directors noted that many members were availing themselves of the transitional arrangements under Article XIV for long periods and agreed that these countries should take appropriate steps to remove remaining exchange restrictions and accept the obligations of Article VIII. They emphasized the importance of a greater commitment of members to current account convertibility. In this regard acceptance of the obligations of Article VIII is viewed by the international community as an important demonstration of the convertibility of a country’s currency.

Article IV Consultations

Article IV consultations, usually held annually, follow a standard procedural pattern. A staff team visits the country, gathers pertinent economic and financial information, and holds discussions with officials on economic developments and policies. Upon return to headquarters, the staff prepares a report, which forms the basis for discussion by the Board. The Managing Director of the Fund, in his capacity as Chairman of the Board, summarizes the views of Directors and this assessment by the Board is then passed on to the country authorities. Table 2 lists the Article IV consultations concluded by the Fund in 1993/94.

Table 2

Article IV Consultations Concluded in 1993/94

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Consultation discussions with Aruba are held in the context of the consultation with the Kingdom of the Netherlands.

Consultation discussions with Hong Kong are held in the context of the consultation with the United Kingdom,

Interim consultation under the tricyclic consultation procedure.

In the section below, the consultation discussions of selected countries, both industrial and developing, are described briefly. In addition, overviews are presented for smaller industrial countries, economies in transition, and developing countries. Within these groups, individual countries have been chosen on the basis of their importance in the world or regional economy. For each of these countries, the Annual Report includes for the first time—in addition to a summary of the conclusion of the Board discussion—summaries of salient macroeconomic and structural developments, and a table of data available to the Board at the time of the consultation. Subsequent revisions to data have not been taken into account, except as indicated in a few cases.

Major Industrial Countries

United States

In August 1993, Directors considered the 1993 Article IV consultation with the United States, in light of economic developments over the previous year (Table 3). These are described briefly below, followed by a summary of Directors’ discussion.

Table 3

United States: Selected Economic Indicators

(Annual percent change unless otherwise noted)

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Note: Data in the table reflect information available at the time of the Board discussion.

In percent of GOP or NNP.

Year over year.

Yearly average.

The recovery of economic activity in the United States began slowly in the second quarter of 1991, but the pace picked up during the second half of 1992 before slowing somewhat in the first half of 1993. Private domestic demand led the recovery, offsetting the effect of lower defense spending. In 1992 and the first half of 1993, strong growth in consumption accounted for most of the increase in GDP. Improvements in household debt service and net worth, consumer confidence, and, to a lesser extent, employment growth contributed to the growth in consumption, and by mid-1993 the personal savings rate had fallen to 4 ¼ percent. Business fixed investment also showed robust growth during the recovery. Employment growth was relatively weak, although there were signs of strengthening in the first half of 1993, and the unemployment rate, which reached a cyclical peak of 7¾ percent in June 1992, fell only gradually and in June 1993 stood at about 7 percent. While inflation had generally been declining since 1991, at the time of the Board discussion in August 1993 the recent data had been mixed. In July 1993, the 12-month change in the core rate of inflation was 3.2 percent. Subsequently, this measure continued to decline, reaching 2.8 percent in April 1994.

The external current account deficit as a percentage of GDP rose to 1.1 percent in 1992 and to 1.4 percent in the first quarter of 1993 because of a rising merchandise trade deficit. The increase in the current account deficit in 1992 was associated with a significant decline in national saving and a small increase in private investment. Both saving and investment have declined markedly in relation to GDP since the 1970s.

In their discussion, Directors noted that policies for sustained economic expansion in the United States should focus on fiscal strengthening and price stability, as well as measures to raise saving and investment, improve domestic resource allocation, and foster an open international trading system. Directors noted that such policies would also support noninflationary growth abroad.

Directors welcomed the enactment of the Omnibus Budget Reconciliation Act of 1993, and observed that although the budget for fiscal year 1994 was a major step toward fiscal consolidation, the planned deficit reduction was to be attained only over an extended period and would rely to a large extent on cuts in discretionary spending that were as yet unspecified. Directors were also concerned that the federal fiscal deficit and the debt-to-GDP ratio would remain high and that outlays for entitlement programs were expected to continue to grow rapidly. Directors agreed that a comprehensive reform of the health care system would be an integral element of the fiscal consolidation effort and that it should be designed and implemented in a way that would support fiscal adjustment in the long term without worsening the fiscal problem in the short term.

Even if the budget plan were implemented fully and there were some recovery in private saving, the national saving rate would remain well below its historical norm. Directors agreed, therefore, that further fiscal consolidation measures might be warranted over the medium term so as to raise national saving to a level consistent with increased domestic investment and productivity growth, thereby reducing reliance on foreign saving. In particular, they suggested that once the effects of health care reform could be evaluated, the authorities would need to consider whether additional fiscal measures would be necessary, including possibly a federal consumption tax.

Directors supported the conduct of U.S. monetary policy over the past several years, with the Federal Reserve first turning back the rise in inflation and then following a course that permitted the economy to recover while gains were made in reducing inflation. They agreed with the Federal Reserve that the most productive function it could perform in pursuing sustainable economic growth would be to maintain price stability, and supported its reliance on a range of indicators to evaluate monetary conditions. Directors noted, however, that the present level of short-term interest rates had remained unchanged for a full year, and they observed that it could not be maintained for long in an expanding economy without jeopardizing price stability. Directors therefore agreed with the Federal Reserve that it would need to move ahead of the actual emergence of inflationary pressures.

Directors noted the view of the U.S. authorities that exchange rates should reflect fundamentals and observed that the real effective exchange rate of the U.S. dollar had been relatively stable in recent years. Since the U.S. current account deficit had increased and was expected to remain relatively large over the medium term, a number of Directors stressed that policies that promoted national saving would be most effective in ensuring a sustainable external position and cautioned against reducing the deficit through protectionist measures. In this context, they therefore urged the authorities to implement the recently negotiated Framework Agreement with Japan in a manner that emphasized its “most-favored-nation” principle and that avoided the introduction of distortions or any weakening of multilateral principles in resolving trade disputes.

Directors noted that some elements of U.S. trade policy, in particular the use of unilateral actions in trade disputes, protection in the textile and apparel industry, and the imposition of antidumping and countervailing duties, could have a negative effect on the functioning of the international trading system and on the environment for multilateral negotiations.

Directors agreed with the emphasis given by the U.S. authorities on structural policies as a means of improving productivity growth and also agreed that along with reform of the health care system, initiatives in education and job training would be beneficial. In conclusion, Directors praised the United States for its wide-ranging assistance to developing countries—notably in debt-reduction operations—but voiced their concern about the trend of U.S. economic assistance and the prospects for such aid in a situation of fiscal consolidation.

* * *

Since the time of the Article IV consultation, the recovery gained further momentum, particularly in the fourth quarter of 1993. Real GDP increased by 3.0 percent in 1993, owing to strong growth in domestic demand, largely related to a surge in investment. This offset a substantial decline in net exports, as the current account deficit rose to 1.7 percent of GDP. As a result, the output gap had narrowed considerably by the end of 1993. Economic activity appears to have slowed some what in the first quarter of 1994, owing to weak foreign demand for domestic products and the effects of severe winter storms and the earthquake in California.

Policy-related developments in early 1994 included the release in February of the administration’s budget for fiscal year 1995, which included various measures to comply with the expenditure ceilings required under the August 1993 budget legislation. The proposed budget would decrease the deficit from 3.5 percent of GDP in 1994 to 2.5 percent in 1995. In addition, the Federal Reserve began to tighten monetary conditions, causing short-term interest rates to rise by¾of 1 percentage point by the end of April.


The Board considered the 1993 Article IV consultation with Japan in July 1993, which was described in the 1993 Annual Report (pages 35-36).5 Subsequently, the Board reviewed economic developments in Japan in the context of two discussions on the World Economic Outlook—in September 1993 and in April 1994 (Table 4), Directors’ views on the Japanese economy expressed during these two reviews were mentioned in the previous chapter of this report. Some of the issues raised by Directors during the discussion of the 1993 consultation report and more recent economic developments are summarized below.

Table 4

Japan: Selected Economic Indicators

(Annual percent change unless otherwise noted)

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Note: Data in the table reflect information available at the time of the Board discussion of the April 1994 World Economic Outlook.

1985 = 100.

In July 1993, Directors noted that over the past two years the Japanese economy had experienced its sharpest downswing since the mid-1970s, mainly because of the correction of factors that had characterized the earlier boom and had led to its unsustainable pace. These included a sharp run-up in asset prices, a large increase in the stock of capital and consumer durables, and excessive lending to the real estate sector. Most Directors felt that despite some signs of recovery, the economy had yet to turn the corner fully and that downside risks persisted at thatstage of the cycle. Directors agreed that the main policy issue for Japan would be to solidify the momentum of the recovery, maintain its excellent price performance, and pursue structural reforms. While welcoming the authorities’ response to the cyclical downswing—on both monetary and fiscal fronts—some Directors thought that earlier and more forceful actions had been warranted. The implementation of the economic stimulation packages were commended by Directors, and most Directors believed that once recovery was firmly established medium-term fiscal consolidation efforts should resume.

As regards the widening current account surplus, most Directors commented that as the economy recovered the surplus would decline. Directors believed that more transparency, quicker action to deal with nonperforming loans, and greater disclosure of asset quality were needed to cope with the risks posed by problems in the financial system. They urged Japan to continue its efforts to open up markets, and reform of agricultural trade was seen as a priority. Directors commended Japan for the high absolute amount of its official development assistance.

Economic activity in Japan remained subdued in 1993, with growth of real GDP being barely positive. Balance sheet adjustments, weakness in the financial sector, the persistent strength of the yen, and depressed levels of consumer and business confidence contributed to the sluggishness of output. Although the downturn appeared to have bottomed out toward the end of 1993, and there was evidence that confidence in the economy had improved, recovery remained uncertain.

To spur recovery, the Japanese Government has implemented four economic stimulus packages since 1992. These packages, together with the large reduction in official interest rates since mid-1991, have helped to moderate the downturn. The latest package, which was announced in February 1994, includes a tax cut for 1994 in central and local government personal income taxes amounting to 1 ¼ percent of GDP for 1994. The tax cut is an interim measure toward a full-fledged tax reform to be realized later in the year. The stimulus package also proposes a further increase in public investment of ¾of 1 percent of GDP. Other measures include increased allocations for land purchases and loans for housing, small and medium-sized enterprises, and equipment investment in new businesses. Subsidies for employment development and various measures for strengthening the financial sector and the securities markets are also provided for in the package.


The 1993 Article IV consultation with Germany was considered by Directors in July 1993. After almost a decade of uninterrupted growth, the west German economy reached a cyclical peak in mid-1992. Clear signs of overheating emerged in the latter phase of the upswing, mainly owing to the major fiscal expansion that followed unification. The downturn that began in the second half of 1992 was far more pronounced than had been anticipated at the time of the 1992 Article IV consultation. It was accompanied by a rise in the unemployment rate, the emergence of large spare capacity in industry, and a considerable widening of fiscal imbalances (Table 5).

Table 5

Germany: Selected Economic Indicators

(Annual percent change unless otherwise noted)

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Note: Data in the table reflect information available at the time of the Board discussion.

Preliminary figures for 1992; projected for 1993.

Projected figures for 1993.

West Germany until June 1990; united Germany from July 1990.

April 1993.

Data for general government are on a national account basis and incorporate east Germany from 1991.

Monetary data include east Germany from the end of June 1990.

First three months compared with same period a year earlier. 8 Average January-May.

Average January-May.

Apart from normal cyclical factors, the steepness of the decline in activity also reflected a sharp deterioration in business and consumer confidence since mid-1992. GDP is estimated to have declined at an annual rate of about 4 percent over the three quarters to the first quarter of 1993 with the fall in output particularly pronounced in the manufacturing sector. The onset of recession abruptly ended the post-unification boom in domestic demand and exports to the east. As employment growth slowed down in 1991-92 and immigrants joined the labor force, the unemployment rate in west Germany rose to about 7 percent in early 1993, compared with 5 ½ percent in mid-1991.

A large shift in the pattern of saving and investment followed unification. The external current account swung from a surplus of 4 ¾ percent of GNP (for west Germany) in 1989 to a deficit of 1 ¼ percent of GNP (for all of Germany) in 1991. Because of transfers to east Germany—amounting to about 4-5 percent of GNP since 1990, the general government finances moved from approximate balance in 1989 to a deficit of about 3 percent of GNP in 1992, despite restrained federal expenditures and tax increases.

Official interest rates were increased substantially in 1990–91 to counter the inflationary pressures that arose mainly from the excess demand on resources arising from unification. After the turbulence in the ERM in late summer 1992 and first clear signs that the pressure on prices were abating, the discount and Lombard rates were lowered by ¼ and ½ of 1 percentage point, respectively, and three-month market rates declined to just below 9 percent. These cuts marked the beginning of gradual monetary easing by the Bundesbank. Long-term interest rates had peaked at the beginning of 1991 and declined substantially over the following years.

In east Germany, output fell by one fourth in the 18 months after unification, stabilized toward the end of 1991, and rose by an estimated 7 percent in 1992. The turnaround was concentrated in the construction and service sectors; manufacturing output had not yet recovered. Rapid wage growth in the labor market led to a more than doubling of labor costs since unification, and, at the end of 1992, 14 percent of the labor force was unemployed.

In their discussions, Directors were concerned about the worsening German economic and financial situation, with its adverse spillover effects on trading partners, especially in Europe. Output and business investment had fallen sharply, unemployment had grown, and the public sector borrowing requirement was high by German standards. Underlying cost and price pressures, however, were much lower because of the considerable slack in the economy and lower import prices, and, in the view of many Directors, inflation was likely to fall significantly in the coming months.

Although recent data were more favorable, Directors feared that given the depressed level of business and consumer confidence the recession could become prolonged, with damaging effects on both the German and the international economy. Directors therefore urged the authorities to strengthen their macroeconomic and structural adjustment policies so as to foster an early economic recovery. Most Directors supported the continuation of gradual lowering of short-term interest rates, along with measures to tackle the structural budget deficit and to make labor and product markets more flexible.

Directors noted that the fiscal deficits had arisen because of the large intra-German transfers associated with unification and, in their view, even though the magnitude of these transfers made it impossible for the deficits to be financed in the short run through tax increases or spending cuts, the authorities had relied excessively on borrowing. Further, despite the consolidation plan set out in the Solidarity Pact, the deficits were likely to continue over the medium term. Directors supported the initiatives to contain the size of the federal deficit in 1994 to its estimated 1993 level, but viewed these initiatives as insufficient, since they did not address fully such issues as subsidies to ailing sectors and excessive social spending.

Directors emphasized the crucial role of monetary policy in fostering noninflationary growth and orderly functioning of foreign exchange markets, especially in the EMS. Most Directors suggested continued monetary easing and further reductions in short-term interest rates. Some Directors agreed with the German authorities that a too aggressive approach to lowering interest rates could be risky in terms of undermining confidence in the deutsche mark. Another view, however, was that interest rates were too high, requiring early and strong action to ease monetary conditions.

A number of Directors doubted whether M3 was useful as a leading indicator of inflation for several reasons, including distortions associated with the effects on monetary demand of German unification and the lack of stability in foreign exchange markets. Several Directors emphasized that because of the increasing integration of ERM countries and given the special role of Germany in the ERM, monetary conditions needed to be considered—to a much greater extent than earlier—from an ERM perspective. Directors considered that some depreciation of the deutsche mark against non-ERM currencies was not a cause for concern since that was to be expected following a substantial real appreciation of the currency.

The importance of structural policies in improving economic performance over the medium term was emphasized by Directors. They recommended, in particular, labor market reforms, further deregulation, and cuts in industrial subsidies in the western states and privatization and the resolution of property rights problems in the eastern states. They also stressed institutional changes in labor markets so that wage adjustments would be linked more closely to productivity and a firm’s ability to pay—which are necessary for attracting private investment and without which reliance on costly and inefficient subsidies would continue. Directors agreed that more flexibility in implementing collective agreements on wages and work practices were also needed.

Directors praised Germany for its generous development assistance, especially to Eastern Europe and countries of the former Soviet Union, and urged it to take a leadership role in dismantling EU barriers to exports from these countries.

* * *

In the period since the Article IV consultation, economic activity in Germany remained subdued, with unemployment continuing to rise. Weakness in domestic demand persisted, partly because of low consumer confidence and poor job prospects, and also because of higher fuel and social security taxes and cuts in public spending in 1994. These fiscal measures may have helped long-term interest rates to decline even further in the second half of 1993, reaching long-term lows by the end of the year. Inflation continued to fall and, excluding the impact of increases in indirect taxes, began to approach the authorities’ medium-term objective. Monetary policy continued to follow a path of cautious easing that was begun in September 1992. In early 1994, long-term interest rates rose—albeit less than in other important markets—while short-term interest rates continued to fall. Subsequent developments indicated that economic prospects were improving.


In November 1993, Directors considered the staff report for the 1993 Article IV consultation with France, which took place at the end of the worst economic slowdown for the French economy since the Second World War.

This economic slowdown was caused by a combination of factors. These included cyclical reversal of the effects of fiscal stimulus associated with German unification—along with the tight monetary policies pursued in order to maintain stable exchange rates within the ERM and, in particular, vis-à-vis the deutsche mark; declining consumer confidence; and, to a lesser extent, asset price declines and balance sheet problems (Table 6).

Table 6

France: Selected Economic Indicators

(Annual percent change unless otherwise noted)

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Note: Data in the table reflect information available at the time of the Board discussion.


National accounts basis.

The large drop is associated with data problems due to a lack of customs data (or the first quarter of 1993.

Based on the Fund’s multilateral exchange rate model.

First half of 1993 over the first half of 1992

Average to October 26,1993.

Over the year prior to the Board discussion, earlier gains in competitiveness derived from the strategy of disinflation in the context of the ERM were reversed partially but abruptly. The exit from the ERM by the pound sterling and the Italian lira and their depreciations in September 1992, and the depreciations of the Spanish peseta, the Portuguese escudo, and the Irish pound all led to a substantial loss of competitiveness relative to EMS partner countries.

Real GDP grew by only 1.4 percent in 1992, and there was negative growth in the fourth quarter of 1992 and the first quarter of 1993. In the second quarter of 1993, GDP ceased to decline, suggesting that the recession had bottomed out. Unemployment rose throughout 1992, and in August 1993, the unemployment rate reached 11.7 percent of the labor force, with particularly high youth unemployment. Inflation continued at a moderate pace, and in September 1993, the rate of change of consumer prices on a 12-month basis was 2.3 percent. The general government deficit was projected to reach about 6 percent of GDP in 1993, compared with 2 percent in 1991.

Between September 1992 and July 1993, substantial use was made of interest rate policy in successfully maintaining the franc’s exchange rate parity with the deutsche mark, consistent with economic fundamentals. However, as tensions rose within the ERM in July 1993, and despite large-scale intervention, central banks were unable to keep currencies within fluctuation margins. On August 2, 1993, the obligatory intervention threshold in the ERM was widened to plus or minus 15 percent around existing bilateral central rates. Since then, the Bank of France has been lowering interest rates cautiously but regularly.

In their discussion, Directors observed that the medium-term strategy of French economic policy over the previous decade, based on a firm anti-inflationary stance and fiscal prudence, had resulted in substantial gains in such areas as competitiveness and inflation. However, over the previous years economic growth had stalled, unemployment had risen, and the fiscal improvements of the past decade had been reversed. Directors were therefore concerned about prospects for recovery, especially the outlook for unemployment.

As regards issues related to the enlargement of the ERM bands of exchange rate fluctuation and its implications for monetary policy, Directors noted that the franc had depreciated only moderately since July 1993 and that short-term interest rates were slightly above German rates. A number of Directors favored the French authorities’ cautious approach to monetary policy and agreed that a faster reduction in these rates would have little effect in stimulating the recovery of economic growth and could indeed be counterproductive if it led to inflationary expectations and a rise in long-term interest rates.

Most Directors supported the staff view that too high domestic interest rates might be regarded as unsustainable and could damage credibility. A number of Directors therefore suggested that the authorities should test the market further to lower short-term interest rates. Some other Directors advocated a much faster reduction in these rates, along with a more flexible approach to exchange rate policy. In the view of these Directors, lower interest rates—and hence a more credible policy mix—might lead the economy toward growth and convergence by reducing the budget deficit and unemployment and creating conditions conducive to structural reforms.

Recent and prospective fiscal developments were of major concern to Directors. Because of the unfavorable cyclical position, as well as an increase in the structural deficit, the fiscal deficit had widened considerably over the preceding year. Directors welcomed the 1994 budget, which was prepared in the context of a multiyear program that envisaged reducing the central government deficit to—or below—2.5 percent of GNP by 1997. While some Directors believed that the assumptions underlying the program were overly optimistic, a number of other Directors wondered whether the medium-term target was ambitious enough, in view of longer-term demands on general government expenditures stemming from such factors as the aging of the population. Further, given that large deficits had emerged in the Government’s health care and unemployment insurance, Directors urged the authorities to ensure that the social security system was balanced over the medium term.

Directors were also concerned about high and persistent unemployment, stemming from severe structural problems in the labor market because of excessive social charges, high minimum wage, lack of training, and various administrative restrictions on hiring practices. They encouraged the authorities to increase labor market flexibility, reduce unemployment benefits, and to replace part of employers’ social charges with a general tax on all incomes, A number of Directors also recommended flexibility in wages for young workers.

Many Directors encouraged the authorities to adopt a firmer stance in resisting pressures from special interest groups and in defending the principle of free trade. They called on the authorities to take a lead role in opening EU markets to goods from other countries, including Central and Eastern European countries In conclusion, Directors praised France for its strong commitment to official development assistance and for its efforts to reduce the debt of low-income countries.

United Kingdom

In the period covered by this Annual Report, the Fund did not hold an Article IV consultation with the United Kingdom, owing to a change in the United Kingdom’s budget cycle that resulted in a shift in the timing of the consultation discussions. The last consultation (concluded in February 1993) was described in the 1993 Annual Report (pages 40-41), and the 1994 consultation will be held later in the year. In the intervening period, Directors reviewed economic developments in the United Kingdom in the context of discussions on the World Economic Outlook, as mentioned in the previous chapter of this report. A summary of Directors’ views on these occasions and economic developments subsequent to the last consultation discussion follows (Table 7).

Table 7

United Kingdom: Selected Economic Indicators

(Annual percent change unless otherwise noted)

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Note: Data in the table reflect information available at the time of the Board discussion of the April 1994 World Economic Outlook. All figures are actuals.

In February 1993, Directors’ discussions took place in the context of the suspension of the pound sterling from the ERM in September 1992, which had ushered in a new framework for economic policy. The challenge for policy in the period ahead was to pursue the objective of price stability while promoting recovery. Directors observed that monetary policy had been eased sufficiently and that the overall stance of policies was to ensure that the inflation objective was not put at risk as the recovery got under way. Directors expressed concern about the medium-term prospects for public finances, as indicated by the erosion of the tax base and discretionary increases in public spending. They noted that the sharp depreciation of the pound sterling after September 1992 should facilitate the correction on the underlying external balance, provided the gain in competitiveness was maintained and the fiscal position was strengthened.

As regards economic developments, recovery has been under way in the United Kingdom since mid-1992. Led by growth in private consumption, the recovery gathered momentum throughout 1993, particularly in the final quarter when investment spending began to pick up. Debt-income ratios of households have fallen from earlier peak levels, and sharply lower short-term interest rates have reduced mortgage payments and have raised disposable incomes of households. During 1993, unemployment dropped by about 1 percent of the labor force to below 10 percent for the first time since August 1992. Because of weak demand in key export markets, the external sector has not contributed to the recovery. Underlying inflation has recently fallen to 2 ½ percent and is expected to stay well within the authorities’ target range of 1-4 percent in 1994-95. The March 1993 budget announced a tightening of fiscal policy, with phased tax increases, and in the November 1993 budget, the authorities set out a medium-term fiscal consolidation program that aims to eliminate public borrowing by the end of the decade. The program is based on restrained growth in government spending over the period and on phased tax increases to be implemented over the next three years. Within the authorities’ monetary policy framework, official interest rates were reduced slightly in the period under review.

In April 1994, Directors discussed the United Kingdom in the context of the discussion on the World Economic Outlook. They noted that the United Kingdom was among the group of industrial countries where recovery was either well established or clearly under way. Directors also welcomed the adoption by the United Kingdom of a medium-term fiscal consolidation program. On the conduct of monetary policy, while some Directors believed that more experience would be needed before a judgment could be made about the merits of the policy framework, other Directors observed that the United Kingdom’s adoption of an explicit inflation target had helped to reduce uncertainty about the authorities’ policy objectives.


Directors met in February 1994 to discuss the staff report for the 1993 Article IV consultation with Italy. The discussions took place against the background of a pervasive slowdown in the Italian economy, marked by a decline in economic growth, with mounting unemployment, and a drop in private consumption (Table 8).

Table 8

Italy: Selected Economic Indicators

(Annual percent change unless otherwise noted)

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Note: Data in the table reflect information available at the time of the Board discussion, except as otherwise indicated.

Fund staff projections.

Excluding workers in the Wage Supplementation Fund. Figure for 1993 is based on a new methodology and is not comparable with earlier years.

Customs basis. Figure for 1993 is based On data available until November 1993.

Revised figure based on data available subsequent to the Board discussion.

Based on the IMF’s multilateral exchange rate model. The NEEH series compiled by the Bank of Italy show a depreciation of 16.6 percent for the same period.

End of November.

The economic uncertainty since the financial crisis in late 1992 affected the behavior of both households and businesses. This uncertainty, together with the drop in real disposable income resulting from lower wage increases, higher taxes, and the fall in employment, led to a decline in private consumption of nearly 2 percent in 1993, the first such fall in the postwar period. The weak economy also moderated price and wage inflation, which fell to 4.4 percent in 1993. Employment (in terms of units of labor) in the third quarter of 1993 was 2.4 percent below the level in the same period of 1992, while unemployment rose in October 1993 to 11.3 percent of the labor force.

The trade balance improved dramatically as a result of weak domestic demand and a decline in the value of the lira by more than 15 percent in nominal effective terms compared with 1992. The strong performance of exports also moderated the impact of the economic slowdown on overall GDP.

Despite the improved current account position, pressure on the lira continued during the year and the value of the lira fluctuated substantially, precluding an early return to a fixed rate regime. Monetary policy, guided by a number of indicators, broadly aimed at reducing interest rates from the crisis levels of late 1992 and early 1993 without exacerbating financial market tensions or underlying inflationary pressures. At the end of the year, the growth in broad money (M2) was 8.2 percent, exceeding the target growth rate of 5-7 percent. Interest rates were lowered by some 4 percentage points during the year.

In contrast to previous budgets, the Government’s 1993 budget provided for longer-lasting savings, including in particular, some structural measures to curtail entitlements. In response to an emerging budget shortfall, these measures were supplemented by additional revenue increases and spending cuts later in the year, although the primary surplus target was lowered from 3.1 percent to 2 percent, and the overall deficit target was raised to 9.7 percent of GDP. The medium-term fiscal targets were also revised, including postponing the target of stabilizing the debt-to-GDP ratio from 1995 to 1996.

The 1994 budget aimed at reducing the overall deficit-to-GDP ratio to 8.7 percent, which represented a further decline in the underlying deficit, and envisaged savings of nearly 2 percent of GDP relative to an otherwise deteriorating trend balance. The revenue-to-GDP ratio was expected to decline by 1.5 percentage points of GDP from 1993.

In their discussion, Directors commended the Italian authorities on the significant steps toward economic reform that the country had taken since 1992, despite difficult economic and political circumstances. Rehabilitation of public finances had begun, a new wage negotiating process had been agreed upon, the full and formal independence of the Bank of Italy had been achieved, and the privatization program had been initiated successfully. Nevertheless, Directors agreed that additional measures were needed to bring about the required turnaround in the fiscal accounts and to reduce interest rates on a lasting basis. Given that since mid-1992 the lira had remained vulnerable to shifting market sentiment and consumer and business confidence had also continued to be weak, it was essential to resolve uncertainties about the course of policies over the medium term. Directors concurred on the desirability of keeping the economy on a firm path of fiscal consolidation, disinflation, and structural reform.

The 1993 budget had been successful in limiting the fiscal deficit despite the recession, but Directors noted that additional measures might be needed to meet the Government’s fiscal targets for 1994. Further, since Italy’s public indebtedness was continuing to rise, from a level already close to 120 percent of GDP, and the stabilization of the debt-to-GDP ratio had again been delayed, Directors unanimously urged the Government to return to the earlier aim of stabilizing the ratio by 1995 and to lower it substantially there after.

Directors emphasized that the budget targets for 1994 were the minimum necessary and suggested that contingent measures be prepared to offset slippages. They also supported the approved measures for restraining entitlements, such as pensions, and stressed the continued importance of the quality of the adjustment measures, including the broadening of the tax base and the improvements in enforcement.

The country’s progress in carrying out the privatization program, such as the sale of state enterprises according to an announced timetable, as well as financial market reforms, were welcomed by Directors. Further, they noted the predominantly structural nature of the country’s unemployment situation and stressed the need for comprehensive reforms to enhance labor market flexibility, especially with regard to employment protection.

The importance of monetary policy in the disinflation process was emphasized by Directors. They agreed that, in the absence of the exchange rate anchor, the Bank of Italy’s approach of basing policy on a number of indicators had successfully permitted interest rates to fall while inflation remained subdued. They advocated a cautious approach to further monetary easing in the context of accelerated fiscal consolidation. They generally viewed the emphasis of monetary policy on the objective of price stability as particularly important at a time when uncertainties remained as to the future course of economic policies in other areas.

Directors stressed the need for continuing the process of trade liberalization and urged Italy to foster efforts within the EU to lower trade restrictions against third countries. Several Directors also noted that the urgency of domestic reforms and fiscal adjustment should not detract from the need to provide an adequate level of development assistance.


The 1994 Article IV consultation with Canada in May 1994 was held against the background of a slow but strengthening recovery. Real GDP grew by 2.4 percent in 1993 after contracting in 1991 and growing by less than 1 percent in 1992. But the pace of recovery was slow relative to previous cyclical upswings, and activity in some areas of the economy remained sluggish during the year leading up to the Board discussion (Table 9).

Table 9

Canada: Selected Economic Indicators

(Annual percent changes unless otherwise noted)

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Note: Data in the table reflect information available at the time of the Board discussion.

Slack employment conditions and limited income growth adversely affected consumer confidence and restricted private spending. The unemployment rate continued to rise following the end of the 1990/91 recession and has remained above 11 percent since early 1992, as capital deepening and industrial restructuring increased productivity relative to the growth of employment.

Investment was boosted by a continued decline in interest rates. During 1993, the authorities eased monetary conditions for a third successive year as inflation subsided to levels in the bottom part of the target ranges established in 1991 by the Government and the Bank of Canada. Since February 1994, interest rates rose in response to increases in U.S. interest rates and exchange and financial market pressures.

The merchandise trade surplus doubled in the two years to 1993 as real exports grew strongly, reflecting higher levels of economic activity in the United States and gains in competitiveness from cost-cutting measures by firms and the depreciation of the Canadian dollar. In nominal effective terms, the Canadian dollar fell by about 15 percent in the two years to the end of 1993, a decline that is closer to 20 percent in inflation-adjusted terms.

In their review of the Canadian economy Directors supported the budget deficit reduction proposals in the February 1994 budget as a needed step toward fiscal consolidation. They underscored the importance of forcefully implementing the fiscal program, which aimed to reduce the budget deficit to 3 percent of GDP in 1996/97 from an estimated 6½ percent of GDP in 1993/94. Directors noted, however, that even if the 3 percent target were achieved, the debt-to-GDP ratio still would be very high. Given this high projected level of debt and the unsettling effect that the fiscal situation appeared to be having on exchange and financial markets, Directors urged the authorities to intensify their fiscal consolidation efforts, taking full advantage of economic expansion to achieve a faster reduction in the deficit and in the debt-to-GDP ratio.

Directors noted with concern the high rate of structural unemployment in Canada, but were encouraged by the authorities’ plans for comprehensive reform of the unemployment insurance system and social programs. They agreed that these reforms should be coordinated with the provinces and should reduce the adverse effects of the unemployment insurance system on the economy and help generate fiscal savings for both levels of government.

While acknowledging the short-term costs in terms of economic activity, Directors commended the authorities for their success in reducing inflation and agreed that this achievement had laid the foundation for sustained growth. They affirmed that a strengthened fiscal consolidation effort would contribute to the attainment of Canada’s monetary policy objectives. The use of inflation targets had helped to define the authorities’ commitment to a stable monetary policy framework, although the true test of the targets’ credibility would be the maintenance of stable prices during the upturn in the economic cycle.

Smaller Industrial Countries

After a temporary change in consultation cycles, the Fund during 1993-94 held Article IV consultation with all the smaller industrial countries. Differences in cyclical positions, macroeconomic imbalances, and structural policies led to specific policy recommendations in individual cases. Nevertheless, two concerns clouded medium-term prospects and predominated in Board discussions: the need for fiscal consolidation and the need to address problems of high structural unemployment.

For many of the smaller industrial countries, large budget deficits were expected to persist even after excess capacity had been absorbed. Directors noted the need for credible fiscal consolidation in particular for Finland, Greece, Portugal, Spain, and Sweden in order to meet inflation objectives, safeguard stability in financial and foreign exchange markets, and permit monetary conditions that support recovery. For Belgium, some Directors, while commending the track record of steady adjustment over a number of years, stated that in light of high public indebtedness further fiscal measures were needed.

In addition to urging fiscal restraint, many consultations commended present and encouraged future structural reforms of the fiscal system. Foremost among these were reducing the public sector and rationalizing tax systems and tax administration. In some cases, Directors addressed structural factors that had contributed to revenue weakness, indicating the need for subsidy reforms, social security reforms, and further privatization efforts, often in the transportation and communication sectors.

Besides concern over fiscal policy, Directors drew attention to high unemployment rates and labor market rigidities in many countries. Over the past two decades, structural unemployment rose in industrial countries, especially in Europe. To reverse this increase as well as the latest surge in cyclical unemployment, the Board urged further reforms to improve labor market flexibility and responsiveness to changes in demand. Reform measures included strengthening productivity through education, differentiating wages more widely, tightening unemployment benefits, eliminating wage indexation mechanisms, and decentralizing wage decision making.

On the positive side, monetary and exchange rate tensions had abated significantly. With a few exceptions, notably Spain, the smaller industrial countries enjoyed low inflation levels. Nevertheless, Directors were cautious in recommending an easing of monetary conditions, although in a few cases they suggested that the authorities explore the opportunities for interest rate cuts. In general, Directors expressed satisfaction with exchange rate and trade policies, though Greece’s large structural trade deficit was noted. Those countries that had newly granted their monetary authorities more autonomy were commended.

Directors commended several of the smaller industrial countries for taking steps to liberalize the trade regime in general and for supporting the successful conclusion of the Uruguay Round in particular. Directors also praised some countries for the generosity of their official development assistance and encouraged others to raise their contributions.


In January 1994, the Board reviewed the Australian economy. In 1992/93, Australia experienced its second year of recovery—economic growth accelerated, with real GDP rising by 2.75 percent, mainly on the strength of public and private consumption and residential construction. Consumer price inflation fell from an average rate of 8 percent in 1989/90 to 1 percent in 1992/93. This reflected continued wage restraint, lower inflationary expectations, and the opening of the economy to greater competition. Despite the recovery, labor market conditions remained weak during 1992-93 with flat employment and very slow labor force growth. As a result, the unemployment rate held at around 11 percent, a postwar peak. However, in the last few months of 1993, the recovery appeared to have strengthened and employment growth was running at an annual rate of around 3 percent(Table 10).

Table 10

Australia: Selected Economic Indicators

(Annual percent change unless otherwise noted)1

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Note: Data in the table reflect information available at the time of the Board discussion.

Fiscal year begins July 1

Official projections.

Gross national expenditure.

September quarter: percentage change over year to September quarter

The Fund’s Information Notice System index.

October 1993.

Data are not fully comparable with earlier periods owing to reclassification of deposits and institutions.

December 22, 1993.

The external current account deficit rose slightly, to 3.9 percent of GDP in 1992/93 from 3.2 percent in 1991/92, reflecting the growth in domestic demand and a sizable deterioration in Australia’s terms of trade. Although the private sector reduced its external debt, total net externa) debt increased substantially because of valuation changes arising from depreciation of the Australian dollar, increased foreign borrowing by state governments, and a decline in official reserves.

Monetary and fiscal policies were used at first to cushion the impact of the recession and later to promote recovery. The Commonwealth budget, which had improved steadily to a surplus position in the later 1980s, reverted to a deficit of 3.6 percent of GDP in 1992/93, with state and local governments also posting sizable deficits. Two interest rate cuts of 0.5 percentage point each were made in March and July 1993. The combination of lower short-term interest rates, reduced inflationary expectations, and lower international interest rates resulted in a substantial decline in Australian long-term interest rates, with the ten-year government bond yield standing at 6.6 percent in December compared with 12 percent in 1990/91.

Reviewing these developments, Directors noted that economic growth had continued uninterrupted for two years and might be gaining momentum, while inflation performance remained excellent. They observed, however, that Australia’s unemployment rate remained high and was likely to decline only gradually. They also noted that the level of external debt was substantial and might rise further.

In these circumstances, Directors strongly endorsed the authorities’ plans to reduce the Commonwealth budget deficit to about 1 percent of GDP by 1996/97, noting that this would increase national savings and support an investment revival without adding significantly to the external debt burden. At the same time, they stressed the importance of a strong performance in private savings and emphasized the need for other public sector entities, particularly the state governments, to improve their savings performance. Several Directors suggested that the Australian authorities give renewed consideration to increases in indirect taxes. As regards monetary policy, Directors were of the view that the gradual reduction in interest rates had been appropriate in light of the movements in foreign interest rates, sluggish domestic economic conditions, and the apparent absence of inflationary pressures.

Directors emphasized that the economy’s ability to generate a lasting reduction in unemployment and improved living standards over the longer term would depend importantly on raising the growth of productivity. This, in turn, would require further progress in the implementation of structural reforms. In particular, most Directors encouraged the authorities to undertake more farreaching reforms of the labor market.

Directors commended the Australian authorities for reducing import protection, noting that this had contributed to the strong performance of manufactured exports in recent years. While welcoming the authorities’ plan to reduce tariff rates on most products to no more than 5 percent by mid-1996, some Directors suggested that the pace might be accelerated. Directors encouraged the authorities to persevere with their reform efforts in other areas, including privatization, introducing greater competition and efficiency in transportation and telecommunications, and harmonizing standards among state governments.


The Board’s Article IV consultation took place in August 1993, at a time when Finland continued to experience its most severe recession in this century.

Following a 1980s boom in domestic demand, fueled in part by financial deregulation and a surge in asset prices, economic activity began to weaken in early 1990. Consumption and investment declined in response to a drop in house and stock prices, increased indebtedness, high interest rates, and a deteriorating economic outlook. Cumulatively, GDP declined about 10 percent between 1990 and 1992, while domestic demand fell 13.5 percent. The unemployment rate surged, reaching 17.5 percent in April 1993 from an average of about 5 percent during the 1980s. Inflation, which had accelerated to 6.6 percent in 1989 as output exceeded capacity, substantially moderated to annual rates of less than 3 percent (Table 11). Wage costs also moderated significantly during 1991-93.

Table 11

Finland: Selected Economic Indicators

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Note: Data in the table reflect information available at the time of the Board discussion.

Official projections.

Includes statistical discrepancy.

The initial economic weakness was transformed into a recession in part by external shocks, notably the collapse of trade with the former Soviet Union and a reversal of favorable movements in the terms of trade for forest products and basic metals that had earlier supported the boom. Strains surfaced most clearly in the foreign exchange market. The markka, devalued in November 1991, was allowed to float in September 1992; by July 1993, it had depreciated about 15 percent against the ECU. This depreciation, combined with subdued inflation and strong productivity performance in manufacturing, greatly enhanced Finland’s international competitiveness. Domestically, however, the depreciation along with high interest rates contributed to balance sheet pressures that resulted in a banking crisis and further depressed demand.

The fiscal situation, which had deteriorated rapidly with the onset of the recession as higher transfer and interest payments drove up the expenditure-to-GDP ratio, continued to worsen in early 1993, prompting new policy initiatives. In addition to the expenditure reduction target established the previous year, in March 1993 the authorities set an additional target of stabilizing state debt at less than 70 percent of GDP by 1997. The authorities also stressed the need for a restrictive incomes policy so that the sharp markka depreciation would not translate into higher inflation. Monetary policy set the target of bringing the rate of core inflation to 2 percent by 1995, to ensure that any unwinding in the real exchange rate would occur through a nominal appreciation rather than through domestic inflation.

For the longer term, Finland has been implementing a major program of structural reform to enhance the flexibility of the economy and align Finland with the countries of the EU. Progress has been made in reforming the tax system, liberalizing foreign direct investment, and prohibiting certain anticompetitive practices. Fiscal reforms have also been made on the expenditure side and in the system of transfers to municipalities.

In their discussion, Directors observed that the latest data pointed to continued weakness in activity and a slow and uneven recovery. Finland continued to face a number of complex economic problems, including an unsustainable fiscal deficit. Directors commended the authorities for the steps already taken to address the fiscal imbalances and agreed that containing the level of real government expenditures and stabilizing the debt-to-GDP ratio were appropriate objectives. Directors expressed concern, however, that to improve public confidence, the Government needed to strengthen its fiscal plans, specify the precise measures to be adopted, and enact implementing legislation as quickly as possible.

As to the serious crisis in the financial sector, Directors commended the steps that had been taken to bolster confidence by improving supervision and ensuring that financial institutions faced appropriate incentives. At the same time, Directors noted that financial institutions should be encouraged to recognize losses in their loan portfolios promptly.

The evidence that wage restraint would continue was welcomed by Directors, who regarded it as fundamental to alleviating unemployment and avoiding a resurgence of inflation. Directors welcomed also recent changes to the unemployment insurance system as an important first step in improving labor market incentives.

Directors agreed that the authorities’ low inflation target would provide monetary policy with a needed focus under the floating exchange rate regime and ensure that the large markka depreciation did not feed through to inflation. In this connection, they were cautious about any loosening of monetary conditions absent more decisive actions to reduce the fiscal deficit and restrain wages. Some Directors concurred that additional cuts in interest rates should only be considered in the context of a strengthening of the exchange rate.

Directors encouraged the authorities to continue with their efforts to align the Finnish economy more closely with those of the EU. Among other structural reforms, government efforts to overhaul the tax system and strengthen competition policy were singled out as particularly noteworthy. Some Directors noted the high level of protection afforded to the agricultural sector, which detracted from Finland’s otherwise good record of open trade relations.

* * *

Since the Board discussion, there has been growing evidence that the decline in economic activity has finally bottomed out, and that an export-led recovery has begun. Unemployment, however has continued to rise to about 20 percent of the work force. Due to the rapid growth in exports, the external current account balance improved sharply and the markka strengthened on balance in the second half of 1993, while inflation moderated further.


Directors met at the end of August 1993 for the Article IV consultation with Sweden. At the time, Sweden was beginning to emerge from its worst economic crisis since the 1930s. The crisis, highlighted in the fall of 1992 by strong speculative attacks on the krona, was characterized by a marked decline in output and employment, a ballooning fiscal deficit, and a banking system under severe strain, as discussed below.

Following a period of overheating, including an asset price boom in the latter half of the 1980s, the Swedish economy entered into recession beginning in 1990. Real GDP declined by about 8 percent from its peak in the first quarter of 1990 to the trough early in 1993. The banking sector was especially affected, necessitating state support to three important banks. Employment declined by about 10 percent between 1990 and mid-1993. As a result, wage and price inflation decelerated sharply. From a peak of 10 percent in 1990, consumer price inflation slowed to slightly over 2 percent by the end of 1992, although it picked up again in early 1993. The latter pick-up reflected changes in taxes and subsidies at the end of 1992 as well as the pass-through of a currency depreciation that followed the floating of the krona in November 1992 (Table 12).

Table 12

Sweden: Selected Economic Indicators

(Annual percent change unless otherwise noted)

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Note: Data in the table reflect information available at the time of the Board discussion.

Official projections.

The floating of the krona marked a substantial change in the Swedish monetary policy framework, which had been based on a fixed exchange rate policy for most of the last century. Sweden was forced to abandon its fixed rate following large-scale outflows of foreign exchange, despite record-high interest hikes and substantial exchange market intervention financed by heavy external borrowing. At the same time, private sector borrowing in foreign currencies was repaid at a fast pace. The substantial krona depreciation that followed the floating, together with the rising share of krona-denominated debt owned by foreigners, contributed to a significant worsening in the balance on net interest payments abroad. Moreover, in connection with this currency turbulence, export performance fell sharply in the fourth quarter of 1992 after having picked up earlier in the year. As a result, Sweden’s external current account deficit widened slightly, to the equivalent of 2.1 percent of GDP in 1992.

The weakening in economic activity was accompanied by a major deterioration in public finances. From a small surplus in 1989/90, the Government’s overall borrowing requirement rose to more than 13 percent of GDP in 1992/93. Beyond the effects of the cycle, the weakening of public finances resulted from support to the banking sector, a less than fully funded tax reform, and the impact of disinflation on real public expenditures, especially transfer payments. The resulting increased transfer payments, together with cyclical conditions, raised public sector spending to more than 70 percent of GDP in 1992.

In April 1993, the Government presented a revised budget proposal designed to reconstruct Sweden’s finances over the medium term. Real public consumption was to be progressively reduced by 1 percent a year, while additional saving of SKr 10 billion a year beginning in 1994/95 were to be made, primarily through reductions in transfer payments and strengthened tax collections. Long-run reform of the supplementary pension system was also in progress.

Between November 1992 and the end of June 1993, monetary conditions significantly eased. Not only did the krona depreciate substantially, but short-term interest rates were also reduced in successive small steps by a cumulative 4 percentage points.

In the August 1993 Board discussion, Directors were of the view that a durable solution to Sweden’s severe economic crisis would require an early correction of the substantial imbalance in the public finances. It was noted that the very high level of public expenditure had contributed to an unsustainably large public sector deficit and to a level of taxation that weakened incentives to work and save, as well as generating doubts about Sweden’s commitment and ability to maintain low inflation.

Directors underscored the importance for fiscal policy credibility of an early specification of the medium-term proposals outlined in the April 1993 budget, but felt that further measures of budget consolidation were required. In light of the already high level of taxation, Directors considered that these measures should focus on cutting back public spending in general and transfer payments in particular, observing that Sweden’s public spending exceeded that in EU member countries.

The announcement of a 1995 inflation target of 2 percent (with a margin for variation of plus or minus 1 percent) as the key target for monetary policy under the floating exchange rate regime was welcomed by Directors. They observed that a balanced recovery of the Swedish economy would require a sustainable further reduction in interest rates. Nevertheless, noting the large krona depreciation since November 1992 and the corresponding substantial easing of monetary conditions, they stressed that any future interest rate reductions should be implemented very gradually, with most Directors counseling that interest rates should be reduced only in the context of a strengthening krona.

Directors stressed that increased labor market flexibility could reduce the employment and output costs of Sweden’s present economic transition while leading to wage differentials that more adequately reflected productivity differences. Moreover, they noted that an early resolution of Sweden’s banking crisis was necessary for sustained economic recovery.

Sweden was commended by the Board for maintaining a generous external development program despite its economic difficulties, and for focusing aid on the world’s poorest countries.


The Board’s January 1994 review of the Swiss economy completed the first Article IV consultation with Switzerland since it joined the Fund in May 1992.

Following a third consecutive year of shallow recession in 1993, the contraction of output affected all sectors of the Swiss economy. Declining private consumption reflected consumers’ concerns about falling real wages, faltering job security, and tighter fiscal policy.

Employment had dropped by about 5 percent since activity reached its most recent peak—a sharper fall relative to the dip in output than in earlier downswings (Table 13). Employment declined thereafter first in the industrial and construction sectors, and subsequently in services, which had not been much affected in previous downturns. By late 1993 the Swiss unemployment rate had reached an unprecedented 4 ¾ percent.

Table 13

Switzerland: Selected Economic Indicators

(Annual percent change unless otherwise noted)

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Note: Data in the table reflect into Information available at the time of the Board discussion.


IMF staff projections.


Average January-November.

After exceeding 6 percent during 1991, inflation declined for the next two years following a renewed tightening of monetary policy in mid-1991 to counteract a fall in the exchange rate. The response of inflation to the monetary tightening has been slow compared with previous experience, partly reflecting the effects of the exchange rate depreciation in 1990-91.

A combination of cyclical conditions and mildly expansionary fiscal policy resulted in a widening of budget deficits at all levels of government. The finances of the general government moved from a position of near balance in 1990 to a deficit expected to exceed 4 ½ percent of GDP in 1993.

Unlike previous Swiss recessions, the latest downturn in the economy was not caused primarily by a deterioration in export performance. Indeed, the external sector offset the decline in domestic demand in 1992 when a rise in exports, which coincided with a fall in imports, left the trade account in near balance. This contributed to a cyclical uptrend in the current account surplus.

In their review, Directors commended the Swiss authorities on their generally successful conduct of an independent monetary policy, which had kept inflation very low and had contributed to making Swiss interest rates the lowest in Europe. Directors expressed, however, concern that prospects for sustained medium-term growth were now clouded by the emergence of a significant fiscal deficit and by structural rigidities in the economy.

Directors considered that restoring stability to the fiscal accounts presented the greatest immediate policy challenge. They supported the authorities’ medium-term target of achieving budget balance over the cycle but observed that, on current policies, the structural deficit would increase over the medium term and measures already announced might not forestall that tendency. They felt that a detailed consolidation program to reduce the general government structural deficit in 1995-96 should be announced as soon as possible.

Directors recognized the steps taken to reduce structural rigidities in the economy. Directors stressed that there remained considerable scope for efficiency improvements in other sectors and they emphasized that the momentum of reform needed to be accelerated. In particular, they noted the authorities’ proposed reform of the competition law, the creation of an internal market in Switzerland, and immigration reform. Nevertheless, noting the increase in unemployment to historically high levels, Directors argued that there was a need to pursue more active labor market policies, including the improvement of work incentives by phasing out unemployment benefits that were overgenerous.

Directors commended Switzerland for its generally liberal trade policies and especially the market access it had granted to the products of economies in transition. Most Directors noted, however, that there had been little progress toward reducing agricultural trade distortions and urged that steps be taken to ease the adverse effects of excessive producer subsidies.

Developing Countries

Many developing countries-ranging from newly industrialized to low-income—were commended by the Board during Article IV consultation for significant strides they had made with mac-roeconomic and structural reforms, many with the financial support of the Fund. In most cases, however, some further macroeconomic and structural adjustment was required.

In the framework of adjustment efforts, Directors frequently stressed the importance of cautious fiscal policies. During 1993 consultations, Directors commended the strong fiscal position of a number of countries while urging tighter policies in others. Together, tight fiscal and monetary policies had in some countries contributed to reduction in the rate of inflation and to attaining noninflationary growth. Adhering to fiscal targets also helped to narrow external imbalances, to meet monetary objectives, and to reduce the threat of exchange market pressures. In a number of cases, Directors said authorities should take action to strengthen the fiscal effort over the near term, especially if the budget turned out to be weaker than expected.

Although often recommending expenditure control, Directors at the same time recognized the need for investment—sometimes substantial—in infrastructure development, social services, and environmental protection. On the expenditure side, Directors often cited the need for better control, and frequently also pointed to the need for additional revenue measures. They underscored the importance of fiscal reforms designed to enlarge the revenue base and, in some cases, raise a low tax-to-GDP ratio. An improvement in the budget position helped to foster private sector investment and to generate adequate public sector savings to finance valuable public investment.

Directors said action on the fiscal front should be supported by appropriate monetary policies, often with additional steps to liberalize the financial system. Many developing countries were commended for pursuing prudent monetary policies, and in some cases where Directors believed that monetary policy was too easy, a tightening was urged. In general, Directors underlined the importance of monetary policy in ensuring that the authorities’ inflation objectives would be attained. To this end, they noted that the implementation of monetary policy could sometimes be facilitated if instruments were diversified.

In circumstances where an accommodating monetary policy was pursued to provide support for economic recovery, Directors emphasized the importance of getting inflation down and strengthening competitiveness. Directors stressed that the authorities should exercise firm control over the credit and monetary aggregates so as to ease pressures on domestic prices and the balance of payments. Although prudent financial policies had frequently resulted in a significant reduction in inflation in many countries, in others the rate of inflation remained above that of main trading partners or had accelerated. Where deterioration on the inflation or balance of payments fronts occurred, this called for a corrective tightening of policies and a deepening of structural reforms. Just as with fiscal discipline, strong monetary policies were seen as essential for achieving greater exchange rate stability.

In the area of monetary policy, Directors welcomed the structural improvements that had been introduced in many developing countries, particularly the introduction—or maintenance—of interest rates at positive levels in real terms. Monetary objectives should be supported by the introduction or continuation of banking and capital market reforms, and the need for greater use of open market instruments was often noted. Monetary policy needed to be geared toward providing adequate credit to the private sector to allow it to play a leading role in the growth process.

Directors welcomed the considerable progress in structural reform in many developing countries, highlighting in these cases such policies as the adoption of measures to foster the role of the price mechanism and improve the allocative efficiency of the economy, privatization, improved financial management and accountability in public enterprises, and capital market liberalization. In general, Directors noted that structural reforms helped to improve confidence, spur private investment, and strengthen economic competitiveness.

Board members considered that although developing countries generally had undertaken significant structural reforms to increase the supply of productive resources and enhance economic efficiency and competitiveness, deficiencies persisted in some areas. These pointed to the need for elimination of labor market rigidities, incentives, subsidies, and price supports. Directors also emphasized the need to promote the diversification of production and of exports, improve the competitiveness of the economy, and strengthen the role of the private sector.

In a number of countries, Directors also urged the authorities to pursue labor market reforms—including reform of labor legislation to facilitate mobility and promote more flexible employment conditions—to enhance the economy’s flexibility.

Social safety nets are increasingly becoming an important component of countries’ efforts to shield the most vulnerablen segments of their populations from the short-term effects of corrective policies. In encouraging governments in their efforts to alleviate poverty through safety nets, Directors sometimes suggested that existing programs be strengthened or their targeting improved.

On the external front, a large number of countries were commended by Directors for the progress made toward balance of payments viability, but Directors observed that in many cases further adjustment efforts would be needed to establish external viability over the medium term. It was recognized that while capital inflows could be beneficial to developing countries in stimulating higher investment and growth, there was the risk that sudden surges in inflows could threaten macroeconomic stability (see section on Experience with Surges in Capital Inflows, above).

Directors considered that the successful December 1993 conclusion of trade talks under the Uruguay Round should help to stem protectionist pressures and contribute to enhancing global business confidence and the prospects for world economic growth. The more open markets should also serve as an important complement to the structural adjustment efforts undertaken by Fund member countries for sustainable growth.

Directors welcomed the opening of the domestic economy in many developing countries to external competition through the elimination of exchange and trade restrictions. Where there was scope for further trade reform, Directors urged the authorities to phase out the remaining barriers to imports, ease marketing restrictions, resist calls for protection of new industries, and reduce regulatory hurdles to foreign investment. Directors welcomed the steps being taken by some countries to promote regional integration and trade. They stressed, however, the importance of ensuring the consistency of such agreements with multilateral trade liberalization efforts.

In some countries, Directors expressed the importance of eliminating quickly external arrears and of remaining current on debt and other external obligations. This would help such countries regain access to voluntary market financing. For most low-income countries, substantial financial support from the international community, on concessional terms, would continue to be necessary. The value of improved access to industrial country markets was stressed by Directors during many discussions.

Exchange rate policy continued to be an important component of Article IV discussions with developing countries. The Fund’s advice in this area depends on the circumstances of each country. A few countries were urged to unify exchange rates at a realistic, market-determined level. Directors noted that the objective of achieving exchange rate stability had been and would continue to be elusive without a concomitant—and significant—tightening of fiscal and monetary policies.

Finally, in order better to guide policymakers in reformed economic environments, Board members asked a number of countries to improve the quality, coverage, and timeliness of their economic and financial data, in some cases with technical assistance from the Fund.

Côte d’lvoire

In March 1994, Directors discussed the Article IV consultation with Côte d’lvoire and approved its request for arrangements under the ESAF. The discussion took place against a background of the authorities’ decision to join other member countries of the CFA franc zone in adopting a comprehensive macroeconomic strategy encompassing the devaluation of the CFA franc against the French franc with effect from January 12, 1994.

For some time before the devaluation, Côte d’lvoire had made serious efforts to reduce financial disequilibria and implement structural reforms against the back-ground of a sharp drop in the world market prices of its major exports and a sizable nominal appreciation of the CFA franc, together with a number of structural and sectoral problems. However, in view of the crisis in competitiveness, the internal adjustment policies implemented were not adequate to restore growth and external viability, and, for seven consecutive years, domestic output had contracted, and considerable amounts of domestic and external payments arrears had been accumulated. With declining rates of saving and investment, and growing capital flight, the prospects for an early return to economic growth and balance of payments viability without external adjustment had become increasingly uncertain.

Economic performance in 1993 was marked by a continuation of the relative stagnation of the Ivoirien economy seen since 1991, and real GDP growth was -1.1 percent (Table 14). The significant improvement in fiscal imbalances achieved in 1992 was not repeated in 1993; preliminary data indicated a 12 percent drop in tax revenue, in the areas of direct and import taxation, reflecting the worsening of the overall economic climate. The authorities were, however, more successful in keeping government expenditures under control. Nevertheless, on a commitment basis, the Government’s primary deficit increased to 3 percent of GDP in 1993 from 1.4 percent in 1992. With a marked increase in interest obligations, the overall fiscal deficit widened to the equivalent of 16.2 percent of GDP in 1993 from 12.9 percent the year before.

Table 14

Côte d’lvoire: Selected Economic Indicators

(Annual percent change unless otherwise noted)

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Note: Data in the table reflect information availabie at the time of the Board discussion.


Of goods, in constant 1989 prices.

Excluding import tariffs.

After 1992, based on changes in projected inflation in the main trading partners and changes in the domestic consumer price index.

Reflecting the increasing liquidity crisis of public finances, the Government again experienced difficulties in meeting its financial obligations, which led to further accumulation of domestic and external payments arrears. The evolution of the main monetary aggregates was greatly affected by the Treasury’s increased recourse to central bank advances, which caused net bank credit to the Government to expand by almost 8 percent. Total net domestic credit of the banking system, on the other hand, declined marginally, as credit demand in the private sector continued to fall.

Côte d’lvoire’s trade surplus strengthened markedly in 1993 because of a decline in imports, although the current account deficit narrowed by only a small margin due to the increase in the deficit of the services account resulting from the higher interest obligations on the external debt. The country’s external financing situation deteriorated sharply after the expiration in 1992 of the Paris Club rescheduling, and substantial external payments arrears were accumulated.

In their discussion of Côte d’lvoire, Directors welcomed the broadening and strengthening of the adjustment strategy represented by the devaluation of the CFA franc, a step they had for some time considered to be a necessary condition for the return to sustainable economic growth and financial viability over the medium term. Directors commended the authorities for their determination in implementing the immediate actions and the accompanying measures of their program for 1994 and the medium term. However, Directors emphasized that the authorities would need to adhere strictly to the tight financial policies foreseen in the program and proceed with far-reaching structural reforms if the devaluation was to have its intended positive effects.

Noting the program’s objectives. Directors stressed that the achievement of the fiscal targets was essential. They strongly supported the restructuring of the tax and tariff system introduced under the program, as well as the cautious stance of wage policy and the reorientation of public expenditure in favor of investment and the development of human resources. They expressed satisfaction with recent progress in restructuring the public domestic debt, and observed that the success of the program would also depend on prudent monetary policy.

Directors considered it crucial for Côte d’lvoire to vigorously implement the structural reforms envisaged under the program since these would promote economic efficiency and the development of the private sector, as well as reinforce gains in the external sector.

Directors also observed that the implementation of social safety net measures would be important for the success of the program. Côte d’lvoire, they felt, would need substantial external financial assistance and debt relief in the years ahead.


In December 1993, Directors completed the Article IV consultation with Kenya and approved its request for a loan equivalent to SDR 45.23 million under the ESAF in support of the Government’s economic and financial program covering October 1993-September 1994.

The discussion took place against the background of the implementation, April 1993, of a macroeconomic framework to restore balance to the economy and resume the economic reform process. By the time of the Board discussion, monetary policy had been tightened and steps taken to stabilize the financial system; the exchange and trade system and maize marketing system had been substantially liberalized; and civil service reform had been initiated. As a result, important progress had been made toward stabilizing the economy.

Since the early 1990s, Kenya’s economic situation had worsened. Economic growth fell from 4.4 percent in 1990 to 0.4 percent in 1992, inflation accelerated, and external payments arrears emerged (Table 15). By March 1993, the economy was in serious difficulty with severe shortages of foreign exchange; inflation rose to 58 percent on an annual basis in the first quarter of 1993. Several factors contributed to this situation: a series of exogenous shocks, including a large influx of refugees from neighboring countries and unfavorable export prices; unsettled social and political conditions during the democratization process; and the suspension of balance of payments assistance from donors in late 1991.

Table 15

Kenya: Selected Economic and Indicators

(Annual percent change unless otherwise noted)

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Note: Data in the table reflect information available at the time of the Board discussion.



December-to-December variations in official exchange rate.

In their discussion, Directors noted the progress made toward re-establishing stable macro-economic conditions and resuming economic liberalization, but stressed that this progress and the proposed financial program should be seen only as the beginning of a process to re-establish an environment conducive to sustained economic growth. They emphasized the importance of implementing the program in full. Directors also emphasized that accountability, transparency, and financial responsibility should be the guiding principles in the public sector and urged resolute action to bolster public confidence at home and abroad in Kenya’s economic management.

Directors stressed that in 1994 the highest priority should be given to the objective of consolidating the gains in macroeconomic stabilization, as evidenced by single-digit inflation and relative exchange rate stability. While interest rates were relatively high, it appeared that a decline in interest rates required further progress on the fiscal front and further deceleration of inflation. Directors stressed that the key consideration guiding monetary policy was to ensure that the inflation objective would be attained. To this end, they noted that the implementation of monetary policy could be facilitated if monetary policy instruments were diversified. They also welcomed the substantial progress made in rehabilitating and strengthening the banking system.

Directors underscored that a key component of the adjustment strategy was to reduce the government budget deficit, primarily through cuts in expenditure in relation to GDP. Stressing the value of improving the quality of expenditure, Directors attached considerable importance to implementing recommendations of the Public Expenditure Review being carried out with the assistance of the World Bank. In order to create enough room for the much-needed expenditure on operations and maintenance, as well as development projects, the civil service reform program should be strengthened and implemented vigorously, and encompass a government restructuring to avoid duplication and to allow privatization of certain functions currently being carried out by the Government. In addition, direct and indirect subsidies and payments to public enterprises should be phased out.

Directors welcomed the actions planned to liberalize domestic markets. In particular, they considered it critical to move ahead with the full elimination of price controls and of restrictions on maize as soon as possible. Directors also supported the planned liberalization of the petroleum market.

Directors welcomed the abolition of import licensing and the scaling back of exchange restrictions. They noted with satisfaction that progress was being made in attaining exchange rate stability and that the liberalized exchange and trade systems appeared to be functioning well. Directors strongly supported the authorities’ intention to remove the remaining exchange restrictions soon, and also welcomed the steps being taken by Kenya and other countries to promote regional integration and trade. Directors noted the Government’s decision to seek multilateral rescheduling of external payments arrears on nonconcessional terms, thereby regularizing Kenya’s relationship with its creditors.

South Africa

In December 1993, Directors conducted the Article IV consultation with South Africa and approved its request for a drawing equivalent to SDR 614.43 million under the CCFF. The drawing, which was South Africa’s first use of Fund credit since 1982, was to help compensate for a shortfall in merchandise export earnings and a drought-related increase in cereal imports for the 12-month period ended June 1993.

The consultation took place as the South African economy began to emerge from the exceptionally harsh and long-lasting recession that it had entered in mid-1989. Real GDP had fallen by more than 3 percent, and nearly half of the labor force was unable to find work in the formal sector.

Inflation, which had been stuck at around 15 percent in the first two years of the recession, began to come down in 1992 and, by September 1993, consumer price inflation had fallen to 9 percent (of which 2 percentage points were attributable to an increase in the value-added tax rate) and producer price inflation had dropped below 6 percent (Table 16).

Table 16

South Africa: Selected Economic Indicators

(Annual percent change unless otherwise noted)

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Note: Data in the table reflect information available at the time of the Board discussion.

Official projections.

Fiscal discipline was eased considerably after 1990, but the budget for 1993/94 sought—by means of higher indirect taxes, some fiscal drag, and a reduction in drought-related expenditure—to cut the deficit to 7 percent of GDP from 8 ½ percent in 1992/93. This deficit objective appeared to be attainable.

Monetary policy remained restrictive during the recession, and interest rates were positive in real terms for the whole of this period. The balance of payments had been severely constrained by the dearth of external financing stemming from financial sanctions. Foreign exchange and gold reserves, which had peaked in August 1992, had fallen by the time of the Directors’ discussions to levels that the authorities regarded as inadequate. The current account was weakened in 1992 by the effects of a severe drought and by a continuation of the prolonged unfavorable trend in the terms of trade.

South Africa’s macroeconomic management in recent years had aimed at achieving financial stability in difficult circumstances. The country had maintained a constructive policy dialogue with the Fund through regular consultations and staff visits. For the period ahead, the authorities were resolved upon a cautious fiscal and monetary stance that was broadly supported by South Africa’s major political groups.

In their discussion, all Directors congratulated South Africa on the bold political transformation under way. They considered that the economic potential of South Africa, properly employed, could improve living standards in the country and have a powerful and beneficial economic influence on the southern Africa region. Directors noted the challenges faced by the economy and welcomed the consensus that was being forged on many of the economic issues facing the country through a participatory approach among the various groups involved in the political dialogue.

Directors believed that, in the short term, underlying real growth—that is, aside from the effects of the recovery from the drought—was likely to be modest and that, although this might help consolidate the gains on inflation, it could entail further deterioration of an already grave unemployment problem.

Directors concurred with the view of the authorities and the principal nongovernmental groups that more expansionary demand management policies would be counterproductive in the current circumstances. They noted that the origins and special characteristics of the recession were not conducive to successful countercyclical macroeconomic policies: the drought would be self-correcting, the weakness of investment was related to political uncertainty, and the recovery of growth in South Africa’s major trading partners was slow. Unemployment was seen as being more structural than cyclical. Directors added that the scope for fiscal initiatives was limited by the large deficit, the scarcity of domestic savings, and the fast growth of government debt.

Directors noted that monetary policy had been circumscribed by exchange rate developments and concurred with the staff’s judgment that the scope for easing monetary policy in the circumstances prevailing at the time of the Board discussion was limited. Looking ahead, it appeared that an easing of monetary conditions in the future could be facilitated by wage restraint, a strengthening of the fiscal position, and a building up of confidence in the authorities’ macroeconomic program.

Directors emphasized the importance of implementing policies that would raise productive investment, both domestic and foreign, and strengthen competitiveness. They stressed that in order to unleash market forces in this manner, macroeconomic policies would need to promote confidence in financial stability, and the authorities would have to encourage wage restraint and devise an effective anti-trust policy. In addition, South Africa would need to adopt a more liberal, outward-looking policy on trade.

On the labor market, Directors believed that future policies to alleviate unemployment would have to include wage restraint, including possibly some form of social contract, some further improvement in competitiveness, the removal of the anti-export bias in the trade regime, measures to enhance productivity, and, more generally, measures to create an economic environment that would be conducive to investment and growth.

Directors recognized the imperative to remove racial discrepancies in social spending that were a feature of apartheid. They observed, however, that the need to respect economic and financial constraints placed limits on the overall level of social spending.

Directors were supportive of the envisaged trade reform, and specifically of the plans for lower and more uniform tariffs, the abolition of import licensing restrictions and formula duties, and the introduction of mechanisms to ensure that exporters had access to inputs at world prices. They urged that the financial rand system be abolished and the exchange market unified as soon as circumstances permitted, and they welcomed the final agreement with foreign creditor banks, which eliminated the exchange restriction that was implicit in the debt standstill.


Directors met in April 1994 to discuss the Article IV consultation with the People’s Republic of China. The discussion took place against a background of the remarkable performance of the Chinese economy, which had grown by over one fourth in the space of just two years as a result of double-digit growth in both 1992 and 1993 (Table 17).

Table 17

China: Selected Economic Indicators

(Annual percent change unless otherwise noted)

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Note: Data in the table reflect information available at the time of the Board discussion.


In 35 cities.

Fund staff estimate

Based on swap rate, in terms of the basket of currencies used in the Fund’s Information Notice System. A decline in the index indicates a depreciation

As of October 1993.

End of September 1993