Abstract

Bilateral or regional payments arrangements maintained between IMF members often give rise to exchange restrictions and multiple currency practices under Article VIII of the IMF’s Articles of Agreement. A basic feature of bilateral payments arrangements is that balances in the bilateral account, which is typically established to settle bilateral trade transactions, can be used only to make settlements between the two partner countries and cannot be transferred into another currency or be used to make payments to a third country. When the transferability of balances in the bilateral account is subject to undue delays, an exchange restriction within the meaning of Article VIII, Section 2(a) may be involved.53 Bilateral payments agreements may also involve discriminatory currency features.

Bilateral or regional payments arrangements maintained between IMF members often give rise to exchange restrictions and multiple currency practices under Article VIII of the IMF’s Articles of Agreement. A basic feature of bilateral payments arrangements is that balances in the bilateral account, which is typically established to settle bilateral trade transactions, can be used only to make settlements between the two partner countries and cannot be transferred into another currency or be used to make payments to a third country. When the transferability of balances in the bilateral account is subject to undue delays, an exchange restriction within the meaning of Article VIII, Section 2(a) may be involved.53 Bilateral payments agreements may also involve discriminatory currency features.

In September 1982, the Executive Board reviewed the IMF’s policy on bilateral payments arrangements and countertrade arrangements, reaching the following broad conclusions: (1) the policy of not approving the maintenance of bilateral payments agreements with restrictive features and of encouraging their termination in the context of Article IV consultations had contributed to a decline in the use of bilateral payments arrangements; (2) the policy on payments arrangements maintained between IMF members in the context of the use of its resources will be continued. Intentions with respect to the elimination of bilateral payments arrangements that are inconsistent with Article VIII would continue to be a performance criterion under upper credit tranche stand-by and extended arrangements; (3) the IMF would continue to encourage members to terminate payments agreements that are inconsistent with Article VIII, including those that are maintained under the transitional provisions of Article XIV; and (4) the use of countertrade arrangements and their impact on the development of a multilateral system of trade and payments need to be kept under review.54

Trends in Bilateral Payments Agreements

Bilateralism in payments, as indicated by the number of agreements, has declined substantially among IMF members in recent years.55 However, with the accession to membership of the former centrally planned economies and the countries of the former Soviet Union, there has been an increase in the use of bilateral payments arrangements. Within the countries of the former Soviet Union, these arrangements have primarily taken the form of correspondent account relationships between the central banks.

At the end of 1993, 53 Fund members out of a total membership of 178 maintained bilateral payments agreements compared with 38 out of a total membership of 159 at the end of 1991, as all new members and those countries succeeding members in 1992–93 maintained bilateral payments arrangements. In spite of the number of new members maintaining bilateral payments arrangements, the percentage of members with bilateral payments agreements was about the same—30 percent—in 1993 as in 1981.

Including the central bank correspondent accounts of the countries of the former Soviet Union, members maintained 328 bilateral payments arrangements, of which 214 were operative at the end of 1993. This represents an increase of 195 in total agreements and of 85 in operative agreements over 1991; 98 of the increases are accounted for by the correspondent accounts between central banks of the countries of the former Soviet Union. Comparing 1981 and 1993, the total number of bilateral payments arrangements, including the central bank correspondent accounts of this group of countries, increased by 160, and the number of operational arrangements by 45.

The increase in bilateral payments arrangements in 1993 is fully accounted for by the 15 new members and the 4 countries that succeeded to the old memberships of Czechoslovakia and Yugoslavia: Croatia. Slovenia, the Czech Republic, and the Slovak Republic. Excluding new members that joined the IMF between 1981 and 1993, the number of bilateral payments arrangements of members fell from 168 to 122, and the number of operational arrangements dropped markedly, from 145 to 24. Thus, of the 328 bilateral payments arrangements in 1993, 206 are attributable to members joining the IMF after 1981. Existing members of the IMF in 1981 therefore made considerable progress in eliminating bilateral payments agreements.

Six countries that maintained bilateral payments in 1981 had eliminated all of their agreements by 1993.56 At the end of 1981, five members maintained at least ten bilateral payments agreements.57 At the end of 1993, eight countries, excluding those of the former U.S.S.R., maintained 10 or more bilateral agreements—Albania (13), Bangladesh (11), Bulgaria (32), Czech Republic (10), Hungary (17), Islamic Republic of Iran (16), Romania (20), and Uganda (13). However, the majority of these arrangements were inoperative.

Trends in Regional Payments Arrangements

Sixty countries participated in regional arrangements at the end of 1993. The number of countries participating in regional payments agreements increased markedly during the 1970s, rising from 29 in 1970 to 64 in 1980 but remaining stable since the mid-1980s.

The main institutional difference between a multilateral payments system and a regional payments arrangement results from the increased involvement of central banks and the role of a clearinghouse in the latter. Under a regional payments arrangement, the central banks and the clearinghouse take the place of commercial banks and foreign exchange markets in settling international transactions. Commercial banks pay, and are reimbursed by, their respective central banks in local currencies, and the central banks settle payment imbalances directly between themselves.58 In the case of multilateral payments, each transaction is settled directly between commercial banks through their correspondent accounts, with conversions between domestic and foreign currency occurring through the foreign exchange market.

The existing operative arrangements are the Asian Clearing Union (ACU), the Economic Community of the Great Lake Countries (CEPGL), the Latin American Integration Association (LAIA), the Central African Clearing Arrangement, the Preferential Trade Area (PTA) for Eastern and Southern African States, and the West African Clearing House (WACH). The membership and coverage of some of the regional arrangements have been expanded, and in some cases, such as the ACU, use of the facility has been made compulsory.59 As a result, the bulk of intraregional trade of the participating countries is channeled through these arrangements. The regional clearing arrangements that have been terminated or suspended are the European Payments Union (EPU) (1950–58), the Caribbean Community Multilateral Clearing Facility (1977–83), the clearing arrangement operated under the Regional Cooperation for Development/Economic Cooperation Organization (RCD/ECO) (1967–90), the Central American Clearing House (CACH) (1961–92), and the regional payments arrangement operated by the members of the former Council for Mutual Economic Assistance (CMEA) from 1964 to 1991.

On January 22, 1993, the heads of state of the Commonwealth of Independent States signed an agreement establishing the Interstate Bank (ISB).60 The operating modalities for the ISB are still being worked out, and in the meantime cross-border correspondent banking has increased rapidly. The ISB is expected to perform several roles in a regional clearing and settlement arrangement. First, it would assist the participating central banks in elaborating operating rules and technical standards for cross-border transactions and in organizing the systematic and standardized clearing of interstate payments. Second, acting as the agent of the participating central banks, the ISB would calculate their regionally netted positions for an agreed-upon settlement cycle and effect settlement in Russian rubles. Third, it would provide settlement credit to participating central banks in the settlement currency, within binding, predetermined limits. For these purposes, the ISB would hold and manage ruble accounts for participating central banks.

Trends in the Use of Countertrade and Barter Trade

Businesses in over one hundred countries were reported to be engaged in countertrade of some sort in 1991–93, but most countries do not have established reporting procedures for these transactions, and only a few countries have regulations requiring countertrade (Ecuador, Indonesia, the Islamic Republic of Iran, and Ukraine issue countertrade regulations). Countertrade transactions refer to bilateral and multilateral trading arrangements under which the seller purchases specified goods or services as a partial or total settlement for his exports. Depending on the type of goods or services traded, financial arrangements involved, and the length of time required to complete a transaction, countertrade arrangements are described as barter, buy-back, counterpurchase, compensation, offset, switch trading, and other. A countertrade agreement may contain more than one type of arrangement and involve more than two parties. Estimates of the scale of barter and countertrade vary from 10 percent to 25 percent of world trade.61

The countries of the former Soviet Union prohibited barter during the first half of 1991 but changed this policy owing to strong pressure to allow countertrade as a means of sustaining trade volumes and because of shortages of convertible currencies.62 As a result, various new barter trade agreements have been concluded, substituting for the previous formal payments agreements, and the importance of barter trade has increased substantially for Eastern Europe and the countries of the former Soviet Union.63 Barter trade is reported to have accounted for 40 percent of Russian exports during the first half of 1992, but to have declined to 11 percent of total exports in 1993, and for 60 percent of Russia’s total trade in 1992 with China. In Ukraine, the proportion of barter transactions in total trade is estimated to have risen from 13 percent in January 1992 to 62 percent in September 1992. Countertrade in Belarus is reported to have accounted for 30 percent of all exports in 1992 and for about 26 percent during 1993. Romania has significant countertrade transactions in its trade with China.

A number of other countries have reduced their reliance on countertrade and barter. In 1991, Albania terminated barter and clearing arrangements with Eastern European countries in favor of conventional trade and payments arrangements (but continued to trade with China on the basis of a barter-type clearing arrangement), and the Islamic Republic of Iran terminated oil-barter agreements with Brazil, Bulgaria, and the former Czech and Slovak Federal Republic, replacing them with payments in foreign exchange. The Indian Government’s policy is to discourage private countertrade, and in mid-1991, the Government of Peru withdrew from countertrade and stopped debt-for-export swaps that had been elaborated in late 1990.

About twenty countries continue to implement official offset programs and schemes under which obligatory requirements of counterpurchase in the amount of 30–50 percent of the original transaction are imposed on a foreign counterparty.64 In most of these cases, the programs were applied to military contracts. However, these arrangements were executed in accordance with conventional trade and settlement practices.

Bilateralism and Regionalism

The conclusions of the 1982 Executive Board discussion of bilateral and countertrade arrangements continue to provide a sound basis for the IMF’s policies in this area in light of the number of new IMF members with bilateral arrangements and the moves to accelerate progress in acceptances of Article VIII.

Issues Raised by Regional Payments Arrangements

The main argument in support of regional payments arrangements is that the working balances in convertible currencies can be reduced because convertible currencies are used only for settlement of net balances at the end of each transaction period. However, the possible savings may be quite limited and would depend on (1) whether the deficits with one country or group of countries are offset by surpluses with other members of the clearing arrangement, and (2) the share of intraregional trade in total trade. Also, the netting would lead only to a onetime reduction in the stock of working balances held for trade-settlement purposes, and such balances are normally only a fraction of a country’s total foreign exchange reserves.65 In examining the Latin American Free Trade Association (LAFTA) and the PTA, the staff concluded that the foreign exchange savings would be relatively minor.66

If multilateral payments instruments are poorly developed—particularly the various trade credit and payment instruments operated through correspondent bank accounts—the regional clearing mechanism could serve as a transitional arrangement while the multilateral payments system is being developed. However, the clearing arrangement should not substitute for or interfere with the development of conventional payments instruments and foreign exchange markets that would provide the next flexible payments arrangements. It is notable that the concept paper for the cross-border initiative for southern and eastern Africa focuses on developing exchange markets, commercial bank correspondent banking, conventional payments instruments, and current account convertibility of the currencies of participating countries as a preferred approach to enhancing payments within the region, rather than on developing regional payments arrangements through the PTA.

Sometimes it is argued that regional payments arrangements are a step toward economic integration through trade liberalization and monetary policy coordination67 or that regional clearing unions could lead to a reduction in transaction costs associated with currency conversions. However, a regional payments arrangement would be only part of a broader package to foster intraregional trade flows and regional integration. Conversion costs are also not avoided if trade is invoiced in a third currency, and reductions in cost have to be measured against the operating costs of the clearing facility.68 Regional payments arrangements may be viewed as an improvement over bilateral payments arrangements and they may decrease the general level of restrictions within the region. However, if any members of the regional group are already free of restrictions, then harmonization could lead to increased restrictiveness for them. Moreover, the arrangements are potentially discriminatory, and various aspects of regional payments arrangements could give rise to restrictions on payments and transfers contrary to the IMF’s Article VIII.

Issues of Countertrade and Barter

Countries generally resort to barter and countertrade when they have insufficient foreign exchange reserves or when external financing is not available to them, such as occurred during the debt crisis, or when non-price incentives associated with the quality or pricing of the goods traded are in use. Arguments in favor of barter and countertrade include increasing the volume of exports and essential imports, gaining access to markets, and attracting foreign investment. The disadvantages include the potential distortion of conventional trade dealing, pricing, and payment practices owing to the nontransparency of the arrangements, the dumping of products on third markets, and the high search and information costs. Official offset policy has evolved out of the objectives of balancing foreign exchange expenditures through counterpurchases and has been used to increase nontraditional exports and support industrial or regional development.

Barter and countertrade arrangements must be viewed as transitional arrangements while a multilateral system of payments is being developed. However, the lack of transparency of these arrangements creates a number of risks, and where the arrangements involve official action they may entail restrictive and discriminatory features contrary to the IMF’s policy on bilateralism. The IMF’s policy has therefore been to keep under review the existing countertrade arrangements and their impact on the development of a multilateral system of payments to ensure that restrictive and discriminatory exchange measures subject to Article VIII are not involved, as such discrimination could arise in countries that officially mandate use of the practices.