The IMF has played an important advisory and technical role in the selection of appropriate exchange rate regimes, including helping to develop foreign exchange markets. In the 1980s, this role centered on assistance to develop the role of floating exchange rates, responding to widespread shortages of reserves and large disequilibria associated with the debt crisis. IMF missions, including a number from the former Exchange and Trade Relations Department that were fielded for this purpose,69 advised on operational aspects of setting up interbank and auction foreign exchange markets and associated macroeconomic policy steps, including unification of multiple exchange rates, liberalization of exchange and trade restrictions, foreign exchange intervention policies, and implications for the conduct of monetary policy. At a later stage of development of spot exchange markets, advice was also given on measures to develop forward foreign exchange markets.
To assist members to simplify and eliminate complex exchange systems, the IMF stands ready to meet members’ requests for technical assistance in preparing economic programs and measures designed to simplify and create foreign exchange markets. Technical assistance in the area of exchange regimes covers a broad range of topics, from general considerations in the choice of exchange rate regime to procedures for introducing new national currencies, management of foreign exchange auctions, development of decentralized foreign exchange markets, organization of central banks’ foreign exchange dealing operations, drafting of foreign exchange laws and regulations, and management of official foreign exchange reserves. This activity has expanded rapidly since the early 1980s, as IMF members have moved increasingly to market based regimes, most with advisory assistance from the IMF, and in 1992 technical assistance was made part of the functions of the new Monetary and Exchange Affairs Department.
As a result of the accession to IMF membership in the late 1980s and early 1990s of a number of previously centrally planned economies, the range of advisory work in foreign exchange systems has again shifted and broadened. About one-half of the IMF’s advisory missions dealing with foreign exchange matters in 1992–94 went to former centrally planned economies.70 Technical assistance to former centrally planned economies emphasized basic and comprehensive market development, including the establishment of central bank operations. Typically, such assistance began with the formulation of a new foreign exchange law and regulations. This was to form a basis for convertibility (limited in some countries) of foreign exchange in the newly emerging private sector and the establishment of central bank functions in administering the market, including exchange rate policymaking, centralization of official international reserves, market dealing operations (front and back offices), prudential regulation of foreign exchange exposures, reserves portfolio management, and statistical monitoring.
In the countries requesting assistance, a significant part of the advisory missions’ work has focused on nonmarket foreign exchange systems and arrangements to liberalize them. This has often involved difficult conceptual work to integrate market and non-market aspects into functioning mechanisms, as the movements to market-based systems were implemented gradually in some countries. Such work was facilitated by the IMF’s jurisdictional focus on issues of nonmarket exchange systems, which seeks to understand, and to inform its membership about, the benefits of convertibility and unified foreign exchange markets.
Recent advisory assistance to other countries in this area has continued to cover a wide range of topics, in many cases culminating in fully decentralized markets, with a significant degree of currency convertibility. Advice has also been directed toward improving detailed operational aspects of foreign exchange markets.71 Other countries were advised to implement a fundamental change in policy and related institutional and structural aspects, for example, a change of exchange rate regime,72 degree of market centralization through adoption or replacement of an auction arrangement,73 adoption of current account convertibility,74 or capital account convertibility.75 With developing countries increasingly adopting both current and capital convertibility, this aspect of technical assistance work is expected to grow significantly. Adaptation of regional systems toward a fully multilateral basis is another likely focus of technical assistance.
Assistance in developing and refining foreign exchange markets and integrating them with monetary operations will remain prominent. Increasingly, the advice on exchange issues has been linked to other areas of technical assistance, including monetary operations, banking supervision, and payments systems. In some instances, particularly in the former Soviet Union and the Baltic countries, this has taken place in comprehensive programs of technical assistance on monetary and exchange issues, reflecting the strong technical and behavioral links among the different structural components. In particular, progress toward capital account liberalization is facilitated by reforms of monetary control systems, and the links between exchange and monetary developments become more pronounced as capital controls are further relaxed.