Currency convertibility—defined in the broadest sense as the right to convert freely and without limit a currency into any other at the prevailing exchange rate—is the linchpin of today’s globalized world economy. To assess the importance of convertibility, it is only necessary to point out that a system of well-managed convertible national currencies imparts to the international arena advantages analogous to those resulting from the introduction of money in a national economy, most notably, the elimination of barter (and the need for coincidence of needs) as a basis for international trade and the provision of an instrument for the development of financial markets.

Currency convertibility—defined in the broadest sense as the right to convert freely and without limit a currency into any other at the prevailing exchange rate—is the linchpin of today’s globalized world economy. To assess the importance of convertibility, it is only necessary to point out that a system of well-managed convertible national currencies imparts to the international arena advantages analogous to those resulting from the introduction of money in a national economy, most notably, the elimination of barter (and the need for coincidence of needs) as a basis for international trade and the provision of an instrument for the development of financial markets.

It is not, therefore, surprising that the founding fathers of the International Monetary Fund (IMF) saw the promotion of convertibility—albeit limited mainly to current account transactions—as central to the Fund’s mandate under Article VIII of the Articles of Agreement. Yet the IMF’s limited concept of convertibility has become increasingly anachronistic in today’s globalized world economy, where current and capital account transactions are at the very least equally important. The logical next step was taken at the last meeting of the Interim Committee of the Board of Governors of the International Monetary Fund. The Committee, in its communique of October 8,1995, “stressed that increased freedom of capital movements and globalized markets bring significant benefits to all countries (p. 2).” It underscored the importance of a “consistent implementation of firm economic policies … to help reduce the volatility of capital movements,” and encouraged the Fund “to pay increased attention to capital account issues and the soundness of financial systems….(p. 2)”

The Fund has made significant progress in its original mandate to encourage members to establish current account convertibility, under Article VIII, Sections 2, 3, and 4 of the Articles of Agreement. As of October 10, 1995, 109 member countries out of a total membership of 180 had accepted the obligations under Article VIII. During the twenty years following the establishment of the Fund, 1946–65, only 27 countries accepted those obligations. The pace picked up during the following twenty years, 1966–85, but only marginally, with 33 additional countries accepting those obligations. It is only over the last eleven years, 1986–96 (as of May 21, 1996), that the pace accelerated significantly, with an additional 55 countries accepting those obligations. Interestingly, only 6 countries in the Middle East had accepted those obligations (Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates, and Oman) through 1974, while no North African country had. Remarkably, there was a hiatus until January 1993, when Tunisia and Morocco accepted those obligations, becoming the first North African countries to do so. Lebanon followed suit in September 1993, with Jordan being the latest country in the region to accept in February 1995. Many countries, however, both in the Middle East and North Africa, as well as in the rest of the world, have achieved in an economic sense de facto current account convertibility, with only some technical issues hindering them from complying with the obligations under Article VIII. Furthermore, many countries that have accepted the obligations under Article VIII, as well as many of those that have not, do have to varying degrees capital account convertibility.

Themes of the Seminar

The seminar in Marrakesh, organized by the Arab Monetary Fund in collaboration with the Government of the Kingdom of Morocco and the International Monetary Fund, focused on both the theoretical aspects and empirical issues relating to the introduction of currency convertibility. It came on the heels of the above-mentioned establishment of current account convertibility in Morocco and Tunisia, an accomplishment that both countries considered as evidence of the success of their adjustment and reform efforts.

The seminar gathered a wide array of government officials and academicians from the Middle East and North Africa. The papers presented covered a number of theoretical questions that contrasted the experience of a number of Middle Eastern and North African countries in moving toward convertibility, and provided detailed case studies of Morocco’s and Tunisia’s efforts to establish current account convertibility. Both of the speakers who delivered opening remarks—Omar Kabbaj, Morocco’s Minister Delegate to the Prime Minister Responsible for Economic Incentives, and Osama Faquih, Director General and Chairman of the Board of the Arab Monetary Fund—stressed the importance of convertibility for fostering trade and financial linkages among the Arab countries and with the rest of the world, for promoting investment and growth, and for enhancing regional economic cooperation. Kabbaj pointed to the lessons that could be drawn from the Moroccan experience, while Faquih highlighted the achievements of both Morocco and Tunisia in establishing current account convertibility and noted the progress that Egypt, Jordan, and Mauritania had made toward that objective in recent years. They both encouraged the participants to focus on the theoretical aspects of the move to convertibility and the empirical experience of the region.

Against this background, there were a number of questions that were addressed at the seminar:

  • What are the various concepts and degrees of convertibility?

  • What are the costs and benefits of convertibility?

  • What are the policy preconditions for the successful establishment and the conditions for sustaining currency convertibility?

  • What are the considerations involved in the sequencing of policies and the speed with which convertibility can be introduced?

  • Should current account convertibility be established before moving to full convertibility?

  • What is the status of exchange restrictions in Arab countries, and what progress has been made in eliminating them?

  • What have been the specific experiences of Tunisia, Morocco, Egypt, and Jordan in moving toward convertibility?

  • In a more general vein, how has the financial code of conduct with regard to convertibility established nearly five decades ago in the Bretton Woods Conference changed?

Concepts and Degrees of Convertibility

Manuel Guitián set the stage for the discussion by reviewing the various concepts and degrees of convertibility. He provided a broad current definition of the concept of convertibility, namely, as the right to convert freely a national currency into any other currency. In this context, he differentiated between soft convertibility, which involves a market-determined exchange rate system, and hard convertibility, which involves a fixed exchange rate system. He noted that, in today’s world of flexible exchange arrangements, it was soft convertibility that prevailed. He explained that the move from hard to soft convertibility, associated with the abandonment of the Bretton Woods par value regime, was fostered by the latter’s very success in promoting the integration of national economies into the world system, which heightened the difficulties encountered by countries to live within the constraints imposed by the consequent interdependence.

Guitián underscored that few currencies adhered to the above definition of full convertibility. He noted that there were limitations or restrictions that resulted in different degrees of convertibility. He examined the degree of convertibility from three angles. First, from the standpoint of holders, he differentiated between external and internal convertibility. The former refers to the right of foreign holders of currency to convert their balances into foreign exchange, while the latter refers to the right of domestic holders of currency to convert their balances into foreign exchange. Second, from the standpoint of the purpose, Guitián pointed out that the degree of convertibility was circumscribed by the nature of the transaction—with current and capital account convertibility being the traditional distinction. Third, from a geographical standpoint, the differentiation could be made between regional and global convertibility.

Convertibility, in a fundamental sense, was affected by restrictions other than those on exchange transactions, particularly those on imports of goods and services and of capital exports, Guitián explained. For instance, a currency that is convertible because there are no exchange restrictions could be made practically inconvertible through trade and capital controls. He argued that the interconnections between financial and real transactions provided the basis for the distinction of real or commodity convertibility (prevailing when there are no exchange and trade controls) and financial convertibility (requiring only the absence of exchange controls).

Guitián noted that the degree of convertibility in the IMF is assessed by three standards: the currency’s usability (the purpose), its exchangeability (into other currencies), and its exchange value (hard or soft convertibility). He explained that the first two standards are conceptually subject to well-defined boundaries. A currency can be used either for all purposes or not at all. Similarly, a currency can be exchanged either for all currencies without limit or for none. The degree of convertibility can be defined as involving gradations within these boundaries. However, as far as exchange value is concerned, the standard of relativity is different, with the degree of currency convertibility depending on the extent or scale of oscillations in its exchange value. In this context, Guitián noted that the focus of convertibility in the IMF’s Articles of Agreement on current account transactions reflected the original concern with restoring the free flow of international trade in goods and services that had been disrupted by World War II.

Preconditions, Sequencing, and Speed

Saleh Nsouli focused on the preconditions to convertibility, the benefits and costs associated with the establishment of convertibility, the considerations behind the appropriate speed at which convertibility can be introduced, and the issues involved in sequencing the reforms to meet the preconditions.

He explained that currency convertibility was not a policy instrument per se, but rather a reflection of a policy outcome where a country had achieved balance between the demand for and supply of foreign exchange vis-à-vis its currency. As such, currency convertibility could be simply achieved by allowing the exchange rate to float and removing all exchange restrictions. However, if domestic financial policies were too expansionary, continuous pressure would then be exerted on the exchange rate, leading to an inflationary cycle involving depreciation-inflation-depreciation—a cycle that would disrupt investment incentives and growth. Furthermore, the lack of adequate foreign exchange reserves would limit the ability of the monetary authorities to smooth fluctuations in the exchange rates arising from seasonal or transient factors, with the resulting instability of the currency (in the absence of stabilizing arbitrageurs) undermining confidence in the currency. Finally, if the regulatory environment was such that prices, production, and trade decisions were controlled centrally, the benefits of the introduction of convertibility would not be passed on to the economy. In this light, he noted that four preconditions needed to be met, namely, achieving internal financial balance through sound fiscal and monetary policies; achieving external financial balance through an appropriate exchange rate; building up adequate international reserves; and liberalizing the incentives system.

The speed with which convertibility is introduced and the sequencing of its introduction were critical to ensure that it generates beneficial effects for the economy, Nsouli explained. He noted that the successful adoption of convertibility involved a comprehensive set of both macroeconomic and structural reforms to achieve financial balance and allocative efficiency. It was, therefore, synonymous with successful adjustment. He argued that the distinction between the fast and gradual approaches to adjustment was somewhat overdrawn. In practice, the speed of adjustment—and the concomitant introduction of convertibility—would depend on the specific circumstances of each country but could be defined theoretically as being the optimal adjustment trajectory that will maximize the country’s intertemporal welfare function, with an appropriate social discount rate, subject to various financial and structural constraints.

With regard to sequencing, he gave high priority to macroeconomic policies designed to align aggregate demand with available resources. But he emphasized the need to take into account the compatibility of structural reforms with the re-establishment of macroeconomic stability; the complementarity of policies in determining the timing of their introduction; the lead time involved in the preparation and the implementation of policies; the gestation period for the reforms to yield results; and the distribution effects to avoid social tensions that would derail the reforms.

Within the above framework, he examined three different approaches to convertibility: front-loaded, preannouncement, and by-product. In general, he considered that the first approach to convertibility, where the establishment of convertibility had to lead policy decision making, implied a low social discount rate and a binding external financial constraint, with sequencing being governed by the need for rapidly adjusting macroeconomic policies and introducing complementary structural measures up front. In the process, the compatibility, lead time, gestation, and distribution considerations would be constrained. The preannouncement approach, which involved setting a specific date for eliminating current account restrictions, subordinated all objectives and policies to the achievement of convertibility and implied a higher social discount rate than the front-loaded approach, with less of an external financial constraint. It was less binding in terms of macroeconomic compatibility, complementarity, lead time, and gestation considerations, as well as distribution effects. Finally, under the by-product approach, Nsouli explained, convertibility was not an objective of economic policy per se. It was, therefore, consistent with either a high or a low social rate of discount, with the pace of adjustment and reforms proceeding either slowly or quickly. The availability of financing would, of course, be an important consideration, but issues relating to compatibility, complementarity, lead time, gestation, and distribution were likely to dominate the process.

Nsouli concluded that, while current account convertibility in today’s world could be viewed as an anachronism in the sense that it deprived the country of the full benefits of convertibility, many countries had moved gradually to establish current account and, subsequently, capital account convertibility. In terms of the framework discussed, the establishment of current account convertibility as a transitional step toward achieving full convertibility would seem consistent with the “revealed” optimal adjustment path that would maximize a country’s welfare function.

Reviewing the Arab Experience

Moustapha Kara and Salam Hleihel focused on the reforms in the 12 Arab countries with exchange restrictions on current or capital transactions, or both (Algeria, Egypt, Iraq, Jordan, Socialist People’s Libyan Arab Jamahiriya, Mauritania, Morocco, Somalia, Sudan, Syrian Arab Republic, Tunisia, and the Republic of Yemen), underscoring that 8 other Arab countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, and Lebanon) had no restrictions. They explained that the reforms of the exchange systems in most of the 12 countries had gained momentum in the 1980s.

Kara and Hleihel broke down the 12 Arab countries surveyed into two groups. Group A was characterized as a set of countries that had or had had a dominant public sector and a centrally planned economy, and where the government exercised strict control over the volume and allocation of foreign exchange. The group comprised Algeria, Egypt, Iraq, Socialist People’s Libyan Arab Jamahiriya, Somalia, Sudan, and the Syrian Arab Republic. In these countries, exchange controls were part of the system of economic management. Group B was defined as consisting of countries with market-oriented economies and whose main reason for exchange controls was the management of the balance of payments. These were Jordan, Mauritania, Morocco, Tunisia, and the Republic of Yemen. In these countries, exchange controls aimed at limiting the balance of payments pressures and supporting the exchange rate.

Kara and Hleihel noted that countries in Group A suffered from higher distortions than those in Group B. Countries in Group A had generally experienced during the 1980s a more pronounced real effective appreciation of their currencies, a greater diversion of domestic resources from the traded to the nontraded sectors, a more disappointing export performance, a wider divergence between official and parallel market exchange rates, a more acute diversion of foreign exchange to parallel markets, and a higher volume of capital flight. For both groups, however, growth performance had been disappointing during the 1980s, as compared with the previous decade, and efficiency, as measured by the incremental capital output ratio, had remained low.

Countries in group A had pursued the transition to liberalized exchange systems since 1980 in stages rather than in one step, Kara and Hleihel explained. By 1991, Egypt had virtually fully liberalized its exchange regime and unified its exchange rate. In Sudan, although a unified foreign exchange market was introduced in 1992, the exchange rate had not been sufficiently flexible and exchange controls had remained in place, with the result that activity on the parallel market had continued to reflect the pressures on external resources. In spite of periods of progress in re-establishing external financial balance and reducing exchange controls, Somalia had continued to experience divergences between the official and parallel market exchange rates throughout the 1980s. In Algeria, efforts to liberalize exchange restrictions remained constrained to a certain degree in 1992 by external sector difficulties. The Syrian Arab Republic, which had reduced exchange restrictions somewhat by 1992, continued to have multiple exchange rates. Iraq and the Socialist People’s Libyan Arab Jamahiriya were singled out as the only two countries that did not undertake significant exchange reforms. By contrast, considerable progress in reducing exchange restrictions in group B had been achieved. Both Morocco and Tunisia had made major strides in liberalizing their exchange controls, particularly for current account transactions, in the context of comprehensive adjustment programs. Similarly, Mauritania and Jordan had moved forward. The Republic of Yemen’s exchange system, however, had become more restrictive.

Specific Case Studies: Tunisia, Morocco, Egypt, and Jordan

Three studies focused in greater depth on Tunisia, Morocco, Egypt, and Jordan. Abdelmoumen Souayah reviewed Tunisia’s experience in decontrolling its exchange system, while Ali Amor traced that of Morocco. Arfan Al-Azmeh provided a comparative study of the four countries.

Souayah placed the move to convertibility in Tunisia in the context of the overall reorientation of the country’s economic and financial policies. He considered that the revival of interest in a liberal economy in Tunisia had followed the failure of the socialist system of development. This revival coincided with the external payments crisis that faced Tunisia in 1986, and which had prompted the government to launch a program aimed at economic rehabilitation and consolidation. Under the program, progress in liberalizing and restructuring the economy had been made in a number of areas, notably the import system, the tax structure, and the financial system. The pursuit of sound budgetary, monetary, and exchange rate policies had helped reduce inflation and strengthen the external sector position. This had enabled Tunisia to liberalize exchange restrictions for current account transactions at the end of 1992 and accept in January 1993 the obligations under Article VIII. Souayah foresaw the next phases toward the establishment of full convertibility, with the expected establishment in 1994 of a foreign exchange market and the continued pursuit of coherent macroeconomic policies.

Amor traced exchange controls in Morocco to the colonial era, as part of a strategy to promote the Moroccan economy’s integration into France’s metropolitan economic system. Upon independence, such controls were viewed as a means of promoting development. In analyzing developments during the 1970s, he reached the conclusion that the exchange restrictions had contributed to stifling economic activity and worsening the financial imbalances. Accordingly, the government had decided in 1983 to liberalize and open up the economy in the context of successive structural adjustment programs. A gradual approach to liberalizing exchange controls had been chosen to allow the banking system to adapt to the new environment and to avoid “jeopardizing the fabric of the domestic economic system.” Amor saw considerable positive results from the liberalization measures implemented, including those on exchange controls. He considered the shift in the structure of imports toward capital and semifinished goods as a positive development associated with increased investment. Exports had also increased and been diversified, while tourism receipts had expanded. Both remittances and foreign direct investment had risen sharply. The improvement in the external sector position had contributed to a reduction in the debt-service burden and the buildup in foreign exchange reserves. At the same time, real GDP growth had averaged 3.5 percent a year during 1983–92. Looking ahead, he, like Souayah, foresaw the move to full convertibility and the establishment of a foreign exchange market.

In a comparative study, Arfan Al-Azmeh reviewed the progress made by Morocco, Tunisia, Jordan, and Egypt in meeting the four major preconditions for establishing convertibility. He considered that Morocco, which had made significant strides in reducing its budget deficit, maintaining a realistic exchange rate, building up its foreign exchange reserves, and substantially decontrolling the incentives system, had satisfied all four preconditions. However, it needed to remain vigilant in avoiding a resurgence of inflationary pressures and safeguarding its competitiveness. While Tunisia had also met the preconditions, he considered that the progress made had been less than that achieved by Morocco and called for completing promptly the envisaged reforms in the second phase. With regard to Egypt and Jordan, Al-Azmeh explained that they had hastened to virtually eliminate the exchange restrictions on current transactions as soon as external balance had been re-established and foreign exchange reserves built up, but that both domestic financial management efforts and structural reforms needed to be pursued.

Al-Azmeh noted a number of similarities and differences in the approaches of these countries to establishing convertibility. First, all four countries had embarked on the liberalization of their exchange systems in the context of comprehensive adjustment and reform programs. Second, the progress in exchange liberalization took place at different rates. In Morocco, the pace was gradual and in tandem with that of trade liberalization. In Egypt, it had also been phased in between 1987 and 1991 in conjunction with the progress made in the reform process. By contrast, in Tunisia, it had been concentrated in the final years of the 1986–92 reform program. In Jordan, the rapidity with which the move toward convertibility had progressed had reflected the limited degree of restrictions already in place. Third, the timing of the announcement of convertibility had differed. In Morocco, it was announced as an objective a year before it was achieved, while in Tunisia it was announced at the same time it was implemented. In Egypt and Jordan, no announcement had been made (as of the end of 1993) as there remained some technical obstacles to officially accepting the obligations under Article VIII. Overall, Al-Azmeh considered that the experience of these four countries showed that convertibility, rather than representing invariably the culmination of adjustment and reform programs, could be viewed as an integral part of the adjustment and reform process, complementing and reinforcing it.

Capital Account Convertibility

In presenting the last paper at the seminar, Guitián made a strong case for an up-front move to full convertibility as a means of leading financial policies and economic reforms, thereby turning the tables on the preconditions for establishing convertibility. He stressed that economic logic advocates the dismantling of capital controls; developments in the world economy make them undesirable and ineffective; and a strong case can be made in support of a rapid and decisive liberalization of capital transactions. All these conditions underpin strongly a code of conduct that eschews resort to capital controls as an acceptable course of action for economic policy.

Guitián argued that, with the growing predominance of capital movements in international transactions, the international financial code of conduct focusing on current account convertibility that was established nearly five decades ago in the Bretton Woods Conference had become outdated. He explained that there were normative benefits to be derived from updating the code of conduct to include full convertibility, with the benefits deriving mainly from the provision of faster and clearer signals when inconsistencies arose between national and international considerations of events. He emphasized that controls could only serve as palliatives to temporarily contain, but not to eliminate, the underlying pressures, and that, in any event, capital controls could be circumvented.

The case for capital controls, Guitián explained, was based on the importance of meeting the necessary preconditions before moving to external financial liberalization, such as achieving a sustainable fiscal position, a realistic exchange rate, as well as a well-functioning liberal domestic financial system. He feared, however, that waiting to fully meet such preconditions to liberalize capital movements could foster the maintenance of capital controls. He considered that opening the capital account without fully meeting the preconditions would exert pressures to adopt quickly the necessary policies to bring about balance and stability to the economy. Nonetheless, he cautioned that, while capital account liberalization could be undertaken in less-than-optimal domestic economic conditions, it should not be undertaken under circumstances so far from optimality that the credibility of the decision to open the economy to international financial transactions would be so impaired that it could not be sustained. In this regard, Guitián dismissed the notion that the opening of the current account should precede the liberalization of the capital account, arguing that there did not seem to be any a priori reason why the two accounts could not be opened up simultaneously.

Regarding the speed of liberalization, Guitián acknowledged that there was no single, categorical answer but leaned in the direction of fast liberalization. He felt that there was no guarantee that the leeway to adjust to confront competition in a gradual approach would be, in effect, used, but rather that the tendency of operators would be to continue exploiting the opportunities of a closed or partially closed economy. If a gradual opening were to encourage delays in adjustment, he considered that its costs would not fall below those resulting from a fast liberalization. By contrast, a rapid opening of the economy would provide quickly to economic agents the transparent signals that would generate gains in efficiency and attract international resource flows.


A number of general conclusions can be drawn from the seminar, although authors differed in their emphasis. First, currency convertibility is critical to help integrate the Middle East and North Africa into the globalized world economy. Apart from the systemic benefits, there are benefits to be derived in each country in terms of the resulting allocative efficiency, the necessary macroeconomic discipline, the increased productivity and competitiveness, the attraction of foreign direct investment, and the importation of technological know-how. The downside risks were viewed particularly in terms of the potential for temporary production dislocations and disruptive capital flows.

Second, the establishment of currency convertibility is part of an overall adjustment and reform process. The case studies of Tunisia and Morocco, which assumed the obligations under Article VIII in early 1993, and the comparative study with Egypt and Jordan, which had only de facto achieved convertibility by the time of the seminar, illustrated clearly how convertibility had progressed in the context of the adjustment and reform programs that these countries had implemented.

Third, the achievement of domestic and external balances, the buildup of reserves, and the liberalization of the incentives system are important preconditions for the establishment and the sustenance of convertibility. The theoretical underpinnings of meeting those preconditions were analyzed, and the case studies showed the progress that various Middle Eastern and North African countries had made in this regard. While most authors considered that convertibility should follow the establishment of the preconditions, at least one author put forward the possibility that the introduction of convertibility could prompt the authorities to move rapidly to satisfy those preconditions.

Fourth, current account convertibility can be viewed as a transitional phase toward the establishment of full convertibility. Most participants were of the view that a gradual approach would minimize the costs and maximize the benefits of establishing convertibility. The theoretical framework for analyzing the optimal speed of introducing convertibility, as part of the overall adjustment process, suggested that it was difficult empirically to qualify a process as fast or gradual. Certainly, the case studies pointed to the “revealed preferences” of the countries considered to proceed in a phased and gradual manner. The point, however, was made that too gradual an approach could result in perpetuating restrictions and inefficiencies, while the benefits of full convertibility could be reaped earlier if it were introduced rapidly and supported by the necessary policies.

Fifth, the progress toward officially establishing convertibility in the Middle East and North Africa needs to be accelerated. Only eight countries in the region had accepted the obligations under Article VIII by the time of the seminar, and only two additional ones have accepted those obligations since then. While a number of other countries in the region have already de facto virtually full convertibility, some minor restrictions still impede them from assuming the obligations under Article VIII and deprive them of the benefits of the signaling effect of the irreversibility of assuming such obligations. Still, some other countries in the region remain far from satisfying the preconditions and need to implement the adjustment policies and structural reforms needed to lay the foundation for establishing convertibility.