Currency Convertibility and the Fund
Review and Prognosis1/
Author: Vicente Galbis1
  • 1 0000000404811396 Monetary Fund

This paper reviews experience with currency convertibility on both the current and capital accounts, with particular attention to the Fund’s concepts and policy implications. After discussing the basic concepts of convertibility, the paper reviews the experience with convertibility in three groups of Fund members--industrial countries, developing countries, and transition countries. The paper also discusses some policy options designed to encourage acceptance of convertibility by Fund members that have not yet done so.


This paper reviews experience with currency convertibility on both the current and capital accounts, with particular attention to the Fund’s concepts and policy implications. After discussing the basic concepts of convertibility, the paper reviews the experience with convertibility in three groups of Fund members--industrial countries, developing countries, and transition countries. The paper also discusses some policy options designed to encourage acceptance of convertibility by Fund members that have not yet done so.

I. Introduction

The Articles of Agreement of the IMF define the basic code of conduct for Fund members in two broad areas of policy: achievement of current account convertibility, and choice of exchange rate regime and policy.

Regarding convertibility, one of the purposes of the Fund is “to assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade” (Article I(iv)). By contrast, the Fund’s Articles allow members to maintain controls on international capital movements at their own discretion, subject to some provisions (Article VI, Section 3). 1/

Exchange rate policy is also central to the Fund’s purposes. One of these purposes is “to promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation” (Article I (iii)). Correspondingly, each member is obliged inter alia to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members” (Article IV, Section 1(iii)). However, since the Second Amendment, the Articles recognize the “right of members to have exchange arrangements of their choice consistent with the purposes of the Fund…” (Article IV, Section 2(c)).

This paper focuses on the experience with, and the policies designed to encourage currency convertibility on both the current and capital accounts (full convertibility). The point of departure is the recognition of the interdependence between currency convertibility, exchange rate policy, and domestic demand (monetary and fiscal) policies. Broadly speaking, it is widely recognized that a country cannot simultaneously achieve convertibility, a fixed exchange rate, and monetary policy independence. 2/ Thus, when most European Union countries accepted participating in the Exchange Rate Mechanism (ERM), which implied maintaining a fixed exchange rate among themselves, and at the same time adopted full convertibility, they did so on the assumption that they would be able to keep appropriately coordinated domestic demand policies (basically a single monetary policy, leading eventually to a common currency, and moderate fiscal policies). However, floating or some other form of exchange rate flexibility became necessary, in the absence of exchange restrictions, when domestic demand policies and economic developments failed to provide adequate coordination for maintaining the agreed exchange rate parities; this was exemplified by the exit of Italy and the United Kingdom from the ERM and devaluations in Portugal and Spain in September 1992, as well as by the subsequent widening of the ERM bands around the established parities. 1/

As noted, under the Second Amendment members are no longer obliged to maintain fixed parities and, therefore, implicitly a clear preference would seem to have been given to the goal of avoiding exchange restrictions (particularly on current transactions) over the fixing of the exchange rate. As a result, convertibility--always an important goal in the Fund’s purposes--is particularly relevant under the Second Amendment. In order of preference, when dealing with balance of payments problems, countries are urged to make use first and foremost of domestic demand policies, and failing this, to make appropriate exchange rate adjustments; the maintenance or reintroduction of exchange restrictions is not viewed as an acceptable option. 2/ This preference for some adjustment policies (market-based policies) over others, is based on efficiency considerations and provides the basis for the Fund’s principles on conditionality. The Fund is called to finance balance of payments adjustment only if carried out through the appropriate methods, that is, by curbing domestic demand and improving supply policies and, failing this, by depreciating the exchange rate, but not through exchange restrictions (Guitián, 1981).

The rest of this paper is arranged as follows. Section II discusses the basic concepts of convertibility, with particular attention to the Fund’s concepts and policy implications. Section III briefly reviews experience with convertibility in three groups of Fund members--industrial countries, developing countries, and transition countries. The last section discusses some policy options designed to encourage early acceptance of convertibility by Fund members that have not yet done so.

II. Basic Concepts

Currency convertibility is the ability of residents and nonresidents to exchange domestic currency for foreign currency and to use foreign currency in real or financial transactions. This implies the absence of restrictions on the making or receipt of payments for international transactions and on the exchange of local for foreign currency for those purposes. There are, however, many degrees of convertibility depending on the restrictions imposed by the government on the exchange of currency. A basic distinction can be made for these purposes between the current and capital account transactions. For the Fund’s purposes, current account convertibility refers to the absence of any restrictions on the making of payments and transfers for “current international transactions” (that is, all current account transactions and a few capital transactions). 1/ Full convertibility of a currency means that there are no payments (or receipts) restrictions either on the current or the capital account.

1. Current account convertibility

The basic concept of convertibility in the Fund’s Articles of Agreement--the jurisdictional concept--is that of current account convertibility (Gold, 1971). 2/ Capital account convertibility is not mandated in the Articles except in some specific cases of transactions which are closely related to the current account, such as amortization of loans or depreciation of direct investments. 3/ Therefore, except in those specific cases, a Fund member may restrict inward or outward movements of capital capital without the need for Fund approval. 1/ However, the Fund may provide advice on capital controls--because they can affect the balance of payments and exchange rates--in the context of exercising its general surveillance over exchange rates or in the context of economic programs supported with the use of Fund resources.

The general obligations of Fund members with regard to the avoidance of restrictions on payments and transfers for current international transactions; discriminatory currency arrangements and multiple currency practices; and the rules regarding the convertibility of foreign-held balances, are set out in Article VIII, Sections 2, 3, and 4, respectively. A member availing itself of the transitional arrangements under Article XIV, Section 2, may, however, “maintain and adapt to changing circumstances the restrictions on the making of payments and transfers for current international transactions that were in effect on the date on which it became a member.” Members’ obligations regarding controls on capital transfers, which cannot be exercised in a manner “which will restrict payments for current transactions or which will unduly delay transfers of funds in settlement of commitments,” are contained in Article VI, Section 3. The general thrust of these provisions is to provide for the elimination of restrictions on payments and transfers for current international transactions (current account convertibility), and to ensure that any controls on capital transfers will not restrict payments for current transactions or unduly delay transfers of funds in settlement of commitments. Restrictions on payments and transfers for current international transactions can take various forms such as prohibitions on import payments, taxes on import payments and on the transfer of profits and dividends, advance import deposit requirements, absolute limits on the availability of foreign exchange for invisible payments (such as for travel, study, and medical allowances) and rationing procedures for allocating foreign exchange to imports of goods and services.

In addition, members, subject to certain exceptions, are prohibited from engaging in discriminatory currency arrangements and/or multiple currency practices (Article VIII, Section 3). In a discussion in February 1985, the Executive Board was divided on the staff’s view that the Fund’s jurisdiction over multiple currency practices encompassed all such practices including the ones related solely to capital transactions. 2/ While most Directors viewed multiple currency practices and capital controls as costly in terms of resource allocation and difficult to administer, others viewed them as important additional emergency tools when faced with large, destabilizing capital flows.

First, although capital account restrictions are generally allowed by the Articles, it does not necessarily follow that the particular restrictions involved in multiple currency practices applicable solely to capital transactions are also allowed. Second, if as suggested by the staff the Articles are interpreted as giving the Fund jurisdiction over all multiple currency practices, including those applicable solely to the capital account, a strange set of policy priorities could result with regard to restrictions applicable to the capital account. Such interpretation would imply that quantitative exchange restrictions on capital movements would be allowed under the Articles, whereas cost restrictions and composite exchange restrictions (a combination of quantitative and cost restrictions) would not, even though quantitative restrictions often are considered to be the more discriminatory and inefficient. 1/ Against this argument, however, it should be noted that the reason for taking a particularly dim view on multiple rates is that foreign exchange is probably one of the most homogeneous goods imaginable and that it should be traded at one price only. For good reason, the Bret ton Woods system wanted to get away from multiple rates. Third, because quantitative exchange restrictions often lead to cost restrictions, thereby becoming composite restrictions, it is unclear whether there is any effective scope for members to maintain any capital restrictions as authorized under Article VI.3. One possible answer is that this general authorization to keep capital restrictions covers cases in which quantitative restrictions lead to cost restrictions for certain transactions which are considered strictly illegal by the member, although it is well known that the existence of the latter is frequently an economic consequence of the quantitative restrictions.

It is indeed generally understood in Fund practice that, from a jurisdictional point of view, whether a dual exchange rate system gives rise to a multiple currency practice depends on whether official action by the member or its fiscal agency gives rise to a spread in rates of more than 2 percent between the member’s currency and another currency. 2/ However, from the economic point of view, a dual exchange rate system involving an official rate and a parallel market rate, whether the parallel market is officially sanctioned or not, results in a distortion of costs and of the allocation of foreign exchange to competitive uses. 1/ Moreover, ultimately, the existence of a parallel rate is a consequence of government restrictions on some international transactions. 2/ For these reasons, the jurisdictional distinction between official and unofficial dual exchange rate systems has been de-emphasized in practice. At a minimum, the Fund has proceeded to request members to provide periodic information on such practices. 3/

Members’ obligations under Article VIII refer exclusively to financial transactions (that is, payments and transfers for current international transactions, and the purchase and sale of foreign exchange) not to the underlying real transactions (trade) which give rise to them. Jurisdiction in the trade area is vested in the World Trade Organization (WTO), one of the three institutions contemplated in the original Bretton Woods conference but which did not get established until 1995. 4/ Given the potentially close substitution between exchange and trade restrictions, however, a combined examination of both aspects is necessary to ascertain the overall direction of change in the restrictive nature of regulations on the current account of the external sector. “Thus, convertibility--a financial concept--should be accompanied by liberalization of trade and other international transactions, implying that the benefits of full convertibility are derived from both ‘financial’ and ‘commodity’ convertibility” (Gilman, 1990, p. 33). Among the obstacles to “commodity” convertibility--trade restrictions--are cumbersome import and export licensing systems, quantitative restrictions on trade in goods and services, import deposit requirements, prohibitive tariffs and trade discrimination in any form. Clearly, to be economically meaningful, current account convertibility needs to be accompanied by substantial elimination of at least nontariff barriers to imports (Williamson, 1991).

Exchange and trade restrictions must be viewed as a whole--and not in separate compartments--to be able to evaluate the overall restrictiveness of a country’s external controls. A country that no longer maintains restrictions on payments and transfers for current international transactions, may nevertheless maintain severe trade restrictions. Conversely, a country that still maintains some exchange restrictions 1/ may have a largely liberal external system, first because the remaining exchange restrictions may be minor in scope and substance and second because it may have minimal trade restrictions. Although both financial and commodity convertibility are necessary to derive the benefits of free international transactions, it is often argued that financial convertibility should come first because the results that can be accomplished through financial restrictions can also be accomplished through trade restrictions but in a manner that provides greater transparency and that permits the use of more market-based instruments, such as tariffs, rather than quantitative restrictions.

The application of restrictions on payments and transfers for current international transactions constitutes under virtually any conditions an inefficient way of maintaining a sustainable balance of payments or protecting specific local industries, because these restrictions tend to be ineffective in the aggregate, while they induce microeconomic distortions, and because of their general lack of transparency compared to trade restrictions. However, there are two reasons for which governments often proceed cautiously in removing exchange restrictions on current account invisibles. First, unlike in the case of merchandise trade, it is difficult to control or tax the underlying real transactions on invisibles, so in this area governments focus instead on the financial transactions to which they give rise. Second, governments often control financial transactions on current invisibles because such transactions are viewed as a potential vehicle for capital outflows. In practice, however, the second problem can be solved by authorizing reasonable minimum allowances for such transactions as traveling, education, and medical services abroad, and by providing for additional allowances, upon request, subject to presentation of adequate documentary evidence.

The need to proceed quickly with both current account convertibility and trade liberalization in eastern Europe has been presented as the only way “to subject domestic producers to competition from abroad and, in the process, to ‘import’ a system of economic pricing” (Polak, 1991, p. 22). In a similar context, various modifications of the current account approach to convertibility have been considered in the literature. One such modification would exclude tourism from the current account and would lump it together with capital transactions; official foreign exchange would be provided for all merchandise trade and other current account transactions, with the exception of tourism, which, together with all capital transactions, would be conducted in a tolerated parallel exchange rate market (Williamson, 1991). Another modification would liberalize, in addition to current account transactions, inward foreign direct investment, which can help attract associated managerial resources and transfers of technology (Greene and Isard, 1991).

Be that as it may, certain conditions for the successful implementation of current account convertibility (or its related concepts) are considered necessary. These include an appropriate exchange rate, substantial international liquidity (reserves), sound macroeconomic policies, and the ability of the economy to respond to market prices (Gilman, 1990; and Greene and Isard, 1991). All these conditions need not be present, however, in any given case. For instance, the external effect of expansionary macroeconomic policies leading to inflation may be handled through an appropriately flexible exchange rate, without the need to recur to exchange and trade restrictions. Moreover, if the domestic demand disturbance is only temporary, it may be appropriate to use up reserves to avoid both exchange rate depreciation and exchange and trade restrictions.

2. Capital account convertibility

Capital account convertibility remains a more controversial goal, and one that has often been relegated to a lower category of desirability. 1/ It is certainly not required under the Articles of Agreement, and it is generally regarded as premature for transition economies (Polak, 1991; Williamson, 1991; and Greene and Isard, 1991******), as well as for many developing countries. Among the main arguments against capital account convertibility (especially at an early stage) are the possibility of destabilizing (speculative) capital flows during the transition period, and the possible loss of capital needed to finance economic development. 1/ However, the inefficiencies generally created by capital controls, as well as the practical difficulties and resource costs in implementing those controls, should be recognized (Mathieson and Rojas-Suárez, 1992, 1993; and Guitián, 1992b and 1993b).

In contrast to the cautious views on capital account convertibility for developing and transition economies, the industrial countries firmly, albeit gradually, moved forward to establish full capital convertibility even as trade barriers increased during the 1980s and early 1990s. Soon after its establishment in 1961 the OECD adopted the Code of Liberalization of Capital Movements (in addition to the Code of Liberalization of Current Invisible Operations). The Capital Movements Code committed OECD member countries to eliminate any restrictions listed therein, although it left reasonable scope for countries to move toward the ultimate objective in different ways and at varying speeds. Since 1989, the Code has covered all capital movements, including money-market and other short-term financial activities, as well as banking and financial services (Fischer and Reisen, 1992, p. 5; and OECD, 1992). More important, capital account liberalization received final impetus within the European Union as a result of the second Capital Markets Liberalization Directive (1988), which committed the EU members to the removal of all remaining capital controls, not only among the EU countries but with nonresidents of the rest of the world as well. This resulted in the establishment of an end-1992 deadline for the removal of capital controls by EU members, except for a few which were given a limited extension. 2/

As in the case of current account convertibility, the achievement and sustainability of capital convertibility is predicated on a number of conditions, some of which are the same as those necessary for current account convertibility. These conditions include macroeconomic stability, fiscal consolidation, noninflationary finance of any remaining public sector deficits, right monetary-fiscal policy mix and last, but not least, the development of the domestic financial sector in a free market context. The latter includes the establishment of free interest rates, the reduction of differences between domestic and external financial conditions, the limitation of taxes on income, wealth and transactions, strengthening the safety and soundness of financial institutions through improved banking supervision and recapitalization, and building of primary and secondary securities markets for monetary policy implementation and financial stability (Fischer and Reisen, 1992; and Mathieson and Rojas-Suárez, 1993). Not all these conditions are necessary in any particular case. Moreover, the introduction of capital convertibility may, under some circumstances, promote the attainment of the very conditions needed to maintain it.

The concerted liberalization of capital flows in the EU is an example of the EMS going ahead of the Bretton Woods system, with which it is often compared. This raises “a question about the continuing appropriateness of the distinction in the Articles of Agreement between current and capital transactions, a distinction conceptually and operationally awkward.” (Guitián, 1992a, p. 31.) In regard to capital controls, “the time has come for updating the code of conduct so as to bring it into conformity with economic logic, which argues against restrictions regardless of the nature of the transaction, and with the current prospective world economic environment, where capital movements have established both a permanent and prominent presence. … [In sum] extending the code of conduct to cover all international transactions would be most appropriate for the establishment of true universality.” (Guitián, 1992a, pp. 44-45).

Based on the notion of the need for capital controls under some circumstances, Article VI, Section 1, of the Articles of Agreement provides that the Fund may request a member using its general resources to impose controls to prevent these resources from being used to meet large or sustained outflows of capital. However, before recommending to the member the imposition of capital controls, the Fund has generally preferred to advise the member to adjust its macroeconomic policy framework so as to discourage capital outflows, e.g., by lifting domestic controls on interest rates and by tightening monetary policy to reduce inflation and increase interest rates. Indeed, in the absence of a sound macroeconomic framework, the Fund would not be in a position to allow the member to use Fund resources. This may explain why the Fund, true to its main objectives, has never used this provision of the Articles.

Foreign exchange repatriation and surrender requirements maintained by many developing countries are closely associated with capital outflow controls. Proceeds from exports of goods and services and from external borrowing must be repatriated if a total capital outflow control is desired because the alternative, that is, depositing or investing abroad, would violate capital outflow controls. 1/ In addition to repatriation, surrender requirements (the mandatory sale of foreign currency, in exchange for domestic currency, to banks or to the central bank) may perform the function of ensuring the availability of foreign exchange to cover not only public sector needs but also those of importers of goods and services. 1/ A repatriation requirement, then, is often an important component in a regime that includes capital controls, whereas a surrender requirement is, in addition, a restriction on the domestic holding of foreign currency assets by residents (a restriction on “internal” convertibility).

3. Sequencing issues

The timing of convertibility poses two issues. The first is to know when is a good time for currency liberalization measures in relation to the liberalization of the rest of the economy. The second is the internal sequencing of convertibility measures. As in other economic policy areas, opinions on sequencing vary on both these issues (Galbis, 1994). Current account convertibility has acquired urgency, as noted earlier, in view of the need of formerly planned economies to introduce a set of rational prices. With regard to capital convertibility, “experience suggests that capital market integration will continue in spite of controls and that economic policy in emerging markets will have to adapt to changes in international interest rates. Capital control programs will become less effective over time and, eventually, the emerging country will have to choose between more flexible exchange rates or domestic interest rates that are determined in international capital markets.” (Dooley, 1995b, p. 7).

On the internal sequencing of convertibility cum trade liberalization, a typical recommendation for the liberalization process would be as follows:

(1) Remove current account restrictions and some selected capital restrictions

  • (1.a) Remove exchange restrictions on current international transactions and on trade finance and inward foreign direct investment;

  • (1.b) Remove quantitative trade restrictions;

  • (1.c) Reduce tariffs and standardize them at a relatively low level.

(2) Remove remaining capital account restrictions

  • (2.a) Remove remaining restrictions on foreign direct investment and trade finance, and lift restrictions on portfolio investment;

  • (2.b) Remove remaining controls on capital outflows;

  • (2.c) Remove remaining controls on capital inflows. 1/

Stage one may lead to a dual exchange rate system: an official rate for current account, trade finance, and foreign direct investment transactions, and a parallel rate for the rest of the capital transactions. If the remaining capital controls could be well designed (effective) and if the market was backed by sound monetary and fiscal policies, a parallel exchange market need not arise, at least not in an organized way. This would be especially true if the official exchange rate was floating or adjustable in some form that took into account market developments.

Depending on individual circumstances of members, however, the above sequencing need not be the preferred one. Some countries may benefit from early capital account liberalization even if not completely able to remove all current account restrictions at once. 2/ Also, the introduction of capital convertibility need not wait until all the preconditions are right but may be introduced simultaneously with current account convertibility (Guitián, 1992b and 1993b). There are also examples of members that have successfully introduced capital convertibility in a big-bang fashion (United Kingdom) and others which did it more gradually (Japan).

III. Experience with Convertibility

The experience with convertibility is varied across members, but as a first approximation, a distinction can be made for the purposes of this paper between industrial countries, developing countries, and transition countries of eastern Europe and the former Soviet Union. In general, industrial countries have progressed further than the others in achieving both current and capital account convertibility. 3/

By contrast, with exceptions, the introduction and maintenance of convertibility in developing countries has been uneven and hesitant, even in the case of some members that have for long formally adhered to the obligations of Article VIII. In fact, there is some blurring between Article VIII and Article XIV members. Some of the Article VIII developing members continue to apply exchange restrictions on current transactions from time to time--some explicitly approved by the Fund and others without due approval--as a result of various circumstances. 1/ By contrast, a number of members that have not formally accepted the obligations of Article VIII, Sections 2, 3, and 4, no longer maintain any exchange restrictions. This blurring is reinforced when account is taken of trade policies, as a few of the Article VIII members maintain extensive quantitative trade and other current account restrictions and high and discriminatory tariffs that reduce the efficacy of exchange liberalization. Moreover, most developing countries still have to achieve capital account convertibility. As a result of remaining restrictions, many developing members (including members that have accepted the obligations of Article VIII as well as members that have not) appear to continue to have parallel exchange markets with exchange rate quotations that differ significantly from the official exchange rate. 2/

The transition countries of central and eastern Europe and the former Soviet Union, have generally advanced rapidly toward current account convertibility as part of the overall reform process. By contrast, some of them consider capital convertibility as an objective for the longer term, once the transition toward a market economy has already taken hold.

1. Industrial countries

All 23 members defined as industrial countries by the IMF have accepted the obligations of Article VIII, Sections 2, 3, and 4 (Table 1); 3/ and they actually maintain no exchange restrictions on current international transactions. They deal with current account adjustment problems by adjusting domestic demand policies and/or the exchange rate.

Table 1.

Members That Have Accepted the Obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement, By Year of Acceptance

(as of end-1995) 1/

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Source: IMF, internal records.

113 members out of 181 members of the Fund. See also footnote 2.

Through end-1995. Hungary became the 114 member that accepted Article VIII in January 1996, and Mongolia became number 115 in February 1996.

Croatia and Slovenia succeeded to the membership of the Socialist Federal Republic of Yugoslavia (original member, 1945) as of December 14, 1992.

The Czech Republic and the Slovak Republic succeeded to the membership of Czechoslovakia (member since 1990) on January 1, 1993.

The situation with regard to trade restrictions is somewhat different. A retrogression in this area took place in the 1980s as a result of protectionist policies in a number of countries (Kelly, Kirmani, et al., 1988, chapter I). Thus, although tariffs remained at historically low levels, nontariff barriers generally intensified; the share of trade covered by such measures increased in the United States and the EU during the 1980s. 1/ As a result of the delay in the Uruguay Round multilateral negotiations, trade liberalization in industrial countries proceeded largely in the context of regional trade arrangements (Kelly, McGuirk, et al., 1992, Chapter III). This situation has changed significantly, however, with the conclusion of the Uruguay Round negotiations in late 1994 and with the establishment of the World Trade Organization in January 1995.

Exchange controls on capital transactions (both inflows and outflows) have been removed in all industrial countries, although in some of them this occurred only recently. 2/ Canada, Switzerland and the United States had long provided a liberal regulatory framework for capital transactions, although there were temporary exceptions. A significant shift toward industrial country liberalization was initiated with the rapid removal of controls by the United Kingdom (1979), Australia (1983), and New Zealand (1984), and the completion of gradual liberalization by Japan (1980) and Germany (1981). 3/ A final impetus toward liberalization was provided by the ratification of the Single European Act (1987) and the Second Capital Markets Liberalization Directive (1988) and by the latest OECD Code of Liberalization of Capital Movements (1989). 4/ The following EU members promptly accepted capital convertibility: Netherlands (1986), Denmark (1988), France (1989), Belgium, Italy, and Luxembourg (1990). Several members of the European Free Trade Association (EFTA) followed suit: Sweden (1989), Austria, Finland, and Norway (1990). 5/ The remaining EU members concluded liberalization in accordance with more distant EU deadlines: Ireland, Portugal, and Spain (1992), Greece (1994) and Iceland (1995) 6/

In accordance with the removal of capital controls, all industrial countries have now removed repatriation and surrender requirements for foreign exchange. This contrasts with the situation at end-1986 when these requirements were still in force in 10 industrial countries (Quirk, Hacche, et al., 1988, p.7).

One of the visible results of the removal of exchange restrictions on both current account and capital transactions in industrial countries has been the complete disappearance of parallel markets for foreign exchange, with the official and parallel rates rapidly tending to converge in the period 1987-95 in those few countries that were still eliminating remaining capital restrictions. (Table 2.) 1/

Consistent with the liberalization of capital movements, all industrial countries now use indirect monetary policy instruments and allow interest rates to be determined by market forces. This is a necessary complement to the liberalization of capital controls to ensure that interest rate differentials are freely interacting with exchange rate risk to prevent destabilizing capital movements.

Table 2.

Official and “Parallel” Exchange Rates in Article VIII Countries, 1987-1995 1/

(End-of-period U.S. dollar rates)

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Sources: IMF, International Financial Statistics; and Free or Black Market Rates of Payments and/or Transfers Abroad, monthly sheet, International Currency Analysis, Inc. (New York).

For lack of an alternative, this table uses “parallel” market data from a private source (ICA), whose accuracy cannot be checked directly. However, as an indirect test of the representativeness of these data, the author checked the countries for which the data indicated the existence of “significant” parallel premiums (10 percent and up) or quasi-significant premiums (2 percent to 10 percent) at the end of 1993 and 1994, against the exchange restrictions reported for those countries in the Fund’s publication Exchange Arrangements and Exchange Restrictions (Annual Report, 1994, and 1995). In virtually all cases, countries with significant and quasi-significant premiums were those with reported remaining restrictions on current and/or capital account. As of end-1994, there were only a handful of countries (including two of the Baltics—Estonia, and Latvia) for which a significant premium was reported, yet they did not reportedly have any exchange restrictions either on the current or the capital account. In such cases, it would seem that the “parallel” rate may have been misreported. Or perhaps there were trade and other restrictions accounting for them. Such discrepancies would warrant further study on a case-by-case basis. In any case, the Fund does not rely on the ICA data or on any other data than those provided by the authorities of a member country when it involves the determination of the existence or not of multiple rates in the Fund’s jurisdictional sense. (See further commentaries in footnote 1, p. 19.)

List of member countries under Article VIII as of end-December 1995. Marshall Islands, Micronesia, Panama, and the United

States are excluded from the table as they use the U.S. dollar. Also excluded are Kiribati which uses the Australian dollar, and San Marino which uses the Italian lira. See also footnote 9 below.

In U.S. dollars per Australian dollar.

In addition to the principal official rate there is also a secondary rate which is more depreciated (1.2250).

U.S. dollars per dinar.

Until 1989 there was a secondary rate in addition to the principal rate, but the deviation of the two rates was small.

U.S. dollars per pula.

U.S. dollars per pound.

Rates for Czechoslovakia before separation of Czech Republic and Slovak Republic.

The ECCB dollar is the common currency of the following six Article VIII members: Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent.

U.S. dollars per Fijian dollar.

U.S. dollars per Gambian delasi.

There is also a secondary market rate (1.00); and a tertiary rate applied through 1988 (2.71).

U.S. dollars per pound.

U.S. dollars per dinar.

U.S. dollars per dinar.

U.S. dollars per Kwacha.

U.S. dollars per lira.

U.S. dollars per New Zealand dollar.

Gold cordobas per billion U.S. dollars through 1987, per million U.S. dollars in 1988, per thousand U.S. dollars in 1989-90, and per U.S. dollar thereafter.

Currency unit is not well specified.

U.S. dollars per Omani rial.

U.S. dollars per kina.

New soles per million U.S. dollars through December 1989 and new soles per thousand U.S. dollars therafter.

U.S. dollars per Sierra Leone leone through 1992; thereafter Sierra Leone leones per U.S. dollar.

U.S. dollars per SI dollar

U.S. dollars per rand.

U.S. dollars per lilangeni.

U.S. dollars per Tonga Isl pa’anga.

U.S. dollars per pound.

U.S. dollars per tala.

U.S. dollars per Zimbabwe dollar.