The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy.


The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy.

Spring Meetings Preview IMF’s Role in Dealing with Low-Income Countries Is High on Agenda

Finance ministers and central bank governors will gather in Washington for the April 22 meeting of the IMF’s Interim Committee of the Board of Governors on the International Monetary System—the IMF’s principal advisory body. They will conduct their six-month review of the world economic outlook and of the soundness of economic policies of member countries in the context of IMF surveillance. The Interim Committee will evaluate economic policies and performance in the light of the Madrid Declaration on Cooperation to Strengthen the Global Expansion. The main objective of the Declaration, first adopted at the October 1994 Committee meeting in Madrid, was to encourage countries to make wise use of the economic expansion under way and avoid the policy errors of previous recoveries. The Committee will also assess prospects for continued noninflationary growth in industrial and developing countries and for further recovery of output in economies in transition to market-oriented systems. At the same time, the Interim Committee will discuss recent issues relating to the IMF’s conduct of surveillance.

Recent IMF Publications

Working Papers ($7.00)

96/14: Economic Transformation and Income Distribution: Some Evidence from the Baltic Countries

96/15: Financial Development and Economic Growth: An Economic Analysis of Singapore

96/16: Employment Protection, International Specialization, and Innovation

96/17: Should the IMF Become More Adaptive?

96/18: The Role of Credit Markets in a Transition Economy with Incomplete Public Information

96/19: Do Government Wage Cuts Close Budget Deficits? A Conceptual Framework for Developing Countries and Transition Economies

96/20: The Sources of Macroeconomic Fluctuations in Developing Countries: Brazil and Korea

96/21: Jumps, Martingales, and Foreign Exchange Futures Prices

96/22: Capital Inflows in the Baltic Countries, Russia, and Other Countries of the Former Soviet Union: Monetary and Prudential Issues

IMF Staff Country Reports ($15.00)

No. 15: Norway

No. 16: Cyprus

No. 17: Iceland

No. 18: Colombia

No. 19: Poland

No. 20: Poland (Appendix)

No. 21: Ukraine

No. 22: Kazakstan

No. 23: Botswana

No. 24: Mongolia

No. 142: Singapore (1995, revised)

Pamphlet Series (free)

No. 48: Unproductive Public Expenditure: Approaches to Policy Analysis (French and Spanish)

Occasional Papers (S15.00; academic rate $12.00)

No. 135: Vietnam: Transition to a Market Economy

Other Publications

International Monetary Fund Publications, February (free)

Publications are available from Publication Services, Box XS600, International Monetary Fund, Washington. DC 211431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet:

For a wide range of information about the IMF on the Internet—including daily SDR exchange rates of 45 currencies—please visit our gopher site (gopher://

Ministers and governors will discuss a report on the options for financing a continuation of the enhanced structural adjustment facility (ESAF), the IMF’s concessional lending facility aimed at assisting low-income countries engaged in growth-oriented adjustment. The Interim Committee will also discuss a joint report by the IMF Managing Director and the World Bank President on ways to resolve the debt problems of the poor, heavily indebted countries with unsustainable debt burdens—including their debt to multilateral institutions. For the IMF’s part, ministers will consider ways of addressing this problem through the ESAF.

With regard to ensuring that the IMF has adequate financial resources to do its job in the coming years, the Committee will discuss a progress report on the Eleventh General Review of IMF Quotas; quotas, which constitute the IMF’s capital base, now total SDR 145 billion—about $212 billion—with the last quota increase under the Ninth General Review completed in November 1992. The Interim Committee will also consider a report on possible new arrangements to borrow by the IMF to supplement its ordinary financial resources.

The Interim Committee session will be chaired by Philippe Maystadt, Deputy Prime Minister, Minister of Finance, and Minister of Foreign Trade of Belgium, who has been Chairman since September 1993. At the session, IMF Managing Director Michel Camdessus will also give progress reports on:

  • issues for further work on the special drawing right (SDR), in light of the recent IMF-sponsored seminar on the SDR’s future role in view of changes in the world financial system (see IMF Survey, April 1 issue); and

  • IMF efforts to develop standards for the dissemination of economic and financial statistics to the public by member countries. The Managing Director is expected to invite member countries with, or seeking access to, financial markets to participate in publishing economic and financial statistics adhering to a “special data dissemination standard” developed by IMF staff.

The Development Committee (the Joint Ministerial Committee of the Boards of Governors of the Bank and Fund on the Transfer of Real Resources to Developing Countries) will meet on April 23. The main items on its agenda will be:

  • the status of the eleventh replenishment of IDA (International Development Association), the World Bank agency that provides concessional, long-term financing to poor countries;

  • the final report by the Task Force Development Committee on the Role of Multilateral Development Banks; and

  • resolution of the debt problems of the heavily indebted poor countries.

Photo Credits: Denio Zara and Padraic Hughes for the IMF.

Azerbaijan Achieves Macro Stability, Moves to Address Structural Problems Azerbaijan Recovery in 1996?

Azerbaijan is a small, oil-rich country on the southeastern flanks of the Caucasus and bordering the Caspian Sea. After a period plagued by severe external shocks, Azerbaijan launched a bold economic reform program in early 1995—one of the last countries of the former Soviet Union to do so. The results have been impressive, especially in the area of macroeconomic stabilization. Structural reforms have lagged, however, and efforts in this area need to be stepped up urgently to achieve sustainable economic growth.

Since the late 1980s, the Azerbaijan economy has experienced severe external shocks. These included the breakup of the U.S.S.R. and the associated disruptions in trade and financial links, the conflict over Nagorno-Karabakh, and the deterioration of Azerbaijan’s terms of trade as prices of natural gas imports increased to world market levels and transportation costs rose sharply with the closure of trade routes through Georgia and Chechnya. The resulting economic decline—real GDP fell by about 60 percent in 1990–94—has been among the largest in the transition economies.

Following independence in 1991, financial policies were largely inconsistent with achieving economic stability. The government’s fiscal position deteriorated sharply—as the revenue base shrank with falling output and an accelerating shift of economic activity to the informal sector—while expenditures remained high. With fiscal deficits fully financed by the central bank, the result was excessive money growth and accelerating inflation. In 1994, consumer prices increased by nearly 1,800 percent, with monthly inflation exceeding 50 percent at the end of the year. Confidence in the domestic currency, the manat, dwindled, and people increasingly sought protection from inflation by shifting into goods and foreign currencies. The nominal exchange rate fell, with the manat losing about 90 percent of its value vis-à-vis the U.S. dollar.


Azerbaijan: Inflation, Money, and GDP

(Percent change)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A008

Data: Azerbaijan authorities

High Inflation Prompts Reform

In the face of incipient hyperinflation, the authorities fundamentally changed their financial policies at the start of 1995. With the assistance of the IMF, the authorities developed an ambitious economic reform program, supported by the IMF’s former systemic transformation facility (STF). The program’s main objective was to reduce inflation quickly and create an environment conducive to the resumption of economic growth. Monetary policy was geared toward curbing the growth of money and credit, with fiscal consolidation a prerequisite. Although the authorities took several measures to enhance budgetary revenues, revenues continued to decline in 1995. Expenditures were therefore sharply compressed through the elimination of bread price subsidies, tight control over increases in wages and social benefits, and large cuts in other spending. The government also reduced drastically central bank financing of the budget, aided by the availability of external financing. In 1995, the Azerbaijan budget was helped by $91 million in the form of an oil signature bonus received for concluding an oil contract with international oil companies.

Rapid Disinflation Follows

Azerbaijan’s new reform policies have yielded impressive gains, especially in the area of macroeconomic stabilization. The general government budget deficit narrowed to 5½ percent of GDP in 1995 from 10½ percent in 1994. Although the deficit was fully financed by the central bank in 1994, domestic bank financing amounted to less than ½ of 1 percent of GDP in 1995. With tight central bank credit policies, money growth fell to 6 percent in the last quarter of 1995 from 35 percent in the first quarter. The velocity of manat broad money rose sharply in the beginning of the year, but has been declining since then, reflecting gradually growing confidence in the manat. As a result of the tight financial policies, inflation eased significantly while the exchange rate has been broadly stable since the beginning of 1995. Monthly inflation fell to an average of about 3 percent in the last quarter of 1995—and then to 1½ percent in the first quarter of 1996—from more than 50 percent at the end of 1994.

In November 1995, the IMF’s STF support for the Azerbaijan reform program was replaced by a stand-by arrangement. The new reform program aims at a further reduction in monthly inflation rates to 1 percent by mid-1996—reflecting an expected appreciation of the undervalued nominal exchange rate—and a resumption of economic growth in the second half of 1996. This is to be achieved by continued tight monetary and fiscal policies, in particular by reducing the budget deficit further to 3½ percent of GDP in 1996 and avoiding the monetization of the deficit. The deficit will again be financed from external sources—that is, new oil signature bonuses received in mid-1995 and expected toward the end of 1996.

Structural Reforms Lag

The implementation of structural reforms did not keep pace with the success on the macroeconomic front. Initially, the authorities took important steps, notably liberalizing most producer prices and discontinuing the system of differentiated surrender requirements of foreign exchange at nonmarket rates. But progress in such key areas as privatization, agricultural reform, and enterprise restructuring has been slow. In early 1996, foreign and domestic trade were still hindered by administrative controls and red tape, despite the official abolition of the state order system and reduced licensing requirements.

The persistence of old economic structures—in particular, many obstacles to private entrepreneurship—has impeded recovery. In the absence of a significant supply response from the private sector, Azerbaijan’s output decline continued in 1995—albeit at a slower pace than before stabilization (real GDP in 1995 was -13 percent versus -21 percent in 1994). The state-owned industrial sector continued to be plagued by inefficiencies and marketing problems, and agriculture remained depressed for most of the year as the authorities only reluctantly raised domestic producer prices to world market levels. In 1995, recorded wages fell 25 percent in real terms, year-on-year, reflecting delays in enterprise restructuring and the continued deterioration of productivity throughout the economy. Economic conditions for the average citizen in 1995 deteriorated, although the situation may not be as bad as official data suggest, as activity increasingly shifted to the informal sector.


Azerbaijan: Fiscal Balance

(Percent of GDP)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A008

Data: Azerbaijan authorities

1996 Could Mark Reversal

With monetary and fiscal policies largely on track, structural issues are moving into the forefront of reform. The Azerbaijan authorities recognize that the population will only reap the full benefits from macroeconomic stabilization if structural reforms take hold rapidly. In 1996, they plan to step up structural reform efforts with the technical and financial support of both the IMF and the World Bank. Privatization is now gaining momentum, with the first small enterprises changing ownership through cash auctions. The government has also devised a voucher privatization plan that entails holding auctions for medium-and large-sized enterprises before the end of 1996.

If these reform measures take hold, 1996 could mark the beginning of the economic recovery initiated with the stabilization of inflation and exchange rates in 1995. Although real GDP is still expected to decline, year-on-year economic growth is projected to reverse in the second half of 1996, driven by an increase in foreign direct investment and supported by an economic environment freed from administrative burdens. Real incomes are expected to catch up as inflation is reduced further and the private sector continues to expand. The IMF-supported adjustment program envisages real wages to increase by 15 percent during the year and monthly dollar wages to reach $26 by the end of 1996.

Oil a Dominant Feature

Azerbaijan’s wealth lies mainly in its oil reserves, estimated at 900 million tons. Medium-term prospects for the petroleum sector are good since the government signed a production-sharing contract with an international oil consortium in 1994, providing access to technology needed to exploit the reserves under the Caspian Sea. The contract stipulates a total investment of $7.5 billion over ten years; crude-oil production from new sources, beginning in 1997, is expected to reach about 33 million tons annually by 2006.

The dominance of the petroleum sector also entails risks: large capital inflows may lead to strong real exchange rate appreciation, income disparities between oil and non-oil sectors, and crowding out of such other competitive activities as agriculture. A strategy for balanced growth is needed, and the authorities have begun to develop a medium-term economic program, which may be supported by an enhanced structural adjustment facility (ESAF) arrangement with the IMF. The foundations for such a strategy are already being laid by the encouragement of production in such non-oil sectors as cotton through privatization and trade liberalization. In the prospective ESAF program, the question of capital inflows and development strategies connected with the petroleum sector will receive particular attention.

Although a lot needs to be done, Azerbaijan’s economic prospects are good. Much depends on the authorities’ persevering with adjustment, keeping macroeconomic policies on track, and deepening structural reforms.

Christoph Rosenberg and Ron van Rooden

IMF European II Department

Should the IMF Become More Adaptive?

Is the IMF sufficiently adaptive to meet the needs of a profoundly transformed global economy? In a recent IMF Working Paper, Ian D. Clark, the IMF Executive Director representing Canada, Ireland, and ten Caribbean countries, contrasts the relatively modest changes within the IMF to the dramatic changes in the world economy and reviews arguments for and against placing greater emphasis on the organization’s adaptivity. He concludes that the IMF will have to make a deliberate effort to adapt if it is to keep pace with this global transformation.

In recent years, the world economy has undergone massive change—much of it rooted in developments that will have significant implications for the work of the IMF. These changes include a new role for international capital markets (and a heightened potential for instability); more flexible exchange rates and greater independence in monetary policy; chronic public sector deficits; intractable debt burdens in some of the poorest developing countries; a growing convergence of opinion on what constitutes good economic policy (the “Washington consensus,” which encompasses the traditional IMF virtues of noninflationary expansion, fiscal balance over time, high savings and investment, market-based pricing, and transparency); and continuing shifts in the relative economic power of member countries.

These sweeping changes in the global economy have prompted extraordinary changes in the private sector and spawned the influential “new public management” approach that borrows heavily from the private sector’s experience. Many national civil services now make greater use of markets and market-type mechanisms, employee and client participation in decision making, deregulation of internal controls, and greater operational flexibility.

Institutional Characteristics

International organizations have not reinvented themselves to the extent that private corporations, or even national governments, have, says Clark. The IMF, however, has been one of the most adaptive of the international organizations. In contrasting IMF ad-ministrative practices with those of the Canadian national government, Clark finds many attributes of the IMF that would be in step with the new public management philosophy. He commends the clarity and focus of the IMF’s mandate, the strength and tenure of its management, the sustained and high quality of its recruitment, the organization’s substantial internal review capacity, and the close integration of staff and line functions.

There are arguments against greater adaptivity in the IMF, says Clark, and the most persuasive of them derive from the basic nature of the organization. The IMF, much like central banks, is quintessentially associated with the virtues of stability, predictability, and caution. The IMF’s founders were mindful of this when they chose to emphasize the rule of law rather than discretion in the IMF’s work. And subsequent generations of IMF Governors have remained wary of excessive or inappropriate responsiveness—the concern that moral hazard may encourage perverse behavior.

Those in favor of more caution also note that the IMF has repeatedly demonstrated its ability to adapt when crises demanded it. Clark cites the IMF’s rapid response to the first oil shock in 1973 and its decisive assumption of the role of crisis manager during the debt crisis, the transition of the former centrally planned economies of eastern Europe and the former Soviet Union, and the recent Mexican financial crisis. The IMF has also addressed vital issues on a noncrisis basis—most recently, with initiatives to deal with countries emerging from conflict, support for stabilization funds, and continuing deliberations on the future of the enhanced structural adjustment facility and on finding a solution for the debt problems of the poorest developing countries.

Certain features of international organizations, however, may inhibit or facilitate their adaptiveness. Clark identifies a number of characteristics of the IMF that tend to inhibit adaptiveness. These include:

  • Dependence on rules and uniform treatment. While both facilitate cooperation, they can inhibit adaptiveness. Ironically, this same institutional rigidity may also hasten the implementation of change, which can occur rapidly in a crisis once a consensus has developed that change is necessary.

  • Universal membership. Some issues are better coordinated among small groups than the full membership of a multilateral institution. This is perhaps best exemplified by exchange rate coordination—an issue in which, Clark argues, the organization’s insistence on the participation of the full membership is a structural disadvantage. Few additional benefits accrue from including more countries in the decision making, but the potential costs—in terms of delays and difficulties—increase dramatically as the number of participants rises. Some have urged the IMF to explore the use of limited membership panels to take up specific issues, such as reserve currency coordination. If this noninclusive, nonuniform treatment, which is so sharply at odds with IMF tradition, is unacceptable, Clark suggests the organization at least consider procedural changes to lower the costs of universal decision making.

  • Consensus tradition. The IMF’s elaborate process of consultation and discussion traditionally produces “decisions that stick and minimal rancor,” but at a substantial cost in terms of time and energy. In the absence of a crisis, institutional adjustment is slow, but the stock of “trust and good will” built up during the regular process appears to serve the institution well in crises, when rapid decision making is needed.

  • Divergent country interests. With the large size of its membership and the magnitude of its cultural differences, consensus on institutional changes in the IMF will always prove difficult.

Change is never easy for organizations. On the other hand, other institutional characteristics, some unique to the IMF, may tend to facilitate adaptivity, according to Clark. These include:

  • Taking initiative. Management and staff have a crucial role in IMF decision making. The impetus for major reforms normally comes from management, whose formulations tend to reflect the overt general preferences of the major shareholders and the sometimes latent preferences of the majority of developing countries.

  • Members’ commitment. Member countries value the services provided by the IMF, but not all services are of equal value to all members. Clark notes, for example, that the major industrial countries may value the IMF’s crisis management highly, since this addresses systemic problems that they might otherwise have to take on themselves. Smaller countries, without a ready supply of economic expertise, may find the IMF’s policy and technical advice more useful. Many countries, Clark notes, value the role of IMF missions and surveillance, since these often serve as a “political catalyst” for policy decision making and promote coordination and collaboration within national governments. On balance, the benefits of IMF membership appear fairly evenly distributed among members, although the benefits are associated with different roles of the IMF. Proposed changes in these roles are likely to be viewed “differently by different members,” suggests Clark.

  • Culture of discipline and excellence. The IMF sees itself as the “most agile and effective of the major international institutions,” and chief among the qualities it treasures are organizational discipline and crisis management. Its hierarchical culture encourages questioning and debate in the early stages but requires “cabinet-like solidarity” once decisions are made, says Clark. Hierarchical structures can nonetheless adapt rapidly under determined management. Also, the IMF’s commitment to excellence and its success in dealing with crises have endowed it with relatively high morale.

  • Strong relationships between staff and member countries and between management and the Executive Board. Critics have questioned whether the strength of the relationship between the IMF and its members sometimes blunts the “hard edges of the Fund’s advice.” Clark notes, however, that this same closeness makes the institution “more sensitive to the changing needs of the membership.” The IMF also benefits, he believes, from “creative tension” between the IMF’s management and Executive Board.

  • Voting mechanisms. Many scholars link the IMF’s effectiveness to its weighted system of voting, which reflects the relative economic clout of its members. A major change in the IMF also requires special voting majorities; this requirement, Clark argues, allows countries to debate change “without fearing that they could lose control over the final outcome.”

  • Resource availability. The IMF’s relatively comfortable liquidity position since the early 1980s has permitted it to adapt and to support initiatives.

A Need to Be More Adaptive?

Ultimately, Clark believes the IMF will have to become more adaptive to keep pace with the intensifying breadth and pace of global economic change. He emphasizes the need for the IMF to work “with the grain”—that is, with the organization’s strengths, while remaining keenly aware of the attributes that inhibit change.

He suggests several general directions for change that could reinforce the IMF’s traditional strengths. For example, while the organization’s broad purposes remain valid, Clark argues that it might be useful to refine and make explicit several of the IMF’s more specific objectives, including:

  • promoting market-based principles to better integrate countries into the world economy;

  • emphasizing the need for fiscal discipline; and

  • helping members gain and retain the confidence of capital markets.

The IMF would do well, Clark adds, to recognize that the universal nature of its membership works against an effective role for the organization in the management of exchange rate issues. Either the organization should allow deliberations on the basis of restricted membership (in this instance, among holders of the major currencies) or it should play down expectations of significant progress in this area in the foreseeable future.

Clark also encourages the IMF to be more conscious of the trade-off between regulations and innovation. IMF rules and its commitment to uniform treatment help create consensus and facilitate compromise in crises, but they also reinforce the status quo and slow decision making on less urgent matters. It would be useful to leaven the IMF’s inherent conservatism with more activism, innovation, and initiative, suggests Clark. And if members agree that the IMF should pursue a more adaptive stance, they should encourage its Managing Director—who has been the most “consistent and vigorous initiator of change and adaptation”—to take an even more activist role in proposing change.

Finally, if the IMF is to be more adaptive, Clark believes it cannot be excessively concerned about overlapping responsibilities with development banks. The costs of such overlaps are easily exaggerated, and the respective managements are committed to minimizing them. The IMF must look forward, not backward, Clark concludes. And in seeking a model for future adaptation, the IMF must look to its evolution rather than to its purely monetary past.

Should the IMF Become More Adaptive? by Ian D. Clark, is No. 96/17 in the IMF’s Working Paper series. Copies are available for $7.00 from Publication Services, Box XS600, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; tax: (202) 623-7201; Internet:

Camdessus on IMF Support For Russian Reforms

Following is a summary of an address given by IMF Managing Director Michel Camdessus to the U.S.-Russia Business Council on April 1 in Washington:

Camdessus outlined Russia’s strategy for adjustment and reform, which the IMF was supporting with an extended Fund facility (EFF) credit amounting to about $10 billion (see IMF Survey, April 1). He noted that although the program was “strong and comprehensive” and corresponded to Russia’s needs, many questions had been raised about its appropriateness, timing, and chances for success.

Camdessus offered his perspective on these questions.

  • Is the program risky? All adjustment programs supported by the IMF entail risk, Camdessus noted, since only countries experiencing balance of payments difficulties borrow from the IMF. Although the IMF can never eliminate all risks, substantial safeguards have been built into the Russian program. These include the strong track record established by the authorities last year, the program’s extensive preparation, and the continuation of monthly monitoring and disbursements during 1996, in addition to broader quarterly reviews. The Russia program, Camdessus emphasized, is the only IMF-supported program subject to monthly monitoring.

    Some observers have questioned the wisdom of negotiating a program that could be derailed by political developments. But although a general election is imminent, Camdessus said that President Boris Yeltsin has confirmed that he and his economic team are fully committed to the program, and the authorities are continuing to fulfill their obligations under the program during the pre-electoral period.

  • Is Russia receiving exceptionally favorable treatment from the IMF? The size of the loan is large in absolute terms, Camdessus acknowledged, but as a percentage of Russia’s quota, the magnitude of the EFF arrangement is fully in line with the IMF’s established lending limits. Any IMF member in need of assistance that has established a sound track record and negotiates a rigorous program worthy of IMF support is entitled to draw on IMF resources, he said. The high degree of macroeconomic discipline and structural reform required under the Russian program, in addition to the strict monitoring, does not imply exceptionally favorable treatment.

  • Is the program too demanding? We must guard against the danger that continued macroeconomic adjustment and sweeping structural change could irreparably undermine domestic support for reform, Camdessus said. This could be done by ensuring that an adequate social safety net was in place with enough budgetary resources to support it. Beyond this, the government should be encouraged to do all that it can to ensure that the benefits of reform emerge—and become evident to the Russian people—as soon as possible. Based on past experience with transition economies, Camdessus said, the most promising approach was to reduce inflation and complete a sufficient mass of structural reform.

  • Why embark on the program now? The IMF cannot equivocate on the basis of the electoral timetable, Camdessus emphasized. To postpone a program simply because of elections would be “a political act” in itself. Worse, he said, it would invite policy drift during the pre-electoral period, and the inevitable renewal of adjustment would be all the more painful. The IMF does not support individuals, he concluded, it supports economic programs: “As long as the duly constituted authorities continue to fulfill the requirements of the program agreed with the IMF, the IMF will continue to support that program.”

Selected IMF Rates

article image

The SDR interest rate, and the rate of remuneration, are equal to a weighted average of interest rates on specified short-term domestic obligations in the money markets of the five countries whose currencies constitute the SDR valuation basket (the U.S. dollar, weighted 39 percent; deutsche mark, 21 percent; Japanese yen, 18 percent; French franc, 11 percent; and U.K. pound, 11 percent). The rate of remuneration is the rate of return on members’ remunerated reserve tranche positions. The rate of charge, a proportion (currently 102.5 percent) of the SDR interest rate, is the cost of using the IMF’s financial resources. All three rates are computed each Friday for the following week. The basic rates of remuneration and charge are further adjusted to reflect burden-sharing arrangements. For the latest rates, call (202) 623-7171.

Data: IMF Treasurer’s Department

IMF Study Explores Legal Dimensions of Central Bank Activities

The legal environment surrounding the operations of national banks and international financial institutions is the focus of an IMF study, Current Legal Issues Affecting Central Banks. Edited by Robert C. Effros of the IMF’s Legal Department, the book devotes particular attention to the activities of the IMF, the European Union, and central banks generally. Among other subjects, it also surveys legal aspects of financial reform in Chile, Eastern Europe, and the Russian Federation; the developing country debt problem; and banking law developments in the United States and the United Kingdom.

IMF Issues

François P. Gianviti, General Counsel of the IMF, discusses how the IMF’s Articles of Agreement are interpreted to address questions regarding the rights and obligations of member countries. The analogy between the practice of an international organization and the case law of national courts is particularly relevant, he notes. Unlike most national public agencies, some international organizations, such as the IMF, are vested with quasi-judicial powers to interpret their charters. The IMF—through its Executive Board and Board of Governors—is the final interpreter of its own charter. It has in practice shown great restraint in exercising its power in interpreting its Articles. Only ten official interpretations have been adopted, says Gianviti. The mere existence of this power makes its exercise less necessary. The IMF’s power to interpret its Articles, while complete, is also limited in certain respects. For example, while the IMF decides when the conditions specified in the Articles governing the use of its general resources are met, in accordance with the entitlement of Article V, Section 3(b) of the Articles of Agreement, it cannot “impose other conditions.”

In a companion article, Gianviti discusses various sanctions available for use by the IMF against members who fail to fulfill their obligations under the IMF’s Articles. The nature of each sanction, he explains, is determined by whether such failures concern obligations pertaining to special drawing rights (SDRs) or other obligations. In the latter case, sanctions include suspension of the member’s entitlement to use IMF general resources, expulsion from the IMF, and—as a protection of IMF resources rather than a sanction—the suspension of disbursements to members in arrears. Gianviti then discusses how the search for an “intermediate sanction” led to the adoption of the Third Amendment to the IMF’s Articles, which provides for suspending a member’s voting rights—a step short of expulsion.

William E. Holder of the IMF’s Legal Department examines the statutory requirements guiding IMF technical assistance, including principles governing its use. While the IMF willingly provides such services, it is not obligated to do so, he states. In the original Articles of Agreement, Holder notes, technical assistance was not mentioned; nor was it a focus of attention in the drafting of the Articles at the Bretton Woods Conference. Since the first request for technical assistance in 1946, the IMF has nonetheless become increasingly active in this area. According to Holder, fully one third of the resources of the Legal Department are now devoted to technical assistance.

The IMF considers a number of factors in determining whether to provide technical assistance, including need, the alternative availability of assistance, and IMF staffing and budget constraints. Such assistance is not confined to members, Holder adds. In 1991, for example, the IMF agreed to provide extensive technical assistance to the former Soviet Union under a Special Association Agreement. To economize on the use of technical assistance resources, the IMF has taken steps to improve the delivery of technical assistance—including through more effective coordination with other entities, such as the United Nations Development Program. Another approach, says Holder, is to leverage such programs through the use of external and parallel financing.

Reinhard H. Munzberg, also of the IMF’s Legal Department, discusses the IMF’s approach to members with overdue obligations. The most important approach is through the IMF’s “cooperative strategy,” whereby countries in arrears may accumulate “rights” under a new adjustment program that, upon completion, allows them to draw on IMF resources under a successor arrangement, he explains. Achieving this status is not automatic, Munzberg points out. Because a member cannot have access to resources while in arrears, a rights accumulation program does not entail any commitment of resources. The IMF’s aim is to provide such members with appropriate incentives while they accumulate these rights, says Munzberg. Once the program is completed, the IMF would then agree to provide a member with appropriate support under a successor arrangement in an amount not exceeding the member’s accumulated rights, but only if all other conditions for the new program have been met.

While the IMF provides technical assistance, it is not obliged to do so.


Law and the EMU

René Smits of the Netherlands Central Bank maintains that final approval of the Maastricht Treaty has opened the door to far-reaching financial liberalization in Europe. In this regard, Smits highlights the Treaty’s requirement of freedom of all financial transactions. The European Union, he says, is the only jurisdiction in the world whose constitution requires that financial freedom be the rule not only among the 12 member states but also with third countries.

Jean-Victor Louis of the National Bank of Belgium examines the objectives and tasks of the institutions of European economic and monetary union (EMU), including the newly established European Monetary Institute (EMI). The EMI will disappear upon the creation of the European System of Central Banks, which will consist of the European Central Bank (ECB) and the national central banks. In the meantime, the EMI will be responsible for monetary policy once the EMU enters its third and final stage. Louis concludes that the ECB will be independent, “perhaps to a greater degree than the German Bundesbank.”

Central Bank Independence

The editor of the volume, Robert C. Effros, suggests that support for central bank independence derives largely from the belief that insulation from short-term political pressures is necessary if these institutions are to carry out their monetary policy mandates effectively. This point is also made by J. Virgil Mattingly, Jr., of the U.S. Federal Reserve in his historical review of the Federal Reserve System. Independence does not preclude central bank political accountability, however. Mattingly notes that the Federal Reserve is required to submit biannual reports to the U.S. Congress concerning recent economic trends. Mindful of the history of central banking in the United States, the Federal Reserve Board is careful to maintain close working relations with the executive and congressional branches of the U.S. government. And the government regularly audits the Federal Reserve’s budget.

The Federal Reserve must also balance important regional and economic interests, says Mattingly. One third of the board of directors of each Federal Reserve Bank is accordingly chosen by the representative of the member banks in that Federal Reserve Bank’s district. Two thirds of the directors must represent the public; may not be affiliated with any bank; and should represent the interests of agriculture, commerce, industry, services, labor, and consumers. The location and structure of the Federal Reserve Banks not only ensure that local concerns are heard and met but also prevent any one interest or region from dictating Federal Reserve policy.

As the world’s oldest central bank, the Swedish central bank has, since its inception in 1668, been able to carry out a relatively independent financial policy. This independence, says Robert Sparve of the Swedish central bank, gives it a relatively free hand in economic policymaking. While the government is responsible for overall economic policy—following consultation with a cabinet member—only the central bank has the authority to make the final decision about any monetary or exchange rate policies.

Bertold Wahlig of the German Bundesbank examines the relationship of this institution to the German federal government. The Bundesbank, he notes, is widely considered to be the model upon which the drafters of the Maastricht Treaty drew for the in-dependence of the ECB and the national banks of the European System of Central Banks. The Bundesbank enjoys a high degree of independence from the government as well as the right and duty to express its views in federal cabinet meetings. It does not exist in a political vacuum, however, says Wahlig. Cooperation between the government and the central bank is necessary and subject to statutory guidance. The Bundesbank has the responsibility to advise the government on its own initiative, he says, just as the government, in turn, must invite the bank’s president to participate in discussions of monetary policy issues.

Current Legal Issues Affecting Central Banks, Vol. 3, edited by Robert C. Effros, is available for $42.50 from Publication Services, Box XS600, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet:

From the Executive Board

Hungary: Stand-By

The IMF approved a stand-by credit for Hungary authorizing drawings up to the equivalent of SDR 264.2 million (about $387 million) over the next 23 months to support the government’s economic program through end-1997. The Hungarian authorities do not intend to make any drawings and plan to treat the stand-by as precautionary.

In the early 1990s, Hungary’s economy faced a number of external shocks to which it was unable to react quickly. Constrained by high levels of taxation and social expenditure and by the size and inefficiency of the public sector, the external current account deficit deteriorated markedly to 9-10 percent of GDP in 1993-94, against a background of relatively subdued economic activity and already high external debt and debt-service ratios. Structural reform slowed to a halt.

In 1995, the government began corrective action through a policy package that sought to reverse the negative trends of the previous years, while addressing the economy’s structural problems. The package—which included the devaluation of the forint and the introduction of a crawling exchange rate peg, the tightening of public sector wage policy, and budgetary measures—has had positive results on the balance of payments, the decline in high levels (in relation to GDP) of both public expenditures and revenues, and privatization, while output growth remained positive in 1995. The government intends to continue the adjustment effort with IMF support and to tackle the remaining imbalances in the economy—notably fiscal and structural—to help stabilize it and to achieve secure and sustainable growth.

Hungary: Selected Economic Indicators

article image



Data: Hungarian authorities and IMF staff estimates

The 1996-97 Program

Hungary’s 1996–97 economic program retains features key to the 1995 program, such as the exchange rate crawl and limits on public sector wages, but is more ambitious in scope. The program targets output growth strengthening to 2 percent in 1996 and to 3.2 percent in 1997, from 1.7 percent in 1995; a significant deceleration of inflation to 16.6 percent in 1996 and 12.7 percent in 1997, from 28.3 percent in 1995; and further consolidation of the external current account deficit to 4 percent of GDP in 1996 and 3 percent in 1997, from 5.6 percent of GDP in 1995.

To these ends, the authorities will seek to reduce the fiscal deficit to a level consistent with the current account and inflation targets and to continue the gradual decline in the comparatively high levels, in relation to GDP, of both expenditure and revenue. The consolidated government deficit, net of privatization receipts, is programmed to fall to 3.9 percent of GDP in 1996 and 3 percent in 1997, from 6.8 percent of GDP in 1995, primarily through lowering real expenditures. Monetary and exchange rate polices will be guided by the preannounced nominal rate of depreciation of the forint, which the authorities have reduced from a monthly rate of crawl of 1.3 percent in the second half of 1995 to 1.2 percent in the first half of 1996. Wage policy under the program will be restrained, since it is critical to the success of fiscal adjustment, the preservation of competitiveness, and the realization of the inflation target.

Structural Reforms

Under the program, structural reforms will focus on four areas: improving budget planning, monitoring, and execution, and placing different levels of government on sounder financial footing; strengthening the social security system; restructuring and privatizing state-owned enterprises, including banks; and continuing the liberalization of international transactions.

Addressing Social Needs

The objective of reform of the social security system is to generate enough savings to allow for a significant reduction in contribution rates while ensuring the viability of the system. Reform of provision of medical services will be undertaken while ensuring adequate support to the truly needy.

The Challenge Ahead

The program’s success faces risks from adverse developments outside Hungary, such as weak growth in western Europe, but also from fiscal and monetary slippage, and the authorities will need to be ready to prepare for them.

Hungary joined the IMF on May 6, 1982; its quota is SDR 754.8 million (about $1.1 billion). Its outstanding use of IMF credit currently totals SDR 259 million (about $379 million).

Press Release No. 96/10, March 15

Yemen: Stand-By

The IMF approved a 15-month stand-by credit for the Republic of Yemen totaling SDR 132.4 million (about $193 million) in support of the government’s economic and financial reform program for 1996-97.

Yemen’s economy has faced severe difficulties in recent years. Both the real rate of growth and incomes declined, unemployment rose, inflation accelerated, and the balance of payments deficit widened. In response to these conditions, the authorities in 1995 initiated a reform program to improve the economy’s performance. The adjustments to fiscal, monetary, pricing, and exchange rate policies and the start of structural reforms yielded positive results, with output recovering and inflation moderating sharply over the second half of the year.

The 1996-97 Program

The government’s macroeconomic objectives for 1996-97 are real GDP growth of 2.5 percent in 1996 and 5 percent in 1997; a reduction in the core inflation rate (excluding the effects of administered price adjustments) to about 20 percent in 1996 and 10 percent in 1997 from 55 percent in 1995; and the elimination of external debt service arrears by end-June 1996. To these ends, the government’s program aims at substantially strengthening the fiscal position by more than 5 percentage points to 2 percent of GDP in 1997. The financing of the central government deficit will not entail any domestic bank borrowing and will be met largely from external sources. The program also entails achievement of positive real interest rates, exchange system unification, and adoption of a floating exchange rate regime.

Structural Reform Policies

The government’s structural reform priorities under the program include major improvements in the tax system; reforms of the civil service, customs administration, and public enterprises; legal reforms to enhance banking system intermediation; one-step trade liberalization, tariff reform, and harmonization of excise taxes; multisector privatization; and a major liberalization of the investment and regulatory framework in order to further enhance private sector investment and activity.

Addressing Social Concerns

The program s social safety net components include a Social Safety Net Fund for which some resources have been provided in the 1996 budget and external resources are being solicited; a civil works program to create income-generating employment for unskilled labor while upgrading infrastructure and social service facilities; and concessional first tranche pricing for electricity and water following large price increases for these public utilities. The budget also maintains the expenditure-to-GDP ratios for primary health care as well as primary and secondary education. The government is also studying a targeting mechanism to assist vulnerable groups that will replace the present generalized food subsidy with income support from the Social Safety Net Fund.

Yemen: Selected Economic Indicators

article image




Excludes the effects of administered price adjustments.

Excludes transactions of foreign oil companies.

Data: Yemeni authorities and IMF staff estimates

The Challenge Ahead

The timely availability of external financial assistance on appropriate terms will be crucial to the success of the program, given the magnitude of Yemen’s external debt service relative to the debt-servicing capacity of the economy. Implementation of the program is being supported by broadened and quickly available technical assistance under IMF and UNDP programs.

Yemen’s membership in the IMF dates from May 22, 1990. Its quota is SDR 176.5 million (about $258 million). Yemen has no outstanding obligations to the IMF.

Press Release No. 96/11, March 20

Bolivia: Second Annual ESAF

The IMF approved the second annual loan for Bolivia in an amount equivalent to SDR 33.7 million (about $49 million) under the enhanced structural adjustment facility (ESAF) to support the government’s economic and reform program for 1996. The loan will be disbursed in two equal semiannual installments; the first, in an amount equivalent to SDR 16.8 million (about $25 million), will be available on April 15, 1996; the second will become available in September 1996 after review of the program’s implementation by the IMF’s Executive Board.

Within the framework of the present ESAF arrangement, Bolivia has been implementing a comprehensive program to stabilize and restructure the economy. Under the program, Bolivia has maintained real GDP growth of about 4 percent; initiated major structural reforms, including the transfer of ownership and management of large public enterprises to the private sector; and achieved significant progress toward external viability, while maintaining moderate inflation. Notwithstanding these achievements, poverty remains widespread, and the growth rates achieved so far have resulted in only gradual improvements in living standards.

The 1996 Program

The macroeconomic objectives of Bolivia’s 1996 program, which the ESAF loan supports, are to reach a growth rate of 5 percent; an annual rate of inflation of 8 percent; and a current account deficit limited to less than 6 percent of GDP—excluding imports related to the program for capitalization of major public enterprises—while maintaining international gross reserves at the equivalent of six months of imports. To these ends, tight fiscal policy will be maintained, and monetary and credit policy will be geared to achieving the inflation and balance of payments targets of the program.

Structural Reforms

Under the program, the government intends to further consolidate the structural reform effort by extending the capitalization process to the hydrocarbon sector in order to promote its development and expand natural gas exports. For this purpose, the monopoly position of the national oil company will be eliminated. In the education sector, the program seeks to improve the quality and provision of basic education, including the supply of educational materials, increased access to basic education in rural areas, and construction of schools. In the area of social security, the government will establish a minimum pension for all Bolivians based on shares of the capitalized public enterprises, and employees will have personal contributory accounts.

Bolivia: Selected Economic Indicators

article image


Data: Bolivian authorities and IMF staff estimates

Addressing Social Problems

The government’s strategy to alleviate poverty is based on raising the rate of economic growth while expanding the coverage and quality of basic education and health. Safety net programs to help the poor include the Social Investment Fund, which channels external funding to meet basic needs in health, water supply, sanitation, and education in the poorest communities; the Mother-Child Health Care Program; the Food and Nutritional Vigilance Program; the Integrated Child Development Program; and the Program for the Development of the Indigenous People.

The Challenge Ahead

In addition to the increase in inflation in recent months, the economy remains vulnerable to adverse external developments. Consistent implementation of financial policies envisaged under the program will be crucial to avoiding a resurgence of inflation that could jeopardize the expected benefits from the authorities’ ambitious structural reform efforts.

Bolivia joined the IMF on December 27, 1945; its quota is SDR 126.2 million (about $184 million). Bolivia’s outstanding use of IMF credit currently totals SDR 178 million (about $260 million).

Press Release No. 96/12, March 25

Mali: ESAF

The IMF approved a new three-year loan for Mali under the enhanced structural adjustment facility (ESAF), equivalent to SDR 62.0 million (about $91 million) to support the government’s 1996-98 economic reform program. The first annual loan in an amount equivalent to SDR 20.7 million (about $30 million) will be disbursed in two equal semiannual installments, the first of which will be available on April 30, 1996.

Mali successfully implemented its economic reform programs supported by a three-year ESAF loan that expired at the end of March 1996. Especially after the devaluation of the CFA franc in January 1994, important strides were made in reducing financial imbalances, containing inflation, improving the competitiveness of the economy, and lessening distortions, thus revitalizing the private sector and boosting economic growth prospects. Under the 1995 program, economic developments were particularly encouraging: real GDP growth is estimated to have been about 6 percent, and average consumer price inflation was reduced from 24.8 percent in 1994 to 12.4 percent. Notwithstanding the important headway that has been made, Mali’s economic and financial situation remains fragile and vulnerable to exogenous shocks, while poverty remains widespread.

Mali: Selected Economic Indicators

article image



Data: Malian authorities and IMF staff estimates

Medium-Term Strategy for 1996-98 And 1996 Program

Building on the progress achieved so far, Mali’s economic program for 1996–98, supported by the ESAF loans, focuses on the following three key areas: preserving the competitiveness gains achieved; ensuring a sound basis for sustained economic growth through further improvements in resource allocation and a more conducive environment for private sector activity; and taking well-targeted actions to make inroads against poverty. The basic medium-term macroeconomic objectives are to achieve an average annual economic growth rate of about 4–5 percent; to reduce inflation to less than 5 percent in 1996 and to 2-3 percent beginning in 1997; and to lower the external current account deficit, excluding official transfers, to about 10.5 percent of GDP by 1998.

Within this medium-term strategy, the program for 1996, to be supported by the first annual ESAF loan, aims at a real GDP growth rate of 4 percent; limiting average inflation to 4-5 percent; and reducing the external current account deficit, excluding official transfers, to about 13 percent of GDP. To achieve these objectives, the authorities will reduce the overall fiscal deficit (on a commitment basis and excluding grants) to 10.1 percent of GDP in 1996, from 10.5 percent in 1995 and 13.7 percent in 1994, through measures designed to increase government revenue by about 13 percent in 1996, to the equivalent of 14 percent of GDP, and by cutting the ratio of total expenditure to GDP by 1 percent. On the revenue side, a large taxpayer unit will be created to improve tax collections from the largest enterprises; the fiscal identification system will be improved; tax audits will be increased and better targeted; and tax administration will be computerized. On the spending side, nonpriority expenditure is to be contained, while proper provisions are to be made for social services and the investment program. Monetary and credit policy will continue to be prudent, consistent with the regional balance of payments objective. To provide for adequate credit to the private sector, government indebtedness to the banking system will not be increased; at the same time, the Malian authorities will work, in collaboration with their West African Economic and Monetary Union (WAEMU) partners, toward the establishment of a true open market monetary policy and ensure that interest rates are determined by market forces.

Structural Reforms

The government will give priority to structural measures designed to promote private sector activities and will continue to pursue reform of the public enterprise and agricultural sectors. Actions will focus on the following: encouraging private sector activities by establishing a clear, simple, and properly enforced legal framework; stepping up efforts to reform public enterprises; enhancing the competitiveness of the cotton and rice sectors; improving the monitoring of public investment projects; and promoting regional integration within the framework of the WAEMU.

Addressing Social Costs

The government’s strategy in the social and environmental spheres aims at raising living standards, reducing poverty, and improving management of natural resources and the urban environment. A key element in the improvement of living conditions of most social groups will be sustaining the pickup of economic activity. At the same time, to support human resource development, the authorities intend to rapidly raise primary education enrollment rates: increase the share of spending on health in the recurrent budget; reinvigorate primary health care through greater community participation; and ensure the availability of essential medicines.

The Challenge Ahead

Mali made important strides under its first ESAF-supported program, but, as noted, the economic and financial situation remains fragile and vulnerable to exogenous shocks. The authorities must, therefore, persevere with their reform efforts and continue to implement sound macroeconomic policies effectively, as well as to deepen and accelerate structural reforms.

Mali joined the IMF on September 27, 1963, and its quota is SDR 68.9 million (about $101 million). Its outstanding use of IMF credit currently totals SDR 96 million (about $139 million).

Press Release No. 96/14, April 10

EMU on the Runway, Preparing for Takeoff

On January 1, 1999, stage 3 of the European economic and monetary union (EMU) comes into force. On this date, pursuant to the terms of the Maastricht Treaty, an as-yet-undetermined number of member countries of the European Union (EU) will adopt the euro as a common currency, and the European Central Bank (ECB) will execute a single monetary policy for all participating members of the euro area. As the deadline draws closer, policymakers are focusing on the challenges facing individual countries in satisfying the Treaty’s convergence criteria and the outstanding issues related to the policy framework and its implementation.

At a recent IMF Economic Forum on progress toward economic and monetary union, moderator Massimo Russo, Director of the IMF’s European I Department, set the stage by noting that decisions on membership in EMU will be made in early 1998 on the basis of economic performance in 1997—that is, whether countries have met the convergence criteria on inflation, interest and exchange rates, and fiscal performance spelled out in the Maastricht Treaty. A major dilemma, said Russo, is how to grant entry to the largest number of countries without sacrificing the eligibility criteria needed to make the monetary union sustainable.

Staying in the “European Mainstream”

Daniel Gros, Senior Research Fellow at the Brussels-based Centre for Economic Policy Studies, stressed that the completion of EMU was unthinkable without the participation of France as well as Germany. Referring to France’s decision in 1983 to stay in the European Monetary System (EMS) during an economically difficult period, Gros said: “The option of leaving the European mainstream was not taken then, and I do not believe it will be taken today.” This will likely be the choice of most European countries, despite the adjustment costs associated with EMU. In fact, said Gros, the magnitude and incidence of these costs have often been exaggerated or misinterpreted.

Is EMU Still a Good Idea? It has long been accepted by economists that EMU will yield significant gains in terms of lower transaction costs and greater transparency of markets, said Gros. But the unprecedented turmoil in foreign exchange markets and the resulting pressures on the exchange rate mechanism of the EMS in 1992 and 1993 have prompted a re-examination of the question whether the costs entailed by the loss of the exchange rate as a policy instrument do not outweigh these benefits.

According to Gros, the large and extended exchange rate fluctuations in Europe over the past few years were due probably more to differences in policy stances and unanticipated speculative attacks than to external shocks. From the point of view of economists, the main attraction of keeping the exchange rate as an instrument is that it allows an economy to react quickly to an external shock. If, for example, exports fall as the result of a shock to external demand, it is better, according to conventional wisdom, to adjust the exchange rate rather than wait for the slower adjustment of wages, which is always painful in terms of transitional unemployment. However, in researching the influence of external shocks on unemployment, Gros found no statistically significant effect. Thus, the usefulness of the exchange rate as an adjustment instrument may be overrated.

“Self-fulfilling” speculative attacks have been responsible for many large exchange rate swings in the recent past, said Gros. Two countries—for example, Belgium and Italy—may have equally high ratios of debt to GDP but may be perceived differently by the market. If the market considers Italy to be a “bad bet,” interest rates in Italy will increase, the country’s budget deficit will increase, and fiscal consolidation becomes harder to achieve, while pressure on the exchange rate mounts. If, on the other hand, the market sees Belgium as a “good bet,” interest rates in Belgium will remain low. Two countries with similar economic fundamentals could thus end up with “radically different interest rates and a radically different debt-service burden.” Under EMU, said Gros, with a single currency there would, of course, no longer be a risk of speculative attacks on the exchange rate that might distort competition in the euro area.

How High Are Transition Costs? The cost of transition is defined as the temporary loss of output and the possible increase in unemployment that result from the required adjustment to the price stability and fiscal criteria laid out in the Maastricht Treaty. Although acknowledging these costs, Gros suggested that many countries would incur most of them even without EMU. In fact, according to Gros, 11 of the 15 member countries of the EU have already achieved the required price stability; and the remaining 4 (Greece, Italy, Spain, and the United Kingdom) are not “actually that far off.”

The requirement that the fiscal deficit be limited to 3 percent of GDP could entail painful adjustment costs, especially since the EU economies are presently encountering a period of slow growth. But this cost is not exclusively related to EMU, Gros noted. For many countries—such as France, which has a tradition of conservative fiscal policy—a fiscal deficit higher than 3 percent of GDP is considered excessive; for these countries, adjustment would be necessary with or without EMU.

Some observers have suggested that the transition costs would be lower if countries were given more time to meet the Maastricht criteria. But, according to Gros, the cost might actually be higher if the adjustment were slower. A quick adjustment that is perceived to be motivated by the Maastricht deadline might appear more credible to the markets. This “credibility bonus” might make the adjustment less costly in terms of forgone output and unemployment. Therefore, if the costs of transition have to be borne anyway, Gros concluded, quick adjustment is probably the most efficient course.

Resolving Political Issues. A major unresolved issue is the relationship between the “ins” and the “outs”—that is, the countries that participate initially in EMU and the ones that do not. The outs consist of countries temporarily unable to qualify and those, such as the United Kingdom and Denmark, that may not wish to participate. The concerns of this latter group are not central to the process of EMU, said Gros, but the others face a danger of speculative attacks and higher interest rates that would make convergence even more difficult for them. Leaving these willing but temporarily ineligible members out in the cold goes against the “spirit of the Union.”

For those countries that are close to meeting the criteria, Gros proposed a “unilateral” or “associated membership.” Although they do not satisfy the convergence criteria and cannot participate as full members of EMU, these countries could be invited to link their currencies, irrevocably and without margins or fluctuations, to the euro. Their national central banks would be instructed to behave as if they were members of EMU—that is, they would execute the common monetary policy decided by the ECB. They would be linked to the European payments system; and all issues of public debt would be denominated in euros. The only difference between these associate members and full EMU members would be that the governor of the national central bank would not have a vote in the council of the ECB. This unilateral linkage to the euro and the associated common monetary policy should, said Gros, expedite interest rate and fiscal convergence.

It is often argued that EMU is not possible without a full-fledged political union. Even the long-lived monetary unions of the nineteenth century were eventually dissolved. According to Gros, however, these unions differed considerably from EMU. In particular, they lacked a common monetary institution, which gave rise to moral hazard problems: the participating central banks had an incentive to print as much currency as possible, because they knew that the inflationary consequences would be borne by the entire group. In addition, political developments, such as wars, rather than asymmetric shocks, were the main reason for the dissolution of the nineteenth-century monetary unions. Such political developments, said Gros, were no longer a risk in Europe.

Although Gros expressed confidence that EMU would be able to weather both external and internal shocks, he acknowledged that one issue remains open. Economic crises will inevitably apply pressure on the fiscal side. Can one really be sure, he asked, that the prohibition against excessive deficits will be maintained once EMU has begun? Staying below 3 percent of GDP is a condition for entry, but what will be the response when a country goes beyond this limit—perhaps even far beyond—and threatens the financial stability of the entire Union? This question has yet to be answered satisfactorily.

Implementing Stage 3

The Maastricht Treaty does not say how the changeover to a common currency should be accomplished, said Julius Rosenblatt, Advisor and Assistant Director in the IMF’s Paris Office, only that it should be done quickly. The scenario adopted by the European Council in December 1995 calls for a decision to be made in early 1998 on the countries that will participate in EMU; on January 1, 1999, fixed conversion rates will be adopted for the currencies of the participating countries and a common monetary policy will be executed. Following a transition period of three years at the most, the substitution of euro notes and coins will start—at the latest on January 1, 2002. Six months later, the changeover is expected to be complete.

Over the past several months, central bankers and EU officials have been working out the mechanics—the “nuts and bolts”—of implementing this final stage of EMU. According to Rosenblatt, a major consideration was the speed at which the transition should take place. The position of many bankers was that the three-year transition period—during which monetary policy would be pursued in a single currency, but national currencies would still be in circulation—would pose major accounting problems.

Even more important than the cost angle, according to Rosenblatt, was the concern about credibility and the need to reach “critical mass” as soon as possible. Those who favored rapid transition argued that to avoid derailment of EMU, the new currency needed to be introduced swiftly in a sufficient number of areas, so that people would find it difficult to go back on the agreement. The Germans objected to this approach, however, saying that the three-year transition period was necessary to give economic agents time to prepare.

According to Rosenblatt, the scenario adopted last December takes both issues into account. The problem of the institutions that find the cost of keeping accounts in two currencies excessive has been resolved by the decision to set up conversion facilities. This procedure would entail adapting the software used by the commercial banks so that they could register payments and expenditures in two different currencies. Also, a consensus view is emerging that the shift to using the euro as a unit of account may turn out to be faster than originally expected. Many economic agents—large companies and banks—have concluded that it would be more efficient to achieve the transition immediately, rather than to wait and maintain complicated accounts in various currencies.

Setting Monetary Policy for EMU

In anticipation of the execution of a single monetary policy, the European Monetary Institute (EMI)—the precursor to the European Central Bank—has been working with the national central banks to prepare the ground for stage 3. Donogh McDonald, Advisor in the IMF’s European I Department, out-lined three areas of monetary policy that are under discussion:

  • Payments system. A unitary monetary policy requires an efficient payments system that integrates financial markets, McDonald said. An EU-wide payments system will be set up for large-value payments that will integrate national real-time gross settlement systems. Consistent with the importance attached to market principles, this system will not have a monopoly on large-value payments.

  • Operating procedures. Although the ECB will make the final decisions about its operating procedures and market instruments, the EMI is preparing the ground for these decisions by narrowing the options. There is broad agreement, McDonald said, that a key instrument in the implementation of monetary policy will be a system of regular open market operations on a predetermined schedule. These operations may be supplemented, as needed by market conditions, with unscheduled “quick tenders” that would respond to unexpected liquidity shocks. Discussion is continuing in other areas where national systems differ—for example, the role of reserve requirements and discount windows.

  • Macroeconomic policy framework. The decision about which framework to adopt must be made in early 1998, but, according to McDonald, formal discussions in this area are not far advanced. Two broad options are whether to follow a monetary targeting approach, which underpins the monetary policy of the Bundesbank, or an inflation targeting approach, which has been adopted by the United Kingdom and a number of other countries in Europe and elsewhere.

No matter which approach is selected, said McDonald, implementation of monetary policy after the start of stage 3 will encounter difficulties: the monetary transmission mechanism—the relationships that central bankers need to understand to implement monetary policy—will be in a state of flux. The EMI and the central banks will therefore be carefully weighing the options before deciding in early 1998 on the framework that will be adopted.

The next issue of the IMF Survey will cover the Spring Meetings and will appear on May 6.

David M. Cheney, Editor

Sara Kane • John Starrels

Senior Editors

Sheila Meehan Assistant Editor • Sharon Metzger Editorial Assistant

David Juhren

Staff Assistant

Philip Torsani Art Editor • In-Ok Yoon Graphic Artist

The IMF Survey (ISSN 0047-083X) is published by the International Monetary Fund 23 times a year, in addition to an annual Supplement on the IMF, an annual Index, and other occasional supplements. Editions are also published in French and Spanish. Opinions and materials in the IMF Survey, including any legal aspects, do not necessarily reflect the official views of the IMF. Address editorial correspondence to Current Publications Division, Room IS9-1300, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-8585. The IMF Survey is mailed by first class mail in Canada, Mexico, and the United States, and by airspeed elsewhere. Private firms and individuals are charged an annual rate of US$79.00. Apply for subscriptions to Publication Services, Box XS600, IMF, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430. Cable: Interfund. Fax: (202) 623-7201. Internet:

IMF Survey: Volume 25 1996
Author: International Monetary Fund. External Relations Dept.