State of the World Economy

In aggregate terms, world economic growth moderated slightly in 1995/96. This minor change, however, masked more distinct movements at regional and other levels. Many industrial countries, as well as the developing countries of the Western Hemisphere, saw their expansion slow, but this slowing was largely offset by improved performances in the transition economies, Africa, and the Middle East. Asia’s emerging market economies continued to sustain impressive growth rates.

Against this backdrop, economic fundamentals remained favorable. Inflation continued to be kept in check in the industrial countries and to moderate in developing and transition economies. Long-term interest rates dropped notably in 1995/96 (though they would rise again in early 1996/97); exchange rates tracked fundamentals more consistently than they had in recent years; and equity markets rose sharply, reflecting both strong profits and lower interest rates. World trade expanded at twice the rate of world output—reflecting the synergy achieved through increased trade liberalization, currency convertibility, and intensifying globalization. The generally steady, and in some cases strong, economic performance in 1995/96—and the likelihood of its continuation into 1996/97—was shadowed, however, by substantial actual or prospective fiscal imbalances and structural rigidities that have constrained, or threaten to constrain, stronger growth. These imbalances and rigidities underscore the need for adjustment and structural change if countries are to keep pace with the rapidly evolving world economy.

Strengthening Surveillance

Good policies have always mattered, but globalization, the massively expanded role of private capital markets, and technology have now transformed the markets into a stern and impatient taskmaster. This, in turn, has vividly re-emphasized for IMF member countries, and for the IMF itself, the fundamental importance of good policies and the vital role that IMF surveillance can play in promoting such policies. IMF surveillance is grounded in the belief that sound policies offer the best chance for sustained growth and that the virtues of monetary stability, macroeconomic discipline, sound financial systems, and efficient market mechanisms engender their own real, and long-term, benefits.

To refine and strengthen its surveillance, the IMF regularly reviews its surveillance policies and procedures. In 1995/96, in response to both the stubborn long-term budget deficits in industrial countries and impending demographic changes and public pension crises, the IMF gave new urgency to the issue of fiscal balance. It also stressed the importance of banking soundness and reducing labor market rigidities, particularly in Europe. At the same time, the IMF took steps to strengthen its surveillance, namely by:

• encouraging more timely and complete provision of economic data by member countries to the IMF and by developing a standard for members’ dissemination of economic and financial data to the public;

• ensuring a more continuous process of surveillance that would serve to identify—and begin to address—problems at earlier stages; and

• sharpening the focus of IMF surveillance in three areas: on key issues, such as capital account developments; on countries whose domestic developments have international repercussions; and on the regional level.

Expanding IMF Resources

While strengthened IMF surveillance is intended to forestall major disruptions in the world economy or lessen their severity, crises cannot be entirely avoided. A key lesson of the “first crisis of the twenty-first century”—as Managing Director Camdessus termed the Mexican financial crisis—is that the size and speed with which these crises arise in a global economy are unmatched by past experience. This underscores the importance of the adequacy of the IMF’s resources to deal with these crises. It also points to the need for the IMF to respond quickly to potential crises; in this connection, the IMF has formalized procedures for providing rapid approval of conditional financial support in an emergency financing mechanism.

With regard to expanding IMF resources, the Eleventh General Review of Quotas is already under way. The review has focused on issues concerning the size and distribution of an overall increase in quotas. In view of the projected sharp fall in the IMF’s liquidity through 1997 and early 1998, most members favor a substantial increase in the IMF’s quotas. Agreement in principle has been reached between participants in the General Arrangements to Borrow (GAB) and a number of other countries with the capacity to support the international monetary system on the main features of new borrowing arrangements that would double the resources potentially available for borrowing by the IMF under the current GAB. Legal and operational details of the new arrangements are under preparation. The Interim Committee, the IMF’s principal advisory body, has stressed the importance of reaching an expeditious conclusion to both the quota exercise and the GAB expansion.

Assisting Low-Income Countries

The downside of a rapidly globalized world economy is that countries unable to adapt quickly and effectively risk not just falling behind but being left behind. The danger of marginalization of poor and heavily indebted member countries has spurred the IMF to press for funding to ensure the uninterrupted operation of its enhanced structural adjustment facility (ESAF)—the IMF’s chief means of assisting low-income member countries seeking to restructure their economies. The ESAF, which is expected to become self-financing in 2005, faces an interim period between 2000 and 2004 when it must raise “bridging” resources. The IMF is currently exploring a mix of options, including the sale of a limited amount of its gold, to keep the ESAF continuously operational.

The IMF, together with the World Bank, is also taking steps to address the unsustainable debt-service burden of a number of heavily indebted low-income countries. The initiative, which would operate in conjunction with bilateral and other lenders, seeks to put eligible countries’ debt burdens on a sustainable basis, enabling them to service their external debt without undue burden. The initiative stresses the crucial role of effective policies in putting these economies on the path to adjustment and growth. It would provide special assistance—enhanced debt relief and other financial support—to ensure that indebted countries following sound policies do not see the results of their adjustment effort overwhelmed by unsustainable debt-service burdens.

The IMF’s 1996 Annual Meetings will provide a forum for reaching decisions on the debt initiative. The meetings will provide for further discussion of the quota, borrowing, and ESAF financing issues. More generally, governors will continue the work of reshaping the IMF to meet the needs of its members in a rapidly globalizing world economy.

Evolution of Quota Formulas

The initial quotas of the original members of the IMF were related to, but not strictly determined by, the Bretton Woods formula. That formula included basic variables such as average annual import and export flows, gold holdings and dollar balances, the variability of export flows, and national income. It served as the basis for determining initial quotas of new members until the early 1960s.

In 1963, the Bretton Woods formula was revised and a number of other quota formulas were introduced. Taken together, these were used as guides in determining initial quotas of new members and increases in quotas. These formulas incorporated the economic data described above but also included parallel calculations that employed current receipts, current payments, and the variability of current receipts in place of the data on exports, imports, and the variability of exports.

In the early 1980s, the IMF simplified the procedures for calculating quotas and improved the quality of the economic data used in the formulas. GDP replaced national income, a broader measure of official reserves was employed, and more broadly based data for current receipts and payments replaced the corresponding data for “visible” trade.

Quotas of New Members

When a country applies for IMF membership, the IMF staff calculates a quota for the new member and compares it with the quotas of existing members of similar economic size and characteristics. The suggested initial quota or quota range is then considered by a membership committee of the Executive Board. After the country has agreed to the terms and conditions of membership—including the amount of the initial quota proposed by the committee—the full Executive Board considers the committee’s recommendations and forwards a proposed resolution on membership to the IMF’s Board of Governors. After the membership resolution is approved by the Board of Governors and appropriate domestic legal and procedural steps are effected, a representative of the country is invited to Washington to sign the Articles of Agreement, at which time the country becomes a member.

IMF Quotas¹

(million SDRs)

¹Quotas are those in effect as of August 15, 1996. As of that date, five members had not yet paid for their quota increases under the Ninth General Review of Quotas; the quotas listed for these members are those determined under the Eighth General Review. These members (with their Ninth General Review quotas, in millions of SDRs, appearing in parentheses) are as follows: Iraq (864.8). Liberia (96.2), Somalia (60.9), Sudan (233.1), and Zaïre (394.8).

IMF Quotas¹

(million SDRs)

Member
Afghanistan, Islamic State of	120.4
Albania	35.3
Algeria	914.4
Angola	207.3
Antigua and Barbuda	8.5
Argentina	1,537.1
Armenia	67.5
Australia	2,333.2
Austria	1,188.3
Azerbaijan	117.0
Bahamas, The	94.9
Bahrain	82.8
Bangladesh	392.5
Barbados	48.9
Belarus	280.4
Belgium	3,102.3
Belize	13.5
Benin	45.3
Bhutan	4.5
Bolivia	126.2
Bosnia and Herzegovina	121.2
Botswana	36.6
Brazil	2,170.6
Brunei Darussalam	150.0
Bulgaria	464.9
Burkina Faso	44.2
Burundi	57.2
Cambodia	65.0
Cameroon	135.1
Canada	4,320.3
Cape Verde	7.0
Central African Republic	41.2
Chad	41.3
Chile	621.7
China	3,385.2
Colombia	561.3
Comoros	6.5
Congo	57.9
Costa Rica	119.0
Côte d’Ivoire	238.2
Croatia	261.6
Cyprus	100.0
Czech Republic	589.6
Denmark	1,069.9
Djibouti	11.5
Dominica	6.0
Dominican Republic	158.8
Ecuador	219.2
Egypt	678.4
El Salvador	125.6
Equatorial Guinea	24.3
Eritrea	11.5
Estonia	46.5
Ethiopia	98.3
Fiji	51.1
Finland	861.8
France	7,414.6
Gabon	110.3
Gambia, The	22.9
Georgia	111.0
Germany	8,241.5
Ghana	274.0
Greece	587.6
Grenada	8.5
Guatemala	153.8
Guinea	78.7
Guinea-Bissau	10.5
Guyana	67.2
Haiti	60.7
Honduras	95.0
Hungary	754.8
Iceland	85.3
India	3,055.5
Indonesia	1,497.6
Iran, Islamic Rep. of	1,078.5
Iraq	504.0
Ireland	525.0
Israel	666.2
Italy	4,590.7
Jamaica	200.9
Japan	8,241.5
Jordan	121.7
Kazakstan	247.5
Kenya	199.4
Kiribati	4.0
Korea	799.6
Kuwait	995.2
Kyrgyz Republic	64.5
Lao People’s Dem. Rep.	39.1
Latvia	91.5
Lebanon	146.0
Lesotho	23.9
Liberia	71.3
Libya	817.6
Lithuania	103.5
Luxembourg	135.5
Macedonia, FYR of	49.6
Madagascar	90.4
Malawi	50.9
Malaysia	832.7
Maldives	5.5
Mali	68.9
Malta	67.5
Marshall Islands	2.5
Mauritania	47.5
Mauritius	73.3
Mexico	1,753.3
Micronesia	3.5
Moldova	90.0
Mongolia	37.1
Morocco	427.7
Mozambique	84.0
Myanmar	184.9
Namibia	99.6
Nepal	52.0
Netherlands	3,444.2
New Zealand	650.1
Nicaragua	96.1
Niger	48.3
Nigeria	1,281.6
Norway	1,104.6
Oman	119.4
Pakistan	758.2
Panama	149.6
Papua New Guinea	95.3
Paraguay	72.1
Peru	466.1
Philippines	633.4
Poland	988.5
Portugal	557.6
Qatar	190.5
Romania	754.1
Russia	4,313.1
Rwanda	59.5
St. Kitts and Nevis	6.5
St. Lucia	11.0
St. Vincent & Grenadine	6.0
San Marino	10.0
São Tomé and Príncipe	5.5
Saudi Arabia	5,130.6
Senegal	118.9
Seychelles	6.0
Sierra Leone	77.2
Singapore	357.6
Slovak Republic	257.4
Slovenia	150.5
Solomon Islands	7.5
Somalia	44.2
South Africa	1,365.4
Spain	1,935.4
Sri Lanka	303.6
Sudan	169.7
Suriname	67.6
Swaziland	36.5
Sweden	1,614.0
Switzerland	2,470.4
Syrian Arab Republic	209.9
Tajikistan	60.0
Tanzania	146.9
Thailand	573.9
Togo	54.3
Tonga	5.0
Trinidad and Tobago	246.8
Tunisia	206.0
Turkey	642.0
Turkmenistan	48.0
Uganda	133.9
Ukraine	997.3
United Arab Emirates	392.1
United Kingdom	7,414.6
United States	26,526.8
Uruguay	225.3
Uzbekistan	199.5
Vanuatu	12.5
Venezuela	1,951.3
Vietnam	241.6
Western Samoa	8.5
Yemen, Republic of	176.5
Zaïre	291.0
Zambia	363.5
Zimbabwe	261.3

¹Quotas are those in effect as of August 15, 1996. As of that date, five members had not yet paid for their quota increases under the Ninth General Review of Quotas; the quotas listed for these members are those determined under the Eighth General Review. These members (with their Ninth General Review quotas, in millions of SDRs, appearing in parentheses) are as follows: Iraq (864.8). Liberia (96.2), Somalia (60.9), Sudan (233.1), and Zaïre (394.8).

View Table

IMF Quotas¹

(million SDRs)

Member
Afghanistan, Islamic State of	120.4
Albania	35.3
Algeria	914.4
Angola	207.3
Antigua and Barbuda	8.5
Argentina	1,537.1
Armenia	67.5
Australia	2,333.2
Austria	1,188.3
Azerbaijan	117.0
Bahamas, The	94.9
Bahrain	82.8
Bangladesh	392.5
Barbados	48.9
Belarus	280.4
Belgium	3,102.3
Belize	13.5
Benin	45.3
Bhutan	4.5
Bolivia	126.2
Bosnia and Herzegovina	121.2
Botswana	36.6
Brazil	2,170.6
Brunei Darussalam	150.0
Bulgaria	464.9
Burkina Faso	44.2
Burundi	57.2
Cambodia	65.0
Cameroon	135.1
Canada	4,320.3
Cape Verde	7.0
Central African Republic	41.2
Chad	41.3
Chile	621.7
China	3,385.2
Colombia	561.3
Comoros	6.5
Congo	57.9
Costa Rica	119.0
Côte d’Ivoire	238.2
Croatia	261.6
Cyprus	100.0
Czech Republic	589.6
Denmark	1,069.9
Djibouti	11.5
Dominica	6.0
Dominican Republic	158.8
Ecuador	219.2
Egypt	678.4
El Salvador	125.6
Equatorial Guinea	24.3
Eritrea	11.5
Estonia	46.5
Ethiopia	98.3
Fiji	51.1
Finland	861.8
France	7,414.6
Gabon	110.3
Gambia, The	22.9
Georgia	111.0
Germany	8,241.5
Ghana	274.0
Greece	587.6
Grenada	8.5
Guatemala	153.8
Guinea	78.7
Guinea-Bissau	10.5
Guyana	67.2
Haiti	60.7
Honduras	95.0
Hungary	754.8
Iceland	85.3
India	3,055.5
Indonesia	1,497.6
Iran, Islamic Rep. of	1,078.5
Iraq	504.0
Ireland	525.0
Israel	666.2
Italy	4,590.7
Jamaica	200.9
Japan	8,241.5
Jordan	121.7
Kazakstan	247.5
Kenya	199.4
Kiribati	4.0
Korea	799.6
Kuwait	995.2
Kyrgyz Republic	64.5
Lao People’s Dem. Rep.	39.1
Latvia	91.5
Lebanon	146.0
Lesotho	23.9
Liberia	71.3
Libya	817.6
Lithuania	103.5
Luxembourg	135.5
Macedonia, FYR of	49.6
Madagascar	90.4
Malawi	50.9
Malaysia	832.7
Maldives	5.5
Mali	68.9
Malta	67.5
Marshall Islands	2.5
Mauritania	47.5
Mauritius	73.3
Mexico	1,753.3
Micronesia	3.5
Moldova	90.0
Mongolia	37.1
Morocco	427.7
Mozambique	84.0
Myanmar	184.9
Namibia	99.6
Nepal	52.0
Netherlands	3,444.2
New Zealand	650.1
Nicaragua	96.1
Niger	48.3
Nigeria	1,281.6
Norway	1,104.6
Oman	119.4
Pakistan	758.2
Panama	149.6
Papua New Guinea	95.3
Paraguay	72.1
Peru	466.1
Philippines	633.4
Poland	988.5
Portugal	557.6
Qatar	190.5
Romania	754.1
Russia	4,313.1
Rwanda	59.5
St. Kitts and Nevis	6.5
St. Lucia	11.0
St. Vincent & Grenadine	6.0
San Marino	10.0
São Tomé and Príncipe	5.5
Saudi Arabia	5,130.6
Senegal	118.9
Seychelles	6.0
Sierra Leone	77.2
Singapore	357.6
Slovak Republic	257.4
Slovenia	150.5
Solomon Islands	7.5
Somalia	44.2
South Africa	1,365.4
Spain	1,935.4
Sri Lanka	303.6
Sudan	169.7
Suriname	67.6
Swaziland	36.5
Sweden	1,614.0
Switzerland	2,470.4
Syrian Arab Republic	209.9
Tajikistan	60.0
Tanzania	146.9
Thailand	573.9
Togo	54.3
Tonga	5.0
Trinidad and Tobago	246.8
Tunisia	206.0
Turkey	642.0
Turkmenistan	48.0
Uganda	133.9
Ukraine	997.3
United Arab Emirates	392.1
United Kingdom	7,414.6
United States	26,526.8
Uruguay	225.3
Uzbekistan	199.5
Vanuatu	12.5
Venezuela	1,951.3
Vietnam	241.6
Western Samoa	8.5
Yemen, Republic of	176.5
Zaïre	291.0
Zambia	363.5
Zimbabwe	261.3

¹Quotas are those in effect as of August 15, 1996. As of that date, five members had not yet paid for their quota increases under the Ninth General Review of Quotas; the quotas listed for these members are those determined under the Eighth General Review. These members (with their Ninth General Review quotas, in millions of SDRs, appearing in parentheses) are as follows: Iraq (864.8). Liberia (96.2), Somalia (60.9), Sudan (233.1), and Zaïre (394.8).

As of August 1, 1996, 181 countries were members of the IMF, with total quotas amounting to about SDR 145.3 billion. In 1995/96, Brunei Darussalam became a member on October 10, 1995, and on December 20, 1995, the Executive Board determined that Bosnia and Herzegovina had fulfilled the necessary conditions to succeed to the membership of the former Socialist Federal Republic of Yugoslavia. The Federal Republic of Yugoslavia (Serbia/Montenegro) has not yet completed arrangements for succession to membership in the IMF.

Review of Quotas

The Board of Governors is required by the IMF’s Articles of Agreement to conduct a general review of quotas at intervals of not more than five years. These general reviews are meant to assess whether growth in the world economy and changes in the relative strength of members’ economies warrant quota adjustments.

The Ninth General Review of Quotas was the last review to result in an increase in IMF quotas. The Board of Governors concluded the Tenth Review without an increase in quotas, and the Executive Board decided to closely monitor the adequacy of members’ quotas and the IMF’s liquidity position. Developments in Mexico and Argentina in late 1994 and early 1995—as well as IMF financial support for adjustment programs in a number of transition economies—have since resulted in exceptionally large demands on the resources of the IMF and have heightened the importance of monitoring the IMF’s liquidity position in the period ahead.

The Executive Board has begun work on the Eleventh General Review of Quotas, which is to be completed by March 1998. In a series of meetings, a Committee of the Whole reviewed some of the issues concerning the size and distribution of an overall increase in quotas, with many members noting that the projected sharp drop in the IMF’s liquidity ratio through 1997 and early 1998 highlighted the need for a substantial increase in IMF quotas and a review of the IMF’s borrowing arrangements. At the April 1996 meeting of the Interim Committee, the Managing Director indicated that most member countries favor a substantial increase in IMF quotas.

Tools of Surveillance

The IMF carries out its surveillance responsibilities mainly through regular—normally annual—consultations with member countries (known as “Article IV consultations,” because they are mandated under Article IV of the IMF’s Articles of Agreement), and through multilateral discussions held in the context of twice-yearly World Economic Outlook reviews by the Executive Board.

Article IV Consultations systematically review economic developments and policies in member countries and assess the impact of these policies on the exchange rate and the balance of payments. Structural policies are also examined as they are germane to macroeconomic developments and policies. In recent years, surveillance has taken more account of regional, social, industrial, labor market, income distribution, governance, and environmental issues, where these have important implications for macroeconomic policies and performance. Assessments in the context of Article IV consultations provide a comprehensive analysis of recent and prospective domestic and external developments and their effect on the international community.

World Economic Outlook discussions provide the Executive Board with a framework for reviewing members’ policies from a multilateral perspective, monitoring and analyzing the global economic situation, and assessing prospects for the international economy under various policy assumptions.

The Board supplements this systematic monitoring of global developments with informal Board sessions on significant developments in selected countries and on world economic and market developments. The Board also reviews developments in international capital markets twice a year. In addition, the IMF’s Managing Director takes part in some of the policy discussions of the Group of 7 major industrial countries, where he provides a global perspective by focusing on the international implications of G-7 policies.

Strengthening Surveillance

The Mexican financial crisis of late 1994 and the broader realization that the size, speed, and impact of financial crises were fundamentally altered in a more open and integrated world economy led the IMF to take important steps in 1995/96 to strengthen its surveillance. These efforts crystallized around three themes:

• the full and timely provision of data;

• the continuity of surveillance; and

• the focus of surveillance.

Provision of Economic Data. The quality of the IMF’s surveillance depends critically on the availability of timely, reliable data. The IMF has identified a core set of economic and financial indicators and encouraged all members to report these data monthly to the IMF. Where shortcomings in member country data have been identified, the IMF and individual members have devised a cooperative strategy to remedy them. The IMF also provides technical assistance to help members compile and report economic data.

Timely, reliable data are also critically important for financial markets. The IMF has established the Special Data Dissemination Standard (SDDS) for members having, or seeking, access to international capital markets. (See box on SDDS, page 9.) A general standard toward which all members should strive is under development and should be established before the end of 1996/97.

Continuity of Surveillance. The globalization of international capital markets and the rapidity with which changed market perceptions of a country’s economic fundamentals affect these markets put a premium on continuous IMF surveillance. To ensure more continuous surveillance, the IMF has intensified its efforts on several fronts, including:

• supplementing annual consultations with interim staff visits for some members. In several cases, the IMF’s management has also followed up the Executive Board’s annual consultation discussions with letters to country authorities on important policy issues;

• holding informal Board meetings to review major developments in selected member countries on a monthly basis. These sessions facilitate the early identification of emerging financial tensions by focusing on potential problems and providing additional data; and

• holding twice-yearly Board discussions on the implementation of members’ policies in the context of surveillance, which focus on the principal issues arising in discussions with members during Article IV consultations. A report on these discussions serves as a bridge between the Board’s daily work on surveillance and the Interim Committee’s oversight role.

Focus of Surveillance. Increasing globalization underscores the likelihood of new issues and risks and re-inforces the importance of rigorously pursuing traditional areas of surveillance. To address both needs, the Executive Board has agreed that IMF surveillance should:

• concentrate, through its Article IV consultations, on core topics directly linked to the IMF’s statutory mandate to exercise “surveillance over exchange rate policies of members”;

• pay greater attention to capital account developments;

• follow more closely those countries in which economic developments have the potential to spill over to other countries; and

• continue to strengthen its regional surveillance where important economic policies are formulated at a supranational level.

Other Issues

Capital Account Convertibility. The movement of capital among countries is a central concern of the IMF. Over the past decade, all industrial countries and a significant number of developing countries have liberalized capital account transactions. This has improved the global allocation of savings but has posed new challenges for economic policymakers, most notably those relating to large swings in private capital flows. In April 1995, the Executive Board amended a 1977 decision to take explicit account of the role of such flows in IMF surveillance. It also agreed to discuss further whether it would be useful to extend the jurisdiction of the IMF to the capital account.

Strengthening Banking Systems. Since 1980, roughly two-thirds of the IMF’s member countries have had problems in their banking sectors, with many of the bank failures having international repercussions. These experiences illustrate not only that a sound banking system is important for macroeconomic stability and the efficient conduct of stabilization policies, but that macroeconomic and structural policies have an impact on the soundness of the banking system.

In March 1996, the Executive Board examined the relationship between banking system soundness and macroeconomic and structural policies. It also looked at ways in which bank soundness issues could be incorporated into surveillance, emphasizing that the IMF should concentrate on the links between macroeconomic policy and banking systems and provide guidance on monetary and prudential policies in support of bank soundness. Most Directors believed that IMF surveillance of financial sectors was critically important and that the IMF should have access to appropriate data. The Board supported a greater concentration on banking and financial sector issues in IMF surveillance and IMF-supported adjustment programs of its members.

Reviews of Surveillance

Every two years, the IMF reviews the principles and procedures that guide its surveillance. The latest review, concluded in April 1995, paid particular attention to the increased globalization of capital markets, the greater mobility of cross-border capital flows, and the ability of the IMF to identify emerging financial tensions at an early stage.

The Executive Board noted the progress made in improving the flexibility, timeliness, and continuity of IMF surveillance and welcomed the intensified contact with members between consultations. It also agreed on the need for greater transparency in key areas of surveillance, as well as more candid appraisals in staff reports.

To improve regional surveillance, Executive Directors agreed to annual discussions of reports on economic and currency unions and to continue the annual discussion of European Union policies—although they emphasized that Article IV consultations should remain the basic channel for surveillance. Finally, Directors supported the increased clustering of Article IV consultations among countries that shared common characteristics or common issues, provided that staffing resources permit.

Other Means of Collaborating

While Article IV consultations are the main form of collaboration between the IMF and a member country, members have also sought closer collaboration in other ways, including precautionary arrangements, informal monitoring (and “shadow” programs), and enhanced surveillance. Precautionary arrangements, by which members reach agreement with the IMF on stand-by or extended arrangements but do not use IMF resources, are useful in indicating the IMF’s endorsement of a member’s policies and serve to boost confidence in those policies. Informal monitoring provides members with a more intensive dialogue with the IMF staff and may take the shape of setting quantitative benchmarks under a shadow program or closer collaboration in formulating policies, but it does not constitute a formal IMF endorsement. Likewise, enhanced surveillance does not imply an IMF endorsement of policies; it was initially established in 1985 to facilitate multiyear debt-rescheduling agreements with commercial banks and has been used sparingly. These less formal arrangements offer members a flexible means of collaborating more closely with the IMF.

Conditionality Is Flexible

Although IMF conditionality employs specified performance criteria, it does not rely on a rigid set of operational rules. The Executive Board’s guidelines on conditionality:

• encourage members to adopt corrective measures at an early stage;

• stress that the IMF pay due regard to members’ domestic social and political objectives, as well as economic priorities and circumstances;

• permit flexibility in determining the number and content of performance criteria; and

• emphasize that IMF arrangements are decisions of the IMF that set out—in consultation with members—the conditions for its financial assistance.

Conditionality in Practice

The IMF takes a pragmatic approach to helping members formulate economic reform programs in the recognition that no one model would suit all members. Each IMF-supported program is designed by the member country in close collaboration with the IMF staff. The process involves a comprehensive review of the member’s economy, including the causes and nature of the balance of payments problems and an analysis of the policies needed to achieve a sustainable balance between the demand for, and the availability of, resources.

IMF-supported programs emphasize certain key aggregate economic variables—domestic credit, the public-sector deficit, international reserves, and external debt—and crucial elements of the pricing system—including the exchange rate, interest rates, and, in some cases, commodity prices—that significantly affect the country’s public finances and foreign trade and the economy’s supply response.

During a stand-by or extended arrangement, a member’s reform program is monitored by the IMF through performance criteria selected according to the economic and institutional structure of the country, the availability of data, and the desirability of focusing on broad macroeconomic variables, among other considerations. Performance under programs is also monitored through periodic reviews.

Growth-Oriented Adjustment

To succeed in bringing about a sustained return to external viability, an adjustment program must elicit an adequate response from the supply side. Interest rates and exchange rates are particularly important, since they influence saving and investment decisions and a member’s growth prospects. IMF-supported policy adjustments by member countries focus on such supply-related actions as removing distortions that hamper export growth and increasing the efficiency of government spending—measures that help reduce a country’s imbalances and enhance its growth prospects. The IMF also continues to support appropriate measures that affect demand, which remain essential to achieving sustainable growth.

Given the importance of structural reform in IMF-supported programs, close collaboration between the IMF and the World Bank is important. This is particularly true in developing programs to support members’ requests for resources under the IMF’s extended Fund facility (EFF) and the enhanced structural adjustment facility (ESAF).

Social Safety Nets

Adjustment programs typically have an impact on income distribution, employment, and social services. While sound macroeconomic policies and effective structural reforms promote sustained growth and employment, the adjustment process itself may involve short-term social costs for vulnerable groups. Measures built into IMF-supported programs address these costs. In collaboration with the World Bank staff, the IMF staff analyzes the social implications of reform measures and advises the authorities on how best to design social safety nets and target them to assist the neediest groups.

Conditionality Reviews

Periodically, the Executive Board reviews members’ experience with stand-by and extended arrangements to evaluate the appropriateness of the policy design, the record of policy implementation, and the achievements. In 1994 it analyzed the experience of 45 stand-by and extended arrangements in 36 member countries. The Board reviewed the effectiveness of the three principal elements of the IMF’s approach toward adjustment and stabilization: reining in excessive domestic demand, adopting structural reforms, and mobilizing external financing.

Executive Directors concluded that this broad policy paradigm remained appropriate and was particularly effective in correcting external imbalances. But growth and investment were frequently slow to respond. IMF-supported programs should:

• be framed in a medium-term context to ensure consistency and credibility;

• pay close attention to the structure of government spending and revenue;

• limit upward pressure on real interest rates by emphasizing an appropriate balance between fiscal and monetary restraint and by measures to promote sound banking practices; and

• strive for a transparent and predictable timetable for structural reforms.

Structural reforms were essential, the Board concluded. Countries had made considerable progress in price, exchange, and trade liberalization, and notable strides in financial market reforms, particularly in auctions for central bank or government paper and in removing controls on a significant range of interest rates. Much still needed to be done to improve prudential controls and bank supervision, address weak bank portfolios, expedite privatization, and restructure public expenditures. In many countries, rigidities in labor markets and insufficient job creation remain serious problems that had not been addressed by adjustment programs.

Regular Facilities

Reserve Tranche. A member has a reserve tranche position if the IMF’s holdings of its currency in the General Resources Account—excluding these holdings that reflect the member’s use of IMF resources—are less than its quota. A member may draw up to the full amount of its reserve tranche position at any time, subject only to the member’s representation of a balance of payments need. A reserve tranche drawing does not constitute a use of IMF credit and is not subject to charges or to an expectation or obligation to repay.

Credit Tranches. IMF credit is subject to different conditionality and phasing, depending on whether it is made available in the first credit “tranche” (or segment) of 25 percent of a member’s quota or in the upper credit tranches (any segment above 25 percent of quota). For drawings in the first credit tranche, members must demonstrate reasonable efforts to overcome their balance of payments difficulties.

Upper credit tranche drawings are made in installments and are released when established performance targets are met. Such drawings are normally associated with stand-by or extended arrangements, which typically seek to resolve balance of payments difficulties and to support structural policy reforms where appropriate. Performance criteria and periodic reviews are used to assess policy implementation.

Stand-By Arrangements. Stand-by arrangements give members the right to draw up to a specified amount of IMF financing during a prescribed period. Drawings are normally phased on a quarterly basis, with their release conditional upon meeting performance criteria and the completion of periodic reviews. Performance criteria generally cover credit policy, government or public-sector borrowing requirements, trade and payments restrictions, foreign borrowing, and reserve levels. These criteria allow both the member and the IMF to assess progress and may signal the need for further corrective policies.

Stand-by arrangements typically cover a 12–18 month period (although they can extend up to 3 years). Repayments are to be made within 3¼ to 5 years of each drawing.

In 1995/96, 19 new stand-by arrangements were approved. These include stand-by arrangements for five Latin American countries (Argentina, Costa Rica, El Salvador, Panama, and Uruguay), totaling SDR 1.0 billion; for eight former Soviet Union and central and eastern European countries (Armenia, Azerbaijan, Belarus, Georgia, Hungary, Kazakstan, the former Yugoslav Republic of Macedonia, and Uzbekistan), totaling SDR 1.0 billion; for three Asian and Middle Eastern countries (Pakistan, Papua New Guinea, and Yemen), totaling SDR 0.6 billion; and for three African countries (Cameroon, Djibouti, and Lesotho), totaling SDR 0.1 billion.

Extended Fund Facility (EFF). The EFF provides assistance for longer periods and in generally larger amounts than under stand-by arrangements. Extended arrangements, which normally run for three years (and can be extended for a fourth), are designed to rectify balance of payments difficulties that stem largely from structural problems and require a longer period of adjustment.

A member requesting an extended arrangement outlines its objectives and policies for the whole period of the arrangement and presents a detailed statement each year of the policies and measures to be pursued over the next 12 months. The phasing and performance criteria are comparable to those of stand-by arrangements, although phasing on a semiannual basis is possible. Countries using EFF resources must repay the currencies they have drawn within 4½ to 10 years of the drawing.

In 1995/96, the IMF approved four new extended arrangements totaling SDR 8.4 billion for Algeria, Gabon, Jordan, and Russia. The arrangement for Russia for SDR 6.9 billion (equivalent to 160 percent of Russia’s quota), which was approved in late March 1996, is the largest extended arrangement in the history of the IMF. As of April 30, 1996, seven countries had extended arrangements, with commitments totaling SDR 9.4 billion and undrawn balances of SDR 8.6 billion.

New commitments of IMF resources under stand-by and extended arrangements increased significantly in 1995/96 to SDR 18.0 billion. This level exceeds the SDR 15.4 billion committed in 1994/95 and the SDR 14.1 billion committed in 1982/83 at the height of the debt crisis. The record high level of commitments in 1995/96 was largely attributable to support for economies in transition to market-oriented systems—including an EFF arrangement for Russia—that reflect their progress in formulating macroeconomic and structural reform programs that could be supported under stand-by or extended arrangements.

Special Facilities

The IMF’s special facilities include the compensatory and contingency financing facility (CCFF); the buffer stock financing facility, which has not been used since 1984; and the systemic transformation facility (STF), which ceased operations at end-December 1995.

Compensatory and Contingency Financing Facility. The compensatory element of the CCFF provides financing to members experiencing a balance of payments need related to temporary shortfalls in export earnings (from goods and services, other than interest income) and/or temporary excesses in cereal import costs attributable to factors largely beyond their control. This element of the facility has been used particularly by commodity exporters. The contingency element helps members with IMF arrangements keep their adjustment programs on track when faced with unforeseen adverse external shocks that are largely beyond their control. The variables could include export earnings, import prices, and international interest rates. Workers’ remittances and tourism receipts may also be covered if they represent a significant element in the member’s current account. In 1995/96, Rwanda drew SDR 9 million under the CCFF; this compares with two drawings totaling SDR 286.5 million in 1994/95.

Buffer Stock Financing Facility. Under this facility, the IMF helps finance members’ contributions to approved international buffer stocks, if the member demonstrates a balance of payments need.

Systemic Transformation Facility. The STF was created in April 1993 as a temporary special facility. It provided financial assistance to countries facing balance of payments difficulties arising from severe disruptions in their traditional trade and payments arrangements owing to a shift from significant reliance on trading at nonmarket prices to multilateral market-based trade. The STF was designed to pave the way for these countries to move to regular IMF arrangements. Over the course of the STF’s operations, 20 countries made drawings of nearly SDR 4.0 billion. Operations under the STF were terminated at end-December 1995.

Total IMF Credit Outstanding to Members¹

(billion SDRs; end of period)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A017

¹ The IMF’s financial year begins on May 1 and ends on April 30.Data: IMF, Annual Report 1996

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Total IMF Credit Outstanding to Members¹

(billion SDRs; end of period)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A017

¹ The IMF’s financial year begins on May 1 and ends on April 30.Data: IMF, Annual Report 1996

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Total IMF Credit Outstanding to Members¹

(billion SDRs; end of period)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A017

¹ The IMF’s financial year begins on May 1 and ends on April 30.Data: IMF, Annual Report 1996

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Concessional Facilities

Structural Adjustment Facility (SAF). Established in 1986, SAF arrangements provided low-income member countries with concessional loans in support of medium-term macroeconomic adjustment policies and structural reforms. In November 1993, the IMF’s Executive Board agreed that no new commitments would be made under the SAF, except for Sierra Leone and Zambia in connection with rights accumulation programs (see Arrears, page 23). Subsequently, SAF arrangements were approved for Sierra Leone and Zambia, in conjunction with ESAF arrangements, following the successful conclusion of their rights accumulation programs and clearance of arrears to the IMF.

Access Limits Are Guided by Quotas

The rules governing access to the IMF’s general resources apply uniformly to all members. Access is determined primarily by a member’s balance of payments need, the strength of its adjustment policies, and its capacity to repay the IMF. Access is permitted up to limits defined in relation to the member’s quota.

The Executive Board reviews the access limits in the credit tranches and under the extended Fund facility (EFF) annually in light of many elements, including the magnitude of members’ payments problems and developments in the IMF’s liquidity. Guided by the principle that strong adjustment programs deserve strong support and by the need to safeguard the monetary character and catalytic role of the IMF, the Executive Board decided that, for a three-year period beginning October 24, 1994, the annual limit for access to the IMF’s general resources in the credit tranches and under extended arrangements would rise to 100 percent of quota from 68 percent of quota. The cumulative access limit was left unchanged at 300 percent of quota, net of scheduled repayments.

These limits may be exceeded in exceptional cases. The limits exclude drawings under the compensatory and contingency financing facility (CCFF), the buffer stock financing facility (BSFF), the enhanced structural adjustment facility (ESAF), and the systemic transformation facility (STF). The current overall access limit under the CCFF is set at 95 percent of a member’s quota. For the BSFF, the access limit is 35 percent of quota.

Access under ESAF arrangements also differs according to members’ balance of payments needs, the strength of their adjustment efforts, and their capacity to repay. An eligible member country may borrow a maximum of 190 percent of its quota under a three-year ESAF arrangement, although this limit may be increased, under exceptional circumstances, up to a maximum of 255 percent of quota. ESAF access is expected to average about 110 percent of quota for first-time users.

Access Limits

(percent of member’s quota)

¹Under exceptional circumstances, these limits may be exceeded.

²When a member has a satisfactory balance of payments position—except for the effect of an export earnings shortfall or an excess in cereal import costs—a limit of 65 percent of quota applies to either the export earnings shortfall or the excess cereal import costs, with a joint limit of 80 percent.

³A sublimit of 25 percent of quota applies on account of deviations in interest rates.

⁴May be applied to supplement the amounts for export earnings shortfalls, excesses in cereal import costs, or contingency financing.

⁵Average access expected at 110 percent of quota for first-time ESAF users.

Access Limits

(percent of member’s quota)

Under stand-by and extended arrangements1
Annual		100
Cumulative		300
Under special facilities
Compensatory and contingency financing facility (CCFF)
	Export earnings shortfall2	30
	Excess cereal import costs2	15
	Contingency financing3	30
	Optional tranche4	20
	Combined	95
Buffer stock financing facility
(BSFF)		35
Under ESAF arrangements1
	Three-year access5	190

¹Under exceptional circumstances, these limits may be exceeded.

²When a member has a satisfactory balance of payments position—except for the effect of an export earnings shortfall or an excess in cereal import costs—a limit of 65 percent of quota applies to either the export earnings shortfall or the excess cereal import costs, with a joint limit of 80 percent.

³A sublimit of 25 percent of quota applies on account of deviations in interest rates.

⁴May be applied to supplement the amounts for export earnings shortfalls, excesses in cereal import costs, or contingency financing.

⁵Average access expected at 110 percent of quota for first-time ESAF users.

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Access Limits

(percent of member’s quota)

Under stand-by and extended arrangements1
Annual		100
Cumulative		300
Under special facilities
Compensatory and contingency financing facility (CCFF)
	Export earnings shortfall2	30
	Excess cereal import costs2	15
	Contingency financing3	30
	Optional tranche4	20
	Combined	95
Buffer stock financing facility
(BSFF)		35
Under ESAF arrangements1
	Three-year access5	190

¹Under exceptional circumstances, these limits may be exceeded.

²When a member has a satisfactory balance of payments position—except for the effect of an export earnings shortfall or an excess in cereal import costs—a limit of 65 percent of quota applies to either the export earnings shortfall or the excess cereal import costs, with a joint limit of 80 percent.

³A sublimit of 25 percent of quota applies on account of deviations in interest rates.

⁴May be applied to supplement the amounts for export earnings shortfalls, excesses in cereal import costs, or contingency financing.

⁵Average access expected at 110 percent of quota for first-time ESAF users.

Enhanced Structural Adjustment Facility (ESAF). Established by the Executive Board in 1987 and extended and enlarged in February 1994, ESAF arrangements are the principal means by which the IMF provides financial support, in the form of highly concessional loans, to low-income member countries facing protracted balance of payments problems.

ESAF resources are intended to support strong medium-term structural adjustment programs. Eligible members seeking the use of ESAF resources must develop, with the assistance of the staffs of the IMF and the World Bank, a policy framework paper (PFP) for a three-year adjustment program. The PFP, which is updated annually, describes the authorities’ economic objectives, macroeconomic and structural policies during the three-year period, and associated external financing needs and major sources of financing. The PFP, which is a document of the authorities, is intended to ensure a consistent framework for economic policies and to attract financial and technical assistance in support of the adjustment program.

Adjustment measures under ESAF-supported programs are expected to substantially strengthen a country’s balance of payments position and foster growth during the three-year period. Monitoring under ESAF arrangements is conducted through quarterly financial and structural benchmarks. In addition, semiannual performance criteria are set for key quantitative and structural targets. ESAF loans are disbursed semiannually, initially upon approval of an annual arrangement and subsequently based on the observance of performance criteria and after completion of a midterm review. ESAF loans are repaid in ten equal semiannual installments, beginning 5½ years and ending 10 years after the date of each disbursement. The interest rate on ESAF loans is 0.5 percent a year.

As of April 30, 1996, 28 ESAF arrangements were in effect. In 1995/96, the IMF approved 8 new three-year ESAF arrangements totaling SDR 1.4 billion for Armenia, Chad, Georgia, Ghana, Kenya, Malawi, Mali, and Zambia, along with increased access under the existing ESAF arrangements for Burkina Faso, the Kyrgyz Republic, and Sierra Leone.

Cumulative commitments under all approved SAF and ESAF arrangements (excluding undisbursed amounts under expired and canceled arrangements) totaled SDR 8.0 billion as of April 30, 1996, compared with SDR 6.9 billion a year earlier. SAF and ESAF disbursements during 1995/96 totaled SDR 1.5 billion, compared with SDR 0.6 billion in 1994/95, bringing cumulative disbursements through April 30, 1996 to SDR 6.5 billion. As of April 30, 1996, outstanding credit under SAF and ESAF arrangements accounted for 13.5 percent of total IMF credit outstanding of SDR 42.0 billion.

Under current projections, existing ESAF resources are expected to meet demands through 1999, possibly into 2000. Resources owned by the IMF, currently used to provide security for ESAF lenders against the risk of nonpayment by borrowers, will be freed as lenders are repaid. These resources are expected to support a “self-sustained” ESAF beginning in 2005, or possibly a little earlier. In the interim period, the ESAF will need financing to support a lending program estimated at SDR 1 billion annually. The sources of this interim funding have not yet been decided, but there is broad agreement that ESAF operations are, and will remain, the centerpiece of the IMF’s strategy to help low-income countries, including those most heavily indebted.

Adaptations of IMF Policies and Procedures

In 1995/96, the IMF moved to strengthen the financial support it makes available to member countries. It formalized the procedures used following the Mexican crisis as an emergency financing mechanism, established guidelines for IMF support of currency stabilization funds, and expanded the guidelines on the provision of emergency assistance to include post-conflict situations.

Emergency Financing Mechanism. The emergency financing mechanism is a set of procedures to facilitate rapid Executive Board approval of IMF financial support while ensuring the conditionality necessary to warrant such support. These emergency measures are used only in circumstances representing, or threatening to give rise to, a crisis in a member’s external accounts that requires an immediate IMF response.

Identification of such an emergency is based on an initial judgment by IMF management in consultation with the Executive Board. Conditions for activation of emergency procedures include the readiness of the member to begin immediately accelerated negotiations with the IMF, with the prospect of early implementation of agreed measures sufficiently strong to address the problem. Use of these emergency procedures is expected to be rare, and the IMF’s role will remain catalytic.

Support for Currency Stabilization Funds. In the framework of an upper credit tranche stand-by or extended arrangement, IMF financial support for the establishment of a currency stabilization fund provides, for a transitional period, additional confidence for an exchange-rate-based stabilization strategy. For currency stabilization funds to play their intended role, economic policies have to be sufficiently tight to deliver an inflation path compatible with the targeted exchange rate anchor, so that little, if any, use of the currency stabilization fund would be expected. The most appropriate arrangement to be supported by a currency stabilization fund would be an exchange rate peg with relatively narrow margins or a preannounced crawl.

IMF support would be conditional upon fiscal adjustment and credit creation consistent with targeted inflation, appropriate measures to deal with backward-looking wage and other indexation schemes, a high degree of current account convertibility and an open trade regime, contingency plans to deal with large capital account outflows or inflows, integrated management of foreign exchange reserves and intervention policy, and other structural and institutional elements designed to reduce inflation sharply.

Emergency Assistance. In the context of balance of payments assistance under its credit tranche policies, the IMF provides emergency assistance. Such assistance allows members to make drawings to meet balance of payments needs arising from sudden and unforeseeable natural disasters. These drawings do not entail performance criteria or a phasing of disbursements, although they often precede an arrangement from the IMF under its regular facilities.

Post-Conflict Countries. In September 1995, the Executive Board expanded the scope of the existing guidelines on emergency assistance to include post-conflict countries. In reviewing the IMF’s involvement in post-conflict situations, most Directors agreed IMF financial assistance would be appropriate where:

• a country’s institutional and administrative capacity had been disrupted by conflict, but the member, while not yet able to develop and implement a comprehensive economic program that could be supported by an IMF arrangement, had sufficient capacity for planning and policy implementation and a demonstrated commitment on the part of the authorities;

• there was an urgent balance of payments need to help rebuild reserves and meet essential external payments and a role for the IMF to catalyze support from other official sources; and

• IMF support would be part of a concerted international effort to address the aftermath of the conflict in a comprehensive way.

IMF resources in post-conflict cases are generally limited to one credit tranche (25 percent of the country’s quota), with the access policy under the existing emergency assistance guidelines sufficiently flexible to handle exceptional needs.

IMF financial assistance for post-conflict countries is available only if the member intends to move within a relatively short period of time to an upper credit tranche stand-by or extended arrangement, or to arrangements under the ESAF.

Prospective recipient countries would need to prepare a statement of economic policies and, where possible, a quantified macroeconomic framework. Part of the coordinated response would be a comprehensive technical assistance program, including institution-building aspects.

Commercial Bank Debt Operations

The IMF continues to support commercial bank debt- and debt-service-reduction operations on a case-by-case basis. It evaluates proposed packages in light of the strength of the member’s economic policies, the likelihood that the country would regain access to credit markets and attain external viability with growth, and the assurance that the package represents an efficient use of scarce resources.

The Executive Board takes into account the appropriate balance between debt and debt-service reduction in bank debt packages. It considers whether the resulting debt-service profile on restructured debt is consistent with a country’s likely debt-service capacity; whether the package is cost effective; whether it would imply continued commercial bank involvement, where appropriate, and where it could facilitate a return to normal commercial financing; and whether the menu of options is both balanced and sufficiently broad to ensure a high rate of participation in the package.

Official Debt Rescheduling

Member countries seeking to reschedule official debt normally approach the Paris Club of official creditors. This arrangement provides a forum for indebted countries and their official bilateral creditors to work out agreements that generally provide for the rescheduling of eligible arrears and the flow of current maturities of eligible debt service falling due during the consolidation period, with a repayment period stretching over many years. To ensure that such relief helps restore balance of payments viability and achieves sustainable economic growth, the Paris Club links debt relief to the formulation of economic programs endorsed by the IMF. In deciding on the coverage and terms of individual rescheduling agreements, Paris Club creditors also draw upon the IMF’s analysis and assessment of countries’ debt situations.

In December 1994, Paris Club creditors agreed on “Naples terms,” under which debt service on eligible official development assistance debt for low-income countries could be reduced by up to 67 percent in net present value terms. Naples terms also provide concessional rescheduling of the stock of eligible debt for those countries that have demonstrated a good track record under rescheduling agreements and IMF-supported programs and that envisage no further reschedulings.

Sound policies coupled with new concessional financial assistance and debt relief under Naples terms are expected to allow most indebted developing countries to achieve debt sustainability over the medium term (sustainability meaning that a country’s export earnings, capital, and aid flows are sufficient to service its debt comfortably). For some heavily indebted poor countries, however, the burden of debt is likely to remain above sustainable levels over the medium term. Additional assistance is needed to ensure that continued high debt and debt-service burdens do not endanger adjustment and reform efforts. The Executive Board has recommended that future work on debt sustainability meet certain broad criteria, including:

• application of a case-by-case approach that focuses on the totality of a country’s debt;

• a strong track record on the part of the recipient country of reform and sound policies, with a proven ability to make good use of exceptional assistance;

• reliance on existing mechanisms, wherever possible;

• coordinated additional action on problem cases, so that broad and equitable treatment among all creditors is ensured;

• preservation of the financial integrity and creditor status of multilateral creditors; and

• new external finance for heavily indebted countries on appropriately concessional terms.

In April 1996, the Interim and Development Committees welcomed a draft framework for addressing the debt problems of the heavily indebted poor countries, jointly proposed by the Managing Director of the IMF and the President of the World Bank. The first stage of the proposed framework builds on the existing three-year track record required of countries to qualify for a stock-of-debt operation on Naples terms, together with at least comparable treatment from bilateral and commercial creditors.

The framework provides that countries able to exit from the debt-rescheduling process with stock-of-debt operations under Naples terms do so. Countries whose debt burdens cannot be brought to sustainable levels—defined as present value of all claims on the country not in excess of 200-250 percent of export earnings and debt service in the range of 20–25 percent of export earnings—would be expected to undertake a second three-year adjustment program. During this second program, these countries would receive enhanced debt relief and other financial support. And they would have a firm commitment from the international community—including the World Bank and the IMF—that their debt burden would be brought to a sustainable level upon the successful completion of the program.

Supporting operations by the IMF and other multilateral institutions would not involve any write-down of their claims. Rather, these institutions would provide special assistance to reduce the burden of debt for the relevant countries. A reduction in the net present value of claims on a country at the end of the second phase would entail the IMF’s providing resources on a more concessional basis than under the current enhanced structural adjustment facility (ESAF). Two possible ways in which more concessional IMF financing would be provided are through the provision of grants or loans on maturities longer than the 5½ to 10-year maturity of ESAF loans. Both mechanisms would effectively reduce the net present value of IMF claims on the indebted country. Decisions on these issues are expected to be reached at the IMF-World Bank Annual Meetings in September-October 1996.

Setting Priorities

Demand for the IMF’s technical assistance exceeds its capacity. This requires rigorous prioritization and allocation of technical assistance resources among member countries and regions. As part of this process, the IMF’s area (regional) departments play a major role in helping to identify and prioritize countries’ technical assistance needs, often in consultation with other donors. The allocation of resources and determination of the IMF’s technical assistance policies and procedures are facilitated by an interdepartmental committee of senior IMF staff, the Technical Assistance Committee.

The IMF’s Executive Board has paid increasing attention to technical assistance matters in recent years. In addition to commenting on the importance of technical assistance in individual country cases, the Board has provided guidance on evaluation of technical assistance, financing arrangements, and areas of priority. There is a growing consensus that a careful blending of policy and institution-building technical assistance in support of governments’ macroeconomic objectives is a critical ingredient for creating and maintaining sustainable growth. Indeed, technical assistance is viewed as one of the three legs of the IMF stool, along with surveillance and program design and financing.

IMF Technical Assistance: 1995/96

(In person years)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A017

Note: IMF technical assistance is conducted under the IMF’s own grant resources and through financing arrangements with the United Nations Development Program, the World Bank, the European Union, the Japanese government, and other donors.¹Including legal and computer services.Data: IMF Technical Assistance Committee

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IMF Technical Assistance: 1995/96

(In person years)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A017

Note: IMF technical assistance is conducted under the IMF’s own grant resources and through financing arrangements with the United Nations Development Program, the World Bank, the European Union, the Japanese government, and other donors.¹Including legal and computer services.Data: IMF Technical Assistance Committee

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IMF Technical Assistance: 1995/96

(In person years)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A017

Note: IMF technical assistance is conducted under the IMF’s own grant resources and through financing arrangements with the United Nations Development Program, the World Bank, the European Union, the Japanese government, and other donors.¹Including legal and computer services.Data: IMF Technical Assistance Committee

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Types of Technical Assistance

The IMF provides technical assistance and training in four broad areas: designing and implementing fiscal and monetary policies; institution-building (such as the development of central banks, treasuries, tax and customs administration); collecting and refining statistical data; and drafting and reviewing financial legislation. The IMF provides technical assistance through a number of its departments. These include:

The Monetary and Exchange Affairs Department. MAE focuses its assistance on central banking and exchange system issues and in designing or improving monetary policy instruments. In 1995/96, MAE’s assistance covered banking regulation, supervision, and restructuring; foreign exchange management and operations; central bank organization and management; Central banking accounting; clearing and settlement systems for payments; monetary operations and money market development; and monetary analysis and research.

The Fiscal Affairs Department is chiefly responsible for providing policy advice on tax and expenditure reform and on the design of social safety nets. As in previous years, FAD’s technical assistance activity in 1995/96 also embraced tax and customs administration and public expenditure management, as well as assistance in macro fiscal management issues.

The Statistics Department helps members comply with internationally accepted standards of statistical reporting. The recent agreement on the Special Data Dissemination Standard has already led to an increase in the demand for its technical assistance services, which cover monetary, balance of payments, real sector, and government finance statistics and includes a substantial training element through the organization of regional and local seminars.

The IMF Institute provides training for senior and midlevel officials at IMF headquarters, the Joint Vienna Institute, and national and regional centers in financial programming and policy, financial analysis, and external sector policies. New courses have been added on national accounts statistics and monetary and exchange operations.

The Legal Department provides advice for members wishing to draft new laws or recast their legal framework to support a market-oriented economy in areas such as central banking, commercial banking, foreign exchange, fiscal, and bankruptcy law.

In addition, the Treasurer’s Department provides technical assistance on the establishment and maintenance of IMF accounts, the IMF financial organization and operations, and matters related to members’ transactions with the IMF, including the payment of quota subscriptions. The Policy Development and Review Department provides advice on debt policy and management and on the design and implementation of trade policy reforms. The Bureau of Computing Services has assisted in the modernization of computer systems in central banks, finance ministries, and statistical offices.

Delivering Technical Assistance

Advisory missions, composed chiefly of IMF staff, provide much of the technical assistance. They offer advice on the monetary, fiscal, and statistical problems that often lie at the heart of the macroeconomic imbalances that countries wish to address.

Traditionally, technical assistance had a single, well-focused objective and a relatively short time span in which to accomplish it. In recent years, technical assistance projects have grown both larger and more complex. Time horizons, particularly for institution-building, have lengthened, and multiple sources of financing have been needed to underwrite costs. Large projects now commonly involve more than one IMF department and more than one donor.

External Cooperation and Coordination

Beginning in 1989, the IMF took formal steps to coordinate its technical assistance policies and cooperate with other multilateral and bilateral agencies to minimize conflicting advice and redundant activities. It also began to explore ways of complementing its own resources through various co-financing arrangements with other technical assistance suppliers. This cooperation has led to a more integrated approach to the planning and implementation of technical assistance—particularly at the country level, where comprehensive, multiyear programs of technical assistance are being implemented with, for example, the United Nations Development Program (UNDP), the World Bank, and the European Union. The Japanese government has continued its generous annual contribution to IMF technical assistance and is supporting a new scholarship program.

Coordination has also progressed at the global level through specialized technical steering committees and working groups. The IMF continues to participate in international forums, such as the Development Assistance Committee of the Organization for Economic Cooperation and Development, which reviews and coordinates technical assistance policies and procedures. In the central banking area, coordination has led to operational cooperation between the IMF and 24 central banks in providing technical assistance and training to the countries of the former Soviet Union. The IMF coordinates this arrangement with support from the Bank for International Settlements.

In recent years, the IMF has concluded general technical assistance agreements with the UNDP and the Japanese government, as well as several individual country agreements with the World Bank and the European Union. A number of bilateral donors have also supported IMF-administered technical assistance by making cash contributions to UNDP-IMF projects. To accommodate the growing interest of other potential donors in supporting IMF technical assistance, the Executive Board authorized the establishment of a Technical Assistance Framework Account in April 1995. Under the Framework Account, separate subaccounts are created for individual donors to support IMF technical assistance activities. Subaccounts can be established easily and quickly and can finance a variety of short- or long-term technical assistance and training activities that a donor may wish to support through the IMF.

Use of SDRs

Members with a balance of payments need may use SDRs to acquire foreign exchange in a transaction “with designation”—that is, one in which another member, designated by the IMF, provides a freely usable currency in exchange for the SDRs. The IMF may designate members to provide currencies in exchange for SDRs on the basis of the strength of their balance of payments and reserve positions. A member’s obligation to provide currency is limited to three times its net cumulative allocation, although the IMF and a member may agree on a higher limit.

IMF members may use SDRs in a variety of voluntary transfers. These include transactions “by agreement”—that is, spot exchanges of SDRs for other monetary assets—and operations among themselves and with prescribed holders. In addition, SDRs may be used in operations under the enhanced structural adjustment facility. These operations require the involvement of prescribed holders because the IMF’s Special Disbursement Account and accounts administered by the IMF may not hold SDRs directly.

The uses of SDRs between members and the IMF consist of receipts of SDRs by the IMF’s General Resources Account from members and transfers of SDRs from the General Resources Account to members. IMF receipts mainly take the form of charges levied on members’ use of IMF resources, repurchases (repayments), and quota subscriptions. Transfers from the IMF consist mainly of purchases (drawings); remuneration on members’ creditor positions; and repayments of, and interest payments on, IMF borrowing.

SDR Transfers

The use of SDRs by member countries to discharge their financial obligations to the IMF increased sharply in 1995/96, and transfers among participants and prescribed holders grew substantially, along with a high level of transfers from the General Resources Account to participants. Total transfers of SDRs in 1995/96 rose to a record of SDR 27.4 billion.

Transfers of SDRs from participants to the General Resources Account more than doubled to SDR 7.7 billion in 1995/96, largely reflecting a jump in the use of SDRs for repurchases. With the growth in outstanding IMF credit, charges paid in SDRs increased to SDR 2.0 billion in 1995/96, despite a decline in the average rate of charge.

Substantial amounts of SDRs received by the General Resources Account during the year enabled the IMF to transfer to participants SDR 7.9 billion, exceeding the record level of such transfers in 1994/95. Members’ drawings from the IMF represented the largest category of transfers from the General Resources Account, followed by payments of remuneration to members with creditor positions vis-à-vis the IMF. Acquisitions of SDRs by member countries for the payment of charges fell to a small amount, reflecting generally higher holdings of SDRs by debtor countries and the larger supply of SDRs available through transactions by agreement.

Transfers among participants and prescribed holders increased to SDR 11.9 billion in 1995/96 from SDR 9.6 billion in 1994/95. Countries continued to acquire substantial amounts of SDRs in transactions by agreement during 1995/96 to discharge their financial obligations to the IMF and build up their holdings of SDRs.

Transactions by agreement totaled SDR 8.9 billion during the year, close to the record level of SDR 9.0 billion in 1994/95. These transactions continued to be facilitated by “two-way arrangements,” under which members stand ready to buy or sell SDRs for one or more freely usable currencies at any time, provided that their SDR holdings remain within certain limits.

SDR Allocations

One of the IMF’s principal goals is to facilitate the expansion and balanced growth of international trade, which requires adequate levels of reserves. If the IMF identifies a long-term global need for reserves, it can supplement existing assets through an allocation of SDRs—the timing and size of that allocation are determined by the Board of Governors. The IMF has authority to create unconditional liquidity by allocating SDRs to all member countries in proportion to their quotas. It cannot allocate SDRs to itself or to prescribed holders. The most recent allocation was on January 1, 1981, when SDR 4.1 billion was allocated to the IMF’s then 141 member countries. In response to an Interim Committee request, the Executive Board continued to consider the issue of an SDR allocation in 1995/96. At present, 38 new members of the IMF have never received an SDR allocation.

Developments

The level of outstanding overdue financial obligations to the IMF declined significantly in 1995/96 to SDR 2.2 billion on April 30, 1996 from SDR 3.0 billion on April 30, 1995. This decrease resulted largely from the clearance of arrears in December 1995 by Zambia (SDR 830.2 million) and Bosnia and Herzegovina (SDR 25.1 million). No new cases of protracted overdue obligations to the IMF arose in 1995/96, and the number of countries in arrears to the IMF by six months or more decreased to six from eight. As of April 30, 1996, four countries remained ineligible to use the IMF’s general resources. Declarations of noncooperation remained in effect for three countries.

In April 1996, the Executive Board approved an extension of the rights approach for another year, until the time of the spring 1997 Interim Committee meeting, with the proviso that it would be reviewed earlier in connection with progress on financing a continuation of ESAF operations.