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.

International Capital Markets Charting a Steadier Course

International financial markets and their participants—financial intermediaries and supervisory authorities—appear to be settling into a more steady pattern of growth and innovation, in marked contrast to the turbulence that characterized the transitional years from 1992 to 1995. In fact, according to the IMF’s just-published annual review, International Capital Markets: Developments, Prospects, and Key Policy Issues, the global financial system appears to have emerged stronger and more resilient from the costly and disruptive crises of the previous three years.

Two financial policy challenges remain, however, whose resolution is essential for the stable evolution of the international financial system over the longer run:

• How to strengthen the system by extending the successful supervisory and regulatory practices developed under existing Group of Ten (G-10) multilateral arrangements to include the growing number of systemically important emerging market countries.

• How to further reduce the potential for disruptions in the global foreign exchange market, where turnover now exceeds $1 trillion a day.

Profiting from the School of Hard Knocks

Over the last ten years, international financial markets and participants have been visited by several costly and contagious financial crises. These have included abrupt declines in asset prices, major bouts of volatility in foreign exchange markets, an exchange rate and debt crisis in the emerging markets in early 1995, and costly banking problems in several industrial and some key emerging market countries.


Private Market Financing for Developing Countries

(billions of U.S. dollars)

Citation: IMF Survey 0025, 001; 10.5089/9781451937442.023.A019

Data: DCBEL database. Financial Times, and International Financial Review


• The Interim Committee’s Evolving Role, page 299

• Preview of the Annual Meetings, page 303

• IMF Dissemination Standards Bulletin Board Debuts on Internet, page 308

According to the IMF study, many factors have contributed to these events, including macroeconomic events and policies and internal management control failures. But they are also to some extent a by-product of the transformation and restructuring of international finance that have taken place over the last ten years. Both the private and the official sector have been forced to learn how to manage new risks generated by the evolving financial environment. Although the scale of financial activity continues to grow, market participants—including high-risk, high-return investment funds—are more disciplined, cautious, and sensitive to market fundamentals.

Furthermore, the major industrial countries have made significant strides in restructuring their financial regulatory and surveillance activities and strengthening market infrastructures. Cooperation among industrial countries in the surveillance of international banking markets has also been strengthened through the activities of the Basle Committee on Banking Supervision. This Committee consists of representatives from the G-10 industrial countries and serves as the focal point for issues relating to the supervision of international banks. It was established in 1974 in the aftermath of the Herstatt crisis in foreign exchange markets and has a permanent secretariat at the Bank for International Settlements.

The authorities responsible for financial surveillance in the major industrial countries have also strengthened existing cooperative arrangements. For instance, the Basle Concordat, which divides supervisory responsibility between home and host country, has been extended to allow the host country to deny access to banking institutions from countries whose oversight of the consolidated activities of their institutions is not in keeping with minimum standards. In addition, the G-10 central banks have been considering more orderly procedures to prevent and resolve sovereign liquidity crises, such as the December 1994 Mexico peso crisis.

The international banking sector has made significant progress in managing the risks it faces in the new financial environment. Initiatives include the following.

• Efforts to reduce credit risk exposures—the traditional source of banking problems and the most difficult exposure to hedge—have increased. The international banking sector has also become more diversified, and the management and control of the credit risk associated with off-balance-sheet derivative positions has been improved.

• The investment activities of the high-risk, high-return pools of institutional investment funds have, for now, become more cautious and less aggressive, following two years of significant losses that offset the major gains realized in 1990–94.

The devaluation of the Mexican peso in December 1994, and the financial contagion that followed during the first quarter of 1995, produced a sharp decline in flows to emerging markets, combined with significant pressures on the exchange rates of several countries. Most of the emerging market countries felt at least temporary effects from the changes in investor sentiment and the rebalancing of international portfolios that followed.

After the initial overreaction to the Mexican crisis, investors began to discriminate more carefully between regions and between countries within regions, and investment increasingly took the form of more stable, longer-term direct investment. For example, in 1995, foreign direct investment in developing countries increased by 17 percent, while net portfolio flows declined by 27 percent.

Developments in the emerging markets from late 1995 to early 1996 also suggest a return to a more stable environment. Most developing countries have become more cautious about relying on highly volatile short-term portfolio capital flows, and investors are paying greater attention to economic fundamentals when evaluating the risks of investing in emerging markets.

All in all, international financial markets are now better placed to support global macroeconomic developments. Nevertheless, the IMF study cautions, there is no guarantee that financial turbulence, stress, and crises will not reappear. The hard lessons learned in recent years could be forgotten, and the current cautious behavior could well give way to renewed bouts of exaggerated optimism and herd behavior. But at least for now, international capital markets appear to have become more resilient and are less likely to be a source of disturbances.

Emerging Markets Stage Quick Recovery

The big news in emerging capital markets was their unexpectedly strong recovery, in late 1995, from the Mexican financial crisis of December 1994. In the first quarter of 1995, portfolio flows to emerging markets declined dramatically, premiums on developing country bonds increased, equity prices in emerging markets fell sharply, and currency pressures were felt—at least temporarily—from Argentina and Brazil to Hong Kong and South Africa.

Some emerging market countries responded successfully to the changed investment climate with economic reforms and defensive policy measures. In addition, the concerted liquidity support extended during the crisis in the beginning of 1995 by the international community was successful. Most of the major market indicators in the emerging markets recovered by the end of 1995 and early 1996, including local equity price indices, new international bond issues, international syndicated loans, and currency values. By the end of 1995, overall capital flows to emerging markets had not only resumed but had surpassed their previous peak reached in 1993 (see chart, page 295).

The good news about international capital flows was dampened by the realization that the fragility of the banking systems in some of the emerging market countries could seriously impede macroeconomic performance. It is widely recognized that the efforts being made to improve the health of these banking systems are critical to improved economic performance. Foreign investors appear to be paying far greater attention to the soundness of a recipient country’s financial system as a key variable in investment decisions. Indeed, the soundness of the financial sector has become one of the economic fundamentals.


Private Market Financing for Developing Countries

(billions of U.S. dollars)

Citation: IMF Survey 0025, 001; 10.5089/9781451937442.023.A019

1Data for the most recent month are preliminary.Data: DCBEL database. Financial Times, and International Financial Review

Capital Flows. Net capital inflows surged to a record $228 billion in 1995, with $194 billion going to developing countries and $34 billion to countries in transition to market-oriented systems. The inflows were bolstered by a strong performance by Asian emerging markets, liquid bank-loan markets, and strong demand for emerging market bonds by Japanese and German investors.

Much of the investor community appears to be more risk-aware and more likely to do its homework in assessing the economic fundamentals and to respond to good data and equal treatment. Investors are differentiating among countries in two important ways:

• They are relying on a broader array of macroeconomic and financial indicators in assessing the sustainability of internal and external macroeconomic balances and investment opportunities.

• They are paying more attention to the safety and soundness of banking systems, the integrity of financial data, the availability of legal recourse, and the efficiency and safety of the financial infrastructure.

The process of learning to assess the risk of various investments in emerging market countries on a continuous and timely basis has just begun. According to the IMF study, there is a long way to go before the availability and quality of macroeconomic and corporate data and the supporting analysis will compare favorably with that of the major international financial markets. The IMF’s new standards for improving the quality, timeliness, and dissemination of economic and financial data should be helpful in this context.

International Bond Issues. Many emerging market countries were welcomed back into international markets during the second and subsequent quarters of 1995. By the end of the year, total bond issuance by all developing countries had surpassed the level reached in 1994.

A notable development was the shift in currency denomination of developing country issues from the U.S. dollar to the yen and the deutsche mark. In 1995, 26 percent of new bond issues by developing countries were issued in yen, amounting to $15.3 billion, compared with 13 percent in 1994; and $6 billion or 10 percent were issued in deutsche mark, compared with 3 percent in 1994. According to the IMF study, sovereign borrowers apparently do not hedge the currency risk incurred with these issues, preferring instead to reap the immediate positive benefits—including fiscal—from the relatively low interest coupons on these obligations. Given the potential for an increase in the local currency value of these obligations in the event of an appreciation of the yen or the deutsche mark, these positions will have to be carefully monitored and managed.

Extending Global Surveillance to Emerging Markets

An important challenge facing the major industrial countries is how to extend and broaden current arrangements for surveillance over international banking systems to include a growing number of systemically important emerging market countries.

Capital markets have remained relatively underdeveloped in most emerging market countries, and the banking system typically still plays a central role. In many emerging market countries, however, the banking system is prone to serious problems that have the potential to spill across national borders. The extension of international supervisory arrangements to include emerging market countries is therefore important not only to safeguard the stability of the international financial system but also to increase the effectiveness of surveillance over domestic banking institutions in emerging markets.

Several features of the financial systems in these countries, however, tend to make financial surveillance more difficult than in the major industrial countries. For instance:

• Technical ability and supervisory resources are sparser than in the G-10 countries.

• Legal systems make it occasionally difficult for supervisors to implement prudential directives, such as cease-and-desist orders.

• In cases where the economy is dominated by a small number of large corporate groups, it is difficult to avoid concentrations of risk and ownership.

• Extensive implicit and explicit financial safety nets have tended to remove some of the discipline imposed by the market on the credit allocation process.

• Domestic and foreign banks are increasingly tending to shift some of their wholesale activities in emerging markets to offshore locations and to alter their risk positions through the use of derivatives and offshore transactions.

Despite these impediments, there is widespread agreement among supervisors and market participants in the major industrial countries on the need for a way to extend the improvements in the supervisory and regulatory infrastructure in international financial markets to the systemically important emerging market countries. Most G-10 supervisors think it unlikely that their existing institutional arrangements—whose success derives from the relatively small number of homogenous participants—can be easily extended to include an increasing number of emerging market countries. Any effort to do so, according to the IMF study, would need to be mindful of the main lessons of the postwar experience with surveillance:

• International cooperation in the area of financial surveillance should be based on home country control rather than on supranational legal arrangements.

• Any cooperative global agreements should include all countries whose financial institutions are significant and active players in the international financial markets.

• International agreements should be narrowly focused on minimum standards for the regulation and surveillance of internationally active financial institutions; the assignment of responsibility between home and host countries for the surveillance of the operations of international banking institutions; and the exchange of information among national supervisory authorities.

The first step in constructing a more comprehensive arrangement should be the formulation of international regulatory and supervisory standards; these standards should cover, at a minimum, consolidated supervision of international banks, capital requirements, provisioning rules, exposure limits, and the authority of supervisors over all aspects of the operations of financial institutions. The effectiveness of such standards in strengthening the stability and performance of banking systems would depend crucially on the ability and willingness of the authorities to implement them.

Settlement Risk in Global Foreign Exchange Markets

The second major policy issue addressed in the IMF study is how to reduce the potential for disruptions in the global foreign exchange market. This market, which is at the center of the international financial system, is the largest, most liquid, most innovative, and only 24-hour global financial market in the world. Turnover in this market has risen to $1.2 trillion daily, with much of it concentrated in a handful of international dealing banks. A disruption in this market could have serious consequences for global trade and finance and for the international banking system.

The risk of disruption in the global foreign exchange market arises from the possibility that sudden doubts about the solvency of one of the major market participants could cause its counterparties to withhold or delay payments for foreign exchange transactions that are not yet settled, thereby aggravating the difficulty, and possibly causing a chain reaction of other settlement failures.

Foreign exchange settlement risk could be substantially reduced if the two payments of a transaction could be finalized simultaneously. But this would require two major changes in international payments arrangements:

• eliminating gaps in operating hours of the major wholesale payments systems; and

• linking payments systems in real time to achieve “intraday finality” (that is, closing the books on both transactions as they happen, within one business day).

Implementing these steps would entail substantial reforms in the major domestic payments systems and either an increased need for continuous coordination among the major central banks or greater efforts by the private sector to reduce foreign exchange settlement exposures significantly.

Keeping a Firm Hand At the Helm

The evidence provided by developments in international financial markets since the early 1990s suggests that these markets will continue to become more global and more dominated by institutional investors; that the continuing diversification of institutional portfolios will mean that the exposure of these investors to emerging markets will grow in line with recently established trends; and that global derivative finance will continue to spread.

The evidence also suggests that this evolution will take place against the backdrop of improved risk management in the international banking sector, strengthened market surveillance within an adaptive regulatory environment, a more resilient market infrastructure, and with an official sector that has made it a top policy priority to create the infrastructure required for a stable market environment.

International Capital Markets: Developments, Prospects, and Key Policy Issues, by a staff team from the IMF’s Research Department, is part of the IMF’s World Economic and Financial Surveys series. Copies are available for $20.00 (academic rate: $12.00) from Publication Services, Box XS600, IMF, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet:

Current Issues in the Baltics, Russia, and Other FSU Countries

The Baltic countries, Russia, and other countries of the former Soviet Union (FSU) have made considerable progress toward macroeconomic stabilization over the last three years, and several are now recording positive economic growth (see also page 310, for article on Georgia). In virtually all countries in the region, the situation remains fragile, however, because of the pressing need to improve public sector finances and continued pressures on the authorities by interest groups hurt by the restructuring. Three region-wide issues that have commanded the attention of the authorities and IMF staff are highlighted below:

• tax revenue collection;

• the pace of structural reform in countries with IMF-supported adjustment programs; and

• potential banking sector problems.

Economic Overview

Inflation. Monthly inflation rates have fallen to low levels in most of the region, although some countries are expected to experience a rebound later in the year associated with the unwinding of seasonal summer factors (see chart, page 298, top).

In the three Baltic countries (Estonia, Latvia, and Lithuania), as well as Russia, Armenia, Azerbaijan, Georgia, Kazakstan, the Kyrgyz Republic, and Moldova, inflation is expected to range from 15 to 30 percent in 1996 (see table, below). Although still high, these rates reflect adjustments in administrative prices and the catch-up in domestic prices following the undervaluation of domestic currencies that prevailed at the outset of economic reforms.

Annual inflation rates above 50 percent this year are expected for only three countries—Turkmenistan, which does not have an IMF-supported adjustment program in place; Tajikistan, where an IMF-supported program started just a few months ago; and Belarus, whose IMF-supported program is now inoperative.

Baltic Countries, Russia, Other Former Soviet States: Output, Prices, and Fiscal Indicators, 1996

article image

In percent.

End of period.

In percent of GDP.

Data: IMF European II Department, staff projections

Consumer Price Index

(monthly percent change)

Citation: IMF Survey 0025, 001; 10.5089/9781451937442.023.A019

1Inflation rates are weighted by GDP valued at purchasing power parity as a share of total group GDP.2IMF staff projections.Data: IMF European II Department

Real GDP

(annual percent change)

Citation: IMF Survey 0025, 001; 10.5089/9781451937442.023.A019

1Growth rates are weighted’ by GDP valued at purchasing power panty as a share of total group GDP.2IMF staff projections.Data: IMF European II Department

Output. Declines in output appear to have bottomed out in most of the region, and IMF staff are now projecting positive economic growth in several countries during 1996–97 (see chart, bottom left). Actual growth rates in 1996 may be lower than initially expected, however, owing partly to political uncertainties in Russia and the effect of bad weather on agricultural output. Further output declines are expected mainly in such high-inflation countries as Tajikistan and Belarus.

Exchange Rates. Nominal exchange rates are fairly stable in most countries in the region, largely reflecting a reduction in inflation expectations and in line with policy intentions. Currencies continue to appreciate in real terms because of inflation rates that are higher than those of their main trading partners. In the view of IMF staff, however, the competitive advantage deriving from the initial undervaluation of the currencies has not yet disappeared in most countries.

External Sector. Progress in macroeconomic stabilization has been associated with rapid export growth and positive trends in official reserves. In most countries, the reserve position is fairly comfortable—equivalent to 2.5 months of imports or more—in marked contrast to the insignificant reserve levels prevailing when these countries first gained independence.

Fiscal Position. Budget deficits are now under control in most countries, with monetary financing at very low and declining levels. Tax revenue-to-GDP ratios remain depressed, however. This has resulted in sequestration of government spending and an accumulation of payments arrears (including wages and pensions) in many countries.

Economic Issues

In addition to the key financial policy concerns cited above, the authorities are focusing attention on three structural issues.

Revenue Collection. Tax revenue-to-GDP ratios have fallen sharply in most countries of the FSU over the last three to four years. Tax evasion has become another means used by enterprises to avoid the hardening of their budget constraints and delay necessary adjustment, according to IMF staff. During the initial years of reform, rent-seeking behavior (that is, the search for financial assistance from government) and the proliferation of interenterprise arrears were the main means firms used to avoid adjustment. Governments increasingly resisted pressures for subsidies and credits, however, and enterprises became stricter about extending credit to each other. As the reform process continued, nonpayment of taxes, wages, and energy bills became a major means of circumventing budget constraints. The efficacy of this approach is expected to lessen as governments take firmer corrective measures in the face of the mounting political and social costs of nonpayment.

Program Targets. Slippages in meeting structural reform targets—including enterprise privatization, land reform, trade policy, and social safety nets—are probably greater and more frequent than in other areas. These delays largely reflect the complexity of the measures involved and delays with policy implementation caused by the opposition of vested interests and the slow pace of the legislative decisionmaking process. IMF staff, in collaboration with World Bank staff, will continue to monitor the situation and to encourage implementation of structural measures as prerequisites for the approval of new IMF arrangements and the completion of program reviews.

Banking Sector. Weaknesses in the banking sector are endemic throughout the region. The fragility stems mainly from activities carried out by inexperienced lenders in a context of systemic changes that further complicate risk assessment; the precarious financial situation of main borrowers; directed lending by governments; and, in some cases, fraud. These underlying problems are now being brought to a head by macroeconomic stabilization and the strengthened role of central banks in tightening supervision and raising prudential standards. Resolution of banking sector problems, according to IMF staff, should aim to:

• foster an orderly restructuring of the sector;

• minimize the fiscal impact of restructuring; and

• preserve the financial stability of the economy.

Despite the major restructuring required in the banking sector, the financial costs of recapitalizing the banking system and the macroeconomic impact of its problems are likely to be limited because of the relatively small size of the sector in most of the region’s countries.

John Odling-Smee and Gonzalo Pastor

IMF, European II Department

The Growing Role of the Interim Committee

The Interim Committee of the IMF’s Board of Governors on the International Monetary System is the principal policymaking body of the IMF at the ministerial level. It is the only forum in which finance ministers and central bank governors representing the entire membership of the IMF periodically meet in closed working sessions to discuss and give political guidance on issues of common interest in international monetary cooperation. Since its inception in 1974, the Committee’s agendas have covered the key issues and challenges before the IMF. The development of the IMF into a universal institution in the early 1990s has further enhanced the Committee’s authority and legitimacy. In an environment of globalized markets for goods and capital, the Interim Committee provides strong and active leadership on systemic issues and in setting the economic strategy for the world community.

The Interim Committee was born in unpropitious circumstances in the aftermath of the collapse of the Bretton Woods system of fixed exchange rates in the early 1970s. As the successor of the Committee of Twenty—which had been created to negotiate a reformed international monetary system—the Interim Committee’s main task was to advise the Board of Governors on the management and adaptation of the new international monetary system. The central features of that system included a greater degree of freedom with regard to exchange rates, with the IMF given a broader role in the surveillance of its members’ policies.

With the advantage of hindsight, the establishment of the Interim Committee proved to be a fortunate decision. The Board of Governors had become too large and unwieldy precisely at a time when the strains in the system required active participation from a representative political body to guide the IMF’s Executive Board. Since the early 1970s, the IMF has repeatedly been called upon to manage crisis situations that pose threats to the functioning of the system. The Committee has established a strong record of consensus building on difficult political issues. Its advice and recommendations form the basis for formal decisions in the Executive Board. The Committee meetings have fostered a strong and mutually reinforcing process of collaboration with the Executive Board.

Range of Issues Considered by The Committee since 1974

The Interim Committee’s first task was to prepare an extensive amendment of the Articles of Agreement reflecting the changes in the international monetary arrangements following the collapse of the par value system. Key issues to be addressed in such an amendment—including the demonetization of gold, the new exchange rate provision, and the principles and procedures for surveillance—figured prominently in the early meetings of the Committee.

From the start, an examination of the current economic situation and prospects set the backdrop for each of the Committee’s meetings. Thus, the World Economic Outlook exercise, with emphasis on the working of the adjustment process and on systemic issues, has typically been the first substantive item on the Committee’s agenda. For this subject, the IMF staff prepares twice a year a set of papers that is subsequently published as the World Economic Outlook. Following Board discussions of the papers, the Managing Director prepares a summary report to the Interim Committee on the world economic outlook.

From the outset, the Interim Committee has dealt with crises and shocks to the international financial system—beginning with the oil crises of the 1970s and the IMF’s response, including through recycling of oil surpluses. The debt crisis followed in the 1980s and the development of the IMF’s central role in the collaborative debt strategy. In the late 1980s, the IMF embarked on the complex process of assisting formerly centrally planned economies to reform their economic structures and institutions and to assist their integration into the international economy. And the Mexican financial crisis of late 1994-early 1995, with its contagion effects in other countries, led to reconsideration of IMF financial assistance in a framework of globalized financial markets and an intensification of the IMF’s methods of country surveillance.

Issues related to the supply of IMF resources—typically the reviews of IMF quotas and IMF borrowing from official sources—have frequently been resolved at Interim Committee meetings. The preparations in the Executive Board on such issues are always complex and often raise issues that require resolution at the ministerial level. For example, with respect to the quota reviews, decisions on the size and distribution of the overall quota increase must reconcile conflicting interests, in which the voting power and ranking of individual members and of groups of members can play a large role.

IMF borrowing from official sources was critically important in the 1970s when large surplus countries, particularly Saudi Arabia and other oil producers, “recycled” part of their surpluses through the IMF. Today, the negotiation of new arrangements to borrow by the IMF—in which the Group of Ten (G-10) countries are being joined by a number of other industrial and middle-income developing countries—is on the Committee’s agenda.

Policies on the use of IMF resources have been recurring items on the Committee’s agendas, including the policies on enlarged access to IMF resources and on the increased use of the extended Fund facility during the debt crisis of the 1980s.

In the same period, the need to provide special assistance at low cost to the IMF’s poorest members required the Committee’s growing attention. A Trust Fund was set up in the mid-1970s, financed with the sale of some IMF gold. The structural adjustment facility was created in 1986 to lend the reflow of Trust Fund resources; shortly thereafter, the enhanced structural adjustment facility (ESAF) was introduced and quickly became the principal instrument for concessional financing of far-reaching reforms to promote sustainable growth in the poorest member countries. The positive results of that facility led to the extension and enlargement of the ESAF in 1993 and to the current consensus to prepare for a self-sustained ESAF. The issue of financing the continuation of ESAF operations beyond the end of the 1990s is on the agenda of the Interim Committee, together with proposed actions to resolve the debt problems of the heavily indebted poor countries (see box, page 301).

The issue of members’ overdue financial obligations to the IMF, which grew rapidly in the second half of the 1980s, has repeatedly been considered by the Interim Committee. The Committee gave effective support to the efforts of the Managing Director and the Executive Board to contain this difficult problem and progressively reduce its magnitude.

In the first half of the 1980s, concerns about the functioning of the international monetary system—in particular, the growing misalignment of the exchange rates of major currencies—in the period leading up to the 1985 Plaza Accord prompted the G-10 and the Group of Twenty-Four developing countries (G-24) to undertake separate studies on the working of the system. The Interim Committee considered these studies in 1985 and 1986. The G-10 suggested that improvements could be achieved by enhancing the appropriateness and mutual compatibility of members’ policies, by regular monitoring of key economic indicators, and by strengthened surveillance over industrial countries in a multilateral context. The G-24 advocated the adoption of target zones for the exchange rates of major currencies, the development of a mutually consistent set of objectives and policies to be pursued by major industrial countries, and stronger IMF surveillance over the domestic policies of major countries that have international repercussions. Also, IMF staff, in the early 1980s, produced several important studies examining the experience with floating exchange rates and policy options to be considered. Moreover, in the context of bilateral surveillance and in the world economic outlook reviews, the staff and the Executive Board expressed concern about excessive exchange rate variability and misalignments. The Interim Committee, in 1985–86, however, took the position that the flexibility with which the exchange rate system had operated since the early 1970s had enabled the world economy to adjust to major disturbances. It agreed that the variability of exchange rates was a cause for concern and concluded that greater exchange rate stability and improved mutual consistency of economic policies should be pursued. The reluctance of the Interim Committee to deal with the exchange rate system owed to the wish of the major countries to deal with the matter themselves.

The question of further SDR allocations has been on the agenda of most Interim Committee meetings since the early 1980s without resolution. The G-10, in a report on the functioning of the international monetary system, noted that the system had undergone fundamental changes, which affected the rationale for the SDR. However, they recognized that the SDR might still have a role to play in meeting the “long-term global need” for reserves as and when such a need would arise. In a similar report, the G-24 emphasized the reserve shortage faced by a large number of developing countries and called for annual SDR allocations.

In the early 1990s, the issue arose of equity in SDR allocations, mainly with respect to the countries that had joined the IMF after the last allocation of SDRs in 1981 and had thus never participated in an SDR allocation. An attempt to reach agreement on proposals to allocate SDRs at the October 1994 Madrid meeting of the Interim Committee failed. The membership remains divided on the global need for a general allocation of SDRs. However, a resolution of the equity issue through an amendment of the Articles of Agreement that would authorize a one-time allocation of SDRs is being actively considered and is on the Committee’s agenda.

Executive Board Reaches Consensus on Permanent ESAF and Debt Initiative

On September 18, following a meeting of the IMF’s Executive Board, IMF Managing Director Michel Camdessus said: “I am very pleased to announce that the Executive Board has reached understandings to ensure a permanent continuation of the enhanced structural adjustment facility (ESAF)—the IMF’s concessional lending window for low-income members—and allow the IMF to participate in the joint IMF/World Bank initiative for the highly indebted poor countries. With these understandings, we can now indicate to the Interim and Development Committees that the IMF is fully ready to assist its low-income members well into the next millennium. I warmly welcome the cooperative spirit in the Executive Board that made these understandings possible.”

A Leadership Role for the Interim Committee

The Interim Committee has come to play a key policymaking role in the IMF, and there is a close and mutually reinforcing collaboration among the Committee, IMF management, the Executive Board, and IMF staff. The Committee has been particularly helpful in dealing with issues of international crisis management. In response to the major challenges the IMF has faced in recent years, the Interim Committee has strengthened its role, particularly in the area of surveillance, by giving member countries clear guidance on the policy strategy for sustained growth with price stability and by stressing the critical importance of transparency of economic policies.

In the years ahead, the Interim Committee will likely be called upon to play a still more critical role. The globalization of financial markets imposes a more demanding standard of economic policies on countries, and particularly on those that have—or aspire to have—access to those markets. The power of private capital markets will continue to grow, making resources abundantly available when confidence prevails and withdrawing resources abruptly when confidence falters.

In this environment, the IMF will have to exercise strong and continuous surveillance of members’ policies and of markets, and the Interim Committee will play a major role at the ministerial level. At the same time, the IMF will need to have at its disposal sizable financial resources to deal with market crises that may occur again and with their contagion effects while avoiding issues of moral hazard.

In addition, the IMF will have to play a pivotal role in strengthening the soundness of financial institutions of many member countries by fostering adherence to internationally agreed supervisory and regulatory standards. Moreover, the higher standard of economic policies necessary to maintain market confidence will require stronger governance by members to reduce and adjust the role of the public sector and to give broader scope for private sector activity. All of these issues will require reflection, involvement, and advice at the ministerial level.

The maintenance of reasonably balanced exchange rate relationships between the major currencies is critically important for the proper functioning of the international monetary system. These issues are of particular importance for the major countries as well as for the rest of the world. They fall directly within the mandate of the Interim Committee. Similarly, the pursuit of economic and monetary union by a number of western European countries raises major systemic issues, both for that region and for the rest of the world, as well as for the future functioning of the IMF—on which Interim Committee guidance will be required.

In facing the increasing demands ahead, the Interim Committee’s authority will be reinforced by the universality of the IMF membership. In fulfilling its role, it will be important to continue to build on the arrangements for collaboration that have developed among the Interim Committee, the Executive Board, and the staff. These constitute the institutional foundations of the cooperative spirit among the membership that has enabled the IMF to adapt its surveillance and financing roles to a constantly changing world environment.


New Challenges in the 1990s

In the 1990s, the reform of transition economies moving toward market-oriented economic systems has required the Committee’s close attention. A USSR delegation was first invited to participate in some of the Committee’s discussions in Bangkok in October 1991. The subsequent breakup of the Soviet Union was rapidly followed by IMF membership of all the successor states. The Committee strongly supported policies for stabilization and reform, as well as targeting financial support and technical assistance for the transition economies. At the same time, the sluggish growth performance of the industrial countries was a cause for concern, while the progressive globalization of financial markets, the successful conclusion of the Uruguay Round of multilateral trade negotiations, and the rapid growth of the developing countries as a group opened new opportunities.

In the light of these various concerns and challenges, the Interim Committee has assumed a larger role in the exercise of IMF surveillance and policy coordination. An important step in this direction was the Interim Committee’s Declaration on Cooperation for Sustained Global Expansion, adopted in April 1993. This declaration focused on the global cooperative effort that would be required to strengthen prospects for durable noninflationary growth worldwide. The policy strategy has a clear medium-term focus, with macroeconomic policies stressing fiscal consolidation, a firm anti-inflationary role for monetary policy, and structural policies aimed at making economies more open, more efficient, and more private-sector driven.

By the time of its meeting in Madrid in October 1994, the Committee saw the need to update the 1993 Declaration and to make it more pointed, with a focus on making good use of the renewed economic expansion and avoiding the mistakes of the past. Subsequent Interim Committee meetings have reaffirmed the main thrust of this strategy and welcomed progress in its implementation by IMF members. At its meeting on September 29, 1996, the Interim Committee will consider whether to adapt and expand the medium-term strategy.

The Mexican crisis was a forceful reminder of the need to strengthen IMF surveillance and to examine the implications of globalized financial markets for the financing role of the IMF. One important conclusion was that there is a need for greater transparency of members’ policies through timely publication of comprehensive data. Work has moved forward quickly on a major initiative to establish standards to guide members in the provision of data to the public. These include a more demanding special standard for publication of data for countries that have or seek access to capital markets, which has already become operative, and a general standard for all IMF members. The data initiative should become a catalyst for global improvement of economic information.

Leo Van Houtven

Secretary of the IMF and Counsellor

Photo Credits: Denio Zara for the IMF, page 299 and IMF stock photograph, page 300.

Annual Meetings Preview: Surveillance, IMF Funding, And Debt Are on the Agenda

Finance ministers and central bank governors will gather for the fifty-first Annual Meetings of the IMF and the World Bank, on October 1–3 in Washington. They will spend much of their time assessing global economic prospects and recent initiatives to strengthen IMF surveillance over the policies of its member countries in response to the challenges of globalized financial markets and the lessons of the December 1994 Mexican financial crisis. Within the past year, the IMF strengthened its surveillance considerably through more continuous and candid dialogue with member countries; closer monitoring of data reported by members and the development of standards for dissemination of their data; and more attention to capital account developments, financial flows, and regional issues. It also introduced new forms of support: an emergency financing mechanism establishing procedures to provide quick financing in crisis situations, a financing mechanism to support currency stabilization funds, and a financing mechanism to support countries emerging from conflicts. Eduardo Aninat, Minister of Finance of Chile, will chair the Annual Meetings.

The Annual Meetings will be preceded by meetings of the IMF’s Interim Committee of the IMF’s Board of Governors on the International Monetary System (the Interim Committee), and the Joint Bank and Fund Committee on the Transfer of Real Resources to Developing Countries (the Development Committee), as well as meetings of the Group of Ten industrial countries and the Group of Twenty-Four developing countries.

IMF Management Supports Revised Argentine Economic Program

The management of the IMF announced on September 13 that the Argentine authorities had formulated a revised economic program for the period through end-1997 that preserves the thrust of the policies and objectives currently supported by a stand-by arrangement from the IMF while allowing for the modification of certain targets to reflect changed circumstances.

Managing Director Michel Camdessus said that the revised program “includes important measures in the structural reform area that will help to strengthen the ongoing recovery of economic activity and employment.”

A letter from the authorities describing this program and requesting the corresponding modifications is expected to be sent in coming days to the IMF for consideration by the Executive Board in October. Camdessus said he has approved the basic elements of this new program and indicated that he is prepared to recommend them to the Executive Board.

Surveillance and IMF Funding

On the issue of IMF surveillance, the Interim Committee, which meets on September 29 under the Chairmanship of Belgian Finance Minister Philippe Maystadt, will review the world economic outlook and will consider an update of the Madrid Declaration on Cooperation to Strengthen the Global Expansion. The Madrid Declaration, agreed at the October 1994 Madrid Annual Meetings, delineated a comprehensive medium-term strategy to achieve sustained noninflationary growth in industrial, transition, and developing countries; it marked an important step in the Committee’s greater involvement in IMF surveillance.

The Interim Committee will also discuss implementation of the standards for dissemination of economic and financial data. The special data dissemination standard developed and launched by the IMF on September 19 (see page 308) aims to guide members having, or seeking, access to international capital markets in publishing timely and accurate economic and financial data. The IMF is concurrently engaged in formulating a general data standard for all member countries.

The Interim Committee will also take up the issue of equipping the IMF with adequate financial resources. It is expected to expedite the Eleventh General Review of Quotas and a doubling of borrowed resources available to the IMF under the General Arrangements to Borrow (GAB). At its spring meeting, the Interim Committee stressed the need to ensure the adequacy of quotas for the IMF to fulfill its mandate, given the changes in the global economy since its last quota increase in 1990 (which raised quotas to their current level of SDR 145 million). Indeed, continued demands on the IMF could further weaken its liquidity position. Interim Committee members have therefore endorsed a doubling of borrowed resources under the current GAB—to SDR 34 billion—through the development of new arrangements to borrow that would include Group of Ten and selected non-G-10 participants, including developing countries. At the same time, the Committee has emphasized that expanded borrowing does not substitute for an increase in quotas, which remain the IMF’s primary source of liquidity.

The ESAF is the centerpiece of the IMF’s support for low-income countries.

The Interim Committee has endorsed the enhanced structural adjustment facility (ESAF) as the centerpiece of the IMF’s support for low-income countries, and as the basis for the IMF’s participation in a joint initiative with the World Bank and other multilateral agencies and bilateral creditors to reduce the external debt burden of heavily indebted poor countries pursuing sound policies. Ministers will seek to ensure uninterrupted operation of the ESAF—the IMF’s concessional lending facility for low-income countries engaged in growth-oriented adjustment—by agreeing on the means of funding the ESAF for the interim period of 2000-2004, after which it becomes self-sustaining. The interim financing mechanisms to be discussed will include bilateral contributions and, possibly, on a contingent basis, the sale of a limited amount of IMF gold (up to 5 million of the IMF’s 103 million ounces).

Finally, Ministers will consider the idea of an “equity” allocation of SDRs, to achieve the full participation of all IMF members in the SDR system, including those members that have joined since the last SDR allocation in 1981.

Development and Debt

The Development Committee meets on September 30 with Moroccan Minister of Finance and Foreign Investment Mohamed Kabbaj as Chairman. The two main items on the Committee’s agenda are the first ministerial meeting of the World Trade Organization, scheduled for December 1996 in Singapore, including its implications for developing countries; and the proposed action plan to resolve the debt problems of heavily indebted poor countries, including debt owed to multilateral institutions. On the latter, the Interim and Development Committees will consider the joint debt initiative, for which some 41 countries—mainly in Africa—may be eligible (see IMF Survey, July 15, p. 229).

Selected IMF Rates

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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, weighed 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 109.4 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 Hosts Seminar for Russian State Duma Representatives

A senior delegation from the Russian State Duma met with senior IMF staff in Vienna in late August. Twenty-eight Duma deputies and staff advisors participated in three days of discussions on the experiences of economies in transition and the key problems still to be overcome. The seminar was organized by senior staff from four IMF departments: External Relations, European II, Fiscal Affairs, and the IMF Institute and was held at the Joint Vienna Institute. First Deputy Managing Director Stanley Fischer participated via a video teleconference.

In the first-ever IMF-sponsored seminar for Russian parliamentarians on macroeconomic and financial policies, the Duma delegation comprised not only representatives of all major and some minor political parties but also a wide range of regions, ages, and occupations. The discussion of economic issues thus took place on several planes, reflecting the gamut of experiences and perspectives, from those of an economics professor to those of a factory foreman.

Inflation and Growth

First Deputy Managing Director Fischer kicked off the discussion with a summary of the findings of recent IMF research on the experience of 26 economies in transition. (See IMF Working Paper 96/31, Stabilization and Growth in Transition Economies: The Early Experience, by Stanley Fischer and others.) The study concludes that a serious, sustained effort to reduce inflation through monetary and fiscal restraint leads to a resumption of economic growth within a year or two, with growth being stronger where structural reform accompanies macroeconomic stabilization.

Duma representatives were nonetheless skeptical that economic growth would resume in Russia in 1997 under the government’s IMF-supported economic program of inflation containment and structural reform. Communist and Agrarian party members argued that a resumption of growth could only be attained by allocating more money to agriculture and industry.

Revenue collection and financial system weaknesses were prominent themes at the seminar discussions.

IMF staff and Duma deputies debated the sources and effects of inflation and its relation to growth in transition economies. Anthony Lanyi of the IMF Institute and Thomas Wolf of the IMF Moscow Office emphasized the possibilities for sustainable expansion of credit and investment in Russia if inflation were contained, the exchange rate remained stable, and the confidence of Russians continued to increase. Many Deputies acknowledged the theoretical possibility that return of flight capital, mobilization through the banking system of “mattress money,” and new foreign capital inflows could eventually provide enough financing for growth but doubted that this would happen anytime soon.

Structural Reform

Two related issues were prominent at the seminar: the problem of collecting sufficient revenue to finance the federal budget and the deficiencies of the financial system in Russia. All agreed that garnering the federal revenue projected in the Russian budget would be difficult. Several Duma deputies cited the already high tax rates on business and an inequitable burden of taxation across sectors and industries. Adrienne Cheasty of the IMF Fiscal Affairs Department outlined the measures other countries have found successful in improving tax policy and tax administration. This prompted a discussion as to which aspects might be pertinent for the current situation in Russia. The Duma delegation voiced concern about weaknesses in the Russian banking system. Poorly performing loans and insufficient capital reserves could hinder some banks’ efforts to expand their deposit base while at the same time discouraging them from making the longer-term loans desired by business customers. IMF staff suggested that credit terms and availability were likely to improve gradually if inflation were kept low and the exchange rate remained relatively stable.

Privatization and monopolies were another hot topic. Duma representatives were generally critical of the Russian experience with privatization but uncertain about the next steps. IMF staff described the experience of other countries and suggested some policy options that could advance market reforms while meeting the concerns expressed.

The Exchange Rate

On the ruble corridor, the Duma deputies split into several camps, reflecting the divergent economic interests of their constituencies. A deputy from a manufacturing region argued that the ruble was overvalued for export purposes, but a deputy from an energy producing region preferred the ruble corridor, which he believed was maximizing foreign exchange earnings from energy exports. A third deputy urged an even harder ruble for the purpose of encouraging repatriation of flight capital. IMF staff emphasized the advantages of at least stabilizing the exchange rate while getting inflation under control and restoring the confidence of savers and investors.

Good Governance

John Odling-Smee, Director of the European II Department, led off the final session of the seminar by remarking on the importance of good governance in transition economies. Duma members welcomed his emphasis on curbing corruption, increasing transparency, establishing clear and consistent rules for making and enforcing contracts, and reforming the civil service. They agreed that the Duma should accept greater responsibility for improving governance in Russia.

At the conclusion of the seminar, Duma representatives said they had a better understanding of the conceptual basis for IMF policy recommendations and of the lessons from experience in other transition economies, while IMF staff gained insights into the views of the Duma delegation on the situation in Russia. Participants agreed that exchanging information and perspectives in this forum had proven useful.

Robert W. Russell

IMF External Relations Department

The next issue of the IMF Survey will cover the Annual Meetings and will appear on October 14.

Fischer Speaks at Symposium On Price Stability

At a recent conference on Achieving Price Stability, sponsored by the Kansas City Federal Reserve Bank, in Jackson Hole, Wyoming, First Deputy Managing Director Stanley Fischer endorsed the view that long-run price stability should be the major goal of a central bank. At the same time, he noted that by price stability, central banks mean reasonably low inflation targeted at about 2 percent annually, rather than zero inflation.

Among Fischer’s key points were the following:

• Public aversion to the costs of high inflation has in the past been caused by both economic and social factors: history confirms that in extreme situations, steep rises in inflation are associated with political and social disorder. Public opinion polls underscore the unpopularity of high inflation around the world.

• The natural level of unemployment in most industrial countries has been significantly higher in the low-inflation 1990s than during the previous two decades when higher inflation rates were the norm.

• Based on recent European experience, adjustment to very low levels of inflation—by resetting wages and prices to achieve an inflation rate close to zero—tends to be protracted.

• For industrial countries that have already attained single digit inflation rates, policymakers should aim for a targeted rate of between 1 and 3 percent.

Summarizing new research on the relationship between inflation and growth, Fischer explained that annual inflation of 40 percent constitutes a threshold, beyond which a country is likely to go into a prolonged high-inflation, low-growth crisis. Such research also shows that per capita growth is on average lower than the world average in the period leading up to the crisis, and then higher than the world average after stabilizing at below 40 percent inflation. Results at a lower threshold are either insignificant or very sensitive to particular observations. But while inflation is bad for growth, firm conclusions about the relationship between these two variables in the major industrial countries remain elusive.

Why Do Governments Inflate? Fischer listed two reasons for governments’ tendency to inflate. First, the classic analysis of the costs and benefits of inflation focus on seigniorage—the revenue obtained by government from the creation of money. This revenue motive applies to both the direct creation of high-powered money (central bank reserves plus cash on hand), as well as to the process of credit creation. The rate of inflation that can be justified by seigniorage in turn depends on the efficiency of other methods of raising revenue. For example, governments faced with pressing revenue needs during wartime might well be justified in producing double-digit inflation, he said. In contrast, seigniorage is relatively unimportant today in most industrial countries, amounting to about 0.5 percent or less of GDP.

Governments might also inflate because the short- and long-run tradeoffs between inflation and output differ in ways that make inflation hard to stop and almost always tempting to start. This circumstance most frequently occurs when political leaders—faced with a low inflation rate and a short-run trade-off between inflation and output—choose to stimulate output above the natural rate through expansionary monetary policy.

Indexation. Because many economic costs identified with inflation would presumably disappear if the tax system were properly indexed, Fischer asked, why not devise a comprehensive index and accept a moderate level of inflation? The first reason for rejecting such a course, he said, is that comprehensive indexation is both difficult and cumbersome to implement. A more serious objection is the strong possibility that by introducing indexation, the equilibrium inflation rate will also rise; the new, higher, inflation-indexed equilibrium rate could thus end up being worse than the initial unindexed equilibrium rate.

Public Opinion and Inflation. The last several decades have witnessed a major shift in the U.S. public’s attitude toward inflation, according to Fischer. Citing Gallup surveys taken in the United States from 1972 to 1982, when inflationary pressures were especially pronounced, he noted that between 30 and 80 percent of respondents chose inflation and high prices as the most serious problems facing the country. But as inflation began to drop in the mid-1980s, it ceased to be a major source of public worry in the United States; unemployment has since taken its place.

In contrast, relative to the actual rate, public worries about inflation and high prices remain high in Belgium, Canada, China, Germany, Japan, and Singapore. Recent opinion surveys in both Russia and Ukraine also reveal substantial public concerns about inflation.

Monetary Policy Goals. Long-run price stability should be the primary goal of the central bank, with the promotion of full employment and growth permitted to the extent they do not conflict with the central bank’s primary purpose, Fischer concluded. The most feasible way to achieve this is through inflation targeting. Inflation targeting, he said, would alert policymakers to potential inflationary consequences of monetary expansion and help them better identify the onset of long-term inflationary trends.

Ukraine Introduces New Currency

On September 13, the IMF announced that the government of Ukraine had notified the IMF that it has introduced its new currency, the hryvnia. Ukraine indicated that all monetary holdings in the former currency, the karbovanets, will be converted into hryvnia at a single rate of conversion (Krb 100,000 for one hryvnia). During the period September 2-September 16, the karbovanets and the hryvnia have been allowed to circulate in parallel. Beyond this period, the hryvnia will be Ukraine’s sole legal tender. The government has expressed its satisfaction about the pace of conversion of monetary holdings.

The authorities have also indicated that certain administrative restrictions that were introduced in the context of the currency conversion have now been lifted. A price freeze that was introduced on September 2 has been canceled by the government. Restrictions on the use of foreign currency accounts have also been lifted.

Commenting on the introduction of the hryvnia, Managing Director Michel Camdessus made the following statement:

“The management of the IMF welcomes the introduction of the hryvnia and the continued commitment of the Ukrainian authorities to the program supported by a stand-by arrangement with the IMF. The sound financial policies pursued by Ukraine so far in 1996 have helped reduce inflation and stabilize the exchange rate. Together with the structural reforms undertaken as part of the program, in particular, privatization of state enterprises, this has helped pave the way toward the recovery of the economy. The informal sector of the economy is already growing rapidly.”

On May 10, 1996, the IMF approved a stand-by arrangement with Ukraine in an amount equivalent to SDR 598.2 million (about $864 million). Under the current arrangement, Ukraine has made five purchases for a total of SDR 335 million (about $484 million).

IMF Launches Dissemination Standards Bulletin Board on Internet

The IMF today opens to public access, through the Internet, the electronic bulletin board for its Special Data Dissemination Standard (special standard), designed to provide information about the data dissemination practices of subscribing member countries. The Internet address of the Dissemination Standards Bulletin Board (DSBB) is http//

The special standard and its associated bulletin board respond to the need for comprehensive and timely economic and financial data—with equal and ready access for all users—generated by increased global integration and the associated substantial expansion of financial flows.

Countries subscribing to the special standard undertake to follow sound practices regarding the coverage, periodicity, and timeliness of data; access by the public to those data; the integrity of the data; and the quality of the data. As of today, 34 countries have subscribed to the special standard. They are as follows: Argentina, Austria, Australia, Belgium, Canada, Chile, Colombia, Croatia, Denmark, Finland, France, Hungary, Iceland, Ireland, Israel, Italy, Japan, Lithuania, Malaysia, Mexico, the Netherlands, Norway, Peru, Philippines, Poland, Singapore, Slovenia, South Africa, Sweden, Switzerland, Thailand, Turkey, the United Kingdom, and the United States.

The IMF’s bulletin board posts information on the practices of subscribing countries in each of these areas—the so-called metadata. It also identifies a contact person or persons in the subscribing country and provides information on how to obtain the data. The IMF is currently exploring ways to facilitate electronic links from the DSBB to country data sites on the Internet.

As of today, the metadata for 18 countries are on the DSBB. They are Argentina Canada, Denmark, Finland, Ireland, Italy, Malaysia, Mexico, the Netherlands, Norway, Peru, the Philippines, Singapore, Slovenia, Switzerland, Thailand, the United Kingdom, and the United States. The IMF expects to post metadata for a number of other countries on the DSBB during the next few weeks.


The IMF’s ministerial-level Interim Committee in April 1995 requested a set of standards to guide IMF members in providing economic and financial statistics to the public. A similar request was made to the IMF in June 1995 by the G-7 Heads of State at their Summit in Halifax. The special standard, which is designed for countries having or seeking access to international capital markets, was subsequently developed by IMF staff on the basis of consultations on best practices and needs with a wide array of data producers and users. Subscription to the special standard by IMF member countries is voluntary.

The practices that subscribing countries are expected to follow under the special standard are encompassed by four dimensions:

• To ensure coverage, periodicity, and timeliness, the special standard focuses on the basic data that are most important to evaluate economic performance and policy in the real, fiscal, financial, and external sectors (see table, page 309).

• To support ready and equal access by the public to basic data, the special standard prescribes advance dissemination of release calendars and simultaneous release of data to all interested parties.

• To assist users in assessing the integrity of data, the special standard prescribes dissemination of the terms and conditions under which official statistics are produced, including those relating to the confidentiality of individually identifiable information; identification of internal government access to data before release; identification of ministerial commentary on the occasion of statistical release; and provision of information about revisions and advance notice of major changes in methodology.

• To assist users in assessing the quality of data, the special standard prescribes the dissemination of documentation on the methodology and sources used in preparing statistics; and the dissemination of component detail, reconciliations with related data, and statistical frameworks that support statistical cross-checks and provide assurance that the data are reliable.

The IMF expects that many countries will need to make changes in their dissemination practices in order to observe the best practices incorporated in the special standard. It is therefore providing for a transition period through the end of 1998 for countries to meet fully the standard. During this period, countries may subscribe to the special standard and appear on the bulletin board while they make the adjustments necessary to meet the standard. During the transition period the IMF, in cooperation with member countries, will continue to elaborate certain aspects of the special standard and to undertake review of its operation in light of experience.

Press Release No. 96/47, September 19

The Special Data Dissemination Standard: Coverage, Periodicity, and Timeliness

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Note: For periodicity and timeliness: dally (“D”); weekly or with lapse of no more than one week (“W”) after the reference date or close of the reference week; monthly or with lapse of no more than one month (“M”): quarterly or with lapse of no more than one quarter (“Q”); annual (“A”).

Comprehensive statistical frameworks.

Tracking categories.

Given that data are widely available from private sources, dissemination of official producers may be less time-sensitive. Although dissemination by recorded telephone messages or telefax services is encouraged, dissemination of these data can be made part of other (preferably high-frequency) dissemination products.

Georgia: From Hyperinflation to Growth

Civil conflict and political turmoil followed Georgia’s declaration of independence from the Soviet Union in April 1991. The ensuing breakdown in law and order undermined the government’s authority and—coupled with accommodative domestic financial policies and severe economic shocks stemming from the breakup of the Soviet Union—led to one of the worst cases of hyperinflation on record.

By early 1994, Georgia was at the brink of collapse. Output had dropped precipitously; hyperinflation had eroded public finances and incomes; and international reserves had been depleted. The revenue-to-GDP ratio was about 2 percent, among the lowest ever recorded. Faced with serious shortages of food and supplies, the country had to rely on foreign grants and loans to meet its most basic needs.

In mid-1994, the authorities took steps to address these problems and put Georgia back on a sustainable growth path. Their bold reform efforts centered around a stabilization program predicated on the pursuit of tight financial policies and the liberalization of prices, trade, and the exchange system. In addition, the early implementation of structural reforms was expected to facilitate the development of a vigorous private sector.

The IMF has supported Georgia’s reform efforts through its systemic transformation facility, a stand-by arrangement and, since February 1996, an enhanced structural adjustment facility arrangement. World Bank support and assistance from the European Union (EU) and other bilateral donors, together with debt relief or standstill (that is, suspension of payments during negotiations for debt restructuring) granted by external creditors, have also contributed to the successful implementation of the reform program. In particular, food aid provided under EU and U.S. auspices was an important source of budgetary revenue and played a crucial role in Georgia’s stabilization program.

During 1995, Georgia began to reap the benefits of the reform program launched in 1994. Following four years of output collapse, real GDP increased, led by agriculture, trade, transport, and construction. The exchange rate stabilized and inflation declined (see chart, page 312). The introduction of Georgia’s new currency, the lari, in September 1995 resulted in a reversal of the rampant currency substitution that had characterized the earlier coupon era. This, together with continued financial support from the international community, allowed the central bank to boost its international reserves considerably.

Developments in the first half of 1996 were also encouraging. Output growth accelerated, inflation continued to decline, the exchange rate remained stable, and international reserves strengthened further, suggesting that the reforms have started to take hold (see table, below). Furthermore, substantial progress was made in normalizing relations with external creditors, through the conclusion or active negotiation of bilateral debt-rescheduling agreements with several states of the former Soviet Union.

Progress in curbing inflation has been particularly impressive. Average monthly inflation fell from the hyper-inflationary level of 62 percent in the first nine months of 1994 to about 4 percent in 1995, and further to 1.8 percent in the first half of 1996. This remarkable achievement resulted from a sharp fiscal adjustment, accompanied by the pursuit of a tight monetary policy aimed at stabilizing the exchange rate.

Georgia made major strides toward fiscal adjustment during 1995-96. The advances rested largely on a tight expenditure program, but lately also reflected a gradual improvement of revenue from the extremely low levels that prevailed before the reform program. As a result of these efforts, Georgia’s overall fiscal deficit was reduced substantially during this period. Among the more drastic adjustment measures taken were the elimination of most tax exemptions, a 30–35 percent reduction in the number of civil servants, and the immediate increase in the statutory retirement age by five years. The authorities also initiated reforms in the tax and customs administration and launched one of the most far-reaching health care reform programs of all of the former states of the Soviet Union.

Georgia: Basic Indicators

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Preliminary actual figures.

Over same period in 1995.

On accrual basis, excluding grants.

Data: Georgian authorities

Despite encouraging developments during the first half of 1996, the fiscal situation remains fragile. Revenues are still very low, and expenditures have been compressed to an unsustainable level. Against this background, improved tax administration offers the best hope to increase revenue in the short run.

A combination of tight financial policies, termination of government-guaranteed gas imports, and elimination of soft loans to state enterprises has reduced demand pressures. As a result, the current account deficit has narrowed markedly, to about 14 percent of GDP in 1995, from 36 percent in the previous year. Imports and exports are estimated to have fallen sharply in 1995, reflecting the continued impact of the disruption of traditional trade patterns and, more generally, the ongoing structural changes in the economy. The export decline appears, however, to have bottomed out. In view of the low level of wages, competitiveness has not yet been jeopardized, despite the marked real appreciation of the lari against the U.S. dollar.

Georgia has made substantial progress on the structural front, but needs to accelerate reforms in certain areas to avoid compromising growth and stabilization prospects. Price liberalization is nearly complete, after the liberalization of the price of bread in June 1996; the trade and payments system is essentially free of restrictions; privatization has proceeded rapidly; and considerable progress has been achieved in establishing a market-oriented legal framework. Relatively slow progress in restructuring enterprises and the energy sector and in creating an efficient land market—which allows land to be sold and pledged as collateral—has created bottlenecks for growth.

Recent IMF Publications

Working Papers ($7.00)

96/80: Deja Vu All Over Again? The Mexican Crisis and the Stabilization of Uruguay in the 1970s, Mario I. Blejer and Graciana del Castillo

96/81: Currency Unions, Economic Fluctuations, and Adjustment: Some New Empirical Evidence, Tamim Bayoumi and Eswar Prasad

96/82: Volatility of Oil Prices, Peter Wickham

96/83: Deposit Insurance: Obtaining the Benefits and Avoiding the Pitfalls, Gillian Garcia

96/84: Policy Toward Commodity Shocks in Developing Countries, Paul Collier and Jan Willem Gunning

96/85: Are Australia’s Current Account Deficits Excessive? Paul Cashin and C. John McDermott

96/86: Capital Flows in a Transitional Economy and the Sterilization Dilemma: The Hungarian Case, Pierre L. Siklos

96/87: U.S. Private Saving and the Tax Treatment of IRA/401(k)s: A Re-Examination Using Household Survey Data, Alun H. Thomas and Christopher M. Towe

96/88: Macroeconomic Conditions and Pressures for Protection Under Antidumping and Countervailing Duty Laws: Empirical Evidence from the United States, Michael Leidy

96/89: How Accurate Are the IMF’s Short-Term Forecasts? Another Examination of the World Economic Outlook, Michael Artis

96/90: Stock-Market Equilibrium and the Dividend Yield, Charles Kramer

96/91: Unemployment in Greece: A Survey of the Issues, Dimitrios Demekas and Zenon G. Kontolemis

96/92: Regional Growth in Mexico: 1970-93, V. Hugo Juan-Ramon and Luis A. Rivera-Batiz

96/93: Policy Complementarities: The Case for Fundamental Labor Market Reform, David T. Coe and Dennis J. Snower

96/94: Pension Reform, Financial Market Development, and Economic Growth: Preliminary Evidence from Chile, Robert S. Holzmann

96/95: Currency Speculation and the Optimum Control of Bank Lending in Singapore Dollar: A Case for Partial Liberalization, Kenneth S. Chan and Kee-Jin Ngiam

96/96: The Social Safety Net in Albania, Natasha Koliadina

96/97: Income Distribution and Macroeconomic Performance in the United States, Jeffrey Cole and Christopher M. Towe

96/98: The Effects of Corruption on Growth, Investment, and Government Expenditure, Paolo Mauro

96/99: Gender Bias in Tax Systems, Janet G. Stotsky

96/100: The Feldstein-Horioka Test of International Capital Mobility: Is It Feasible? W. Jos Jansen

96/101: Privatization and Restructuring: An Incomplete-Contract Approach, Dieter Bos

Papers on Policy Analysis and Assessment ($7.00)

96/8: The First-Round Monetary and Fiscal Impact of Bank Recapitalization in Transition Economies, Timothy D. Lane


Tax Law Design and Drafting, Volume I, Victor Thuronyi, Editor ($25.00)

Occasional Papers ($15.00; academic rate: $12.00)

No. 139: Reinvigorating Growth in Developing Countries: Lessons from Eight Countries, David Goldsbrough, Sharmini Coorey, and others.

Publications are available from Publication Services, Box XS600, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet:

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


Georgia: Prices, Exchange Rates, and Broad Money

(Index January 1994=100, Log Scale)

Citation: IMF Survey 0025, 001; 10.5089/9781451937442.023.A019

1The priced bread was increased 285 times in September 1994 and by another 40 percent in December 1994.Data: National Bank of Georgia and Georgian Department of Social and Economic Information

Banking sector reform is advanced, on the strength of revamped banking legislation and improved banking supervision, payments system, and bank accounting. Georgia has sharply reduced the number of its banks; confidence in the banking system is building; and bank deposits have started to grow, albeit by small amounts. Nevertheless, much remains to be done to encourage financial intermediation, develop financial markets, and establish a sound banking system.

Close collaboration between the IMF and the Georgian authorities has enabled the IMF to play a leading role in the international effort to rehabilitate Georgia’s economy. The authorities have continuously welcomed and solicited policy advice from IMF staff. Also the IMF’s Monetary and Exchange Affairs, Fiscal Affairs, Legal, and Statistics departments have provided substantial technical assistance. Georgia will continue to need technical assistance from the IMF in the near future.

With improved political stability and the restoration of law and order, low wages, and a liberal foreign investment law, Georgia has begun to create a favorable climate for investment. Notwithstanding the initial success of its reform program, however, Georgia’s economy will require further progress in stabilization and the continued steadfast implementation of structural reforms to consolidate its hard-won gains since 1994 and pave the way for sustained growth. The challenges ahead will be to strengthen Georgia’s public finances and complete ongoing structural reforms—particularly in the energy and banking sectors—so that Georgia can facilitate the growth of its private sector and attract much-needed foreign investment. Given Georgia’s fragile public finances, external assistance will continue to be essential to ensure the sustainability of reforms over the next few years.

Marta de Castello Branco

IMF, European II Department

David M. Cheney, Editor

Sara Kane • John Starrels

Senior Editors

Sheila Meehan

Assistant Editor

Sharon Metzger

Editorial Assistant

Lijun Li

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.