Policies on the Use of Fund Resources

POLICIES governing the use of Fund resources have developed gradually in the light of experience and changing international conditions. These policies have emphasized two principles: Fund assistance is available only for a limited period, and a country can regard this assistance as a means of permitting it to undertake a constructive program to restore domestic and external stability, without recourse to restrictions on trade and payments and other undesirable practices.

Abstract

POLICIES governing the use of Fund resources have developed gradually in the light of experience and changing international conditions. These policies have emphasized two principles: Fund assistance is available only for a limited period, and a country can regard this assistance as a means of permitting it to undertake a constructive program to restore domestic and external stability, without recourse to restrictions on trade and payments and other undesirable practices.

POLICIES governing the use of Fund resources have developed gradually in the light of experience and changing international conditions. These policies have emphasized two principles: Fund assistance is available only for a limited period, and a country can regard this assistance as a means of permitting it to undertake a constructive program to restore domestic and external stability, without recourse to restrictions on trade and payments and other undesirable practices.

This paper describes the evolution of Fund policies and practices regarding the use of its resources, and discusses the experience gained in the implementation of its policies, including the general role played by stabilization programs. The paper does not deal with Fund policies on the selection of currencies for drawings and repurchases or with issues related to the problem of liquidity creation, adequacy of Fund resources, or possible changes in the compensatory drawing facility.

Policies Governing Drawings and Repurchases

In making available its resources, the Fund is guided largely by the policies summarized below:

  • (1) Requests for transactions in the gold tranche are granted on a virtually automatic basis and under procedures which normally make it possible to deliver exchange to a member two business days after receipt of the request by the Fund.

  • (2) Requests for transactions in the first credit tranche are granted on a liberal basis, provided that the member itself is making reasonable efforts to solve its problems.

  • (3) Requests for transactions beyond the first credit tranche require substantial justification. They are likely to be favorably received when the drawings or stand-by arrangements are intended to support a sound program aimed at establishing or maintaining the enduring stability of the member’s currency at a realistic rate of exchange. Drawings beyond the first credit tranche are very frequently provided for by stand-by arrangements. These arrangements usually include specific undertakings as to the policies to be pursued by the member, and the drawing rights are phased over time. If the member is unable to observe certain of these policy commitments, it undertakes to refrain from requesting purchases under the arrangements and, instead, to consult with the Fund and agree with it on the terms for resuming purchases. A stand-by arrangement is usually for a period of one year, but may be followed by a new arrangement.

  • (4) Requests for drawings to compensate for a temporary shortfall in receipts from exports may be expected to be granted under a special facility, provided that the shortfall is largely attributable to circumstances beyond the control of the member country. The amount of drawings outstanding under this arrangement will not normally exceed 25 per cent of the member’s quota. No specific undertakings are required, other than the willingness of the member country to cooperate with the Fund in an effort to find, where required, appropriate solutions for its balance of payments difficulties.

  • (5) Any drawing or stand-by arrangement exceeding 25 per cent of a member’s quota within any 12-month period (except to the extent that the Fund holds less of the member’s currency than 75 per cent of its quota), and any drawing or stand-by arrangement which would increase the Fund’s holdings of that currency to more than 200 per cent of the quota, require a waiver. Waivers of the former kind have been granted frequently. Waivers of the latter kind have been granted only on few occasions. The 200-per-cent limit has been exceeded only twice—in a drawing made in October 1963 and in a stand-by arrangement concluded in February 1964. The drawing was under the policy relating to the compensatory financing of export fluctuations, in which a special provision for such a waiver is included. In the stand-by arrangement, the Fund’s holdings of the member’s currency exceeded 200 per cent of its quota for a brief interval during the period of the stand-by arrangement.

  • (6) Drawings are required to be repurchased, subject to the provisions of Article V, Section 7(b), within an outside range of three to five years from the date of purchase. Stand-by arrangements stipulate repurchase in three years, but repurchases are, at the request of the member, frequently rescheduled to be completed in five years. A member is required to consult with the Fund when the charge on any outstanding segment of the Fund’s holdings reaches 4 per cent a year, and agree upon appropriate arrangements to ensure the reduction of the Fund’s holdings of the member’s currency within the maximum period of five years. So far there have been only two instances where a repurchase has not taken place within the period of five years. Several members, however, have been in a debtor position to the Fund for more than five years.

These policies and practices relating to drawings and repurchases have been developed over a considerable period by decisions of the Executive Board and statements of policy in the Fund’s Annual Reports, as well as by practical application of the announced principles. The following section is a brief description of the stages in the evolution of these policies.

Evolution of Fund Policy on the Use of Its Resources

Throughout the period of its operations, the Fund has striven to define the short-term nature of the Fund assistance 1 and the type of conditionality that should govern access to its resources. It has been necessary, on the one hand, to give reasonable assurance to members that they would be able to make temporary use of Fund resources in proper circumstances and, on the other, to ensure that Fund resources would be used to promote the achievement of the Fund’s objectives. Under continuously changing international monetary conditions, and in the face of increasingly complex economic problems, various degrees of conditionality have developed, as reflected in the present policy governing the use of Fund resources.

The historical development of Fund policies and practices as to use of its resources may be most conveniently traced by dividing Fund operations into four periods.

Before March 1948

This early period of the Fund’s existence saw considerable discussion about the interpretation which should be placed on those parts of the Articles of Agreement which refer to the use of Fund resources. In one of their first meetings, on September 26, 1946, the Executive Directors of the Fund, interpreting the Articles, declared that the Fund’s resources could be placed at the disposal of the members only “to give temporary assistance in financing balance of payments deficits on current account for monetary stabilization operations.” 2

In accordance with the purposes set out in Article I, Fund assistance was to be made available to countries which made efforts to move toward the elimination of those aspects of their exchange and monetary policies that were detrimental to the interests of the member itself or those of other members. Thus it was felt that some conditions should be attached to the use of Fund resources; the point at issue was the degree of conditionality. The proponents of automatic or near automatic access to Fund resources argued that a member that had not been declared ineligible could draw freely, in amounts for which no waiver was required, provided that it represented that the currency was “needed for making in that currency payments which are consistent with the provisions of this Agreement” (Article V, Section 3(a) (i)). A number of transactions took place under this policy during this period. However, the proponents of conditional access to the Fund resources argued that the policy provided little assurance that a proper use of Fund resources was being made. There was a feeling that the economic and financial problems facing the world, but especially in Europe, were of such a size and expected duration that the use of Fund resources was inappropriate.

March 1948-1951

The argument was somewhat resolved on March 10, 1948, when the Executive Board decided3 that the Fund had the power to challenge a member’s representation that the currency to be purchased was presently needed for making payments in that currency consistent with the provisions of the Articles of Agreement. If the Fund concluded that the representation was incorrect, it had the power to postpone or reject the request for a drawing, or grant it subject to conditions designed to safeguard the Fund’s purposes.

While the concept of conditionality, thus explicitly introduced into the policy on the use of resources, assured the Fund that such use would not be contrary to its purposes, the new policy created uncertainty as to the circumstances under which members would be able to use the Fund’s resources. On April 5, 1948 a decision4 was adopted that member countries in receipt of European Recovery Program (ERP) funds should request the purchase of U.S. dollars from the Fund only in exceptional and unforeseen circumstances, because of the presumption that their needs were being met. Largely as a result of these developments, the volume of Fund transactions fell sharply: drawings, which had amounted to $606.0 million during the year ended April 1948, fell to $119.4 million, $51.8 million, and $28.0 million, respectively, in the following three years.

Not until the international payments situation had improved did the Fund begin to formulate more explicit policies as to the circumstances under which members could expect to have access to its financial facilities. On May 2, 1951 a new policy proposal was approved by the Board, the aim of which was to ensure that resources would be made available to members undertaking practical programs of action designed to achieve the purposes of the Fund Agreement, especially the relaxation and removal of restrictions and discrimination, and the simplification of multiple currency practices.5 The programs would be the result of consultations between member countries and the Fund and would be drawn up on the basis that the use of the Fund’s resources would be temporary. It was hoped that the availability of assistance from the Fund would give greater confidence to member countries and thereby encourage them to take more decisive policy measures.

This formal linkage of the use of Fund resources with practical programs of action was an important new step in the Fund’s policy. Moreover, on November 19, 1951 the Fund adopted a new schedule of charges, which provided more favorable terms for the short-term use of Fund resources and materially shortened the period of continuous use after which the member must consult on means for reducing the Fund’s holdings of the member’s currency.6

1952-55

The search for a means of reducing the uncertainty about the conditions of access to Fund resources continued, and in a major decision taken on February 13, 1952 the Executive Board set out the guidelines to be followed.7 The decision contained four important features.

First, it established the general criteria to be taken into account. It was stated that “the Fund’s attitude toward the position of each member should turn on whether the problem to be met is of a temporary nature and whether the policies the member will pursue will be adequate to overcome the problem within such a period. The policies, above all, should determine the Fund’s attitude.” Second, a brief reference was made to what would be known subsequently as stand-by arrangements. The intention of such an arrangement was to give a member having no immediate need for a drawing, an advance assurance that a drawing would be available if, within six to twelve months, the need presented itself. Third, it was stated that in order to ensure the revolving character of the Fund’s resources, “exchange purchased from the Fund should not remain outstanding beyond the period reasonably related to the payments problem for which it was purchased from the Fund.” This period should fall within an outside range of three to five years.8 Fourth, it was declared that members would receive the overwhelming benefit of any doubt when applying for a drawing within the gold tranche.

The process of clarification of Fund policies and practices continued with the adoption by the Executive Board, on October 1, 1952,9 of a general policy on stand-by arrangements. It was expected that these would normally be for a period of six months but could be renewed, at the member’s request, at the end of that period. In considering a request for a stand-by arrangement, the Fund would apply the same policies as were applied to requests for immediate drawings, including a review of the member’s position, policies, and prospects in the context of the Fund’s objectives and purposes. In view of the policy of the Fund on drawings within the gold tranche, it was not considered likely that members would request stand-by arrangements confined to transactions within the gold tranche. Accordingly, the policy was designed primarily to deal with stand-by arrangements for drawings beyond the gold tranche. A stand-by arrangement would cover that portion of the quota—generally expected to be a maximum of 25 per cent—which a member could draw under Article V, Section 3, within the period provided for in the arrrangement. This provision, however, would not preclude the Fund from granting stand-by arrangements for larger amounts on terms in accordance with Article V, Section 4, which authorizes the Fund, at its discretion, to waive the quantitative limits on drawings. The explicit recognition of the fact that the waiver provisions of the Articles might have to be used in the implementation of policies on the use of Fund resources was an important feature of this decision. Until then, no such waiver had been granted; in fact, the first waiver of this kind was not granted until August 1953, when Turkey was allowed to draw more than 25 per cent of its quota within a year. This drawing, however, was not made under a stand-by arrangement. Since then, the granting of such waivers has been frequent (Table 1). This and the previous decisions did not refer to the repurchase period for drawings under stand-by arrangements, but in the early operation of this policy the practice was adopted of stipulating a maximum period of three years for such repurchase.

Table 1.

Use of Fund Resources: Proportion of Waivers Granted Under Article V, Section 4, 1956-65

(In millions of U.S. dollars)

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New or renewed.

January-September only.

The decision of February 13, 1952 on the use of Fund resources had been made effective only until December 31, 1953; in a decision of December 23, 1953 the Executive Board extended its previous decision without a definite expiration date, subject to review from time to time. The decision also confirmed the Fund’s policy on stand-by arrangements; in doing so, however, it emphasized that the Fund would “give sympathetic consideration to a request for a longer stand-by arrangement in the light of the problems facing the member and the measures taken to deal with them.” In this connection, however, the Fund and the member might find it appropriate to reach additional understandings.10 Reaffirmation of Fund policy in this decision was expected to give members not only assurance of continuity in Fund policy but also confidence in the Fund’s readiness to give individual consideration to the special needs of particular countries.

Nevertheless, the volume and value of Fund transactions continued to be relatively small.11 In part this small volume reflected the improvement in the balance of payments position of many Fund members; in addition, however, individual member countries continued to be somewhat reluctant to approach the Fund for assistance. In a further effort to convince members that the Fund’s resources could confidently be regarded as an important supplement to members’ reserves, the Fund took the opportunity, in its Annual Report for 1955 (pp. 84-85), to elaborate on its drawing policies beyond the gold tranche. The Report established the principle that applications for drawings beyond the gold tranche “are naturally subject to a more detailed examination of all the relevant circumstances, and the larger the drawing in relation to a member’s quota the stronger is the justification required of the member.” The degree of justification that has to be furnished in accordance with the above principle was related to the different tranches of the quota. It was stated that the Fund’s attitude toward applications for drawings within the first credit tranche would be liberal provided that the member itself was making reasonable efforts to solve its problems. For drawings beyond the first credit tranche, substantial justification would be required, and foremost among the developments that the Fund foresaw as justifying liberal approval of such drawings were transactions in support of the establishment or maintenance of convertibility.12

This statement of drawing policy contained in the 1955 Annual Report culminated almost a decade of efforts to formulate a policy which would enable member countries to know in advance the conditions under which they could gain access to Fund resources but which would also provide adequate safeguards for the Fund.

1956 To Present

After several years of relative inactivity, the volume and amount of transactions with the Fund rose sharply in 1956 and subsequent years. In part, the Suez crisis of 1956 and the fall in export prices in 1957 were responsible for some of the requests for drawings from the Fund; an important development, however, was the fact that members had come to understand better the significance of the Fund’s policies and practices and were prepared to seek the use of Fund resources in support of their own policies. In subsequent years this greater awareness of the Fund’s functions and policies led an increasing number of members—particularly the developing countries—to look to the Fund for assistance in achieving monetary stability and simplifying their exchange systems. This awareness is illustrated by the use which has been made of Fund resources in the last nine years (Table 2).

Table 2.

Amounts of Fund Transactions by Tranches, 1947-65

(In millions of U.S. dollars)

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January-September only.

During this period the policy on the use of resources has been further developed in two directions. In the first place, the circumstances which may justify a member’s access to Fund resources have been clarified and broadened in several respects. Secondly, the techniques of implementing Fund policies in the form of stand-by arrangements have been substantially elaborated and improved.

It was observed in the 1957 Annual Report (p. 119) that although convertibility was one of the main objectives of the Fund’s activities, the opportunity for linking Fund transactions with programs for the establishment or maintenance of convertibility had at that time been very limited. The general principles contained in the 1955 Annual Report concerning the use of Fund resources beyond the first credit tranche were therefore restated in the 1957 Report (p. 120) as follows: “members’ requests for such drawings or stand-by arrangements are likely to be favorably received where they are intended to support well-balanced and adequate programs which are aimed at establishing or maintaining the enduring stability of the currencies concerned at realistic rates of exchange….”

Another clarification which was made in 1961 concerned the possibility of Fund assistance for payments problems created by capital transfers. The experience of many countries has shown that capital movements may be substantial even under systems embodying exchange restrictions, but such movements can naturally assume even greater proportions under conditions of convertibility. After external convertibility was established by the principal European countries in December 1958, it was found that a substantial movement of short-term funds between these and other countries was taking place. An outflow of such funds can cause difficulties in the same way as an adverse development in any other item in the balance of payments. Moreover, it is difficult to identify quickly the precise source of a decline in exchange reserves, and the use of resources obtained from the Fund cannot be reserved to cover any particular source to the exclusion of others.

Although the Fund’s resources had been previously used to meet problems involving capital transfers, there was some uncertainty as to the extent to which, or the circumstances in which, these resources could be made available to countries whose balance of payments deficits were attributable mainly or totally to capital transfers. This uncertainty had arisen largely because of the 1946 decision, noted above, which stressed deficits on current account. By a decision of July 28, 1961 the Executive Directors clarified the earlier interpretation of the Articles of Agreement and thus eliminated any doubt that the Fund’s resources could be used, in accordance with the relevant provisions of the Articles, to alleviate balance of payments pressures brought about by capital transfers.13 In connection with this decision, it was said that “if a country facing an outflow of capital were to turn to the Fund for assistance, the test to be applied by the Fund would be in accordance with its accepted principles, i.e., that appropriate measures were being taken so that equilibrium in the balance of payments would be restored, and that assistance provided by the Fund would be repaid within a maximum period of three to five years.” 14

In order to extend access to the Fund’s resources to members who have not established an initial par value with the Fund, the Executive Directors decided on April 22, 1964 to permit exchange transactions with such members under conditions and in amounts to be prescribed in each case. The relevant Executive Board decision15 noted that in deciding whether to permit exchange transactions before the establishment of an initial par value, the Fund would be guided by the purposes of the Articles of Agreement; it would encourage members to follow policies leading to the establishment of realistic exchange rates and to the adoption at the earliest feasible date of effective par values, and would take into account the efforts that were being made to achieve this objective. However, requests for drawings within the gold tranche and under the compensatory financing facility described below would be granted to such members on the same basis as to others.

Another modification of the Fund policy has been to provide further emphasis on the de facto automaticity of drawings in the gold tranche. By an Executive Board decision of August 3, 1964 16 the procedures for drawings in the gold tranche were simplified; henceforth, requests for drawings in the gold tranche would be granted without Executive Board discussion, unless the Managing Director decided or an Executive Director requested that the matter be placed on the Board’s agenda, and exchange could be delivered to the member normally two business days after receipt of the request by the Fund.

A significant development in drawing policy during the period under review has concerned a specialized use of Fund resources to provide for the compensatory financing of export fluctuations. The new policy, which was approved by the Executive Board on February 27, 1963, 17 created a special facility to provide support to members suffering from fluctuations in receipts from exports of primary products. The Fund must be satisfied, however, that the shortfall in export earnings is of a temporary character and largely attributable to circumstances beyond the control of the member. The Fund must also be satisfied that the member will cooperate with the Fund to find, where required, appropriate solutions for its balance of payments difficulties. In order to implement this policy, the Fund will be prepared to grant a waiver under Article V, Section 4, and allow drawings beyond 200 per cent of the quota, where appropriate.

Another specialized use of Fund resources has evolved in connection with the quota increases approved by the Board of Governors in February 1959 and under the above Compensatory Financing Decision. The Executive Board decided on these occasions18 to give sympathetic consideration to requests for drawings where the member would encounter undue payments difficulties through the reduction in its reserves by the payment of the required gold subscription.19

A further specialized use of Fund resources is reflected in the stand-by arrangements for the United States in July 1963 and July 1964. The currencies purchased by the United States under these arrangements were intended for sale for U.S. dollars at par by the United States to those members of the Fund that keep their international reserves mainly in U.S. dollars and have repurchase commitments to the Fund, in order to enable them to meet these commitments at times when Fund holdings of U.S. dollars are at or above 75 per cent of the U.S. quota.

An important aspect of Fund transactions on which there has been further evolution since February 1961 should also be noted. Before that time, no country had outstanding drawings or a stand-by arrangement with the Fund for amounts that in the aggregate exceeded 100 per cent of its quota. The first approval for a larger amount was given in connection with a combined drawing and stand-by arrangement requested by Chile.20 Since then, such approval has been given to requests by a number of other countries; so far, the Fund holdings of the currencies of five members have exceeded 175 per cent.

The foregoing review indicates the various clarifications and extensions of drawing policies introduced since 1956. The main development in the implementation of these policies in the last decade has been the increasing use of stand-by arrangements and the formulation of techniques associated with such arrangements. Although the Fund had formulated a general policy on stand-by arrangements in 1952 and had granted several such arrangements in the following three years, outright drawings continued to be the main vehicle of Fund assistance until 1956. In that year the stand-by technique began to play a more important role in Fund operations; although no precise criteria have been formulated concerning the circumstances under which immediate drawings would be granted or stand-by arrangements would be negotiated, recent practice has been to negotiate stand-by arrangements based on specific understandings regarding the policies to be followed by the member when the use of Fund resources required “substantial justification.” In the eight years ended April 30, 1965 the Fund approved 137 new or renewed stand-by arrangements (17 for developed countries and 120 for developing countries) compared with 55 direct drawings (19 by developed countries and 36 by developing countries).

It had been intended that the main application of the stand-by arrangement would be for a member which did not have an immediate need for a drawing from the Fund but wished to have an assurance that such assistance would be available, if and when needed. Since 1956, however, the stand-by arrangement has been adapted to act also as a means by which the Fund can give support to a member’s stabilization program and by which close contact can be maintained during its implementation.21 It is this adaptation which has made stand-by arrangements such a prominent feature of Fund operations. Usually the arrangement is accompanied by a letter of intent which contains precise declarations of policy to be pursued over time, including undertakings such as those concerning extension of bank credit to the government or private sector and concerning public finance. Furthermore, the envisaged drawings on the Fund are usually phased between two or more periods and may be made only while certain specific conditions were being observed. If these conditions are not satisfied, drawings may be resumed only after new understandings are reached. This type of stand-by arrangement provides greater assurance of the proper use of Fund resources than an immediate drawing granted on the basis only of the member’s declaration that it intends to follow certain policies. It strengthens the hands of the authorities so that they can more energetically implement policies designed to establish or maintain the monetary stability and the liberal payments system required to facilitate economic growth. At the same time it strengthens the confidence of other lenders in the ability of the country to promote these objectives, thus leading to the provision of further resources for meeting both immediate and longer-term needs.

The phasing technique, first introduced in March 1956, was used rather infrequently in the following two years. Since the beginning of 1958, however, phasing has been included in the majority of stand-by arrangements; between the end of 1957 and the end of September 1965, the Fund approved 136 stand-by arrangements, of which 112 included phasing clauses.22 Phasing has usually been combined with a clause making drawings under the arrangement dependent on the observance of certain conditions. Few of the stand-by arrangements with phasing clauses approved since the end of 1960 have omitted such a clause.

The use of the phasing technique has been determined according to the circumstances of particular members.23 The linking of stand-by arrangements with stabilization programs which necessarily require implementation over a period of time suggests that drawing rights should be phased so as to ensure that resources will be available when the need for them arises. In particular, the phasing should provide for the need for financing arising from seasonal factors as well as from pressures created by the implementation of the policy measures. Moreover, since uncertainties often arise over the effects of the measures included in the program, phasing provides the opportunity of periodic joint reviews of the progress of the program and thus facilitates modifications when they become necessary. In these circumstances, the Fund may be prepared to assume greater risks as to the outcome of the program and, accordingly, make larger commitments.

The amounts available for drawing under each phase of a stand-by arrangement have been determined according to the needs of each particular case. In many arrangements a large proportion of the total amount has been available for drawing within a relatively short period. All stand-by arrangements, moreover, permit acceleration of the use of resources if the member requests this and the Fund agrees.

Review of Fund Transactions

Throughout the gradual evolution of Fund policies and practices discussed in the preceding sections, one consideration has predominated. This has been the Fund’s desire to assist members when adjusting their payments positions in a manner compatible with the Fund’s objectives (especially the achievement of a liberal system of international payments) while at the same time preserving the revolving nature of its resources. The principles and standards which the Fund has set up are sufficiently definite to be predictable, but they have been applied in a flexible manner to take into account the need and circumstances of each country, including its social priorities and institutional practices.

Over the years, Fund assistance has grown considerably in volume; drawings rose from an average of $151 million a year in 1947–55 to $495 million in 1956–60 and to $1,590 million in the subsequent four and a half years. The increase in the amount of Fund transactions has concerned both developed and less developed countries. The number of stand-by arrangements and outright drawings, however, has increased more rapidly for less developed countries than for developed countries (Tables 3 and 4). If it had not been for the wide acceptance of the principles governing Fund assistance, transactions in such growing magnitudes could not have been consummated. There is now sufficient experience to show that a country which is facing balance of payments problems and is prepared to take appropriate measures to cope with these problems can confidently turn to the Fund for assistance. Also, other potential creditors have increasingly viewed a program supported by the Fund as an effective basis for providing support to the country. The Fund has thus succeeded in establishing an internationally recognized form of initiative and decision and has thereby been instrumental in increasing the flow of foreign assistance.

The problems for which Fund assistance has been provided may be grouped broadly into those caused by factors largely outside the control of members and those more directly connected with the policies of members. In practice, the distinction between these groups has not always been clear cut; balance of payments difficulties of some countries have resulted from a mixture of both types of factors. The nature of the problems caused by factors largely outside the control of members has been such that corrective action has not always been necessary; during the period of strain, however, balance of payments support has been needed. Various types of natural disasters, such as earthquakes, droughts, hurricanes, floods, and pest infection, have either affected export crops or necessitated unexpectedly large imports and have led a number of countries to seek Fund assistance. For some countries, exports consist mainly of one or a few agricultural products and export earnings are often concentrated within a short period. If these countries hold only a relatively small amount of foreign exchange reserves, they may experience payments difficulties during the period of the year when their export earnings are low, although their external financial position may be basically sound. Fund assistance has helped such countries to tide over their difficulties during this “ebb” period. Again, falling export prices, problems in the marketing of exports, and difficulties associated with foreign aid (such as a temporary decline in the inflow of foreign aid, the need to support the process of adjustment to a more permanent decline in such inflow, or lags in the disbursement of foreign aid commitments) have strained the payments situation of some countries and have been occasions for Fund assistance. Finally, destabilizing movements of short-term capital sparked by economic or political developments abroad have also led to large-scale Fund support.

Problems caused by factors directly connected with the policies of members have furnished more numerous occasions for recourse to Fund assistance, which has been provided mainly in the form of stand-by arrangements. Stand-by arrangements have been approved for a number of countries in order to maintain confidence in the economic policies being followed by them. Some of these stand-by arrangements have been used only in part; under several, no drawings were made (Table 5).

Table 3.

Direct Drawings and Drawings Under Stand-By Arrangements by Developed and Other Countries, 1952-65

(In millions of U.S. dollars)

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In addition to the participants in the General Arrangements to Borrow (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States, these include, Australia, Austria, Denmark, Finland, Iceland, Ireland, Israel, New Zealand, Norway, Portugal, South Africa, Spain, and Yugoslavia.

January-September only.

Table 4.

Number of Stand-By Arrangements and Direct Drawings, 1957/58-1964/65 1

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Year ended April 30.

See Table 3, fn. 1.

Table 5.

Amounts Drawn Under Stand-By Arrangements1

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All stand-by arrangements which had expired by September 30, 1965.

Nevertheless, the existence of such stand-by arrangements has effectively helped to sustain confidence in the members’ currencies or in their over-all policies, because it was known that the countries had Fund resources at their disposal. Closely related are numerous stand-by arrangements made chiefly to strengthen the hands of the monetary authorities in maintaining financial discipline. The stabilization programs supported by the Fund, involving commitments regarding the fiscal and monetary policies to be followed in specific periods, have helped the authorities to withstand pressures for excessive credit creation. Drawings under some of these stand-by arrangements have been relatively infrequent, but the arrangements have generally been renewed from year to year. Another reason for Fund assistance has been the payments difficulties experienced by some developed countries as a result of an over-expansion of domestic demand that was reflected mainly in a sharp increase in imports. The availability of Fund resources has given these countries time in which to implement corrective measures.

The most common purpose for which Fund assistance has been given has been the support of stabilization programs designed to eliminate inflation and reduce reliance on restrictions. The inflationary pressures have arisen mainly from deficits in government budgets but also from the excessive expansion of credit to the private sector; often these pressures have resulted in complex exchange systems with increasing reliance on restrictions. In a number of countries, Fund-supported stabilization programs have helped to eliminate inflation and to simplify and liberalize exchange systems on an enduring basis. In other countries, experience has been less favorable. Although some countries have made gradual improvement over the years, the basic sources of their payments difficulties have not yet been eliminated. Other countries achieved initial success but were unable to continue pursuing the appropriate policies, with the result that inflationary pressures reappeared and restrictive measures were reintroduced. A few countries have had occasional recourse to Fund assistance in support of stabilization efforts which have proved inadequate and, moreover, have not been sustained. Finally, a number of countries, despite successive stabilization programs undertaken with the support of the Fund, have continued to suffer from domestic and external imbalances.

The Fund’s responsibility in these diverse situations has been to encourage members using the Fund’s resources to adopt adequate measures consistent with its objectives and purposes. On the whole, the more developed countries have adopted policies which have corrected their payments maladjustments and have facilitated progress toward, or adherence to, convertibility and currency stability. In recent years the Fund has played an increasingly active role in the less developed countries. The Fund’s experience in these countries has been considerably more varied than in the developed countries and cannot be easily generalized. On the one hand, the Fund has had a substantial measure of success in assisting many countries to devise and carry out sound financial policies, which have enabled them to establish and maintain realistic exchange rates and which have provided a firm basis for sustained economic development. However, despite long-term Fund collaboration, some countries have made little progress toward achieving the agreed objectives. The internal and external imbalance in these countries has not improved significantly, substantial inflation has persisted, and reliance on restrictive practices has continued.

Although the continued use of Fund resources for long periods is not desirable, it has resulted from new drawings to which the Fund has agreed in order to meet a succession of payments problems. Each new drawing or stand-by arrangement has required negotiations in which the Fund, after closely reviewing the policies being followed by the member, has reached new understandings with the member as to future policies. Thus, in the course of refinancing of outstanding drawings, the Fund has had the opportunity to influence the policies of the member toward the strengthening of its balance of payments and improving its trade and payments system. It is this feature which particularly distinguishes the continued use of Fund assistance from that of long-term development assistance or lines of credit.

A number of difficulties beset some of the less developed countries in the successful formulation and implementation of stabilization programs. By and large, they are hindered in their efforts to achieve the goals of rapid growth and economic stability by various structural problems including wide fluctuations in export receipts and difficulties in the reallocation of resources. These structural problems are aggravated by the pursuit of expansionary financial policies which generate strong inflationary pressures, resulting in a misdirection of resources. The persistent inflation and the social and political difficulties involved in an adjustment of the exchange rate create a tendency toward currency overvaluation. As a result, the balance of payments deteriorates, foreign reserves fall to dangerously low levels, and foreign debts—especially short-term debts—build up. While the effects of the overvaluation may be moderated by export subsidies and import taxes, and by restrictions on trade and payments, such measures soon prove to be inadequate. The difficulties are compounded by the fact that inflation, after a period, is sustained by expectations of further inflation. Many stabilization programs have been supported by the Fund at times when the economic situation has suffered extreme deterioration. The governments may have recognized that only the achievement of financial stability can provide a firm basis for sustaining a high rate of growth; but the formulation and administration of a reform program is highly dependent on the availability of effective policy instruments, the existence of broad political support, and the ability to provide leadership and expertise to implement the program. Nevertheless, the Fund has concluded that international collaboration with a number of these countries was justified, even though the prospects for a rapid transition to stable conditions were uncertain.

Successful negotiation of a stand-by arrangement with the Fund has often been paralleled by substantial assistance from other sources. In this way, the Fund has been able not only to influence the adoption of policies designed to create a sound basis for economic development but also to increase indirectly the amount of resources available for such development. Even where the process of adjustment to sound financial conditions has been long and often checkered, the creditor countries have regarded the existence of stand-by arrangements for the debtor countries as providing a satisfactory basis for continuing their participation in long-term development programs. Moreover, both creditor countries and lending agencies have at times made the initiation of a concerted aid program for a country dependent on a Fund review of its financial problems and policies and the agreement between the Fund and the country on the necessary policy adjustments. On the whole, therefore, it may be said that Fund assistance has effectively contributed to the solution of the payments difficulties of its members and thus to the strengthening of the international payments system.

Politique relative à l’utilisation des ressources du Fonds

Résumé

II ressort de cette étude, qui retrace l’historique des politiques relatives à l’utilisation des ressources du Fonds et à leur application, que leur évolution a été progressive. Elles mettent en lumière le caractère renouvelable de l’utilisation de ces ressources et l’acceptation par les membres du Fonds de modalités propres à garantir l’accomplissement de ses objectifs. Après avoir débattu pendant plusieurs années les mérites respectifs de Pautomatisme et de la conditionnalité des tirages, le Fonds a conclu en faveur de cette dernière; cependant la question s’est posée de savoir dans quelles conditions ces ressources pourraient être utilisées. Cette question a été résolue par la fixation des conditions régissant le recours aux tirages par tranches successives, et les modalités du rachat des tirages ainsi que par l’adoption d’accords de crédit “stand-by” qui, sous réserve des conditions stipulées dans l’accord, garantissent à un pays membre l’accès aux ressources du Fonds, pour un montant et une durée donnés. En 1952, le Conseil d’Administration s’est prononcé en faveur de droits quasi-automatiques de tirage dans la “tranche-or”, d’une période de trois à cinq ans pour les rachats et de l’utilisation d’accords de crédit “stand-by”. En 1955 et 1957, le Fonds a annoncé qu’il entendait adopter une attitude libérale à l’égard des demandes de tirage das la “première tranche de crédit”; des “justifications sérieuses” seront requises pour les demandes de tirage au-delà de cette tranche, qui seront accueillies favorablement si les tirages ont pour objet de financer un programme rationnel destiné à établir ou à maintenir une stabilité durable de la monnaie du pays membre à un taux conforme à un taux conforme à la réalité. En 1963, le Fonds a décidé d’accorder des tirages pour le financement compensatoire des fluctuations des exportations. L’auteur passe brièvement en revue les transactions du Fonds, et les divers problèmes de balance des paiements pour lesquels ses membres ont eu recours aux ressources du Fonds. II met l’accent sur l’utilisation croissante et l’adaptation des accords “stand-by” pour l’exécution des programmes de stabilisation, et prend note des difficultés que présente, pour certains des pays moins développés, la mise en œuvre de ces programmes.

Politícas respecto al uso de los recursos del Fondo

Resumen

Este repaso histórico de las políticas relativas a la utilización de los recursos del Fondo y la manera en que las mismas se aplican indica que esas políticas han ido surgiendo gradualmente. Subrayan el carácter rotatorio del empleo de los recursos del Fondo y la aceptación por los países miembros de las condiciones que velan por el cumplimiento de las finalidades del Fondo. El debate en el Fondo que habíase planteado anteriormente en torno al automatismo o la condicionalidad de los giros fue resuelto en favor de la condicionalidad, pero ocurrieron incertidumbres en cuanto a las condiciones que habrían de mediar para el uso de los recursos. Esas incertidumbres quedaron vencidas mediante el señalamiento de normas relativas a los giros en tramos sucesivos y a las obligaciones de recompra, y también mediante la implantación del sistema de los acuerdos de crédito contingente (stand-by), los cuales ofrecen la seguridad de que el país miembro podrá usar, con sujeción a las condiciones que se incluyan en el acuerdo, los recursos del Fondo hasta una cifra determinada y durante un período dado. En 1952 el Consejo Ejecutivo se decidió por el automatismo virtual de los giros dentro del “tramo de oro”, por que los períodos de recompra fuesen de tres a cinco años, y por la utilizatión de los acuerdos de crédito contingente. En 1955 y 1957 el Fondo declaró que su actitud tocante a los giros en el “primer tramo de crédito” sería liberal; que para los demás giros exigiría una justificación sustancial; y que consideraría propiciamente las solicitudes correspondientes siempre que los giros fuesen a objeto de apoyar un programa bien concebido destinado a establecer o hacer perdurar la estabilidad de la moneda del país miembro a un tipo de cambio realista. En 1963 el Fondo instauró el financiamiento compensatorio de las fluctuaciones de las exportaciones. Este artículo reseña sucintamente las transacciones del Fondo y los problemas de balanza de pagos para los cuales se han utilizado recursos del Fondo. Destaca el creciente uso y la adaptación de los acuerdos de crédito contingente a los programas de estabilización, y advierte las dificultades que algunos países menos desarrollados experimentan al llevar a la práctica dichos programas.

*

Mr. Mookerjee, Advisor in the Exchange and Trade Relations Department, is a graduate of the University of Calcutta and of Harvard University. He was formerly Professor of International Economics at the Indian School of International Studies, New Delhi. He is the author of Factor Endowments and International Trade and a number of articles published in technical journals.

1

The repurchase provisions of the Articles, as set forth in Article V, Section 7, relate repurchase to the movements of members’ international reserves and do not specify any time range within which repurchases have to be made.

2

Decision 71-2, Selected Decisions of the Executive Directors and Selected Documents, Third Issue (Washington, 1965, hereafter cited as Selected Decisions), p. 54.

3

Decision No. 284-4, Selected Decisions, p. 19.

4

International Monetary Fund, Annual Report, 1948, p. 74. The decision noted that the Fund and members participating in ERP should maintain the resources of the Fund at a safe and reasonable level during the ERP period in order that at the end of the period such members would have unencumbered access to the resources of the Fund.

5

International Monetary Fund, Annual Report, 1951, p. 81.

6

The charge at which there is obligatory consultations was reduced from 4 per cent to 3½ per cent and the period of continuous use after which there is obligatory consultation was reduced from seven years to three years for the first credit tranche and from four and a half years to one and a half years for the fourth credit tranche.

7

Decision No. 102-(52/11), Selected Decisions, pp. 21-24.

8

In subsequent revisions of the schedule of charges, the charge at which consultations become obligatory was restored to 4 per cent. The last revision of the schedule of charges was made on April 24, 1963.

9

Decision No. 155-(52/57), Selected Decisions, p. 24. The Fund had entered into its first stand-by arrangement, for Belgium, on June 19, 1952; the first stand-by arrangement under this new general policy was for Finland, approved on December 4, 1952.

10

Decision No. 270-(53/95), Selected Decisions, p. 26. The first stand-by arrangement under this revised policy, for Peru, was approved on February 18, 1954; the stand-by arrangement was for one year and was in support of an exchange stabilization program. This was also the first Fund transaction with a member which did not maintain an effective par value but instead adopted a fluctuating rate of exchange.

11

Total drawings from the Fund amounted to US$62 million in 1954.

12

Particular emphasis was placed in Executive Board Decision No. 433-(55/42) {Selected Decisions, pp. 76-77) on the elimination of bilateral arrangements that involved the use of exchange restrictions, and thus might impede the attainment and maintenance of convertibility. The decision noted that the Fund would explore the ways and means, including the use of its resources, by which it could assist in the process of an early removal of such arrangements.

13

Decision No. 1238-(61/43), Selected Decisions, p. 54.

14

International Monetary Fund, Annual Report, 1962, p. 33.

15

Decision No. 1687-(64/22), Selected Decisions, p. 48.

16

Decision No. 1745-(64/46), Selected Decisions, p. 49.

17

Decision No. 1477-(63/8), Selected Decisions, pp. 40-43.

18

International Monetary Fund, Annual Report, 1959, p. 17, and Decision No. 1529-(63/33), Selected Decisions, p. 6.

19

Repurchases corresponding to such drawings are to be made in equal annual installments, to commence one year after the drawing and to be completed not later than three years after the drawing.

20

The drawing was intended to facilitate the termination of Chile’s bilateral payments agreement with Argentina. This was an application of the policy under which the Fund contemplated the use of its resources, where appropriate, to help to terminate bilateral payments arrangements.

21

The February 1954 stand-by arrangement for Peru (see p. 428, footnote 10) was the first to include a provision to this effect.

22

Beginning in 1960 the use of phasing has become even more common; of 96 stand-by arrangements approved since the end of 1960, 84 have included phasing clauses.

23

The 12 stand-by arrangements without phasing which have been approved since the end of 1960 have involved only six countries. In several of these arrangements the circumstances made it desirable that all of the resources should be available immediately if needed. In others the amount involved was very small in relation to the member’s quota, or fell within the first credit tranche.