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Finance & Development, December 1980
Article

International monetary stability-challenges and response: A review of the issues of the Fund Annual Meeting

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1980
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Avinash Bhagwat

The 1980 Annual Meeting of the Board of Governors of the International Monetary Fund affirmed again the willingness of the Fund to evolve, under its charter, to meet new circumstances; but in some ways there was a departure from the past. Two substantive problems dominated the Meeting: the persistence of high inflation as a worldwide problem and the large payments deficits engulfing the non-oil developing countries. There was general agreement that these were the immediate threats to international monetary stability. The Meeting also indicated the concrete ways in which the Fund would respond to these challenges. The difference from the past, though more a matter of degree than of kind, was that the proceedings also included a lively debate regarding the Fund’s approach in dealing with the problems of the developing countries. In itself, this was not new. But the impact was greater because of the difficult plight and prospects of the low-income developing countries, which made many of the other participants more sympathetic and attentive to their predicament and point of view. In practical terms, this served to increase the attention given to the endorsement of the important policy reorientations being implemented by the Fund in recent months and to further adaptations that deserved serious examination.

The main concern of the participants remained with the two urgent threats to international monetary stability and the appropriate responses by the Fund to these challenges. In this area of the Fund’s basic responsibility, the following main policy guidelines could be identified from the deliberations of the Interim Committee and from the Plenary speeches by Governors.

  • The battle against inflation must continue to have top priority and the implementation of effective energy policies was an essential part of this.
  • The dramatic increases in the payments deficits of non-oil developing countries underscored the great and urgent need for more official development assistance to them and for unhampered access for them to export and capital markets.
  • Endorsement of an enhanced role for the Fund in financing payments imbalances and in promoting adjustment. In this regard, the Interim Committee endorsed a substantial enlargement of members’ access to Fund resources up to an annual limit of 200 per cent of quota for a total of up to 600 per cent of quota over a three-year period, in support of appropriate adjustment programs.
  • To enable the implementation of this policy of enlarging access to its resources, the Fund received a clear mandate to make the arrangements to borrow the necessary resources.
  • Affirmation that quotas should remain the primary source of finance for the Fund’s operations and that the size of the Fund and of members’ quota shares in it were of central importance.
  • Support for putting into effect a subsidy account to reduce the cost of using the Fund’s supplementary financing facility.
  • Agreement that prompt consideration should be given to an arrangement for Fund assistance for countries adversely affected by higher food import costs.
  • Endorsement of concrete measures to strengthen the reserve asset role of the special drawing right (SDR), including, in particular, further allocations by the Fund in the period beginning in 1982.

For detailed reviews of the Annual Meeting, those of the Development and Interim Committees, and the Croups of 10 and 24 see the IMF Survey for October 13, 1980.

Many of the themes and policy directions had been debated at previous meetings, and in other forums; several, for instance, were included in the Program of Immediate Action endorsed a year ago by the Group of Twenty-Four at the Annual Meetings in Belgrade, Yugoslavia. In effect, the policy directions and responses emerging out of the Annual Meeting will form the core of the Fund’s current work program to be implemented under the stewardship of its Managing Director, Mr. Jacques de Larosière.

A notable development this year was that the People’s Republic of China occupied China’s seat and participated in the Meeting for the first time. Three new countries, St. Lucia, St. Vincent and the Grenadines, and Zimbabwe, joined the Fund during the past year, thereby bringing the total membership to 141 countries.

A special factor this year was the concern on the eve of the Annual Meeting that their traditional concentration on financial matters might be affected by the question of the application of the Palestine Liberation Organization for Observer status. Thanks to the skillful diplomacy of the Chairman of the Board of Governors for 1980, Amir H. Jamal, Tanzania’s Minister of Finance, as well as to the cooperative attitude adopted by interested member countries, the matter was discussed outside the Plenary sessions and a Committee of Governors was appointed to deal with certain questions of legal interpretation that had arisen.

Inflation-growth dilemma

A year ago, during the Annual Meeting in Belgrade, inflation was without question at the top of everyone’s agenda. Subsequent developments have vindicated this concern, as during 1979 and the early part of 1980 inflation accelerated worldwide. In the industrial countries in 1980, it will be at its worst since 1975, and in the non-oil developing countries it will have reached an unprecedented annual rate of 35 per cent. However, consumer prices were beginning to slow down perceptibly during 1980, indicating some success for the anti-inflationary policies followed in the major industrial countries. But the cost in many countries has been a weakening of industrial activity, rising unemployment, and slower economic growth. The human suffering and social cost associated with unemployment and slow economic growth create a dilemma for national economic policymakers, and anti-inflationary policies now face a difficult test.

Nevertheless, many Governors expressed their conviction that top priority must continue to be given to the fight against inflation. This conviction was based on the realization that any premature relaxation of fiscal and monetary policies would only lead to short-lived gains in output and employment; thereafter, rising inflationary pressures and larger external payment imbalances would again force countries to contract and risk another sharp recession. Moreover, several years would have been lost for the fight against inflation. In fact, the Interim Committee was endorsing a widely-held view when it stressed that the control of inflation and the defeat of inflationary expectations were a prerequisite for insuring sustained economic growth and improved employment prospects over the longer run.

In his comments the Managing Director, Mr. Jacques de Larosière, stressed the importance of the energy situation. He emphasized that the core of the energy problem is quite simple: the present level of oil consumption greatly exceeds rates of production that can be sustained in the long run. The implications of this for national and international policies are obvious and of great importance. It is essential to recognize that oil had become an expensive product and is bound to remain so. Mr. de Larosière asserted that “no anti-inflation effort, no sustained policy of growth, no plan to organize the world’s monetary system could succeed if the present energy situation were to persist.”

These policy priorities will be of importance in the coming year in the Fund’s dialogue with its member countries, and in particular for the annual consultation discussions with members. These regular discussions are one of the means through which the Fund fulfills its responsibilities for exercising surveillance over exchange rate policies of members and for overseeing the international monetary system.

Non-oil LDC payments imbalances

The greatest threat to the international monetary system at the present time is from the recent large shifts in the current account payments balances of the major groups of countries. The combined current account deficit of industrial countries is estimated to increase from US$13 billion in 1979 to $55 billion in 1980; the deficit for the non-oil developing countries, already unsustainably large at $56 billion in 1979, is now expected to increase further to over $70 billion in 1980. Not only that, but Fund staff projections indicate that the deficit for the industrial countries will be nearly halved in 1981. The prospect for the non-oil developing countries is for a further increase to $80 billion.

The non-oil developing countries have steadily run relatively large current account deficits throughout the period since 1973, when the first large oil price increase took place. Thus, during 1974-79, they had an annual average deficit of about $40 billion and a cumulative deficit on the order of $240 billion. (The comparable annual figure, prior to 1974 was roughly around $10 billion; see the chart.) Much of this was financed more smoothly than had been anticipated through the international capital markets, particularly the commercial banks. But now the prospect exists for further financing needs of perhaps $150 billion during 1980-81 alone; even more serious is the realization that such large deficits are not likely to disappear easily during the next several years. As a result, policymakers have become convinced that it is now essential for international financial institutions, and in particular the Fund, to play a much larger role in the recycling process.

Payments balances on current account, 1973-81

(In billions of U.S. dollars)

During the turbulent 1970s, Fund policies have been continuously adapted in response to the needs of the emerging international payments situation. The principal features of the most recent reorientations have been a substantial enlargement in the amounts that members can borrow from the Fund in relation to their quotas; an extension of the time period during which members are expected by the Fund to restore their external payments position to a sound footing; and greater emphasis on supply-oriented and structural adjustment policies in the designing of adjustment programs to be supported by the use of Fund resources. Thus, the conditionality that is incorporated in the adjustment programs that the Fund and the borrowing countries jointly work out is being adapted to the new international payments environment; adjustment programs will also, as always, take into account the particular situation of individual countries. The underlying principle continues to be that financing and adjustment must go hand in hand; for the inescapable reality is that with or without Fund resources, adjustment must take place when a member country has an unsustainable payments deficit. The availability of larger resources from the Fund can make this unavoidable adjustment less harsh; and adoption of Fund-supported programs can have a catalytic effect in improving a country’s access to financing from other sources. There was a wide endorsement of this overall approach by Governors in their speeches and also by the Interim Committee.

The new policy of enlarged access to Fund resources provides that for an individual country amounts up to an annual limit of 200 per cent of quota for a total of 600 per cent of quota over a three-year period would be a reasonable guideline in the present circumstances. What exactly does this guideline mean and how much of a change does it imply? A country X with a quota of SDR 100 million (at present SDR 1=US$1.32, approximately) has the possibility of borrowing under this policy up to SDR 200 million a year and up to SDR 600 million over a period of three years (this excludes borrowing under special facilities) so long as this use of Fund resources is in support of adequate adjustment programs addressed to the balance of payments problem of the country. Until seven years ago, the comparable overall limit for country X would at any given time have normally been SDR 100 million. With the introduction of the extended Fund facility in 1974, this limit was increased to SDR 165 million. Subsequently, when the supplementary financing facility came into operation in 1979, the comparable limit increased to about SDR 200 million and then to 300 million. Thus, the new guideline implies a substantial jump indeed in the amounts that member countries can look forward to borrowing from the Fund under appropriate circumstances.

The Executive Board of the Fund and the Managing Director have recently been working on two initiatives intended particularly to benefit low-income countries. One of them has been agreed: a subsidy account for the purpose of reducing the interest cost to low-income members of borrowing under the existing supplementary financing facility. The other initiative envisages arrangements under which the Fund would be enabled to provide financial assistance to member countries who have been adversely affected by increases in the costs of importing food, especially cereals. Both of these ideas will be actively pursued by the Managing Director and the Executive Board in the coming months.

Financial resources for the Fund

There was consensus among Governors that the new policy of enlarged access to Fund resources would make it necessary for the Fund to supplement them. It was also the overwhelming view that the primary source of finance for the Fund’s operations should be quotas. At the present time, member countries are acting on a resolution that would increase the size of the Fund (that is, the sum of the quotas of all member countries) from about SDR 40 billion to about SDR 60 billion. The larger size of the Fund was expected to become effective late in 1980. However, as many of the currencies in which members will pay quota subscriptions will not be usable by the Fund in its lending operations, the actual increase in the Fund’s liquidity will not be anywhere near the increase in the size of the Fund. Hence, in order to implement the policy of enlarged access, it is essential for the Fund to raise borrowed resources either from member countries bilaterally or by recourse to the private markets, if this were indispensable. It was therefore generally agreed during the Annual Meeting that arrangements should, as soon as possible, be made to enable the Fund to do this. It can be expected that this matter will also have a very high priority in the Fund’s current work program.

As regards the appropriate size of the Fund, many Governors, including the Ministers of the Group of Twenty-Four (on International Monetary Affairs), noted that, at a time when there was such an acute need for the Fund to increase its resources, the size of its quotas in relation to the volume of imports and financial needs had shrunk sharply over the years. They urged that this erosion in the relative size of quotas should be countered. It was agreed accordingly that work on the next General Review of Quotas should be taken promptly in hand. This forthcoming Review would also provide an occasion for the examination of three related matters: a review of the criteria by which quotas are calculated, the appropriateness of existing quotas in relation to the changing importance of members’ positions in the world economy, and also the demand by the developing countries that their participation in the decision making in the Fund be strengthened.

The Board of Governors

is the highest authority of the Fund. The membership of the Board consists of a Governor and an alternate Governor representing each of the 141 member countries. Usually, Governors are ministers of finance or central bank governors.

The Interim Committee

(on the International Monetary System) held its 15th meeting in Washington on September 28 this year. The Chairman was Mr. Hannes Androsch, Vice-chancellor and Minister of Finance of Austria, who acted in the absence of Mr. Pandolfi, Minister of the Treasury of Italy. Each constituency on the Executive Board of the Fund is entitled to appoint a member of the committee, which meets more than once a year.

The Interim Committee was established by a resolution adopted on October 2, 1974 at the Annual Meeting of the Fund:

  • To advise the Board on the management and adaptation of the international monetary system;
  • To review developments in the transfer of real resources to developing countries;
  • To consider proposals to amend the Articles of Agreement; and
  • To advise the Governors in dealing with monetary disturbances.

The Development Committee

which is a joint ministerial committee of the World Bank and the Fund on the transfer of real resources to developing countries, held its 14th meeting in Washington, D.C. on September 29, 1980, under the chairmanship of Mr. Cesar E. A. Virata, Minister of Finance of the Philippines.

Special Drawing Rights

A year ago, a great deal of attention and priority was given to the idea of establishing a substitution account for the purpose of exchanging U.S. dollar-denominated assets into SDR-denominated assets in the absence of exchange market transactions as a step in the direction of shifting to an SDR-based system. However, one thorny issue on which potential participants could not agree in April in Hamburg was the manner and proportion in which the potential ultimate financial risks inherent in such a substitution account would be shared amongst the various groups of participants. As the monetary system evolves, the contribution as well as the remaining problems of a substitution account should be reappraised. Accordingly, the Interim Committee reiterated its intention to continue the study of the subject.

In the meanwhile, several important steps have already been taken, or are under active consideration, to realize the goal of an international monetary system relying on the SDR as a principal reserve asset. For the last several years, the SDR has been based on a basket of 16 selected currencies. This summer the Fund decided that, effective January 1, 1981, the size of the SDR basket would be reduced from sixteen to the five major currencies, namely, the U.S. dollar, the deutsche mark, the French franc, the Japanese yen, and the pound sterling. It is expected that this simplification would greatly enhance the attractiveness of the SDR as a unit of account in which commercial banks and other financial institutions would accept deposits or acquire earning assets. In turn, this should increase its potential as an international medium of exchange. In recent months there has also been an increase in the number of official institutions that can hold and deal in SDRs.

The Interim Committee asked the Executive Board to give early attention to two further questions. One was to adjust the SDR interest rate to the full market rate. Such an adjustment would naturally make the SDR a more attractive asset to hold. The other was to eliminate the so-called reconstitution requirement for SDRs. The reconstitution requirement, adopted at the time when the idea of the SDR was at the conception stage, laid down that countries receiving allocations of SDRs should, over a period of time, hold in their international reserves at least a certain minimum specified portion of their SDR allocations. It is a sign of the coming of age of the SDR that it is possible now to consider dispensing with the shackle of the reconstitution rule.

Many Governors expressed the view that following the end of the present series of SDR allocations, further allocations should continue during the next period, which begins in 1982, and that these allocations should be at a higher rate than the present SDR 4 billion per year. The creation of a link between SDR allocations and development assistance was also pressed again by the developing countries. The Interim Committee agreed that the Executive Board should carry out a more comprehensive study of a possible link.

These and other policy issues emerging from the 1980 Annual Meeting will now be actively dealt with by the Fund’s Executive Board during the period up to the next meeting of the Interim Committee, to be held in Gabon on May 21, 1981.

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