imf - annual report 1985technical assistance and training 82 relations with other international...

ANNUAL REPORT1985

©International Monetary Fund. Not for Redistribution

The paper used in this publication meets the minimum require-ments of American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984.

International Standard Serial Number: ISSN 0250-7498


INTERNATIONAL MONETARY FUND

ANNUAL REPORT

of theExecutive Board for the

Financial Year Ended April 30, 1985

WASHINGTON, D.C.


This page intentionally left blank


Contents

Letter of Transmittal xiii

CHAPTER 1. Developments in the World Economy 1

Introduction 1Domestic Activity and Policies 2

Industrial Countries 2Developing Countries 9

International Trade and Payments 14Industrial Countries 16Developing Countries 19

Policy Issues 24

CHAPTER 2. Developments in the International Monetary System 30

Exchange Rates and Surveillance 30Exchange Rate Issues in Industrial Countries 30

Factors Influencing Floating Exchange Rates 31Exchange Rates and Financial Integration 32The EMS and Smaller Industrial Economies 35Implications for Exchange Rate Policies 36

Exchange Rate Policies in Developing Countries 37Recent Exchange Rate Experience 37Exchange Arrangements 39Role of Exchange Rate in External Adjustment 40

Surveillance 42The Substance of Surveillance 43Procedures 46Recent Changes in Reported Exchange Arrangements 47

International Liquidity, Reserves, and Financial Markets 49The Role of Reserves in the International Monetary System 49Recent Evolution of Official Reserve Assets 50

Non-Gold Reserves 50Foreign Exchange Reserves 50Holdings of Fund-Related Reserve Assets 52Gold 52Developments in First Quarter of 1985 53

Currency Composition and Placement of Foreign ExchangeReserves 53

Currency Composition of Reserves 53Placement of Foreign Exchange Reserves 56

V


CONTENTS

Sources of Reserve Growth 57International Financial Markets, the Adjustment Process

Provision of International Liquidity 57Recent Developments in the International Banking and

Markets 58Developments in Debt Reschedulings 60Current Account Imbalances and Reserve Growth 60

Adequacy of Reserves and the Role of the Fund 62Adequacy of International Reserves 62The Role of the Fund in the Provision of Liquidity 62

, an.

Bond

CHAPTER 3. Activities of the Fund 64

Introduction 64Membership of the Fund and Participation in the SDR

Department 66Transactions and Operations in the General Resources Account 67

Reserve Tranche Purchases 67Credit Tranche Purchases 68Extended Fund Facility 69Policy on Enlarged Access 69Compensatory Financing Facility 69

Purchases Under Decision Relating to Export Fluctuations 69Purchases Under Decision Relating to Cereal Import Costs 70

Buffer Stock Financing Facility 70Repurchases 70

Fund Liquidity 70Borrowing 71

General Arrangements to Borrow and AssociatedArrangements 72

Supplementary Financing Facility 72Borrowing to Finance Enlarged Access 72

Medium-Term Borrowing 72Short-Term Borrowing 73

Borrowed Resources Suspense Accounts 73Net Income Position, Charges, and Remuneration 73

Income, Expense, and Reserves 73Charges 75Remuneration 75

SDR Department 75Prescribed Holders of SDRs 76Transactions and Operations in SDRs 77

Transactions with Designation 77Transactions by Agreement 78Additional Uses of SDRs 79Inflows of SDRs 79Outflows of SDRs 79

Pattern of Holdings 79SDR as a Unit of Account Outside the Fund and as a Currency

Peg 79

VI


CONTENTS

V I I

APPENDICES1.II.III.

IV.V.

VI.VII.

VIM.IX.

TABLES1.

2.3.4.5.6.7.8.9.

10.

11.

12.13.

14.

15.

16.

17.18.

Accounts Administered by the Fund 80Trust Fund 80Supplementary Financing Facility Subsidy Account 80

Article IV Consultations and Notifications of Changes in ExchangeRates 81

Debt Restructuring 82Technical Assistance and Training 82Relations with Other International Organizations 84External Relations 85Executive Directors and Staff 85

Fund Activities in 1984/85 91Principal Policy Decisions of the Executive Board 110Press Communiques and Announcement of the Interim Committee

and the Development Committee 125Executive Directors and Voting Power on April 30, 1985 136Changes in Membership of Executive Board 140Administrative Budget 146Comparative Statement of Income and Expense 147Financial Statements 148Classification of Countries 179

Major Industrial Countries: Central Government Fiscal Balances andImpulses, 1977-84 5

Industrial Countries: Changes in Output and Prices, 1967-84 7Major Industrial Countries: Real Gross Fixed Investment, 1981-84 7Developing Countries: Growth of Real GDP, 1967-84 10Developing Countries: Changes in Consumer Prices, 1967-84 12World Trade, 1967-84 15Summary of Payments Balances on Current Account, 1977-84 16Developing Countries: Current Account Financing, 1978-84 22Developing Countries: Debt, Debt Service, and Current Account

Deficits of Market Borrowers, 1981-84 22Developing Countries: Changes in Current Account Financing, from

1981 to 1984 23Developing Countries: Exchange Rate Arrangements, End of June

1979-85 41Exchange Arrangements as of June 30, 1985 48Official Holdings of Reserve Assets, End of Selected Years 1979-84

and End of March 1985 51Share of National Currencies in Total Identified Official Holdings of

Foreign Exchange, End of Selected Years 1977-84 54Currency Composition of Official Holdings of Foreign Exchange,

End of 1979-End of 1984 55Placement of Official Holdings of Foreign Exchange Reserves, End

of Year 1977-34 56Total Cross-Border Bank Lending and Deposit-Taking, 1982-84 58International Bond Issues and Placements, 1979-84 59


CONTENTS

19.

20.21.22.

23.

24.25.26.

27.

Selected Financial Activities by Type and Country Group,1979-̂ 85 65

Purchases Under Tranche Policies and Special Facilities, 1979-85 66Outstanding Fund Credit by Facility and Policy, 1979-85 66Flow of Transactions in the General Resources Account and

Resulting Stocks, 1979-85 67Lenders and Amounts of Credit Arrangements Under the General

Arrangements to Borrow and Associated Arrangements 72SDR Interest Rate and Rate of Remuneration 76Transfers of SDRs, January 1, 1970-April 30, 1985 78Supplementary Financing Facility Subsidy Account: Donations

Received to April 30, 1985 80Purchases Under Supplementary Financing Facility by Eligible

Members, and Subsidy Payments 81

CHARTS1.2.3.

4.

5.

6.7.

8.

9.10.

11.

12.

13.

14.

15.

16.

17.

18.

Five Major Industrial Countries: Interest Rates, 1980-May 1985 4Major Industrial Countries: Real GNP, 1981-First Quarter 1985 6Major Industrial Countries: Unemployment, 1965-Second Quarter

1985 8Major Industrial Countries: Consumer Price Inflation, 1979-March

1985 8Non-Fuel Exporting Developing Countries: Selected Demand and

Output Indicators, 197&-34 11Developing Countries: Real GDP by Region, 1976-84 13Major Industrial Countries: Indices of Monthly Average U.S. Dollar

and Effective Exchange Rates, 1980-April 1985 17Major Industrial Countries: Payments Balances on Current Account,

Including Official Transfers, 1980-First Quarter 1985 18Developing Countries: Current Account Balances, 1980-64 20Developing Countries: Non-Oil Primary Commodity Prices, 1980-

Second Quarter 1985 20Industrial Countries: Imports from Developing Countries, 1980-

84 21Three Major Industrial Countries: Payments Balances on Current

Account, Including Official Transfers, as Percent of GNP, and RealEffective Exchange Rates, 1973-84 33

Exchange Rates for Six Major Currencies: Daily Percentage ChangesAgainst the U.S. Dollar, January 1, 1981-April 29, 1985 34

Five Major Industrial Countries: Variability of Interest RateDifferentials and Bilateral Exchange Rates, 1981-84 35

Developing Countries: Real Effective Exchange Rates byPredominant Export, 1977-84 39

Developing Countires: Real Effective Exchange Rates by Region,1977-̂ 84 39

Developing Countries: Real Effective Exchange Rates by ExchangeArrangements, 1980-84 40

Developing Countries: Nominal Effective Exchange Rates byExchange Arrangements, 1980-84 41

V I I I


CONTENTS

19. Developing Countries: Real Effective Exchange Rates by FinancialCriteria, 1977-84 42

20. Six Industrial Countries: Current Account Imbalances and Reserves,1975^84 61

21. Use of Fund Resources as at April 30, 1974-85 6822. SDR Interest Rate, Rate of Remuneration, and Short-Term Interest

Rates, July 1974-June 1985 77

The following symbols have been used throughout this Report:

to indicate that data are not available;

— to indicate that the figure is zero or less than half the final digit shown, or that theitem does not exist;

- between years or months (e.g., 1979-81 or January-June) to indicate the years ormonths covered, including the beginning and ending years or months:

/ between years (e.g., 1980/81) to indicate a crop or fiscal (financial) year.

"Billion" means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

IX


International Monetary Fund

J. de Larosiere, Managing Director and Chairman of the Executive Board

Richard D. Erb, Deputy Managing Director

Executive Directors

Charles H. DallaraNigel Wicks

Guenter GroscheBruno de MauldeHirotake Fuji no

Yusuf A. NimatallahPedro P£rez

J. J. PolakJacques de Groote

Robert K. JoyceSalvatore Zecchini

AlternateExecutive Directors

Mary K. BushT. A. ClarkBernd Goos

Xavier BlandinMasahiro Sugita

Jobarah E. SuraisryGuillermo Ortiz

J. de Beaufort WijnholdsHeinrich G. Schneider

Luke LeonardNikolaos Coumbis

Executive Directors

Mohamed FinaishC. R. Rye

Hans LundstromArjun K. SenguptaAlexandre Kafka

E. I. M. MteiJ. E. Ismael

ZHANG ZicunFernando L. NebbiaGhassem Salehkhou

Abderrahmane Alfidja

AlternateExecutive Directors

Tariq AlhaimusAntonio V. Romucildez

Henrik FugmannA. S. Jayawarden

Hernando AriasAhmed AbdallahJAAFAR Ahmad

Brian JensenOmar Kabbaj

Mawakani Samba

Senior Officers

CounsellorCounsellor

Economic CounsellorCounsellor

Administration DepartmentAfrican Department

Asian DepartmentCentral Banking Department

European DepartmentExchange and Trade Relations Department

External Relations DepartmentFiscal Affairs Department

IMF InstituteLegal Department

Middle Eastern DepartmentResearch Department

Secretary's DepartmentTreasurer's Department

Western Hemisphere DepartmentBureau of Computing Services

Bureau of Language ServicesBureau of Statistics

Office in Europe (Paris)Office in Geneva

C. David Finch*Walter O. Habermeier*William C. Hood*L. A. Whittome*Graeme F. Rea, DirectorAlassane D. Ouattara, DirectorTun Thin, DirectorJ. B. Zulu, DirectorL. A. Whittome, DirectorC. David Finch, DirectorAzizali F. Mohammed, DirectorVito Tanzi, DirectorGerard M. Teyssier, DirectorGeorge Nicoletopoulos, DirectorA. Shakour Shaalan, DirectorWilliam C. Hood, DirectorLeo Van Houtven, SecretaryWalter O. Habermeier, TreasurerEduardo Wiesner, DirectorWarren N. Minami, DirectorAndrew J. Beith, DirectorWerner Dannemann, DirectorAldo Guetta, DirectorCarlos E. Sanson, Director

Chief Editor Norman K. Humphreys

* Alphabetical listing. August 19, 1985

XI


Letter of Transmittedto the Board of Governors

August 19, 1985

Dear Mr. Chairman:

I have the honor to present to the Board of Governors the Annual Report of theExecutive Board for the financial year ended April 30, 1985, in accordance withArticle XII, Section 7(a) of the Articles of Agreement of the International MonetaryFund and Section 10 of the Fund's By-Laws. In accordance with Section 20 of theBy-Laws, the administrative budget of the Fund approved by the Executive Board forthe financial year ending April 30, 1986 is presented in Appendix VI and the auditedfinancial statements of the General Department, the SDR Department, the Supple-mentary Financing Facility Subsidy Account, the Trust Fund, and the Staff RetirementPlan for the year ended April 30, 1985, together with the reports of the External AuditCommittee thereon, are presented in Appendix VIM.

Yours sincerely,

/s/

J. DE LAROSIEREChairman of the Executive Board

Chairman of the Board of GovernorsInternational Monetary Fund

XIII


Chapter

1

Developments in the World Economy

INTRODUCTION

By mid-1985, economic recovery in the industrialcountries1 had been under way, although unevenly,for some two and a half years. Output growth in 1984was the strongest in almost a decade, and inflationcontinued to recede. There were encouraging signsthat the benefits of this recovery were spreading tothe developing world. Aided by the improved externalenvironment and the increased firmness with whichadjustment policies were pursued, domestic growthrates in developing countries accelerated, while cur-rent account deficits generally declined further.

Despite this progress, however, important problemsremain to be dealt with. Unemployment is high andin many countries has risen further. Protectionistpressures continue to increase. Fiscal imbalances area major source of uncertainty and concern in severalmajor industrial countries and, together with otherfactors, have contributed to a pattern of currentaccount positions that may be unsustainable over thelonger term. In the developing world, economic growth,despite recent improvements, remains significantlybelow its longer-run average and is uneven acrossregions. Moreover, heavy external indebtedness makesthe financial position of many countries still quitefragile.

Economic growth in 1984, as in 1983, was led bythe rapid expansion of demand in the United States.By late 1984 and the early part of 1985, however,economic activity in the United States had revertedto a more moderate pace, while demand growth inother countries was tending to pick up. As a result,although the overall rate of expansion was less rapid,the geographical basis of the recovery appeared tohave become more even. Despite the spreading ofrecovery, though, output growth in Europe had stillnot reached a pace at which unemployment couldbegin to fall.

For classification of groups of countries, see Appendix IX.

The continuation of expansion in industrial coun-tries was not marked by any significant accelerationof price pressures. Indeed, the weighted average rateof inflation in these countries in 1984 fell by a further3/4 of 1 percent, less than the average declines of almost2 percent per annum in the previous two years, but stillan encouraging performance given the strength of outputgrowth. Interest rates on U.S. dollar-denominated assetrose in the early and middle part of 1984, before adowntrend was resumed later in the year that by mid-1985 had brought short-term interest rates to their lowestlevels since the late 1970s. Nevertheless, in real termsinterest rates remained at levels that were high inhistorical perspective.

The shifts that occurred in U.S. dollar interest ratesdo not appear to be very closely related to developmentsin exchange markets. A key feature of exchange ratesfor most of 1984 and the opening weeks of 1985 was thefurther strengthening of the U.S. dollar. This was par-tially reversed in the months after February, when thedollar depreciated substantially. Nonetheless, the dollarin June 1985 was 9.3 percent above its year-earlier level,in real effective terms. Partly reflecting the dollar'sstrength, as well as changes in the relative cyclicalposition of the United States, the current account deficitof the United States (including official transfers) wid-ened to some $102 billion in 1984, while the surplus ofJapan rose to $35 billion.

The rapid growth of industrial country imports in1984 had a favorable effect on both the external positionand domestic economic growth of many developingcountries. The current account deficit of those countrieswhose exports are not dominated by oil (the "non-fuelexporters") fell to only 9 percent of exports, two-fifthsthe level of three years earlier, and the lowest ratio sincecomparable statistics began to be assembled in the mid-1960s. Stimulated by strong export increases, domesticeconomic growth in these countries also strengthened,reaching almost 4!/2 percent, the best performance infive years. Among fuel exporting countries, economicperformance continued to be adversely affected by weak-

1


ANNUAL REPORT, 1985

ness in the international oil market, but, here too, outputgrowth improved significantly in 1984.

The better outturn is, of course, modest in relation tothe adverse developments of earlier years. Per capitaabsorption fell significantly in developing countries in1981-83, reflecting both the weakness of overall outputand the continuation of a high rate of population growth.Even in the 1984 recovery, many countries (especiallyamong the low-income countries in Africa) did not sharein the improvements reflected in the aggregate statistics.

The improving current account of developing coun-tries has led to an easing of their external financialposition but it has not removed the need for concertedapproaches to the debt difficulties of a number ofcountries. During 1984 and the first four months of 1985,debt rescheduling agreements between Fund membersand their creditors, including multiyear agreements,covered some $112 billion of debt. These agreementspostponed about $25!/2 billion of debt service paymentsthat had been due in 1984 (equivalent to 4!/2 percent ofexports of goods and services).

A further strengthening of domestic investment andoutput in developing countries, together with a consoli-dation of their payments position, and a reduction inthe relative size of their external debt must be regardedas central objectives of economic policy over the comingperiod. Their attainment will require both the deter-mined pursuit of appropriate adjustment policies andsuccess on the part of industrial countries in reducingreal interest rates and achieving sustainable noninfla-tionary expansion in a liberal trading environment.

Economic recovery in the industrial countries hasbenefited from an improved climate of confidence andan environment of greater price stability that has owedmuch to the medium-term framework within whicheconomic policies have been formulated. To consolidateand extend the progress that has been made, it isimportant that those elements of the strategy that havenot yet been implemented satisfactorily be brought intoline. In this context, the three most important areas inwhich policy adaptations are called for are the correctionof fiscal imbalances in those countries where the govern-ment's absorption of a large share of resources hasundesirable effects or pre-empts a disproportionate shareof global savings; the elimination of structural rigiditiesthat impede the efficient allocation of resources andhamper the growth of employment; and determinedresistance to protectionist pressures.

While effective action in these areas would improvethe external environment for adjustment among devel-oping countries, the principal responsibility for suchadjustment must lie with the developing countries them-selves. Recent improvements in their external positioncan best be consolidated through prudent demand man-agement and exchange rate policies, together with struc-tural reforms aimed at improving price and other incen-tives for investment and production in the traded goodssector. Particularly worrisome in this context is the surgein inflation in a number of developing countries. Thisdevelopment points to the presence of real and financial

imbalances in these economies which must be addressedif satisfactory growth is to be restored and improvementson current account are to be sustained.

Attention also needs to be paid to certain specificareas in which economic policies and conditions interactacross countries. The preservation of an open tradingregime is of key importance to the developing countriesand lies at the heart of efforts aimed at combiningdevelopment with financial stability. Continued co-operation among debtors, creditors, and internationalinstitutions will be necessary if the debt situation is tobe satisfactorily managed. At the same time, officialdevelopment assistance remains essential for many ofthe poorest developing countries; the climate for suchassistance, which has tended to stabilize in recent years,will benefit both from improved economic performancein the donor countries and from a demonstrated effec-tiveness in the use of aid on the part of the recipients.Lastly, an enlarged role for direct investment would behelpful and requires from all parties concerned a will-ingness to remove obstacles to such flows.

DOMESTIC ACTIVITY AND POLICIES

INDUSTRIAL COUNTRIES

Stance of Policies. Since the beginning of the1980s governments in the industrial countries haveaccorded the highest priority to establishing the basisfor sustainable noninflationary economic growth overthe medium term. To that end authorities have at-tempted to follow sound financial policies while intro-ducing specific measures to improve the structuralfunctioning of their economies. For a number of themajor industrial countries this has meant a gradualreduction in targeted growth rates for specified mon-etary aggregates and the adoption of policies havingthe objective of limiting the share of financial andreal resources absorbed by the public sector.

Monetary policy continued to have an anti-infla-tionary orientation in 1984. In those countries withspecified monetary targets, monetary growth waseither within or relatively close to the target range.However, the short-run implementation of monetarypolicy varied in individual countries according to theprevailing circumstances. Some countries, for exam-ple, endeavored to limit the growth rate for theirmonetary aggregates to the lower end of their targetranges, often in order to stem the inflationary pres-sures arising from movements of their currency inexchange markets. In other countries, the implemen-tation of monetary policy was influenced by the stateof economic activity, but only to the extent possiblewithout endangering hard-won progress in reducinginflation and inflationary expectations.

The monetary environment was more stable in1984 than it had been for several years. The targetedmonetary aggregates returned to a more normal re-lationship with the nominal growth of gross nationalproduct (GNP), and this facilitated the task of the

2


CHAPTER 1: DEVELOPMENTS IN THE WORLD ECONOMY

authorities in bringing about a gradual decelerationin monetary growth. From increases of about 9-10percent per annum during 1982 and 1983, the growthof narrow and broad money for the seven majorindustrial countries as a group declined to 6.5 percentand 7.9 percent, respectively, in 1984. This monetarydeceleration was accompanied by a resumption of theunderlying trend increase in the income velocity ofthe monetary aggregates, which was sufficient toaccommodate some acceleration in GNP growth.

Interest rates remained high but, outside the UnitedStates and the United Kingdom, they tended tofluctuate less than in earlier years. In Japan and mostof the major European countries short-term interestrates generally held steady through 1984 and the firsthalf of 1985 while long-term interest rates followed amodest downward trend (Chart 1). In the UnitedKingdom, however, there was a fairly pronouncedrise in interest rates in the early months of 1985 inresponse to a temporary weakening of the poundsterling. In the United States, interest rates rose fromthe second half of 1983 to mid-1984 in response tothe needs to finance the federal government deficitand a growing level of economic activity. As growthin the U.S. economy decelerated in the latter half of1984 and in the early part of 1985, interest rates fellback to, and then below, the low point that had beenreached in 1983.

It is not possible to measure real interest ratesprecisely, since they depend on expectations of infla-tion that are not observable directly, and are moreuncertain, the longer the holding period considered.Nevertheless, using current inflation rates as a guideto expectations, it appears that apart from the tem-porary rise in U.S. rates discussed above, both short-term and long-term real interest rates remained closeto their 1983 levels for most:of 1984, before decliningsomewhat late in the year and in early 1985(Chart 1). In the first quarter of 1985, inflation-adjusted short-term rates averaged about 5 percentin the major industrial countries while the corre-sponding long-term rate was some 6!/2 percent. Theseyields are well above the average level of real interestrates during the preceding two decades.

Since the late 1970s a central aim of governments inmost industrial countries has been to limit the share ofgovernment expenditure in GNP, and to reduce fiscaldeficits in order to lower interest rates and increase theshare of saving available to finance investment by theprivate sector. In many cases, however, these intentionshave proved difficult to put fully into practice. As ashare of GNP, the combined central government deficitof the seven major industrial countries increased in eachyear from 1979 to 1983, under the influence of weaknessin economic activity, rising interest payments on publicdebt, and slippages in the implementation of expenditurereduction measures.

The combined deficit declined somewhat in 1984, butthe decline was entirely attributable to improvements inthe level of economic activity. After making allowance

for cyclical factors, there was little change in the aggre-gate deficit in the major industrial countries, the netresult of a continuing significant injection of stimulus onthe part of North American countries and an offsettingwithdrawal of stimulus by the large European countries(Table 1). Similar differences in the thrust of fiscalpolicy between the United States and most of the othermajor industrial countries have been noted in previousAnnual Reports. From 1979 to 1984, the expansionaryimpulse imparted by fiscal policy in the United Statesis estimated to have amounted to 3 percent of GNP. Incontrast, the fiscal position of the central government inthe other major industrial countries as a group hasresulted in a composite withdrawal of stimulus of ap-proximately 1 Vz percent of GNP. The most pronounce.changes in underlying fiscal policy have occurred in theUnited Kingdom and the Federal Republic of Germanywhere the reduction in stimulus has amounted to53A percent of GNP and 31/2 percent of GNP, respec-tively. When fiscal policy is assessed at the broadergeneral government level, the picture is generally simi-lar, although in some countries, notably Japan and theFederal Republic of Germany, the measured withdrawalof stimulus is greater.

As just noted, significant slippages have been encoun-tered in the objective of reducing the share of govern-ment expenditure in GNP. Between 1979 and 1983, totalgovernment expenditure (including transfer paymentsand interest costs) in the seven largest industrial coun-tries rose in relation to total output by 4!/2 percentagepoints on average. Spending on goods and servicesgenerally grew only slightly faster than GNP in thisperiod (and in Japan and the Federal Republic ofGermany actually grew more slowly), but transfer andinterest payments increased dramatically. In 1984, therewas a slight decline in the average share of governmentexpenditure in GNP, amounting to about 3/4 of a per-centage point. The reduction was most significant inJapan and the United States, both of which benefitedfrom above-trend growth. The Federal Republic of Ger-many also achieved a decline, with the other four largecountries all experiencing further increases in the ratiosof government spending to GNP.

Previous Annual Reports have stressed the complexorigins of the economic problems of the industrial coun-tries and the corresponding need for a multifacetedapproach that goes beyond conventional financial poli-cies. In this vein, a number of governments, particularlyin Europe, have undertaken to support their monetaryand fiscal policy strategy by modifying or reformingmany of the institutional arrangements that impedeadjustments in real wages, raise the costs to firms ofhiring and releasing workers, and reduce the incentiveto work. Common modifications have been to reducethe extent to which incomes are automatically adjustedfor price increases, to exclude items such as energy andindirect taxes from wage-regulating price indices, andto lengthen the period between cost of living adjust-ments. Other developments have included the loweringof minimum wages, the limitation of unemployment

3


ANNUAL REPORT, 1985

1 Monthly averages of daily rates on money market instruments of about 90 days' maturity.2 Monthly averages of daily or weekly yields on government bonds, with maturities ranging from 7 years for Japan to 20 years for the United States and the United

Kingdom.3 The United States, Japan, France, the Federal Republic of Germany, and the United Kingdom.4 Short-term interest rates deflated by a weighted average of the increase in the private final domestic demand deflator in the current and the following two quarters;

for the most recent periods, staff projections of the deflator are used.5 Long-term interest rates deflated as indicated in footnote 4.

4

Chart 1.

Five Major Industrial Countries: Interest Rates, 1980-May 1985



Table 1.

Major Industrial Countries: Central Government Fiscal Balances and Impulses, 1977-841

(In percent of GNP)

1977 1978 197719 1980 1981 1982 1983 1984

Fiscal balance2 (-1- surplus, - deficit)

Canada3

United StatesJapan4

France5

Germany, Fed. Rep. ofItaly6

United Kingdom

Seven major countries aboveSeven major countries except the

United States

Fiscal impulse2 (+ expansionary,- contractionary)

Canada3

United StatesJapan4

France5


United Kingdom

Seven major countries aboveSeven major countries except the

United States

3.52.75.1

1.02.29.03.0

-4.6-2 .0-5.3

-1.6-2.2-1

-13.1-5.0

-3.5-1.2-6.2

-1.5-1.8

-10.8-5.3

-3.5-2.4-6.3

-1.1-1.7

-10.8-4.7

-2.2-2.5-6 .0

-2.6-2.2

-12.8-4.1

-5.3-4.3-6 .0

-2.8-1.9

-15.1-2.8

-6.2-5.8-5.8

-3.3-2 .0

-16.4-4.8

-7 .0-5 .0-5.7

-3 .4-1.6

-15.6-3.3

-3.2

-3.7

-3 .4

-4.6

-3 .0

-4.5

-3.5

-4.4

-3.8

-4.7

-4.7

-5 .0

-5.7

-5.6

-5.2

-5.3

1.50.20.2

0.30.50.82.0

0.1

0.3

1.2—

0.2

0.90.13.82.8

0.6

1.1

-0.5-0.8

1.0

0.10.1

-1.70.9

-0.2

0.3

-0.10.40.2

-0.7-0.4

0.1-2.6

-0.1

-0.4

-1.10.1

-0.3

0.9-0.8

0.6-2.4

-0.2

-0.5

0.80.4

-0.2

0.1-1.8

0.6-1.4

-0.1

-0.5

0.71.7

-0.5

0.1-0.3-0.2

2.2

0.9

0.2

1.40.50.2

-0.1-0.3-1.1-1.6

0.1

-0.2

1 For the definition of the fiscal impulse measure, see World Economic Outlook: A Survey by the Staff of the International Monetary Fund (Washington: InternationMonetary Fund, April 1985), pp. 108-10. Composites for the country groups are weighted averages of the individual national ratios for each year, with weightsproportionate to the U.S. dollar value of the respective GNPs in the preceding three years.

2 Cash basis, unless otherwise specified.3 Data for Canada are on a national income accounts basis.4 Data for Japan cover the consolidated operations of the general account, certain special accounts, social security transactions, and disbursements of the fiscal

investment and loan program (FILP) except those to financial institutions. Japanese data other than FILP transactions are based on national income accounts.5 Data for France are on an administrative basis and do not include social security transactions.6 Data for Italy refer to the state sector and cover the transactions of the state budget as well as those of several autonomous entities operating at the state level.

They also include the deficit, but not the gross transactions, of social security institutions, and part of that of local authorities.

benefits, the extension of occupational training schemes,reductions in subsidies, deregulation, and the "privati-zation" of some public enterprises.

Output and Demand. Economic expansion in th.industrial world strengthened significantly in 1984,with output recording the largest increase since 1976.As may be seen from Chart 2, expansion in 1983 an.the early part of 1984 was led by the strong perform-ance of the United States. Beginning in the latter halfof 1984, however, there has been some shift in thedistribution of growth; output in the United Stateshas decelerated significantly while the rate of growthin the larger European economies seems to have beenconsolidated at some 2/6 percent.

Output growth in the United States was significantlystronger than in any other industrial country in the firstwo years of the recovery (Table 2). Real GNP increasedby 6.8 percent in the United States in 1984, led bysubstantial increases in business fixed investment andin spending on residential construction. A significantproportion of this growth took place in the first half of

the year; all major components of demand deceleratedin the second half of the year and into 1985. While thedeceleration in domestic demand was partly in responseto the increases in interest rates from mid-1983 to mid-1984, the most important factor behind the moderatio.of overall output growth has been the deterioration ofthe foreign balance.

Among the other major industrial countries, increasesin output in 1984 were strongest in Japan and Canada.The growth of output accelerated significantly in Japanin 1984, as stronger domestic demand arising from r a p .growth in private fixed investment and a turnaround instockbuilding combined with a further strengthening ofthe net foreign balance. Output increased by 5 percentin Canada in 1984, led by a strong improvement in thnet foreign balance, but supported by a notable recoveryin final domestic demand resulting from rising govern-ment spending and a stabilization of business investmentafter a period of substantial declines.

In the large European economies, output increases in1984 remained below those of Japan and North America,

5


ANNUAL REPORT, 1985

Chart 2.

Major Industrial Countries: Real GNP,1981-First Quarter 1985

(Percentage changes)1

1 Current quarter relative to two quarters previously; seasonally adjustedannual rates.

but nevertheless showed improvement over the previousyear. Exports to the United States were an importantsource of growth in these countries in 1984 and early1985. In addition, there was an acceleration in domesticdemand, mainly as a result of changes in stockbuilding.Total fixed investment also increased significantly in theUnited Kingdom and Italy. Nevertheless, the pace ofrecovery in the major European countries has not yetbeen sufficient to produce a reduction in the level ofunemployment.

The economic situation of the smaller industrial coun-tries as a group also improved in 1984, the weightedaverage growth rate of output rising from 11/2 percent in1983 to 314 percent in 1984. The acceleration in growthin the smaller industrial countries was partly attribut-able to a turnaround in fixed investment. Such spendingincreased by almost 3!/2 percent in these countries in1984, following a decline of over 2 percent in 1983.

However, the foreign balance remained an importantsource of growth in many of the smaller industrialcountries. Several countries in the group, includingAustralia, New Zealand, Denmark, Ireland, and Nor-way, recorded quite high growth rates in 1984, but inmost others little progress was made in absorbing under-utilized resources.

A key feature of the current recovery has been thestrength of fixed investment in industrial countries.Investment began to increase in early 1983 and it hasbeen the fastest growing component of demand sincethat time. Moreover, as shown in Table 3, the increasein investment in the major countries has been wide-spread, with capital formation in 1984 increasing rapidlynot only in the faster growing economies such as theUnited States and Japan but also in several countrieswhere the recovery has been relatively weak. Majorfiscal incentives, buoyant demand, wage moderation,and an improved profit outlook underlie the increasesin investment in the United States. In Europe, theincrease in investment has also been associated with animprovement in profits, but it may also reflect capital/labor substitution in response to earlier increases inlabor costs. New technological opportunities and lowerinterest rates also appear to have played a role instimulating business investment spending.

Increases in investment spending, together with abroadly similar expansion of consumer expenditures,have led to growth rates of final domestic demandcomparable to those recorded in the recovery periodfollowing the 1974-75 recession. However, the geo-graphic distribution of demand growth has been decid-edly more uneven in this recovery. In the United States,domestic demand has grown particularly rapidly, whilemost other countries have had only modest increases inthe domestic components of demand. Balance of pay-ments developments have helped spread recovery andthus moderate the unevenness in demand growth.Nevertheless, despite the substantial widening of currentaccount imbalances that has occurred, wide disparitiesin overall GNP growth have remained.

Employment and Unemployment. Although totalemployment in the industrial countries has increasedsignificantly since the beginning of the recovery, theunemployment rate has declined in only a few coun-tries. More than half the industrial countries recordedgains in employment in 1984, and total employmentincreased by almost 2 percent over 1983. With de-mographic factors acting to increase the labor force,however, the decline in the unemployment rate av-eraged only !/2 of 1 percentage point and was more thanaccounted for by a drop of 2 percentage points in theUnited States. Many countries, including most of thosein Europe, experienced further increases in joblessnessthroughout 1984 (Chart 3). In the first quarter of 1985the unemployment rate exceeded 10 percent in France,Italy, the United Kingdom, and the smaller Europeaneconomies taken as a group.

While a portion of the unemployment in virtually allof the industrial countries is due to the cyclical weakness

6



Table 2.

Industrial Countries: Changes in Output and Prices, 1967-84'(In percent)

Average1967-762

From Preceding Year

1977 1978 1979 1980 1981 1982 1983 1984

Real GNP

CanadaUnited Statesjapan

France3


United Kingdom3

Other industrial countries4

All industrial countriesOf which,

Seven major countries aboveEuropean countries

4.82.87.4

4.73.54.32.2

4.2

3.7

3.63.8

2.05.55.3

3.12.81.93.0

1.7

4.0

4.42.5

3.65.05.1

3.83.42.74.0

2.0

4.1

4.53.7

3.22.85.2

3.34.04.93.23.2

3.5

3.63.5

1.1-0.34.8

1.11.93.9

-2.6

2.1

1.3

1.27.5

3.32.54.0

0.2-0.20.2

-1.4

0.6

1.6

1.8-0.2

-4.4-2.1

3.3

2.0-1.1-0.5

2.4

0.6

-0.2

-0.30.5

3.33.73.4

0.71.3

-0.43.2

1.6

2.6

2.87.5

5.06.85.8

1.82.62.62.4

3.2

4.9

5.12A

GNP deflator

CanadaUnited StatesJapan

France3


United Kingdom3

Other industrial countries4

All industrial countriesOf which,

Seven major countries aboveEuropean countries

6.95.67.9

7.35.19.39.9

8.0

6.7

6.57.5

7.45.85.7

9.03.7

191.1

13.99

9.7

7.5

7.29.7

6.77.44.6

9.44.2

13.99

11.11

9.6

7.6

7.38.9

10.338.72.6

10.44

4.015.9914.44

7.7

8.0

8.08.9

11..4

9.22.8

12.22

4.520.77

19.99

9.2

9.2

9.27 7 . 0

10.66

9.62.7

12.33

4.218.44

11.6

9.4

8.7

8.69.9

10.336.01.7

12..4

4.717.99

7.1

9.8

7.2

6.79.4

5.33.80.7

9.53.2

15.11

5.1

7.1

4.9

4.67.2

2.83.80.5

7.01.9

10.77

4.2

6.7

4.1

3.65.7

1 Composites for the country groups are averages of percentage changes for individual countries weighted by the average U.S. dollar value of their respective GNPsover the preceding three years.

2 Compound annual rates of change.3 GDP at market prices.4 Comprise Australia, Austria, Belgium, Denmark, Finland, Iceland, Ireland, Luxembourg, the Netherlands, New Zealand, Norway, Spain, Sweden, and Switzerland.

Table 3.

Major Industrial Countries: Real Gross FixedInvestment, 1981-84

(In percent)

Change from Preceding Year


FranceGermany, Fed. Rep. ofItalyUnited Kingdom

All seven countries1

1981

6.43.13.6

-1.8-4.33

0.6-8.44

0.9

1982

-9.77-6.88

1.9

-0.66-4.66-5.22

6.6

-3.33

1983

-5.779.70.7

-1.93.0

-3.884.2

4.5

1984

0.718.05.7

-1.91.24.16.6

10.2

1 Averages of percentage changes for individual countries weighted by theaverage U.S. dollar value of their respective GNPs over the preceding threeyears.

of their economies, the presence of severe labor marketrigidities, especially in many of the European countries,has contributed to the unemployment problem. In recentyears, the economies of most industrial countries havehad to adapt to profound employment dislocations asindustrial structures have shifted. These adjustmentshave been hindered in many countries by the rigidity ofwage patterns, government-mandated job security pro-visions, and a lack of labor mobility.

Labor shedding either stopped or slowed perceptiblyin most European countries in 1984. However, employ-ment in Europe appeared to be responding more slowlythan usual to the recovery in output, suggesting thatEuropean firms may still be rationalizing their use oflabor. In the major European countries, as well as inthe smaller industrial countries as a group, the growthof labor productivity has decelerated less than that ofoutput in recent years, which may be the result of firms'adjusting their labor input to be consistent with relativefactor costs.

7


ANNUAL REPORT, 1985

Chart 3.

Major Industrial Countries: Unemployment,1965-Second Quarter 1985

(In percent of labor force)1

1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 19851 National unemployment rates weighted by labor force in the respective

countries.2 France, the Federal Republic of Germany, Italy, and the United Kingdom.

The unemployment rate in the United States declinedsharply in 1983 and the first half of 1984, but thereafterit stabilized at a level slightly above 7 percent. Thisrelative stability of the unemployment rate in the UnitedStates since mid-1984 has been the combined result ofa deceleration in the rate of job creation and a pickupin the growth of the labor force. Nevertheless, employ-ment has continued to increase rapidly, growing bysome 1.7 percent in the 12 months to May 1985.Employment also increased rapidly in Canada, by 4percent in the 12-month period ended in May 1985.However, Canada's unemployment rate remains at some10!/2 percent. Japan's unemployment rate remained littlechanged at about 23A percent from the beginning of therecovery to late 1984 because of the unwinding of laborhoarded during the recession. More recently, however,this unwinding has come to an end and rising outputhas been translated into employment gains and decliningunemployment.

Inflation. The strengthening of the economic ex-pansion in 1984 did not lead to any significant re-surgence of inflationary presssures in the industrialcountries. Inflation continued to decelerate in thesecountries in 1984 and the first half of 1985. Asmeasured by consumer prices, the weighted averageinflation rate was 3.5 percent in the year ended in thefirst quarter of 1985 (Chart 4). The rate of increasein the weighted implicit GNP deflator has followed asimilar moderating trend during the course of therecovery, falling from an average of 9 percent in 1980-81 to under 5 percent in 1983, and to just over 4

Chart 4.

Major Industrial Countries: Consumer Price Inflation,1979-March 1985

(In percent)1

1 Average of consumer price index for three months ended in month indicatedover corresponding three months a year earlier.

2 The figures for the second half of 1979 and the first half of 1980 wereaffected by the approximately 33/4 percent increase in value-added tax rates,with effect from June 18, 1979.

percent in 1984. Moreover, the improvement in infla-tion has been pervasive—some countries that previ-ously had encountered difficulty in reducing inflationhaving made notable progress toward better pricestability during 1984 and the early part of 1985 (Ta-ble 2).

Among the major countries, Italy had the largestabsolute reduction in its inflation rate in this period,though its price level continued to increase morerapidly than in the other large countries. France alsohad a notable fall in inflation. Canada's inflation ratefell to under 3 percent in 1984, while the UnitedStates and the United Kingdom consolidated theconsiderable gains they have made in reducing infla-tion since 1980. As has been the case for a number ofyears, the Federal Republic of Germany and Japanmaintained inflation rates appreciably below thoseprevailing in the other major industrial countries.Taken as a whole, however, these developments haveled to a significant narrowing of inflation differentialsamong the major industrial countries.

8



Inflation in the smaller industrial countries contin-ued to run 2!/2-3 percent above the rate recorded bythe larger countries. Only the Netherlands and Switz-erland had inflation rates lower than the average for themajor industrial countries. Nonetheless, inflation in thesmaller countries has been on a generally downwardpath, with most countries in the group recording adeceleration in price increases in 1984.

Monetary policy has been instrumental in establishingthe less inflationary environment. By consistently di-recting their efforts to controlling and reducing the rateof expansion of monetary aggregates, authorities haveachieved declines in expected inflation, at least for thenear term. This reduction in inflationary expectations,together with the continuation of a significant margin ofeconomic slack, greater flexibility in wage-setting proc-esses, and the demonstration effect of modest wagesettlements in the public sector, induced further mod-eration in wage and salary increases in other sectors ofthe economy.

There was another substantial fall in the rate ofincrease in unit labor costs in 1984 as the moderationin wage increases was reinforced by a significant increasein labor productivity. In fact, unit labor costs in man-ufacturing were virtually unchanged in 1984. Laborproductivity has increased rapidly during the recovery,partly for cyclical reasons. There are also reasons forthinking that a part of the improvement in productivitymay be more lasting. For example, the electronics in-dustry has spawned a number of important technologicalinnovations, demographic factors are tending to increasethe average work experience of the labor force, inflationhas been reduced, and relative factor prices havestabilized.

The relatively modest increases in the costs of im-ported raw materials have been another important factorin the improved inflation picture in the industrial coun-tries. Basic commodity prices have been depressed bythe high level of international real interest rates and bythe relatively ample supply conditions in the marketsfor a number of key commodities. In addition, theintroduction of new technologies may have made thedemand structure of the present recovery less resource-intensive than earlier ones. Prices expressed in U.S.dollars have also been affected by the rise of the dollarover the past few years. In any event, raw material costshave risen less during this recovery than might havebeen expected on the basis of past experience. Expressedin U.S. dollar terms (changes in SDR prices in paren-theses) oil prices declined by over 12 percent ( — 9percent) in 1983 and by 2 percent ( + 2 percent) in 1984.The index of other commodity prices increased byslightly less than 8 percent ( + 1 1 percent) in 1983 andby only 2!/2 percent ( + 61/2 percent) in 1984. With theslackening in the pace of expansion in industrial coun-tries in the second half of 1984 and early 1985, com-modity prices began to weaken more significantly, andfor the first six months of 1985, the index of non-oilcommodity prices was 13 percent ( — 7 percent) belowyear-earlier levels.

DEVELOPING COUNTRIES

General Developments. The recovery of demandin the industrial countries, together with the furtherimplementation of policies of adjustment in the de-veloping countries, led to a substantial quickening inthe pace of output expansion in the developing coun-tries in 1984. After two years of very low growth (l ' /2percent per annum), real gross domestic product (GDP)in the developing countries increased by 33/4 percent in1984. Growth among those countries whose exports arenot dominated by oil (the non-fuel exporters) was evenstronger—close to 4!/2 percent. Among the fuel exportingcountries, which account for roughly a third of devel-oping country output, growth was more sluggish (2percent) because of the continuing weakness in worlddemand for their principal export. Nevertheless, even inthese countries, the 1984 outturn represented a consid-erable improvement over the declines in real GDP ofthe preceding two years (Table 4).

The improvement in the performance of the develop-ing countries is also evident when these are grouped onthe basis of financial criteria. The major borrowersposted a 3 percent gain in real GDP, more than reversingthe decline in output experienced in 1983. Countriesthat had previously experienced debt-servicing difficul-ties, some of which are also included in the group ofmajor borrowers, registered a rate of growth of 2 percentin 1984, restoring the level of real GDP to its 1981 level.

The recovery of activity in the developing countrieswas led by a strong rebound in the growth of exports.Exports were particularly strong among the non-fuelexporters, increasing by 6 percent in volume terms in1983 and by a further 12 percent in 1984. These largeincreases in exports were attributable mainly to therapid growth in the imports of industrial country tradingpartners, especially the United States. However, marketgrowth does not account for all of the buoyancy of non-fuel developing country exports in 1983-84; these coun-tries also achieved an increase in market share over theperiod. Thus, a significant fraction of the growth ofexports can be ascribed to the adjustment measures,including exchange rate changes, taken by developingcountries themselves over the past several years.

The recovery set in train by exports spread graduallyto the domestic economy. Domestic demand growthamong the non-fuel exporters, which had progressivelydecelerated from over 6 percent in 1978 to less than 1percent in 1982, firmed over the following two years toreach almost 3 percent in 1984 (Chart 5). Although thisrecovery in domestic demand owed much to the rise inreal incomes that stemmed from an increasing volumeof exports, it was also spurred by rpore favorable (or, atleast, much less unfavorable) terms of trade develop-ments. The terms of trade of the non-fuel exportersimproved by some l!/2 percent per annum in 1983-84,a marked change from the terms of trade losses averaging4 percent per annum of the 1978-82 period. As a resultof this change, what had been a source of significantleakage from the domestic spending stream became a

9


ANNUAL REPORT, 1985

By predominant export

Fuel exportersNon-fuel exporters

Primary productexporters

Exporters ofmanufactures

Service and remit-tance countries

MemorandumMajor borrowersCountries with recent

debt-servicingdifficulties

Table 4.

Developing Countries: Growth of Real GDP, 1967-841

(In percent)

Developing countries

MemorandumMedian growth rate

By region

AfricaAsiaEuropeMiddle EastWestern Hemisphere

Weights2

100

12339

1729

Average1967-763

6.0

5.1

5.05.26.09.35.9

From Preceding Year

1977

5.8

5.1

4.37.25.46.95.3

1978

5.3

6.0

1.49.45.41.94.1

1979

4.5

4.9

4.24.83.81.86.1

1980

3.4

3.7

3.74.71.6

-1.85.3

1981

2.4

3.3

0.95.82.5

-77.71.0

1982

1.6

1.5

0.15.12.20.3

-1.0

1983

1.5

1.4

-0.227.11.30.6

-3.11

1984

3.7

2.8

2.26.42.52.32.4

3268

49

42

9

30

41

8.15.3

5.5

5.3

4.0

6.8

5.5

5.75.9

5.1

6.9

7.8

6.0

5.4

2.96.3

3.6

9.6

6.0

3.74.8

4.7

4.6

5.7

4.8 6.4

3.7 5.3

1.04.3

4.6

3.8

5.3

4.7

3.9

1.23.0

1.0

5.2

3.0

-0.2.2

2.5

0.2

5.1

3.1

-0.882.7

-0.55

6.6

2.0

1.8 0.4 -1.2

1.1

2.04.4

3.1

6.2

3.3

3.0

2.0

1 Except where otherwise indicated, arithmetic averages of country growth rates weighted by the average U.S. dollar value of GDPs over the preceding three years.China is excluded prior to 1978. For classification of countries in groups shown here, see Appendix IX.

2 Weights are calculated on the basis of the average U.S. dollar value of GDPs for 1982-84.3 Compound annual rates of change.

source of modest support. Another favorable develop-ment has been the stabilization since 1982 of the pro-portion of domestic income required for interest pay-ments on foreign debt. Because of the rise in internationalinterest rates, as well as rapid rates of external borrow-ing, the proportion of national income required to servicethat debt had more than doubled from 1978 to 1982—an important contractionary impulse to the incomegeneration process. With the easing of internationalinterest rates that has taken place since 1982, this sourceof contraction has abated.

Further evidence of improvement, or at least of re-duced strain, in the developing countries in 1984 isprovided by developments in imports and investment.Both of these (overlapping) forms of spending wereseverely reduced in the early phase of the adjustmentprocess. For the non-fuel exporters as a group, importsfell by 5*/2 percent in volume terms in 1982 and grewby only l!/2 percent on a year-over-year basis in 1983.Similarly, investment spending in volume terms declinedin each year from 1981 to 1983. With the establishmentin 1984 of a reasonably sustainable external position forthe group as a whole (see below), export growth couldbegin to be matched by an increased absorption of

imports, and imports rose by some 6 percent in volume.Investment spending was less buoyant, but the down-ward trend in capital formation appears to have beenhalted in 1984.

Although output and demand have thus strengthenedin the developing countries in 1984, two importantqualifications must be made. First, the firming of activitythat is apparent in the aggregate statistics masks a quiteuneven distribution in the pattern of improvement. Somelarge countries (notably China and India) once againhad above-average growth, but output increases in themore numerous group of smaller countries have tendedto be below the average. Thus, the median growth rateamong developing countries was only 2.8 percent in1984, against 3.7 percent for the corresponding weightedaverage. Moreover, the acceleration in growth from 1983to 1984 was considerably less marked on a median basis.These general indications of the uneven distribution ofgrowth among countries are confirmed by an analysis(see below) of developments among the various regionalgroupings of developing countries.

Second, the improvement in economic performancein 1984 was modest in historical perspective and doeslittle to recoup the declines in living standards of the

10

-0.1.1 -1.9.9



Chart 5.

Non-Fuel Exporting Developing Countries: SelectedDemand and Output Indicators, 1978-841

(Changes, in percent)

1 For classification of countries, see Appendix IX.

past several years. Growth in 1984 fell well short ofthe average for 1967—76, a period that included amajor recession. Moreover, even with the recovery ofactivity in 1984, per capita output last year was nohigher than it had been in 1980. Also, a larger shareof output than in 1980 had to be directed abroad tocompensate for adverse terms of trade shifts andhigher interest costs and to bring about an underlyingimprovement in the current account of the balance ofpayments needed to improve creditworthiness. Onaverage, therefore, per capita absorption declinedsharply over the four-year period. The decline inliving standards was especially marked among theheavily indebted countries of the Western Hemispherewhere, overall, per capita absorption in 1984 wassome 20 percent below what it had been in 1980. TheAfrican region was also hard hit, for although thedecline in per capita absorption was somewhat lessthan in the Western Hemisphere, it was superimposedon standards of living that were already well belowthe average in the rest of the developing world.

The modest firming of activity in 1984 coincidedwith a notable shift in the thrust of fiscal policies inthe developing countries. The most significant devel-opment was the turnaround in the aggregate fiscaldeficit of central governments2 which, after rising from\1A percent of GDP in 1980 to 5/2 percent in 1983,declined to 4!/2 percent in 1984. The shift in fiscal policyappears to have been quite widespread, with the mediancentral government deficit declining from 63/4 percent ofGDP in 1983 to 514 percent in 1984. Not surprisingly,the largest improvements in fiscal positions were amongcountries that had earlier encountered debt-servicingdifficulties. Many of these countries had received finan-cial assistance from the Fund in support of programsaimed at a major strengthening in public sector finances.Nevertheless, reductions in deficits were also prevalentamong countries that had avoided debt-servicingdifficulties.

In part because of these reductions in net publicsector dissaving, there was also some improvement inthe overall savings ratio of developing countries in 1984.This ratio had tended to fall over the preceding yearsas many countries had encountered difficulties in curb-ing consumption, despite the need to curtail currentaccount deficits. Indeed, whereas per capita absorptiondeclined from 1981 to 1984, per capita consumptionchanged little (in the developing countries as a groupalthough not in all subgroups and regions). Overall,therefore, external adjustment appears to have beeneffected, in the first instance, through sharp curtailmentsin investment spending. As a proportion of GDP, in-vestment fell from 26 percent in 1981 to 23 percent in1984—a development which clouds longer-term growthprospects. Fortunately, the resumption of growth andthe reductions in dissaving by central governments in1984 have had a positive effect on aggregate savings,thus reducing the pressure to cut investment spending,which appears to have stabilized in real terms.

The improvement in real output in developing coun-tries in 1984 was not matched by a comparable improve-ment in price performance. For the group as a whole,the weighted average rate of inflation, which had risenfrom 25-27 percent in 1980-82 to 33 percent in 1983,accelerated further to almost 38 percent in 1984 (Ta-ble 5). However, this trend is largely attributable tosome atypical developments in a few countries. Themedian rate of inflation has stabilized at about 10percent since 1982, after having declined from 14!/2percent in 1980. It is disquieting to note, however, howlittle progress has been made in further reducing infla-tion over the past two to three years, a period duringwhich the corresponding rate of price increases in in-dustrial countries was cut by more than a third.

The countries which have had the most difficulty inbringing inflation under control are, for the most part,

2 Deficits for the public sector remain considerably greater thanthose for the central government sector cited in the text. The estimatesalso do not include the "monetary corrections" that are part of somehigh-inflation countries' accounts.

11


ANNUAL REPORT, 1985

Table 5.

Developing Countries: Changes in Consumer Prices, 1967-841

(In percent)

Weighted averages2


By region

AfricaSub-Saharan Africa3

AsiaEuropeMiddle EastWestern Hemisphere

Average1967-76

13.8

8.59.79.49.08.7

24.5

From Preceding Year

1977

24.8

18.828.0

7.815.118.049.9

1978

18.8

16.922.24.0

19.812.841.9

1979

21.5

16.726.78.0

25.911.146.5

1980

27.3

16.626.113.137.917.454.0

1981

26.1

21.430.910.624.015.658.6

1982

24.7

13.419.66.2

23.812.765.5

1983

33.0

19.030.26.6

23.212.7

100.5

1984

37.7

17.818.36.9

28.016.5

119.8



9.716.2

18.128.0

12.521.4

11.825.7

15.932.2

16.430.6

18.028.0

25.536.9

20.147.1

Medians


By region

AfricaSub-Saharan Africa3

AsiaEuropeMiddle EastWestern Hemisphere



7.8

7.57.67.17.28.29.0

7.97.7

11.3

12.011.96.2

11.113.211.6

12.010.9

9.8

10.310.55.99.9

10.710.2

10.59.4

11.5

11.612.4

7.514.310.314.9

10.012.1

14.5

13.513.813.016.211.018.1

11.815.1

13.3

13.713.612.515.78.8

14.6

13.313.3

10.7

12.712.97.6

19.08.29.4

9.710.9

9.8

12.012.58.1

13.95.18.9

7.79.9

10.0

11.712.58.1

13.55.6

11.9

8.010.0

1 For classification of countries in groups shown here, see Appendix IX.2 Geometric averages of country indices weighted by the average U.S. dollar value of GDPs over the preceding three years.3 Excluding Nigeria and South Africa.

those that have had severe adjustment problems andthat have encountered debt-servicing difficulties. Exter-nal adjustment typically requires changes in the relativeprice structure of the economy, changes that are effectedin part through depreciation of the exchange rate andthe reduction or elimination of subsidies. Such changesare a source of upward pressure on the domestic pricelevel, which, if not counteracted through suitably restric-tive financial policies and/or changes in indexationmechanisms, can generate an inflationary spiral. Moregenerally, the accommodative financial policies thatpermit these very high inflation rates to become estab-lished may be symptomatic of more deep-seated mal-adjustments that need to be addressed if the adjustmentsalready effected are to be sustainable.

Regional Developments. Perhaps because the re-covery of output in developing countries was largelyexternal in origin, it was quite widespread, encom-passing all major geographic regions and all cate-gories of exporters (Table 4). Only in the Asian

region, however, could the rate of output growth betermed satisfactory in historical perspective. GDP inAsian countries grew by 6!/2 percent in 1984, afterhaving increased by over 7 percent the previous year.In each of the other major geographical regions, GDProse at between 2 and 2!/2 percent in 1984, a notableimprovement from the previous year, but little if at allabove the rate of population growth.

The disparity in economic performance between Asiancountries and the rest of the developing world is evenmore marked when output trends are viewed in a slightlylonger perspective (Chart 6). While the growth rate ofAsian countries has averaged over 6 percent per annumfor the past four years, output in the Western Hemi-sphere is estimated to have fallen in absolute terms, andthus to have declined even more sharply in per capitaterms. A broadly similar picture prevails in Africa andthe Middle East, where marginal gains in output havefallen well short of the rate of population growth. Indeveloping countries in the European region, output

12



Chart 6.

Developing Countries: Real GDP by Region, 1976-84(Indices, 1976 = 100)1

170

1 Logarithmic scale. For classification of countries, see Appendix IX.

growth has generally kept pace with population, but,given the need to bring about an improvement in balanceof payments positions, per capita absorption has prob-ably been declining or stagnant.

This dispersion in growth performance reflects severalfactors, including differences in external positions,creditworthiness, and access to external finance, in thedegree of price stability, and in the ability to capitalizeon the recovery in world trade. The Asian countries,many of which have a high proportion of manufacturesin their exports, were most successful in shifting relativeprices and curbing inflation at an early stage in theadjustment process and in restoring export expansion.This was true not only among the export-led economiesof East and Southeast Asia but also in the largercountries. In particular, China experienced two consec-utive years of rapid economic growth accompanied bystable domestic prices, as both agricultural and indus-trial output responded to policy reforms. The Chineseeconomy also became more open to foreign trade andinvestment. Relatively few Asian countries had severedebt service or external adjustment problems. As aresult, the national authorities were able to pursueneutral or only mildly restrictive financial policies in1984. Fiscal deficits, for instance, which were alreadylower than the average of other regions, changed littlefrom 1983 to 1984. In combination with a 14 percentincrease in exports, these policies resulted in continuedstrong growth in 1984.

The European developing countries, which are alsohighly dependent on exports of manufactures, experi-enced an equally strong recovery of exports in 1983 and1984. However, several of these countries, handicappedby higher debt ratios and weaker external positions thanmany Asian countries, experienced difficulties in con-

trolling inflation. Their composite inflation rate accel-erated from an already unsatisfactory 23 percent in 1983to 28 percent in 1984. At the same time, and despitestrong exports, growth picked up only modestly to 2!/2percent, a rate no better than that achieved in 1981-82.

The region where developments contrast most withthose in Asia is the Western Hemisphere. Many coun-tries in this region began the 1980s with very high debtand debt service ratios and large external imbalances.In 1981, current account deficits in the Western Hemi-sphere region averaged 32 percent of exports of goodsand services, compared with only 11 percent for Asia.The ensuing payments difficulties led to sharply con-tractionary policies, including significant cutbacks ingovernment expenditure and investment programs, anddomestic absorption fell sharply. By 1984, the favorableeffects of exchange rate shifts, as well as of improvementsin the domestic price structure, were becoming apparent,and with demand reviving in industrial countries, ex-ports grew rapidly. However, since a significant part ofthe growth in foreign receipts had to be devoted to afurther strengthening of the external financial position,domestic demand remained relatively subdued. As aresult, real GDP growth was limited to an average of2!/2 percent—not enough to increase per capita incomes,but a significant improvement on the output declines(averaging 3 percent) that had been recorded in 1983.More disappointing was the deterioration in inflationperformance in a number of major countries in theWestern Hemisphere. Because of the interaction betweenaccommodative financial policies, exchange rate depre-ciation, and built-in wage and cost adjustment mecha-nisms, inflation accelerated sharply in several countries.For the region as a whole, the median rate of inflationrose from 9 percent in 1983 to about 12 percent in 1984,but the weighted average rate jumped from 100 percentto 120 percent.

Countries in the Middle East have, generally, alsoexperienced sluggish economic growth over the pastseveral years, in part because of declining oil prices andexport volumes and the hostilities that have continuedin several countries in the region. The region's combinedexport earnings declined by some 43 percent from 1980to 1984, after having increased by nearly 100 percentfrom 1978 to 1980. Although the oil exporting countriessustained their spending and imports at a high levelduring 1981-82, the continued decline in export earningsnecessitated a scaling down of their spending and im-ports from 1983 onward. Largely reflecting weakness inthe oil sector, the combined real output of the regionhad declined from 1979 to 1983 before rising by 2V4percent in 1984. However, output in the non-oil coun-tries, as well as in the non-oil sectors of oil exportingcountries, has been rather better sustained. As for infla-tion, it is relatively well contained in most countries inthe region. In Israel, however, price increases acceler-ated sharply in a situation of worsening fiscal imbalanceagainst a background of widespread indexation.

Perhaps the most distressing aspect of output trendsin developing countries in 1984 was the continued

13


ANNUAL REPORT, 1985

weakness of economic activity in Africa. Growth in sub-Saharan Africa was especially weak—l l/2 percent, orwell below the region's population growth rate. More-over, this development follows three years of very weakgrowth (1 percent per annum), so that the already lowreal per capita incomes of this region in 1980 had fallenby a further 5-10 percent by 1984. The decline in re.per capita absorption was probably even larger, sincemuch of the region's increased output over the periodhad to be exported in order to contain the drain on theexternal position stemming from terms of trade losses,higher debt service payments, and increased food im-ports because of the drought that has affected much ofthe continent. While the reduction in external financingwas less in Africa than elsewhere (because of the region'sreliance on official grants and credits), the strains onthe external position of African countries were neverthe-less substantial, as may be seen from the contraction inimports from 1980 to 1984.

The origins of these difficulties are complex, andpartly reflect factors beyond the control of the coun-tries concerned, such as the prolonged drought ofrecent years. However, adjustment to such adversedevelopments has been complicated by the region'spoor record on exports, which, in volume terms,increased by only \l/2 percent per annum over theentire period 1967-84. This extremely low growth ofexports was again apparent in 1984, despite the relatively strong growth of world trade. The low growth ofexports results in part from the commodity compositionof Africa's trade, a composition which is to a large extentdictated by the region's resource endowment and stageof development. Moreover, commodity prices have beenweak and the recovery has been slow in Africa's tradi-tional markets in Europe. Nevertheless, there is anincreasing realization that the financial, exchange rate,and structural policies of governments have also playeda role, particularly in terms of distorting incentives inthe agricultural sector. Significant improvement in theregion's growth prospects would seem to hinge on shift-ing development strategies toward fostering agriculturalproduction and exports as well as persevering with theimprovements in financial policies that have taken placesince 1983. Sustained and strong economic growth wilalso depend on better terms of trade and access toforeign markets.

INTERNATIONAL TRADE AND PAYMENTS

World trade growth rebounded strongly in 1984under the impetus of the recovery of economic activityin industrial countries. Imports into these countriesrose by 12 percent, with growth being concentratedin, but not limited to, the United States. As a resultof the surge in industrial country demand, the exportsof non-fuel exporting developing countries increasedby some 12 percent in volume terms. The fuel ex-porting countries were less favored. Because of energyconservation, interfuel substitution, and increases indomestic energy production in the aftermath of the

oil price increases of the 1970s and early 1980s, oilimports of industrial and oil importing developingcountries remained sluggish. Nevertheless, the fuelexporters recorded a small rise in the volume of theirexports after four years of substantial declines (Ta-ble 6).

Despite the buoyancy of trade, world trade pricesremained little changed in 1984. In SDR terms, theaverage price of traded goods rose by 2!/4 percent,after having declined by 1 !/i percent the previous yearIn dollar terms, however, prices fell for the fourthsuccessive year, reflecting the continued strong appre-ciation of the U.S. dollar. Export prices for both man-ufactures and petroleum continued to decline in dollarterms, while other primary commodity prices were upby about 2*/2 percent on a year-over-year basis. As aresult, the terms of trade of non-fuel exporting devel-oping countries improved for the second year in a rowAdded to the strong growth in export volumes, thisdevelopment permitted a significant increase in thesecountries' imports for the first time since 1980. Nevertheless, it should be recognized that the terms of tradeimprovement for these countries in 1983-84 was modestin relation to the preceding deterioration. Moreover,non-oil primary commodity prices reached a peak inmid-1984 and fell sharply in dollar terms thereafter.While part of this subsequent decline was due to thefurther appreciation of the U.S. dollar, prices also fellin SDR terms.

The rebound of economic activity in the industrialcountries led to a partly cyclical shift in the globalpattern of current account balances in 1984. The indus-trial countries, taken as a group, moved from a positionof rough balance to a deficit of $34 billion, excludingofficial transfers (Table 7). This deterioration was morethan accounted for by a $58 billion deterioration in theU.S. balance. The other industrial countries generallyexperienced a strengthening in their current accountposition, which was quite marked for Japan and thesmaller industrial countries taken as a group.

The continuation of recovery in the industrial coun-tries, together with sustained adjustment efforts by de-veloping countries, led to a further improvement in theexternal position of the latter group of countries. Thesecountries' combined deficit declined from $71 billion in1983 to $44 billion in 1984. Excluding the MiddleEastern oil exporters, the current account deficit ofdeveloping countries, which had been $113 billion in1981, fell to $38 billion in 1984—the lowest deficit inrelation to exports of goods and services in the pasttwenty years. By 1984 this narrowing in current accountdeficits, together with greater stability in the availabilityof external financing, permitted the resumption of importgrowth as well as a large accumulation of reserves.Nevertheless, adjustment efforts among developingcountries were uneven and many countries' externalpositions remained precarious.

The recorded improvement in developing countrybalances did not compensate fully for the recordeddeterioration in industrial country balances. As a result,

14



Table 6.

World Trade, 1967-841

(Changes, in percent)

Average1967-762

From Preceding Year

1977 1978 1979 1980 1981 1982 1983 1984

World trade3

VolumeUnit value (in U.S. dollar terms)

(in SDR terms)4

7.78.77.1

4.79.28.0

5.410.02.6

6.618.514.8

1.519.818.9

0.7-1.2

9.1

-2..3-4.1

2.4

2.1-4..4-1.3

8.8-1.8

2.3

Volume of trade

ExportsIndustrial countriesDeveloping countries


ImportsIndustrial countriesDeveloping countries


Terms of trade

Industrial countriesDeveloping countries


Memorandum

World trade prices (in U.S.dollar terms) for majorcommodity groups5

ManufacturesOilNon-oil primary commodities

World trade prices (in SDR terms)4

ManufacturesOilNon-oil primary commodities

8.06.05.36.8

7.58.4

15.16.3

-0..94.1

11.4-0.66

7.521.7

7.4

6.020.0

5.8

5.12.51.04.0

4.19.5

13.37.5

-1.43.71.06.2

8.09.6

21.2

6.88.4

19.8

5.73.9

-1.99.4

4.97.04.2-.8.5

3.0-6..7-9..7-4.1.

14.50.4

-4..1

6.8-.6.4

-10.6

7.15.42.09.0

8.64.9

-4.39.6

-3..010.826.9-1.6

13.945.916.3

10.441.412.7

3.7-2..6

-10.99.0

-1.78.3

13.06.4

-6..815.240.4-5..7

11.163.5

8.3

10.362.3

7.5

3.4-4..0

-1.2.67.0

-.2.57.3

20.51.6

-2..11.28.5

-5..5

-6..09.9

-15.2

3.821.3

-6..4

-2..2-7.2.

-15.11.0

-0..8-3.9.-0.7.-5.5.

1.8-1.7-1..1-2.2.

-2..0-4.0.

-12.4

4.72.5

-6..4

2.40.9

-5.76.2

4.2-3..6

-12.91.5

2.0-2..1-7..5

2.4

-3..5-12.2

7.8

-0..3-9.3.11.4

9.98.02.5

12.0

12.22.5

-4..95.9

-0.220.30.10.6

-3.5-2.02.5

0.62.26.9

1 For classification of countries in groups shown here, see Appendix IX. Excludes data for China prior to 1978.2 Compound annual rates of change.3 Averages based on data for the two groups of countries shown separately below and on partly estimated data for other countries (mainly the U.S.S.R. and other

nonmember countries of Eastern Europe and, for years prior to 1978, China).4 For years prior to 1970, an imputed value of US$1.00 has been assigned to the SDR.5 As represented, respectively, by (1) the United Nations export unit value index for the manufactures of the developed countries; (2) the oil export unit values of

the oil exporting countries; and (3) the Fund's International Financial Statistics index of market quotations for non-oil primary commodities.

the global discrepancy on current account, after havingdeclined from $96 billion in 1982 to $64 billion in 1983,rose once again to some $70 billion in 1984. An inter-national working party has been established by the Fundto attempt to identify the principal sources of the dis-crepancy and to make recommendations concerningimprovements in statistical techniques.

Exchange market developments during 1984 and theearly part of 1985 were dominated by the continuedstrength of the U.S. dollar, although by mid-1985 thedollar had reversed about half of the appreciation thatoccurred in 1984. From December 1983 to April 1985,

the nominal effective rate of the U.S. dollar appreciatedby 17 percent (Chart 7). Over that same period, thedeutsche mark depreciated by 2 percent in nominaleffective terms, and the pound sterling by 5!/2 percent;the Japanese yen was little changed, on balance. TheU.S. dollar, therefore, continued to be the focus ofinternational attention as its value in real effective termsreached levels some 30 to 45 percent above its value forthe first decade of generalized floating, despite the rapiddeterioration in the U.S. current account. These devel-opments, and the factors contributing to them, arediscussed in Chapter 2.

15


ANNUAL REPORT, 1985

Table 7.

Summary of Payments Balances on Current Account, 1977-84'(In billions of U.S. dollars)

Industrial countries


FranceGermany, Fed. Rep. ofItalyUnited Kingdom

Other industrial countries

1977

4-2.4

-14.1-11.7

11.3

1.08.53.12.0

-1.2.5

1978

31.9

-4..0-12.33

17.0

8.513.4

7.95.5

-4.00

1979

-5.66

-4.222.6

-7.99

6.90.16.43.3

-12..8

1980

-38.88

-1.26.6

-9.55

-2.55-8.33-9.5512.33

-26.77

1981

3.1

-5.4410.76.2

-2.3880.8

-7.517.5

-16.4

1982

1.2

1.9-3.88

8.1

-9.5510.2

-4.9911.8

-12..7

1983

2.2

1.3-35..5

22.2

-2.3310.0

1.06.9

-1.3

1984

-342.2

1.7-934.4

36.4

1.813.1

-3..03.2

5.9


By region


By analytical criteria


Market borrowersOfficial borrowers

-0.1

-10.4-0..9-9.031.8

-11.6

25.0-25..1

-19..5-8.4.

-36..2

-15.4-8.99-7.1114.5

-19.4

-0.77-35.55

-32.88-11.5

0.2

-6.66-15..2

-9.9.53.7

-21.7

54.0-53.88

-30.3.-12.9.

22.6

-5.3.-21.8.-12.5.

91.6-29..3

100.1-77.5

-35.6.-16.9

-56.33

-25.2.-23.4-10.5.

45.8-43..1

34.7-91.00

-72.2-19.3.

-99.6.

-24.4-19.8

-6.7.-6.5.

-42.1.

-23.44-76.22

-73.66-18.0

-70.5

-15.55-16.3

-5..3-21.77-11.7

-17.00-53.6.

-29.88-15.4

-43.99

-10.9-7.99-3.33

-16.3-5.55

-5.77-38.22

-8.44-16.8

Other countries2

Total3

-6.99

-9.5.

-3.5.

-7.88

-2.1 -3.0

-7.6 -19.1

-2.8 2.6

-56.0 -95.8

4.9

-635.5

6.7

-714.4

1 On goods, services, and private transfers. For classification of countries in groups shown here, see Appendix IX.2 Covers estimated balances on current account transactions only in convertible currencies of the U.S.S.R. and other nonmember countries of Eastern Europe.3 Reflects errors, omissions, and asymmetries in reported balance of payments statistics on current account, plus balance of listed groups with countries not

included.

INDUSTRIAL COUNTRIES

The major balance of payments developments inindustrial countries during 1984 and the first part of1985 were the increases in the current account deficitof the United States and in the surplus of Japan(Chart 8). The U.S. current account had been inapproximate balance or a small surplus from 1979through 1981, before shifting into deficit in 1982; thedeficit then increased to more than $100 billion (about23/4 percent of GNP) in 1984.3 Data on merchandisetrade for the first quarter of 1985 suggest that the deficitn>ay have widened still further in that period. In Japan,the current account surplus rose from $7 billion in 1982to $21 billion in 1983 and to $35 billion in 1984.

The emergence of a large deficit in the U.S. currentaccount has been associated with the relatively rapidgrowth of demand in the United States. Growth of real

3 The current account figures discussed in this section includeofficial transfers; the general pattern of developments is quite similarfor balances excluding these transfers.

domestic demand from 1982 to 1984 was almost twiceas rapid (at 14 percent) in the United States as in anyother major industrial country. However, and at leastequally important, the United States has also suffered asharp loss of export market shares in recent years (abouta fourth from 1980 to 1984) and a significant increasein import penetration in domestic markets (about a fifthover these four years, measured as the ratio of importvolume to real GNP). These developments are attrib-utable primarily to the effects on U.S. competitivenessof the very large appreciation of the U.S. dollar since1980.

The sharp increase in the Japanese surplus is attrib-utable in large measure to the responsiveness of Japaneseexports to the growth in demand abroad, especially intherUnited States, and, to a lesser extent, developmentsin primary commodity prices, including oil, over thepast few years. Japanese imports actually increased by11 percent in volume in 1984, but exports rose by evenmore (16 percent). Because Japanese industry has beensubstantially restructured toward high-technology prod-ucts, Japan was particularly well placed to expand its

16

.

.

.

6



Chart 7.Major Industrial Countries: Indices of Monthly Average U.S. Dollar and Effective Exchange Rates,

1980-April 1985(Average value for 1974-83 = 100)

17


ANNUAL REPORT, 1985

Chart 8.Major Industrial Countries: Payments Balances on

Current Account, Including Official Transfers,1980-First Quarter 1985

(In percent of GNP)1

exports in spite of growing pressure from some otherindustrial countries to limit voluntarily shipments ofsome products.

With very limited recourse to exchange market inter-vention, the large shifts in current account balances forJapan and the United States were associated with op-posing movements of similar magnitude in private cap-ital flows. For Japan, the shift was primarily in terms oflong-term instruments, as Japanese residents boughtlarger quantities of foreign securities while nonresidents'net purchases of Japanese securities declined. The majorshift in the U.S. accounts was a reduction in the rate ofnet acquisition of foreign assets by U.S. residents, froman outflow of $108 billion in 1982 to one of $ 121/2 billionin 1984.

The Federal Republic of Germany recorded only asmall increase in its current account surplus in 1984, inspite of a number of favorable developments. Exportvolumes increased strongly, reflecting rapid growth inexport markets, gains in competitiveness, and a favor-able commodity composition of German exports. At thesame time, imports were restrained by the continuedslow growth of demand in Germany relative to theaverage of industrial countries. On the other hand, thecontinued depreciation of the deutsche mark during 1984resulted in a deterioration in the terms of trade thatlimited the increase in the current account surplus. Also,export growth was held back during the first half of1984 by the strike of metalworkers.

The deficit in the French current account balance fellfrom $12 billion in 1982 to $4'/2 billion in 1983 and thento nearly zero in 1984. The major source of this reductionwas the implementation of policies restraining the growthof domestic demand in France at a time when demandgrowth was accelerating abroad. Real total domesticdemand in France declined slightly from 1982 to 1984,compared with aggregate growth of more than 8 percentfor the other industrial countries. France also has gainedcompetitiveness over the past four years, especially vis-a-vis the United States and Canada; the real bilateralexchange rates against Germany and the other membercountries of the European Monetary System have beenbroadly stable.

Italy's current account slipped back into deficit in1984, reversing a substantial portion of the gain achievedin the previous year. The major source of this reversalwas the resumption of growth in domestic demand,which was considerably more rapid than in the otherlarge countries of continental Europe. In addition, al-though Italy has gained competitiveness relative to theNorth American countries during the past few years,inflation differentials have led to an erosion of competi-tiveness in relation to its major European tradingpartners.

The United Kingdom also experienced a deteriorationin its current external position, as the $3!/2 billion currentaccount surplus of 1983 largely disappeared in 1984. Alarge part of this shift could be attributed to the effectsof the year-long strike by coal miners. At the same time,while the trend toward declining market shares in non-

18

1Based on seasonally adjusted data.2Datanot available at time of publication,



oil exports appears to have been arrested, non-oil im-ports were stimulated by a relatively buoyant growth indomestic demand. It would appear that, despite sub-stantial competitiveness gains in the past four years, theexternal position of the United Kingdom is continuingto suffer from the earlier (and even larger) decline inexternal competitiveness.

Canada has experienced a weakening of competitive-ness vis-a-vis European countries and Japan on a scalesimilar to that of the United States during the past fouryears. However, because of the large share of Canadiantrade with the United States, the real effective appreci-ation of the Canadian dollar has been fairly modest.Furthermore, growth of domestic demand in Canadahas been below the average for its major trading partnersfor the past three years, reflecting the relatively severerecession in Canada. Consequently, Canada's trade performance has been strong, and the current accountbalance has shown a small surplus in each of the pastthree years.

The combined current account balance of the smallerindustrial countries strengthened by $7 billion in 1984and showed a surplus for the first time since 1973. Thelargest improvement in this group was recorded bySpain, where the current account balance shifted froma $2!/4 billion deficit in 1983 to a $2 billion surplus in1984. This improvement reflected a decline in realdomestic demand, at a time when foreign demand wasaccelerating, as well as a lagged response to the 20percent depreciation in the real effective exchange rate(measured on the basis of consumer prices) over theprevious four years. Finland, Norway, and Sweden alsoshowed significant improvements, ranging from 1 !/2 percent to over 2 percent of GNP, reflecting partly theearlier depreciation of their real effective exchange rates.Sweden shifted from a deficit in 1983 to a surplus in1984, while Finland moved into balance; the Norwegiansurplus rose from 3!/2 percent to about 6 percent ofGNP. The largest deterioration in the current balancewas that of New Zealand, where the deficit increasedfrom 414 percent to nearly 7 percent of GNP.

DEVELOPING COUNTRIES

Developing countries made further progress in 1984in their efforts to reduce imbalances in their externalaccounts. Export growth was the driving force behindthe adjustment in 1984, as many developing countriestook advantage of the opportunities afforded by thestrong growth of demand in the United States. Exportexpansion was sufficient to reduce the current accountdeficit and to finance a modest growth of imports, thefirst time the latter had shown an increase since 1981.

For the group of developing countries excludingthose for which comprehensive statistics of externaldebt are either not available or whose debt is smallin relation to external assets (i.e., all developingcountries except the eight major oil exporters in theMiddle East), the reduction in the current accountdeficit was approximately matched by lower borrow-

ing from market sources. This led to a considerabledeceleration in the rate of growth of debt. The debt/export ratio fell for the first time in several years, andthe maturity structure of the debt was improved,mainly through continuing large rescheduling opera-tions. Other encouraging financial developments in-cluded a reduction in capital flight, the rebuilding ofofficial reserves (by a record $22 billion), and reduc-tions in payments arrears.

Current Account Developments. Strenuous ad-justment efforts, together with an improved externalenvironment, resulted in a further substantial narrow-ing in the combined current account deficit of devel-oping countries. This deficit, which had been approx-imately $100 billion in 1982, fell to $44 billion in1984, approximately 61A percent of exports of goodsand services (Table 7).

The aggregate picture, however, masks divergenttrends in different groups of developing countries,particularly between those that are and are not heav-ily dependent on exports of oil (Chart 9). Fuel ex-porting countries were in surplus on their currentaccount during 1979—81, but slipped into deficit there-after. Initially, the accumulated surpluses of earlieryears enabled them to adopt a more gradual approachto adjustment, but continued declines in export vol-umes and prices eventually prompted a sharp cutbackin imports which arrested the decline in their currentaccount position. Among the non-fuel exporting coun-tries, 1984 represents the third year in which the needfor adjustment dominated economic management ofmany countries in the group. These countries did nothave the cushion of several years of sustained currentaccount surpluses and had been obliged to adjust atan earlier stage than the fuel exporters. Their aggre-gate deficit declined from $91 billion in 1981 (equiv-alent to 23 percent of exports of goods and services)to only $38 billion in 1984 (9 percent of exports ofgoods and services).

The nature of the current account improvementtaking place in developing countries has changed overtime as export growth has replaced import cuts asthe driving force behind adjustment. In the period1981—83, adjustment took the form of import compres-sion rather than export growth in four of the fivegeographical regions. However, the relative contri-butions were reversed in 1984. Export expansion wasthe dominant force in adjustment in 1984 in Asia,Europe, and the Western Hemisphere; in Africa,export growth also picked up, although by a lesseramount and from a lower base; and only in theMiddle East did import compression continue to leadadjustment. The Middle East is exceptional becausemost of the major oil exporters in the region had torely on import compression, given the limited scopefor alternative means of adjustment; excluding thesemajor oil producers, the Middle East followed asimilar pattern to other regions.

The recovery in industrial countries helped devel-oping countries in a number of respects. Increased

19


ANNUAL REPORT, 1985

Chart 9.

Developing Countries: Current Account Balances,1980-841

(In percent of exports of goods and services)


demand boosted export opportunities for developingcountries. The growth of export volumes among thenon-fuel exporting countries, after dropping to nearstagnation in 1982, accelerated rapidly thereafter andreached 12 percent in 1984, almost double the long-run average. Recovery also assisted the fuel exportingcountries: the rate of decline of the latter's exportvolume diminished in 1983, and a modest increase inexport volume was achieved in 1984, the first growthsince 1979.

Strengthening economic activity also had a signifi-cant impact on the prices of non-oil primary com-modities. After having declined by some 25 percentin U.S. dollars in 1981-82, the index of these pricesincreased by a cumulative IQVz percent in 1983-84.Price increases were unevenly distributed across com-modities, however (Chart 10). Prices for tropical bev-erage crops, agricultural raw materials, and food grewstrongly during 1983, then leveled off in the first half of1984 and declined significantly thereafter. The index ofmetals prices experienced only a brief and limited re-covery in early 1983, then resumed its earlier decline;by the end of 1984 metals prices were 5 percent lowerthan at the trough of the recession. Producers of copper,

iron ore, and tin were most affected. Their prices weak-ened for a number of reasons, including excess capacityand high levels of stocks at the end of 1982, substitutionof other materials for metals by consumers, and a shiftin supply toward low-cost producers.

Shifts in commodity prices were an important con-tributory factor in terms of trade movements during1983-84. On a year-over-year basis, the terms of tradeof the non-fuel exporting countries improved by 2!/2percent in 1983 and by l/2 of 1 percent in 1984, the firstimprovements since 1977. Nevertheless, these countries'terms of trade in 1984 were 15 percent worse than theyhad been in 1977. The terms of trade of fuel exportingcountries were stable in 1984, after having deterioratedin 1982-83; the cumulative improvement from 1977 to1984 was about 60 percent.

Falling nominal interest rates also provided a morefavorable environment for the developing countries' ad-justment efforts. While the London interbank offeredrate (LIBOR) firmed somewhat in 1984, it was never-theless over 4 percentage points below the average for1981-82.

Chart 10.

Developing Countries: Non-Oil Primary CommodityPrices, 1980-Second Quarter 19851

(Indices, expressed in terms of U.S. dollars, 1980 = 100) 100))

1 For classification of countries, see Appendix IX.2 Nominal commodity prices deflated by the UN index of prices of manufac-

tured exports of developed countries.

20



The U.S. recovery was of fundamental importance tocountries seeking export-led adjustment, as can be seenfrom Chart 11. U.S. imports from Asian and Europeandeveloping countries increased by some 80 percent be-tween 1980 and 1984, with the growth being concen-trated in 1983-84. In contrast, other industrial countries'imports from these regions were comparatively flat. Thepattern was the same, though growth was more muted,for the Western Hemisphere. The opposite pattern offalling and relatively weaker exports to the United Statesapplied to Africa and the Middle East. These develop-ments were, however, due wholly to the weak exports tothe United States of the fuel exporting countries in thesetwo regions.

While the U.S. economic recovery offered the oppor-tunity for export-led adjustment in many developingcountries, it did so in an uneven manner (Chart 11),largely reflecting the commodity composition of U.S.import growth. Exporters of manufactures achieved re-markable success, as U.S. imports from them doubledbetween 1980 and 1984; exporters of agricultural pri-mary commodities also benefited substantially from a

Chart 11.

Industrial Countries: Imports from DevelopingCountries, 1980-84'

(Indices, in terms of U.S. dollars, 1980 = 100)

U. S. imports from Other industrial countryimports from

Africa Europe Middle EastAsia Western Hemisphere

40 percent rise in U.S. imports. However, U.S. importsfrom fuel exporters fell by one third between 1980 and1984, and by one tenth from both mineral exporters andfrom countries that rely mainly on service exports or onremittances. The groups that did not benefit directlyfrom the U.S. recovery had to continue to rely on importcuts to bring about their adjustment. Some fuel export-ing countries, in particular, continued to be in thisposition.

The domestic aspects of adjustment were also impor-tant. Developing countries laid the basis for externaladjustment by adopting measures to curb domesticdemand, to boost savings, and to improve resourceallocation (including the adoption of more market-oriented policies on interest rates and exchange rates).Measures of demand restraint tend to take effect morequickly than those that enhance supply; hence the initialphase of adjustment was characterized more by importcuts than by export growth. However, supply-side ad-justment policies have improved the developing coun-tries' ability to take advantage of the recovery in worlddemand, and this too has contributed to the growingrelative importance of export expansion in current ac-count adjustment.

One measure of the success of the supply-side policieswas the change in the developing countries' share in theimports of industrial countries: Asia's share increasedby 2.6 percentage points between 1980 and 1984, West-ern Hemisphere's share by 1 percentage point, andEurope's by 1/4 of 1 percentage point; the Middle East(excluding the major oil exporters) retained its marketshare, but Africa's share (excluding Algeria and Nigeria)dropped back by l/2 of 1 percentage point.

Finance and Debt. The developing countries' bor-rowing from market sources, net of amortization, hadreached a peak of some $84 billion in 1981 beforedeclining sharply from mid-1982 onward (Table 8).Although long-term borrowing from official creditorsand non-debt-creating capital flows continued at arelatively stable level (about $50 billion annually),the initial decline in commercial lending precipitated,for countries which were suffering from fundamentalbalance of payments weaknesses, a severe financialcrisis, leading to arrears, debt rescheduling, heavyuse of Fund credit, and a substantial drawdown ofreserves. As the current account position of indebtedcountries strengthened, however, the financing situa-tion became less acute. While rescheduling continuedto be necessary on a large scale in 1984, recourse toFund credit diminished, outstanding arrears declined,and developing countries added a record $22 billionto their reserve holdings.

The decline in the developing countries' net bor-rowing from market sources was the most dramaticfinancial development in 1981—84. It was initiated bya perception on the part of creditors that borrowingcountries would experience extreme difficulty in serv-icing their external obligations if the current accountdeficits that had emerged in 1980—81 remained atexisting levels. As a result, the supply of new com-

21

Fuel exporters Exporters of agricultural primary commoditiesExporters of manufacturesService and remittance countriesExporters of mineral primary commodities other than fuel



ANNUAL REPORT, 1985

Table 8.

Developing Countries: Current Account Financing, 1978-84]

(In billions of U.S. dollars)

Current account deficit

Use of reserves

Capital outflowsAsset transactions, netErrors and omissions2

1978

57

-14

-10-5-5

1979

62

-22

-11-8-3

1980

77

-18

-27-8

-19

1981

113

2

-37-17-20

1982

103

14

-38-13-25

1983

59

-10

-20-8

-11

1984

38

-22

-9-6-4

Non-debt-creating flows3 18 25 24 28 29

1 Excluding the eight major oil exporters in the Middle East. See Appendix IX.2 Positioned here on the presumption that this reflects primarily unrecorded capital outflows.3 Official transfers, direct investment, SDR allocations, gold monetization, and valuation adjustments.4 Publicly guaranteed by the recipient.5 Mainly from banks and other private creditors.

23 23

Net external borrowingLong-term borrowing from official creditors4

Other financing flows, netReserve-related transactions

Liabilities constituting foreignauthorities' reserves

Use of Fund creditArrears

Other net external borrowing5

Long-termShort-term

631646

2

1—

1453510

701852-1

-1——524310

9824744

221

703930

1202793

9

162

846123

98306719

17

11483513

66293617

-1118

1936

-17

4730174

—5

-11425

-11

mitments to borrowing countries from commercialsources virtually dried up. Countries that relied pre-dominantly on market sources for financing theirexternal position (the market borrowers) borrowed$125 billion (net) from banks and other private cred-itors in 1981-82, but only $20 billion in 1983-84.Indeed, the market borrowers' financing situation waseven tighter than these figures suggest. They securednet inflows from private creditors in 1983—84 only asa result of obtaining some $23-24 billion in concertedlending packages related to debt restructuring.

The sharp contraction in new lending to the marketborrowers, as well as the capital flight that occurredin many of these countries, led to widespread debt-servicing difficulties. Where such difficulties wereencountered, they often reflected more fundamentalproblems than merely the reduced availability of newlending. Inadequate adjustment policies in responseto adverse shifts in the external environment had ledto growing price distortions and fiscal imbalances inthe years before 1982. These distortions had ham-pered the process of payments adjustment and hadpermitted growing current account deficits and arapid buildup of external debt. Countries which hadto interrupt normal debt servicing at some timeduring 1981-84 had current account deficits averag-ing one third of export earnings in 1981, despite theiralready high debt and debt service ratios (Table 9).In contrast, the market borrowers that avoided debt-servicing problems had considerably lower currentaccount deficits and debt service ratios.

There is a marked contrast between the instabilityin recent developments in the external financing ofmarket borrowers and the relative stability of theexternal financing of the countries that borrow mainlyfrom official creditors (the official borrowers). Thecapital inflows of the latter group are less vulnerableto changing perceptions of creditworthiness, based asthey are predominantly on long-term borrowing fromofficial creditors and non-debt-creating flows (mainlyofficial transfers and direct investment). These fi-nancing considerations largely explain why the official

Table 9.

Developing Countries: Debt, Debt Service,and Current Account Deficits of Market Borrowers,

1981-841

(In percent of exports of goods and services)

Market Borrowerswith Recent Debt-Servicing Problems

OtherMarket Borrowers

Change Change1981 1984 1981-84 1981 1984 1981-84

Debt

Debt service

Current accountdeficit

194

38

30

264

40

2

70

2

-28

65

12

10

78

14

2

13

2

-8


22

1



borrowers' current account adjustment could be lessthan that of the market borrowers. For the officialborrowers as a group, current account deficits de-clined only from 50 percent of exports of goods andservices in 1981 to 46 percent in 1984 (Table 10).

The adjustment efforts of developing countries en-compassed improvements in the capital as well as inthe current account. Indeed, capital outflows—mostlycapital flight—fell by a proportionally greater amountthan the current account deficit between 1981 and1984. The stemming of capital outflows, from $37billion in 1981 to $9 billion in 1984 (Table 8), waslargely attributable to improvements in financial andexchange rate policies in indebted countries.

By 1984, the reduced level of capital outflows,together with improvements in the current accountand a stabilization in capital inflows, created theopportunity for reduced reliance on exceptional fi-nancing and for a rebuilding of official reserves. Theuse of Fund credit fell by half in 1984, arrears declinedslightly, and a further $22 billion was added toreserves (Table 8).

Increases in reserves had become a matter of prior-ity in many countries by 1983-84. The median reservelevel of developing countries (other than the eightmajor oil exporting countries in the Middle East) hadbeen run down to only five weeks' imports at the endof 1982, against a median level of over two months'imports in the late 1970s. Despite the recent recordincrease in reserves, the median stock of these coun-tries' reserves was still equivalent to only six weeks'

imports at the end of 1984. The situation was partic-ularly precarious for countries in sub-Saharan Africa:their total stock of reserves was only $3 billion at theend of 1984, with a median level at only three weeks'imports. This is an extremely low level, and helps toexplain why these countries are vulnerable to liquidityproblems as a result of any adverse change in theircircumstances.

Table 10 also illustrates regional diversities in thechange in developing countries' financing patterns.The deepest cut in financing requirements was madeby the Western Hemisphere, reflecting both the largenumber of market borrowers with recent debt-serv-icing problems in the region and the capital flight towhich many countries in the region had been subject.Reductions in the financing requirements of Asia,Africa, and Europe also reflect the policies of marketborrowers in those regions. In the context of policiesdesigned to restore creditworthiness, it is notable thatWestern Hemisphere and African countries temperedthe reduction in their financing requirements by bor-rowing to increase their reserves.

The rate of growth of developing countries' externaldebt, expressed in U.S. dollars, slowed dramaticallyin the early 1980s, from 18!/2 percent annually in 1980-81 to 5!/4 percent annually in 1983-84. The decelerationwas the result of the reduction in the developing countries' overall external financing requirement, of the effectof exchange rate changes on the dollar value of outstand-ing debt denominated in other currencies, and of theincreasing importance of the non-debt-creating flows

Table 10.

Developing Countries: Changes in Current Account Financing, from 1981 to 19841

(In billions of U.S. dollars, except where otherwise noted)

Changes in Financing Requirement Changes in Financing Flow

Of which Of which

Total

Currentaccountdeficit

Capitalout-flow2

Accumulationof

reserves Total

MemorandumItem

Long-term Change inNon-debt- borrowing currentcreating from official Other accountflows3 creditors4 borrowing5 deficit6

Developing countries -79 -75 -28 24 -79 -5

Of which,Market borrowers -71 -64 -28 21 -71 -4Official borrowers7 -4 -3 — -1 -4 -2

-76

-70-2

-14.1

-16.5-3.8

By region

AfricaAsiaEuropeNon-oil Middle

East1

Western Hemisphere

-8-13-4

-3-52

-14-16-7

-38

-1-1

1

-26

743

-212

-8-13-4

-3-52

1-2

1

-1-3

-1——

13

-8-10-4

-2-51

-13.5-7.8

-11.8

-0.3-27..5

1 Excluding the eight major oil exporters in the Middle East. See Appendix IX.2 Asset transactions, net, plus recorded errors and omissions (on the presumption that the latter reflects primarily unrecorded capital outflows).3 Official transfers, net direct investment, SDR allocations, valuation adjustments, and gold monetization.4 Publicly guaranteed by the recipient.5 Mainly borrowing from market sources but also includes use of reserve-related assets.6 As percent of exports of goods and services.7 Excludes China and India.

23

2

3


ANNUAL REPORT, 1985

relative to the current account deficit. Although non-debt-creating flows fell by some $5 billion from 1981 to1984, their contribution to financing the current accountdeficit rose from about one fourth to almost two thirds.

While the appreciation of the U.S. dollar tended toretard the growth of debt expressed in dollars, onbalance it seems likely that the appreciation of the dollaradversely affected the debt-servicing capacity of theindebted countries. The dollar's appreciation reducedthe dollar value of debt by about 11 percent between1980 and 1984, but it probably affected export prices interms of dollars to an even greater extent. Thus, theexchange rate movement of 1980-84 would have tended,other things being equal, to increase the debt/exportratio of most developing countries.

Developing countries' debt/export ratios fell from 158percent in 1983 to 151 percent in 1984, despite theadverse impact of the dollar's appreciation. This wasthe first reduction in the debt ratio since 1980. However,the overall debt ratio remains very high in historicalperspective. Moreover, debt ratios are highly unequalacross regions: the Western Hemisphere's ratio wasextraordinarily high at 280 percent in 1984; the non-oilMiddle East and Africa also recorded high ratios, 176percent and 162 percent, respectively, both of whichincreased in 1984; however, Europe (127 percent) andAsia (86 percent) achieved reductions in 1984 in theiralready relatively low ratios.

Adjustment policies in 1982-84 were combined withefforts to improve the maturity structure of debt. In-debted countries reduced their short-term debt from$155 billion at the end of 1982 to $126 billion at the endof 1984. At 1514 percent of total debt in 1984, short-term debt was considerably below the 20!/2 percentaverage during 1980-82. The reduction in short-termdebt was more than accounted for by countries in theWestern Hemisphere, whose short-term debt fell by $31billion during 1982-84.

The refinancing of long-term debt falling due alsopresented problems of debt management. The greaterpart of maturing long-term debt, over $90 billion, wasrefinanced on a voluntary basis. However, the enormousliquidity pressures on some countries resulted in anunprecedented amount of amortization payments fallingdue in 1983-84, about $40 billion, being restructured informal multilateral arrangements. In this connection, apotentially stabilizing influence was the introduction ofmultiyear debt rescheduling arrangements. In 1984 suchmultiyear arrangements were agreed in principle for thebank debt of a limited number of countries, while inearly 1985, a similar arrangement covering debt toofficial creditors was negotiated in the case of onecountry.

Debt service ratios fell as a result of a combinationof rescheduling agreements, lower nominal interestrates on variable interest rate debt, and strong exportgrowth in 1984. The developing countries' debt serv-ice ratio fell from 241/2 percent in 1982 to about 22V2percent in 1983-84. In judging the ongoing costs ofservicing a given volume of debt, it is also of significance

to consider the ratio of interest payments to exports.This ratio fell from 14!/4 percent in 1982 to 13 percentin 1984, but remained high in comparison with theimmediate past. The interest payments ratio was lessthan 6 percent in 1977.

The overall decline in the debt service ratio over thepast two years masks disparate regional trends. Africa'sdebt service ratio increased by 7l/2 percentage pointsbetween 1982 and 1984, to reach 28'A percent. The ratiowould have been even higher were it not for reschedulingarrangements involving a number of African countries.European and non-oil Middle Eastern debt service ratiosalso increased, albeit by lesser amounts, and are nowslightly above the indebted countries' average, at 2614percent and 243/4 percent, respectively. Asia's ratio fellback to under 11 percent in 1984, the lowest ratio forany region. The major change was in the WesternHemisphere: the average debt service ratio of countriesin the region declined from 511/2 percent in 1982 to 39!/2percent in 1984. This was mainly attributable to a nearhalving of the amortization/export ratio owing to re-schedulings, but falling interest rates and increasingexports also brought some relief. Nevertheless, the re-gion's debt service ratio remained almost twice theindebted country average, and will rise over the short-term as current rescheduling arrangements expire andpreviously rescheduled debt falls due for repayment.

It is also a cause for concern that many low-incomecountries, and other countries unable to attract com-mercial loans, are encountering debt-servicing problems.Countries that borrow mainly from official creditorsgenerally obtain their finance more cheaply than marketborrowers. But their debts are now so large that theirdebt service ratios are at high levels, despite the below-market-rate payment terms. Official borrowers in Asia(excluding China and India) recorded a debt/exportratio of 382 percent in 1984, and African official borrow-ers a ratio of 333 percent. These resulted in debt serviceratios of 21 percent and 26 percent for the Asian andAfrican official borrowers, respectively. Some countrieswere unable to service these debts and, as a result ofrescheduling, jeopardized their access to new tradecredits. These countries, just as much as the marketborrowers who have attracted the world's attentionduring 1982-84, face severe financial constraints.

POLICY ISSUES

Although the overall pace of economic recoveryaccelerated in the industrial countries during 1984and its benefits spread increasingly to developingcountries, the problems faced by the authorities ofboth groups remained difficult and complex. Largelybecause of the uneven progress of the recovery andthe divergent positions in which individual countriesemerged from the economic and financial disturb-ances of earlier years, a feature of the economicsituation in 1984 was an exceptional diversity in thepolicy issues confronting individual countries.

24



In the industrial countries, this diversity reflectedproblems of policy implementation, rather than dif-ferences in basic strategy. Virtually all countries inthe industrial group have espoused a medium-termstrategy of restoring price stability and sustainablegrowth. However, differences in emphasis and instructural characteristics have resulted in continuingdivergences in rates of inflation, widely contrastingbalances on external current account, divergent fiscaldevelopments, and sharply differing labor markettrends.

Among developing countries, the current diversityof policy issues reflects, first and foremost, substantialdifferences in the timing and effectiveness of adjust-ment programs adopted to deal with the global reces-sion and their external debt burden. Generally speak-ing, countries whose authorities reacted early andfirmly to the weakening in their external position in1980—82 were in a better position to take advantageof the upswing in world markets that began in 1983.On the other hand, countries that were late in imple-menting corrective policies have experienced sharperand more disruptive adjustments. Other major differ-entiating influences on the nature of policy problemsfaced by individual developing countries have arisenfrom the commodity composition of their trade andthe source of their external financing, as well as fromlarge differences in prevailing rates of inflation andin degrees of indebtedness.

Maintenance of Growth in the Industrial Coun-tries. The key elements of the medium-term strategysupported by most of the industrial countries havebeen the restoration of financial stability and theimprovement of incentives for investment and pro-ductive activity. It has been agreed that these objec-tives could best be pursued through gradual slowingof growth in monetary aggregates, curbing govern-ment expenditures and deficits, and modification ofregulations or taxes that act as deterrents to invest-ment or expansion of employment. The area in whichpolicy implementation has come closest to meetingthe authorities' goals has been that of monetarypolicy. The pace of inflation has subsided throughoutthe industrial world, although considerable furtherprogress is still needed in some countries. In otherrespects, however, much remains to be done to im-prove the implementation of the overall policy strat-egy. Government expenditures and fiscal deficits haveexceeded targets and thus need to be curbed in anumber of countries. In some countries, structuralrigidities need to be corrected in order to bring policyinto conformity with the medium-term design.

In the United States, where by far the greatestgains in domestic investment and employment wereachieved during 1983 and 1984, the main problemhas been to accomplish a smooth transition from therapid cyclical rebound of the early recovery period tosteady growth with a sustainable balance in thecomposition of demand. During 1984 and early 1985,this transition appeared to be jeopardized by two

major and related imbalances in the U.S. economy:the fiscal deficit of the Federal Government and thedeficit in the current account of the balance of pay-ments. The former, while stimulating demand andoutput in the short run, threatened, if not corrected,to crowd out the productive investment in the privatesector that is needed to underpin longer-term growth.Meanwhile, its impact on the savings-investment bal-ance in the U.S. economy was an element, amongother factors, in the deterioration of the U.S. currentaccount balance. The growing shift of U.S. demandfrom domestic to foreign sources of supply, in turn,further dampened the expansion of domestic invest-ment and tended to stimulate protectionist pressures.

Firm action to deal with the deficit of the U.S.Federal Government, for example through implemen-tation of the expenditure cuts envisaged by the au-thorities, would make a crucial contribution to sus-taining the expansion of U.S. output and employmentover the medium term. Lower government borrowingrequirements could pave the way for a sustainedreduction in interest rates, and contribute to anorderly reduction in the exchange rate of the U.S.dollar. For the longer term, a more productive use ofnational saving and a better competitive position inworld trade would greatly enhance the prospect ofdurable expansion of U.S. economic activity, and atthe same time diminish pressures for protectionisttrade policies.

In most of the European industrial countries, cur-rent policy problems are rather different from thosein the United States. Generally speaking, the Euro-pean countries have made greater progress in redress-ing fiscal imbalances, but much less progress towardrecovery from the recession of the early 1980s. Al-though unemployment is a major problem in mostcountries of the area, the medium-term viability ofattempting to reduce it by expansionary demand-management policies is in doubt. The reluctance ofprivate sector employers to increase their demand forlabor on a long-term basis appears to derive frommore fundamental factors than a shortage of finaldemand. The best prospect for a substantial reductionof unemployment in these countries thus lies in struc-tural adjustments and institutional reforms designedto introduce greater flexibility into factor and productmarkets. These means of encouraging investment andexpansion of employment opportunities do not offerthe likelihood of dramatic advances in the immediatefuture, but should facilitate solid and lasting gainsover the medium term. The reduction of structuralweaknesses in European economies would enhanceincentives for capital formation in these countries andthus contribute to bringing about a more sustainablepattern of international capital flows and exchangerates.

A particular requirement to enhance prospects fordurable improvement in labor market conditions isthe removal of rigidities that enable wage costs to bemaintained at an unduly high level. Meeting this

25


ANNUAL REPORT, 1985

requirement calls not only for alteration of unrealisticindexation arrangements and general moderation ofwage demands by organized employees (as well asresistance by employers to excessive demands) butalso for the limitation of a variety of incidental costsof employment not necessarily reflected in wagesreceived by workers. It appears that a number ofpractices or regulatory requirements initially adopted(in an economic environment radically different fromthe current one) to provide security for employedpersons are now operating, perversely, to deny jobsto the unemployed. Critical re-examination of existingminimum wage regulations and employment-basedtaxes may also be in order where high wage costs aregiving undue encouragement to economies in the useof labor.

The economic recovery in Japan, although appre-ciably stronger than that in Europe, was even moredependent on external demand in its early stages.The substantial increase in the current account sur-plus of Japan since 1982 is a symptom of strains inthe international economy. The increase in this sur-plus was associated with excess savings relative toinvestment in Japan. While the factors resulting inthis particular savings and investment balance arecomplex, both external and internal developmentshave been important. One such development has beenthe unusually rapid growth of domestic demand inthe United States, and the associated strong appre-ciation of the U.S. dollar. Another has been the veryhigh level of international interest rates, which havespurred substantial long-term private capital outflowsfrom Japan, and, in combination with exchange rateconsiderations, placed serious constraints on the man-agement of monetary policy. With respect to internaldevelopments, demographic factors have helped sus-tain savings in Japan at a high level, while fiscalconsolidation has led to significant reductions inpublic sector dissaving. Meanwhile, the pace of do-mestic demand growth, although firming, has notgenerated a sufficient growth of investment to matchfully the additional savings. It will be important thatthe recent strengthening of domestic demand in Japanbe sustained at a satisfactory pace.

An important element making for stronger recoveryin Japan than in Europe has been the greater flexi-bility of the Japanese economy in reallocating re-sources among industries. This experience, along withthat of the United States, appears to demonstrate themerits of flexibility when major structural adjust-ments are forced by circumstances.

In one respect, however, the Japanese market itselfmay suffer from rigidity. Traditional trading practicesand regulations in Japan are sometimes perceived topresent obstacles to the distribution of imports ofmanufactured goods. While some of the difficultiesencountered by foreign companies attempting to enterthe market are created by deficiencies in their ownmodes of operation, initiatives that have been takenon the part of the Japanese authorities on this issue

are welcome, and further efforts in this regard couldboth benefit Japanese consumers and help fend offsome of the proposals now pending in other countriesfor restrictions against Japanese exports.

Most of the key issues noted above, although viewedin different perspectives by various industrial coun-tries, are clearly of concern to all of them—andindeed, to a considerable extent, to developing coun-tries as well. The high exchange rate of the U.S.dollar and the large U.S. balance of payments deficiton current account are widely regarded as undesirableand unsustainable. Yet they have helped supportother countries' exports during the recovery period,and their decline would carry opposite implicationsfor trading partners. That is one reason why adjust-ments in exchange rates and payments patterns shouldtake place in as orderly a fashion as possible. As thestimulus imparted by the U.S. economy to the rest ofthe world tapers off, it thus becomes important thatdomestic economic performance in other countries,particularly those that have succeeded in bringingabout significant adjustment in their economies, shouldcontinue to strengthen at a satisfactory pace.

A marked reduction in the flow of external capitalto the United States could help to make funds morereadily available to other potential borrowers, andespecially to developing countries, if it occurred underconditions of continued adjustment by the developingcountries, as well as better balance between U.S.domestic demands for credit and its supply, permit-ting an easing of interest rates. However, if U.S.dollar-denominated investments should become lessattractive to foreigners while U.S. credit demands,including those of the Federal Government, continuedfar in excess of private saving in the United States,upward pressures on interest rates in U.S. and inter-national financial markets would compound debt-servicing difficulties for many developing countriesand foreclose access to external credit for others.Higher interest rates would also tend to dampenprivate investment expenditures almost everywhere.These international considerations reinforce the do-mestic considerations in support of the efforts of theU.S. authorities to achieve a lower fiscal deficit.

Growth-Oriented Adjustment in Developing Coun-tries. The developing countries best placed to benefitfrom the recovery in the industrial world during 1984and the first half of 1985 were generally those thathad undertaken early adjustments during the preced-ing recession. These countries, mostly in the Asianregion, did not have to contend with sudden andmassive interruptions in the flow of available re-sources. Although they were by no means immune tothe effects of the global recession, healthy rates ofgrowth in output and exports were rather quicklyrestored even during 1983. With relatively moderatedebt service obligations, these countries have beenable to use most of their growing export earnings toacquire larger volumes of immediately usable re-sources. Their authorities, although facing the contin-

26



uing need to keep growth of nominal demand fromoutpacing that of productive potential, are confrontedby fewer short-term conflicts of objectives than themajority of developing countries at the present time.In general, the domestic policy problems of the au-thorities in these countries are those of maintainingthe financial discipline that has served them well todate. Vigilance against short-sighted pressures forloosening of fiscal or monetary policy remains neces-sary, but its maintenance is clearly less difficult thanthe imposition of major new adjustment programs.

A more dangerous threat, from the standpoint ofthese countries, is the spread of protectionist trademeasures in their external markets. A number ofdeveloping countries that have been most successfulin combining rapid domestic growth with externalfinancial stability have relied heavily on increasingexports of manufactures to underpin their economicdevelopment. This underlines the importance, for allcountries, of trade policy decisions being made withdue regard for the health of world trade and long-term efficiency in resource allocation.

Other developing countries are in less favorableand more severely constrained positions than thecountries just discussed. Although balance of pay-ments deficits on current account have generally beensubstantially reduced during the past several years,the reorientation in the use of domestic resources thatis needed to permit a return to satisfactory outputlevels has not yet been completed. External adjust-ment has too often been associated with reducedinvestment and unchanged rates of domestic savings.

In many cases, the initial phase of adjustment toreduced availability of external resources has alreadybeen carried out. The international cyclical recoveryis generating renewed expansion of export earnings,and some scope for a more closely parallel growth ofimports is opening up. For most of these countries,the overriding economic policy issue is how best toaccelerate development under the constraints imposedby the external environment and the need to achieveor maintain a stable domestic financial position. Giventhe prevalence of still overextended fiscal positions,and the tendency of these to induce excessive mone-tary expansion and inflation, direct application offiscal stimulus would not generally be an effectivemeans of promoting growth.

Revival of investment without external capital in-flows on the scale prevailing before the downturn willrequire expansion of domestic saving. The most fea-sible means of raising the share of saving in nationalincome in developing countries is generally throughbudgetary restraint, particularly if achieved throughcurtailment of public consumption. The exercise ofsuch restraint, if coupled with prudent monetarypolicies and realistic interest rates, can restore orcreate a domestic environment conducive to orderlyeconomic planning and growth, especially if sup-ported by realistic exchange rates and avoidance ofdomestic pricing mechanisms that distort market re-

lationships. Creation of such a domestic environment,in turn, would contribute more than any other singlefactor to renewed expansion and access to externalresources, both financial and real.

For a number of developing countries, such aprospect has been seriously compromised by theirinability to control inflation. The rapidly acceleratingand/or triple-digit inflation rates observed in severaldeveloping countries are undermining the viability ofthe adjustments made so far and bringing into ques-tion medium-term growth prospects. Inflation ratesof this magnitude can only be injurious to the devel-opmental effort. They distort relative prices, obscurethe significance of economic information, discouragesavings, encourage speculative activities at the ex-pense of productive ones, promote capital flight, andinduce shifts in portfolio preferences from domestic toforeign-currency-denominated assets—shifts which inturn reduce the effectiveness of monetary policy. Thecountries thus affected simply cannot afford the re-sulting misallocation and waste of resources. It istherefore essential that their economies be restored toa sound financial footing. Although circumstancesdiffer, the high inflation rates observed in these coun-tries are typically traceable, in the first instance, toinadequate control over the monetary aggregates whosedevelopments have paralleled those of prices. In mostsuch cases, adequate control by the monetary author-ities over the expansion of money and credit wouldseem to require greater realism in fiscal policies,especially given the constraints created by high levelsof interest payments on public debt. Even then,progress in some cases may require marked changesin the practices by which nominal incomes are deter-mined. Unless wages and other incomes are set in away that does not perpetuate inflationary pressures,the scope for successful application of monetary re-straint will remain severely limited.

Among the countries that delayed making appro-priate adjustments to the changes in internationaleconomic conditions that accompanied the recessionof the early 1980s, a considerable number were coun-tries that had relied heavily on market borrowing toexpedite their development during the previous dec-ade. Some of them, after the onset of the recession,sustained the momentum of domestic demand througheven larger recourse to external credit at market ratesof interest. One of the costs of doing so proved to besharp expenditure restraint and the particularly se-vere compression of imports that was required whenadjustment was finally made inevitable by the reluc-tance of creditors to continue lending. These countriesnow face an extended period during which their accessto external real resources will be limited by the needto service outstanding debt. This limitation, althoughpainful, is essential for the ultimate restoration ofnormal access to foreign credit.

Meanwhile, the authorities of such countries mustcontend with delicate problems of debt renegotiationand domestic demand management. Although the

27


ANNUAL REPORT, 1985

prospects for a matching expansion of both exportsand imports have improved now that the import-compression phase of adjustment has been generallycompleted, restraint over the growth of domesticabsorption will remain necessary for a considerabletime. As there will undoubtedly be strong pressuresto speed up the recovery of consumption spending,the authorities may find it hard to maintain thenecessary discipline in their financial programs. How-ever, given the magnitude of the imbalances that haveto be corrected, there is no realistic alternative to theexercise of firmness and patience during the processof economic rehabilitation.

Another large group of developing countries ischaracterized by relatively slight reliance on externalborrowing at market terms. The external credit usedby these countries has come predominantly fromofficial sources, bilateral and multilateral, and theinflow, unlike the flow of credit from market sources,has been relatively well maintained. However, inrelation to the needs of these countries—many ofwhich are small, low-income countries in sub-SaharanAfrica—the inflow has fallen short. A large majorityof these countries are exporters of primary productswhose export prices and terms of trade deterioratedbadly during the recession and whose economies werenot sufficiently resilient to withstand a markedcompression of imports. Such a result was avoided orminimized in a good many cases only through draw-ings on the Fund.

The authorities in a number of these countries havehad difficulty in implementing programs that wouldallow them to continue to avail themselves of Fundcredit. Many governments have often found it hardto develop the necessary consensus and the adminis-trative resources to achieve durable restraint in fiscaland monetary policies. However, the unquestionablyurgent needs of their populations cannot be metthrough inflationary financial policies that impedereal growth domestically and undermine the externalposition. In some cases, the combination of inflation-ary conditions with domestic price controls and un-realistic exchange rates has impaired the effectivenessof the price mechanism in the allocation of resources.The restructuring of price relationships to facilitate,rather than hinder, effective use of potentially avail-able resources must be a major preoccupation of theauthorities. Without the adjustment to which suchrestructuring contributes, the effective utilization ofboth domestic resources and official developmentassistance will be compromised and badly neededincreases in the latter may not be forthcoming. Theneed for such assistance is especially pronouncedamong the low-income countries of sub-Saharan Af-rica. Debt and debt service burdens in these countriesare very high, especially in relation to per capitaincomes. Moreover, the prolonged drought sufferedby most countries in that region has further exacer-bated these countries' positions by undercutting ex-port capacity and by boosting import requirements.

Nevertheless, while the dire straits of these countriesneed to be recognized and addressed by the interna-tional community, it is at least equally important thatthese countries implement policies that would im-prove the allocation of their scarce resources.

International Cooperation. The foregoing com-mentary has repeatedly stressed, explicitly or implic-itly, the high and rising degree of interdependenceamong countries. Close and complex interrelation-ships among the various policy issues just discussedare equally evident. In these circumstances, it hasbecome more important than ever for the Fund toexercise surveillance and to provide a forum forinternational consultation on a wide range of eco-nomic policy issues. Due respect for the legitimateinterests of other countries must pervade the nationaldecision-making process if the potential benefits ofmutual support in an interdependent system are tobe realized.

The Fund itself is an agent or intermediary forsome of the most important forms of internationalfinancial cooperation, and collaborates closely withthe World Bank in this endeavor. It has providedsubstantial amounts of financial assistance directly tocountries undertaking adjustment programs and hasplayed a catalytic role in the provision of largeadditional amounts from private and official lenders,in a wide variety of country circumstances. In thiscontext, the Fund can be particularly helpful indescribing to creditors the nature and implications ofthe economic adjustments being undertaken by mem-ber countries, and the overall financial requirementsfor an adjustment program to be viable.

In recent years, the Fund has experienced a periodof unprecedented net use of its resources. Net ofrepurchases, members obtained more than SDR 26billion during the past four calendar years, with thepeak annual flow, amounting to about SDR 10!/2billion, occurring in 1983. In terms of net purchases,this activity was already subsiding somewhat in 1984,reflecting in large part the general improvement in thepayments positions of the developing countries, as wellas the commencement of sizable repurchases underarrangements instituted during the recent years of largedrawings. Net drawings are subsiding further in 1985 asrepurchase obligations continue to mount, while fewercountries have both need and eligibility for large newdrawings. However, the Fund is likely to remain in-volved in the maintenance and monitoring of programsundertaken by members with credit tranche drawingsoutstanding for a long time. These activities, many ofthem connected with the 29 stand-by and extendedarrangements in effect at mid-1985, are described inChapters 2 and 3.

Another aspect of the Fund's operations that is re-quiring intensified attention is the conduct of surveil-lance under Article IV. The discharge of this responsi-bility—discussed in some detail in Chapter 2—requiresthe Fund to focus particularly on the internationaleconomic and financial implications of policies and

28



conditions in member countries. The increasing inter-dependence of both financial markets and markets forgoods and services has made it increasingly constructive,in assessing the policies of the large countries, to considerthe impact on—and reactions of—the other countriesaffected. The Fund can be helpful in assuring attentionto such considerations, through its analyses and throughthe opportunities it is able to provide for discussionswith the members individually and for more generaldiscussions in the Executive Board and the InterimCommittee.

Although the Fund cannot itself dispense official de-velopment assistance, it recognizes the dire need of anumber of members, particularly in sub-Saharan Africaat the present time, for a larger volume of such assist-ance. Without it, they are unlikely to accomplish thebasic structural reforms needed for full participation ingrowth of world production and markets. Recognizingthe interest of the whole international community inhelping these countries to make such a transition, theFund has strongly encouraged the industrial countriesto enlarge their official development assistance contri-butions.

The field in which international cooperation is perhapsmost seriously threatened, despite an urgent need for itsstrengthening, is that of external trade policy. Almostthroughout the industrial world, protectionist pressureswere greatly intensified during the international reces-sion of the early 1980s. They have continued to flourishunder the conditions of slack demand, relatively lowcapacity utilization, and high unemployment that stillprevail in major sectors of most of the industrial econ-omies. Progress of the cyclical recovery, while it hasalready weakened the rationale for protectionist actionsin several key countries, has not yet arrested the prolif-eration of narrowly based demands by particular pro-ducers and groups of workers for government interven-tion to defend them from external competition. As aresult of these pressures, many new barriers to tradehave been introduced to protect specific sectors orindustries, and the use of quotas and "voluntary" exportrestraints has expanded. A regrettable feature of thesearrangements has been an increasing degree of bilater-

alism. Moreover, subsidies to ailing industries havebecome progressively more widespread.

The selective support for domestic production andemployment that can be provided by such measures istypically limited and temporary, while the damage donethrough distortion of resource allocation tends to belasting. A continuation of the recent drift in that direc-tion, in contradiction of the basic principle of compar-ative advantage that has formed the basis for the healthyexpansion of international trade since World War II,could pose a serious threat to the whole fabric of themultilateral trading system that has served the world sowell over the past forty years.

Halting the spread of protectionism and rolling backexisting trade barriers would facilitate the smooth func-tioning of the international adjustment process. In par-ticular, it could help to assure for developing countriesthe adequate access to expanding markets that is essen-tial to their achievement of sustained medium-termgrowth and satisfactory resolution of their debt-servicingproblems. In present circumstances, the industrial coun-tries have a special responsibility to lead the way towardtrade liberalization. Such action, apart from its obviousdirect merits, would encourage adoption of trade liber-alization measures also by developing countries, whichwould improve the efficiency and resilience of theireconomies. Moreover, these developments, in turn, wouldhelp the industrial countries to resist protectionist pres-sures at home and would thus facilitate renewed expan-sion of trade, productivity, and living standards on aworldwide basis.

Action to strengthen the trading system is clearlyneeded. Current proposals for the launching of a newround of trade negotiations within the framework of theGeneral Agreement on Tariffs and Trade offer hope thatconstructive multilateral action will be forthcoming.However, it will take considerable time for any suchnegotiations to bear fruit. The rebuilding of confidencein the preservation of an open trading system will dependcrucially on steps taken by individual countries—andespecially by the major industrial countries to honortheir commitments to spurn new protectionist measuresand roll back existing trade barriers.

29


Chapter

2Developments in the International

Monetary System

The growing importance of international capitalmovements continued to dominate developments inexchange markets and in world liquidity. In the faceof rapid changes in asset preferences caused by actualand expected divergences in economic policies andperformance among industrial countries, exchangerates moved sharply at times in 1984 and 1985. Inthe process, competitive relations among importantcountries were altered so as to increase, rather thandiminish, existing imbalances in trade flows. As aresult, protectionist pressures increased, the task ofeconomic policymaking was made more difficult, anda greater burden was placed on international surveil-lance over these policies. Creditworthy countries con-

tinued to have adequate access to cross-border creditand could thus finance their balance of payments andadjust their reserve holdings in accordance with theirneeds. All the same, world reserves have not increasedsince the end of 1982, as a decline in the value ofgold reserves offset a rise in non-gold reserves. Coun-tries with balance of payments deficits whose lack ofcreditworthiness limited their access to internationalcapital markets had some difficulty, and faced rela-tively high costs, in maintaining reserves at levelsthey considered adequate. These issues will be dis-cussed in this chapter, beginning with exchange ratematters and then proceeding to questions of interna-tional liquidity.

Exchange Rates and Surveillance

For the major industrial countries, exchange ratemovements during most of the period since the begin-ning of 1984 tended to increase existing currentaccount imbalances. These movements occurred inspite of the marked tendency toward convergence ofinflation rates that has been evident among thesecountries over the past several years. Despite a partialreversal since February 1985, appreciation of the U.S.dollar over the last five years has caused a loss ofinternational competitiveness by the United States,and the U.S. current account balance has gone in-creasingly into deficit. In contrast, during 1984 Japanand, to a much lesser degree, the Federal Republic ofGermany increased their already substantial currentaccount surpluses.

The recent evolution of exchange rates and externalpayments positions among major industrial countrieshas given rise to substantial concern about strains onthe international monetary system, leading to re-newed interest in discussions regarding possible im-

provement in its functioning. These concerns relateto a number of features, including a pattern of realexchange rates for the major currencies that may notbe conducive to an orderly evolution of trade andpayments positions, debt-servicing difficulties in de-veloping countries, and increased pressures for pro-tectionism in industrial countries. This part of thechapter discusses these issues and their implicationsfor Fund surveillance.

EXCHANGE RATE ISSUES ININDUSTRIAL COUNTRIES

The appreciation of the U.S. dollar relative to othermajor currencies, which had been a feature of theinternational monetary scene since the third quarterof 1980, continued during 1984 and the first twomonths of 1985. Indeed, the dollar experienced asharp upward movement during the month of Feb-ruary 1985 that brought its effective exchange rate to

30


CHAPTER 2: DEVELOPMENTS IN THE INTERNATIONAL MONETARY SYSTEM

a level 50 percent higher than its average over thedecade 1974 to 1983, and more than 20 percent aboveits level at the end of 1983. During February, thedollar rose briefly above 3.45 deutsche mark and 260Japanese yen. The sharp appreciation in Februarywas reversed in March, and in the subsequent fourmonths nominal exchange rates of the dollar declinedfurther, to below 2.9 deutsche mark and 240 yen,bringing them back to levels prevailing during Julyand August of 1984.

Movements in competitiveness were often in direc-tions opposite to those needed to re-establish a stablepattern of current account positions among the majorindustrial countries. Normalized unit labor costs inU.S. manufacturing rose by 11 percent relative to thedollar value of labor costs in other industrial countriesfrom the fourth quarter of 1983 to the fourth quarterof 1984. Over this same period, the U.S. currentaccount deficit, including official transfers, widenedfrom $40 billion in 1983 to about $100 billion in 1984.The counterpart of these developments for the UnitedStates was exchange rate depreciation and increasedcurrent account surpluses for several major industrialcountries. The deutsche mark depreciated by 13 per-cent against the U.S. dollar during 1984, while thecurrent account surplus of the Federal Republic ofGermany increased from $4 billion in 1983 to $6billion in 1984. Similarly, despite favorable move-ments in prices and costs in Japan relative to theUnited States, the Japanese yen was 7 percent loweragainst the U.S. dollar at the end of 1984 than a yearearlier; Japan's current account surplus increasedfrom $21 billion in 1983 to $35 billion in 1984. Whenscaled by output, the current account imbalance ofJapan is comparable in magnitude to that of theUnited States, though in the opposite direction: bothare close to 3 percent of gross domestic product(GDP).

FACTORS INFLUENCING FLOATINGEXCHANGE RATES

A number of separate factors may have contributedto the exchange rate movements that occurred in 1984and the first half of 1985. First, the continued attrac-tiveness of acquiring claims on the United States hasbeen enhanced by the vigor of the U.S. economy,especially relative to that of the European economies.Direct investment flows to the United States increasedand, with the sharp decline in new bank lending todeveloping countries, the United States also experi-enced substantial net banking inflows. Both of thesedevelopments acted to strengthen the U.S. dollar. Incontrast, most European countries exhibited onlymoderate economic growth during 1984, and confi-dence may also have been adversely affected byindustrial disputes in the United Kingdom and theFederal Republic of Germany.

Second, the stance of monetary policy in majorindustrial countries has had a determining effect on

movements in nominal exchange rates and in realexchange rates, that is, exchange rates adjusted fordifferences in rates of change of prices and costsamong countries. A policy based on control of themonetary aggregates by the authorities in the UnitedStates has meant that, when economic activity hasexpanded at a rapid pace, as was the case during thefirst half of 1984, U.S. domestic interest rates adjustedfor inflation have tended to rise relative to ratesabroad, contributing to some strengthening of thedollar in real terms. Conversely, the slower pace ofeconomic activity since mid-1984 has led to a steadydecline of real interest rates in the United States.Furthermore, the evident success of U.S. FederalReserve policy in containing inflationary pressureshas helped to make dollar assets attractive as a storeof value. While other industrial countries also havehad marked success in reducing rates of inflation—inflation rates in the Federal Republic of Germany,the Netherlands, and Japan are currently lower thanthose in the United States—interest rates in thosecountries have not generally matched U.S. interestrates. Interest differentials have therefore frequentlyfavored investment in assets denominated in U.S.dollars. However, since August 1984, interest ratespreads in favor of the dollar have declined substan-tially.

Third, fiscal policy settings in major countries havecontinued to be quite divergent, and discretionaryshifts in fiscal policy accentuated that divergence in1984. When government fiscal deficits, defined broadlyto include the position of both central and localgovernments, are adjusted to remove purely cyclicalmovements owing to the functioning of automaticstabilizers, such as benefits to the unemployed, it isapparent that fiscal policy in France, the FederalRepublic of Germany, and Japan has become morerestrictive, while that in the United States has becomemore expansionary. Large U.S. federal deficits, whilestimulating economic activity both domestically andin other countries, have added to the already sub-stantial demand for credit to finance private invest-ment spending in the United States; and relativelyhigh real interest rates have helped to bring about alarge and growing transfer of savings from the rest ofthe world.

These factors have exercised a strong influence onexchange rates, particularly through their effects oncapital movements. Removal of restrictions on finan-cial transactions as well as financial innovations havepromoted integration of international capital markets.As a result, asset market transactions have becomeincreasingly important, relative to trade, in influenc-ing exchange rate movements.

In recent years, major industrial countries havetaken measures that facilitate shifts in asset holdings,both by making it easier to acquire claims on foreignresidents and by allowing nationals to take positionsin foreign currencies. Among these measures havebeen a series of changes since 1980 that have liber-

31


ANNUAL REPORT, 1985

alized capital flows into and out of Japan. Thesemeasures have allowed portfolio diversification bylarge Japanese institutional investors and, to a lesserextent, have favored the increased international useof yen-denominated instruments. During 1984 severalcountries, led by the United States, abolished thewithholding of taxes on interest paid to foreign holdersof bonds, thus furthering the integration of interna-tional capital markets. The arbitraging of expectedrates of return on assets denominated in differentcurrencies has also been facilitated by the develop-ment of new financial instruments, such as interestrate swaps, currency swaps, and note issuance facili-ties. Finally, domestic financial deregulation and in-novation may tend to promote integration of worldasset markets by expanding the range of instrumentsyielding competitive rates of return available to bothdomestic and foreign investors. In the United States,for instance, abandonment of ceilings on interest rateson bank deposits and the introduction of moneymarket accounts have provided attractive alternativesto marketable securities. In some other industrialcountries, for instance Australia and New Zealand,increasing competition and regulatory changes havelowered barriers separating financial institutions, withthe result that interest rates came to be more stronglyinfluenced by market forces. Some domestic financialliberalization has also taken place in Japan.

Innovations in financial markets have to someextent been the result of technological advances thathave lowered transaction costs, making movement offunds and automatic transfer of balances into interest-bearing accounts less costly. Information about for-eign financial markets is being made more widelyavailable via computerized information services. Someinnovations have no doubt been spurred by the periodof very high nominal interest rates in the early 1980s.Furthermore, in several major countries there hasbeen a change in philosophy concerning the properrole of government that has favored moves towardless regulation in a number of fields, including finan-cial matters.

EXCHANGE RATES AND FINANCIALINTEGRATION

The international integration of financial asset mar-kets has several implications for interpreting recentevents and for considering the functioning of theinternational monetary system. First, internationalcapital mobility, by giving a country access to foreignsaving, allows it more flexibility in its macroeconomicpolicies; recent experience of major industrial coun-tries suggests that the associated current accountdeficits and surpluses can persist for extended periodsof time. Second, exchange rates may at times respondsuddenly to changes in expected returns and percep-tions of risk associated with assets denominated indifferent currencies. Finally, the importance of finan-cial asset markets in the determination of exchange

rates has implications for the conduct of domesticmonetary and fiscal policies. These issues are furtherconsidered below.

Since widespread floating began in 1973, but par-ticularly during the 1980s, financial integration hasbeen associated with substantial and persistent devia-tions of real exchange rates from levels that would beconsistent with sustainable current account positions.The real effective exchange rate of the U.S. dollar atthe end of 1984 was some 35 percent above its averageover the period 1974 through 1983, and its apprecia-tion from the beginning of 1980 amounted to morethan 50 percent (Chart 12). The United States hashad current account deficits for the last two yearstotaling some $140 billion and is likely to have annualdeficits exceeding $100 billion for the next few years.Since the beginning of 1981 Japan has persistentlyrun current account surpluses, totaling some $70billion over the past four years. The Federal Republicof Germany was in a position of current accountsurplus from 1973 to the end of 1978; a series ofsubstantial deficits in the period 1979—81 has beenfollowed by small but growing current account sur-pluses.

As a result of recent current account deficits, theUnited States has moved from a large net creditorposition vis-a-vis the rest of the world, estimated bythe U.S. Department of Commerce to have been $150billion at the end of 1982, to a net debtor position.Prospective current account developments imply thatit will soon be a substantial net debtor, although thedata are subject to considerable measurement prob-lems. Japan's net asset position vis-a-vis nonresidentsof Japan was $25 billion at the end of 1982, asestimated by the Ministry of Finance, and currentaccount surpluses and valuation adjustments in 1983and 1984 have added some $49 billion to that figure.These current account surpluses had as their maincounterpart substantial long-term capital outflows,taking the form both of acquisition of foreign securitiesby large institutional investors in Japan and foreignloans by Japanese financial institutions and, to amuch lesser extent, of direct investment abroad byJapanese companies. Continuing current account sur-pluses in coming years would reinforce Japan's posi-tion as a large net creditor.

Another implication of the importance of assettransactions in the determination of exchange rates isthat, like other asset prices, exchange rates mayexhibit a high degree of volatility. This volatility hasbeen evident over the past year, as on numerousoccasions day-to-day movements of the U.S. dollaragainst currencies of the European Monetary System(EMS) have been very large. On September 21, 1984,the range of movement of the dollar-deutsche markrate in the course of the day even attained 4 percent.An investor considering the purchase of foreign cur-rency must take into account any eventualities thatmay affect the value of the currency in the future.For instance, volatility in the value of the pound

32



Chart 12.

Three Major Industrial Countries: Payments Balanceson Current Account, Including Official Transfers, a.Percent of GNP, and Real Effective Exchange Rates,

1973-841

1 Real effective exchange rates are measured by relative normalized unit laborcosts.

sterling against other major currencies during 1984stemmed in part from rapid changes in prospects inworld oil markets.

To some extent, volatility of exchange rates maysimply reflect rapid adjustment to new information,and the increasing integration of world financial mar-kets favors that process by allowing positions indifferent currencies to be taken quickly and cheaply.On the other hand, as with other asset prices, it ispossible that investors may on occasion ignore fun-damental determinants and concentrate on their per-

ceptions of other investors' preferences, leading to"speculative bubbles." Sudden shifts in sentiment arepossible in such a situation as investors realize thatthe bubble will eventually burst, and exchange ratesmay appreciate or depreciate substantially as a result.

The degree of risk that investors perceive to beassociated with an asset is also important, and changesin the perception of the underlying risks can bringabout sharp exchange rate changes. In recent years,substantial movements both into and out of dollarassets have been motivated by risk considerations.The United States has benefited from a safe-havendemand for dollar assets by investors in both indus-trial and developing countries, but there have alsobeen occasions when concern about the solvency offinancial institutions in the United States has led tosudden exchange rate changes. The announcement ofloan losses by the Continental Illinois Bank in May1984 triggered downward pressures on the dollar, andthe failure of several dealers in government securitiesand the troubles of non-federally-insured savings andloan associations are certainly part of the explanationfor the depreciation of the dollar in March of thisyear.

In recent years, day-to-day movements in the U.S.dollar exchange rates of other major currencies, ex-cept the Canadian dollar, have on numerous occa-sions approached, and sometimes exceeded, 1 percent(Chart 13). Contrary to the expectations of someobservers, there has been little tendency for the vari-ability of exchange rates to decrease through time,despite the experience of more than a decade withthe widespread floating of exchange rates and asubstantial convergence of inflation rates. Industrialcountries have made considerable progress in damp-ening inflation, and the reduction in the rate of priceincrease has been greatest in the countries that ini-tially had relatively high inflation. As a result, nom-inal interest rate differentials have also generallydeclined. However, because of the speculative elementin exchange rate determination, underlying determi-nants may not entirely explain exchange rate move-ments. For instance, exchange rate variability maynot correspond closely to the variability of interestrate differentials (Chart 14).

During 1984 and early in 1985, on several occasionsthe central banks of major industrial countries inter-vened substantially, either alone or in a concertedeffort, in order to limit exchange rate variability. Onone occasion in May 1984, the dollar was subject tosharp downward pressure and the U.S. authoritiesintervened to calm disorderly exchange market con-ditions. In the summer of 1'984, and early in 1985,the Bank of Canada intervened substantially to moder-ate the depreciation of the Canadian dollar againstthe U.S. currency. At times, in September and Oc-tober of 1984 and early in 1985, there was concertedintervention by the Deutsche Bundesbank and othercentral banks during episodes of persistent strengthof the dollar. Intervention seems to have had the

33


ANNUAL REPORT, 1985

Chart 13.

Exchange Rates for Six Major Currencies: Daily Percentage Changes Against the U.S. Dollar,January 1, 1981-April 29, 1985

34



Chart 14.

Five Major Industrial Countries: Variability of InterestRate Differentials and Bilateral Exchange Rates,

1981-84

1 The variability of interest rate differentials is measured as the standarddeviation of the daily series of day-to-day changes in the interest rate differentialon assets of three months' maturity.

2 Exchange rate variability is measured as the standard deviation of the dailyseries of day-to-day percentage changes in the currency of the first countryexpressed in terms of the currency of the second.

desired effect in these latter cases of halting a seriesof sharp moves in the same direction in currencyvalues—in this case in the direction of U.S. dollarappreciation. Nevertheless, the size of day-to-daymovements in the days following a period of substan-tial intervention remained high and, although thedollar broadly declined late in September 1984, itattained new peaks later in the year and early in1985.

More generally, the integration of internationalcapital markets and its effect on the functioning ofthe international monetary system has implicationsfor the conduct of monetary and fiscal policies. Al-though recent experience suggests that sterilized ex-change market intervention (i.e., intervention trans-actions that are not allowed to affect the moneysupply) seems to have some effect in calming disor-derly markets, the effectiveness of this policy measure

is limited. A durable official influence over exchangerates can result only from the use of policy tools thatchange underlying macroeconomic conditions.

As has been discussed above, monetary and fiscalpolicies can have persistent effects on real exchangerates. For instance, appreciation of real exchangerates may result from a sustained anti-inflationarymonetary policy; fiscal expansion may lead to anappreciation when it is accompanied by strong busi-ness investment and is not accommodated throughcentral bank credit, particularly if there is a highdegree of capital mobility. A combination of thesetwo factors, as recently experienced in the UnitedStates, is thus especially likely to impart a tendencytoward exchange rate appreciation. Appreciation mayhelp to achieve anti-inflationary objectives by lower-ing the prices of imported goods, but it worsens thecompetitive position of industries producing tradedgoods.

The international integration of markets for bothfinancial instruments and goods implies that policychanges in one country may have substantial effectson neighboring countries, and one channel for sucheffects is exchange rate movements. Contrary to ex-pectations, floating exchange rates among the curren-cies of major industrial countries have not in practicegranted governments an extra degree of autonomy topursue their own policy objectives. Instead, the ex-perience of industrial countries over the past decadehas emphasized their interdependence. Consequently,particular attention has been given to ways ofstrengthening Fund surveillance to achieve a greaterdegree of international compatibility and convergenceof economic conditions and policies in a medium-term framework.

Exchange rate volatility may result from uncer-tainty about the stance of policy at home and abroad,given the integration of international asset markets.It is therefore important for members to reduce thisuncertainty as much as possible by avoiding suddenshifts in announced policy measures and in the im-plementation of those policies.

THE EMS AND SMALLERINDUSTRIAL ECONOMIES

The EMS has been successful in achieving consid-erable stability among the exchange rates of thecurrencies of participants in the exchange rate mech-anism. Exchange rate movements among these cur-rencies have generally been smaller than those amongother major currencies. Although realignments ofcentral parities have been necessary at times, theyhave taken place less frequently in recent years thanpreviously. A realignment occurred in July 1985, thefirst since March 1983; in contrast, there were sevenrealignments between the formation of the EMS inMarch 1979 and March 1983. The strength of theU.S. dollar has probably helped in recent years to

35


ANNUAL REPORT, 1985

prevent pressures on central parities from developing.Among the EMS currencies, the deutsche mark pro-vides the principal investment alternative to assetsdenominated in U.S. dollars, in part because theFederal Republic of Germany (like the Netherlands)imposes virtually no restrictions on capital move-ments. Strong demand for dollar assets has thereforetended to reduce the demand for deutsche mark assetsand has thus attenuated upward pressures on thedeutsche mark relative to other EMS currencies.

A more important factor supporting the relativestability of the EMS in recent years has been theintroduction of restrictive monetary and fiscal policiesin the countries with higher inflation rates. Since1983, the French Government has taken vigorousmeasures to restrain domestic expenditures, leadingto a fall in the rate of inflation and an improvementof the trade balance. In Belgium, a reduction of thelarge government deficit has been a precondition bothfor re-establishing internal equilibrium and for easingpressures on the franc, and some progress has beenmade in that direction. In Italy, moves to limit thegovernment deficit, together with a reduction in thedegree of automatic indexation of wages, have led toa marked deceleration of inflation. However, the rateof inflation is still higher than in other major EMScountries. This inflation differential, and a deteriorat-ing external position, made necessary the realignmentwithin the EMS in July 1985, which involved adownward shift in the central rate of the lira againstother member currencies of about 8 percent.

Several other industrial countries have recentlyreduced restrictions on capital movements and pro-moted integration with international financial mar-kets. Where a particular country has followed thepractice of pegging its currency either to anothercurrency or to a basket of currencies, liberalizationmay bring out the problem of reconciling domesticmonetary targets and a fixed exchange rate. Theremay therefore be pressures on the authorities to floatthe exchange rate.

Australia and New Zealand have recently movedto floating exchange rates during a period of majordomestic financial innovation and deregulation. Since1980, measures have been taken in Australia to re-move lending guidelines and controls on interest rates,and the Australian dollar moved from an adminis-tered to a market float starting in December 1983.Since the change in government in July 1984, NewZealand has taken a series of liberalization measuresrelating to domestic financial arrangements and ex-ternal payments. Wide-ranging moves in the directionof deregulation highlighted the difficulty in reconcil-ing domestic monetary goals with a pegged exchangerate, and, for this reason, among others, on March 4,1985, the New Zealand dollar was allowed to float.

Finland, Norway, and Sweden have continued topeg their exchange rates to trade-weighted baskets ofcurrencies and to subordinate monetary policies, to agreater or lesser extent, to exchange rate objectives.

During 1984, interest rates in Sweden were keptsomewhat above levels prevailing abroad in order tolimit capital outflows. In Norway, despite moves since1980 toward liberalization of the banking system,interest rates are still tightly controlled. Finland hassignificantly liberalized the domestic financial system,but has retained exchange controls.

IMPLICATIONS FOR EXCHANGERATE POLICIES

Concern about exchange rate volatility and persist-ent shifts in competitiveness among both major andother industrial countries that seem to result from theimportance of asset market transactions in exchangerate determination has led to discussion of ways tolimit exchange rate movements. The success of theEMS is sometimes cited as a model for a return to asystem of adjustable pegs for major currencies. Thoughit is true that the intervention mechanisms haveserved to limit exchange rate fluctuations within theEMS, it is also the case that the countries of the EMSare very closely linked by trade and, as members ofthe European Community, share some supranationalinstitutions. As discussed above, member countries ofthe EMS have been willing to coordinate policies insuch a way that divergences in inflation and paymentsimbalances are reduced.

Some observers have suggested that countries shouldrestrict capital movements to insulate themselves fromfinancial developments abroad, for instance, by im-posing an interest equalization tax. As a result, it isargued, speculative forces would have less play, andexchange rates would diverge less from those consist-ent with a normal level of competitiveness. Restric-tions on capital flows would, however, be contrary tothe secular trend in favor of liberalization, whichstems from concern to promote economic efficiency.It would in any case be difficult to restrict interna-tional capital flows in the face of a wide range ofcompetitively priced instruments associated with do-mestic financial deregulation. Furthermore, restric-tions on capital mobility would reduce countries'access to foreign savings and prevent some profitableinvestment opportunities from being exploited.

Unfortunately, asset market deregulation does notseem to have been accompanied, in recent years, byany decline in the incidence of trade barriers. On thecontrary, there has been a revival of protectionistsentiment. Liberalization of capital movements, if notaccompanied by appropriate policies for internal andexternal balance, may result in large real exchangerate changes that bring forth demands for protectionof industries producing traded goods. It is thereforeimportant in choosing economic policies that theirinternational consequences be taken into account, inorder to avoid disruption to the international tradingsystem, from which all countries benefit.

36



EXCHANGE RATE POLICIES INDEVELOPING COUNTRIES

For many developing countries, exchange rate pol-icies in recent years were an essential element ofadjustment in the face of unsustainable current ac-count deficits and external indebtedness, as well ashigh and rising rates of inflation. The need to improvethe current account was made more urgent by theincreased difficulty of attracting foreign loans and thelimited supply of direct foreign investment capital.The difficulty of attracting capital to developing coun-tries was aggravated by high interest rates in inter-national financial markets, a safe haven for loanablefunds in a few industrial countries, an adverse invest-ment climate including uncertainty about profit pros-pects in many of the developing countries, and aperception among some suppliers of funds of severerestrictions on foreign direct investment in some ofthe developing countries. In light of these constraintson capital inflows and the heavy burden of debtservice payments foreseen for the medium term, ex-change rate policies during the period 1982—84 re-flected a need for reducing current account deficitsfrom the historically high levels of 1981 and 1982.

RECENT EXCHANGE RATE EXPERIENCE

The discussion of exchange rate policies in thissection focuses on developments in real effective ex-change rates, which can serve as an indicator ofchanges in external price competitiveness. Changesin the real effective exchange rate ensue from acombination of changes in the nominal effective ex-change rate, domestic price developments, and pricemovements in trading-partner countries.1 The realeffective exchange rate thus reflects the effects ofeconomic policies both in a particular country and inits trading partners, as well as other developments.This rate is, therefore, not entirely under the controlof the authorities and should be thought of as anintermediate target variable rather than a direct in-strument of economic policy.

For some developing countries, the movements inreal effective exchange rates in 1984 reflected thepolicy intentions of the authorities, acting in responseto the need for external adjustment. For other coun-tries, these exchange rate movements resulted frompolicies taken mainlv for domestic reasons, usually toreduce inflation and foster real output growth. In stillother countries, they were the outcome of peggingarrangements in conjunction with the reluctance ofthe authorities to move the nominal rate in line with

1 Indices of real effective exchange rates measure the evolution ofa country's prices relative to those of its trading partners, adjusted forexchange rate changes. In this section of the Report, prices aremeasured by the average annual consumer price index, with indicesof partner countries averaged by using import weights, and exchangerates are measured by an import-weighted index of average annualeffective exchange rates.

the difference between domestic and foreign inflation;thus, movements of exchange rates among the majorcurrencies often played a role in determining the realeffective exchange rates of the developing countriesconcerned.

The real effective exchange rates of about 45 per-cent of the 104 developing countries for which dataare available depreciated in 1984; the remainingexchange rates appreciated. Of the total number ofcountries in the sample, 13 percent had a real depre-ciation of over 10 percent and about 17 percent a realappreciation of over 10 percent. Taking all the 104developing countries together, the unweighted aver-age real effective exchange rate remained approxi-mately constant. A similar constancy of real effectiveexchange rates of the developing countries can beobserved over the period 1982—84 as a whole.

For about 70 percent of the developing countries,the change in the real effective exchange rate during1984 was less than 10 percent. A relatively largedepreciation (at least 10 percent) was often associatedwith undertaking a comprehensive adjustment pro-gram which was sometimes supported by the use ofFund resources (Ghana, Uganda, and Zaire). Forsome countries, depreciation was part of the contin-uing adjustment effort made necessary by high cur-rent account deficits in relation to exports of goodsand services (Paraguay, Uganda, and Zambia) orhigh ratios of external debt and debt service to exportearnings (Chile, Zambia, and Zai're). For other coun-tries, the real effective depreciation reflected, to someextent, the low rate of inflation relative to that oftrading partners (China and Togo).

A relatively large appreciation of the real effectiveexchange rate (at least 10 percent) resulted from avariety of factors. For some countries it reflected alag of nominal exchange rate adjustments behindbursts of domestic inflation (Bolivia and Guyana).Permitting the real exchange rate to appreciate sub-stantially was also an indication that the authoritiespreferred other measures to adjust their current ac-count balances, including the tightening of exchangeand trade restrictions (Nigeria and Trinidad andTobago). In some countries, the authorities delayedexchange rate adjustment because they were con-cerned, inter alia, with the effect of nominal exchangerate depreciation on inflation and income distribution(Egypt, Nigeria, and Tanzania); this was so, evenwhere beneficial effects on external adjustment mayhave been expected. It may be noted that in a fewcountries the real appreciation in 1984 partially offsetthe depreciation of 1982-83, but still did not preventsubstantial depreciation over the whole period 1982-84 (Cyprus, Malawi, and Mexico).

Differences among the exchange rate policies ofindividual developing countries can be explained inpart by the structure of their foreign trade. Expecta-tions regarding the effectiveness of a change in theexchange rate in influencing exports differ with re-spect to commodity groups. Most developing coun-

37


ANNUAL REPORT, 1985

tries exporting primarily fuel products did not feel anacute need for exchange rate change in the face ofdeclining export earnings. Foreign exchange earningsare not perceptibly influenced by the nominal ex-change rate, the latter being important principally fordetermining the domestic currency counterpart (whichhas budgetary significance) and for influencing thenon-fuel sector. Imports of raw materials and capitalgoods have varied mainly with public sector invest-ment; at the same time, with the cushion of accu-mulated international reserves, there has not beenpressure to reduce the importation of consumer goods.But among fuel exporters with a strong potential fornon-fuel exports, whose supply is apt to be influencedby relative prices, active use of the exchange rate hasbeen felt desirable, especially when accumulated for-eign reserves were small in relation to imports and todebt service obligations. Among the latter group offuel exporters, some (Indonesia, Mexico, and Vene-zuela) permitted their real effective exchange rates todepreciate substantially (15-28 percent) during 1982-84. Taken as a whole, however, the real effectiveexchange rate of fuel exporters appreciated during1984 by a weighted average of 8!/2 percent (4Y4 percenton an unweighted basis), as many of these countriescontinued to maintain relatively fixed nominal exchangerates with the U.S. dollar; this brought the cumulativeappreciation of the weighted-average exchange rate overthe period 1982-84 to 10 percent (113A percent, ifunweighted).

For developing countries exporting mainly manu-factured products, changes in the real effective ex-change rate can have important effects on overallcompetitiveness. Since wages are an important partof production cost, variations in the foreign currencyequivalent of domestic wage rates greatly affect prof-itability in the export and import-substituting man-ufacturing sectors relative to that in sectors producingnontraded goods, especially when prices of exportsand import substitutes are set in international com-modity markets without the individual country in-volved having a perceptible influence. In that case, adecline in the nominal exchange rate is often neces-sary to offset the effect of an excessive rise in wagerates on competitiveness in the export and import-competing sectors. The willingness of countries ex-porting manufactures to make active use of exchangerate policies is based not only on the perceived effectsof such policies on domestic supply but is also relatedto the relatively high income elasticities of demandfor their products in international markets. In 1984,countries exporting mainly manufactures experienceda real exchange rate depreciation of 5% percent(weighted average); seven of the ten countries in thisrelatively small group allowed their real effective ex-change rates to depreciate.

The authorities in countries exporting primary prod-ucts are traditionally less optimistic about the role ofexchange rates in their export performance and see otherfactors as playing much more crucial roles in determin-

ing the volume of their exports. Among such otherfactors are international commodity agreements (e.g.,for coffee, sugar, tin); regulated domestic producer prices(as in many sub-Saharan African countries where thereare state marketing boards); economic conditions andagricultural protectionism in the industrial countries;and the level and efficiency of domestic investment inexport industries and in infrastructure. While there issome basis for this view, it can sometimes be exaggeratedbecause the exchange rate imposes constraints on theuse of other instruments for influencing domestic supply.For instance, in the absence of adjustment of nominalexchange rates, the authorities are often reluctant, forbudgetary reasons, to raise regulated domestic producerprices for export crops so as to keep pace with domesticinflation or to induce an expansion in production. Sim-ilarly, the efficiency of investment in export industriescan be seriously compromised if foreign inputs areunderpriced relative to domestic inputs as a result of anovervalued domestic currency. Moreover, in countriesthat are exporters of mineral products, wages are im-portant in production cost, and movements in the ex-change rate play an important role in profitability,output, and investment in the mineral subsector. Finally,many exporters of primary products have rapidly ex-panding manufacturing export sectors. For such coun-tries, the role of the exchange rate is no less importantthan for countries now classified as exporters of manu-factures. In any event, during the period 1982-84 coun-tries exporting mainly primary products permitted theirreal effective exchange rates to depreciate less than didcountries exporting mainly manufactures (see Chart 15)despite the greater relative deterioration of the currentaccount ratio of primary product exporters during 1978-81. In 1984, exporters of primary products showed adepreciation of the weighted-average real effective ex-change rate of only 3A of 1 percent; fewer than half (45percent) of the primary product exporters (57 countriesin the sample) showed real effective exchange ratedepreciation.

The group of countries for which services and remit-tances constitute relatively important sources of foreignexchange earnings was about evenly divided betweenthose with depreciating and appreciating real effectiveexchange rates in 1984; but, overall, the group experi-enced significant appreciation (by a weighted averageof 6% percent).

There have been wide differences in the exchange rateexperience of the developing countries in different re-gions in recent years, which to some extent mirrordifferences found among country groups classified bystructure of foreign trade (Chart 16). For instance,exporters of manufactures are found chiefly in Asia andEurope; the bulk of the African countries are primaryproduct exporters; 10 of the 16 Middle Eastern countriesin the sample (of 104 countries) are fuel exporters. Since1981, the real effective exchange rates of developingcountries in Asia, Europe, and the Western Hemispherehave on average tended to depreciate, while those ofAfrica and the Middle East have appreciated. In 1984,

38



the weighted average of real effective exchange rateindices in Africa and the Middle East rose by 53A and10 percent, respectively, while the rates in Asia andEurope on average depreciated in real effective terms by31/2 and 6 percent, respectively; those in the WesternHemisphere showed a real effective appreciation of \1Apercent in 1984.

EXCHANGE ARRANGEMENTS

The exchange rate regimes chosen by the develop-ing countries have affected the way in which exchangerate fluctuations among major currencies have im-pinged upon their economies. In fact, movements inreal effective exchange rates have differed markedlyamong countries according to the type of exchangearrangement. The nominal exchange rates of curren-cies that are pegged, especially those pegged to asingle currency, have not, for the most part, been

Chart 15.

Developing Countries: Real Effective Exchange Ratesby Predominant Export, 1977-841

(Indices, 1977 = 100)

1 These indices measure the evolution of a country's prices relative to thoseof its trading partners, adjusted for exchange rate changes. Prices are measuredby the average annual consumer price index, with indices of partner countriesaveraged by using import weights, and exchange rates are measured by animport-weighted index of average annual exchange rates. Group indices areGDP-weighted averages of country indices. For classification of countries ingroups shown here, see Appendix IX.

Chart 16.

Developing Countries: Real Effective Exchange Ratesby Region, 1977-841

(Indices, 1977 = 100)

1 These indices measure the evolution of a country's prices relative to thoseof its trading partners, adjusted for exchange rate changes. Prices are measuredby the average annual consumer price index, with indices of partner countriesaveraged by using import weights, and exchange rates are measured by animport-weighted index of average annual exchange rates. Group indices areGDP-weighted averages of country indices. For classification of countries ingroups shown here, see Appendix IX.

adjusted enough to offset the influence of the effectivedepreciation or appreciation of the currencies or com-posite to which they are pegged. Hence, between 1979and 1984 the currencies pegged to the U.S. dollarappreciated substantially in real effective terms(Chart 17). The currencies pegged to the SDR havealso tended to appreciate significantly in real effectiveterms during this period, except for 1981.

Since 1973, when the major currencies began tofloat against each other, developing countries havepaid increasingly close attention to the choice of theirexchange rate regime. The evolution of exchangearrangements over the past six to ten years has beenaffected mainly by the desire for more frequent ad-justment of nominal effective exchange rates or forgreater control over the evolution of the real effectiveexchange rate. Over the last five to six years theevolution has been away from single-currency pegstoward flexible arrangements and, somewhat less so,

39


ANNUAL REPORT, 1985

Chart 17.

Developing Countries: Real Effective Exchange Ratesby Exchange Arrangements, 1980-841

(Change from preceding year, in percent)

1 Percentage changes for groups are unweighted averages of percentagechanges in country indices. The indices measure the evolution of a country'sprices relative to those of its trading partners, adjusted for exchange ratechanges. Prices are measured by the average annual consumer price index,with indices of partner countries averaged by using import weights, and exchangerates are measured by an import-weighted index of average annual exchangerates. Changes from each year to the following year are calculated for a constantsample of countries that observed the exchange arrangement in question inboth years. For classification of countries, see Appendix IX.

toward pegging to currency composites, especiallythose reflecting individual countries' trade weights(Table 11). Consistently with this desire for increasedflexibility, the nominal effective exchange rate hasdepreciated markedly for currencies with flexible ar-rangements (Chart 18). The need for flexibility hasbeen felt especially by countries with relatively highinflation rates, which have generally maintained ex-change arrangements that permit frequent adjustmentof nominal rates. In 1984, among 29 high-inflationcountries2 only 5 were pegged to a single currency,compared with 28 for 50 medium-inflation countriesand 18 for 46 low-inflation countries. In contrast, 20of the high-inflation countries had flexible arrange-ments compared with 10 for medium-inflation and 9for low-inflation countries.

The decision to permit greater flexibility of ex-change rates was, in some countries, taken after aprolonged period of generally rigid pegging with onlyminor and infrequent adjustments of the nominalrate, despite high and rising domestic inflation (Ghana,Uganda, and Zaire). For these countries, the ex-

2 For this grouping, "high-inflation" was defined as an average of20 percent or more over the period 1979-83; "medium-inflation" asan average of between 10 and 20 percent; and "low-inflation" as anaverage of less than 10 percent.

change rates became seriously overvalued and sizableparallel markets developed outside of the officialexchange systems. While it was clear, in each case,that the required adjustment of the rate would haveto be large, it was not obvious what the correct levelof the rate should be. Hence, it was decided to allowmarket forces to play a role in the determination ofthe rate. At the same time, there was a fear ofsubstantial overshooting, given the narrowness of theexchange markets in these countries and the virtualabsence of foreign assets of the monetary authority tobe assigned to exchange market intervention. Theconcern with overshooting was increased by the fearof its adverse distributional effects on certain incomegroups. For these reasons, a modified floating system,usually involving multiple rates, was generally pre-ferred to one of free floating for finding the new"equilibrium" rate. The two (or more) rates weregenerally unified at the free market rate once effectivepolicies of demand management were put in place.

ROLE OF EXCHANGE RATE INEXTERNAL ADJUSTMENT

The basic aim of external adjustment is to bringthe current account balance to a level that is deemedsustainable over the medium term. For most devel-oping countries, external adjustment over the period1982—84 required improving the current account bal-ance in relation to exports of goods and services (thecurrent account ratio). A number of countries useddirect controls and exchange restrictions to curtailimports of goods and services. The latter policies,especially when they are combined with domesticprice controls, can limit the appreciation of the realeffective exchange rate, and the deterioration of thecurrent account, while failing to address the financialdisequilibrium and the structural distortions of whichweak current account performance is a symptom. Tothe extent, however, that current account improve-ments were brought about by adjustment policiesrather than by trade and payments restrictions, thecurrent account ratio can be taken as an indicator ofthe effectiveness of these policies.

Of 104 developing countries for which the requisitedata are available, 36 experienced a worsening and68 an improvement in the current account ratiobetween 1981 and 1984. Of the 36 countries whosecurrent account ratio deteriorated, 25 experiencedappreciation of their real effective exchange rates.Twenty-four of the 36 countries experienced a wors-ening in their fiscal balances (in relation to GDP)while, in all, 31 showed either an appreciation of theexchange rate or worsened fiscal balance, or both.This demonstrates the importance of the associationbetween current account performance, the real effec-tive rate, and the fiscal balance. But it should beunderscored that other factors also had significant

40



Table 11.

Developing Countries: Exchange Rate Arrangements, End of June 1979-851

(Number of countries)

1979 1980 1981 1982 1983

Total 117 118 120 125 125

1984

125

1985

Pegged to a single currencyU.S. dollarFrench francOther currency

Pegged to compositeSDROther composite

Flexible arrangementsAdjusted according to

a set of indicatorsOther2

6141146

271314

29

425

5840144

321517

28

325

5638144

321418

32

428

563813

5

341519

35

431

543613

5

351421

36

531

513313

5

351124

39

633

4931144

401228

38

632

127

1 Based on mid-year classifications; excludes Democratic Kampuchea, for which no current information is available. For classification of countries, see Appen-dix IX.

2 This category comprises the following categories used in Table 12: "Flexibility limited vis-a-vis single currency," "Managed floating," and "Independentlyfloating."

direct effects on the current account balance that didnot operate through the real effective exchange rateor the fiscal balance. Among these were externalfactors such as worsening terms of trade or fall inforeign demand for exports. Also important weredomestic factors such as faulty domestic producerpricing policies, disturbances and disruptions to nor-mal productive activities, and unfavorable weatherfor agricultural export crops.

The importance of other factors in current accountperformance can be seen from the fact that 36 of 61countries whose real effective exchange rate appreci-ated between 1981 and 1984 experienced an improvement in their current account ratios between the twodates, and among 35 countries with real effectiveexchange rate appreciation of at least 10 percent, 17countries (including Bolivia, the Congo, Egypt, Haiti,the Libyan Arab Jamahiriya, Malaysia, Nigeria, andSierra Leone) improved their current account ratios.Various factors appear to have contributed to suchfavorable current account developments in the face ofreal effective exchange appreciation, including in-creased exchange and trade restrictions in a numberof these countries, as well as substantial improve-ments in fiscal balances and increased efficiency inthe supply of exports in some of them.

Of the 68 countries (in the sample of 104 developingcountries) that improved their current account bal-ances in relation to exports between 1981 and 1984,32 experienced real effective exchange rate deprecia-tion during this period. Forty-five countries of the 68improved their fiscal balances (in relation to GDP)and, in all, 54 countries had either a depreciation ofthe real effective exchange rate or improved fiscalbalance or both.

Between 1981 and 1984, there were 43 countries

with depreciating real effective exchange rates. For32 of these countries, the current account ratio im-proved between the two dates. There were, therefore,11 countries that realized deteriorating current ac-count ratios despite real effective exchange rate de-

Chart 18.

Developing Countries: Nominal Effective ExchangeRates by Exchange Arrangements, 1980-84'

(Change from preceding year, in percent)

10

1 The nominal effective exchange rate of a country is an import-weightedindex of average annual exchange rates of the trading partner currencies inunits of the domestic currencies. Changes in group nominal exchange rates areunweighted averages of changes in country indices. Changes from each yearto the following year are calculated for a constant sample of countries thatobserved the exchange arrangement in question in both years. For classificationof countries, see Appendix IX.

41


ANNUAL REPORT, 1985

preciation. The reasons for this varied among coun-tries. For some countries the authorities were reluctantto take measures to realize a real effective exchangerate depreciation large enough to counteract otherfactors, especially those emanating from the interna-tional economy, that were having an unfavorableimpact on the current account. In some of thesecountries the authorities may not have felt a strongneed for adjustment, owing to such factors as areasonably strong foreign reserve position, the avail-ability of capital inflows from abroad, and the expec-tation of an early reversal of the adverse developmentsthat had caused the current account deterioration inthe first place. In a few countries the real effectiveexchange rate depreciated sharply only in 1984, afterappreciating in 1982 and 1983, while other adjust-ment measures had also been inadequate; given thelag between exchange rate changes and their effecton the current account, the real depreciation appearsto have come too late in these countries to preventthe worsening of the current account ratio over thewhole period.

In recent years, the need for adjustment has beenparticularly acute among the major borrowers. Thesecountries, like some others, have diversified economiesthat respond in a fairly elastic way to relative prices.In these circumstances, more active use of the ex-change rate for external adjustment was generallyconsidered appropriate. From 1981 to 1984, the un-weighted average of the real effective exchange ratesof these countries dropped markedly—on average byover 13 percent (Chart 19). For other market borrow-ers and for official borrowers, real effective exchangerates appreciated after 1981. For the official borrowers(excluding China and India), the appreciation accu-mulated to 4J/2 percent during the period 1982-84. Forthe other market borrowers, the real effective exchangerate appreciated by somewhat less than 4 percent in1984, thereby just wiping out depreciations in 1982 and1983. Between 1981 and 1984 the current account ratioimproved for 6 of the 7 major borrowers, compared with19 of the 26 other market borrowers and 24 of the 42official borrowers, in the sample of 104 countries; 29countries in the sample were not classified as borrowers.

SURVEILLANCE

As exchange rate developments in recent yearsshow, discordance in policy strategies and perform-ance among countries can lead to misalignment inthe pattern of exchange rates. Through the exerciseof surveillance over its members' policies, the Fundaims at reducing such discordance in a manner thatis consonant with the achievement of sustained non-inflationary growth. The Fund also encourages mem-bers that manage their exchange rates to follow aflexible exchange rate policy consistent with the needfor balance of payments adjustment. These surveil-lance activities are conducted according to the prin-

Chart 19.

Developing Countries: Real Effective Exchange Ratesby Financial Criteria, 1977-841

(Indices, 1977 = 100)

1 The indices measure the evolution of a country's prices relative to those ofits trading partners, adjusted for exchange rate changes. Prices are measuredby the average annual consumer price index, with indices of partner countriesaveraged by using import weights, and exchange rates are measured by animport-weighted index of average annual exchange rates. Group indices areunweighted averages of country indices. For classification of countries in groupsshown here, see Appendix IX.

ciples and procedures for surveillance set forth in thedocument entitled "Surveillance over Exchange RatePolicies."3

In its annual review of the general implementationof surveillance over members' exchange rate policiesconducted in March 1985, the Executive Board onceagain emphasized the great importance that it at-taches to the surveillance function of the Fund.4 Muchof the discussion was focused on the effectiveness ofsurveillance in the current international economicenvironment. The Board noted the important role

3 Executive Board Decision No. 5392-(77/63), adopted April 29,1977, Selected Decisions of the International Monetary Fund andSelected Documents, Tenth Issue (Washington, April 30, 1983).

4 See Executive Board Decision No. 7939-(85/49), adoptedMarch 25, 1985 (reproduced in Appendix II).

42



that surveillance had played in bringing key policyissues to the attention of the relevant authorities andkeeping them under active discussion. In many in-stances, policy decisions in member countries clearlyhad taken account of the views expressed by theinternational community through the Fund's surveil-lance process. More generally, however, the Boardstressed that there remained substantial divergencesbetween the policies actually pursued by some mem-ber countries and those advocated by the Fund mem-bership collectively. It also stressed that, while theFund should continuously endeavor to sharpen itsanalysis and to improve its procedures, the basicproblem was neither analytical nor procedural; rather,it had to do with a lack of determination in imple-menting policy strategies that were framed in the lightof their international compatibility.

A related point discussed by the Executive Boardduring the 1985 review concerned the evenhandednessof surveillance, which was considered essential for itseffectiveness. While Directors noted the view that theFund was much stricter in its surveillance over thepolicies of developing countries that were in deficitthan over those of other countries, they ascribed itlargely to an insufficient distinction between the func-tion of surveillance and other functions of the Fund,such as the implementation of conditionality and theFund's jurisdiction over exchange restrictions. Theseother functions do imply special responsibilities forthe Fund. For example, the Fund has the responsi-bility to see that its resources are used in support ofeffective adjustment, and member countries that seekthe Fund's financial support have therefore to arrangetheir policies so as to qualify for such support accord-ing to the criteria used by the Fund. It is thusinevitable that the Fund has a stronger direct influ-ence on the policies of countries that undertake Fund-supported adjustment programs than on the policiesof other countries. This asymmetry can, however, begreatly attenuated by strengthening the effectivenessof surveillance over the policies of all member coun-tries. Because of the strong effects of developments inmajor industrial countries on the rest of the world,more effective surveillance for those countries wouldimprove the international monetary system as a whole.

In the course of the review, the Board consideredvarious possible avenues for improving the effective-ness of surveillance. The Interim Committee, too,discussed these matters at its meeting in April 1985.In its conclusions, the Committee urged that steps betaken to strengthen surveillance over the policies ofall Fund members. It also urged that considerationbe given, within the context of the policy of uniformtreatment of members, to means of increasing theeffectiveness of surveillance over the policies of thoseindustrial and developing countries that have a sig-nificant effect on the functioning of the worldeconomy.

Through its Article IV consultations, bilateralmeetings, and the participation of the Managing

Director in international meetings, the Fund hascommunicated its views to the authorities concernedand highlighted the unfavorable effects of existingpolicy weaknesses on the international community.In addition, the Fund has taken a strong public stancein this context, especially through its publications andthe speeches of the Managing Director. In particular,the Fund has stressed that the unfavorable conse-quences of policy weaknesses in major industrialcountries are felt with severity by developing coun-tries. While developing countries should continuetheir adjustment efforts, the major industrial countriesneed to improve their policies and thereby contributeto the global adjustment process.

THE SUBSTANCE OF SURVEILLANCE

An assessment of the effectiveness of surveillance,of possible areas of weakness, and of feasible improve-ments must be based on an analysis of the factorsand policies that have led to the emergence andpersistence of the severe problems that plague theworld economy. Such analysis has been a majoraspect of each annual review of Fund surveillancesince the first review in 1979, as well as of each Boarddiscussion of the world economic outlook since thattime. The main conclusions reached during thesereviews and discussions have been presented in pre-vious Annual Reports. Nonetheless, at this time ofrenewed search for ways of improving the effectivenessof surveillance, it is useful to pull together thesevarious conclusions and reassess them in the light ofrecent developments.

It is clear from the above discussion of the factorsbehind the pronounced movements in exchange ratesamong major industrial countries that these move-ments cannot be viewed as prima facie evidence of alack of effectiveness of surveillance. In particular,some of these exchange rate movements may be thenormal consequence of economic developments andpolicies—magnified perhaps by increased integrationof national financial markets, which per se is awelcome evolution—rather than the result of faultyeconomic policies or of capricious behavior of privatemarket participants. Changes in perceptions of acurrency as a "safe haven" and in prospects forreturns on investments in particular currencies mayalso cause substantial movements in exchange rates.Reactions to new developments take place rapidly infinancial markets so that, with the rising volume offinancial transactions, exchange rates tend to be vol-atile. Even more important, since reactions to pricechanges in markets for goods and labor, which areimportant determinants of long-run exchange ratetrends, are much less rapid than those in financialmarkets, exchange rates at times deviate for lengthyperiods and in substantial degree from their long-runtrend values. The task of surveillance begins when

43


ANNUAL REPORT, 1985

there are reasons to believe that unwelcome economicdevelopments, including exchange rate changes, arethe result of inappropriate policies. In this context,the Fund has for some time stressed the need for eachcountry to follow a policy strategy that is both stableand balanced. It should be stable because frequentchanges in policies will inevitably lead to frequentchanges in the exchange rate. Moreover, in the ab-sence of predictable policies, views regarding thelonger-run trend value of the exchange rate may beso weakly held that the rate may become subject toself-sustaining speculative effects. From a domesticstandpoint, frequent changes in policies may desta-bilize output and prices, and may ultimately hinderrational decision making by private economic agents.The policy strategy should, moreover, be balancedbecause a lack of harmonious coordination of variouspolicy instruments results in economic tensions thatare apt to manifest themselves in a waste of domesticresources and in external imbalances. In any case, anunbalanced combination of policies is unlikely to bestable, because the pressure for a change in policiesis bound to grow as their unfavorable effects becomemore obvious.

In principle, the desirability of a policy strategythat is stable and balanced is not contested. Theproblem is that in practice the authorities often findit difficult to pursue such a strategy. For instance,removal of rigidities in markets for goods and laboris often unpopular, if only because the benefits andcosts resulting from the removal may fall unevenly onsocial groups of different political strength. Again, thereduction of fiscal deficits, which generally entailsunpopular measures, requires difficult budgetary de-cisions—whether to raise taxes or to lower govern-ment spending, and which components of these rev-enues or expenditures to alter. Such questions clearlygo beyond the realm of economic efficiency and haveimportant political dimensions.

Furthermore, it is often difficult to know what theappropriate policy measures are. For instance, anumber of observers have focused attention on theeffects of shifts in international currency preferenceson exchange rates. It can be argued that the monetaryauthorities should accommodate these shifts whenthey are unrelated to the fundamental determinantsof exchange rates rather than accept large temporaryexchange rate movements that would disturb resourceallocation in the markets for goods and labor. At thelimit, a stable monetary strategy could be interpretedas one that allows the monetary aggregates to changein order to reflect shifts in external demand for thecurrency. In practice, however, it is not always clearwhether an exchange rate movement is the conse-quence of a shift in currency preferences or of morefundamental developments. Moreover, even when sucha shift can be identified, a policy of accommodationmay not be without danger: for example, an expansionof the monetary aggregates undertaken to meet a risein foreign demand may be misinterpreted by domestic

residents and lead to a rise in inflationary expecta-tions. It could thus be inappropriate for nationalauthorities to attempt systematic accommodation ofinternational currency shifts. At the same time, theexchange rate movements, apart from signaling shiftsin external demand for a currency, may at times alsoprovide a presumptive indication that previously un-detected domestic developments, possibly resultingfrom structural changes in the financial system, war-rant a reassessment of the monetary targets.

Foreign exchange market intervention, althoughsometimes itself a source of volatility, may at timesplay a useful role in dampening, or even stopping,speculative exchange rate movements, especially ifthe intervention is decisive, concerted among themajor countries, and properly timed. For example,the concerted intervention by a number of majorindustrial countries in February 1985 seems to havebeen instrumental in arresting the rise of the U.S.dollar. However, as stated in the report of the workinggroup on exchange market intervention,5 there ismuch evidence that sterilized intervention does notgenerally have a lasting effect. Ultimately, any seriousattempt to achieve greater exchange rate stability hasto rest on the implementation of more appropriateand internationally compatible economic policies.

In this context, it is noteworthy that the countriesparticipating in the exchange rate arrangements ofthe EMS have been largely successful in stabilizingexchange rates among their currencies. This successhas been achieved mainly through a convergence oftheir domestic policies and performance, with thecountries suffering from relatively high inflation mak-ing a major adjustment effort in order to reduce theirinflation rates to the level prevailing in the relativelylow-inflation countries. Nonetheless, there is littledoubt that the commitment of the authorities to thedefense of the central rates and the agreed interven-tion mechanisms have contributed to the success ofthe system. While the EMS system could not easilybe extended or reproduced elsewhere, its successunder the circumstances in which it operates mayoffer encouragement to those searching for greaterstability of exchange rates in the world economy.

Timely adjustment is as important for developingcountries as for developed countries. Delay in takingappropriate measures results in unnecessary loss offoreign reserves, in a worsening of the structure of thecountry's debt, and often in large accumulation ofexternal arrears. Stop-gap borrowing is normally pos-sible only on rather unfavorable terms with respectto both interest payments and repayment periods.Postponing adjustment also aggravates distortions inthe structure of domestic production caused by inef-

5 Working Group on Exchange Market Intervention, established atthe Versailles Summit of the Heads of State and Government, June 4,5, and 6, 1982, Report of the Working Group on Exchange MarketIntervention, March 1983.

44



ficient pricing and the use of direct controls. Inaddition, an unwelcome consequence of the contin-uation of inappropriate policies is often a decline inprivate capital inflows and in domestic investment.When the delayed adjustment is finally undertaken,it may have to be large and rapid, and therefore morecostly to output and employment in the short termand less beneficial over the medium term than if moretimely and resolute policies had been put in place.

Achievement of timely adjustment in developingcountries depends very much on the appropriatecombination and phasing of the various policy instru-ments used in the adjustment program. Adjustmentproblems typically arise in circumstances in which acountry has come to use more resources than areavailable within its own borders. The need to curtailpublic and private demand for goods and services istherefore usually the centerpiece of an adjustmentprogram. Demand-management policies must, ofcourse, reflect the particular social and political, aswell as economic, circumstances of the country. More-over, they should be used in such a way as to avoidor minimize any adverse influence on the overallsupply of goods and services, for instance, through anegative impact on the level and efficiency of privateinvestment, lest they undo the effect of any supply-enhancing policies contained in the program. In turn,policies to increase domestic output should be, as faras possible, designed so as to avoid raising overalldomestic demand in order not to conflict with theaims of the demand-management policies included inthe policy package. To the extent that these tasks—constraining demand and augmenting production—are to be accomplished simultaneously through arearrangement of market incentives, a shift of relativeprices will often be required.

In the short run, an adjustment of the exchangerate, when needed, can improve the allocation ofscarce foreign exchange resources in the economy. Inthe longer run, the effects of exchange rate adjustmenton relative prices can improve the allocation of eco-nomic resources in general in line with the truescarcity value of foreign resources. When nominalwages are inflexible and cannot easily be lowered,exchange depreciation supported by restrictive mon-etary policies can reduce the budgetary contractionrequired to achieve a given improvement in thecurrent account balance. In this way, exchange rateadjustment can contribute to a more favorable situa-tion with respect to output growth and employmentthan could have been reached if the same externaladjustment had been attained through larger bud-getary contraction with an unchanged exchange rate.

The choice of adjustment policies must be guidedby the effectiveness of different measures in improvingthe current account balance and promoting long-termcapital inflows. Since various measures affect theseelements of external adjustment at different speed andin different degree, the size and timing of the requiredadjustment plays a role in determining the optimal

combination of policies at any given time. Indeed, animportant reason for timely adjustment is that itpermits a much broader range of instruments to beapplied, compared with a situation in which theadjustment need has become a matter of emergency.Timely adjustment can, in consequence, permit abetter policy design, fostering a more even growth ofeconomic welfare over time, than could be achievedif adjustments were initially delayed.

Flexible management of exchange rate policy canincrease the effectiveness and efficiency of other sup-ply policies, including producer pricing policies andthe structure of government investment. As stressedbefore in this Report, the exchange rate often imposesconstraints on the efficient use of certain other supplypolicy instruments. For example, producer prices canaffect the domestic supply of export crops; neededincreases in these prices are often resisted unless thenominal exchange rate is allowed to depreciate at thesame time, because at a given exchange rate theprofitability of marketing boards would tend to beimpaired, at least in the short term. The relative useof domestic and foreign inputs also tends to bedistorted when the exchange rate is kept at an inap-propriate level.

Flexibility of the nominal exchange rate is of par-ticular relevance when the external disequilibrium tobe corrected has been caused mainly by domesticfinancial developments. This tends to be true, forexample, in countries with substantial inflation, wherefiscal disequilibrium and rapid domestic credit expan-sion result in serious pressure on the balance ofpayments. In the absence of continuous revision ofthe nominal exchange rate, the real effective exchangerate in such countries soon becomes inappropriateand harmful to economic development prospects.

Adjustments in the real exchange rate can beespecially effective in correcting payments imbalancesfor countries that are producing exportables withrelatively high supply elasticities or countries that arein the process of promoting export diversification anda shift toward the supply of goods benefiting fromlonger-run favorable demand prospects in the worldmarket. Whether disturbances requiring external ad-justment come from international or domestic factors,adjustment of the real exchange rate recognizes thechanged economic opportunities confronting thecountry. The ability to alter the real effective ex-change rate in such circumstances is a crucial elementin adjustment.

The implication is that the typical developing coun-try should aim at keeping its real effective exchangerate at a level that facilitates attainment of its poten-tial output growth and a sustainable current accountbalance. The nominal exchange rate should then bechanged as frequently as needed to maintain thedesired real effective rate, taking into account thecircumstances of the country, particularly its abilityto use monetary and fiscal instruments to keep do-mestic prices in check. The choice of exchange ar-

45


ANNUAL REPORT, 1985

rangements should be made with a view to providingthe needed exchange rate flexibility.

External adjustment by the developing countriesneeds to be supported by an adequate flow of appro-priate financial resources. Beyond exercising surveil-lance over the policies of these member countries, theFund has continued to encourage commercial banksto provide financing in support of Fund-assisted ad-justment programs. In particular, the Fund has wel-comed recent examples of multiyear debt reschedulingarrangements for countries that have already achievedsolid progress in their adjustment efforts. The Fundhas also stressed the primary need, particularly forthe low-income developing countries, for an increasein the volume of foreign aid and its effective utiliza-tion. This is especially true for sub-Saharan Africancountries that are severely affected by the currentdrought. Many low-income developing countries facedebt-servicing problems even though much of theirdebt is owed to official creditors. The Fund has oftenassisted in the process of official debt reschedulingwithin the framework of the Paris Club in support ofadjustment programs involving the use of Fund re-sources. So far, most of these reschedulings have beenmade one year at a time. The Paris Club has,however, recently started to conduct multiyear re-schedulings, in close cooperation with the Fund, whendebtor countries have a proven record and continuingprospects of sound adjustment.

Ultimately, an open multilateral trading systemremains the most important requirement for a gradualimprovement of the international economic situation.Although there have recently been some favorabledevelopments in this respect, the overall trend towardprotectionism can hardly be considered as havingbeen checked, let alone reversed. The Fund is ex-tremely concerned with this evolution and has focusedin* its recent work on the issue of protectionism andhow it relates to problems in the areas of fiscal policyand structural adjustment. It has also highlighted theimportance of this issue in all its surveillance activitiesand has continued its close collaboration with theCONTRACTING PARTIES to the General Agreement onTariffs and Trade.

PROCEDURES

The basic vehicle for the Fund's surveillance con-tinues to be the Article IV consultation. In recentyears, the Fund has been successful in its efforts toensure that consultations with all members are heldregularly. Article IV consultations normally take placeannually but there could be a longer interval—up totwo years—for some members, and shorter cyclesmay be requested in some circumstances. The annualcycle is, however, required for countries whose devel-opments have a substantial effect on other members,for countries with Fund-supported programs, and forcountries for which there are questions about balance

of payments viability. At the time of the 1985 reviewof surveillance, the Executive Board stated that atleast the 25 Fund members with the largest quotasshould be regarded as countries whose developmentshave a substantial effect on other members. In thenew system of advance specification of consultationcycles instituted in 1983, the length of the consultationcycle or the date for the next consultation is specifiedat the conclusion of each consultation. As a result ofthe new system, the consultation frequency has risensharply in the past two years, with 80 percent of themembership covered both in 1983 and in 1984. Atthe end of 1984, there were only 4 members withoutconsultation for two years or more, compared with 6at the end of 1983 and 19 at the end of 1982.

The analytical content of Article IV reports hasbeen considerably broadened and adapted to therequirements of surveillance in recent years. In par-ticular, international economic linkages and issuesrelated to trade and protectionism have been increas-ingly emphasized. Moreover, Article IV consultationshave stressed the need to discuss with member coun-tries the medium-term implications of their policies.Since 1983, consultation reports for almost all coun-tries in which external indebtedness is a significantissue have included a description of the medium-termexternal debt outlook. More recently, the medium-term analysis has been expanded to include thesensitivity of the debt projections to alternative as-sumptions and to examine the evolution of importantcomponents of the balance of payments. Even forcountries in which external indebtedness is not amajor issue, including many industrial countries, theneed to analyze the internal coherence and chance ofsuccess of the whole medium-term policy strategy ofthe authorities has led to the introduction of medium-term scenarios in consultation reports.

Another major surveillance issue is the need forstructural adjustment. This need has, of course, al-ways been recognized in the Fund's work with devel-oping countries. There is, however, a new emphasison these issues in industrial countries. This emphasisreflects mainly the earlier experience with inflation attimes of economic slack and, most recently, the per-sistence of fiscal deficits and unemployment in manyindustrial countries. These latter problems are oftenintimately related through the effects of low economicactivity on tax receipts and on government financialsupport for ailing industries and unemployed workers.

Among the innovations in the content of staffreports made in 1984, two can be singled out. Thefirst was the inclusion in most staff reports on devel-oping countries of material describing the country'srelations with the World Bank, in many cases includ-ing the Bank's assessment of the investment or devel-opment program and other policy issues studied bythe Bank. The second was a review of recent devel-opments and policies against the background of theconclusions of the previous consultation. In particu-lar, care was taken to explore whether the country

46



had implemented the Executive Board's recommen-dations and whether further developments supportedthe case for these recommendations.

The continuous efforts by the Fund to adapt itssurveillance procedures has also led to a new proce-dure, usually referred to as enhanced surveillance.This procedure is still evolving and has been adoptedfor only a few countries in the context of multiyearrescheduling arrangements. In those cases in whichit has been adopted, the country concerned has takenthe initiative of requesting the Fund to monitor itspolicies through more frequent Article IV consulta-tions. The new procedure has facilitated negotiationof multiyear rescheduling arrangements for severalmembers, which have been aimed at helping membersmake the transition to normal access to bank lending.While enhanced surveillance can support banks' riskassessment, it is in no way a substitute for independ-ent economic evaluations by commercial banks, whichretain full responsibility for their credit decisionsbased on their own assessments.

Fund participation in multilateral meetings withgovernments and with other international organiza-tions remains another major channel for Fund sur-veillance. The Managing Director has participated inmeetings between the finance ministers of the fivemajor industrial countries, which provide an impor-tant opportunity for discussion of world economicdevelopments and international policy coordination.The Group of Ten has also played an important roleover the past year in serving as a forum for discussionof new approaches to surveillance. The report of thedeputies of the Group of Ten on the functioning ofthe international monetary system, which was re-leased in June 1985, contains findings with respect tostrengthening surveillance, as well as the functioningof floating exchange rates, the management of inter-national liquidity, and the role of the Fund. TheGroup of Twenty-Four is reviewing issues relating tothe conduct of surveillance, especially those concernedwith the relations between industrial and developingcountries. The Interim Committee will give prelimi-nary consideration to these matters at its next meetingin October 1985.

Fund surveillance activities rest on a large amountof supporting work. In particular, the Fund continu-ously monitors its members' exchange rates and ex-change rate policies. Since 1983, the Executive Boardhas been notified regularly of all sizable changes inreal effective exchange rates. Information notices gen-erally include appraisals of the exchange rate devel-opments reported. So far, information notices havenot led to Board discussions, though they have oftenserved to sharpen the focus of discussion of exchangerate policy when a Board meeting concluding an Arti-cle IV consultation or discussing the use of Fundresources was scheduled shortly after the issuance ofan information notice.These new monitoring proce-dures supplement the existing system, implementedin 1977, according to which any change in a member's

exchange arrangements must be communicated to theFund within three days.

Even more importantly, the Fund's surveillanceactivities benefit from the comprehensive analyses ofthe world economy provided in the world economicoutlook exercise. Besides serving as the focus of theFund's consideration of questions of internationalpolicy interactions and economic linkages, the papersprepared for this exercise provide short-term forecastsand a medium-term perspective that serve as refer-ence points for the Fund's work on issues involvingindividual countries. In 1984 and the first half of1985, a major topic of the discussion on the worldeconomic outlook was the medium-term prospects forgrowth in industrial countries and the likely conse-quences for developing countries. The aim of theanalysis was to delineate the adjustment policies thatare needed in each group of countries.

RECENT CHANGES IN REPORTEDEXCHANGE ARRANGEMENTS

The trend toward the adoption of more flexibleexchange arrangements continued in 1984 and thefirst half of 1985. A major new development in thisperiod has been the adoption of independently float-ing exchange rates by a number of developing coun-tries. Another feature of the movement toward in-creased flexibility of exchange arrangements has beenthe shift away from arrangements of "limited flexibil-ity"—quasi-pegs to a single currency, which in allinstances was the U.S. dollar—toward pegging tocurrency composites, including the SDR. Of the 15members that changed their exchange arrangementsin 1984 and the first half of 1985, 6 adopted arrange-ments of independent floating. El Salvador, whichhad maintained its currency pegged to the U.S. dollar,was reclassified as operating managed floating ar-rangements. Peru moved from a managed float to anarrangement under which the currency is adjustedaccording to a set of indicators. Guyana, Maldives,and Thailand, which had previously maintained theircurrencies with limited flexibility against the U.S.dollar, and Malawi, whose currency had been peggedto the SDR, adopted as pegs currency compositestailored to reflect the relative importance of theirtrading partners. Sierra Leone changed its peggingarrangement from the U.S. dollar to the SDR, whileEquatorial Guinea changed its currency from theSpanish peseta to the French franc. In addition, 2new members informed the Fund of their exchangearrangements: St. Christopher and Nevis has beenclassified within the group of countries whose curren-cies are pegged to the U.S. dollar and Mozambiquewithin the group of countries whose currencies arepegged to a currency composite other than the SDR.As a result of these changes, the number of Fundmembers with "more flexible" exchange arrange-ments increased from 38 at the end of 1983 to 40 at the

47


TableExchange Arrangements

U.S. dollar

Antigua andBarbuda

Bahamas3

BarbadosBelizeBolivia

DjiboutiDominicaEgypt3EthiopiaGhanaGrenadaGuatemala3

HaitiHonduras3

Iraq

Lao People'sDemocraticRepublic3

LiberiaLibyan Arab

JamahiriyaNicaragua3

Oman

PanamaParaguay3

St. Christopher andNevis

St. LuciaSt. Vincent and the

Grenadines

Sudan3

SurinameSyrian Arab

Republic3

Trinidad andTobago

Venezuela3

Yemen ArabRepublic

Yemen, People'sDemocraticRepublic

Single currencyFrench franc

BeninBurkina FasoCameroonCentral African

Republic

ChadComorosCongoEquatorial

GuineaGabonIvory Coast

MaliNigerSenegalTogo

Pegged to

12

as of June 30,

Flexibility Limited

19851

vis-a-vis a SingleCurrency or drnup ot ( nrrpnrips

Currency composite

Other

Bhutan (Indianrupee)

The Gambia(poundsterling)

Lesotho (SouthAfrican rand)

Swaziland (SouthAfrican rand)

1 No current information is available relating to Democratic

SDR

BurmaBurundiGuinea3

Iran, IslamicRepublic of

Jordan

Kenya8

RwandaSao Tome and

PrincipeSeychellesSierra Leone3

VanuatuViet Nam

Kampuchea.

Other

Algeria3

AustriaBangladesh3

BotswanaCape VerdeChina

Cvorus^ 1 r vtj

FijiFinland8

GuyanaHungaryKuwait

MadagascarMalawiMalaysiaMaldivesMaltaMauritaniaMauritius

Mozambique3

NepalNorwayPapua New GuineaRomania

SingaporeSolomon IslandsSwedenTanzaniaI naiiand

TunisiaZambiaZimbabwe

Single currency2

Afghanistan3

Bahrain4

Qatar4

Saudi Arabia5

United ArabEmirates5

Cooperativearrangements

Belgium3

DenmarkFranceGermany,

FederalRepublic of

IrelandItaly6

Luxembourg3

Netherlands

6 Margins of ±6 percent are maintained2 All exchange rates have shown limited flexibility vis-a-vis the U.S. dollar.3 Member maintains dual exchange markets involving multiple exchange arrangements. The arrangement

shown is that maintained in the major market.4 Member maintains a system of advance announcement of exchange rates.5 Exchange rates are determined on the basis of a fixed relationship to the SDR, within margins of up to

±7.25 percent. However, because of the maintenance of a relatively stable relationship with the U.S.

/Adjustedaccording to a

set of indicators

Brazil4

Chile3'4

ColombiaPeru3

PortugalSomalia3'7

More Flexible

Managedfloating

ArgentinaCosta Rica3

Ecuador3

El Salvador3

GreeceGuineaBissauIcelandIndia9

IndonesiaIsraelKoreaMexico3

MoroccoNigeriaPakistan

SpainSri LankaTurkeyWestern SamoaYugoslavia

Independentlyfloating

AustraliaCanadaDominican

RepublicJamaica

JapanLebanonNew ZealandPhilippinesSouth Africa

UgandaUnited KingdomUnited StatesUruguayZaVre

with respect to the currencies of other countries participatingin the exchange rate mechanism of the European Monetary System.

7 The exchange rate is maintained within overall margins of ±7.5 percent about the fixed shilling/SDRrelationship; the exchange rate is re-evaluated when indicative margins of ±2.25 percent are exceeded.

8 The exchange rate9 The exchange rate

is maintained within margins of ±2.25 percent,is maintained within margins of ±5 percent on either side of a weighted composite

of the currencies of the main trading partners.dollar, these margins are not always observed.


ANNUAL REPORT, 1985

end of June 1985, and members whose arrangementsare labeled as "independently floating" increasedfrom 8 to 14 over this 18-month period. One industrialcountry (New Zealand) and 5 developing countries(the Dominican Republic, Jamaica, the Philippines,Uganda, and Zaire) formally adopted floating ratearrangements in unitary exchange markets. The num-ber of countries with currencies pegged to a singleforeign currency decreased from 51 to 50, while thenumber of those pegging to a composite of currenciesincreased from 39 to 44. Arrangements in the "limitedflexibility" category declined from 17 to 13.

From the inception of the present classificationsystem in December 1981 to June 1985, the proportionof Fund members with "more flexible" arrangements,including members maintaining a cooperative ar-

rangement under the EMS, has risen from 28 percentto 33 percent, while that of members with single-currency pegs (including arrangements under whichthere is limited flexibility vis-a-vis a single currency)declined from 47 percent to 37 percent. The propor-tion of members pegging to currency compositesincreased from 25 percent to 30 percent in this period(with the proportion of arrangements classified withinthe "other currency composite" subcategory increas-ing from 16 percent to 22 percent).6

At the end of June 1985, 50 member currencieswere pegged to a single currency, 12 to the SDR, and32 to other currency composites; 40 members main-tained exchange arrangements in the "more flexible"category; and 13 members maintained arrangementsof limited flexibility (Table 12).

International Liquidity, Reserves, and Financial Markets

During 1983 and 1984, reserve movements werestrongly affected by the efforts of many countries torebuild their reserve holdings following the losses offoreign exchange reserves in 1982. For many devel-oping countries, this reserve accumulation has oc-curred during a period of sharply reduced access tointernational financial markets. The expansion ofreserve holdings entailed changes in the types of assetsheld as reserves, in the currency composition offoreign exchange holdings, and in the sources ofreserve growth.

This section examines a number of recent devel-opments in international liquidity and reserves. First,there is consideration of the changes in internationalmonetary arrangements that may have made the stockof international reserves more a reflection of theeconomic policies and reserve preferences of individ-ual countries than an exogenous constraint on coun-tries' policies. Second, there is a review of the recentevolution of holdings of official reserve assets. Third,the currency composition and distribution of inter-national reserves and liquidity are examined. Fourth,the sources of reserve growth are reviewed, withspecial emphasis on the role of private internationalfinancial markets in the provision of internationalliquidity and the financing of the adjustment process,and on the importance of current account imbalancesas sources of reserves. Finally, there is a discussion ofthe adequacy of international reserves and the role ofthe Fund in the provision of international liquiditythrough conditional credit and SDR allocation.

THE ROLE OF RESERVES IN THEINTERNATIONAL MONETARY SYSTEM

The role of reserves in the international monetarysystem has gradually evolved in response to a number

of developments fostering the perception that reservesare no longer determined primarily by forces orpolicies external to the operations of the monetarysystem but rather reflect the economic policies andreserve preferences of individual countries, includingthose of reserve currency countries. Under the goldstandard, the relatively fixed stock of gold and thecommitment of many countries to making their cur-rencies convertible into gold imposed a constraint onthe issuance of domestic money and thereby on thelevels of prices and economic activity in individualcountries. In contrast, the link between the stock ofgold on the one hand and prices and output on theother hand was less direct under the gold exchangestandard, in part owing to the more active use ofcredit arrangements as a source of reserves and re-strictions on gold convertibility. Since countries couldincrease their reserve holdings by acquiring claimson reserve-currency countries, an important compo-nent of total reserves could respond to the policies ofcountries. Nonetheless, the possibility of gold conver-sion at times influenced the policies of even thereserve-currency countries.

The current multicurrency reserve system repre-sents the cumulation of an evolutionary trend inwhich the importance of the level of reserves as aconstraint upon policy has progressively declined forcountries having access to international financial mar-kets and, in particular, for the reserve-currency coun-tries. The suspension of convertibility of the U.S.dollar and the collapse of the system of fixed exchangerates were further—and definitive—steps in that ev-olution because the collective demand for reserves no

6 Excluding the arrangements for Democratic Kampuchea, forwhich no information is available.

49


ANNUAL REPORT, 1985

longer reflected the need to meet conversion andintervention obligations. Of course, these develop-ments did not imply that national authorities nolonger wished to hold gold and other reserve assets.

With the weakening of the reserve constraint, coun-tries sought other ways to guide their economic per-formance, individually and collectively. In the majorindustrial countries, for example, the post-1971 sys-tem relied heavily on targets for monetary and creditaggregates. Such control techniques did not, of course,appear de novo\ they were increasingly experimentedwith as the system evolved toward the climactic eventsof the early 1970s. Moreover, the widespread adoptionof floating in no way implied that a country's policychoices had no effects beyond its own borders. Onthe contrary, experience since 1971 reinforces theview that countries have common interests in settingtheir economic policies; these interests manifest them-selves in a number of ways, for instance, in growingsupport for international surveillance over thesepolicies.

Under the current system, the total stock of reservescan to some extent adjust to changes in the demand.This supply response is not constrained by forcesoutside the international monetary system even thoughsupplies of specific reserve assets may be fixed. Coun-tries with access to international capital markets haveoften found borrowing from private financial institu-tions an efficient means of obtaining additional foreignexchange reserves. An individual country can acquirereserves at a net cost equal to the rate at which itcan borrow (inclusive of the risk premium) less thedeposit rate paid on reserves (or the yield on securi-ties).7 However, a significant number of developingcountries do not have access to the international creditmarkets and such countries can acquire reserve ad-ditions only through a surplus in their current ac-counts or through intergovernmental borrowing.

The supply of foreign exchange reserves for coun-tries with access to credit markets is not necessarilytied to the structure of current account balances ofany group of countries (including the reserve-currencycountries). The counterpart of a given country's cur-rent account deficit is the accumulation of domesticassets by foreign entities or the sale of foreign assetsby domestic residents. This exchange of assets couldbe undertaken either by the private sector (whichwould not directly lead to reserve accumulation) orby the authorities (which can reflect interventionactivity in the foreign exchange market and canthereby result in reserve accumulation).

For countries that do not have access to interna-tional capital markets, the process of reserve acqui-sition is different from that described above. Thesecountries often face a high real cost of accumulating

7 In addition to the acquisition of reserves through actual borrowingfrom private markets and intervention in the foreign exchange mar-kets, countries can arrange for lines of credit from either privatefinancial institutions, central banks, or other official institutions.

reserves associated with the adjustments of domesticmacroeconomic and exchange rate policies needed toachieve a balance of payments surplus. For thesecountries, reserve holdings can at times correspondto minimal working balances.

The remainder of this chapter examines a numberof recent aspects of the continuing evolution of themulticurrency reserve system. In addition to a dis-cussion of movements in holdings of reserves, there isalso consideration of the changes in the compositionof foreign exchange reserves, the sources of reservegrowth, including current account balances and in-ternational financial markets, and the adequacy ofreserves and international liquidity.

RECENT EVOLUTION OF OFFICIALRESERVE ASSETS

In 1984, total international reserves measured interms of the SDR declined by about 1 percent, as afall in the market value of official holdings of goldwas almost completely offset by an increase in hold-ings of non-gold reserves. The growth of non-goldreserves reflected larger holdings of both Fund-relatedreserve assets and foreign exchange reserves by bothof the major country groups, industrial countries anddeveloping countries. The fall in the value of officialholdings of gold reflected both a small reduction inthe quantity of official gold holdings and a 14 percentdecline in the market price of gold in terms of theSDR. Out of the SDR 701 billion of total reserves atthe end of 1984, two thirds was held by industrialcountries and one third by developing countries.

NON-GOLD RESERVES

Non-gold reserves increased by 12 percent in 1984,to SDR 403 billion at the end of the year (Table 13).Following a 1 percent decline in non-gold reserves in1982, these reserves have grown at an annual rate of11 percent in the period 1983-84, slightly less thanthan the annual growth rate of 13 percent in theperiod 1973-81.

The expansion of non-gold reserves by SDR 42billion in 1984 reflected an increase of SDR 4.5 billion(8 percent) in the holdings of Fund-related reserveassets and an increase of SDR 38 billion (12 percent)in foreign exchange reserves. Both major countrygroups increased their holdings of non-gold reservesin 1984: industrial countries by SDR 20 billion (10percent), and developing countries by SDR 23 billion(14 percent).

FOREIGN EXCHANGE RESERVES

Foreign exchange reserves increased by 12 percent(SDR 38 billion) in 1984 to SDR 345 billion at theend of the year (Table 13). Although this expansionof foreign exchange reserves was somewhat slowerthan the average rate of growth for the period 1973-

50



Table 13.

Official Holdings of Reserve Assets, End of Selected Years 1979-84 and End of March 19851

(In billions of SDRs)

1979 1980 1981 1982 1983 1984March1985

All countriesTotal reserves excluding gold

Fund-related assetsReserve positions in the FundSDRs

Subtotal, Fund-related assetsForeign exchange

Total reserves excluding goldGold2

Quantity (millions of ounces)Value at London market price

Industrial countriesTotal reserves excluding gold

Fund-related assetsReserve positions in the FundSDRs




Developing countries3

Total reserves excluding goldFund-related assets

Reserve positions in the FundSDRs




11.812.5

24.2249.7

274.0

944.4367.1

7.793

17.1136.1

153.2

789.1306.7

4.03.2

7.2113.6

120.8

155.460.4

16.811.8

28.6292.9

321.6

953.0440.5

10.78.9

19.6164.7

184.3

787.9364.2

6.12.9

9.0128.2

137.2

165.176.3

21.316.4

37.7292.7

330.4

953.3325.5

13.511.9

25.5159.6

185.1

787.6269.0

7.84.5

12.3133.1

145.3

165.656.6

25.517.7

43.2284.2

327.4

948.7392.9

17.114.1

31.1153.2

184.4

787.3326.1

8.437

12.1131.0

143.1

161.466.8

39.114.4

53.5307.0

360.6

947.4345.2

25.611.5

37.1167.5

204.6

786.6286.6

13.62.9

16.5139.5

155.9

160.858.6

41.616.5

58.0345.0

403.1

946.3297.6

27..213..4

40.6.

183.9

224.5

786.0247.2

14.3

3J_

17.4

161.1

178.5

160.350.4

40.916.7

57.6

328.8

386.5

947.331.4.6

26.61.3.9

40..5176.3

216.8

786.3261..2

143.3

2.8

172.2152.5

169.7

161.153..5

Source: International Monetary Fund, International Financial Statistics.1 "Fund-related assets" comprise reserve positions in the Fund and SDR holdings of all Fund members and Switzerland. Claims by Switzerland on the Fund are

included in the line showing reserve positions in the Fund. The entries under "Foreign exchange" and "Gold" comprise official holdings of those Fund members forwhich data are available and certain other countries or areas, including Switzerland. For classification of countries in groups shown here, see Appendix IX.

2 One troy ounce equals 31.103 grams. The market price is the afternoon price fixed in London on the last business day of each period.3 In previous Annual Reports, data on the reserve holdings of oil exporting and non-oil developing countries were reported separately. The corresponding figures

for 1983 and 1984 are as follows:

Total reservesFund-related assets

Reserve positions in the FundSDRs


Total reserves excluding goldGold

Quantity (in millions of ounces)Value at London market prices

Oil ExportingCountries

Non-Oil DevelopingCountries

1983

11.31.5

12.852.965.7

43.816.0

1984 1983


12.61.7

14.353.667.9

44.013.8

2.31.43.6

86.690.3

117.042.6

1984

1.7_1

3.1107.5110.6

116.336.6

51


ANNUAL REPORT, 1985

81 (14 percent), it represented a further accelerationin the growth of foreign exchange reserves followinga decline of 3 percent in 1982 and an increase of 8percent in 1983. While total holdings of foreign ex-change reserves grew by SDR 38 billion, the industrialcountries accounted for nearly half of this increase astheir holdings rose by SDR 16 billion. Among thecountries in this group, Spain experienced the largestincrease in foreign exchange reserves (SDR 5.0 bil-lion), following an exchange rate depreciation andimplementation of restrictive demand-managementpolicies. Other industrial countries with significantaccumulations of foreign exchange reserves were Nor-way (SDR 3.2 billion) and Japan (SDR 3.3 billion).

Developing countries' holdings of foreign exchangereserves increased by SDR 22 billion in 1984, afterdeclining in 1982 and increasing by a modest amountin 1983. This relatively large expansion in foreignexchange reserves (15 percent) was associated withimprovements in their current account positions andcontinued, though often quite limited, access to inter-national financial markets. The experiences of thevarious regions in the group, however, were notuniform. Western Hemisphere countries, which re-duced their current account deficit from SDR 11.7billion in 1983 to SDR 5.5 billion in 1984, receivednet capital inflows that permitted an accumulation offoreign exchange reserves of SDR 14 billion in 1984.Within this region, the largest individual accumula-tions took place in Brazil (SDR 7.6 billion), Mexico(SDR 3.8 billion), and Venezuela (SDR 1.8 billion).Similarly, Asian countries reduced their aggregatecurrent account deficits from SDR 15 billion in 1983to SDR 7.7 billion in 1984, and increased theirholdings of foreign exchange reserves by SDR 10billion in 1984. Singapore experienced the largestindividual accumulation (SDR 1.7 billion) within thisregion, followed by Indonesia (SDR 1.3 billion). Incontrast, Middle Eastern countries, despite a declinein their current account deficit from SDR 20 billionin 1983 to SDR 16 billion in 1984, reduced theirholdings of foreign exchange reserves by SDR 4.2billion in 1984. Changes in holdings of foreign ex-change reserves in the other regions were significantlysmaller. European countries increased their holdingsof foreign exchange reserves by SDR 1.5 billion in1984, while the foreign exchange reserves of Africancountries remained virtually unchanged from 1983 to1984.

The share of industrial countries in total foreignexchange reserves has declined substantially duringthe past decade, from 64 percent to 53 percent, whilethe share of developing countries thus increased from36 percent to 47 percent. This redistribution of foreignexchange reserves did not occur at a uniform pacethroughout the decade. The share of developing coun-tries in total foreign exchange reserves rose substan-tially during the first years of this period, partly as aresult of increases in the current account surpluses inthe oil exporting countries, to reach 54 percent at the

end of 1976. This process was reversed in the nexttwo years, and the share of developing countries intotal foreign exchange reserves reached 43 percent atthe end of 1978. Since then, changes in the distribu-tion of foreign exchange reserves have been moremodest.

HOLDINGS OF FUND-RELATEDRESERVE ASSETS

In 1984, Fund-related reserve assets increased by8 percent to SDR 58 billion at the end of the year,reflecting expansions of holdings of both reserve po-sitions in the Fund and SDRs (Table 13). Reservepositions in the Fund grew by SDR 2.5 billion,maintaining the upward trend evident since 1980.Holdings of SDRs increased by SDR 2.1 billion in1984, in contrast to a decline of SDR 3.3 billion in1983. This decline was largely associated with theincrease in quotas under the Eighth General Reviewof Quotas. Since member countries in the aggregatepaid 22 percent of the 1983 quota increase in SDRs,their holdings of SDRs declined, with an accompa-nying increase in their reserve positions in the Fund.These SDR payments, made in December 1983,amounted to SDR 6.0 billion. In 1984, payments forquota increases were relatively minor, with onlySDR 0.2 billion paid in SDRs. Since the cumulativetotal stock of SDRs has remained constant since thelast allocation in 1981, the expansion in SDR holdingsof member countries (SDR 2.1 billion) in 1984 wasreflected in a roughly corresponding decline of Fundholdings of SDRs.

In 1984, holdings of Fund-related reserve assetsincreased for both industrial and developing coun-tries. Industrial countries increased their holdings bySDR 3.5 billion, with the United States experiencingthe largest individual accumulation, of SDR 1.9 bil-lion. Developing countries increased their holdings bySDR 0.9 billion. This expansion largely reflected anincrease in Saudi Arabia's reserve position in theFund resulting from additional Fund borrowing fromthat country. As a result of these changes, industrialcountries held 70 percent of total Fund-related reserveassets at the end of 1984, while developing countriesheld the remaining 30 percent.

GOLD

Gold valued at current market prices (in terms ofthe SDR) declined by 14 percent in 1984, reflectinga small reduction in the physical amount of officialholdings of gold accompanied by a fall in its marketprice. The physical stock of gold reserves has re-mained fairly constant since 1972, with the exceptionof a 9 percent decline in 1979. The reduction in 1979was largely the result of members of the EMS depos-iting 20 percent of their gold holdings with theEuropean Monetary Cooperation Fund (EMCF) inexchange for European Currency Units (ECUs). Since

52



1979, changes in physical holdings have been small,and at the end of 1984 such holdings were nearlyequal to those at the end of 1979. The distribution ofgold holdings between both major country groups hasalso remained virtually constant. Of a total physicalstock of gold reserves of 946 million ounces at the endof 1984, industrial countries held 83 percent anddeveloping countries 17 percent.

The market price of gold has shown large changesduring the last 12 years, ranging from an equivalentof SDR 90 an ounce at one point in August 1976 toone of SDR 639 an ounce at one point in January1980. During 1984, a decline in the market price ofgold (from SDR 364 an ounce to SDR 315 an ounce)reduced official gold holdings valued at current mar-ket prices to SDR 298 billion. As a result of thedecline in gold prices during the last two years, aswell as the accumulation of non-gold reserves, theshare of gold in total reserves declined from 55 percentat the end of 1982 to 42 percent at year-end 1984.

DEVELOPMENTS IN FIRST QUARTEROF 1985

In a reversal of the growth experienced in 1984,non-gold reserves fell by SDR 17 billion in the firstquarter of 1985. This decline was due almost entirelyto a reduction in foreign exchange reserves (SDR 16billion). The small decline in Fund-related reserveassets (SDR 0.5 billion) reflected a fall in reservepositions in the Fund (SDR 0.7 billion) that was onlypartially offset by an increase in SDR holdings(SDR 0.2 billion). Both major country groups reducedtheir holdings of non-gold reserves, industrial coun-tries by SDR 7.7 billion and developing countries bySDR 10 billion.

The market price of gold measured in terms of theSDR increased by 6 percent in the first quarter of1985. The resulting increase in official gold holdingsvalued at current market prices (SDR 17 billion)offset almost exactly the decline in non-gold reserves.As a result, total international reserves (includinggold valued at market prices) remained virtuallyunchanged in the first quarter of 1985.

CURRENCY COMPOSITION ANDPLACEMENT OF FOREIGN EXCHANGE

RESERVESThis section examines the currency composition of

foreign exchange reserves, the effects of market trans-actions and exchange rate movements on officialholdings of major currencies, and the placement offoreign exchange reserves.

CURRENCY COMPOSITION OF RESERVESDuring the last decade, there has been a continuing

diversification of the currency composition of foreignexchange reserves. While that composition had re-mained relatively stable during the period 1975—77,the attempts of authorities to reduce the risk ofsignificant capital losses due to a depreciation of the

U.S. dollar led to some diversification of foreignexchange reserves in the years 1977—80. The share ofthe U.S. dollar in total foreign exchange reservesdeclined from 78 percent in 1977 to 67 percent in1980 (Table 14). This diversification away from theU.S. dollar was partly reversed in the early 1980s,when the sharp appreciation of the U.S. dollar andhigh real interest rates on U.S. dollar assets increasedthe attractiveness of U.S. dollar instruments. As aresult, the share of U.S. dollars in foreign exchangereserves rose to 69 percent by end-1983. In 1984,however, the share of the U.S. dollar in foreignexchange reserves declined to 65 percent, as monetaryauthorities shifted the composition of their portfoliotoward the deutsche mark, the Japanese yen, and, toa lesser extent, the pound sterling. In the calculationof these shares, the SDR value of ECUs issued againstgold is not counted as part of foreign exchangereserves, but the SDR value of ECUs issued againstU.S. dollars is counted as part of the holdings of U.S.dollars. The overall picture regarding trend changesin the currency composition of foreign exchange re-serves is similar if ECUs, which were introduced in1979 and accounted for 11 percent of total foreignexchange reserves at the end of 1984, are treatedseparately. Under this alternative treatment of ECUs,the share of the U.S. dollar declined from 77 percentin 1977 to 55 percent in 1980; it then increased to 58percent in 1981 and stayed at that level through 1983,before declining to 57 percent in 1984.

The changes in the SDR value of foreign exchangereserves can also be decomposed into price and quan-tity changes for each of the major currencies (includ-ing ECUs) and for the total of the identified foreignexchange reserves (Table 15). In 1984, total identifiedforeign exchange reserves increased by SDR 27 billionas a result of a positive quantity change of SDR 24billion and a positive price change of SDR 3.3 billion.This overall change in the SDR value of foreignexchange reserves encompassed increases in the quan-tity of each major currency with the exception of theECU, and negative price changes for all the currencieswith the exception of the U.S. dollar. The change inholdings (resulting from the combination of price andquantity changes) was positive for all the nationalcurrencies. The currencies with the largest expansionswere the U.S. dollar (SDR 18 billion), the deutschemark (SDR 7.1 billion), and the Japanese yen(SDR 3.4 billion). Holdings of pounds sterling in-creased by SDR 2.0 billion, while holdings of theFrench franc, Swiss franc, and Netherlands guilderincreased by smaller amounts. The relatively smalloverall price change reflected the offsetting effects ofan increase in the SDR price of the U.S. dollar anddeclines in the SDR prices of the other currencies.While price changes accounted for nearly two thirds(SDR 12 billion) of the increase in the holdings ofU.S. dollars, the declining SDR values of the othercurrencies reduced holdings of those currencies bySDR 8.9 billion.

53


ANNUAL REPORT, 1985

Table 14.

Share of National Currencies in Total Identified Official Holdings of Foreign Exchange,End of Selected Years 1977-841

(In percent)

Memorandum:ECUs TreatedSeparately2

1977 1978 1979 1980 1981 1982 1983 1984 1984

All countriesU.S. dollarPound sterlingDeutsche markFrench francSwiss francNetherlands guilderJapanese yenUnspecified currencies

Industrial countriesU.S. dollarPound sterlingDeutsche markFrench francSwiss francNetherlands guilderJapanese yenUnspecified currencies

78.01.89.11.22.20.82.44.4

89.00.95.40.30.80.61.81.2

75.61.7

10.91.22.10.93.34.3

86.20.77.90.41.20.52.30.8

72.92.0

12.5I.3

2.51.03.64.2

83.50.89.70.61.50.62.60.6

66.83.0

15.01.73.21.34.44.6

77.60.8

14.40.51.80.73.50.6

69.82.1

12.91.42.71.14.15.8

78.70.7

13.00.51.80.83.70.7

68.72.4

12.31.32.71.14.57.0

77.00.8

12.50.41.80.74.52.3

68.52.6

11.21.12.30.84.78.7

77.60.9

13.10.31.50.55.20.9

65.12.9

12.01.12.00.85.2

11.0

73.61.6

15.20.41.40.76.30.8

57.02.6

11.01.01.90.74.8

21.1

57.01.4

12.90.41.20.65.3

21.3

Developing countries3

U.S. dollarPound sterlingDeutsche markFrench francSwiss francNetherlands guilderJapanese yenUnspecified currencies

672

1223137,

.2

.7

.6

.1

.7

.1

.0

.6

61.73.0

14.82.23.41.44.69.0

62.33.2

15.22.13.51.54.57.8

56.25.0

15.72.94.61.95.28.5

613

12,2,314,

10,

.1

.5

.8

.3

.6

.4

.5

.8

60.64.0

12.12.13.61.54.6

11.4

59.74.39.41.83.11.24.3

16.2

57.04.18.81.72.60.94.1

20.8

57.04.18.81.72.60.94.1

20.8

Sources: Various Fund publications and Fund staff estimates.1 Starting with 1979, the SDR value of European currency units (ECUs) issued against U.S. dollars is added to the SDR value of U.S. dollars, but the SDR value of

ECUs issued against gold is excluded from the total distributed here. For classification of countries in groups shown here, see Appendix IX.2 This column is for comparison and indicates the currency composition of reserves when holdings of ECUs are treated as a separate reserve asset, unlike the

earlier columns starting with 1979 as is explained in the preceding footnote. The share of ECUs in total foreign exchange holdings was 11.0 percent for all countriesand 20.6 percent for the industrial countries.

3 The calculations here rely to a greater extent on Fund staff estimates than do those provided for the group of industrial countries.

In contrast to the expansion in the holdings ofnational currencies, holdings of ECUs declined bySDR 4.1 billion in 1984. EGUs are issued by theEMCF to the central banks of the members in ex-change for the deposit of 20 percent of the goldholdings and 20 percent of the gross U.S. dollarholdings of these institutions. These swaps are re-newed every three months, and changes in the mem-bers' holdings of U.S. dollars and gold, as well as inthe market price of gold and in the value of the U.S.dollar, affect the amount of ECUs outstanding.8

8 In calculating the value of the gold holdings of the EMCF in termsof ECUs, the ECU swap price is equal to the lower of two values: theaverage of the prices recorded daily at the two London fixings duringthe previous six calendar months and the average price of the twofixings on the penultimate working day of the period.

Quantity and price changes in the SDR value of ECUholdings, therefore, depend on the evolution of its twocomponents, gold and U.S. dollars. In 1984, thedecline in the holdings of ECUs resulted from both anegative quantity change and a negative price change.The negative quantity change, SDR 0.8 billion, wasdue mostly to a decline in the quantity of dollarsdeposited at the EMCF, since the quantity of golddeposited remained virtually unchanged at 85.7 mil-lion ounces during the year. The negative price change,SDR 3.3 billion, was the net result of two oppositeeffects: an increase in the SDR value of ECUs issuedagainst U.S. dollars (owing to the appreciation of theU.S. dollar with respect to the SDR), and a declinein the SDR value of ECUs issued against gold (owingto the decline in the price of gold in terms of SDRs).Since the ECUs issued against gold constitute a large

54



Tablets.

Currency Composition of Official Holdings of Foreign Exchange, End of 1979-End of 19841

(In millions of SDRs)

U.S. dollarChange in holdings

Quantity changePrice change

Year-end value

Pound sterlingChange in holdings


Year-end value

Deutsche markChange in holdings


Year-end value

French francChange in holdings


Year-end value

Swiss francChange in holdings


Year-end value

Netherlands guilderChange in holdings


Year-end value

Japanese yenChange in holdings


Year-end value

European currency unitChange in holdings

Quantity change3

Price changeYear-end value

Sum of the aboveChange in holdings


Year-end value

Total official holdings4

Change in holdingsYear-end value

1979

-14,057-12,5912- 1 ,466155,410

754430324

4,551

3,9142,8401,074

28,272

435356

793,027

1,000916

845,760

37432549

2,357

7142,408

-1,6948,100

32,70627,295

5,41132,706

25,84021,979

3,861240,183

25,663249,731

1980

5,889642

5,247161,299

2,9212,311

6107,472

9,77012,795

-3,02538,043

1,2651,588-3234,292

2,3572,881-5248,117

9591,193-2343,316

2,9011,0211,880

11,001

14,952-1,54516,49747,658

41,01520,88620,129

281,197

43,190292,921

1981

9,113-6,51615,629

170,412

-1,847-966-8815,625

-4,123-2,288-1,83633,919

-656-35

-6223,636

-1,032- 1 ,470

4397,085

-387-219-1682,928

-110-242

13210,890

-4,727-2,143-2,58442,931

-3,770-13,879

10,108277,427

-321292,600

1982

-4,530-13,288

8,758165,882

6261,289-6636,250

-2,266-2,262

-331,654

-372-5

-3673,264

-187162

-3506,898

-64-41-23

2,864

752856

-1041 1 ,64

-5,007-1,460-3,54737,925

- 1 1 ,049-14,750

3,701266,378

-8,348284,252

1983

12,6553,8488,807

178,536

8781,230-3527,129

-8271,673

-2,50030,826

-315161

-4762,949

-503-271-2316,395

-533-276-2572,331

1,357569789

13,000

4,074-2974,371

41,999

16,7876,636

10,151283,165

22,772307,024

1984

18,1695,999

12,170196,705

1,9603,362

-1,4039,088

7,0839,977

-2,89537,909

388618

-2303,337

17681

-6646,412

179374

-1952,510

3,4013,597-196

16,401

-4,071-774

-3,29737,928

27,12623,835

3,291310,290

37,989345,012

Source: Fund staff estimates.1 The currency composition of foreign exchange is based on the Fund's currency survey and on estimates derived mainly, but not solely, from official national

reports. The numbers in this table should be regarded as estimates that are subject to adjustment as more information is received. Quantity changes are derived bymultiplying the change in official holdings of each currency from the end of one quarter to the next by the average of the two SDR prices of that currency prevailingat the corresponding dates (except that the average of daily rates is used to obtain the average quarterly SDR price of the U.S. dollar). This procedure converts thchange in the quantity of national currencies from own units to SDR units of account. Subtracting the SDR value of the quantity change so derived from the quarterlychange in the SDR value of foreign exchange held at the end of two successive quarters and cumulating these differences yields the effect of price changes over theyears shown.

2 Reflects mainly deposits of U.S. dollars by members of the European Monetary System (EMS) in the European Monetary Cooperation Fund.3 Quantity changes in European currency units (ECUs) issued against dollars are evaluated by applying the SDR price of the U.S. dollar on the swap date to th

estimated change in dollar holdings. Similarly, quantity changes in ECUs issued against gold are determined by applying the SDR price of the ECU on the swap dateto the ECU price of gold used by the EMS and multiplying by the change in the number of ounces.

4 Include a residual whose currency composition could not be ascertained, as well as holdings of currencies other than those shown.

55


ANNUAL REPORT, 1985

fraction of the total amount of ECUs, 77 percent atthe end of 1983, the net price change in 1984 wasnegative.

There are significant differences in the pattern ofcurrency diversification between industrial and de-veloping countries (Table 14). In the period since1975, reserve portfolios of the industrial countrieshave been more concentrated than those of the de-veloping countries. Although the share of U.S. dollarsin the foreign exchange reserves of the industrialcountries declined from 89 percent in 1977 to 74percent in 1984, it remained considerably above thecorresponding share of 57 percent for developingcountries in 1984. In addition, the combined sharesof the two currencies with the largest shares haveremained more stable for the industrial countries. Forthese countries, the combined shares of the U.S. dollarand the deutsche mark remained within the range of88 to 94 percent; while for the developing countries,this combined share has been between 66 and 80percent. Developing countries have also held muchlarger shares of their foreign exchange reserves inpounds sterling, French francs, Swiss francs, andNetherlands guilders. During 1984, the decline in theshare of the U.S. dollar in total foreign exchangereserves for all countries represented a decline in the

U.S. dollar share for both groups of countries. Inpart, the fall in the share of the U.S. dollar in thereserve portfolios of the industrial countries reflectedthe concerted exchange market intervention under-taken by a number of countries to limit the deprecia-tions of their currencies against the U.S. dollar.

PLACEMENT OF FOREIGNEXCHANGE RESERVES

The growth of foreign exchange reserves in 1984was accounted for largely by increased official U.S.dollar claims on residents of the United States andincreased official holdings of Eurocurrency deposits(Table 16). While foreign exchange reserves grew bySDR 38 billion, official claims on residents of theUnited States increased by SDR 21 billion, andofficial holdings of Eurocurrency deposits increasedby SDR 14 billion. The growth of Eurocurrencydeposits reflected additional holdings of both Euro-dollar deposits (SDR 9 billion) and deposits in othercurrencies (SDR 5 billion). Official claims on resi-dents of other countries denominated in the debtor'sown currency increased by SDR 6 billion, whileholdings of ECUs declined by SDR 4 billion.

Table 16.

Placement of Official Holdings of Foreign Exchange Reserves, End of Year 1977-841


1977 1978 1979 1980 1981 1982

Total official holdings of foreignexchange 204 224 250 293 293 284

1983

307

1984

Liabilities of residents of the United States toforeign official institutions 104 120 109 123 139 149 163 178

Items not included in reported official U.S.dollar holdings2 -10 -7 -13 -22 -36 -50 -52 -46

Reported official U.S. dollar claims on resi-dents of the United States 94 113 96 101 103 99 111 132

Reported official claims on residents of othercountries denominated in the debtor's owncurrency 19 27 30 41 39 38 40 46

Subtotal 113 140 126 142 142 137 151 178

Identified official holdings of EurocurrenciesEurodollars 54 47 49 54 58 56 57 66Other currencies 19 21 25 34 32 30 33 38

Subtotal 73 68 74 88 90 86 90 104

European currency units — — 33 48 43 38 42 38

Residual3 18 16 17 15 18 23 24 25

345

Sources: International Monetary Fund, International Financial Statistics; U.S. Treasury Department, Bulletin; and Fund staff estimates.1 Official foreign exchange reserves of Fund members and certain other countries and areas, including Switzerland. Beginning in April 1978, Saudi Arabian holdings

exclude the foreign exchange cover against a note issue, which amounted to SDR 4.3 billion at the end of March 1978.2 Mainly U.S. dollars deposited with the European Monetary Cooperation Fund in connection with the issuance of European currency units, U.S. obligations to

official institutions in countries not reporting to the Fund, and U.S. obligations that are not classified as foreign exchange reserves in the reports provided to the Fundby the holders.

3 Part of this residual occurs because some member countries do not classify all the foreign exchange claims that they report to the Fund. Includes identified officialclaims on the International Bank for Reconstruction and Development, on the International Development Association, and the statistical discrepancy.

56



The composition of the holdings of foreign exchangereserves changed somewhat in 1984, after remainingrelatively constant during the previous three years.The share of foreign exchange reserves accounted forby official claims on residents of the United Statesincreased to 38 percent, while the share of EC Usdeclined to 11 per cent. The other components didnot change significantly. At the end of 1984, officialclaims on residents of other countries accounted for13 percent of foreign exchange reserves, while officialEurocurrency deposits accounted for 30 percent. Of-ficial Eurodollar deposits accounted for 63 percent oftotal official Eurocurrency deposits.

SOURCES OF RESERVE GROWTH

This section considers the roles of private interna-tional financial markets and the current accountimbalances of reserve-currency countries as sourcesof international reserves and liquidity. It also exam-ines the role of international capital markets in thecurrent adjustment process.

INTERNATIONAL FINANCIAL MARKETS,THE ADJUSTMENT PROCESS, ANDPROVISION OF INTERNATIONAL

LIQUIDITY

An important aspect of developments in the inter-national monetary system over the past twenty yearshas been the greatly increased role of the internationalfinancial markets as a source of international liquidityand reserves. The widespread use of private interna-tional credit markets by the authorities suggests thatinternational reserves and liquidity are no longerconstrained by the structure of current account bal-ances of the reserve-currency countries or by thesupply of reserve assets from official sources. Inter-national reserves and liquidity have been made avail-able to most countries through the international fi-nancial markets on terms reflecting to some degreethe borrowing country's ability and willingness tomake the real transfers required to service its debt.In contrast, countries with limited access to theinternational financial markets could acquire inter-national reserves mainly through net sales of goodsand services to nonresidents or through intergovern-mental transfers and borrowing.

Since 1982, the flow of funds through internationalfinancial markets and the ability of these markets toprovide reserves and liquidity have been stronglyinfluenced by the external payments difficulties of anumber of developing countries that threaten to cur-tail the availability of international credit to thesecountries. The availability of international credit wassustained as a result of a high degree of cooperationbetween the Fund, international banks, the develop-ing country debtors, and national and other interna-tional agencies. This cooperation promoted an orderlybalance of payments adjustment process based on a

case-by-case approach involving Fund stand-by orextended arrangements, the restructuring of externaldebt payments, and, for certain countries, the provi-sion of new credits from international banks.

The adjustment efforts of many developing coun-tries and their more limited access to internationalfinancial markets resulted in significant changes intheir current account positions and their accumula-tion of international reserves. The financing require-ments (current account deficit plus private capitaloutflows exclusive of principal repayments on foreigndebt) of developing countries (except eight fuel ex-porting countries of the Middle East9) fell from $150billion in 1981 to $47 billion in 1984. This reducedrequirement was largely financed by grants and directinvestment flows and by long-term borrowing fromofficial creditors. Hence, these developing countriesdid not increase their liabilities, net of deposits, tothe international financial markets in 1984. Further-more, their improved financial situation allowed themto increase their foreign exchange reserves by about$21 billion in 1984. This overall experience encom-passed divergent behavior for different groups of thesecountries. In particular, the 34 market borrowers,which account for 70 percent of the developing coun-tries' total external debt, experienced significantlygreater fluctuations in the availability of financingthan the remaining 59 official borrowers, which ac-count for 11 percent of the developing countries'external debt. While market borrowers obtained netprivate credit of $125 billion in 1981-82, their netborrowing in 1983—84 would have been negative inthe absence of $24 billion of concerted lending. Privateborrowing of the group of market borrowers experi-encing debt service difficulties fell from $59 billion in1981 to $3 billion in 1984, while those market borrow-ers that avoided such difficulties experienced a smallerreduction in private lending, from $27 billion to $13billion. The reduced access of market borrowers toexternal credit sharply changed the relative impor-tance of the various sources of finance. By 1984, thisgroup's combined current account deficit was fi-nanced entirely by grants and direct investment flows.New external borrowings for this group from privatesources was more than matched by an increase inreserves. In contrast, the official borrowers experi-enced greater stability in their sources of externalfinance. These countries financed their current ac-count deficits through grants, direct investment, andlong-term concessional borrowing from official credi-tors. The remaining indebted developing countries,whose external borrowing in 1978—82 was more evenlydivided among official and commercial creditors, wereable to increase their net borrowing from privatecreditors from $10 billion in 1981-82 to $13 billion in1983-84.

9 The Islamic Republic of Iran, Iraq, Kuwait, the Libyan ArabJamahiriya, Oman, Qatar, Saudi Arabia, and the United ArabEmirates.

57


ANNUAL REPORT, 1985

The limitations on access to international financialmarkets experienced by market borrowers since theend of 1982 has shown that the availability of inter-national liquidity and borrowed reserves can be sub-ject to abrupt changes. Thus, even though the totalreserves of developing countries increased in 1984,the continued limitations on access to private financialmarkets for some countries may have prevented acorresponding increase in the overall internationalliquidity available to this group. In part, the rapidaccumulation of reserves by these countries reflectsattempts to offset the decline in the availability ofborrowed reserves through increased holdings of ownedreserves.

RECENT DEVELOPMENTS IN THEINTERNATIONAL BANKING AND BOND

MARKETSSince the emergence of external payments difficul-

ties for a number of developing countries in the secondhalf of 1982, net international bank lending to devel-oping countries has continued to decline. This declinein net claims reflects both a decline in bank lendingand an increase in deposits held by these countrieswith international banks (Table 17). The developingcountries increased their deposits with the interna-tional banking markets by $56 billion and $45 billionduring 1983 and 1984, respectively, compared withan increase of $30 billion in 1982. In 1984, thisincrease in deposits primarily reflected a rise of $21billion in the holdings of international reserves by alldeveloping countries. Despite the reduction in netbank lending to the developing countries, the overallnet lending activity of international banks increasedto $174 billion in 1984, well above the $148 billionlevel of 1983. Lending to industrial countries andoffshore banking centers accounted for this increasedlending activity.

The cost of borrowing continued to vary widely bytype of borrower. In 1984, the average spread abovethe London interbank offered rate (LIBOR) paid byborrowers from industrial countries for new commit-ments decreased from 65 basis points in 1983 to 57basis points. However, the reported bank lendingrates to some extent overstated the true borrowingcosts of many borrowers in industrial countries whomet their financing needs in international securitymarkets by relying on the use of note issuance facilities10

10 The note issuance facility consists of an arrangement wherebyan underwriting syndicate commits itself for several years (sometimesas long as ten years) to purchase from an international borrower notesof various maturities up to 12 months with a fixed spread (the caprate) above a benchmark interest rate. When the borrower activatesthe facility, notes are sold through bidding by tender or throughnegotiation to banks that then place the notes with investors. Thecost to the borrower of such sales is usually below the "cap rate."The underwriting banks are required to take up only those notes thatcannot be sold below the "cap rate/' although the underwriters mayalso be among the banks that acquire notes voluntarily.

Table 17.

Total Cross-Border Bank Lending and Deposit-Taking,1982-841

(In billions of U.S. dollars; changes in period)

1982 1983 1984

Lending to2

Industrial countriesDeveloping countries3

Other transactors4

Unidentified borrowers5

185122

75-1

-11

1489254

5-4

17412241

29

Deposit-taking from6 182 164 188Industrial countries 144 93 136Developing countries3 30 56 45Other transactors4 4 10 3Unidentified depositors5 4 6 5

Net flow of funds to (+) and from (- )7

Industrial countries -22 -1 -14Developing countries3 45 -1 -4Other transactors4 - 5 - 5 -1Unidentified (net)5 -15 -10 4Net errors and omissions8 14 2 9

Sources: International Monetary Fund, International Financial Statistics (IPS);and Fund staff estimates.

1 Data on lending and deposit-taking are derived from stock data onthe reporting countries' liabilities and assets after allowing for exchangerate movements. For classification of countries in groups shown here, seeAppendix IX.

2 As measured by differences in the outstanding liabilities of borrowingcountries, defined as cross-border interbank accounts by residence of borrowingbank plus international bank credits to nonbanks by residence of borrower.

3 Excluding offshore centers.4 Transactors included in IPS measures for the world, to enhance global

symmetry, but excluding from /F5 measures for "All Countries." Compriseschanges in identified cross-border bank accounts of centrally planned economies(excluding Fund members), and/or international organizations.

5 Calculated as the differences between the amounts that countries report astheir banks' positions with nonresident nonbanks in their monetary statistics andthe amounts that banks in major financial centers report as their positions withnonbanks in each country.

6 As measured by differences in the outstanding assets of depositing countries,defined as cross-border interbank accounts by residence of lending bank plusinternational bank deposits by nonbanks by residence of depositor.

7 Lending to minus deposit-taking from.8 Calculated as the difference between global measures of cross-border

interbank lending and deposit-taking.

and the issuance of bonds and floating rate notes11 inthe Eurobond markets, both of which offered lowerborrowing costs than the conventional bank credit.The average spread on commitments to developing

11 Floating rate notes are medium-term bonds (five to seven years)whose interest rate is reset at short-term intervals. They have beenviewed as a substitute for both fixed rate bonds and syndicated loans.Since 1980 the share of the conventional instruments—straight bonds,syndicated credits, and convertibles—has declined from 85 percentto 58 percent. The greatest decline occurred in the syndicated loanmarket, whose share fell from 57 percent in 1981-82 to 22 percentof total financing in 1984. Note issuance facilities and floating ratenotes have correspondingly increased their share from 6 percent in1981-82 to 15 percent in 1984 and from 7 percent in 1981-82 to28 percent in 1984, respectively. Both types of instruments—noteissuance facilities and floating rate notes—have been used mainly byborrowers from the industrial countries, but several developing coun-tries, most notably Korea, have begun to explore their use.

58

0



Table 18.

International Bond Issues and Placements, 1979-841

(In millions of U.S. dollars)

1979 1980 1981 1982 1983 1984

Foreign bondsIndustrial countriesDeveloping countriesCentrally planned economies2

International organizationsOther

Total foreign bonds

EurobondsIndustrial countriesDeveloping countriesCentrally planned economies2


Total Eurobonds

International bondsIndustrial countriesDeveloping countriesCentrally planned economies2


Total international bonds

13,4211,431

435,259

154

20,308

14,2121,885

302,220

344

18,691

27,6333,316

737,479

498

38,999

11,339746

5,714125

17,924

17,2061,403

1,71075

20,394

28,5452,149

7,424200

38,318

14,1291,212

5,030143

20,514

25,2103,215

552,486

358

31,324

39,3394,427

557,516

501

51,838

16,854726

7,461158

25,199

42,8163,970

3,280263

50,329

59,6704,696

10,741421

75,528

18,693893

7,269195

27,050

41,0152,382

6,074627

50,098

59,7083,275

13,343822

77,148

18,2991,618

7,580304

27,801

73,1453,646

4,218808

81,817

91,4445,264

11,7981,112

109,618

Source: Organization for Economic Cooperation and Development, Financial Market Trends.1 International bonds consist of foreign and Eurocurrency bonds. Foreign bonds are issued by a borrower who is of a nationality different from the country in which

the bonds are issued. Such issues are usually underwritten and sold by a group of banks of the market country and are denominated in that country's currency. Incontrast, Eurocurrency bonds are those underwritten and sold in various national markets simultaneously, usually through international syndicates of banks. Forclassification of countries in groups shown here, see Appendix IX.

2 Excluding Fund member countries.

countries decreased from a peak of 170 basis pointsin 1983 to 144 basis points in 1984. Despite thisnarrowing of spreads, the average cost of borrowingcontinued to be high in real terms, reflecting theincrease in the level of real interest rates in mostmajor industrial economies. For example, the averagereal short-term interest rates in the United States rosefrom 5.8 percent in 1983 to 6.9 percent in 1984, from2.8 percent to 3.6 percent in the Federal Republic ofGermany, from 4.0 percent to 5.2 percent in France,and from 4.6 percent to 6.4 percent in Italy.12

At the same time, the position of the developingcountries improved as a result of a substantial length-ening of the maturity structure of outstanding bankdebt. The average maturities of bank loans for devel-oping countries was extended from seven years in1983 to eight years and eleven months in 1984. Thislengthening of maturities reflected to an importantdegree the restructuring of debts for the WesternHemisphere countries.

12 Real interest rates are defined as the excess of nominal rates overexpected inflation. Expected inflation rates are proxied by a weightedaverage of the rate of inflation in the current quarter and the nexttwo quarters, with the deflator of private financial domestic demandbeing used as the price variable.

The international bond market continued to ex-pand rapidly during 1984 as borrowing by manyhigh-quality corporate and sovereign borrowers wasstimulated by falling interest rates. New gross inter-national bond offerings grew by 42 percent, morethan at any time during the past two decades, toreach about $110 billion in 1984 (Table 18). Theissue of floating rate notes advanced most rapidly, by95 percent in 1984, equity-related issues grew by 36percent, and the issue of straight bonds grew by 18percent. Most of the new issues were accounted forby industrial country borrowers, whose share of totalissues increased from 87 percent in 1983 to 89 percentin 1984. The currency distribution in 1984 remainsheavily skewed toward U.S. dollar issues (62 percentof the total).

As the growth in bank lending slowed in the periodsince 1981, the international bond market gained inrelative importance as a source of financing. From1982 to 1984, international bank lending declinedfrom $185 billion to $174 billion, while internationalbond lending grew from $76 billion to $110 billion.Developing countries issued $5.3 billion of bonds in1984, more than at any time since the peak in 1978,but these issues were made by only a few of thesecountries. The increase in importance of the interna-

59


ANNUAL REPORT, 1985

tional bond market is largely the result of innovationsin this market that have made the underlying debtinstruments more versatile.

DEVELOPMENTS IN DEBTRESCHEDULINGS

The restructuring of bank debt within the contextof a Fund-assisted stabilization program has beenwidely used to alleviate debt service difficulties. Dur-ing 1983 and 1984, 33 agreements were negotiated,involving 25 countries; a number of further agree-ments were being negotiated in the first months of1985. In addition, 23 Fund members obtained 29official debt reschedulings, mostly through the ParisClub mechanism, compared with 15 countries and 21debt reschedulings during the period 1975-82. In1983 and 1984, 32 countries rescheduled a total of$168 billion of their external debt owed to commercialbanks and official agencies. The volume of bank debtformally rescheduled, excluding short-term debt rolledover, is estimated at $35 billion in 1983 and $117billion in 1984, or about 6 percent and 21 percent ofthe total stock of bank debt of developing countriesin 1983 and 1984, respectively. In 1983, 8 countriesreached an agreement with banks on concerted lend-ing packages in the context of restructuring agree-ments, involving lending commitments of $14 billionor 40 percent of new external commitments to devel-oping countries. In 1984, 3 countries reached firmagreements on the concerted lending of $11 billion(40 percent of total new commitments), and 3 addi-tional countries reached agreements in principle onconcerted loans of $5 billion. Moreover, the firstsuccessful multiyear restructuring agreements wereagreed to in principle with Mexico and Venezuelaand a preliminary agreement was reached on a mul-tiyear restructuring agreement with Ecuador. Multi-year restructuring agreements are designed to helprestore voluntary debtor/creditor relationships fordebtor countries that have made substantial progressin their adjustment efforts.

The terms on newly rescheduled debt eased during1984. The spreads of borrowing rates over LIBORon rescheduled debt had ranged from !7/s to 2Vzpercentage points in 1982 and 1983, and they fell to \Vito 2 percentage points in 1984. Rescheduling fees de-clined as well, in part because of a new rule requiringU.S. banks to amortize most fees over the life of a loan.In addition, maturities and grace periods lengthened.Within the context of the multiyear restructuring agreement with Mexico, banks agreed to lengthen the periodof repayment from 8 years to 14 years with margins overLIBOR at 7/s percentage point during 1985-86, IVspercentage points for 1987-91 and 1/4 percentage pointsfor 1992-98. For the multiyear restructuring agreementwith Venezuela, the period of repayment was 12 yearsat \Vs percentage points above LIBOR. Reschedulingfees were waived for both countries.

CURRENT ACCOUNT IMBALANCES ANDRESERVE GROWTH

It has been suggested that a current account deficitof a reserve-currency country would lead to an in-crease in that country's indebtedness vis-a-vis themonetary authorities in other countries, which wouldimply a corresponding increase in the reserves of therest of the world. Such a direct link would have beenmost likely in an international monetary system withrelatively limited private international financial mar-kets. The access of many countries to internationalfinancial markets implies, however, that holdings ofa particular reserve currency can expand even if thecountry that issues that currency has a current ac-count surplus. A creditworthy country can readilyobtain additional reserves by borrowing in interna-tional financial markets and hold these funds asreserve assets at a relatively small net cost equal tothe difference between the loan rate and the returnearned on reserve assets. Holdings of a particularcurrency could therefore expand as a result of inter-national financial transactions even if the reserve-currency country has a current account surplus.

Given the current structure of the internationalmonetary system, the nature of the relationshipsbetween the current account imbalances of the re-serve-currency countries and stocks of reserves de-nominated in their currencies is basically an empiricalissue. During the past decade,13 it has been difficultto find a consistent relationship between the currentaccount imbalances of the major reserve-currencycountries and the foreign exchange reserves denomi-nated in their currencies. In Chart 20, this relation-ship is examined first in terms of linkages betweenthe current account balances of each reserve-currencycountry and the change in the stock of reservesdenominated in that country's currency, and then interms of the connection between the cumulative cur-rent account balances for each reserve-currency coun-try (starting in 1970) and the stock of reserves.14 Acurrent account deficit is measured as a positive valuein Chart 20 since it has been argued that a currentaccount deficit (surplus) would lead to an expansion(contraction) of reserve holdings. The comparison ofthe current account imbalance and changes in reserveholdings year by year examines the short-run linkagesbetween these variables, whereas the relationshipbetween the cumulative current account balances andthe level of reserve holdings considers longer-termlinkages. Although for certain countries there is apositive relationship between current account deficits

13 Consistent data on the currency composition of reserves areavailable only for the period since 1975.

14 To the extent that current account imbalances prior to 1970contributed to the growth of reserve holdings, the estimate of thestock of reserves generated by the cumulative current account bal-ances reported in Chart 20 would be an underestimate. However,this difference would remain constant over time.

60



Chart 20.

Six Industrial Countries: Current Account Imbalances and Reserves, 1975-84

1 A positive value indicates that the country had a current account deficit.2 Change in holdings of official reserves denominated in the national currency of the country considererd.3 Sum of the current account balances starting in 1970. A positive value indicates a cumulative current account deficit.4 Stock of official reserve denominated in the national currency of the country considered.

61

UNITED STATES JAPAN

FEDERAL REPUBLIC OF GERMANY UNITED KINGDOM

FRANCESWITZERLAND


ANNUAL REPORT, 1985

of the reserve-currency countries and increases inreserves denominated in their currencies during por-tions of the period 1976—84, there was no significantlinkage for the period as a whole. The relationshipsbetween the cumulative current account balances andthe stocks of reserves varies within the period but,once again, there is no consistent evidence of a directlinkage.

ADEQUACY OF RESERVES AND THE ROLEOF THE FUND

The recent changes in access to international fi-nance markets for many countries and the movementsin reserves described in previous sections have hadimportant effects on the adequacy of internationalreserves and liquidity. This section considers thefactors influencing the adequacy of reserves and therole of the Fund in the provision of liquidity.

ADEQUACY OF INTERNATIONAL RESERVES

An adequate stock of international reserves andliquidity is an important element in attaining asmoothly functioning international monetary systemand a continuing expansion of world trade, whileavoiding persistent inflation or deflation. An assess-ment of the adequacy of the existing stock of reservesrequires an evaluation of the factors influencing theneed for reserves, the terms and conditions underwhich reserves are supplied, and the sources of sup-ply. The effective demand for reserves is affected bysuch factors as the levels and variability of trade andcapital flows, the speed with which external paymentsimbalances respond to stabilization programs, theterms and conditions under which reserves can beobtained, and the types of domestic and externalshocks that affect a country. Over time, the reserveholdings of all countries together have tended to growas the value of world trade increased. In the period1974—84, the ratio of non-gold reserves to imports forall countries had an average value of 21 percent andremained within the range of 20 to 25 percent. Forthe industrial countries, this ratio has moved in therange of 15 to 19 percent; and for the developingcountries, it has fluctuated between 27 and 41 percent.Apart from periods surrounding large exchange rateadjustments or disturbances in financial markets,those reserve ratios have been relatively stable. Forexample, the average value of the ratio of reserves toimports for all countries of 17 percent in the period1959—63 is only slightly lower than the average valueof 20 percent for the period 1979-84. Although theeffective demand for reserves is affected by a numberof other factors, trade flows therefore provide anindication of likely movements in this demand.

The adequacy of reserves can also be evaluated byconsidering the terms and conditions under whichindividual countries acquire reserves. For countries

with access to international credit markets, the termson which reserves can be acquired and held reflectthe net cost of borrowing funds and investing theproceeds in liquid foreign exchange assets. This netcarrying cost of reserves can be quite small for coun-tries with good credit ratings, especially relative tothe costs of changing other policies in order to gen-erate an overall balance of payments surplus. Borrow-ing rates differ among countries, since they reflectmarket evaluations of creditworthiness; the majorindustrial countries generally have the lowest borrow-ing costs. Even reserve-currency countries face a costof acquiring foreign exchange reserves through bor-rowing, namely, the difference between the cost ofservicing their own obligations and the return theyobtain from holding assets denominated in foreigncurrencies.

The terms and conditions on which internationalreserves can be acquired are also importantly affectedby policies of reserve-currency countries. Since mostcountries have a range of choices as to type ofinstrument and currency composition in which theyhold their foreign exchange reserves, these portfoliodecisions are often affected by the return on andstability of the value of different types of reserveassets. Stable economic policies in reserve-currencycountries will help stabilize the composition of reserveportfolios.

The adequacy of reserves for countries withoutaccess to international financial markets requires fur-ther considerations. First, the stock of reserves deemedoptimal for these countries is probably greater thanthat of countries with access to international creditmarkets. At the same time, the cost of acquiring andholding reserves is related to the necessity of gener-ating net exports of goods and services to the rest ofthe world or of acquiring additional credits fromofficial or multilateral sources. Such countries face aclose linkage between their adjustment policies andtheir ability to accumulate reserves. The adjustmentsin absorption and production required to generatepayments surpluses imply that the cost of reserveaccumulation for these countries is much higher thanfor countries with access to international capital mar-kets. For this reason, the supply of reserves generatedby international agreements takes on special impor-tance. The terms on which such countries acquirereserves, for example, through SDR allocations orgovernment-to-government credit arrangements, mayhave implications for their adjustment efforts.

THE ROLE OF THE FUND IN THEPROVISION OF LIQUIDITY

The Fund provides reserves and liquidity throughthe allocation of SDRs and the generation of reservepositions in the Fund. At the end of 1984, Fund-related reserve assets totaled SDR 58 billion, whichcomprised SDR 16.5 billion of SDRs and SDR 41.6

62



billion of reserve positions. Reserve positions consistof members' subscriptions paid in reserve assets,credit extended by the Fund to its members throughthe sale of other members' currencies, and the creditextended to the Fund by members under variousborrowing arrangements. Fund borrowings frommembers at the end of 1984 equaled SDR 12.8 billion,with the remainder of members' reserve positions,amounting to SDR 28.8 billion, accounted for byreserve asset subscriptions and claims arising fromthe use ot members' currencies in the extension ofFund credit.

The resources made available to the Fund are usedto provide temporary financial support to membersundertaking programs of economic adjustment agreedbetween them and the Fund, with certain specifiedfeatures of the programs being considered conditionsfor the continuation of the phased financial support.Access by Fund members to this type of internationalcredit constitutes an extension of international liquid-ity beyond that provided by reserve holdings andaccess to private international credit markets. Incomparison with these other sources of liquidity, theFund's credit is characterized by its conditionality,which gives it an important role among the

assets and availabilities that constitute internationalliquidity.

The role of the SDR and the possibility of a newSDR allocation have been discussed extensively sincethe last decision to allocate in 1978. SDR allocationsare made on the basis of proposals by the ManagingDirector, concurred in by the Executive Board, andapproved by the Board of Governors by an 85 percentmajority of the total voting power. The question offurther SDR allocations has been kept under contin-uous review by the Executive Board since the lastdecision to allocate, but it has not been possible tomake a proposal for a new allocation that commandsthe required support of members with 85 percent ofthe total voting power in the Fund.

Although most Executive Directors believe thatthere is a strong case for resuming allocations ofSDRs, some other Directors, who hold a substantialshare of total voting power, do not. The matterremains under review by the Executive Directors andwill be considered by the Interim Committee at itsmeeting in October. The Fund staff also is currentlyundertaking a study of the role of the SDR in light ofthe recent structural changes in the internationalfinancial system.

63


Chapter

3Activities of the Fund

INTRODUCTION

The developments in the world economy and inthe international monetary system reviewed in thetwo preceding chapters were reflected in the financialactivities of the Fund and in its liquidity position.The recovery in world economic activity, successfuladjustment policies, and the consequent improvementin the current account and reserve positions of manymember countries led to a slowing down in theexpansion of Fund credit from the peak levels of therecent past. Consequently, there was a marked declinein the Fund's financial activities in 1984/85 in termsof gross purchases as well as in the number andamount of arrangements and commitments. Grosspurchases from the Fund fell from about SDR 10billion in 1982/83 and 1983/84 to about SDR 6 billionin 1984/85. The number of arrangements fell from 35in effect in 1983/84 to 30 in 1984/85 and the amountof commitments from SDR 19 billion to SDR 12billion (see Table 19). Nevertheless, outstanding Fundcredit continued to expand, amounting to aboutSDR 35 billion (or about 39 percent of Fund quotas)and extending to 83 countries at the end of thefinancial year. As in the recent past, the bulk of theFund's financial assistance in 1984/85 was in the formof purchases involving upper credit tranche condi-tionally, which includes purchases under the ex-tended Fund facility, reflecting the continuing adjust-ment problems facing several member countries (seeTables 20 and 21).

The Fund's liquidity position was influenced favor-ably by the improvement in the external positions ofseveral member countries and by higher reflows ofusable resources through repurchases. This in turnled to an increase in the number and amount ofcurrencies that could be used by the Fund to financepurchases. The improvement in the Fund's liquidityposition has, however, to be viewed in the context ofthe prospective demand for Fund resources. Thus, inspite of the improvement in the world economic

situation, many member countries continue to facedifficult payments problems, as well as serious uncer-tainties about the medium-term prospects.

In these circumstances, the Interim Committee, atits meeting in September 1984, agreed that, althoughthe policy on enlarged access to Fund resources wasof a temporary character, there was a need for itscontinuation, with some modification of the accesslimits for 1985. The Committee concluded that thelimits of access to the Fund's general resources, aswell as the enlarged access policy, should be reviewedby the Executive Board again before the end of 1985and yearly thereafter in the light of all relevant factors,including the Fund's liquidity position and the mag-nitude of members' payments problems.

The Interim Committee, at its meeting in April1985, requested the Executive Board also to considerin 1985 the use of resources that will be availablefollowing the repayment of loans made by the TrustFund, to help forward the adjustment process byproviding balance of payments assistance to low-income developing member countries of the Fund.The Managing Director will report to the InterimCommittee on this matter at the time of its nextmeeting in Seoul, Korea, on October 6, 1985.

The Fund's financial and income position for1984/85 was adversely affected by difficulties thatseveral members experienced in settling their financialobligations to the Fund on time. While the amountsof overdue financial obligations of members remainsmall in relation to the Fund's overall financial posi-tion and activity, the increased incidence of overduefinancial obligations to the Fund has led to theestablishment of policies and procedures with respectto members in arrears and to a change in the account-ing treatment of charges receivable from memberswith protracted arrears to the Fund. Reflecting thischange in accounting procedures, the Fund reportedfor the first time since 1976/77 a net deficit ofSDR 30 million in 1984/85 compared with a netincome of SDR 73 million in 1983/84. This deficit

64


CHAPTER 3: ACTIVITIES OF THE FUND

Table 19.

Selected Financial Activities by Type and Country Group, 1979-85(In millions of SDRs)

I. General Resources AccountGross purchases1

Net purchases2

II. Administered AccountsTrust Fund loansOil facility subsidy

account payments(grants)

Supplementary financingfacility subsidy accountpayments (grants)

III. SDR allocations

Total

1979

1,239.2(-3,588.0)

670.0

19.1

—

4,032.6

5,960.9

1980

2,210.8(-1,362.9)

961.7

27.8

—

4,033.2

7,233.5

Financial

1981

4,385.9(1,575.3)

1,059.8

50.0

—

4,052.6

9,548.3

Year Ended April 30

1982

By Type

6,960.2(5,066.0)

9.3

22.9

6,992.4

1983

10,258.2(8,711.5)

2.5

44.3

10,305.0

1984

10,164.1(8,148.9)

11.7

68.5

10,244.3

1985

6,059.8(3,214.8)

—

89.9

6,149.7

By Country Group (1 + II + III)

Industrial countries



All countries

IV. MemorandumNumber of stand-by and

extended arrangementsas of April 30Of which,

extended arrangementsCommitments

As percent oftotal quotas

Undrawn balancesAs percent of

commitments

V. Outstanding Fund CreditAs percent of

total quotas

Number of Countries

2,593.7

3,367.2

928.81,061.4

249.0473.4654.6

5,960.9

20

51,600.4

4.11,377.5

86.1

8,873

22.7

73

2,617.6

4,615.9

7,329.77,247.3

765.8336.7937.0

7,233.5

29

73,049.7

7.82,718.0

89.1

8,038

20.6

74

2,543.9

7,004.4

7,538.73,497.3

987.2273.9773.3

9,548.3

37

759,475.1

15.98,076.4

85.2

9,545

16.0

78

—

6,992.4

7,999.93,763.57,326.0

0.8502.2

6,992.4

35

7216,206.3

26.711,154.6

68.8

14,802

24.4

79

54.0

10,251.0

2,072.73,777.27,788.7

25.23,794.4

10,305.0

39

925,025.5

41.016,405.1

65.6

23,590

38.6

85

—

10,244.3

7,665.32,639.57,658.3

0.74,280.5

10,244.3

35

518,569.4

20.99,269.5

49.9

31,742

35.6

84

—

6,149.7

7,038.8807.5837.5

57.43,408.5

6,149.7

30

311,675.3

13.15,543.1

47.5

34,973

39.2

83

1 Excluding purchases in the reserve tranche.2 Purchases minus repurchases; net repurchases (-).

was charged to the Fund's Special Reserve, reducingthe Fund's total reserves from SDR 1,074 million onApril 30, 1984 to SDR 1,044 million on April 30,1985. In the light of the income and financial positionof the Fund, the net income target was raised, effective

May 1, 1985, from 3 percent to 5 percent of reservesat the beginning of a financial year.

No allocations of SDRs have been made since 1981,which was the last year of the third basic period. Thequestion of an SDR allocation in the current—that

65


ANNUAL REPORT, 1985

Table 20.

Purchases Under Tranche Policies and Special Facilities, 1979-85(In billions of SDRs)

Financial Year Ended April 30

Purchases under tranche policiesFirst credit trancheUpper credit tranchesExtended Fund facility

Purchases under special facilitiesCompensatory financing facilityBuffer stock financing facility

Total

1979

0.720.130.350.24

0.510.460.05

1.23

1980

1.310.160.930.22

0.890.860.03

2.20

1981

3.600.781.900.92

0.780.78

4.38

1982

5.330.022.732.58

1.631.63

6.96

1983

6.170.033.682.46

4.093.740.35

10.26

1984

8.88

4.164.72

1.281.180.10

10.16

1985

4.81

2.772.04

1.251.25

6.06

1 Less than SDR 50 million.

is, the fourth—basic period was discussed by theInterim Committee at its meeting of April 17—19,1985 in Washington, but the degree of support re-quired for an allocation was not forthcoming. TheCommittee agreed to consider the matter again at itsnext meeting in Seoul, Korea, on October 6, 1985.

The continuing evolution of the Fund's role inexercising surveillance over members' exchange ratepolicies, including the new procedure of enhancedsurveillance in the context of multiyear reschedulingarrangements, is reviewed in Chapter 2. During theyear the Fund participated in meetings on externaldebt reschedulings, as well as in meetings convenedby aid and aid coordination groups.

As regards its nonfinancial activities, the Fundcontinued to provide training programs through theIMF Institute, and technical assistance was providedin the areas of central banking, fiscal affairs, andstatistics. In many cases, these activities have helpedmember countries to design and carry out effectiveadjustment policies.

MEMBERSHIP OF THE FUND ANDPARTICIPATION IN THE SDR

DEPARTMENT

During the year, the membership of the Fundincreased from 146 to 148; all members are partici-pants in the SDR Department. St. Christopher andNevis became a member on August 15, 1984 with aquota of SDR 4.5 million, and the People's Republicof Mozambique became a member on September 24,1984 with a quota of SDR 61 million, raising the totalof Fund quotas to SDR 89,301.8 million. Applicationsfor membership were received from two countries inthe financial year: one from Kiribati was received onJuly 18, 1984 and is under review, and the otherreceived from Tonga on January 16, 1985 was ap-proved by the Board of Governors on August 13,1985. Early in 1985, Fund staff also resumed contactswith Poland regarding its application for mem-bership, which was received on November 10,1981.

Table 21.

Outstanding Fund Credit by Facility and Policy, 1979-85(In millions of SDRs)


1979

As percentAmount of total

Regular facilities

Compensatory financing facility

Buffer stock financing facility

Oil facility

Extended Fund facility

Supplementary financing facility

Enlarged access policy

Total

1,233

2,945

48

4,240

407

-

_

8,873

13.9

33.2

0.5

47.8

4.6

-

_

100.0

1980


1,606

2,875

74

2,494

487

502

_

8,038

20.0

35.8

0.9

31.0

6.1

6.2

_

100.0

1981


2,349

2,617

-

1,581

980

2,018

_

9,545

24.6

27.4

-

16.6

10.3

21.1

_

100.0

1982


3,206

3,643

-

565

2,115

4,112

1,160

14,802

21.7

24.6

-

3.8

14.3

27.8

7.8

100.0

1983


4,721

6,837

307

27

3,317

6,039

2,342

23,590

20.0

29.0

1.3

0.1

14.1

25.6

9.9

100.0

1984


5,197

7,304

375

-

5,568

6,920

6,378

31,742

16.4

23.0

1.2

-

17.5

21.8

20.1

100.0

1985


5,511

7,490

237

-

6,529

6,310

8,896

34,973

15.8

21.4

0.7

-

18.7

18.0

25.4

100.0

66

1



Table 22.

Flow of Transactions in the General Resources Account and Resulting Stocks, 1979-85(In millions of SDRs)


Type of Transaction 1979 1980 1981 1982 1983

Outstanding borrowingsIn connection with oil facility 4,257 2,474Under General Arrangements to Borrow 777 777Supplementary financing facility — 502Under policy on enlarged access — —

Holdings of the General Resources Accountat end of yearUsable currencies1 8,800 10,600SDRs 1,290 1,407Gold2 4,055 3,636

Reserve tranche positions of membersat end of year 8,310 8,380

1,528 526 18777 777 777

2,018 4,112 6,037— 1,358 4,120

23,0005,4453,620

13,125

17,0005,4563,620

15,621

14,4004,3353,620

20,592

1984

6,9156,876

32,9006,4373,620

27,415

1985

Total purchasesReserve trancheCredit tranchesBuffer stock financing facilityCompensatory financing facilityExtended Fund facility

Total repurchases

Outstanding Fund credit

3,7202,480

48548

465242

4,859

8,873

2,433222

1,10626

863216

3,776

8,038

4,860474

2,682

784920

2,853

9,545

8,0411,0802,748

1,6352,578

2,010

14,802

11,3921,1343,703

3523,7402,463

1,555

23,590

11,5181,3544,164

1021,1804,718

2,018

31,742

6,289229

2,768

1,2482,044

2,730

34,973

6,2397,964

37,3004,6163,620

28,290

1 "Usable currencies" are those that are available to the Fund for net sales through the operational budget, except for those currencies held by the Fund in excessof quota. Since the Second Amendment became effective on April 1, 1978, the criterion for including currencies for net sales is that the members concerned havea balance of payments and reserve position that the Fund considers "sufficiently strong" for that purpose.

2 Valued at SDR 35 a fine ounce (0.888671 gram of fine gold per SDR).

TRANSACTIONS AND OPERATIONS INTHE GENERAL RESOURCES ACCOUNT

The rate of increase of Fund credit declined during1984/85, after rising steadily since 1978/79. Purchases(excluding those in the reserve tranche1) totaledSDR 6.1 billion in 1984/85, a decline of just over 41percent from their peaks of about SDR 10 billion ineach of the two preceding years (see Table 22). Allpurchases were made by developing countries. Thelargest amount was in the credit tranches (SDR 2,768million), followed by purchases under the extendedFund facility (SDR 2,044 million) and under thecompensatory financing facility (SDR 1,248 million).While the last of the three amounts was slightly higherthan in the previous year, credit tranche purchasesdeclined by one third and those under the extended

1 A member has a reserve tranche position in the Fund to the extentthat the Fund's holdings of the member's currency in the GeneralResources Account, after deducting holdings of the member's currencyresulting from all other purchases (i.e., in the credit tranches, underthe extended Fund facility, and under the special facilities) are lessthan its quota. Reserve tranche purchases represent a use of members'own reserves held in the form of reserve positions in the Fund andtherefore do not constitute use of Fund credit.

Fund facility by more than half. However, at the endof the financial year 1984/85, outstanding purchaseswere substantially higher at SDR 35 billion comparedwith SDR 31.7 billion at April 30, 1984 (seeChart 21).

Total repurchases rose from SDR 2.0 billion in1983/84 to SDR 2.7 billion in 1984/85. The bulk ofthese—SDR 2.0 billion—related to purchases fi-nanced with ordinary resources, while SDR 0.7 billionwas in respect of purchases financed with borrowedresources under the supplementary financing andenlarged access facilities. One third each of totalrepurchases related to purchases in the credit tranchesand under the compensatory financing facility.

On April 30, 1985, 27 stand-by arrangements and3 extended arrangements were in effect for a totalcommitment of SDR 11.7 billion (with an undrawnbalance of SDR 5.5 billion); this compares with 30stand-by and 5 extended arrangements for a totalcommitment of SDR 18.6 billion on April 30, 1984.

RESERVE TRANCHE PURCHASES

Reserve tranche purchases by 17 members in1984/85 amounted to SDR 229.1 million, the lowestamount of such purchases since 1979/80, as against

67


ANNUAL REPORT, 1985

Chart 21.

Use of Fund Resources as at April 30, 1974-85(In billions of SDRs)

purchases of SDR 1.4 billion by 75 members duringthe previous year. The large amount in 1983/84reflected, among other factors, the purchases madeby members to repay loans of SDRs from othermembers to pay the reserve asset portion of theirquota increases under the Eighth General Review.With the exception of New Zealand, all members thatdrew on their reserve tranche positions were devel-oping countries. Four countries—Mexico (SDR 65.0million), Hungary (SDR 38.9 million), New Zealand(SDR 28.5 million), and Peru (SDR 21.2 million)—accounted for more than two thirds of these pur-chases.

CREDIT TRANCHE PURCHASES

Purchases under credit tranche policies declined toSDR 2.8 billion in 1984/85 from a peak of SDR 4.2billion in the previous year (see Table 22). All ofthese purchases were made by 36 developing coun-tries, compared with 43 developing countries in theprevious year. Almost all of these purchases weremade under stand-by arrangements and were fi-nanced in part (SDR 1.2 billion) from the Fund's

ordinary resources, and the balance from borrowedresources under the enlarged access policy. The larg-est amounts purchased were by Korea (SDR 319.8million), Hungary (SDR 297.5 million), Yugoslavia(SDR 280 million), Argentina (SDR 236.5 million),and Chile (SDR 216 million).

New commitments under stand-by arrangementsfor 24 members totaled SDR 3.5 billion in 1984/85,compared with new commitments under 25 arrange-ments for a total of SDR 4.3 billion in 1983/84. Ofthe approved arrangements, 14 were for a period ofone year and involved amounts ranging fromSDR 1.4 million (Dominica) to SDR 162 million(Zai're), while 9 other arrangements were for periodsof 13 months to 21 months and ranged in amountsfrom SDR 54.0 million (Costa Rica) to SDR 1,419million (Argentina). The stand-by arrangement forArgentina was the largest arrangement approved dur-ing the year, followed by those for the Philippines(SDR 615 million), Zambia (SDR 225 million), Ghana(SDR 180 million), and Zaire (SDR 162 million).

Stand-by or extended arrangements with 27 mem-bers either expired or were canceled during the year.As a result, SDR 0.5 billion each of ordinary and

68



borrowed resources were released from committedresources. Only one such arrangement (Zaire), whichexpired in March 1985 with an undrawn balance ofSDR 30 million, was followed by a new one, forSDR 162 million. As of April 30, 1985, the undrawnbalances under stand-by arrangements in effect onthat date amounted to SDR 2.8 billion, includingSDR 1.3 billion under three arrangements that wereinoperative because of members' failure to observerelevant performance criteria.2

EXTENDED FUND FACILITY

The Executive Board reviewed on December 5,19843 the decision on the extended Fund facility,which was established in 19744 to provide medium-term assistance to members to overcome serious struc-tural balance of payments maladjustments. It wasagreed that its provisions remained suitable for deal-ing with balance of payments problems of a structuralcharacter. The Board decided to review further theappropriateness of the facility not later than Decem-ber 31, 1985. No new extended arrangements wereapproved during 1984/85.

Total purchases under extended arrangements dur-ing 1984/85 amounted to SDR 2 billion, comparedwith SDR 4.7 billion in 1983/84 and SDR 2.5 billionin 1982/83. These purchases were financed in equalproportions from ordinary and borrowed resourcesunder the enlarged access policy and were made bythree members: Brazil (SDR 1.1 billion), Malawi(SDR 19 million), and Mexico (SDR 0.9 billion).Two arrangements, with India and the DominicanRepublic, were canceled on May 1, 1984 and Janu-ary 17, 1985 with undrawn amounts of SDR 1.1billion and SDR 247.5 million, respectively. As ofApril 30, 1985, undrawn balances under the threeextended arrangements in effect on that date amountedto SDR 2.8 billion.

POLICY ON ENLARGED ACCESS

As requested by the Interim Committee, the Ex-ecutive Board reviewed the enlarged access policy5 on

2 The Executive Board reviewed the guidelines governing the rela-tionship between performance criteria and phasing of purchases underFund arrangements and enunciated certain operational guidelines.See Executive Board Decision No. 7925-(85/38), adopted March 8,1985 (reproduced in Appendix II).

3 Executive Board Decision No. 7857-(84/175), adopted Decem-ber 5, 1984 (reproduced in Appendix II).

4 Executive Board Decision No. 4377-(74/114), adopted Septem-ber 13, 1974, as amended by Decisions Nos. 6339-(79/179), adoptedDecember 3, 1979, and 6830-(81/65), adopted April 22, 1981,effective May 1,1981 (Selected Decisions of the International MonetaryFund and Selected Documents, Tenth Issue (Washington, April 30,1983), pages 27-31).

5 The policy on enlarged access to Fund resources, adopted by theExecutive Board on March 11, 1981, enables the Fund to provideassistance to members whose balance of payments deficits are largein relation to their quotas and which need resources in larger amounts

November 16, 1984 and decided to continue it withmodified access limits as follows.6 It was decided thataccess in 1985 would be subject to annual limits of95 or 115 percent of quota (previously 102 or 125percent), three-year limits of 280 or 345 percent ofquota (previously 306 or 375 percent), and cumulativelimits of 408 or 450 percent of quota (previously 408or 500 percent), depending on the seriousness of amember's balance of payments need and the strengthof its adjustment effort. As in the past, the Fund mayapprove arrangements for amounts above these accesslimits in exceptional circumstances. The enlargedaccess policy and the revised access limits will bereviewed before the end of 1985.

COMPENSATORY FINANCING FACILITY

Under this special facility, established in 1963, theFund provides financial assistance to members expe-riencing balance of payments difficulties arising fromtemporary shortfalls in export earnings due to factorslargely beyond their control. The scope of the facilitywas extended, effective May 13, 1981, to provide forcompensation to members to meet the excess in thecost of cereal imports. The Interim Committee, at itsmeeting in September 1984, concluded that the limitsof access operative in 1984 for the compensatory andthe buffer stock financing facilities should be retained.Accordingly, the Executive Board reviewed accesslimits to this facility and in November 1984 decidedto leave unchanged the levels fixed in January 1984,namely, the separate limits of 83 percent of quota onoutstanding purchases relating to export shortfalls orcereal import excesses and the joint limit of 105percent on outstanding purchases relating to bothexport shortfalls and cereal import excesses. Theselimits are subject to review by end-1985. In May1985 the Executive Board reviewed the 1981 decisionrelating to the compensation of the cost of cerealimports, and decided to extend it for a further periodof four years, until May 1989, with provision for areview of the decision by the Executive Board notlater than May 13, 1987.7

Purchases Under Decision Relating toExport Fluctuations

A total of SDR 784 million was purchased by 9members during 1984/85, a decline from purchases

and for longer periods than are available under the regular credittranches.—Executive Board Decision No. 6783-(81/40), adoptedMarch 11, 1981, Selected Decisions, Tenth Issue, pages 40-45, andExecutive Board Decisions Nos. 7599-(84/3) and 7600-(84/3), adoptedJanuary 6, 1984, Selected Decisions, Supplement to Tenth Issue(Washington, March 31, 1984), pages 7-8. See also Executive BoardDecision No. 7710-(84/84), adopted May 30, 1984 (reproduced inAppendix II).

6 Executive Board Decision No. 7841-(84/165), adopted Novem-ber 16, 1984 (reproduced in Appendix II).

7 Executive Board Decision No. 7967-(85/69), adopted May 3,1985 (reproduced in Appendix II).

69


ANNUAL REPORT, 1985

of SDR 1.2 billion by 13 members in the previousyear and from a peak of SDR 3.7 billion in 1982/83,which was associated with the world recession in1981—82. Argentina purchased the largest amount(SDR 275 million), followed by Brazil (SDR 247.9million). Other purchases ranged from SDR 74.7million by Peru to SDR 4.8 million by Fiji.

Purchases Under Decision Relating toCereal Import Costs

In 1984/85, 5 members purchased a total ofSDR 464 million under this decision,8 the largestamount purchased in any year since the decision wasadopted in 1981. Of these 5 members, Ghana andJordan purchased under the decision for the firsttime, Bangladesh and Korea for the second time, andMalawi for the third time. Korea's purchase ofSDR 279.7 million was the largest amount, followedby Ghana (SDR 58.2 million), Jordan (SDR 57.4million), Bangladesh (SDR 55.0 million), and Malawi(SDR 13.8 million). The purchases by Korea and byMalawi were entirely in respect of export shortfalls,whereas the purchase by Bangladesh was entirelyrelated to an excess in cereal import costs. Thepurchases by Ghana and Jordan were related to bothexport shortfalls and excess costs of cereal imports.The total purchases for excess cereal costs in 1984/85were SDR 87 million, while those for the exportshortfalls amounted to SDR 377 million.

BUFFER STOCK FINANCING FACILITY

Assistance under this special facility, established in1969, is available to members with a balance ofpayments need, for financing of their contributions toapproved buffer stock operations of international com-modity agreements that meet the criteria for Fundsupport. As of April 30, 1985, only two of theseagreements were in effect—the Sixth InternationalTin Agreement (1981) and the 1979 InternationalNatural Rubber Agreement—but no purchases weremade in connection with either of them during 1984/85. The total outstanding purchases of six Fundmembers—Bolivia, Indonesia, Ivory Coast, Malaysia,Sri Lanka, and Thailand—under the buffer stockfinancing facility amounted to SDR 236.9 million (0.7percent of outstanding Fund credit). With the expi-ration of the 1977 International Sugar Agreement onDecember 31, 1984, the special stocks accumulatedby exporting members of the Agreement were releasedfrom the control of the International Sugar Organi-zation. Consequently, purchases outstanding under

this facility in respect of this Agreement, totalingSDR 128 million by six Fund members—Brazil, theDominican Republic, Malawi, Mauritius, Swaziland,and Zimbabwe—became subject to an expectation ofearly repurchase. With the completion of these repur-chases by the end of March 1985, the Fund's opera-tions under the facility with respect to the 1977International Sugar Agreement were concluded.

The Executive Board reviewed the access limitsunder the buffer stock financing facility on Novem-ber 16, 1984 and decided to retain the access limit of45 percent of quota fixed in January 1984. This limitwill be reviewed before the end of 1985.

REPURCHASES

During 1984/85 repurchases totaled SDR 2,730million, compared with SDR 2,018 million in 1983/84 (see Appendix I, Table 1.6). The bulk of totalrepurchases (76 percent), as in the preceding year(89 percent), was in respect of purchases financedfrom ordinary resources, and the remainder (24 per-cent) related to purchases financed with borrowedresources. Of total repurchases, about 66 percent wasevenly divided between purchases in the credit tranches,mostly under stand-by arrangements, and under thecompensatory financing facility. Repurchases in re-spect of purchases under the supplementary financingfacility9 amounted to about 23 percent of the total,while the remainder (77 percent) was mostly inrespect of purchases under the buffer stock financingfacility and under the extended Fund facility. Twomembers, Malaysia and Papua New Guinea, repur-chased a total of SDR 79 million (3 percent) inaccordance with the guidelines for early repurchase,under which members are expected to repurchasecalculated amounts in advance of the normal scheduleif their balance of payments and reserve positionshave improved.10 One member, Indonesia, opted, inaccordance with Executive Board Decision No. 6172-(79/101), to reduce the Fund's holdings of its currencythrough the sale of Indonesian rupiah by the Fundduring January 1985 rather than through early re-purchase.

FUND LIQUIDITY

The Fund's liquidity position is reviewed regularlyby the Executive Board taking into account all rele-vant factors, particularly the need to maintain the

8 For a period of three years from the date of a member's first requestfor a purchase under this Decision (No. 6860-(81/81), adoptedMay 13, 1981, any purchases by the member in respect of its exportshortfalls should be made under this decision instead of under ExecutiveBoard Decision No. 6224-(79/135)/ adopted August 2, 1979, relatingto compensatory financing of export fluctuations, Selected Decisions,Tenth Issue, pages 65-70 and 61-64, respectively.

9 The supplementary financing facility was established in August1977 to provide additional financing arrangements, in conjunctionwith the use of the Fund's ordinary resources, requested before Febru-ary 22, 1982. For details, see Annual Report of the Executive Boardfor the Financial Year Ended April 30, 7984 (Washington: InternationalMonetary Fund, 1984), pages 77-78.

10 Executive Board Decisions Nos. 5704-(78/39), adoptedMarch 22, 1978, effective April 1, 1978, and 6172-(79/101), adoptedJune 28, 1979, Selected Decisions, Tenth Issue, pages 101-105.

70



liquidity of members' reserve positions and loan claimson the Fund, and the Fund's ability to providefinancing in support of its members' adjustment pol-icies. The Fund needs to have adequate ordinary andborrowed resources both to meet possible demandsfor encashment of reserve tranche positions or credi-tors' claims (all of which are encashable on represen-tation of balance of payments need) and to coverexisting and foreseeable demands for the use of itsresources.

The Fund's ordinary resources that are availablefor use consist of usable currencies and SDKs held inthe General Resources Account.11 Ordinary resourcesare supplemented as and when necessary by borrowedresources. Usable currencies are those issued by mem-bers whose balance of payments and gross reservepositions are considered by the Executive Board tobe sufficiently strong for their currencies to be soldby the Fund through its operational budget to financeother members' purchases in a particular financialquarter. The usability of a currency in a particularquarter depends on whether the issuing member'sexternal position is sufficiently strong during thatperiod. The list of usable currencies can and doeschange every quarter with changes in members' ex-ternal payments and reserve positions. The SDKsheld by the Fund in the General Resources Accountcan be readily used to finance members' purchases.

The Executive Board in its latest review in April1985 noted that the Fund's liquidity position hadimproved owing to a variety of factors, including therecovery in world economic activity, the improvementin the current account and reserve positions of severalmember countries, and the inflow of usable resourcesthrough repurchases. The number of usable curren-cies also increased during the financial year from 23at the end of May 1984 to 28 at the end of May 1985,reflecting an improvement in the external positions ofmembers and the consequent addition of their curren-cies to the operational budgets. The list of usablecurrencies as of April 30, 1985 included those of allbut three—smaller—industrial members, as well asthose of several developing members. Nearly half ofthe total amount of usable currencies during thefinancial year was accounted for by the five currenciesmaking up the SDR basket (deutsche mark, Frenchfranc, Japanese yen, pound sterling, and U.S. dollar).

The Fund's total holdings of usable currencies andSDRs on April 30, 1985, at SDR 41.9 billion, wereabove the level of a year earlier (SDR 39.3 billion).Liquid claims on the Fund as of April 30, 1985amounted to SDR 42.5 billion, consisting of outstand-ing borrowing of SDR 14.2 billion and reserve tranchepositions of SDR 28.3 billion. The bulk of these liquidclaims were held by members in strong balance of

payments and reserve positions with no immediateneed to encash claims. In addition to these claims,undrawn balances under arrangements amounted toSDR 5.5 billion.

The Executive Board has reviewed the policy onsales of SDRs through the operational budgets in eachof the last five years: in March 1981, May 1982, May1983, February 1984, and March 1985. The followingfactors have been taken into account in determiningthe target range of the Fund's SDR holdings: (i) theFund's actual and prospective holdings of SDRs inrelation to total allocations of SDRs; (ii) the Fund'sliquidity; (iii) the Fund's operational need to holdSDRs; and (iv) the Fund's financial position. As aresult of the first three reviews, sales of SDRs follow-ing the coming into effect of the Seventh GeneralReview of Quotas in November 1980 were guided bythe aim of progressively reducing the Fund's SDRholdings in the General Resources Account fromSDR 5.6 billion in early 1981 to approximatelySDR 1.5 billion by the end of 1983.

Following the coming into effect of the EighthGeneral Review of Quotas, the Fund's holdings ofSDRs rose to SDR 6.4 billion by April 30, 1984,largely as a consequence of SDR payments by mem-bers for the reserve asset portion of their quotaincreases. In February 1984 the Executive Boarddecided that the Fund should be guided by the aimof reducing the Fund's SDR holdings to a level ofapproximately SDR 4 billion by May 31, 1985.12

Accordingly, the Fund made more use of SDRs rela-tive to currencies available in the operational budgetfor transfers. As a result, the Fund's SDR holdingsdeclined to SDR 4.6 billion as of April 30, 1985, or22 percent of the net cumulative allocation (SDR 21billion), compared with 30 percent a year earlier. InMarch 1985, the Executive Board decided to reducethe Fund's holdings of SDRs further to a level ofapproximately SDR 2.5 billion by May 31, 1986,consistent with the Fund's liquidity and operationalrequirements.13 The Executive Board will determine,prior to April 30, 1986, whether and to what extentthe Fund's SDR holdings should be further reduced.

BORROWING

Borrowing provides an important temporary sup-plement to the Fund's ordinary resources. Under thecurrent guidelines for the Fund's borrowing, its out-standing borrowing plus unused credit lines cannotexceed the range of 50 to 60 percent of the total ofFund quotas.14 During the financial year 1984/85 the

11 The Fund's holdings of gold (103.440 million ounces) are notincluded in the category of readily usable resources. The sale of thisgold for any purpose requires an 85 percent majority of the totalvoting power of the Fund.

12 Executive Board Decision No. 7626-(84/23) S, adopted Febru-ary 13, 1984, Selected Decisions, Supplement to Tenth Issue,page 19.

13 Executive Board Decision No. 7941-(85/50) S, adoptedMarch 29, 1985 (reproduced in Appendix II).

14 Executive Board Decision No. 7589-(83/181), adopted Decem-ber 23, 1983, Selected Decisions, Supplement to Tenth Issue,pages 29-30.

71


ANNUAL REPORT, 1985

Fund borrowed a total of SDR 2,152 million (34.2percent of all purchases in the same period), raisingthe total outstanding borrowing of the Fund fromSDR 13,791 million to SDR 14,203 million, aftertaking account of repayments of earlier borrowings.As of April 30, 1985, the Fund's total outstandingborrowing (SDR 14.2 billion) and unused lines ofcredit (SDR 18.5 billion) were well below the limitsunder the guidelines. Together, they amounted to 37percent of quotas, compared with 38.7 percent ofquotas on April 30, 1984. The guidelines for borrow-ing will be reviewed in the event of major develop-ments, including any significant change in the Gen-eral Arrangements to Borrow or associatedarrangements and, in any event, when the Board ofGovernors has completed the Ninth General Reviewof Quotas. To date, all borrowing by the Fund hasbeen from official sources, which include its members,Switzerland, and central banks and other officialinstitutions in these countries. The Fund's currentborrowing arrangements are described below.

GENERAL ARRANGEMENTS TO BORROWAND ASSOCIATED ARRANGEMENTS

The General Arrangements to Borrow (GAB) wereoriginally established between the Fund and ten ofits main industrial member countries (the Group ofTen) in 1962 for four years. They were designed toprovide supplementary resources to the Fund, if needed,to forestall or cope with an impairment of the inter-national monetary system. Switzerland became asso-ciated with the GAB in 1964. Since their inception

Table 23.

Lenders and Amounts of Credit Arrangements Underthe General Arrangements to Borrow and Associated

Arrangements

Lender Amount

United StatesDeutsche BundesbankJapanFranceUnited KingdomItalyCanadaNetherlandsBelgiumSveriges RiksbankSwiss National Bank

Total

Credit arrangements associated with theGeneral Arrangements to Borrow:

Saudi Arabia

Total General Arrangements to Borrowand associated lines of credit

(In SDKs)

4,250,000,0002,380,000,0002,125,000,0001,700,000,0001,700,000,0001,105,000,000

892,500,000850,000,000595,000,000382,500,000

1,020,000,000

17,000,000,000

1,500,000,000

18,500,000,000

the Arrangements have been activated on nine occa-sions. No calls have been made on the GAB andassociated arrangements since the last borrowing bythe Fund in 1978 to help finance a reserve tranchepurchase of SDR 2,275 million by the United States.This borrowing was fully repaid in November 1983.

The Arrangements have been periodically reviewedand renewed with some modifications. On Janu-ary 18, 1983 the ministers and governors of the Groupof Ten agreed on major revisions and a substantialenlargement of the GAB from SDR 6.4 billion toSDR 17.0 billion which were approved by the Exec-utive Board on February 24, 1983 and came intoeffect on December 26, 1983.15 The Swiss NationalBank became a participant in the GAB on April 10,1984. Under the revised GAB the Fund can enterinto associated borrowing agreements. One suchagreement was concluded with Saudi Arabia, forSDR 1.5 billion, which came into effect at the sametime as the revised GAB (see Table 23).

The revised GAB decision will be in effect for fiveyears from December 26, 1983 subject to furtherreview and renewal. The Fund and the participantsin the GAB will review the functioning of the decisionwhen considering renewal of the Arrangements.

SUPPLEMENTARY FINANCING FACILITY

Under the borrowing arrangements concluded with13 member countries and the Swiss National Bank16

in order to finance this facility, none of the fundswere to be committed after February 22, 1982, or tobe disbursed after February 22, 1984. The Fundborrowed a total of SDR 7.2 billion under thesearrangements over the period of five years followingthe activation of the facility (see Appendix I, Ta-ble 1.8). An amount of SDR 0.6 billion remainedundrawn at the expiration of the agreements, of whichSDR 0.3 billion had not been called because thebalance of payments and reserve positions of somelenders were not sufficiently strong. The repaymentof borrowing under this facility, which began inNovember 1982, amounted to SDR 675.5 millionduring 1984/85, bringing total repayments toSDR 992.9 million by April 30, 1985. The outstandingborrowings between now and the final maturity dateof April 30, 1991 amount to SDR 6.2 billion.

BORROWING TO FINANCEENLARGED ACCESS

Medium-Term Borrowing

The Fund's policy on enlarged access became op-erational with the signing of a medium-term borrow-

15 Executive Board Decision No. 7337-(83/37), adopted Febru-ary 24, 1983, Selected Decisions, Tenth Issue, pages 131-45.

16 Executive Board Decision No. 5508-(77/127), adopted Au-gust 29, 1977, Selected Decisions, Tenth Issue, pages 33-38.

72



ing agreement for SDR 8.0 billion with the SaudiArabian Monetary Agency (SAMA) in May 1981.The Fund had borrowed SDR 6.3 billion under theagreement through April 30, 1984, and borrowed afurther SDR 300 million in 1984/85. The outstandingbalance as of April 30, 1985 was therefore SDR 6.6billion. The commitment period under the agreementwith SAMA expires on May 6, 1987.

Short-Term Borrowing

Under agreements concluded in 1981, the centralbanks or official agencies of 18 countries agreed tomake available to the Fund the equivalent ofSDR 1.3 billion over a commitment period of twoyears. Of that amount, SDR 675 million was providedunder a borrowing agreement with the Bank forInternational Settlements. At the end of the financialyear 1983/84, the amount of SDR 1.3 billion hadbeen fully utilized, except for a very small amountthat was not drawn before an agreement expired.

At the end of April 1984 the Fund concluded fournew short-term borrowing agreements for a total ofSDR 6 billion with SAMA, the Bank for InternationalSettlements (BIS), Japan, and the National Bank ofBelgium. The agreement with SAMA is in the formof a supplement to its 1981 borrowing agreement withthe Fund. The four new borrowing agreements arebroadly parallel with respect to their principal termsand conditions, with variations reflecting the lenders'preferences and the Fund's projected requirementsfor utilizing the resources available under the respec-tive agreements. The drawdown period under threeof the agreements was for one year, beginning onApril 30, 1984 for the BIS and Japan and onJune 30, 1984 for Belgium. These periods were ex-tended by a further eight months effective April 26,1985, in the light of delays in purchases under severalmajor Fund arrangements. The amount borrowedunder these agreements in 1984/85 was SDR 1,251.6million. Drawings on the agreement with SAMA maybe made by the Fund beginning in 1985 and extendingthrough May 6, 1987. The final maturity of eachdrawing under the borrowing arrangements will betwo and one-half years after the date of the drawing.

BORROWED RESOURCES SUSPENSEACCOUNTS

The borrowed resources suspense accounts holdfunds borrowed under the policy on enlarged access,pending their use in purchases, and funds received inrepurchases pending repayments to lenders. Theamounts are invested in SDR-denominated assets atprevailing short-term SDR interest rates in order toprotect their capital value in terms of the SDR, andto generate income to offset the borrowing cost.During 1984/85 the assets in the accounts consistedentirely of deposits with the Bank for International

Settlements, amounting to SDR 203.4 million as ofApril 30, 1985.

NET INCOME POSITION, CHARGES, ANDREMUNERATION

The Fund aims at achieving positive income eachyear, both to cover its expenses and to add to itsreserves, while at the same time retaining a conces-sional rate of charge on the use of its ordinaryresources and paying appropriate remuneration onthe use of members' currencies. To this end, the Fundreviews its income position at mid-year and at theend of the financial year and determines the rate ofcharge in the light of projected developments in thecost and use of Fund resources.

INCOME, EXPENSE, AND RESERVES

Notwithstanding these general policy objectives,the Fund experienced a net deficit, amounting toSDR 30 million, in the financial year that ended onApril 30, 1985. The deficit compares with a netsurplus of SDR 73 million in 1983/84 and was thefirst excess of expenditures over income since 1976/77.The deficit was the consequence of a decision takenby the Executive Board in March 1985 not to includein current income the charges receivable from mem-bers that are overdue by six months or more inmeeting any financial obligation to the Fund unlessthe member has remained current in paying chargesas they fall due.17

This change in accounting practice was adopted inview of the increase in payments delays during theyear which resulted in an amount of overdue chargesthat exceeded the Fund's net income target. Since theaccounting change was made only toward the end ofthe financial year, the resulting reduction in incomewas not offset by other measures, such as an increasein the rate of charge. Thus, the Fund recorded thedeficit referred to earlier. Charges from members withprotracted overdue obligations to the Fund, whichare now treated as deferred income and will beconsidered current income only when actually re-ceived, amounted to SDR 56.4 million in 1984/85;without their exclusion from accrued income, a netincome of SDR 26.4 million would have been re-corded. The possible effect on the Fund's income ofthe failure of members to pay charges on time is takeninto account in the projection of the Fund's incomeposition so as to reduce the risk that payments delayswill in the future lead to additional deficits in theFund's net income position.

The overall position in regard to overdue financialobligations to the Fund was as follows. On April 30,1985 four members were overdue for six months ormore on their financial obligations to the Fund in the

17 Executive Board Decisions Nos. 7930-(85/41) and 7931-(85/41),adopted March 13, 1985 (reproduced in Appendix II).

73


ANNUAL REPORT, 1985

General Department and one in the SDR Depart-ment. Two members were also overdue for six monthsor more in repayments of interest and principal onTrust Fund loans. The total overdue obligations(inclusive of those overdue for six months or more)of these members (i.e., those with obligations overduefor six months or more) amounted to SDR 176.3million on April 30, 1985, compared with SDR 43.6million due from three members to the General De-partment at the end of April 1984.18

Besides the change in the accounting treatment ofcharges receivable from members with protractedarrears, the increase in overdue financial obligationsled the Executive Board to take a number of relateddecisions as part of the overall policy and procedureswith respect to members in protracted arrears to theFund. One element in this policy is the suspension ofa member's right to purchase under stand-by andextended agreements when it has overdue financialobligations to the Fund.19 Another element relates tothe issue of a member's eligibility to use the Fund'sgeneral resources when in arrears and of relatedpublicity. Thus, pursuant to Article XXVI, Sec-tion 2(0), two members were declared ineligible touse the Fund's general resources—Viet Nam onJanuary 15, 1985 and Guyana on May 15, 1985. Onthe dates of those declarations, the total overduefinancial obligations of Viet Nam and Guyana to theFund amounted to SDR 25.2 million and SDR 18.7million, respectively. The Executive Board also enun-ciated in June 1985 the policy governing publicityupon the declaration of a member's ineligibility touse the Fund's general resources.20

In view of the uncertain impact of overdue financialobligations on the Fund's financial position and tak-ing account of the income position for 1984/85, theExecutive Board decided in May 1985 to raise thenet income target from 3 percent to 5 percent ofreserves at the beginning of a financial year. Thedisposition of any income in excess of the new target—to augment reserves, to increase the rate of remuner-ation or to reduce the rate of charge—would be basedupon further reviews of the Fund's income position.

The deficit of SDR 30 million for 1984/85 wascharged to the Fund's Special Reserve, which wasestablished in 1957. This reduced the Fund's total

18 The size and composition of overdue obligations of members tothe Fund are given in the notes to the Financial Statements relatingto the General Department, the SDR Department, and the Trust Fund,respectively (Appendix VIII).

19 Executive Board Decision No. 7908-(85/26), adopted Febru-ary 20,1985; and amendment of Rule G-4, Decision No. 7909-(85/26),adopted February 20, 1985 (reproduced in Appendix II).

20 Executive Board Decision No. 7999-(85/90), adopted June 5,1985 (reproduced in Appendix II). Effective following the publicationof the Annual Report for 1985, the Fund will issue a press releaseupon declaration of ineligibility and thereafter upon restoration of themember's eligibility. The information contained in such press releaseswill be published, where pertinent, in the Annual Report for the yearconcerned.

reserves (i.e., Special Reserve and General Reserve)from SDR 1,074 million on April 30, 1984 toSDR 1,044 million as of April 30, 1985. This repre-sented the first decline (amounting to 2.8 percent) inthe Fund's total reserves since the end of 1976/77.Between the end of 1976/77 and 1983/84 reserves hadgrown at a compound annual average rate of 6.6percent.

Income from periodic charges increased bySDR 605.4 million from SDR 2,363.8 million in 1983/84 to SDR 2,969.2 million in 1984/85. This reflectednot only an increase in the rate of charge from 6.6percent per annum to 7 percent per annum fromMay 1, 1984 but also an increase in average balancessubject to charge (SDR 34,046 million in 1984/85,compared with SDR 27,962 million in 1983/84). Theweighted average rate of charge on members' use ofFund resources in 1984/85, including the use ofordinary and borrowed resources but after takingaccount of subsidy payments (on use of borrowedresources) made to eligible members, was 8.62 per-cent.

Income from service charges decreased bySDR 20.5 million, from SDR 50.8 million in 1983/84to SDR 30.3 million in 1984/85, because the expan-sion in the use of the Fund's resources was less thanthat of the preceding years.

The Fund's average holdings of SDRs were higherin 1984/85 than in 1983/84. Consequently, the interestearned by the Fund in 1984/85 on its SDR holdings(SDR 478.3 million) was SDR 106.7 million higherthan in the previous year (SDR 371.6 million).

The operational expense of the Fund, related toremuneration on the use of creditor currencies andinterest on borrowing, increased by SDR 761.5 millionfrom SDR 2,526.3 million in the previous year toSDR 3,287.7 million in 1984/85. This reflected anincrease in remuneration payments (SDR 434.9 mil-lion) and in interest costs (SDR 326.6 million) overthe previous year. The remuneration payments re-flected the higher average rate of remuneration (7.77percent in 1984/85, compared with 7.39 percent in1983/84). This in turn reflected the rise in the averageSDR interest rate (8.81 percent in 1984/85, comparedwith 8.70 percent in 1983/84) and the increases inthe remuneration coefficient that became effectiveduring the year (explained below). The rise in re-muneration payments also reflected the expansion ofremunerated positions resulting from the larger fi-nancing provided to members from the Fund's ordi-nary resources. Remuneration payments totalingSDR 1,721.2 million were made to 62 member coun-tries, compared with payments of SDR 1,286.3 millionto 70 member countries in 1983/84.

The Fund's interest costs, net of income fromtemporary investments, increased in 1984/85 toSDR 1,566.5 million from SDR 1,239.8 million in1983/84. The Fund's total outstanding borrowingamounted to SDR 14,203 million on April 30, 1985(SDR 13,791 on April 30, 1984). Over the year

74



1984/85 the rate of interest paid by the Fund on itsborrowing averaged 11.14 percent per annum, com-pared with the average of 10.87 percent per annumin 1983/84, when temporary investments were higherand there was also, up to November 1983, a balanceof GAB borrowing at less than a market-related rateof interest.

Net administrative expenses of the Fund amountedto SDR 224.2 million in 1984/85, compared withSDR 192.8 million in 1983/84. A comparative state-ment of the Fund's income and expense is shown inAppendix VII and details of administrative expensesare shown in Appendix VI.

CHARGES

Since May 1, 1981, the Executive Board has deter-mined a single rate of charge at the beginning of eachfinancial year to be applied to members' use of theFund's ordinary resources, whereas previously thecharges were differentiated by category and maturityof transactions under different facilities. The deter-mination of the rate of charge is made on the basis ofestimated income and expense for the coming yearand the target amount of net income. The ExecutiveBoard determined that the rate of charge, effectiveMay 1, 1985, would remain at 7 percent per annumas in the previous financial year.21 The revised netincome target was regarded as being compatible withthe maintenance of the prevailing rate of charge.

Members also make use of Fund resources that arefinanced through Fund borrowing under the supple-mentary financing facility and the policy on enlargedaccess. Charges applicable to holdings financed withthese resources reflect the Fund's borrowing costsplus a margin, which continued to be determined in1984/85 on the same basis as in previous financialyears. For purchases financed with borrowing underthe supplementary financing facility, the rate of chargeis equal to the rate of interest paid by the Fund, plus0.2 percent for the first three and one-half years apurchase is outstanding and plus 0.325 percent afterthree and one-half years. The rate of charge forpurchases under the enlarged access policy is the netcost of borrowing by the Fund plus 0.2 percent perannum. The average rates of interest per annum onoutstanding Fund borrowing for the year endedApril 30, 1985 were 11.85 percent (supplementaryfinancing facility) and 10.48 percent (enlarged accesspolicy).

REMUNERATION

A remunerated reserve tranche position existswhenever the Fund has used a member's currency toan extent that reduces the holdings of that member'scurrency to a level which is less than the "norm" for

the member. The norm varies from member to mem-ber; for those that were members of the Fund at thetime the Second Amendment of the Articles of Agree-ment entered into effect (April 1, 1978) it is equal tothe sum of 75 percent of their quota at April 1, 1978plus any increases in their quota after that date. Fora member admitted to membership after April 1,1978, the norm is calculated as the weighted averageof the norms of all the other members on the date ofmembership plus all increases in the member's quotapaid subsequent to the date on which the memberjoined the Fund. At the end of April 1985, the averagenorm for all members was 91.73 percent; the normsfor individual members ranged between 88.49 percentand 98.95 percent.22

In January 1984 the Executive Board decided thatthe remuneration coefficient (i.e., the ratio of the rateof remuneration to the SDR interest rate) was to beraised on May 1 in each of the years 1984, 1985, and1986 to specified levels,23 with provision for additionaladjustments depending on developments in the SDRinterest rate. Beginning on May 1, 1984, the remu-neration coefficient was raised from 85 percent to88.33 percent of the SDR interest rate. On Febru-ary 1, 1985, this ratio was increased to 90 percent ofthe SDR interest rate as called for by the agreedformula in the light of developments in the SDRinterest rate. The coefficient was raised again onMay 1, 1985 to 91.66 percent of the SDR interest rateas provided for in the decision. This coefficient willrise on May 1, 1986 to 94.99 percent of the SDRinterest rate. The rate of remuneration will be re-viewed further between May 1, 1986 and April 30,1987, taking account of all relevant factors, includingthe SDR interest rate and the rate of charge.

The rate of remuneration averaged 7.77 percentper annum during the financial year 1984/85. TheSDR rates of interest and the rates of remunerationapplicable in 1984/85 are given in Table 24. (See alsoChart 22.)

SDR DEPARTMENT

The total amount of SDRs remained at SDR 21.4billion, as there have been no allocations since Janu-ary 1, 1981. The volume of activity in the SDRDepartment declined in 1984/85 to SDR 15.7 billion(2,361 transfers) from the record level of SDR 22.7billion (2,301 transfers) in 1983/84 (see Table 25).However, the figures for 1983/84 largely reflected theuse of SDRs by a large number of participants to paythe reserve asset component of their quota increasesubscriptions, pursuant to the Eighth General Reviewof Quotas, and associated transfers. If the transfers

21 Executive Board Decision No. 7998-(85/90)/ adopted June 5,1985 (reproduced in Appendix II).

22 Except for Democratic Kampuchea, whose norm is 75 percentof quota because there has been no change in its quota sinceApril 1, 1978.

23 Executive Board Decision No. 7603-(84/2), adopted January 6,1984. For details see Annual Report, 7984, pages 83, 129-30.

75


ANNUAL REPORT, 1985

Table 24.SDR Interest Rate and Rate of Remuneration

Period Beginning

1984

May 11

May 7May 14May 21May 28

June 4June 11June 18June 25

July 2July 9July 16July 23July 30

August 6August 1 3August 20August 27

September 3September 10September 1 7September 24

October 1October 8October 1 5October 22October 29

November 5November 12November 19November 26

December 3December 10December 1 7December 24December 31

1985

January 7January 14January 21January 28

February 12

February 4February 1 1February 18February 25

March 4March 1 1March 18March 25

April 1April 8April 15April 22April 29

SDRInterest Rate

8.91

9.03

9.209.07

8.99

9.089.10

9.1.

9.09

9.14

9.24

9.35

9.489.56

9.67

9.50

9.399.47

9.56

9.54

9.41

9.36

9.33

9.309.168.97

8.78

8.558.34

8.308.21

8.21

8.158.02

7.817.79

7.82

7.83

7.967.92

7.928.30

8.438.458.60

8.788.778.658.64

8.41

8.388.278.07

8.09

Rate ofRemuneration

7.87

7.988.13

8.017.94

8.028.04

8.058.03

8.07

8.16

8.268.37

8.44

8.54

8.39

8.298.36

8.44

8.438.318.27

8.24

8.21

8.097.92

7.76

7.557.37

7.337.25

7.25

7.20

7.086.906.88

6.916.927.03

7.00

7.137.477.59

7.617.74

7.907.897.797.78

7.57

7.54

7.44

7.267.28

of SDKs associated with quota payments are deductedfrom the totals, the amount and number of transfersin 1984/85 represented increases over the previousyear of 28 percent and 17 percent, respectively. Consequent upon the decline of SDR 1.8 billion in theGeneral Resources Account's holdings of SDRs in1984/85 (explained earlier), the holdings of partici-pants and prescribed holders increased correspond-ingly. The pattern of holdings among industrial anddeveloping countries at the end of April 1985 re-mained broadly similar to that of end-April 1984.

As in 1983/84, the volume of transactions by agree-ment exceeded that of transactions with designation.In transactions by agreement, participants and/orprescribed holders transfer SDRs by mutual agree-ment in exchange for any currency for which theFund has established a representative exchange rate,without any requirement of balance of payments need.

Since May 1, 1981 the SDR rate of interest hasbeen maintained at 100 percent of the combinedmarket rate of interest.24 Since August 1983 it hasbeen determined weekly, instead of quarterly (aspreviously), to reflect movements in the combinedmarket interest rate more closely.

PRESCRIBED HOLDERS OF SDRs

There was no addition during the year to the listof 14 institutions that, to date, have been prescribedby the Fund as holders of SDRS.25 Prescribed holderscannot receive allocations of SDRs nor use SDRs intransactions with designation, but they can acquireand use SDRs in transactions and operations withparticipants in the SDR Department (all Fund mem-bers) and other prescribed holders under the sameterms and conditions as participants. During the year,transfers involving prescribed holders amounted toSDR 235 million, compared with SDR 206 million inthe preceding year. These transfers comprisedSDR 103 million in transactions by agreement,SDR 52 million in loans, SDR 77 million in settlement

1 The week began April 30, 1984. However, the first day of the financialyear was May 1, 1984, at which time the remuneration coefficient increasedfrom 85 percent to 88.33 percent of the SDR interest rate.

2 The remuneration coefficient increased from 88.33 percent to 90 percentof the SDR interest rate as from the first day of the last financial quarter of thefinancial year 1985.

24 The combined market interest rate is the weighted average of the

market yields on the following short-term money market instruments:

three-month U.S. Treasury bills; three-month interbank deposits in the

Federal Republic of Germany; three-month interbank money against

private paper in France; three-month U.K. Treasury bills; and the

discount on two-month (private) bills in Japan.25 The prescribed holders comprise four central banks; three inter-

governmental monetary institutions; and seven development institu-

tions: the Andean Reserve Fund, Bogota; the Arab Monetary Fund,

Abu Dhabi; the Asian Development Bank, Manila; the Bank for Central

African States, Yaounde; the Bank for International Settlements, Basle;

the Central Bank for West African States, Dakar; the East African

Development Bank, Kampala; the Eastern Caribbean Central Bank,

Basseterre, St. Christopher and Nevis; the International Bank for

Reconstruction and Development, Washington, D.C.; the Interna-

tional Development Association, Washington, D.C.; the International

Fund for Agricultural Development, Rome; the Islamic Development

Bank, Jeddah; the Nordic Investment Bank, Helsinki; and the Swiss

National Bank, Zurich.

76



Chart 22.

SDR Interest Rate, Rate of Remuneration, and Short-TermInterest Rates, July 1974-June 19851

(In percent per annum)

1 Data are monthly averages. Up to December 1980, short-term domestic interest rates are the yield on three-month treasury bills for the United Kingdom and theUnited States, the rate on three-month interbank deposits for France and the Federal Republic of Germany, and the call money market rate (unconditional) for Japan.From January 1981, the yield on U.S. Treasury bills was converted to a coupon equivalent basis, and the discount rate on two-month (private) bills was used forJapan. From March 1981, the basis for the interbank rates for France and the Federal Republic of Germany was converted from a 360-day year to a 365-day year.Since August 1, 1983, the SDR interest rate and the rate of remuneration have been fixed weekly.

of financial obligations, and SDR 3 million in interestreceipts on their SDR holdings. At the end of April1985, seven institutions held SDR 18 million, com-pared with holdings of SDR 37 million at the end ofApril 1984. The highest level of their end-of-monthholdings was SDR 35 million in January 1985, andthe lowest was SDR 17 million in February 1985.

TRANSACTIONS ANDOPERATIONS IN SDRs

Transactions with Designation

The designation mechanism ensures that partici-pants can obtain currency against SDRs if they havea balance of payments need. In 1984/85, 34 partici-

pants used SDR 2,152 million in transactions withdesignation to obtain currencies from 26 participantsdesignated by the Fund. Of this total, SDR 2,055million represented the immediate use of SDRs ac-quired from the Fund's General Resources Accountin purchases, and the remainder represented the useof participants' own SDR holdings. About 79 percentof SDRs received in purchases from the Fund wasused in transactions with designation. Of the 26countries designated to provide currency in exchangefor SDRs, 16 industrial countries received SDR 2,064million and 10 developing countries received SDR 88million. The largest amounts of currency were pro-vided by the United Kingdom, Canada, France, theFederal Republic of Germany, Italy, Australia, andSpain, reflecting the strength of their respective bal-ance of payments and reserve positions during theyear.

77


ANNUAL REPORT, 1985

Table 25.

Transfers of SDRs, January 1, 1970-April 30,1985(In millions of SDRs)

Annual AverageJanuary 1, 1970-

April 30, 1979

Financial Year Ended April 30 TotalJanuary 1, 1970-

1980 1981 1982 1983 1984 1985 April 30, 1985

Transfers among participants andprescribed holders

Transactions with designationFrom own holdings 206From purchases of SDRs from the Fund 145

Transactions by agreement 556Prescribed operations —Net interest on SDRs 45

Total 951

Transfers from participants to GeneralResources Account

Repurchases 327Charges 308Quota payments 24Interest received on General Resources

Account holdings 21Assessment 1_

Total 680

Transfers from General Resources Accountto participants and prescribed holders

Purchases 272Repayments of Fund borrowings 4Interest on Fund borrowings 5In exchange for other member's

currenciesAcquisitions to pay charges 1Acquisitions to make quota payments —

Remuneration 38Reconstitution 196Other 26

Total 542

Total transfers 2,174

General Resources Account holdingsat end of period 1,290

298 5031,074 1,379

362 418

190

821

223

6611,2131,242

158245

9681,7451,281

396273

892,3133,1751,194

188

994 930 838 566557 587 968 1,497

1 5,091 266 83

2662

6572

4442

3922,1686,195

1473

1,283 2,033 2,035 2,41964 161 144 2821 50 143 224

— 341140 219

5 204 13

27

348

23

162

861

20

3,876787202

330

1,573

35

982,0552,706

161326

1,923 2,525 3,520 4,664 6,959 5,345

7172,927

14

6064

1,634 6,875 2,732 2,593 8,905 4,268

1,517 2,837 2,721 3,714 6,803 6,089

5,074 12,237 8,972 10,970 22,667 15,703

1,407 5,445 5,456 4,335 6,437 4,616

4,54011,13214,372

1,9091,862

33,816

7,48911,57911,870

2,39425

33,356

2,595 16,779129 1,352446 1,131

953 1,482— 341

1,952 5,448— 1,85114 355

28,740

95,911

4,616

Transactions by Agreement

The volume of transactions by agreement(SDR 2,706 million) in 1984/85 was slightly belowthe level of the previous year, which was influencedby the acquisition of SDRs by member countries inorder to make the reserve asset component of theirquota subscriptions to the Fund in December 1983pursuant to the Eighth General Review of Quotas. Afeature of 1984/85 was the increase in the number ofcountries that entered into standing arrangements toprovide SDRs in transactions by agreement arrangedby the Fund. Under these arrangements countriesspecify the maximum amount of SDRs they wish tosell, or the minimum level to which they are preparedto allow their SDR holdings to fall, in transactions by

agreement. In some cases they also specify the timeperiod over which the arrangement is to be in effect.Within these guidelines, the Fund arranges transac-tions by agreement between these sellers and otherparticipants and prescribed holders who wish to ac-quire SDRs. Twelve countries provided SDR 1,832million under these arrangements in 1984/85, com-pared with five countries which provided SDR 1,151million in 1983/84.

The main source of demand for SDRs in transac-tions by agreement was from countries needing toacquire SDRs in order to pay net charges in the SDRDepartment or charges on the use of Fund resources.A number of countries also acquired SDRs in orderto make repurchases of Fund drawings or to increasetheir holdings of SDR-denominated assets in antici-

78



pation of prospective repurchase and charge obliga-tions. Eight of these countries entered into specialarrangements with the Fund for the acquisition ofSDKs in 1984/85. In each case, the member author-ized the Fund to arrange acquisitions between stipu-lated dates up to a certain amount. Those providingSDKs were generally participants that did not have abalance of payments need and who are hence notentitled to use SDKs in designation, or prescribedholders, who could not resort to the designationprocess. In other cases the Fund arranged for salesto holders wishing to acquire SDKs by directing tothem participants who would otherwise have trans-ferred SDKs in a transaction with designation. Thesetransactions by agreement in lieu of designationamounted to SDR 237 million in 1984/85.

Additional Uses of SDKs

The Fund permits additional uses of SDKs amongparticipants and prescribed holders.26 There were 40such transfers in 1984/85 for a total amount ofSDR 161 million. All of these transfers took placeunder two prescriptions; namely, those allowing theuse of SDRs in loans and in settlement of financialobligations. Prescribed holders were particularly ac-tive in these types of SDR transfers. They were therecipients of SDRs in 22 of these transfers in anamount of SDR 70 million, or 44 percent of the totalvalue of transfers. They were the users in 11 transferstotaling SDR 59 million, or 36 percent of the totalvalue of transfers. Twenty-one operations, totalingSDR 69 million, represented loan repayments andinterest payments by participants to a regional orga-nization that is a prescribed holder of SDRs and alsouses the SDR as a basis of its unit of account. Thissame prescribed holder made five loans in SDRs fora total of SDR 51 million to three different partici-pants. Other uses included loans to new members toprovide them with the SDRs necessary to make thereserve asset portion of their quota payment (onefrom a participant and one from a prescribed holderthat functions as a regional central bank) and therepayment of those loans. Five transfers, for a totalamount of SDR 7 million, represented loan repay-ments and interest payments by a prescribed holderthat also uses the SDR as its unit of account toparticipants in its area. Three transfers totalingSDR 1.4 million, which represented settlements offinancial obligations arising out of an earlier currencyloan, took place between two participants who do nototherwise maintain banking relationships.

26 These are currently as follows: to use SDRs in the settlement offinancial obligations; to engage in forward operations; to borrow,lend, or pledge SDRs; to use SDRs in swaps; to make donations(grants) of SDRs; and to use SDRs as security for performance offinancial obligations. See Selected Decisions, Tenth Issue, pages 278-88.

Inflows of SDRs

The bulk of the inflows of SDRs to the GeneralResources Account in 1984/85 represented paymentsof charges on the use of Fund resources amountingto SDR 2,927 million. Repurchases that were dis-charged at the member's option in SDRs rather thanin currency amounted to SDR 717 million, comparedwith SDR 392 million in 1983/84. Repurchases dis-charged in SDRs amounted to 25 percent of totalrepurchases, compared with 18 percent in 1983/84.

Outflows of SDRs

SDRs transferred from the General Resources Ac-count to members amounted to SDR 6,089 million,compared with SDR 6,803 million in 1983/84. Themajor outflow was the use of SDR 2,595 million inpurchases, which accounted for 70 percent of totalpurchases financed from the Fund's ordinary re-sources. The substantial transfers of SDRs in pur-chases reflected the objectives, explained earlier, ofreducing the Fund's SDR holdings to approximatelySDR 4 billion by the end of May 1985 and toapproximately SDR 2.5 billion by the end of May1986. The Fund made interest payments in SDRs tofive lenders in 1984/85, in a total amount of SDR 446million, of which SDR 296 million represented intereston outstanding loans under the supplementary fi-nancing facility and SDR 150 million interest onborrowing to finance enlarged access. The Fund alsomade loan repayments in SDRs to seven countriesamounting to SDR 129 million, of which SDR 99million represented repayments of supplementary fi-nancing facility loans.

PATTERN OF HOLDINGS

There was a further increase in the concentrationof SDRs with the industrial countries. On April 30,1985, these countries held 82.5 percent of total SDRholdings by participants, compared with 78.3 percenton April 30, 1984. The shares of the two main groupsof countries in cumulative allocations of SDRs are 67percent for industrial countries, and 33 percent fordeveloping countries.

SDR AS A UNIT OF ACCOUNT OUTSIDETHE FUND AND AS A CURRENCY PEG

In addition to its uses as a medium of exchangeand for settlements among participants and pre-scribed holders, the SDR is the unit of account forFund transactions and operations and for its admin-istered accounts. The SDR is also used as a unit ofaccount (or as the basis for the unit of account, i.e.,is equivalent in value to one SDR) by a number ofinternational and regional organizations and in capi-

79


ANNUAL REPORT, 1985

tal markets.27 A number of international conventionsuse the SDR to express monetary magnitudes, notablythose expressing liability limits in the internationaltransport of goods and services. Since August 1984,members of the International Air Transport Associ-ation use movements in the exchange rate of a cur-rency against the SDR as a trigger for a review andpossible revision of cargo tariffs, which are specifiedin local currency.

At the end of June 1985, the currencies of 12member countries were pegged to the SDR. When amember pegs its currency to the SDR, the value ofits currency is fixed in terms of the SDR and is set interms of currencies by reference to the SDR value ofthese currencies, as calculated and published dailyby the Fund.

ACCOUNTS ADMINISTERED BY THE FUND

The Fund administers as a Trustee, in addition toits Staff Retirement Plan, two accounts which areseparate from the Fund's General and SDR Depart-ments, namely, the Trust Fund and the supplemen-tary financing facility subsidy account.

TRUST FUND

The Trust Fund was established in May 1976 toprovide additional concessionary balance of paymentsassistance to eligible member countries. Part of theproceeds of gold auctioned by the Fund was used tomake loans on concessional terms to low-incomemember countries. The Trust Fund was terminatedas of April 30, 1981.28 Thereafter, the responsibilitiesof the Fund are confined to the receipt and dispositionof interest and loan repayments through the specialdisbursement account of the General Department ofthe Fund and the completion of any related business.Two installments of semiannual interest paymentstotaling SDR 14.3 million were received in June andDecember 1984. Repayments of Trust Fund loans,which began in July 1982, were made by 43 countriesin 1984/85 and amounted to SDR 212.3 million. Asof April 30, 1985, Trust Fund loans outstandingamounted to SDR 2,649.6 million.

SUPPLEMENTARY FINANCING FACILITYSUBSIDY ACCOUNT

The supplementary financing facility subsidy ac-count was established in December 1980 to reducethe cost of using the supplementary financing facilityfor low-income developing members. The primarysources of funds for the account were up to SDR 750million from repayments of, and interest on, TrustFund loans which are transferred to the account viathe special disbursement account. By April 30, 1985the account had received SDR 404.4 million from thissource. In addition, the account has been financedthrough donations and loans and the income on theinvestment of resources held pending disbursement.The only loans received by the account, from Belgiumand Luxembourg in a total amount of SDR 4.6million, were repaid in December 1984. Details of thedonations received by April 30, 1985 are shown inTable 26.

Subsidy payments are calculated as a percentageper annum of the average daily balance of the Fund'sholdings of an eligible member's currency that resultfrom purchases outstanding under the supplementaryfinancing facility. Eligible countries are divided intotwo groups: those with per capita incomes in 1979equal to or below the per capita income used todetermine eligibility for assistance from the Interna-tional Development Association (IDA) who receivethe full rate of subsidy, which does not exceed 3percent per annum; and those with a per capitaincome in 1979 above the IDA level, but not morethan that of the member that had the highest percapita income of those countries that were eligible toreceive assistance from the Trust Fund, who receivesubsidies at one half the full rate. All payments todate have been made at the maximum rates of 3percent and 1.5 percent, respectively.

Payments by the account to eligible members in1984/85 amounted to SDR 89.9 million and have

Table 26.

Supplementary Financing Facility Subsidy Account:Donations Received to April 30, 1985


27 The international and regional organizations using the SDR as aunit of account, or as basis for a unit of account, include the AfricanDevelopment Bank, African Development Fund, Arab Monetary Fund,Asian Clearing Union, Asian Development Bank, Great Lakes StatesDevelopment Bank, East African Development Bank, Economic Com-munity of West African States, European Conference of Postal andTelecommunications Administrations, International Center for Settle-ment of Investment Disputes, International Development Association,International Fund for Agricultural Development, International Tele-communications Union, Islamic Development Bank, Nordic Invest-ment Bank, and Universal Postal Union.

28 Executive Board Decision No. 6704-(80/185) TR, adopted De-cember 17, 1980, Selected Decisions, Tenth Issue, pages 318-20.

DonorAmount ofDonation

AustraliaAustriaDenmarkFinlandFrance

NetherlandsNorwaySaudi ArabiaSweden

Switzerland

Total

2.01.21.51.39.3

4.11.4

27.22.2

2.4

52.6

80



totaled SDR 224.79 million since the inception of theaccount (see Table 27). Pending further subsidy pay-ments, the investments of the account are held inSDR-denominated deposits with the Bank for Inter-national Settlements (BIS).29 As of April 30, 1985,the interest-earning deposits of the subsidy accountamounted to SDR 241.9 million, plus accrued incomeof SDR 10.0 million.

On May 28, 1985, the Executive Board decided tosuspend further transfers to the supplementary fi-nancing facility subsidy account of the interest on andrepayment of Trust Fund loans paid into the specialdisbursement account.30 This decision was taken be-cause the assets in hand or pledged to the subsidyaccount were estimated to be sufficient for the accountto make all expected remaining subsidy payments atthe maximum permissible rates of subsidy and todischarge the known liabilities of the subsidy account.Following the suspension of transfers to this account,repayments of and interest on Trust Fund loans areretained in the special disbursement account. Aninvestment policy for the special disbursement ac-count similar to that of the supplementary financingfacility subsidy account was also adopted on May 28,1985. Under this policy, the assets of the account areto be invested in SDR-denominated deposits with theBIS pending their use. The future use of the resourcesreceived by the special disbursement account pur-suant to the decision terminating the Trust Fund willbe discussed by the Executive Board in 1985.

ARTICLE IV CONSULTATIONS ANDNOTIFICATIONS OF CHANGES IN

EXCHANGE RATES

As explained in Chapter 2, consultations with mem-bers under Article IV of the Fund's Articles of Agree-ment are the principal vehicle for the exercise of Fundsurveillance over the exchange rate policies of membercountries. In principle, Article IV consultations takeplace annually and are completed not later than threemonths after the termination of the discussions be-tween the member and the staff. In practice, however,it has not been possible to attain the objective ofannual consultations for all members. In order toimprove the frequency and regularity of consultations,the practice has been adopted of specifying at theconclusion of a consultation the date by which thenext consultation is expected to be concluded. Thispractice has contributed to an increase in the fre-quency of consultations. In 1984/85 the Fund com-pleted 125 consultations covering 84 percent of mem-bership (compared with 117 in 1983/84, 98 in 1982/83 and 79 in 1981/82), of which 72 were with countriesavailing themselves of the transitional arrangements

Table 27.

Purchases Under Supplementary Financing Facility byEligible Members, and Subsidy Payments


Purchases Payments

Recipients of subsidy at 3 percent

Bangladesh 110.0 11.17Bolivia 25.5 3.09Dominica 4.5 0.25Gambia, The 4.8 0.23Guyana 30.9 2.60

India 1,200.0 46.84Kenya 94.8 8.36Liberia 42.9 3.75Madagascar 22.2 2.22Malawi 28.1 2.87

Mauritania 16.0 1.39Pakistan 537.1 38.18Philippines 333.0 32.53Senegal 54.2 4.35Sierra Leone 17.2 1.65

Sri Lanka — 0.591

Sudan 171.4 16.79Tanzania 16.3 1.81Togo 7.3 0.72Zambia — 3.522

Subtotal 2,716.2 182.91

Recipients of subsidy at 1.5 percent

Ivory CostJamaicaMauritiusMoroccoPeru

Subtotal

Total

286.4227.1

69.2137.5195.1

915.3

3,631.5

7.5611.073.467.07

12.62

41.78

224.69

1 Subsidy paid in respect of Fund holdings in excess of 140 percent of quotaunder the Fund's policy on exceptional use.

2 Subsidy paid in respect of Fund holdings in excess of 200 percent of quotaunder the Fund's policy on exceptional use.

under Article XIV and 53 with countries that hadaccepted the obligations of Article VIII.31 With morefrequent, regular consultations there are now onlythree countries, all affected by security problems,outside the cycle of regular, periodic consultations.

In addition to regular Article IV consultations,special consultations were held with major industrial

29 Executive Board Decision No. 7990-(85/81), adopted May 28,1985 (reproduced in Appendix II).

30 Executive Board Decision No. 7989-(85/81) SBS, adoptedMay 28, 1985 (reproduced in Appendix II).

31 In accepting the obligations of Article VIII, Sections 2, 3, and 4,a member undertakes not to impose, without the approval of theFund, restrictions on the making of payments and transfers for currentinternational transactions, not to engage in discriminatory currencyarrangements or multiple currency practices, and to maintain theconvertibility of foreign-held balances of its currency. A memberavailing itself of a transitional arrangement under Article XIV canmaintain and adapt to changing circumstances the restrictions thatwere in effect on the date on which it became a member.

81


ANNUAL REPORT, 1985

countries in connection with the world economicoutlook reviews by the Executive Board. Moreover,Fund management and staff are informed of impor-tant developments through frequent, informal con-tacts with members.

During 1984/85, one country, St. Christopher andNevis (December 3, 1984), accepted the obligationsof Article VIII, Sections 2, 3, and 4 of the Articles ofAgreement, raising to 60 the number of members thathave formally accepted these obligations. Eighty-eightmembers were availing themselves of the transitionalarrangements under Article XIV, Section 2 at theend of the financial year.

Chapter 2 also refers to the Fund's monitoring ofchanges in members' exchange arrangements, and intheir real effective exchange rates. During the finan-cial year there were 43 notifications of changes inexchange arrangements, 28 information notices onlarge changes in members' real effective exchangerates (i.e., 10 percent or more since the Board's lastdiscussion of the member's exchange rate policy), and22 notifications of changes in restrictive exchangepractices. These measures are reported in detail inthe Fund's Annual Report on Exchange Arrangements andExchange Restrictions, 1985. Quarterly reports on ex-change arrangements maintained by members and ondevelopments in members' nominal and real effectiveexchange rates over the medium term were also issuedto the Executive Board.

DEBT RESTRUCTURING

The Fund has continued to assist member countriesin resolving debt-servicing difficulties with inter-national banks and with official creditors and in ar-ranging new medium-term financial lending pack-ages.

From January 1984 to April 1985, 21 Fund membercountries—all developing countries—reached restruc-turing agreements or agreements in principle withinternational banks. Amounts restructured under theseagreements totaled some $105 billion, equivalent to20 percent of the bank debt of developing countries.In 1984, restructuring of medium-term and long-termbank debt postponed the debt service of developingcountries by an estimated $21 billion, or the equiva-lent of 4 percent of their exports of goods and services.In addition, the amount of short-term debt rolledover or converted into medium-term debt under re-structuring agreements is estimated at $36 billionover the period January 1984 to April 1985. Duringthis period, six member countries also reached agree-ments or agreements in principle with commercialbanks on new lending packages in the context ofrestructuring agreements.

An important development in 1984 was the nego-tiation of multiyear rescheduling agreements by com-mercial banks with certain member countries. Suchagreements or agreements in principle were reachedwith Mexico, Venezuela, and Ecuador for a total

amount of $74 billion, and negotiations on similaragreements were proceeding for other countries.

The extent of official multilateral debt reschedul-ings has also risen sharply in recent years. In 1983—84, 23 debtor countries that are Fund members ob-tained 29 official debt reschedulings, sharply abovethe average of 4 reschedulings a year during the eight-year period since 1975. The amount of debt reliefprovided was unparalleled. In 1983—84, 5 reschedul-ings were for amounts in excess of $ 1 billion, and halfof them involved amounts over $300 million; in 1975—82 only a minority of agreements (7 of 28) rescheduledamounts over $300 million. Of the 29 recent resched-ulings, 19 were for African countries, but reschedul-ings covered countries in all major geographic areas.With the exception of Mexico and Yugoslavia (wherethe reschedulings were concluded at meetings of offi-cial creditor groups), the official debt reschedulingnegotiations were conducted under the auspices of theParis Club.

All but one rescheduling agreement was concludedonly after the Fund's Executive Board had approveda stand-by or extended arrangement involving uppercredit tranche conditionality with the debtor countryconcerned; the exception was the People's Republicof Mozambique, which became a Fund member im-mediately prior to the date of the rescheduling agree-ment. Fund staff representatives participated as ob-servers in all of the Paris Club and official creditorgroup meetings. In 1984/85, staff attended such meet-ings convened with the Governments of Argentina,Costa Rica, Ecuador, Jamaica, Liberia, Mauritania,the People's Republic of Mozambique, Niger, Peru,the Philippines, Senegal, Somalia, Sudan, Togo, andZambia. The Fund was also invited by the chairmanof the participating countries to attend a meeting inParis on April 25—26, 1985, to discuss Poland's officialexternal debt service obligations. The Fund was alsorepresented at a meeting of Poland's official creditorsconvened by the Paris Club on May 17, 1985.

TECHNICAL ASSISTANCE AND TRAINING

The technical assistance and advice provided bythe Fund to its members are an integral part of theFund's activities. This assistance and advice may takemany forms and cover a wide array of topics, frombroad policy issues to narrower technical problems.Much of the general technical assistance provided bythe Fund arises from its annual Article IV consulta-tions with members. Similarly, when the Fund and amember country develop a financial stabilization pro-gram, the Fund not only helps the member to drawup the program but often assists the member toimplement and monitor the program, at times throughthe services of a staff member assigned as the Fund'sresident representative in the country.

The Fund also responds to requests for technicalassistance and training in specific economic and fi-nancial areas, which may be provided at Fund head-

82



quarters or by staff missions to member countries. Inrecent years requests have encompassed aspects ofgeneral economic policy, problems arising from infla-tion, exchange and trade systems, balance of pay-ments programs, debt-management systems, account-ing and valuation problems, macroeconomic modeling,computer programming for economic analysis, statis-tical issues, and data processing. These diverse re-quests have been met by staff from virtually everydepartment in the Fund.

During 1984/85, the IMF Institute continued tooffer training to officials from member countries inthe form of regular courses and seminars. The tenregular courses conducted in the past year comprisedthree 18—week courses in financial analysis and policy,one 12—week course in financial programming andpolicy, three 10-week courses in public finance, andthree 8—week courses in techniques of economic anal-ysis, balance of payments methodology, and govern-ment finance statistics, respectively. The courses weregiven in English, French, or Spanish, or in all threelanguages, and, for the main financial analysis andpolicy course, special arrangements were made toallow Arabic-speaking participants to follow the coursein their own language. The courses in public financewere conducted in collaboration with the Fiscal Af-fairs Department and those on balance of paymentsmethodology and government finance statistics incollaboration with the Bureau of Statistsics. In 1984/85 there were two seminars on general topics—oneon the role of the Fund in the international monetarysystem and the other, held in collaboration with theCentral Banking Department, on external debt man-agement. The number of participants attending theInstitute's training courses during the financial yeartotaled 322, and participants in the two seminarstotaled 55. Altogether, about 4,500 officials from 145member countries have participated in the programsof the IMF Institute since its inception in 1964.

The Institute's external training activities in 1984/85 included country seminars conducted in Bolivia,Hungary, Panama, and Uganda. They focused onfinancial programming and the economic problemsand policy issues facing these countries and wereattended by a total of 175 participants. Externalactivities also included providing lecturers to threeregional organizations and briefings on the Fund'spolicies and operations to official visitors from mem-ber countries.

A major activity of the Fiscal Affairs Departmentcontinues to be the provision of technical assistanceon fiscal matters. Adjustments in fiscal policy havebeen important elements in many of the stabilizationprograms of Fund members, with measures taken toimprove revenue effort, strengthen tax administration,rationalize expenditure policies, and increase the ef-ficiency of budgetary operations. Implementation ofsuch measures often requires detailed technical anal-ysis, and an important function of the Fiscal AffairsDepartment, with assistance from Area Departments

and the Legal Department, is to serve as a source offiscal expertise to Fund members. Advice has covereda wide range of topics, including the reform of coun-tries' tax structures, formulation and implementationof specific types of taxation or investment incentivecodes, reorganization of tax departments, and im-provement of assessment and collection procedures,budget preparation procedures, accounting and au-diting practices, fiscal reporting systems, mechanismsfor expenditure control, and public enterprise policies.This assistance has continued to be given through acombination of staff missions and the use of fiscalexperts, most often in field assignments. Support andguidance to experts in the field continued to beprovided from headquarters. In 1984/85 technicalassistance was given to 46 countries, about the sameas in the previous two years. During 1984/85 therewere 32 long-term and 39 short-term assignments inthe field, for a total of 342 man-months; 49 panelmembers and 20 staff members undertook this tech-nical assistance work.

The Central Banking Department has continuedto provide technical assistance through the assign-ment of resident experts to member countries, throughadvisory services, and through the organization oflectures and seminars. In 1984/85, experts and con-sultants served in assignments in executive or advi-sory positions with central monetary institutions andprovided about 96 staff-years of assistance, most ofwhich was in the fields of research and statistics,bank supervision, banking and foreign exchange op-erations, and external debt management. Under theprogram of technical assistance in external debt man-agement instituted in the Department two years ago,13 experts and consultants have been assisting mem-ber countries in the establishment of a permanentnational machinery for the reporting, control, andmanagement of external debt operations and in thecollection of debt statistics. Departmental staff carriedout 12 advisory and assessment missions and partic-ipated in 10 missions led by Area Departments.Topics on which advice was given included centralbanking and financial system legislation (in coopera-tion with the Legal Department), formulation offinancial reform in centrally planned economies, de-velopment of money markets, structure and develop-ment of financial systems, the design of monetarypolicy instruments, and interest rate policy. Duringthe year further progress was made in instituting newresearch programs in support of the advisory work ofthe Department and in expanding the Department'scomputerized data base of central banking legislation.

The provision of technical assistance in statisticsconstitutes a major part of the work of the Bureau ofStatistics, which makes such assistance availablethrough missions to member countries and visits bynational technicians to Fund headquarters. The pri-mary focus of the technical assistance program of theBureau has been in assisting member countries toimprove the currentness and scope of the data base

83


ANNUAL REPORT, 1985

needed for monitoring economic and financial devel-opments in the country, especially in the context ofFund-supported adjustment programs and in theframework of the regular Article IV consultationswith member countries. For the most part, the tech-nical assistance is provided through missions under-taken in response to requests from member countries.Such assistance is concentrated in five principal fieldsof economic statistics that are of particular analyticaland operational significance to the Fund, viz., moneyand banking, balance of payments, government fi-nance, international banking and external debt, andgeneral economic data. During 1984/85, staff of theBureau of Statistics participated in 87 technical as-sistance missions to 58 countries and the AndeanReserve Fund. In addition, staff of the Bureau assistedthe Arab Monetary Fund and the Eastern CaribbeanCentral Bank in conducting two regional seminars onbalance of payments statistics and government fi-nance statistics, respectively. Seven officials frommember countries visited the Bureau for training inthe various fields of statistics.

The Bureau of Computing Services, in addition toproviding technical advice and briefing on the Fund'scomputer applications and facilities to visiting officialsfrom member countries, participated in electronicdata processing technical assistance missions to Jor-dan and Saudi Arabia. The technical assistance toJordan involved the review and evaluation of theautomation program in the Central Bank. In SaudiArabia, the Bureau assisted the Ministry of Financein formulating a plan for the design and implemen-tation of a financial and accounting managementinformation system which would be derived from theMinistry's own general accounting system. The Fundhas also agreed to assist the Ministry in locatingqualified independent consultant staff to implementthe system and to review the status of the projectperiodically.

RELATIONS WITH OTHERINTERNATIONAL ORGANIZATIONS

The Fund maintained its cooperation with otherregional and international organizations in the eco-nomic and financial fields during 1984/85. This co-operation took the form of attendance by staff mem-bers at meetings and seminars, exchanges ofdocumentation and information, and the sharing ofthe Fund's accumulated experience through technicalassistance.

The Fund's participation in the meetings and ac-tivities of other organizations is coordinated partly byoffices and staff away from headquarters. The SpecialRepresentative to the United Nations, stationed inNew York, attends meetings and participates in otheractivities of the United Nations and its agencies andorgans dealing with work related to that of the Fund.The European Office in Paris provides liaison withthe Bank for International Settlements, the Commis-

sion of the European Communities, and the Organi-zation for Economic Cooperation and Development.The Office in Geneva reports on meetings of theUnited Nations Conference on Trade and Develop-ment (UNCTAD) and its committees and groups ontrade matters, and on the meetings of the GeneralAgreement on Tariffs and Trade (GATT) and certainof its Committees. Information and documentationon common members is also provided to the GATT'sCommittee on Balance of Payments Restrictions forits periodic consultations. The Fund participates inthe meetings of many regional organizations as well,in Africa, Asia and the Pacific area, Latin Americaand the Caribbean, and the Middle East, throughstaff representatives or observers.

Close collaboration with the World Bank continuedto be a matter of active interest to the Fund, andboth its general and practical aspects were exploredintensively during the year. Traditional channels ofclose working relationship between the staff of thetwo institutions were strengthened, including the ex-change of information and technical data, joint staffseminars, and participation of staff of one of theinstitutions in missions fielded by the other. Newmodalities for intensive collaboration were adopted,including attendance by appropriate World Bank staffat Executive Board meetings of the Fund when mat-ters of close mutual interest are under discussion, andthe strengthening of channels for regular contactsbetween counterpart staff of the two institutions atall levels.

The Managing Director participated in meetingsof international bodies to discuss world economicproblems. As in past years, he addressed the SecondRegular Session of the United Nations Economic andSocial Council in Geneva, on July 5, 1984, at thebeginning of its General Debate on the internationaleconomic situation. He spoke before the UN Admin-istrative Committee on Coordination in New YorkCity on October 22, 1984, and before the group'smeeting in Geneva on April 22, 1985. The ManagingDirector presented a statement to the ministerialmeeting of the Organization for Economic Coopera-tion and Development in Paris on May 17, 1984, andparticipated in the monthly meeting of the Bank forInternational Settlements on July 9, 1984, in Basle.He attended the thirtieth and thirty-first meetings ofthe ministers of the UNCTAD IntergovernmentalGroup of Twenty-Four on International MonetaryAffairs, which took place in Washington on Septem-ber 21, 1984 and on April 16, 1985, respectively, atthe time of the Interim and Development Committeemeetings. In addition, he took part in the ministerialmeetings of the Group of Ten, held in Rome onMay 19, 1984, in Washington on September 21, 1984,and before the meeting of the Interim Committee inWashington on April 17, 1985. On January 17, 1985,he participated in a meeting of the ministers andgovernors of the five major industrial countries.

The Fund also attended meetings concerning aid

84



and aid coordination. During the financial year, theWorld Bank invited the Fund to take part in themeetings of the Sri Lanka Aid Group and the IndiaConsortium, and in the Consultative Group meetingsfor Ghana, Korea, Madagascar, Morocco, the Phil-ippines, Senegal, and Zambia. Fund staff attended aspecial meeting of Maldives development partnersand a special meeting for Somalia, both held in Paris,and an observer from the Fund participated in aspecial meeting of donors on sub-Saharan Africa, alsoheld in Paris. Relevant documentation was providedby the Fund to the meeting of the IntergovernmentalGroup on Indonesia.

EXTERNAL RELATIONS

During the financial year, the Managing Directorand senior staff participated in several other nationaland international forums where they delivered speecheson international economic issues. Members of theFund staff also delivered papers at a number ofconferences. The Fund continued its program of sem-inars for nonofficials, with the ninth seminar con-ducted in Portuguese on January 16—19, 1985 inEstoril, Portugal, and the tenth seminar conducted inEnglish on March 29—31 in Windsor, England. Theproceedings of these seminars will be published in the

language in which they were conducted. The Fundalso organized a symposium lor Governors ol Atncancentral banks on May 13-15, 1985 in Nairobi, Kenya.

Under the Visitor's Program, representatives ofacademic, business, labor, political, and financialinstitutions visited Fund headquarters, where theyattended presentations by Fund staff. During thefinancial year, the Fund expanded its working con-tacts with the media in Africa and Latin America, ina continuing effort to improve public understandingof the institution. The Fund also expanded its publi-cations program in 1984/85. The publications issuedin the financial year are listed in Appendix I, Ta-ble 1.12.

EXECUTIVE DIRECTORS AND STAFF

A list of Executive Directors and their voting poweron April 30, 1985 is given in Appendix IV. Thechanges in membership of the Executive Board during1984/85 are shown in Appendix V.

In the financial year ended April 30, 1985, therewere 104 appointments to the Fund's regular staffand 62 separations. At the end of the financial year,the staff numbered 1,661 and was drawn from 97countries.

85


Appendices

APPENDIX I. Fund Activities in 1984/85 91

List of Tables

1.1. Exchange Rates and Exchange Arrangements, June 28, 1985 921.2. Fund Stand-By Arrangements for Members, Financial Year Ended

April 30, 1985 961.3. Summary of Members' Purchases and Repurchases, Financial Years

Ended April 30, 1948^85 971.4. Summary of Stand-By Arrangements That Became Effective During

the Financial Years Ended April 30, 1953-S5 971.5. Purchases of Currencies and SDRs from the Fund, Financial Year

Ended April 30, 1985 981.6. Repurchases of Currencies from the Fund, Financial Year Ended

April 30, 1985 1001.7. Extended Fund Facility Arrangements for Members, July 7, 1975-

April 30, 1985 1021.8. Borrowing in Connection with Purchases Under the Supplementary

Financing Facility and Repayments to Lenders, May 29, 1980-April 30, 1985 103

1.9. Schedule of Fund Charges 1031.10. Summary of Transactions and Operations in SDRs, Financial Year

Ended April 30, 1985 1041.11. Members That Have Accepted the Obligations of Article VIM,

April 30, 1985 1081.12. Publications Issued, Financial Year Ended April 30, 1985 109

APPENDIX II. Principal Policy Decisions of the Executive Board 110

A. Policy on Enlarged Access to the Fund's Resources: Charges onHoldings Outstanding, Amendment of Rule 1-6(5) 110

B. Policy on Enlarged Access to the Fund's Resources: Extension ofPeriod, and Access Limits for 1985 111

C. Misreporting and Noncomplying Purchases Under FundArrangements: Guidelines on Corrective Action 111

D. Extended Fund Facility and Guidelines on Conditionality:Review 113

E. Overdue Payments to the Fund: Member's Right to Purchase UnderStand-By and Extended Arrangements 113

F. Overdue Payments to the Fund: Amendment of Rule G-4 114G. Relationship Between Performance Criteria and Phasing of

Purchases Under Fund Arrangements: OperationalGuidelines 114

87


APPENDICES

APPENDIX V. Changes in Membership of Executive Board 140

APPENDIX VI. Administrative Budget 146

88

H. Accounting for Charges from Members with OverdueObligations 115

I. Reporting by the Fund of Overdue Obligations 115J. Developing Countries' Indebtedness to Commercial Banks and

Official Creditors, and Export Credit Cover Policies: Chairman'sConcluding Remarks at Executive Board Meeting 116

K. Surveillance over Members' Exchange Rate Policies: Review ofImplementation of Procedures 119

Attachment to Decision No. 7939-(85/49) : Managing Director'sSumming Up 119

L Level of Fund's SDR Holdings 123M. Compensatory Financing of Fluctuations in the Cost of Cereal

Imports: Renewal of Decision 123N. Suspension of Transfers to the Supplementary Financing Facility

Subsidy Account and Retransfer of Surplus 123O. Special Disbursement Account — Investment 124P. Review of the Fund's Income Position for the Financial Years 1985

and 1986 124(a) Amendment of Rule l-6(4)(a) 124(b) Rate of Charge Effective May 1, 1985 124

Q. Publicity Upon Declaration of Ineligibility 124

APPENDIX III. Press Communiques and Announcement of the InterimCommittee and the Development Committee 125

Interim Committee of the Board of Governors on the InternationalMonetary System 125

Press Communiques 125Twenty-Third Meeting, Washington, September 22, 1984 125

Annex: Interim Committee Attendance, September 22,1984 127

Twenty-Fourth Meeting, Washington, April 17-19, 1985 128Annex: Interim Committee Attendance, April 17-19,

1985 130Joint Ministerial Committee of the Boards of Governors of the Bank

and the Fund on the Transfer of Real Resources toDeveloping Countries (Development Committee) 132

Press Communique 132Twenty-Fourth Meeting, Washington, September 23, 1984 132

Press Announcement 133Twenty-Fifth Meeting, Washington, September 26, 1984 133

Press Communique 133Twenty-Sixth Meeting, Washington, April 18-19, 1985 133

APPENDIX IV. Executive Directors and Voting Power on April 30,1985 136


APPENDICES

APPENDIX VII. Comparative Statement of Income and Expense 147

APPENDIX VIII. Financial Statements 148Report of the External Audit Committee 148

General Department 149Balance Sheet 149Statement of Income and Expense 150Statement of Changes in Reserves 151Notes to the Financial Statements 152

Schedule 1 157Schedule 2 160Schedules 161Schedule 4 162

SDR Department 163Statement of Allocations and Holdings 163Statement of Receipt and Use of SDRs 164Note to the Financial Statements 165

Supplementary Financing Facility Subsidy Account 166Balance Sheet 166Statement of Changes in Resources 167Notes to the Financial Statements 168

Trust Fund 169Balance Sheet 169Statement of Income and Expense 170Statement of Changes in Trust Resources 171Notes to the Financial Statements 172

Staff Retirement Plan 173Report of the External Audit Committee 173Statement of Accumulated Plan Benefits and Net Assets

Available for Benefits 174Statement of Changes in Accumulated Plan Benefits 175Statement of Changes in Net Assets Available for

Benefits 176Notes to the Financial Statements 177

APPENDIX IX. Classification of Countries 179

89


Appendix

IFund Activities in 1984/85

This appendix supplements the information on the Fund given in Chapter 3. Table1.1 provides data on exchange rates and exchange arrangements as of June 28,1985.

91


Table 1.1.Exchange Rates and Exchange Arrangements, June 28, 19851

Member

AfghanistanAlgeriaAntigua and

BarbudaArgentinaAustralia

AustriaBahamasBahrainBangladeshBarbados

BelgiumBelizeBeninBhutanBolivia

BotswanaBrazilBurkina FasoBurmaBurundi

CameroonCanadaCape VerdeCentral African

RepublicChad

ChileChinaColombiaComorosCongo

Costa RicaCyprusDenmarkDjiboutiDominica

Dominican RepublicEcuadorEgyptEl SalvadorEquatorial Guinea

Pegged to Limited Flexibility

Currency UnderOther composite Vis-a-vis cooperative

French single other single arrange-Currency U.S. dollar 2 franc2 currency2 SDR2 than SDR 3 currency3-4 ments 3- 5

Afghani — — — — — 50.60 —dinar — — — — 5.0855 — —Eastern Caribbean

dollar 2.70 — — — — — —austral — — — — — — —dollar _ _ _ _ _ _ _

schilling — — — — 21.467 — —dollar 1.00 — — — — — —dinar — — — — — 0.376 —taka — — — — 27.50 — —dollar 2.0113 — — — — — —

franc _ _ _ _ _ _ 61.5475dollar 2.00 — — — — — —franc — 50.00 — — — — —ngultrum — — 1 .00 6 — — — —peso 67,000.00 — — — — — —

pula — — — — 1.77066 — —cruzeiro — — — — — — —franc — 50.00 — — — — —kyat — — — 8.5085 — — —franc — — — 122.7 — — —

franc — 50.00 — — — — —dollar — — — — — — —escudo — — — — 93.4579 — —

franc — 50.00 — — — — —franc — 50.00 — — — — —

peso — — — — — — —renminbi — — — — 2.8779 — —peso — — — — — — —franc — 50.00 — — — — —franc — 50.00 — — — — —

colon — — — — — — —pound — — — — 0.623636 — —krone _ _ _ _ _ _ 10.9525franc 177.721 — — — — — —Eastern Caribbean

dollar 2.70 — — — — — —

peso _ _ _ _ _ _ _sucre — — — — — — —pound 0.70 — — — — — —colon — — — — — — —franc — 50.00 — — — — —

More Flexibility 3

Adjustedaccording Otherto a set of managed Floatingindicators floating independently

— —

— — —

— — —

— 0.8005 —— — 1.50263

— — —— — —— — —— — —

—

— — —— — —

— —5,960.00 — —

— — —— — —— — —

— — 1.3587— — —

— — —— — —

168.99 — —— — —142.90 — —— — —— — —

— 50.35 —— — —— — —— — —

— — —

— — 3.21_ 67.715 —— — —— 4.46 —— — —


EthiopiaFijiFinlandFranceGabon

Gambia, TheGermany, Federal

Republic ofGhanaGreeceGrenada

GuatemalaGuineaGuinea-BissauGuyanaHaiti

HondurasHungaryIcelandIndiaIndonesia

Iran, IslamicRepublic of

IraqIrelandIsraelItaly

Ivory CoastJamaicaJapanJordanKampuchea,

Democratic 8

KenyaKoreaKuwaitLao People's

DemocraticRepublic

Lebanon

LesothoLiberiaLibyan Arab

JamahiriyaLuxembourgMadagascar

MalawiMalaysiaMaldivesMaliMalta

birrdollarmarkkafrancfranc

dalasi

deutsche markcedidrachmaEastern Caribbean

dollar

quetzalsylipesodollargourde

lempiraforintkronarupeerupiah

rialdinarpoundshekellira

francdollaryendinar

riel

shillingwondinar

kippound

lotidollar

dinarfrancfranc

kwacharinggitrufiyaafranclira

ZgX

83'

czon<

00

-̂OO

2.07 — — — —— — — — 1.17467— — — — 6.347— — — — —— 50.00 — — —

— — 5.00 7 — —

53.00 — — — —— — — — —

2.70 — — — —

1.00 — — — —— — — 24.6853 —— — — — —— — — — 4.305.00 — — — —

2.00 — — — —— — — — 50.8583— — — — —— — — — —— — — — —

— — — 92.30 —0.310857 — — — —— — — — —— — — — —— — — — —

— 50.00 — — —— — — — —— — — — —— — — 0.387747 —

— — — 16.148906 —— — — — —— — — — 0.3029

10.00 — — — —— — — — —

— — 1.009 — —1.00 — — — —

0.296053 — — — —— — — — —— — — — 677.01

— — — — 1.7693— — — — 2.4907— — — — 7.05— 50.00 — — —— — — — 0.476644

— — — —— — — —— — — —— 9.317 — —— — — —

— — — —

— 3.0607 — —— — — —— — — 135.765

— — — —

— — — —— — — 163.641— — — —— — — —

— — — —— — — 41.85— — — 12.431472— — — 1,118.00

— — — —— 0.976563 — —— — — 1,262.4_ 1,949.95 — —

— — — —— — — —

— — —

— — — 873.80— — — —

— — — —

— — — —

_ 61.5475 — —— — — —

— — — —— — —— — —— — — —

————

—

—

—

—

—

———

—

———

—

———

—

5.62248.95

—

—

—

15.65

—

_—

—

————


Table 1.1 (concluded).Exchange Rates and Exchange Arrangements, June 28, 19851

Member

MauritaniaMauritiusMexicoMoroccoMozambique

NepalNetherlandsNew ZealandNicaraguaNiger

NigeriaNorwayOmanPakistanPanama

Papua New GuineaParaguayPeruPhilippinesPortugal

QatarRomaniaRwandaSt. Christopher

and NevisSt. Lucia

St. Vincent

Sao Tom£ andPrincipe

Saudi ArabiaSenegalSeychelles

Sierra LeoneSingaporeSolomon IslandsSomaliaSouth Africa

SpainSri LankaSudanSurinameSwaziland

Currency

ouguiyarupeepesodirhammetical

rupeeguilderdollarcordobafranc

nairakronerial Omanirupeebalboa

kinaguaranfsolpesoescudo

riyalleufrancEastern Caribbean

dollarEastern Caribbean

dollar

Eastern Caribbeandollar

dobrariyalfrancrupee

leonedollardollarshillingrand

pesetarupeepoundguilderlilangeni

Pegged to Limited Flexibility

Currency UnderOther composite Vis-a-vis cooperative

French single other single arrange-U.S. dollar 2 franc 2 currency 2 SDR 2 than SDR 3 currency 3- 4 ments 3- 5

— — — — 80.25 — —— — — — 15.7667 — —

— — — — 43.6635 — —

— — — — 18.10 — —— — — — — — 3.4465

10.00 _ _ _ _ _ _ __ 50.00 — — — — —

— — — — 8.799 — —0.345395 — — — — — —

1.00 — — — — — —

— — — — 1.0248 — —240.00 — — — — — —

— — — — — — —

— — — — — 3.64 —_ _ _ _ 12.47 — —— — — 102.71 — — —

2.70 — — — — — —

2.70 — — — — — —

2.70 — — — — — —

— — — 45.25 — — —— — — — — 3.645 —

— — — 7.2345 — — —

— — — 6.27042 — — —— — — — 2.2335 — —— — — — 1.50128 — —~ ~ ~ ~ 1 ~ ~

2.50 — — — — — —1.785 — — — — — —_ _ 1.Q09 — — — —

More Flexibility 3

Adjustedaccording Otherto a set of managed Floatingindicators floating independently

— 227.59 —_ 10.439 —— — —

— — 2.113271

— — —

— 0.895095 —

— 16.0078 —

11,203.94 — —— — 18.462174.543 _ _

— — —

— — —

_— — —

— — —

— — —

— — —— — — ^

40.6081 — —— — 1 .96078

_ 174.697 —— 27.42 —

50.00


SwedenSyrian Arab

RepublicTanzaniaThailandTogo

Trinidad and TobagoTunisiaTurkeyUgandaUnited Arab

Emirates

United KingdomUnited StatesUruguayVanuatuVenezuela

Viet NamWestern SamoaYemen Arab

RepublicYemen, People's

DemocraticRepublic of

Yugoslavia

ZaVreZambiaZimbabwe

krona

poundshillingbahtfranc

dollardinarlirashilling

dirham

pounddollarnew pesovatubolfvar

dongtala

rial

dinardinar

za'i'rekwachadollar

— — — — 8.8035 — — — — —

3.925 _ _ _ _ _ _ _ _ _— — — — 17.5513 — — — — —— — — — 27.42 — — — — —— 50.00 _ _ _ _ _ _ _ _

2.406 _ _ _ _ _ _ _ _ _— — — — 0.851387 — — — — —_ _ _ _ — — — — 536.72 —_ _ _ _ — — — — — 600.00

— — — — — 3.671 — — — —

— — — — — — — — — 0.7721411 00

— — — — — — — _ _ 96.125— — — 110.14 — — — — — —7.50 _ _ _ _ _ _ _ _ _

— — — 10.37883 — — — — — —— — — — — — — — 2.28363 —

6.485 _ _ _ _ _ _ _ _ _

0.345399 _ _ _ _ _ _ _ _ —— — — — — — — — 287.87 —

— — — — — — — — — 50.7222— — — — 2.33951 — — — — —— — — — 1.56495 — — — — —

1 For further explanation of the classification of exchange rate arrangements, in particular for membersthat maintain dual exchange markets involving multiple exchange rate arrangements, see Table 12. Theexchange rate for the Dominican Republic is for the end of April.

2 Rates as notified to the Fund and in terms of domestic currency units per unit listed.3 Market rates in domestic currency units per U.S. dollar.4 All exchange rates have shown limited flexibility against the U.S. dollar.5 Belgium, Denmark, France, the Federal Republic of Germany, Ireland, Italy, Luxembourg, and the

Netherlands are participating in the European Monetary System and maintain maximum margins of 2.25percent (for the Italian lira, 6 percent) for exchange rates in transactions in the official markets betweentheir currencies and those of the other countries in this group.

6 Per Indian rupee.7 Per pound sterling.8 Information not available.9 Per South African rand.


APPENDIX I (continued). FUND ACTIVITIES IN 1984/85

Table 1.2.Fund Stand-By Arrangements for Members, Financial Year Ended April 30, 1985


TotalNumber

nf StanH-RysApproved

for Member

Current Arrangement

Date ofMember Since 1953 inception

ArgentinaBelizeCentral African

RepublicCosta RicaDominica

DominicanRepublic

Ecuador

Gambia, TheGhana

Guatemala

HaitiHungaryIvory CoastJamaicaKenya

KoreaLiberia

Madagascar

MaliMauritania

Mauritius

MoroccoNiger

PanamaPeru

PhilippinesPortugalSenegal

Sierra LeoneSolomon

Islands

SomaliaSri LankaSudanTogoTurkey

UgandaUruguayWestern Sa-

moa

YugoslaviaZaTre

ZambiaZimbabwe

Total

1 1 Dec.1 Dec.

4 July9 Mar.1 July

3 Apr.11 July

Mar.4 Apr.7 Aug.

Aug.10 Aug.

20 Nov.2 Jan.1 Aug.4 June6 Feb.

15 July18 Sep.

Dec.6 Apr.

Apr.7 Dec.4 Apr.

6 MayMar.

9 Sep.2 Oct.

Dec.16 June1 7 Apr.

1 7 Dec.3 Oct.5 Sep.

Jan.6 Feb.

2 June

1 1 Feb.8 Sep.9 June4 May

15 JuneApr.

5 Sep.13 Apr.

6 JuneJuly

9 Apr.6 Dec.

Apr.

5 July2 Mar.

28, 19843, 1984

6, 198413, 198518, 1984

15, 198525, 198311, 198523, 1984

3, 198327, 198431, 1983

7, 198313, 19843, 1984

22, 19848, 1985

8, 198314, 19837, 1984

10, 198423, 19859, 1983

12, 1985

18, 19831, 1985

16, 19835, 19835, 1984

24, 198326, 1984

14, 19847, 1983

19, 198316, 1985

3, 1984

22, 1983

22, 198514, 198325, 1984

7, 198424, 19834, 1984

16, 198322, 1983

27, 19839, 1984

18, 198427, 198324, 1985

26, 198423, 1983

Amount Approvedin 1983/84

Date ofexpiration

Mar.Mar.

JulyApr.July

Apr.JulyMar.JulyAug.Dec.Dec.

Sep.Jan.MayJuneFeb.

Mar.Sep.JuneMar.Apr.MayApr.

Aug.Aug.Mar.Dec.Dec.Dec.July

JuneFeb.Sep.JulyFeb.

June

Feb.JulyJuneMayJuneApr.

Sep.Apr.

JuneJulyMayMar.Apr.

Apr.Sep.

2731,

5,12,17,

14,24,10,22,2,

31,31,

30,12,2,

21,7,

31,13,6,

31,22,31,11,

17,31,15,4,4,

31,31,

13,28,18,15,2,

21,

21,31,24,6,

23,3,

15,21,

26,8,

15,26,23,

30,22,

19861986

198519861985

19861984198619851

198419851984

19851985198519851986

1985198419861985198619851986

19841986198519841985198419852

19861985198419861985

1984

198619841985198519843

1985

198419854

1984198519855

19851986

198619844

1 Arrangement canceled on April 22, 1985.2 Arrangement canceled on April 24, 1985.3 Arrangement canceled on April 3, 1984.

Total

—

—

—

—

—

157.50—

12.83238.50

—114.75

60.00425.00

———

575.7755.00

—33.00

—40.50

—

49.50—

300.0018.00

—150.00250.00

—445.00

63.00—

50.20

2.40

100.00——

225.00225.00

95.00(378.00)

3.38—

370.00228.00

—

—(300.00)

4,287.33

4

5

Of which:borrowedresources

—

—

—

—

75.77—

6.42121.80

—66.92

45.23212.50

——

—

575.7755.00

—

16.50—

34.62—

46.87—

246.33——

120.27—

222.2038.32

—

24.06

—

57.00—

—39.44

—

95.00(283.50)

—

—185.00135.17

—

—

(187.50)

2,420.19

Amount Approvedin 1984/85

Total

1,419.007.13

15.0054.00

1.40

78.50—

105.50——

1 80.00—

——

82.7564.0085.20

——

42.78—

29.50—

12.00

—49.00

——

16.00——

615.00——

76.60—

—

22.10—

90.0019.00

——

——

—3.37

——

162.00

225.00—

3,454.83

Of which:borrowed

Amount NotPurchased

at Expirationresources or Cancellation

709.50

—27.00

—

——

52.75——

96.53—

—

———

42.60

——

21.39—

14.75—

—

—24.50

——

8.00—

—

307.50——

50.42—

—

11.05—

45.00——

—

—

—

—

1.69——

—

112.50—

1,525.18

—

—

—

—

—

—

10.20——

57.37

—————

———————

——————

220.00

—185.70

——

31.20

1.44

—50.00

——

168.7556.25

30.00226.80

———

30.00—

—125.00

1,192.71

Amount NotPurchased

as ofApril 30,

1985

1,182.504.75

7.0030.000.43

50.48—

84.40——

120.00—

39.00—

20.6936.0055.40

——

34.28—

26.00—

9.60

—35.00

——

9.60——

530.00——

54.00—

—

20.10—

70.00———

——

—0.84

90.00—

122.00

145.00—

2,777.07

Arrangement approved in financial year 1982/83.Expiration date extended from April 17, 1985

96



Table 1.3.Summary of Members' Purchases and Repurchases,

Financial Years EndedApril 30, 1948-85


Table I.4.Summary of Stand-By Arrangements That Became

Effective During the Financial Years EndedApril 30, 1953-851


Year

19481949195019511952

19531954195519561957

19581959196019611962

19631964196519661967

19681969197019711972

19731974197519761977

19781979198019811982

198319841985

Total

Total Purchasesby Members

606.04119.4451.8028.0046.25

66.12231 .2948.7538.75

1,114.05

665.73263.52165.53577.00

2,243.20

579.97625.90

1,897.442,817.291,061.28

1,348.252,838.852,995.651,167.412,028.49

1,175.431,057.725,102.456,591.424,910.33

2,503.013,719.582,433.264,860.018,040.62

11,391.8911,517.736,288.87

93,218.322

Total Repurchasesby Members

——

24.2119.0936.58

184.96145.11276.28271 .66

75.04

86.81537.32522.41658.60

1,260.00

807.25380.41516.97406.00340.12

1,115.511,542.331,670.691,656.863,122.33

540.30672.49518.08960.10868.19

4,485.014,859.183,775.832,852.932,009.88

1,555.122,017.652,730.391

43,501 .693

Year

19531954195519561957

19581959196019611962

19631964196519661967

19681969197019711972

19731974197519761977

19781979198019811982

198319841985

Total

Number

22229

1115141524

1919242425

3226231813

1315141819

1814242119

272524

570

Amount

55.0062.5040.0047.50

1,162.28

1,043.781,056.63

363.88459.88

1,633.13

1,531.102,159.852,159.05

575.35591.15

2,352.36541.15

2,381.28501.70313.75

321.851,394.00

389.751,188.024,679.64

1,285.09507.85

2,479.365,197.933,106.21

5,449.984,287.333,454.83

52,773.16

1 Includes renewals and extensions for one year or less, except therenewals each six months of the stand-by arrangement for Belgium grantedin June 1952 until that member purchased the full amount of the equivalentof SDR 50 million in April 1957.

1 Excludes sales of currency to discharge repurchases for SDR 115 million,and if this is included, the total is SDR 2,845 million, as mentioned inparagraph 5 of the Notes to the Financial Statements, Appendix VIII,page 154 below.

2 Includes purchases that are not subject to repurchase.3 Excludes sales of currency and adjustments that have the effect of repurchase.

97


Table 1.5.Purchases of Currencies and SDRs from the Fund, Financial Year Ended April 30, 1985


Under Tranche Policies Under Decision on

Under stand-by txtended f-undarrangements facility

Member Purchasing

ArgentinaBangladeshBarbadosBelizeBrazil

BurmaCameroonCentral African RepublicChadChile

ComorosCongoCosta RicaDominicaDominican Republic

EcuadorFijiGabonGhanaGuinea-Bissau

HungaryIvory CoastJamaicaJordanKenya

KoreaLiberiaMadagascarMalawiMali


New ZealandNigerPanamaPeruPhilippines

PortugalSt. Christopher and NevisSt. VincentSenegalSomalia

Withinreservetranche

—

—

—

—

6.887.00

—3.20

—

0.252.50

——

—

11.43—

7.00——

38.93——

7.23—

——

—

——

65.04—

13.24

28.47——

21.23—

—0.980.35

——

Firstcredit Ordinary

tranche resources

— 118.25— —— 1.95— 2.38— —

— 8.00— —— 108.00

— —— 12.00— 0.97— 28.03

— 30.24— —— —— 53.85

1.88 —

— 148.75— 62.06— 28.00— —— 14.90

— 4.25— 16.75

— 12.25

— 2.40-— 7.00— —— —— —

— 1 1 .60— —— 30.00— 42.50

— 46.45— ——— 13.79— 1.00

Enlarged Enlargedaccess Ordinary access

resources resources resources

118.25 — —— — —

1 .95 — —— —

— 561.13 561.13

— —— — —— — —

108.00 — —

— — —12.00 — —

— — —— — —

30.24 — —— — —— — —

53.85 — —— — —

H8.75 — —— — —— —— — —

61.05 — —

319.78 — —17.25 — —16.75 — —

— 7.44 11.5612.25 — —

— —23.50 — —

— 451.41 451.41170.00 — —

— — —

3.20 — —75.00 — —

— —42.50 — —

46.45 — — ,— — —

24.56 — —1 .00 — —

Compensatoryfinancing

275.0054.95

——

247.90

————

———

—

4.75—

58.20—

——

72.6057.40

—

279.70—

14.4013.80

—

7.50——

—

———

74.70—

54.60———

32.60

TotalPurchases

511.5054.95

3.902.38

1,370.15

6.887.008.003.20

216.00

0.252.50

24.000.97

28.03

71.904.757.00

165.901.88

336.4362.06

100.6064.6375.95

599.4821.5047.9032.8024.50

2.4038.00

967.86170.00

13.24

28.4714.8075.00

125.9385.00

147.500.980.35

38.3534.60

Ordinary resources

Currencies

60.4210.00

1.951.20

333.00

6.88

——

5.00

—1.50

—

4.75—

49.85—

——

86.767.23

—

279.70

11.903.94

—

0.40—

144.60

—

1.00—

——

—

6.3017.40

SDRs

332.8344.95

—1.18

476.03

7.008.003.20

103.00

0.252.50

10.500.97

28.03

41.66—

7.0062.20

1.88

187.6862.0613.8457.4014.90

4.2519.2517.3012.25

2.0014.50

371.85

13.24

28.4710.60

—125.9342.50

101.050.980.357.49

16.20

Enlargedaccess

resources

118.25—

1.95—

561.13

———

108.00

—12.00

—

—

30.24——

53.85—

148.75———

61.05

319.7817.2516.7511.5612.25

23.50451.411 70.00

—

3.2075.00

42.50

46.45——

24.561.00



SudanTogoTurkeyUruguayWestern Samoa

Yemen Arab RepublicYugoslaviaZaireZambia

Total

—

9.46

5.95

—

229.11

— 10.00— 19.00— 112.50

— 1.27

— 140.00— 100.00— 40.00

1.88 1,228.12

10.00 — —

1.27 — —

140.00 — —60.00 — —40.00 — —

1,537.59 1,019.97 1,024.10

— 20.00— 19.00— 112.50— 9.46— 2.53

— 5.95— 280.00— 160.00

80.00

1,248.10 6,288.87

9.901.50

0.42

5.9550.0031.10

—

1,132.66

0.1017.50

112.509.460.84

90.0068.9040.00

2,594.53

10.00

1.27

140.0060.0040.00

2,561.69



Table 1.6.Repurchases of Currencies from the Fund, Financial Year Ended April 30, 1985


MemberRepurchasing

BangladeshBoliviaBrazilBurmaBurundi

Central African RepublicChadCosta RicaCyprusDominica

Dominican RepublicEgyptEl SalvadorEquatorial GuineaEthiopia

GabonGambia, TheGrenadaGuatemalaGuinea-Bissau

GuyanaHaitiHondurasIndiaIndonesia

Ivory CoastJamaicaKenyaKoreaLao People's Democratic Republic

LiberiaMadagascarMalawiMalaysiaMali

MauritaniaMauritiusMoroccoNepalNicaragua

PakistanPanamaPapua New GuineaPeruPhilippines

RomaniaSt. LuciaSt. VincentSenegalSierra Leone

Solomon IslandsSomaliaSri LankaSudanSwaziland

Repurchases in

Borrowed Resources

Supplementary Enlargedfinancing access

facility resources

24.2 —13.7 —

— —— —

— —

— —— —

2.7 —— —

0.2 —

—— —— —— —— 1.7

— ——

— —— —

——

— —— —— —

11.0 —30.1 —12.5 —86.5 —

— —

2.8 —4.4 —5.3 —— —— —

2.0 —13.4 —30.1 —

— —

— —

35.8 —5.2 —— —

48.8 —58.3 —

— 6.7— —— —

5.6 —2.2 —

— 0.9—

6.3 —— —

Respect of Purchases of

Credittranche

31.86.6—

8.7—

5.0—

5.12.10.4

5.8—

4.02.37.1

0.90.60.92.4—

0.74.8——

14.310.923.9

135.56.3

5.310.27.7——

3.59.6

28.1—

2.7

31.411.7

—27.154.8

32.50.5—

5.36.6

0.36.5—

2.1—

Ordinary Resources

UnderExtended Compen- guidelines

Fund satory Buffer for earlyfacility financing stock repurchase

— — — —— — — —— — 64.51 —— — — —— 2.8 — —

— 4.4 — —— 4.4 — —— 19.0 — —— — — —— 1.3 — —

_ _ 23.21 —5.6 — — —— 12.1 — —— 5.8 — —— 15.8 — —

— 3.4 — —— 0.7 — —— 9.6 — —— 0.2 — —

— 2.0 — —— 2.1 — —— 2.9 — —— 133.0 — —— — 3.62 —

— 28.5 — —12.9 18.3 — —

1.3 17.3 — —— 93.3 — —— — — —

— 6.3 — —— 14.6 — —— 6.3 0.91 —— 3.2 8.02 44.2— 2.6 — —

— 3.9 — —— 20.3 3.61 —— — — —— 5.2 — —— 10.6 — —

—— — — —— — — 34.9— — — —

37.2 52.2 — —

— 124.2 — —— 0.5 — —— 0.7 — —

0.7 10.5 — —— — — —

— — — —15.8 9.5 0.62 —1.0 11.7 — —— — 1.01 —

Total

55.920.364.58.72.8

9.44.4

26.82.11.9

29.05.6

16.18.1

24.5

0.94.01.6

12.00.2

2.02.87.7

133.03.6

53.872.255.0

315.26.3

14.429.120.355.52.6

9.446.858.2

5.213.3

67.216.934.975.9

202.4

163.40.90.7

22.18.8

0.37.4

25.921.2

1.0

100



Table 1.6 (concluded).Repurchases of Currencies from the Fund, Financial Year Ended April 30, 1985


Repurchases in Respect of Purchases of

Borrowed Resources

MemberRepurchasing

TanzaniaThailandTogoTurkeyUganda

Western SamoaYugoslaviaZa'i'reZambiaZimbabwe

Total

Supplementaryfinancingfacility

4.1—1.8

145.0—

65.1———

617.0

Enlargedaccess

resources

_

9.1——

2.3

—8.8

15.0—

44.4

Ordinary Resources

ExtendedCredit Fund

tranche facility

6.2 —39.9 —6.6 —

55.0 —15.8 —

0.4 —143.7 —

54.0 —42.5 —18.8 —

908.8 74.5

Compen-satory

financing

10.069.8

—35.827.5

1.086.6

—7.4—

897.1

Bufferstock

_

2.12

———

———

2.11

109.5

Underguidelinesfor early

repurchase

_————

————

79.1

Total

20.3120.9

8.4235.8

45.6

1.4295.4

62.864.920.8

2,730.4

1 Repurchase under the buffer stock financing facility (sugar) in accordance with paragraph 6(i) of Executive Board Decision No. 5597-(77/171), adoptedDecember 16, 1977. (See Selected Decisions of the International Monetary Fund and Selected Documents, Tenth Issue (Washington, 1983), page 77.)

2 Repurchase under the buffer stock financing facility (rubber) in accordance with paragraph 3(b)(i) of Executive Board Decision No. 7246-(82/147), adoptedNovember 12, 1982. (See Selected Decisions of the International Monetary Fund and Selected Documents, Tenth Issue (Washington, 1983), pages 78-79.)

101



Table 1.7.Extended Fund Facility Arrangements for Members, July 7, 1975-April 30, 1985


Member

Approved in previousfinancial years

BangladeshBrazilCosta RicaDominicaDominican RepublicEgyptGabonGrenadaGuyana

HaitiHondurasIndiaIvory CoastJamaica

KenyaMalawiMexico

Morocco

Pakistan

PeruPhilippinesSenegalSierra LeoneSri LankaSudanZaireZambia

Subtotal

Date ofInception

12/8/803/1/83

6/17/812/6/81

1/21/837/28/786/27/808/24/836/25/797/25/80

10/25/786/28/7911/9/812/27/816/9/78

6/11/794/13/81

7/7/759/19/831/1/771/1/83

10/8/803/9/81

11/24/8012/2/816/7/824/2/768/8/80

3/30/811/1/795/4/79

6/22/815/8/81

Date ofExpiration

12/7/832/28/866/16/842/5/84

1/20/867/27/81

12/31/828/23/866/24/827/24/83

10/24/816/27/8211/8/842/22/846/8/81

6/10/814/12/847/6/78

9/18/8612/31/7912/31/8510/7/8310/7/83

11/23/8311/23/83

6/6/854/1/798/7/83

2/22/8412/31/81

5/3/826/21/845/7/84

TotalAmount of

Arrangement

800.001

4,239.38276.7S2

8.55371,25s

600.0034.0013.504

62.75s

150.006

32.2047.60

5,000.007

484.50200.008

260.009

477.7010

67.20100.00518.0011

3,410.63810.0012

817.0513

1,268.0014

919.00650.0015

217.0016

184.8017

186.0018

260.30427.0019

912.0020

800.0021

24,605.16

Of Which:BorrowedResources

480.802,842.88

190.654.49

255.75

8.9835.00

116.37——

2,595.50324.90

227.10390.55

81.47—

2,287.13600.00567.00869.00490.12311.56

126.00121.81

—303.80632.94674.00

14,537.80

Amount NotPurchased atExpiration orCancellation

580.00

254.25—

247.50525.0034.0012.3752.7598.2721.4023.70

1,100.0038.47

130.00175.0074.9059.50

518.00

663.00680.55919.00189.00385.00

143.70152.50

—176.00737.00500.00

8,490.86

Of TotalAmount

Approved,Amount Not

Purchased as ofApril 30, 1985

1,496.25——

—

——

———

—

—

66.00—

1,203.75

————

—

————

2,766.00

Approved duringfinancial year 1984/85

Total 24,605.16 14,537.80 8,490.86 2,766.00

1 Arrangement canceled as of June 21, 1982.2 Canceled as of December 20, 1982 and replaced by a stand-by arrangemen3 Arrangement canceled as of January 17, 1985.4 Arrangement canceled as of January 23, 1984.5 Canceled as of June 24,1980.6 Arrangement augmented by SDR 50.00 million in July 1981 to a total of SDR 150.00 million. Arrangement canceled as of July 22, 1982.7 Arrangement canceled as of May 1,1984.8 Canceled as of June 10,1979.9 Canceled as of April 12, 1981.10 Arrangement augmented by SDR 241.30 million in June 1981 to a total of SDR 477.70 million.11 Includes augmentation by repurchase equivalent to SDR 100.00 million12 Canceled as of March 8,1981.13 Arrangement canceled as of April 25, 1982 and replaced by a stand-by arrangement.14 Canceled as of December 1, 1981.15 Arrangement canceled as of April 25, 1984 and replaced by a stand-by arrangement16 Includes augmentation by repurchase equivalent to SDR 38.75 million17 Canceled as of September 10, 1981 and replaced by a stand-by arrangement.18 Arrangement augmented by SDR 22.30 million in June 1981 to a total of SDR 186.00 million. Arrangement canceled as of April 6, 1982.19 Arrangement augmented by SDR 227.00 million in November 1980, canceled on February 17, 1982, and replaced by a stand-by arrangement.20 Arrangement canceled as of June 22,1982.21 Arrangement canceled as of July 3,1982.

102



Table 1.8.Borrowing in Connection with Purchases Under the Supplementary Financing Facility and Repayments to

Lenders, May 29, 1980-April 30, 1985(In millions of SDRs)

Lender

Abu DhabiAustrian National BankBanque Nationale de BelgiqueCanadaDeutsche Bundesbank

Banco de GuatemalaJapanCentral Bank of KuwaitDe Nederlandsche Bank, N.V.Central Bank of Nigeria

Saudi Arabian Monetary AgencySwiss National BankUnited StatesCentral Bank of Venezuela

Total

Total Amountof Agreement

150.0050.00

150.00200.00

1,050.00

30.00900.00400.00100.00220.00

1,934.00650.00

1,450.00500.00

7,784.00

AmountBorrowed

105.2250.0012.34

173.611,050.003

8.364

886.69400.00100.0069.85s

1,906.743

650.001,450.00

369.42

7,232.22

AmountUndrawn atExpirationof Agree-

ments1

44.78—

137.6626.39

—

21.6413.31

——

150.15

27.26——

130.58

551.78

AmountRepaid2

14.424.926.17

12.6845.64

8.36115.2546.1010.5669.85

349.3575.01

174.1660.42

992.89

BorrowingOutstanding as of

April 30, 1985

90.8045.08

6.17160.93832.35

—771.44353.9089.44

—

1,729.40574.99

1,275.84309.00

6,239.33

1 Agreements lapsed on February 22, 1984.2 Repayments began on November 24, 1982.3 Claims totaling SDR 172.011 million under the supplementary financing facility were transferred by the Deutsche Bundesbank to the Saudi Arabian

Monetary Agency against U.S. dollars on November 13, 1980.4 Claims totaling SDR 8.356 million were repaid in advance to the Banco de Guatemala on February 8,1982. This encashment was refinanced by a call on

the Swiss National Bank.5 Claims totaling SDR 69.850 million were repaid in advance to the Central Bank of Nigeria on April 8 and 9, 1982. This encashment was financed by calls

in equal amounts under the supplementary financing facility borrowing agreements with Japan and the United States, in agreement with these lenders.

Table I.9.Schedule of Fund Charges

Charges in percent per annum } payable on holdings for the periods stated

PURCHASES IN THE CREDIT TRANCHES AND UNDER THE COMPENSATORYFINANCING, BUFFER STOCK FINANCING, AND EXTENDED FUND FACILITIES

FromMay 1, 1984

Service charge 0.5Periodic charge 7.0


Service chargePeriodic charge

Up to 3^ yearsOver 3i years

0.5

Rate of interest paid by the Fund plus 0.2 percentRate of interest paid by the Fund plus 0.325 percent

ENLARGED ACCESS POLICY

Service charge 0.5Periodic charge Net cost of borrowing by the Fund plus 0.2 percent

1 Except for service charge, which is payable once per transaction and is stated as a percent of the amount of thetransaction.

103


Table 1.10.Summary of Transactions and Operations in SDRs, Financial Year Ended April 30, 1985

(In thousands of SDRs)

Holders

PARTICIPANTS

AfghanistanAlgeriaAntigua and BarbudaArgentinaAustralia




CameroonCanadaCape VerdeCentral African RepublicChad




TotalHoldings

April 30, 1984

14,502104,220

227,626

132,219

155,5171,053

12,4027,1241,687

363,80119

92524

1,573

7,48748,510

5,6283,439

707

1,11953,560

105746425

12,872366,850

70,3171

434

81,006

129,539424

51

4,276345

7,0142,914

6

Receipts fromParticipants and

Prescribed Holders

Designated

_———

141,974

23,207————

76,400————

————

—304,033

———

34,700———

——

26,400——

—————

Other

_——

85,274—

48,000——

31,7002,176

—35——

4,154

—175,456

—6,964

660

———

4,6502,548

54,450—

4,220——

2,5121,000

——

117

14,13717,58215,0507,9013,240

Transfers toParticipants and

Prescribed Holders

Designated

_——

290,361—

——

39,000—

—1,169

———

473,154———

—————

57,820—

76,817——

8,450———

966

27,94233,861

———

Other

_——

41,244—

86,635————

81,347————

————

500245,274

———

33,500————

—————

—————

Receiptsfrom theGeneral

ResourcesAccount

10712,368

—377,468

140

37,571487

—44,950

1,091

65,1491,511

25031

3,508

937582,588

3772,206

411

7,09421,311

488,0203,246

103,5406,0178,699

3142,501

25,4871,000

11,28650

1,982

35,19842,002

—4,9901,171

Transfersto the

GeneralResourcesAccount

——

95,710—

——

33,4093,486

—291

——

6,271

—286,767

—5,607

123

———

11,3854,999

54,117————

16,776275

——

1,007

18,56518,4193,404

13,0593,755

Interest,Charges,

andAssess-

ment (Net)

-1,387-1,320

—-34,864-36,669

+ 1,380-937+ 810

-4,999-807

-5,203+ 3

-967+ 4

-2,889

+ 384-39,195

-378-4,780- 1 ,440

-2,363-80,112

-57-923-992

-13,236+ 11,966-4,028

-76-967

-2,604-2,126-3,549

-84-61

-3,437-3,519

-14,961-2,740

-657

Positions as at April

Holdings

13,222115,268

228,189

237,665

179,039604

13,2116,365

661

418,800107208

5974

8,8077,4385,6272,222

215

5,35053,518

971,109

228

12,189419,533

2,391239

1,968

178605

163,676390116

3,6664,1303,699

64

Netcumulativeallocations

26,703128,640

—318,370470,545

1 79,04510,2306,200

47,1208,039

485,246—

9,409—

26,703

4,359358,670

9,40943,47413,697

24,463779,290

6209,3259,409

121,924236,800114,271

7169,719

23,72619,438

1 78,8641,178

592

31,58532,929

135,92424,985

5,812

30, 1985

Holdings aspercent ofcumulativeallocations

49.589.6

—8.9

50.5

100.05.9

213.113.58.2

86.3—

2.2—

0.3

202.12.1

59.85.11.6

21.96.9

15.611.92.4

10.0177.2

2.133.420.3

0.73.1

91.533.119.6

11.612.52.7—

0.1



Gambia, TheGermany, Federal Republic ofGhanaGreeceGrenada



Iran, Islamic Republic ofIraqIrelandIsraelItaly

Ivory CoastJamaicaJapanJordanKampuchea, Democratic

KenyaKoreaKuwaitLao People's Democratic RepublicLebanon

LesothoLiberiaLibyan Arab JamahiriyaLuxembourgMadagascar



1,9326,817

115,302415,980

681

5381,356,668

6,2514,499

18

68

25

4,004

2,57829,511

1,111375,779

42

310,9473,504

70,6164,750

595,989

6,664—

1,799,75017,393

1,276

6,15714,72841,774

72089

98632

108,86316,091

1,596

2,704100,786

2976

31,857

_

2,02125,74511,231

—

—— ,

10,096278,618

—

_

167,677——

—

———

—

———

1 0,900

—14,622

—141,767

———

—

_

6,746

—

———

—

8,000———

_

——

10,8012,700

21,370—

—

_

—35,500

2,395100

22,003384

——

1,295

10,53525,083

3,000250,000

53,647

1,4455,162

—7,000

50,000

30,800———

—

62,578466,000

——

—

2352,628

———

10,280——

1,000—

7,2921,500

44,100104,106

13,237

— —— —— —— 88,633— 888

__ _— 399,218

60,000 —— —— —

392 —1,699 —

— —— —

— —187,625 —

— ——

— —

— —— —— —— 110,149

41,173 —— 6,075— 14,151

25,778 33,443— —

— ——

— —

— 3,358— —— —

6,080 1,500

1 8,000 —— —— —

6,218 4,400— —

— 5,2289,500 —

305,305 —— 31,127— 13,237

—393

6,49380,183

7,085

2,421242,043

62,4996,556

406

6,9673,3232,007

13,1252,990

—210,533

—23,381

577

2,185—

7,6922,200

66,380

89,07875,770

116,07757,525

—

15,033883

30,1931,4041,359

16,91221,006

69225,484

17,35310,048

416,6902,392

4,27430,671

429,43819,42713,237

10,472958

——

938

2,395—

30,170—

397

23,559794196

11,5096,793

11,04169,606

1,484402,418

28,838

————

75,10965,228

—375

—

76,766464,470

—739

—

14,314——

15,676

9,75219,303

—4,301

—

3,74621,725

162,51285,59813,237

-1,058-137

-3,640-58,348-1,182

-564+ 33,740-6,796

-11,300-101

-3,031-1,962

-130-1,616- 1 ,446

-1,995+ 1,244-1,770

-50,375-24,909

+ 7,682-7,230

-715-11,704-6,261

-3,997-4,467

+ 114,690—

-1,276

-3,163-6,457+ 4,372-1,035

-400

-308- 1 ,900+ 8,530

-79-2,086

-917-3,915

-26-1,723+ 2,398

- 1 ,060- 1 ,692

-31,394-9,095

—

1,2048,816

149,622627,800

4,758

1 ,400,9097,2832,149

26

2,449559

6—50

769,141

857196,368

11,419

322,2591,436

92,2162,246

737,725

6,263—

2,016,36515,322

—

3,83910,68583,086

3511,049

914—

138,40016,703

1,738

1,66795,616

71,125

36,647

1,5331,275

738,944

—

11,1606,958

142,6901,079,870

14,091

5,1211,210,760

62,983103,544

930

27,6781 7,604

1,21214,53013,697

19,057—

1 6,409681,170238,956

244,05668,46487,263

106,360702,400

37,82840,613

891,69016,88715,417

36,99072,91126,744

9,4094,393

3,73921,00758,77116,95519,270

10,975139,048

28215,91211,288

9,71915,744

290,02085,689

—

10.8126.7104.958.133.8

115.711.62.12.8

8.83.20.5—

0.4

0.4—

5.228.8

4.8

132.02.1

105.72.1

105.0

16.6—

226.190.7

—

10.414.7

310.73.7

23.9

24.4—

235.598.59.0

15.268.8

2.47.1

324.7

15.88.1—

10.4—


Table 1.10 (concluded).Summary of Transactions and Operations in SDRs, Financial Year Ended April 30, 1985


Holders




QatarRomaniaRwandaSt. Christopher and NevisSt. Lucia

St. VincentSao Tome and PrincipeSaudi ArabiaSenegalSeychelles



SwedenSyrian Arab RepublicTanzaniaThailandTogo

TotalHoldings

April 30, 1984

504484,098

6,008—

4,063

22,803271,112

7,00020,814

5,410

16,43331,283

1581,2808,590

10,8941,7808,380

—34

43109

529,4572,965

49

1,70054,708

1,623255

21,201

64,649

1,6503,456

126,7147,972

932,304

820

Receipts fromParticipants and

Prescribed Holders

Designated

—62,500

———

5855,200

——

3,342——— ,—

2,900————

——

14,000——

—————

121,610————

57,720————

Other

250—

13,327——

1,832—

67,90039,707

17,000—

112,70073,73918,500

—81,970

— ,977

—

31——

7,300—

————

56,500

32,306——

2,019

4,8561,150

140,3001,100

Transfers toParticipants and

Prescribed Holders

Designated

——

28,472—

10,000

————

—84,227

—54,600

—————

350——

5,000—

——

14,900—

——

—

———

8,500

Other

—83,905

——

600

61,0606,000

——

——

22,56433,900

———

977—

——

666,137——

—5,000

———

——

2,500

4,899——

3,300

Receiptsfrom theGeneral

ResourcesAccount

79661,40428,472

2,91311,101

33,9402,689

67,417256

262,578

126,04443,960

110,444

2,90712,974

428977207

40612

505,85318,747

4

5,7985,702

728,39315,000

19,639

28,10340—

14,113—

5,58015,00018,198

Transfersto the


454——

7342,553

——

119,72036,872

30,464—

134,72274,06234,197

—87,830

—977159

91——

18,747—

5,583—

52811,89751,429

24,21622,229

—1,664

—3,279

158,7863,952

Interest,Charges,

andAssess-

ment (Net)

-8714-6,543

-15,305-2,179

-590

-15,315+ 12,283

+ 330-18,049-2,504

+ 277+ 2,100-9,148

-12,445-5,645

+ 159-8,250

-542—

-81

-38-52

+ 42,294-2,613

-38

-1,915+ 4,553

+ 95-1,506

-22,512

-20,791-7,761-5,873

-539-256

-8,702-3,254-3,460-8,142-1,131

Positions as at April

Holdings

225530,640

4,030—

1,420

7,488258,693

9,21818,3625,997

6,61435,96110,8059,9089,191

16,859644

8,266——

69425,467

2,65114

59,9621,196

34518,760

185,107330

1,1511,056

189,8454,676

—20,676

3,235

Netcumulativeallocations

8,105530,340141,322

19,4839,409

157,155167,770

6,262169,98926,322

9,30013,69791,319

116,59553,320

12,82275,95013,697

—742

354620

195,52724,462

406

17,45516,475

65413,697

220,360

298,80570,86852,192

7,7506,432

246,52536,56431,37284,65210,975

30, 1985

Holdings aspercent ofcumulativeallocations

2.8100.1

2.9—

15.1

4.8154.2147.2

10.822.8

71.1262.5

11.88.5

17.2

131.50.8

60.3——

0.111.1

217.610.83.5

364.0182.8

2.58.5

61.90.5

14.916.4

77.012.8

—24.429.5


Trinidad and TobagoTunisiaTurkeyUgandaUnited Arab Emirates


Viet NamWestern SamoaYemen Arab RepublicYemen, People's Democratic

Republic ofYugoslavia

ZaireZambiaZimbabwe

Total Participants

PRESCRIBED HOLDERS

Arab Monetary FundBank of Central African StatesEast African Development BankEastern Caribbean Central BankIslamic Development BankNordic Investment BankQXA/ ICC M^ti/~vr»-il R-»r»LjWlbS INdllOndl DailK

Total Prescribed Holders

GENERAL RESOURCES ACCOUNT

Total

98,5673,265

12,6503,567

63,076

522,0715,028,824

4,99334

345,130

2008,640

17,52914,440

43,367—

5,054

14,960,568

19,1381,0421,850

7681,044

971 7 1 7 1i j, i j i

37,070

6,436,730

21,434,368

— —— —— 95,990— 23,213

999 —

629,002 20,7377,820 —

— 14,750— —

1 ,600 —

— —— 24,359

— 1 1 ,042— 114,628

— 13,764— 94— 42,437

2,152,419 2,762,477

— 87,336— 8,950— —— 1,134— —— 7,105

— 104,525

— 3,658,791

2,152,419 6,525,793

— —— —

112,500 —— —— —

— 564,996— —— 9,458— —— —

—11,900 12,464

— 15,24445,000 45,000

74,000 —31,660 —

— 2,019

2,152,419 2,739,927

— 104,043— 9,050— 750— 977— —— 7,202

5 054

— 127,076

— 6,089,244

2,152,419 8,956,247

—1,523

197,03113,462

—

118,483938,076

17,85861

38,989

2,033942262

—205,786

104,35199,273

1,494

6,089,244

—————

—

6,089,244

——

1 74,69434,788

—

_—

19,168—

—

886673

1,061218,482

68,98960,05543,008

3,658,791

——————

—

3,658,791

4-5,731-3,240- 1 1 ,844-3,166-1-2,517

-145,725+ 49,931-5,415

+ 6+ 6,542

-2,033-109+ 508

-556-16,743

-9,339-7,541

-616

-608,355

+ 1,175+ 269+ 133+ 93

+ 118+ 9

+ 1 396

+ 3,194

+ 609,471

+ 4,310

104,2971,5486,6332,288

66,593

579,5726,024,652

3,560101

392,441

1478,733

11,7109,629

9,154111

3,341

16,805,218

3,6061,2111,2331,0181,163

89 473

17,713

4,615,747

21,438,678

46,23134,243

112,30729,39638,737

1,913,0704,899,530

49,977—

316,890

47,6581,1426,160

22,583155,161

86,30968,29810,200

21,433,330

——————

—

21,433,330

225.64.55.97.8

171.9

30.3123.0

7.1—

123.8

12.9141.8

51.96.2

10.60.2

32.8

78.4

——————

—

—



Table 1.11.Members That Have Accepted the Obligations of Article VIII, April 30, 1985

MemberEffective Dateof Acceptance Member

Effective Dateof Acceptance

Antigua and BarbudaArgentinaAustraliaAustriaBahamas

BahrainBelgiumBelizeBoliviaCanada

ChileCosta RicaDenmarkDjiboutiDominica

Dominican RepublicEcuadorEl SalvadorFijiFinland

FranceGermany, Fed. Rep. ofGuatemalaGuyanaHaiti

HondurasIcelandIrelandItalyJamaica

November 22, 1983May 14, 1968July 1, 1965August 1, 1962December 5, 1973

March 20, 1973February 15, 1961June 14, 1983June5, 1967March 25, 1952

July 27, 1977February 1, 1965May 1, 1967September 19, 1980December 13, 1979

August 1, 1953August 31, 1970November 6, 1946August 4, 1972September 25, 1979

February 15, 1961February 15, 1961January 27, 1947December 27, 1966December 22, 1953

July 1, 1950September 19, 1983February 15, 1961February 15, 1961February 22, 1963

JapanKuwaitLuxembourgMalaysiaMexico

NetherlandsNew ZealandNicaraguaNorwayOman

PanamaPapua New GuineaPeruQatarSt. Christopher and Nevis

St. LuciaSt. VincentSaudi ArabiaSeychellesSingapore

Solomon IslandsSouth AfricaSurinameSwedenUnited Arab Emirates


April 1, 1964April 5, 1963February 15, 1961November 11, 1968November 12, 1946

February 15, 1961August 5, 1982July 20, 1964May 11, 1967June 19, 1974

November 26, 1946December 4, 1975February 15, 1961June 4, 1973December 3, 1984

May 30, 1980August 24, 1981March 22, 1961January 3, 1978November 9, 1968

July 24, 1979September 15, 1973June 29, 1978February 15, 1961February 13, 1961

February 15, 1961December 10, 1946May 2, 1980December 1, 1982July 1, 1976

108


APPENDIX I (concluded). FUND ACTIVITIES IN 1984/85

Table 1.12.Publications Issued, Financial Year Ended April 30, 1985

Reports and Other Documents

Annual Report of the Executive Board for the Financial Year EndedApril 30, 1984(English, French, German, and Spanish). Free

Annual Report on Exchange Arrangements and Exchange Restrictions,1984One copy free; additional copies US$12.00 each

By-Laws, Rules and RegulationsForty-First Issue (English, French, and Spanish). Free

Selected Decisions of the International Monetary Fund and SelectedDocuments, Supplement to Tenth Issue Free

Summary Proceedings of the Thirty-Ninth Annual Meeting of the Boardof Governors Free

World Economic Outlook, April 1985: A Survey by the Staff of theInternational Monetary FundUS$12.00. US$8.00 to university libraries, faculty members, andstudents.

Subscription Publications

Balance of Payments StatisticsVol. 36. A two-part yearbook and 12 monthly booklets. US$38.00 ayear. US$19.00 to university libraries, faculty members, andstudents. US$12.00 for yearbook only.

Direction of Trade StatisticsMonthly, with yearbook.US$36.00 a year. US$18.00 to university libraries, faculty members,and students. US$10.00 for yearbook only.

Government Finance Statistics YearbookVol. VIII, 1984. (Introduction and title of lines in English, French, andSpanish). US$20.00. US$10.00 to university libraries, facultymembers, and students.

International Financial StatisticsMonthly, with yearbook (English, French, and Spanish) and twosupplements (English). US$100.00 a year. US$50.00 to universitylibraries, faculty members, and students. Yearbook, US$25.00.Supplements separately, US$10.00 each.

Staff PapersFour times a year. US$15.00 a year.libraries, faculty members, and students.

University libraries, faculty members, and students may obtainthe five publications listed above at a special rate of US$80.00 forall five publications.

For users of Fund publications that have access to a computer,tape subscriptions to Balance of Payments Statistics, Direction ofTrade Statistics, Government Finance Statistics Yearbook, andInternational Financial Statistics are available at US$1,500.00 ayear each for single users and US$7,000.00 a year for time-sharingcompanies. This price includes the book version. The price touniversities is US$500.00 a year for each publication.

Occasional Papers

No. 27 World Economic Outlook: A Survey by the Staff of theInternational Monetary Fund

No. 28 Exchange Rate Volatility and World Trade: A Study by theResearch Department of the International Monetary Fund

No. 29 Issues in the Assessment of the Exchange Rates of IndustrialCountries: A Study by the Research Department of the InternationalMonetary Fund

No. 30 The Exchange Rate System—Lessons of the Past and Optionsfor the Future: A Study by the Research Department of the InternationalMonetary Fund

US$7.50 to university

No. 31 International Capital Markets: Developments and Prospects,1984By Maxwell Watson, Peter Keller, and Donald Mathieson

No. 32 World Economic Outlook, September 1984: Revised Projectionsby the Staff of the International Monetary Fund

No. 33 Foreign Private Investment in Developing Countries: A Studyby the Research Department of the International Monetary Fund

No. 34 Adjustment Programs in Africa: The Recent ExperienceBy Justin B. Zulu and Saleh M. Nsouli

Occasional Paper No. 27, the World Economic Outlook, isavailable for US$12.00, with a special price of US$7.50 foruniversity libraries, faculty members, and students. OccasionalPapers Nos. 28-34 are available for US$7.50 each, with a specialprice of US$4.50 each for university libraries, faculty members,and students.

Books

Analyse et programmation financieres: Application a la Coted'lvoireCloth, US$20.00 Paper, US$12.50

Geldwertstabilitat und WirtschaftswachstumEdited by Hans Seidel. In German. DM 58.00

Legal and Institutional Aspects of the International Monetary System:Selected Essays, Vol. IIBy Joseph Gold. US$40.00

Programacidn financiera aplicada: El caso de ColombiaCloth, US$20.00 Paper, US$12.50

Public Enterprise in Mixed Economies: Some Macroeconomic AspectsBy Robert H. Floyd, Clive S. Gray, and R.P. Short. US$12.00

Taxation, Inflation, and Interest RatesEdited by Vito Tanzi. Cloth, US$20.00 Paper, US$15.00

Pamphlet Series

No. 37 The International Monetary Fund: Its Evolution, Organi-zation, and Activities (fourth edition)(English and French) Free

No. 40 SDRs, Currencies, and Gold: Sixth Survey of New LegalDevelopmentsBy Joseph Gold (French and Spanish). Free

No. 41 The General Arrangements to BorrowBy Michael Ainley (English). Free

No. 42 The International Monetary Fund: Its Financial Organi-zation and ActivitiesBy Anand G. Chandavarkar (English). Free

No. 43 The Technical Assistance and Training Services of theInternational Monetary Fund(English) Free

Other

Finance & DevelopmentIssued jointly with World Bank; quarterly (English, Arabic, Chinese,French, German, Portuguese, and Spanish). Free

IMF SurveyTwice monthly but only once in December (English, French, andSpanish). Private firms and individuals are charged for delivery at anannual rate of US$30.00.

109


Appendix

II

Principal Policy Decisions of theExecutive Board

A. Policy on Enlarged Access to the Fund's Resources: Charges on HoldingsOutstanding, Amendment of Rule 1-6(5)

Rule 1-6(5) shall be amended as indicated below:

(5) The rate of charge on holdings of a member's currency acquired as a resultof the member's purchases of borrowed currency under the policy on enlargedaccess to the Fund's resources (Executive Board Decision No. 6783-(81/40))1 duringa six-month period ending June 30 or December 31 shall be equal to the total,expressed as a percentage per annum, of:

(i) the net cost of borrowing by the Fund under that policy for the period,calculated in accordance with (a), (b), and (c) below and

(ii) the imputed borrowing cost of the amount of the ordinary resources beingused to finance purchases of borrowed currency calculated in accordancewith (d) below,

plus 0.2 percent per annum.(a) The net cost of borrowing for a six-month period ending June 30 or

December 31 shall consist of the actual gross cost of borrowing to financepurchases under the policy assignable to the period less net income duringthe period from the temporary employment of the borrowed funds.

(b) Actual gross costs of borrowing shall comprise:(i) interest paid or accrued to lenders on the average daily amount of

balances borrowed; and(ii) fees, commissions, and any other primary costs directly payable to

lenders or incurred in order to secure the borrowed funds, prorated forsix-month periods ending June 30 and December 31 in proportion tothe duration of the borrowing arrangements to which such costs relate,or to the period covered by these costs.

(c) Net income from temporary employment of borrowed funds pendingdisbursement shall be determined by taking into account:(i) income received and income accrued from investments or other

operations to secure a rate of return;(ii) operational expenses (paid and accrued) incurred directly by the Fund

in order to obtain this income, prorated over the period to maturity ofthe investment; and

1 Selected Decisions of the International Monetary Fund and Selected Documents, Tenth Issue(Washington, 1983), pages 40-45.

110


APPENDIX II (continued). PRINCIPAL POLICY DECISIONS

(iii) any net gain or loss, calculated to the end of each six-month periodending June 30 or December 31, resulting from exchange valuationadjustments of currency balances and investments representing theundisbursed proceeds of borrowing in terms of the SDR.

(d) (i) The imputed borrowing cost of the use of ordinary resources beingused to finance purchases of borrowed currency shall be the productof the daily amount of such resources as determined in accordancewith (ii) below multiplied by the rate of interest for the weekly periodcommencing each Monday calculated in accordance with the methodset forth in Rule T-1(b) and (c) for determining the rate of interest onholdings of SDRs except that, in place of the rates or yields for thepreceding Friday on the instruments listed in Rule T-1(c), the yields forthe preceding Wednesday on the instruments specified under para-graph 3(b) of Annex A to the letter referred to in Executive BoardDecision No. 6843-(81/75),2 adopted May 6, 1981, shall be used,

(ii) The amount of ordinary resources being used to finance purchases ofborrowed currency is equal to the amount of the Fund's holdings ofcurrency resulting from members' purchases of borrowed currencyunder the policy on enlarged access less the outstanding amount ofcurrency borrowed by the Fund to finance such purchases afterdeducting the amounts of currency held in the Borrowed ResourcesSuspense Accounts.

Decision No. 7710-(84/84)May 30, 7954

B. Policy on Enlarged Access to the Fund's Resources: Extension of Period, andAccess Limits for 1985

The Fund, having reviewed the decisions on the policy on enlarged access andthe limits on access to the Fund's resources under that policy and under the specialfacilities of the Fund (No. 6783-(81/40),3 No. 7599-(84/3),4 No. 7600-(84/3),5 andNo. 7602-(84/3)),6 decides that:

1. In paragraph a. of Decision No. 7599-(84/3),4 "1984" shall be replaced by"1985."

2. (a) The following sentence shall be added after the first sentence of para-graph a. of Decision No. 7600-(84/3):5 "Access by members to the Fund'sgeneral resources under arrangements approved under Decision No. 6783-(81 /40)3 during 1985 shall be subject to annual limits of 95 or 115 percentof quota, three-year limits of 280 or 345 percent of quota, and cumulativelimits of 408 or 450 percent of quota net of scheduled repurchases,depending on the seriousness of the member's balance of payments needand the strength of its adjustment effort."

(b) In paragraph b. of Decision No. 7600-(84/3),5 "1984" shall be replacedby "1985."

Decision No. 7841-(84/165)November 16, 198

C. Misreporting and Noncomplying Purchases Under Fund Arrangements: Guide-lines on Corrective Action

In a few cases, it has been found that a member has made a purchase under astand-by or extended arrangement which it was not entitled to make by the terms

2 Ibid., pages 188-89.3 Ibid., pages 40-45.4 Selected Decisions of the International Monetary Fund and Selected Documents, Supplement to

Tenth Issue (Washington, 1984), page 7.5 Ibid., pages 7-8.6 Ibid., pages 15-16 and 18.

111



of the arrangement (a "noncomplying purchase"). The purchase was permittedbecause, on the basis of the information available to it at the time, the Fund wassatisfied that all performance criteria that were applicable to the purchase underthe arrangement, or other conditions applicable to purchases under the terms ofthe decisions on the arrangement, had been observed, but this information laterproved to be incorrect. When such a case arises in the future, the member will becalled upon to take corrective action regarding a noncomplying purchase, to theextent that it is still outstanding, either by repurchase or by the use of its currencyin transactions and operations of the Fund, unless the Fund decides that thecircumstances justify the member's continued use of the purchased resources. Stepsshould also be taken to improve the accuracy and completeness of the informationto be reported to the Fund by the member under the arrangement and to defineperformance criteria and other applicable conditions in a manner that wouldfacilitate accurate reporting.

The Fund adopts the following guidelines, which shall apply to purchases madeafter the date of this decision:

1. Whenever evidence comes to the attention of the Fund indicating that aperformance criterion or other condition applicable to an outstanding purchasemade within the previous two years under a stand-by or extended arrangement maynot have been observed, the Managing Director shall promptly inform the memberconcerned.

2. If, after consultation with the member, the Managing Director finds that, infact, the criterion or condition was not observed, he shall promptly notify themember of his finding. At the same time, he shall submit a report to the ExecutiveBoard together with his recommendations, which may include a recommendationthat the member be called upon to take corrective action pursuant to paragraph 3or that the nonobservance be waived pursuant to paragraph 4. The recommendationsof the Managing Director shall be submitted to the Executive Board on a lapse-of-time basis giving Executive Directors a period of at least 10 days during which theycould ask that the matter be placed on the agenda of the Executive Board forconsideration.

3. Unless the decision of the Executive Board is to grant a waiver pursuant toparagraph 4 or to take other action, the member shall be expected to repurchasefrom the Fund the outstanding amount of its currency resulting from the noncom-plying purchase normally within a period of 30 days from the date of the ExecutiveBoard decision referred to in paragraph 2. Instead of repurchasing, the membermay request the Fund to use an equivalent amount of its holdings of the member'scurrency in the Fund's transactions and operations, but if such use cannot be madewithin 20 days from the date of the Executive Board decision the member shall beexpected to make a repurchase in accordance with this paragraph.

4. A waiver will normally be granted only if the deviation from the relevantperformance criterion or other condition was minor or temporary, or if subsequentto the purchase the member had adopted additional policy measures appropriateto achieve the objectives of the program supported by the arrangement under whichthe purchase was made.

5. If a repurchase pursuant to the expectation under paragraph 3 has not beeneffected, the Managing Director shall submit promptly a report to the ExecutiveBoard accompanied by a proposal on how to deal with this matter, in which hemay recommend that the Fund initiate action under Article V, Section 5 of theArticles.

6. Provision shall be made in Fund arrangements for the suspension of furtherpurchases under an arrangement whenever a member fails to meet a repurchaseexpectation pursuant to these guidelines.

7. Nothing in these guidelines shall limit the power of the Fund to take, in casesof noncomplying purchases, other action that could be taken pursuant to the Fund'sArticles and Rules.

Decision No. 7842-(84/165)November 16, 1984

112



D. Extended Fund Facility and Guidelines on Conditionality: Review

The Executive Directors then took the following decision:1. Pursuant to Decision No. 7558-(83/156),7 adopted November 16, 1983, the

Fund has reviewed the programs supported by stand-by and extended arrangements,as well as the appropriateness of the provisions of the extended Fund facility, andof the guidelines on Conditionality, and decides that the provisions of the extendedFund facility and the guidelines on Conditionality remain appropriate in the presentcircumstances.

2. The Fund will again review the programs supported by stand-by and extendedarrangements, and the appropriateness of the provisions of the extended Fundfacility, and of the guidelines on Conditionality, not later than December 31, 1985.

Decision No. 7857-(84/175)December 5, 1984

E. Overdue Payments to the Fund: Member's Right to Purchase Under Stand-Byand Extended Arrangements

1. The following paragraph shall be included, as paragraph 5, in the form of thestand-by arrangement in Attachment A to Decision No. 6838-(81/70),8 April 29,1981, as amended, with an appropriate reference to this paragraph to be includedin paragraph 1 and the subsequent paragraphs of the form to be renumberedaccordingly: "(Member) will not make purchases under this stand-by arrangementduring any period of the arrangement in which the member has an overdue financialobligation to the Fund or is failing to meet a repurchase expectation pursuant tothe Guidelines on Corrective Action9 in respect of a noncomplying purchase."

2. The following paragraph shall be included, as paragraph 5, in the form of theextended arrangement in Attachment B to Decision No. 6838-(81/70),10 April 29,1981, as amended, with an appropriate reference to this paragraph to be includedin paragraph 1 and the subsequent paragraphs of the form to be renumberedaccordingly: "(Member) will not make purchases under this extended arrangementduring any period in which the member has an overdue financial obligation to theFund or is failing to meet a repurchase expectation pursuant to the Guidelines onCorrective Action8 with respect to a noncomplying purchase."

3. Other stand-by or extended arrangements granted by the Fund after the dateof this decision shall include also the provision in 1 or 2 above.

4. The provision in 1 and 2 above shall be included also in an existing stand-byor an extended arrangement when the Fund and the member reach understandingsregarding the circumstances in which further purchases may be made under thearrangement.

5. Decision No. 7678-(84/62),11 April 20, 1984, shall cease to apply in respectof a stand-by or an extended arrangement that includes the provision in 1 or 2above.

Decision No. 7908-(85/26)February 20, 198

At the same meeting the Executive Board agreed that, if a member were failingto meet a repurchase expectation pursuant to the Guidelines on Corrective Action9

with respect to a noncomplying purchase, the Fund would not negotiate or approveeither a stand-by or extended arrangement for the member or the use of the Fund'sgeneral resources outside an arrangement, as in the case of an overdue financialobligation to the Fund.

7 Selected Decisions of the International Monetary Fund and Selected Documents, Supplement toTenth Issue (Washington, 1984), page 6.


9 See item C, pages 111-12, above.10 Selected Decisions of the International Monetary Fund and Selected Documents, Tenth Issue

(Washington, 1983), pages 53-57.11 See Annual Report, 1984, page 136.

113



F. Overdue Payments to the Fund: Amendment of Rule G-4

Rule G-4 shall be amended to include the following provision as paragraph (e):

"Instructions for the transfer of currency for any purchase, other than a reservetranche purchase, shall be rescinded, to the extent that it is feasible, during theperiod between the issuance of the instructions and the value date for the purchaseif, during that period, the member requesting the purchase has any overdue financialobligation to the Fund or is failing to meet a repurchase expectation pursuant tothe Guidelines on Corrective Action12 with respect to a noncomplying purchase/'

Decision No. 7909-(85/26)February 20, 1985

G. Relationship Between Performance Criteria and Phasing of Purchases UnderFund Arrangements: Operational Guidelines

(1) As a general rule, every effort should be made to limit the lag between thebeginning of the annual program period and the date of discussion by the ExecutiveBoard of supporting annual arrangement (or the annual segment of a multiyeararrangement) to a minimum. This would facilitate the inclusion of quarterlyperformance criteria throughout the program period and of purchases throughoutthe period of the arrangement, thereby strengthening the link between Fund financingand adjustment.

(2) Particular attention should be given to minimizing lags in reporting of datarelating to performance criteria without loss of reliability of data. It would bereasonable for the Fund to expect that all members seeking the Fund's supportshould be able to limit reporting lags to two months. In very exceptional caseswhere reporting lags exceed two months, the staff will explain the reasons for suchlags as well as the steps being taken to reduce them.

(3) Every effort should be made to limit the period between the approval of anadjustment program by management and the date when the supporting arrangementis discussed by the Executive Board to no more than three months. Should theperiod be exceeded, the staff would confirm before the Board discussion of thearrangement that the program as originally proposed remains generally appropriate.In those exceptional cases where the delay indicates a significant slippage in theimplementation of the agreed program, the staff would renegotiate the program,including the performance criteria and phasing of purchases.

(4) There would be no fewer than four purchases during a 12-month period ofthe arrangement, five being the preferred course of action. The purchase dateswould also be distributed as evenly as possible throughout the arrangement. However,problems have often been experienced in this regard because of a bunching of thefirst two purchases under an arrangement and/or the last purchase occurring undulyearly before the end of the arrangement. In order to avoid such problems, as ageneral rule, the date of the second purchase would not be earlier than two monthsfrom the initial purchase on approval of the arrangement and the date of the lastpurchase would not be earlier than two months before the end of the arrangement.One possible exception would be the case where initial Executive Board approvalhas been only in principle and final approval follows later by up to 30 days.

(5) The test dates for performance criteria would also be distributed as evenly aspossible through the period of the arrangement. Normally the date of the firstperformance test would not be earlier than the date on which the arrangementbecomes effective, and the date of the last performance test would not be earlierthan three months from the end of the arrangement.

(6) Every effort should be made to include performance criteria initially for asmuch of the 12-month period of the Fund arrangement as possible. However, itmay not be possible always to establish in advance one or more performance criteria

12 See item C, pages 111-12, above.

114


APPENDIX II (continued}. PRINCIPAL POLICY DECISIONS

for part of the period of the arrangement because of substantial uncertainties aboutmajor economic trends and normal time lags between the completion of negotiationson the arrangement and Board discussion of the arrangement. Taking into accountboth sets of factors, as well as the actual experience in recent years, it would bereasonable to expect that, as a normal rule, performance criteria would be includedinitially which would govern purchases over a period of at least six months of thearrangement. This would normally involve at least two sets of performance criteria.Where this minimum period is not met, the staff report would include a fullexplanation of the underlying reasons.

(7) As a general rule, indicative targets would be included at the outset for thatpart of the 12-month arrangement for which performance criteria are yet to beestablished. Provision will also be made for a review in order to replace theseindicative targets later with performance criteria. Indicative targets will also beincluded for the last month of the arrangement period.

(8) In the case of segments within the framework of a multiyear arrangement,normally performance criteria would be set up to the end of each underlying annualprogram period. The purchase after the end of the underlying annual program(which may be the last purchase under the preceding segment of the arrangementor the first purchase under the subsequent segment) would be contingent both onunderstandings being reached with the Fund on the next year's underlying programand on observance of performance criteria for the end of the preceding programperiod or established in the context of the member's new program, or on a waiverbeing approved by the Board in the case of nonobservance of these performancecriteria.

Decision No. 7925-^(85/38)March 8, 1985

H. Accounting for Charges from Members with Overdue Obligations

The Executive Board decides that henceforth charges on the use of Fund resourcesfrom members that are overdue in meeting financial obligations for six months ormore will not be included in accrued income unless a member, though overdue inother obligations to the Fund, has remained current in settling charges as they falldue. Charges that are not included in accrued income will instead be reported asdeferred income.

Decision No. 7930-(85/41)March 13, 1985

I. Reporting by the Fund of Overdue Obligations

The Executive Board decides that overdue financial obligations to the Fund ofmembers having obligations overdue for six months or more will be reported inaggregate by category of obligation but without identifying the members involved,in the Fund's Annual Report, quarterly Financial Statements of the General Departmentand the SDR Department, yearbook issue of Balance of Payments Statistics, andInternational Financial Statistics.

Declarations of ineligibility to use the Fund's general resources will be reportedin the Fund's Annual Report and will identify the members concerned, beginningwith the 1985 Annual Report.


115



J. Developing Countries' Indebtedness to Commercial Banks and Official Creditors,and Export Credit Cover Policies

Chairman's Concluding Remarksat Executive Board Meeting

General Remarks

In their overall assessment of the present situation in indebted countries and ofpolicy objectives for the period ahead, Executive Directors agreed that encouragingprogress has been made in managing developing countries' debt-servicing difficulties.But they cautioned against complacency, noting that the debt problems in somecountries have not yet been solved.

The clear progress over the past two and a half years has been due to majoradjustments by debtor countries and to concerted action by debtors and creditors,and it has undoubtedly been helped considerably by the strength of the economicrecovery, and particularly by the upturn in the U.S. economy. However, Directorsnoted that the progress of individual countries in restoring a viable payments positionand real growth has been uneven. Directors stressed that balanced growth of theworld economy, open trading systems, appropriate adjustment policies by the debtorcountries, and continued collaboration between debtors and creditors are the keysto solving external debt problems.

Appropriate adjustment policies in debtor countries are clearly needed to fosterwhat Directors called the normalization of debtor-creditor relationships, which inturn would encourage the restoration of debtors' creditworthiness, greater sponta-neous bank lending, official credit flows, and official development assistance. Inthis connection, several Directors underscored the serious nature of the manyproblems facing sub-Saharan African countries. A number of Directors also stressedthat adjustment policies could pave the way for a return of flight capital and for anincrease in direct foreign investment and related non-debt-creating flows andtransfers of technology.

Several Directors, however, expressed their concern about the social and humancosts of the adjustment efforts in developing countries. In their view, the costs werenot stressed sufficiently in the staff papers. They thought that greater emphasisshould be placed on mobilizing additional financing, especially official developmentassistance, in order to strengthen the growth potential of debtor countries, especiallylow-income countries, which have very limited resources or access to bank credit.Those Directors noted in particular the low level of bank lending to debtor countriesin the recent past and the additional debt-servicing burden due to high realinternational interest rates, the present trends in the exchange markets, and theeffect of protectionism in a number of industrial countries.

Executive Directors generally observed that the progress in reducing debt-servicingdifficulties could be endangered by adverse developments in the world economy,particularly developments in trade, interest rates, and exchange rates. Directorsstressed that appropriate policies in major industrial countries could greatly reducethis danger. In this connection, a number of Directors, noting that policy responsesto adverse developments would of course have to be made by both industrial anddeveloping countries—in close collaboration with financial institutions—reiteratedthe importance they attach to effective and evenhanded Fund surveillance.

Directors commented favorably on commercial banks' readiness to enter intomultiyear restructuring arrangements (MYRAs) for certain countries that have madesignificant progress in correcting the imbalances in their economies. They thoughtthat MYRAs could play a useful role in facilitating a return to more normal capitalmarket access by removing the "hump" in future amortization payments. The abilityof the countries concerned to forgo concerted lending would help to set the stagefor normalizing creditor-debtor relationships. A number of Directors urged officialcreditors also to agree to multiyear rescheduling.

Directors agreed that countries at an early stage in solving their payments problemsneeded to maintain comprehensive and convincing adjustment efforts, supportedby Fund arrangements where appropriate. Financial flows, including debt relief and

116



concerted lending, should be tailored to each country's prospects and adjustmenteffort. A number of Directors considered that smaller and medium-sized countriesmaking strong adjustment efforts must be given the same close and active attentionby creditor countries and institutions as countries having greater influence oninternational economic and financial developments. Some Directors emphasizedthe need to ensure that financial flows would be sufficient to finance not onlyimmediate balance of payments gaps, but also growth and development. In thatcontext, the roles of official development assistance and cofinancing through theWorld Bank were stressed. Directors observed that banks and official creditorsmight need to be flexible, perhaps within a longer-term framework, in dealing withthe problems of countries experiencing severe and protracted debt-servicing diffi-culties, especially low-income countries, which generally have little or no accessto commercial lending and depend heavily on development assistance. SeveralDirectors emphasized that, as a monetary institution, the Fund should limit its rolein those low-income countries to that of a catalyst, providing advice on adjustmentthat was perhaps as important, or more important, than financing.

Directors generally stressed the appropriateness of continuing the case-by-caseapproach of tailoring the mix between adjustment and financing to a country'scircumstances and prospects, and they considered that the Fund would continueto have a major role to play in this field. In this regard, debt restructuring andconcerted lending, where necessary, would appear to be a pragmatic and appropriat.approach to securing additional financing, despite the sometimes admittedly arduousprocess of assembling financing packages. Developing countries were stronglyencouraged actively to promote non-debt-creating capital inflows, particularlydirect investment.

While some Directors believed that the problem of external indebtedness requireda more integrated approach than the one suggested in the staff papers, I have notdiscerned today a trend in favor of what some Directors have called generalizeddebt relief.

Developing Countries' External Indebtedness to Commercial Banks

A large number of Directors agreed that enhancing Fund surveillance on a case-by-case basis could make an important contribution to supporting continuingadjustment by countries that were no longer using Fund resources. While notingthat the provision of semiannual consultation reports reviewing countries' progresstoward a more viable balance of payments position would assist banks in makingthe transition toward more market-based credit decisions, most Directors stressedthat Fund reports should not take a position on the appropriateness of continuingrestructuring or additional bank lending. Directors felt strongly that it was up to thebanks to utilize the information given to them by the countries concerned; thebanks should make their own judgments. Furthermore, Fund reports should beviewed as only one element of the banks' information and monitoring procedures.Directors encouraged the banks to develop their own risk assessment and monitoringcapabilities, a process in which the Institute for International Finance might play auseful role. In addition, some Directors said, banks should not take enhancementof Fund surveillance as a signal that they could relax their own monitoring.

Many Directors commented on the need to reinforce the soundness of theinternational banking system in order to improve the medium-term prospects forlending. They observed that bank supervisors have generally sought improvementin banks' balance sheets in a judicious manner, weighing the need to move rapidlyagainst the risk that an excessively stringent approach could be highly counter-productive. Directors also stressed that more forward-looking risk assessment bybanks was an important factor in assisting developing countries to regain morenormal market access. These Directors felt that improved risk assessment would beessential to ensure that, over time, the recurrence of cycles of overlending andunderlending to individual countries would be avoided, and that financial inno-vations would be made in a sound manner. Close Fund surveillance of developingand developed countries' economic policies would also support the strengtheningof the financial system.

117



Export Credit Cover Policies

Directors welcomed the opportunity to discuss export credit cover policies inthe belief that official export credit agencies would have an important role to playin coming years. The role of official credit insurance agencies was particularlyimportant in helping to maintain vital short-term trade credits, especially in periodsin which debtor countries pursued adjustment efforts supported by Fund resources.The recent maintenance of short-term credit insurance by virtually all majoragencies—when the appropriate conditions were met—was welcomed by Directors.

As to officially supported commercial credits of longer maturity, Directors believedthat the activities of export credit agencies would be crucial in coming years, withthe resumption of the growth of capital goods imports in developing countries. Theefforts of those countries that make adjustments to restore balance of paymentsviability over the medium term should be supported by a timely resumption ofofficial export credit and cover. In this way, official export credit agencies couldhelp certain borrowers to gradually regain access to commercial credit. Directorsstressed, however, the need to ensure that official export credits were used forproductive purposes. In this context, they welcomed the efforts made by officialexport credit agencies to strengthen their country risk assessment and projectappraisal procedures. They noted that lending by those agencies was likely to bemost effective and secure when it was part of a well-designed and carefully appraisedinvestment program. In this respect, the role of the World Bank was stressed.

Directors thought that debtors would gain the greatest possible benefit fromfinancial assistance from export credit agencies by being fully aware of the varietyof practices and procedures of these institutions. In particular, they should be awareof the linkages between rescheduling and new credit cover.

Developing Countries' Indebtedness to Official Creditors

Directors welcomed the efforts by official creditors to respond to the financingneeds of countries that were undertaking adjustment programs. They noted inparticular the flexibility that had been shown by the Paris Club creditors in reachingagreements that reflected the particular circumstances of individual countries. Thiscase-by-case approach had enabled creditors to deal with each country's immediatefinancing difficulties while bearing in mind the impact of any rescheduling agreementon a country's access to new export credits and export credit insurance. Given theimportance of maintaining or restoring such access, a number of Directorsemphasized that rescheduling must continue to be viewed as a response toexceptionally difficult circumstances, and not as an alternative form of balance ofpayments financing or development assistance.

Some Directors said that, while the Paris Club's activities were welcome, officialcreditors had responded less flexibly than other creditors. A number of Directorsstressed that it would be appropriate for official creditors to take a somewhat longer-term approach to a country's debt-servicing difficulties. A number of other Directors,while being receptive in principle to this suggestion, stressed that MYRAs by officialcreditors should remain the exception, and that MYRAs by banks and by officialcreditors should not necessarily go hand in hand and need not have identical terms.They also stressed the severe budgetary constraints in a number of creditor countries.

Although Directors differed in their views on when a longer-term approach to acountry's debt-servicing difficulties would be appropriate, some of them felt thatthe key question was whether or not multiyear rescheduling by official agencieswould facilitate access to new credits and the restoration of normal debtor-creditorrelationships. There was agreement that multiyear rescheduling could be a usefulresponse to countries that had made major progress in their domestic and externaladjustment efforts but faced a hump in their amortization payments that could notbe refinanced through normal market mechanisms. Even in those cases, however,care would have to be taken to ensure that the rescheduling exercise did in factpave the way for the opening of new export credits and cover. The Fund and theParis Club will be examining these matters further.

A number of Directors considered that a longer-term approach was also calledfor in the case of countries—particularly the low-income countries—experiencing

118



prolonged debt-servicing difficulties. They believed that the year-by-year approachdid not realistically address the situations in these countries, which obviouslyrequired very long-term debt restructuring on highly concessional terms. However,other Directors noted the generous terms the Paris Club had been granting suchcountries and emphasized that these countries' difficulties could only be addressedby strong adjustment efforts supported by appropriate development assistance,which, in their view, should be kept separate from rescheduling policies. Withouta firm reorientation of economic and financial policies, even the most generousrescheduling terms were unlikely to generate an increased level of net lending tosuch countries.

Directors noted the importance attached by all creditor groups to comparabilityof treatment among creditors and nondiscrimination. For countries experiencingdebt-servicing difficulties, careful coordination was necessary not only to achieveequitable burden sharing among creditors, but also to ensure an appropriate balancebetween financing and adjustment.

March 20, 1985

K. Surveillance over Members' Exchange Rate Policies: Review of Implementationof Procedures

The Executive Board has reviewed the general implementation of the Fund'ssurveillance over members' exchange rate policies, as required by paragraph VI ofProcedures for Surveillance attached to Decision No. 5392-(77/63),13 adoptedApril 29, 1977, including the procedures for the conduct of consultations under Arti-cle IV, which consultations shall comprehend the consultations under Article VIMand Article XIV, and approves the continuation of the procedures as described inSM/85/65, in the light of the Managing Director's summing up, until the next annualreview, which shall be conducted not later than April 1, 1986.


Attachment to Decision No. 7939-(85/49)Managing Director's Summing Up

Directors once again emphasized the great importance that they attach to therole of the Fund in the area of surveillance. They welcomed the emphasis of thisyear's review on questions related to the effectiveness of surveillance, particularlyin view of the current international economic environment. Directors stressed inparticular the need for a continued evolution of surveillance procedures to enhancethe ability of the Fund to carry out its responsibilities in this area in an effective andevenhanded way, and made a number of suggestions for improvements in the waysurveillance is implemented.

1. The Effectiveness and Evenhandedness of Surveillance

The discussion of the question of the effectiveness of surveillance was wide-ranging and we have heard some very thoughtful comments on this subject. Theviews expressed on the extent to which surveillance can be considered to beevenhanded in its implementation were particularly noteworthy, and I shall beginwith an attempt to draw together the common threads of that discussion.

Directors all agreed that evenhandedness was essential to the effectiveness ofsurveillance. They noted the widely held view that the Fund was much stricter inits oversight of the policies of deficit developing countries than of those of othercountries. Several Directors indicated their support for this view, but most agreedwith the staff paper that this interpretation resulted from an insufficient distinction


119



between the function of surveillance and other functions of the Fund, such as thoseinvolved in conditionality and jurisdiction over exchange restrictions. It was truethat conditionality did involve particularly detailed attention to the policies ofmember countries engaged in Fund-supported adjustment programs. When countriesfaced financial crises, however, it was clear that policies needed to be correctedimmediately, and, in any case, the Fund was obliged to see that appropriate usewas made of its resources. Most Directors thus agreed that surveillance, as such,had been evenhanded in its application. They stressed, however, that surveillancealso needed to appear to be evenhanded, and for that to be the case it must beseen to be effective with respect to the large industrial countries. Given the effectsthat developments in such countries had on the rest of the world economy,moreover, it was particularly important that it be effective for those countries.

Directors considered that surveillance in fact had been much less effective thanit should have been. Directors did note the important role that surveillance hadplayed in bringing key policy issues to the attention of the authorities and keepingthem under active discussion. It was also possible to cite many instances wherepolicy decisions in member countries clearly had taken account of the viewsexpressed by the international community through the Fund's surveillance process.

More generally, however, it was clear that there remained substantial divergencesbetween the policies actually pursued by some member countries and thoseadvocated by the Fund membership collectively. A number of references weremade by Directors to the fact that fiscal policy in the United States continues todiverge from what in the view of those Directors would be optimal in terms of itseffects on the world economy, as well as on the U.S. economy itself. The continuinginadequacy of corrective policies in other industrial countries and in manydeveloping countries was also stressed. Some Directors expressed the view thatwhat was needed was more explicit guidance for members on the types of exchangerate and other policies that were consistent with the objectives of the Fund thanwas provided in the surveillance decision or, indeed, in the Articles themselves.Directors underlined the fact that while we must continually endeavor to sharpenour analysis and to improve our procedures, the basic issue was not procedural.Rather it was the willingness of member countries to adapt their policies in light ofthe views expressed by the international community.

Before turning to Directors' views on the major ideas for enhancing the effec-tiveness of surveillance in this area noted in Section VI of the staff paper, I will sumup the discussion of various issues emerging from the experience in 1984 with theimplementation of surveillance.

2. Issues Arising from the Implementation of Surveillance in 1984

(i) The analytical basis of surveillance

Directors considered that the analytical framework provided by the worldeconomic outlook exercise continued to be an extremely useful basis for evaluatingthe global impact of the economic policies of the major countries. They welcomedthe increasing emphasis, both in the world economic outlook and in Article IVconsultations, on the medium-term implications of members' policies. Directorsalso noted the desirability of further development of analytical techniques in thekey policy areas. In this connection, they stressed the need for more comprehensiveanalysis of the international implications of country policies. They also noted theneed for a better understanding of the ways in which financial policies and problemsof structural adjustment interacted internationally to affect exchange rates.

(ii) Article IV consultations

Directors considered that Article IV consultations were the key element of thesurveillance process. They welcomed the increased coverage in Article IV staffreports, both of important policy issues and of technical aspects, such as the qualityof statistics and relations with the World Bank. They nonetheless encouraged thestaff to be economical in reporting, to avoid blurring the focus of staff reports onthe key issues. Many Directors felt that, given the heavy work load, the staff should

120



be free to experiment with abbreviated reports on recent economic developments(REDs) in some cases.

Directors welcomed the improvement in consultation scheduling that has occurredsince the implementation in 1983 of the system of advance specification ofconsultation cycles. In this connection, Directors considered it important that theFund focus its efforts on those situations most in need of attention, and suggestedthat more differentiation in specification of cycles would be appropriate. In particular,all of the largest countries (several figures have been mentioned to define this group,and on that basis, I would say at least the 25 largest members) should be on thestandard cycle. On the other hand, for small countries (other than countries withprograms with the Fund or where there were questions about balance of paymentsviability), longer cycles up to two years would generally be appropriate, althoughwhere such members valued annual discussions with the Fund, they should beentitled to request the standard cycle. Some Directors suggested that informal staffvisits for policy discussions midway between full consultations might be a usefulway to accommodate the preferences of some members in such cases, while stillkeeping the work load within manageable proportions.

(iii) Monitoring of exchange rates

Directors considered that experience had been broadly satisfactory with thesystem of monitoring exchange rate developments through notifications to theExecutive Board of changes in exchange arrangements and through informationnotices relating to large movements in real effective exchange rate indices, althoughsome Directors cautioned against the temptation to rely too heavily on mechanicalindicators of that sort. Many Directors felt that exchange rate developments in largeindustrial countries deserved perhaps more frequent attention, and a number ofDirectors supported a reduction in the threshold for information notices for suchcountries. But after having looked at the tally, I would conclude that the Board hasnot called at this point in time for a change in the information notice system.

3. Suggestions for Improving the Effectiveness of Surveillance

I turn now to the discussion of the major ideas described in Section VI of thestaff paper. In general, Directors believe that we should explore every possibleavenue for improving the effectiveness of surveillance.

First, while some Directors were quite negative with regard to the use of objectiveindicators, there was a broad-based interest in exploring the idea of making greateruse of objective indicators as an instrument of Fund surveillance, particularly vis-a-vis major industrial countries. Most Directors stressed, however, that there wouldbe considerable difficulty in establishing such indicators and agreeing with memberson appropriate values for them. Directors therefore urged the staff to take anexperimental approach in terms both of further development in the conceptualapproach to be followed and of exploration of the concept with interested authorities.I conclude that, for the time being at least, the use of such indicators in particularcases where they might be appropriate and acceptable would be limited to providinga basis for reviewing, in the course of an Article IV consultation, developmentsagainst the background of the conclusion of the previous one.

Second, most Directors reacted negatively to the idea of a major move towardgreater publicity in connection with Article IV consultations. They emphasized thatthe confidential relationship between the Fund and its members has been one ofthe most important elements of the consultation process, and they believed thatpublicity would involve a change in that practice that could have serious conse-quences for the candor and frankness of the policy discussions between the Fundand its members.

In the same vein, most Directors expressed reservations—although some of themwere very interested in the idea—about the release of staff reports, and wereconcerned that such a practice could adversely affect the frankness and usefulnessof these reports. For, I think, similar reasons, the reaction was negative at this pointin time to the idea of the Managing Director making public statements followingthe conclusion of Article IV consultations. At the same time, I noted the Board'sgeneral support for the manner in which I have been expressing my views and

121



positions on matters of Fund concern in my public addresses. I should also notethat most Directors were open to the wider release, including publication, of REDswith the approval of the member concerned.

Third, Directors believed that there was considerable scope for expanded follow-up to consultations on the side of both the Fund and country authorities. Theyconsidered that the current practice in Article IV staff reports of including reviewsof developments against the background of the previous consultation should befurther developed as a means of assessing the effectiveness of the consultationprocess, by giving indications of the weight the authorities attached to the views ofthe Fund. Directors strongly supported more "internal publicity" among theauthorities of member countries themselves for the findings of the Fund. It wasnoted approvingly that in many member countries authorities at the ministerial levelparticipate in the final policy discussions with the mission. The staff will continuethe practice of listing in its reports the principal representatives of the membercountry taking part in the discussions.

It was also considered desirable that management communicate directly withministers of finance regarding the outcome of the Fund's review, but only incarefully selected cases where the Executive Board felt high-level consideration tobe particularly important because of the urgency of the policy views expressed. Inthat context, it was noted that the Managing Director frequently has contacts withthe highest authorities of member countries, in Washington or abroad, as well asthrough exchanges of communications and telephone conversations, which will ofcourse continue.

Fourth, Directors encouraged the use of supplemental consultations with membercountries in selected circumstances. A wide range of detailed views were expressedon this subject. Several Directors suggested that supplemental consultations mightbe appropriate for members in arrears to the Fund, members without currentprograms but with large financial obligations to the Fund, or members makingprolonged use of Fund resources. Supplemental consultations could, in the viewof several Directors, also be triggered as a result of major policy actions by members.At their discussion on March 18 on trade policies, Directors asked that the Boardbe notified of major new developments in that area, and such notifications, as withthe current exchange rate information notices, could well lead to supplementalconsultations if Directors so requested. They could also take place some timefollowing the conclusion of an Article IV consultation that left serious doubts aboutthe appropriateness of a member's policies.

Finally, there was a wide-ranging discussion of various issues involved in enhancedsurveillance of the policies of member countries involved in multiyear reschedulingarrangements. Directors believed that the Fund should be selective in acceding torequests for enhanced surveillance, and some Directors cautioned against theinvolvement of the Fund in such arrangements for too long a period of time. Anumber of them considered that in practice the procedure would be appropriatemainly for countries where strong adjustment policies were well under way.Otherwise, the Fund would continue to consider the endorsement of the country'sadjustment program in the context of a stand-by or an extended arrangement as thenormal means of providing the necessary signal to commercial banks and othersources of finance. Most Directors considered that release of staff reports to banksin such cases would be acceptable if the country requested it and if it was necessaryfor the restructuring to take place. Directors emphasized that staff reports providedto commercial banks in cases of enhanced surveillance should not be, and shouldnot be seen to be, of such a character as to provide on/off signals from the Fund.Directors, moreover, reiterated the view expressed during the Board's discussionon March 20 of external indebtedness that commercial banks should take fullresponsibility for their country-risk assessments. More generally, Directors cautionedthat, under enhanced surveillance, the Fund should not be seen as either formallyendorsing the member's policies or intervening too deeply in the relations betweendebtor countries and commercial banks. We have taken very careful note of themany issues raised by Directors regarding the access to and procedures for enhancedsurveillance. The staff will reflect on them and we will return to these matters asexperience is gained on a case-by-case basis.

122



In the course of their discussion, Directors indicated their awareness of thedifficulties of embarking on new procedures at a time when Board, management,and staff all face very heavy work loads, and urged that ways be found to mitigatethe burden. Some of the ideas supported by the Board today could be implementedwithout too much difficulty, but others would involve some considerable effort.What I would propose is that over the next few months management and staffconsider Directors' ideas both to gain experience with how they could beimplemented in practice and to explore their implications for the work load andfor the budget.

The Executive Board will return to the matter of surveillance, taking stock of allthe ideas that have been explored and of suggestions put forward by Directors,including the issue of publicity.

L. Level of Fund's SDR Holdings

In determining the amounts of SDRs to be transferred in purchases under theoperational budgets, the Fund will be guided by the aim of reducing the Fund'sSDR holdings to a level of approximately SDR 2.5 billion by May 31, 1986. Priorto April 30, 1986, the Fund will review the level of its SDR holdings to determinewhether and to what extent they should be reduced further.

Decision No. 7941-(85/50) SMarch 29, 1985

M. Compensatory Financing of Fluctuations in the Cost of Cereal Imports: Renewalof Decision

Decision No. 6860-(81/81),14 adopted May 13, 1981, as amended by DecisionNo. 7602-(84/3),15 adopted January 6, 1984, shall be further amended as follows:

1. In paragraph 1, the words "For an initial period of four years . . ." shall bereplaced by the words "For a period of eight years . . ."

2. Paragraph 17 shall read: "The Executive Board will review this Decision notlater than May 13, 1987."

Decision No. 7967-(85/69)May 3, 1985

N. Suspension of Transfers to the Supplementary Financing Facility SubsidyAccount and Retransfer of Surplus

In accordance with Section 4(b) of the Instrument establishing the SupplementaryFinancing Facility Subsidy Account ((Decision No. 6683-(80/185) G/TR)),16 transfersfrom the Special Disbursement Account to the SFF Subsidy Account shall besuspended as soon as arrangements can be made for the investment of resourcesretained in the Special Disbursement Account. Any resources of the SFF SubsidAccount above the amounts necessary to meet its future liabilities shall be promptlyretransferred to the Special Disbursement Account as soon after the date of thisdecision as possible and as they may be received in the future.

Decision No. 7989-(85/81) SBSMay 28, 1985


15 Selected Decisions of the International Monetary Fund and Selected Documents, Supplement toTenth Issue (Washington, 1984), page 18.


123


APPENDIX II (concluded). PRINCIPAL POLICY DECISIONS

O. Special Disbursement Account—Investment

Pending their use, the Managing Director shall place in investments, denominatedin SDRs, with the Bank for International Settlements, the currencies received by theSpecial Disbursement Account as a result of the termination of the Trust Fund,unless the Managing Director considers that the terms offered by the BIS on anintended deposit denominated in SDRs are not sufficiently attractive. In that eventthe Managing Director shall inform the Executive Board promptly and make otherproposals to it for investment in SDR-denominated obligations in accordance withArticle V, Section 12(h).

Decision No. 7990-(85/81)May 28, 1985

P. Review of the Fund's Income Position for the Financial Years 1985 and 1986

(a) Amendment of Rule l-6(4)(a)

Rule l-6(4)(a) is amended, effective May 1, 1985, by replacing in the secondsentence "3 percent" with "5 percent/'

Decision No. 7997-(85/90)]une 5, 1985

(b) Rate of Charge Effective May 7, 1985

In accordance with Rule l-6(4)(a), the Fund determines that, effective May 1,1985, the rate of charge on the Fund's holdings of currency covered by Rule 1-6(4)shall be 7 percent per annum.

Decision No. 7998-(85/90)June 5, 1985

Q. Publicity Upon Declaration of Ineligibility

Effective following the publication of the Annual Report for 1985, the Fund shallissue a press release upon the declaration of a member's ineligibility to use thegeneral resources of the Fund and thereafter upon the restoration of the member'seligibility to use the Fund's general resources, and shall also include the informationcontained in such press releases, where pertinent, in the Annual Reports for theyear concerned.

Decision No. 7999-(85/90)]une 5, 1985

124


Appendix

IIIPress Communiques and

Announcement of the InterimCommittee and the Development Committee

Interim Committee of the Board of Governors on theInternational Monetary System

PRESS COMMUNIQUES

Twenty-Third Meeting, Washington, September 22, 1984

1. The Interim Committee of the Board of Governors of the International MonetaryFund held its twenty-third meeting in Washington, D.C., on September 22, 1984,under the chairmanship of Mr. Willy De Clercq, Vice Prime Minister and Ministerof Finance and Foreign Trade of Belgium. Mr. Jacques de Larosiere, ManagingDirector of the International Monetary Fund, participated in the meeting. Themeeting was also attended by observers from a number of international and regionalorganizations and from Switzerland.

2. In their discussion of the world economic outlook, members of the Committeeexpressed satisfaction that economic growth in the industrial world had beenproceeding during 1984 at a 5 percent rate—even more rapidly than expected.They noted that investment had displayed particular strength and that inflation hadremained under control. Concern was voiced, however, that European countrieshad not yet participated fully in the recovery and that unemployment in thesecountries remained at very high levels. The Committee expressed concern that theposition of many developing countries remained difficult. Nonetheless, in a numberof the developing countries, the further reduction in current account deficits thatwas in prospect was viewed as encouraging, especially as it stemmed increasinglyfrom export growth, and was being accompanied by a return to positive growth inper capita incomes.

The Committee agreed that continued pursuit of a medium-term strategy wasappropriate to sustain recovery. Such a strategy would involve, in particular, adisinflationary monetary policy, further action to improve the structure of governmentbudgets and reduce deficits, primarily through reduced spending, and a determined

125


APPENDIX III (continued). COMMUNIQUES AND ANNOUNCEMENT

attack on structural rigidities, including protectionist measures, which impede theefficient functioning of markets.

3. While the external debt problems of many developing countries remain serious,the Committee felt that good progress had been made in the implementation of thecoordinated strategy of debtors and creditors to tackle these problems within theframework of adjustment programs—a development that has been facilitated by therecovery in world trade. The Committee stressed that a satisfactory resolution ofdebt problems would continue to require close cooperation among all partiesconcerned. In this connection, it is important that reasonable economic growth bemaintained in industrial countries, that real interest rates come down substantiallyfrom current levels, and that the indebted countries themselves pursue determinedadjustment policies. The major industrial countries have a special responsibility topursue policies that result in noninflationary growth and permit developing countriesadequate access to markets. There is also a continuing need for adequate financingto encourage and facilitate effective adjustment. The borrowing countries themselveshave to make the fundamental contribution by persevering with programs ofeconomic adjustment that strengthen their external position, lay the basis for a moreeffective utilization of resources, and thereby restore creditworthiness and permitthe resumption of growth at an early date. In this connection, the Committeewelcomed the initiatives toward multiyear debt rescheduling arrangements in casesof effective adjustment. The Committee also stressed the importance of a continuingFund role in the implementation of the coordinated strategy of external debtmanagement.

4. The Committee expressed concern over the continued resort to protectionistmeasures. It noted that the drift toward protectionism, if unchecked, wouldundermine the prospects for world recovery and would impede the smoothfunctioning of the international trading and financing system. The Committee,therefore, welcomed the commitments to open trade policies undertaken at theLondon summit of major industrial countries which have a large weight in worldtrade, and in other international forums in the recent past. While welcoming somerecent actions in some countries to resist protectionist pressures, it called on allmembers to translate general commitments into concrete actions to prevent new,and to roll back existing, protectionist measures.

The Committee called attention to the need for improved access to foreignmarkets for the exports of developing countries as an important element in supportingthe adjustment efforts of these countries and in contributing to a long-term solutionof the debt problem. The Committee also emphasized the importance of increasedand effective international surveillance of trade policies. In this regard, it consideredthat the Fund should continue to give special attention to the problem of protectionismin the context of its surveillance function and in support of the efforts of the GATTand other institutions having responsibilities in this field.

5. It was agreed that at its next meeting the Interim Committee will discuss, ina medium-term framework and in the context of the global financial environmentand the current approaches toward resolving debt problems, certain issues relatingto the adjustment efforts and balance of payments prospects of member countries.These will include external indebtedness, international capital flows, trade policies,and the role of Fund surveillance in dealing with these issues. In this connection,it called on the Managing Director to prepare, in the framework of the Fund'scompetence, background papers for consideration by the Executive Board, and toreport to the next meeting of the Committee in order to provide a basis for itsdiscussion of these issues.

6. The Committee discussed the question of the Fund's policy on enlarged accessand the limits on access to the Fund's resources in 1985. It was recalled that theFund's policy on enlarged access is a facility of a temporary character, and thatthis policy and the access limits under it, as well as the access limits under theFund's special facilities, were to be reviewed before the end of 1984.

The Committee recognized that, in spite of the improvement in the worldeconomic situation, many member countries continued to face difficult paymentsproblems and that serious uncertainties remained about the prospects in the mediumterm. In these circumstances, the Committee agreed that there was a need for the

126



continuation of the enlarged access policy and it reached the following conclusionson the access limits for 1985:

(a) Access under the enlarged access policy in 1985 should be subject to annuallimits of 95 or 115 percent of quota, three-year limits of 280 or 345 percent ofquota, and cumulative limits of 408 or 450 percent of quota, depending on theseriousness of the balance of payments need and the strength of the adjustmenteffort. As at present, the Executive Board should retain the flexibility to approvestand-by or extended arrangements for amounts above these access limits inexceptional circumstances.

(b) The present access limits under the special facilities should be retained.(c) As at present, access limits should not be regarded as targets. These limits,

and the enlarged access policy itself, should be reviewed before the end of 1985and yearly thereafter, in light of all relevant factors, including the magnitude ofmembers' payments problems and developments in the Fund's liquidity position.

The Committee requested the Executive Board to complete, before the end ofthis year, the necessary action in order to implement the conclusions reached bythe Committee.

7. The Committee considered again the question of an SDR allocation againstthe background of the state of international liquidity and the conditions of the worldeconomy. In this connection, it noted the statement of the Managing Director onthe discussions on the subject in the Executive Board.

Most members of the Committee expressed again their firm view that there wasa long-term global need to supplement existing reserve assets and that an allocationof SDRs in present circumstances would be in full conformity with the requirementsof the Fund's Articles and would strengthen the world economy and the internationalmonetary system. Some members of the Committee, however, continued to feelthat a global liquidity shortage had not been demonstrated. In their view, theproblems faced by some countries with reserve inadequacies should be met throughadjustment in economic policies and the provision of conditional financing.

While no conclusion was reached at this meeting, the Committee recognizedthat the matter should be kept under close and continuing consideration. Therefore,it urged the Executive Board to continue its examination of the issues involved. Themajority of the members of the Committee agreed that efforts should continuetoward the achievement of a broad consensus on an SDR allocation in the currentbasic period.

8. The Committee agreed to hold its next meeting in Washington, D.C., in April1985.

Annex: Interim Committee Attendance, September 22, 1984

ChairmanWilly De Clercq, Vice Prime Minister and Minister of Finance and Foreign Trade of

Belgium

Managing DirectorJ. de Larosiere

Members or AlternatesMohammad Abal-Khail, Minister of Finance and National Economy, Saudi ArabiaHassan Tawfik AI-Najafi, Governor, Central Bank of IraqPierre Beregovoy, Minister of Economy, Finance and Budget, FranceRachid Bouraoui, Governor, Banque Centrale d'AlgerieAbdulai O. Conteh, Minister of Finance, Sierra LeoneJacques F. Poos, Vice President of the Government and Minister of Economy, Luxembourg

(Alternate for Willy De Clercq, Vice Prime Minister and Minister of Finance and ForeignTrade, Belgium)

Ernane Galveas, Minister of Finance, BrazilGiovanni Goria, Minister of the Treasury, ItalyBernardo Grinspun, Minister of Economy, Argentina

127



Paul J. Keating, Treasurer, AustraliaNigel Lawson, Chancellor of the Exchequer, United KingdomLIU Hongru, Vice Governor, People's Bank of ChinaBenito Raul Losada, President, Banco Central de VenezuelaPranab Kumar Mukherjee, Minister of Finance, IndiaRadius Prawiro, Minister of Finance, IndonesiaKjell Storvik, State Secretary, Ministry of Finance, Norway (Alternate for Rolf Presthus,

Minister of Finance, Norway)Donald T. Regan, Secretary of the Treasury, United StatesH.O. Ruding, Minister of Finance, NetherlandsSAMBWA Pida Nbagui, Governor, Banque du ZaVreGerhard Stoltenberg, Federal Minister of Finance, GermanyNoboru Takeshita, Minister of Finance, JapanMichael Wilson, Minister of Finance, Canada

ObserversA.W. Clausen, President, World BankArthur Dunkel, Director-General, GATTDavid Henderson, Head, Economics and Statistics Department, OECDAli K. Hussain, International Money and Finance Analyst, Economics and Finance

Department, OPECGhulam Ishaq Khan, Chairman, Development CommitteeF. Leutwiler, Chairman of the Governing Board, Swiss National BankFrangois-Xavier Ortoli, Vice-President for Economic and Financial Affairs, CE.J. Pronk, Assistant Secretary General, UNCTADJean Ripert, Director-General, Development and International Economic Cooperation, UNGunther Schleiminger, General Manager, BIS

Twenty-Fourth Meeting, Washington, April 17-19, 1985

1. The Interim Committee of the Board of Governors of the International MonetaryFund held its twenty-fourth meeting in Washington, D.C., on April 17 to 19, 1985,under the chairmanship of Mr. H. Onno Ruding, Minister of Finance of theNetherlands. Mr. Jacques de Larosiere, Managing Director of the InternationalMonetary Fund, participated in the meeting. The meeting was also attended byobservers from a number of international and regional organizations and fromSwitzerland.

2. As agreed last September, the Committee focused its attention at this meetingprimarily on certain issues relating to the adjustment efforts and balance of paymentsprospects of member countries, which it discussed in a medium-term framework.These issues included external indebtedness, international capital flows, tradepolicies, and the role of Fund surveillance in dealing with them. The Committeehad a constructive exchange of views aimed at developing agreement on possiblemeasures to strengthen international arrangements and understandings in all theseareas.

3. The members of the Committee welcomed the continuing recovery in theworld economy and the fact that inflation has generally continued to decline. Non-oil developing countries as a whole have significantly improved their exports andtheir current account position and have, on average, resumed per capita incomegrowth. While noting that the recovery, though geographically uneven so far, wasexpected to be sustained, the Committee drew attention to the following facts: themomentum of growth in many developing countries has not yet achieved anacceptable pace; their commodity prices and terms of trade have not recovered;fiscal and current account imbalances in some industrial countries have continuedand intensified; unemployment has remained very high in many countries; andexchange rate volatility has persisted. The Committee noted the continued plightof sub-Saharan Africa, which remains a major concern of the internationalcommunity.

4. The Committee noted that world economic prospects in the medium termwould be affected by developments in the fields of trade, capital flows, interest

128



rates, and exchange rates. In this connection, it stressed the special responsibilityof the major industrial countries to pursue policies that would result in sustainablenoninflationary growth and would permit developing countries growing access tomarkets. More particularly, the Committee drew attention to the need for action inthe following areas:

(a) It is urgent that the trend toward protectionism be reversed, and that freerworld trade be promoted.

(b) The magnitude of fiscal deficits in a number of countries continued to be acause for concern. In these countries measures were needed to reduce publicsector reliance on domestic and foreign savings, thereby easing pressures onfinancial resources, which could lower interest rates and foster growth. In thisrespect, the Committee welcomed the recent announcement by the U.S. Governmentof its initiative to reduce substantially its fiscal deficit.

(c) Measures are needed to improve the functioning of labor, financial, andgoods markets by removing structural rigidities.

(d) It is equally important to seek greater exchange rate stability.By creating a basis for durable growth of production and international trade,

these actions would enhance the export growth of developing countries and facilitatethe implementation of the necessary adjustment policies by the debtor countries.

5. The Committee agreed that many developing countries had made progress indealing with their debt-servicing difficulties, a development that has undoubtedlybeen facilitated by the strength of the economic recovery, particularly by the upturnin the U.S. economy. The Committee noted, however, that the external debtproblems of a number of countries remain serious and have been exacerbated byrates of interest, which, while they have declined, remain very high. A satisfactoryresolution of these difficulties would require sustained, determined, and coordinatedefforts by both creditor and debtor countries, and would continue to take intoaccount the particular circumstances of each case. Several low-income developingcountries continue to face severe debt-servicing problems even though much oftheir debt is to official creditors.

6. In debtor countries, adjustment is essential and, indeed, unavoidable. In theview of the Committee, appropriate policies to that effect, including measures toencourage domestic savings and investment and to promote realistic exchange ratesand prices, are necessary for the restoration of growth and creditworthiness, andto encourage spontaneous lending by commercial banks and flows from officialsources. They will also create a favorable climate for the return of flight capitaland, together with greater receptivity to inward direct investment, for an increasein non-debt-creating flows and transfers of technology.

7. These adjustment efforts should be supported by the creditors through adequateflows of new lending on realistic terms, and by a readiness to restructure pastmaturities of loans extended by private and official creditors. The Committeewelcomed recent examples of multiyear rescheduling arrangements for commercialdebts of some countries and the contribution they should make to improvedcreditworthiness. As regards official debt reschedulings within the framework of theParis Club, the Committee recognizes that these have been handled with flexibility.It welcomes the intention of the Paris Club to consider, in particular cases, multiyearreschedulings in close cooperation with the Fund, where debtor countries have aproven record and continuing prospects of sound adjustment. For those countrieswhose external debt has been rescheduled, whose prospects of economic progressare good, and which are undertaking satisfactory adjustment policies, the industrialcountries should consider resuming export credit cover, subject to standard nationalpolicies.

8. The Committee underscored the importance it attached to the role of the Fundin support of adjustment programs and as a financial catalyst. The Committee alsostressed the importance of close collaboration between the Fund and the WorldBank.

In view of the many uncertainties remaining on the financial horizon, theCommittee stressed the need for a strong International Monetary Fund that canappropriately assist members that are prepared to take needed adjustment measuresin the event that severe payments problems arise.

129



9. The Committee stressed the importance of effective Fund surveillance as ameans of promoting sound underlying economic policies and convergence ofperformance among member countries. It urged that steps be taken to strengthensurveillance over the policies of all Fund members. It also urged that considerationbe given, within the context of the policy of uniform treatment of members, tomeans of increasing the effectiveness of surveillance over the policies of thoseindustrial and developing countries which have a significant impact on thefunctioning of the world economy.

10. The members of the Committee had an exchange of views on the questionof an SDR allocation in the current basic period. While the SDR constitutes anintegral part of the structure of the Fund, it was not possible to reach the degree ofsupport required for such an allocation. The Committee agreed to consider thematter again at its next meeting in the light of developments.

11. The Committee requested that the Executive Board, in the light of its 1980decision, consider the use of the resources that will be available following repaymentof loans that have been made by the Trust Fund, to help forward the adjustmentprocess by providing assistance to low-income developing countries, and that theManaging Director report to the Committee on this matter by the time of the nextmeeting of the Committee in Seoul.

12. The Committee noted that improvements of the international monetary systemwere currently under study. It was agreed that the Committee would review theseissues at its next meeting in Seoul.

13. The Committee agreed to have its next meeting in Seoul on October 6, 1985.

Annex: Interim Committee Attendance, April 17-19, 1985

ChairmanH. O. Ruding, Minister of Finance of Netherlands

Managing DirectorJ. de Larosi&re

Members or AlternatesMohammad Abal-Khail, Minister of Finance and National Economy, Saudi ArabiaHikmat M. AI-Azzawi, Governor, Central Bank of IraqJames A. Baker III, Secretary of the Treasury, United StatesPierre Beregovoy, Minister of Economy, Finance and Budget, FranceRachid Bouraoui, Governor, Banque Centrale d'AlgerieMariano Rubio, Governor, Banco de Espana (Alternate for Miguel Boyer, Minister of

Economy and Finance, Spain)Abdulai O. Conteh, Minister of Finance, Sierra LeoneAbdul Daim bin Haji Zainuddin, Minister of Finance, MalaysiaGiovanni Goria, Minister of the Treasury, ItalyFrans Grootjans, Vice Prime Minister, Minister of Finance, and Minister of Middle Classes,

BelgiumChristopher Hurford, Minister for Immigration and Ethnic Affairs and Minister Assisting the

Treasurer, Australia (Alternate for Paul J. Keating, Treasurer, Australia)Nigel Lawson, Chancellor of the Exchequer, United KingdomLIU Hongru, Vice Chairman of the Council and Vice Governor, People's Bank of ChinaMAWAKANI Samba, Alternate Governor of the Fund for ZaVreHermod Skanland, Governor, Norges Bank (Alternate for Rolf Presthus, Minister of Finance,

Norway)W. F. Duisenberg, President, De Nederlandsche Bank N.V. (Alternate for H. O. Ruding,

Minister of Finance, Netherlands)Antonio Carlos Braga Lemgruber, President, Banco Central do Brasil (Alternate for Joao

Sayad, Minister of Planning, Brazil)Vishwanath Pratap Singh, Minister of Finance, IndiaJuan Vital Sourrouille, Minister of Economy, ArgentinaGerhard Stoltenberg, Federal Minister of Finance, Germany

130



Satoshi Sumita, Governor, The Bank of Japan (Alternate for Noboru Takeshita, Minister ofFinance, Japan)

Michael H. Wilson, Minister of Finance, Canada

ObserversA.W. Clausen, President, World BankAntonio Costa, Special Counsellor to the Secretary General, OECDM. G. Dealtry, Manager, Monetary and Economic Department, BISJ. Dixon, Financial Counselor, Delegation in Washington, CECArthur Dunkel, Director-General, GATTAli K. Hussain, International Money and Finance Analyst, Economics and Finance

Department, OPECGhulam Ishaq Khan, Chairman, Development CommitteePierre Languetin, Chairman of the Governing Board, Swiss National BankGoran Ohlin, Assistant Secretary-General, Development Research and Policy Analysis,

UNJ. Pronk, Deputy Secretary-General, UNCTAD

131



Joint Ministerial Committee of the Boards of Governorsof the Bank and the Fund on the Transfer of Real

Resources to Developing Countries(Development Committee)

PRESS COMMUNIQUE

Twenty-Fourth Meeting, Washington, September 23, 1984

1. The Development Committee held its twenty-fourth meeting in Washington,D.C. on September 23, 1984 under the chairmanship of His Excellency GhulamIshaq Khan, Minister for Finance, Commerce and Economic Coordination ofPakistan. Mr. A.W. Clausen, President of the World Bank, Mr. J. de Larosiere,Managing Director of the International Monetary Fund, and Mr. Fritz Fischer,Executive Secretary of the Development Committee, participated in the meeting.Representatives from a number of international and regional organizations andSwitzerland also attended.

2. The Committee heard its Chairman, the Managing Director of the InternationalMonetary Fund, the President of the World Bank, and the Chairman of the Groupof Twenty-Four on the world economic outlook.

3. The Committee welcomed the successful completion of negotiations of aSelective Capital Increase of $8.4 billion for the World Bank and a capital increaseof $650 million for the International Finance Corporation. It noted with concernthat recent efforts by IDA management and donors to mobilize a supplementaryfunding arrangement for IDA 7 had not yet been successful and requested that inaccordance with the Canadian proposal the situation should be reviewed.

4. The Committee discussed the report prepared for the meeting by the WorldBank entitled "Toward Sustained Development: A Joint Program of Action for Sub-Saharan Africa/' The members reiterated their concern at the severity of the sub-Saharan African economic situation and noted that many African governments weremaking serious efforts to rehabilitate and restructure their economies. The Committeeconcluded that there was an emerging consensus on the diagnosis of sub-SaharanAfrica's economic problems and on measures needed to address them. Membersfurther agreed that delay in taking action could not be justified. The Committeeexpressed strong support for the report's proposed action program, emphasizingthat its implementation required the concerted and sustained efforts of Africangovernments, bilateral donors, and international organizations. The Committeeencouraged the donors to provide more flexible forms of development assistancein both their bilateral and multilateral aid best adapted to Africa's needs and urgedthe World Bank to take a leadership role in strengthening aid coordination efforts.In that connection, the Bank was also encouraged to explore with donors variousapproaches to mobilizing the resources required to implement the proposed programfor sub-Saharan Africa. The Bank was asked to report to the next meeting of theDevelopment Committee on the progress achieved in implementing the program.

5. In the discussion on linkages between trade and the promotion of developmena presentation was made to the Committee by the Director-General of GATT,Mr. Arthur Dunkel. The Committee agreed that progress in maintaining open accessto markets for the exports of developing countries and in reinforcing the multilateralrules and disciplines for trade was an essential support to their current adjustmentefforts and to the long-term solution to the debt problem. The Committee encouragedthe immediate adoption of concrete measures to combat protectionism. It notedthe progress being made in the implementation of the GATT's ongoing work program,and welcomed the consideration being given to the role that could be played inliberalizing and strengthening the trading system by a new GATT round of multilateraltrade negotiations in which all countries'—developed and developing alike—couldparticipate and from which all could benefit. Members also emphasized thecontribution private investment could make to trade and development.

132



6. The Committee noted the ongoing discussions in the World Bank on its futurerole and the contribution it could make to developing countries' structural adjustmenefforts and to the successful resumption of investment and economic growth. TheCommittee looks forward at its next meeting to suggestions from World Bankmanagement concerning the future role of the Bank and the implications for longer-term capital requirements, keeping in mind the need for a general capital increase.It urged that sufficient progress should be made in the next several months for thesubject to be considered in depth at the spring 1985 meeting.

7. It was agreed that, at an extended meeting in spring 1985, the DevelopmentCommittee will discuss, within the context of a medium- to long-term frameworkand the current approaches toward resolving debt problems, the structural anddevelopment aspects of the problems of developing countries in their efforts toachieve sound economic growth. These include, inter alia, external indebtedness,protectionism, commodity prices, interest rates, the structure of capital flows, andobstacles to direct investment and equity capital flows. In this connection, it calledon the Managing Director of the Fund and the President of the World Bank toprepare in close collaboration, contributing from the perspective of their respectivemandates and competences, background papers for submission, after considerationby their respective Executive Boards, to the next meeting of the Committee.

PRESS ANNOUNCEMENT

Twenty-Fifth Meeting, Washington, September 26, 1984

At its twenty-fifth meeting on September 26, 1984, in Washington, D.C., theDevelopment Committee selected His Excellency Ghulam Ishaq Khan, Minister forFinance, Commerce and Economic Coordination of Pakistan, as Chairman foranother term.

PRESS COMMUNIQUE

Twenty-Sixth Meeting, Washington, April 18-19, 1985

1. The Development Committee held its twenty-sixth meeting in Washington,D.C. or, April 18-19, 1985 under the chairmanship of His Excellency GhulamIshaq Khan. Mr. J. de Larosiere, Managing Director of the International MonetaryFund, Mr. A.W. Clausen, President of the World Bank, and Mr. Fritz Fischer,Executive Secretary of the Development Committee, participated in the meeting.Observers from a number of international organizations and Switzerland alsoattended.

2. As decided at the previous meeting of the Committee in September 1984, themeeting was an extended one, designed to allow a constructive dialogue to takeplace between members on the structural and development aspects of the worldeconomy. These discussions took place during sessions which were largely of aninformal character. The Committee heard a report on the earlier discussion in theInterim Committee on the world economic outlook and the balance of paymentsprospects and adjustment efforts of industrial and developing countries. In thiscontext, the Committee briefly reviewed the medium- and long-term setting fordeveloping country growth.

3. The Committee was encouraged by the strengthening of the world economyover the last two years, with the recovery from recession in industrial countries andthe resumption of growth in much of the developing world. The Committee stressedthat continued adjustment was needed in both industrial and developing countries,within the limits of social and political tolerance, and that many problems remainedto be tackled before the progress already achieved could be translated into sustainedgrowth and improved living standards over the longer run. The steps required toachieve this goal formed the agenda for this meeting of the Development Committee.

133



4. Endorsing the conclusions reached and recommendations made in the InterimCommittee, the Committee welcomed the progress made by many indebteddeveloping countries in restoring normal relations with their creditors but noted thatdebt-servicing difficulties, exacerbated by high interest rates, remained for asignificant number of countries. The restoration of creditworthiness and normali-zation of relations with creditors for these countries would require, in a manneradapted to the circumstances of each case, the continuation of adjustment efforts,supported by financial flows on appropriate terms, improved access to marketsand, where appropriate, by multiyear rescheduling arrangements. The Committeeagreed all parties concerned should cooperate toward this end.

5. The growth and adjustment prospects of developing countries are closelylinked to the expansion of world trade. Trade liberalization is a part of a coordinatedeffort aimed at securing a better economic environment. In its discussion of tradepolicy developments and issues, the Committee benefited from a presentation byMr. Arthur Dunkel, Director-General of the GATT. Mr. Dunkel also referred to areport by a study group commissioned by him entitled "Trade Policies for a BetterFuture—Proposals for Action/' Members regretted that, in spite of some limitedinitiatives, the onset of world recovery had not yet led to an easing of protectionistpressures; indeed they seem to have increased. The proliferation and continuationof nontariff barriers, especially those applied in a discriminatory fashion, wereharmful to the multilateral trading system and impeded the growth prospects of allcountries.

6. The Committee called on all countries to promptly implement their undertak-ings to lift any measure inconsistent with GATT or not based on specific GATTdisciplines, given the fact that these practices have in particular the effect ofrestricting exports of developing countries to trade markets. The Committee alsostressed that the central role of the GATT in promoting an open trading system andensuring the effective functioning of multilateral trade rules and disciplines shouldbe strengthened. The Committee also called on governments to resist protectionismand, to the extent feasible, roll back existing barriers to trade. The Committeeendorsed the idea, to engage as matters of priority, in serious efforts to carry forwardthe unfinished business from the 1982 GATT work program. This could lay thebasis for a general participation of all countries in the trade negotiation round onwhich, it was noted, a number of countries have decided to embark under theauspices of the GATT. It was also noted that full participation would be encouragedby quick action to improve market access for developing countries. The Committeeinvited the GATT Director-General to continue to keep it informed about furtherdevelopments. The respective competencies of the GATT and UNCTAD werereiterated.

7. The Committee agreed that developing countries' efforts to adjust and resumegrowth need to be supported by an increase in the overall volume of capital flows.

8. For the low-income countries, it was agreed that increasing official devel-opment assistance flows deserved the highest priority. The Committee reiterated itsrequest to the management of the International Development Association to carryout a mid-term review of IDA 7. The Committee asked management and theExecutive Board to start consideration of a broad array of possibilities for addressingthe future needs of the poor countries for concessional resources, including IDA.

9. The Committee was gratified by the prompt action taken by the Bank toexplore with donors various approaches to mobilizing resources for sub-SaharanAfrica, as requested at the Committee's September meeting. The agreement reachedby donors to establish the Special Facility for sub-Saharan Africa in support ofdomestic policy reform was welcomed as a significant achievement. The Committeenoted with satisfaction the agreement reached regarding the implementationprocedures of the facility. The Committee underlined the importance of quickdisbursement of resources from the facility. The Committee expressed its appreciationfor the efforts made by supporters of the facility and called on other donors, whohad not yet done so, to contribute, directly or indirectly. The Committee noted,however, that the facility could only be a catalyst for the financing required tomeet the immense needs of the region and encouraged donors to further increasetheir efforts to provide additional flows of concessional resources through bilateral

134


APPENDIX III (concluded). COMMUNIQUES AND ANNOUNCEMENT

and multilateral channels. The Committee also welcomed the impressive respons.both governmental and private, to the emergency needs of the region.

10. The Committee also reviewed the Bank's progress report on the "Implemen-tation of the Joint Program of Action for Sub-Saharan Africa" and expressedappreciation for the progress made so far in strengthening aid coordinationmechanisms and in enlarging technical assistance programs. The Committee notedthat the balance of payments problems of sub-Saharan African countries, includingsevere difficulties with debt servicing, aggravated by a serious fall in commodityprices, required urgent attention. The Committee stressed that official creditorsshould take into account in their actions the long-term nature of these countries'problems and should encourage the pursuit of appropriate policies by debtors andadequate aid from donors. The Committee urged all parties concerned to exploresteps to introduce this broader approach on a case-by-case basis.

11. The Committee agreed that private direct and portfolio investment couldmake useful contributions to development. Such flows can be promoted by improvingthe policy environment toward foreign investment in both developing and industrialcountries. In this connection, the proposal being developed by the World Bank forthe establishment of a Multilateral Investment Guarantee Agency (MICA), whichwould seek to improve the investment environment in developing countries byissuing guarantees against noncommercial risks and providing promotional services,was noted. The Bank was encouraged to hold further discussions in order to reachan understanding among governments for the creation of MICA on a voluntarybasis.

12. The Committee also noted the importance of officially guaranteed exportcredits. It agreed that developing countries and export credit agencies, in cooperationwith the World Bank and the Fund, should take steps to enhance the developmentalimpact of export credits.

13. In the light of the uncertainties in commercial flows to the developingcountries and the changing world economic situation, the Committee discussedthe future role of the World Bank. The Committee took note of discussions on thissubject in the Executive Board of the Bank over the past year and endorsed thebroad consensus that had emerged from these deliberations as summarized in aBank background document prepared for the Committee. Bearing in mind the needto maintain lending standards and prudent financial policies, the Committee calledfor an expansion in the Bank's lending program in order for it to respond moreeffectively to the needs of its borrowing members and to stimulate the flow of capitalfrom other sources. In that perspective, the Committee urged Bank management topresent a report at its next meeting in Seoul which would provide projections ofBank lending over the next five years, and their implications in terms of resources,so as to seek an early consensus on the future financial requirements of the Bank,including the possibility of a General Capital Increase.

14. The Committee considered its deliberations to have been constructive,informative, and productive and thus agreed to continue the process begun at thissession at future meetings of the Committee.

15. The Committee agreed to meet again on October 7 in Seoul.

135


Appendix

IVExecutive Directors and Voting Power

on April 30, 1985

DirectorAlternate

APPOINTED

Charles H. DallaraMary K. Bush

Nigel WicksT.A. Clark

Guenter GroscheBernd Coos

Bruno de MauldeXavier Blandin

Hirotake Fuji noMasahiro Sugita

Yusuf A. NimatallahJobarah E. Suraisry

ELECTED

Pedro Perez (Spain)Guillermo Ortiz

(Mexico)

J. J. Polak (Netherlands)/. de Beaufort Wijnholds

(Netherlands)

Jacques de Groote(Belgium)

Heinrich G. Schneider(Austria)

CastingVotes of

United States

United Kingdom

Germany, Fed. Rep. of

France

Japan

Saudi Arabia

Costa RicaEl SalvadorGuatemalaHondurasMexicoNicaraguaSpainVenezuela

CyprusIsraelNetherlandsRomaniaYugoslavia

AustriaBelgiumHungaryLuxembourgTurkey

Votesby Total

Country Votes1

179,433 179,433

62,190 62,190

54,287 54,287

45,078 45,078

42,483 42,483

32,274 32,274

1,0911,1401,330

9281 1 ,905

93213,11013,965 44,401

9474,716

22,8985,4846,380 40,425

8,00621,0545,5571,0204,541 40,178

Percentof FundTotal2

19.29

6.69

5.84

4.85

4.57

3.47

4.77

4.35

4.32

136


APPENDIX IV (continued). EXECUTIVE DIRECTORS AND VOTING POWER

DirectorAlternate

CastingVotes of

Votesby

CountryTotal

Votes1


ELECTED (continued)

Robert K. Joyce(Canada)

Luke Leonard (Ireland)

Antigua and Barbuda 300Bahamas 914Barbados 591Belize 345Canada 29,660Dominica 290Grenada 310Ireland 3,684Jamaica 1,705St. Christopher and

Nevis 295St. Lucia 325St. Vincent 290 38,709 4.16

Salvatore Zecchini Greece(Italy) Italy

Nikolaos Coumbis Malta(Greece) Portugal

4,24929,341

7014,016 38,307 4.12

Mohamed Finaish(Libya)

Tariq Alhaimus (Iraq)

BahrainIraqJordanKuwaitLebanonLibyaMaldivesOmanPakistanQatarSomaliaSyrian Arab RepublicUnited Arab EmiratesYemen Arab RepublicYemen, People's

Dem. Rep. of

7395,290

9896,6031,0375,407

270881

5,7131,399

6921,6412,276

683

1,022 34,642 3.72

C.R. Rye (Australia)Antonio V. Romualdez

(Philippines)

Hans Lundstrom(Sweden)

Henrik Fugmann(Denmark)

AustraliaKoreaNew ZealandPapua New GuineaPhilippinesSeychellesSolomon IslandsVanuatuWestern Samoa

DenmarkFinlandIcelandNorwaySweden

16,4424,8784,866

9094,654

280300340310

7,3605,999

8467,240

10,893

32,979 3.55

32,338 3.48

137


APPENDIX IV (continued). EXECUTIVE DIRECTORS AND VOTING POWER

DirectorAlternate

CastingVotes of

Votesby

CountryTotal

Votes1


ELECTED (continued)

Arjun K. Sengupta(India)

AS. layawardena(Sri Lanka)

BangladeshBhutanIndiaSri Lanka

3,125275

22,3272,481 28,208 3.03

Alexandre Kafka (Brazil)Hernando Arias

(Panama)

Brazil 14,863Colombia 4,192Dominican Republic 1,371Ecuador 1,757Guyana 742Haiti 691Panama 1,272Suriname 743Trinidad and Tobago 1,951 27,582 2.97

E. I. M. Mtei (Tanzania)Ahmed Abdallah

(Kenya)

J.E. Ismael (Indonesia)IAAFAR Ahmad

(Malaysia)

ZHANG Zicun(CHANG Tse Chun)(China)

WANG Enshao (China)

Botswana 471Burundi 677Ethiopia 956The Gambia 421Guinea 829Kenya 1,670Lesotho 401Liberia 963Malawi 622Mozambique,

People's Republic of 860Nigeria 8,745Sierra Leone 829Sudan 1,947Swaziland 497Tanzania 1,320Uganda 1,246Zambia 2,953Zimbabwe 2,160

Burma 1,620Fiji 615Indonesia 10,347Lao People's

Democratic Republic 543Malaysia 5,756Nepal 623Singapore 1,174Thailand 4,116Viet Nam 2,018

China 24,159

27,567 2.96

26,812

24,159

2.88

2.60

138


APPENDIX IV (concluded). EXECUTIVE DIRECTORS AND VOTING POWER

DirectorAlternate

CastingVotes of

Votesby

CountryTotal

Votes1


ELECTED (concluded)

Fernando L. Nebbia(Argentina)

Brian Jensen (Peru)

Ghassem Salehkhou(Islamic Republic ofIran)

Omar Kabbaj (Morocco)

Abderrahmane Alfidja(Niger)

Vacanf,

ArgentinaBoliviaChileParaguayPeruUruguay

AfghanistanAlgeriaGhanaIran, Islamic Republic ofMoroccoTunisia

BeninBurkina FasoCameroonCape VerdeCentral African RepublicChadComorosCongoDjiboutiEquatorial GuineaGabonGuinea-BissauIvory CoastMadagascarMali-MauritaniaMauritiusNigerRwandaSao Tom£ and PrincipeSenegalTogoZaTre

11,3801,1574,655

7343,5591,888 23,373 2.51

1,1176,4812,2956,8503,3161,632 21,691 2.33

563566

1,177295554556295623330434981325

1,905914758589786587688290

1,101634

3,160 18,111 1.95

915,2273 98.412

'Voting power varies on certain matters pertaining to the General Department with use of the Fund'sresources in that Department.

Percentages of total votes in the General Department and the SDR Department (930,018).3This total does not include the votes of Egypt, Democratic Kampuchea, and South Africa, which did

not participate in the 1984 Regular Election of Executive Directors. The combined votes of thosemembers total 14,791—1.59 percent of those in the General Department and SDR Department.

139


Appendix

VChanges in Membership of Executive Board

Changes in membership of the Executive Board between May 1, 1984 and April 30, 1985were as follows:

Nikolaos Coumbis (Greece) was appointed Alternate Executive Director toGiovanni Lovato (Italy), effective May 1, 1984.

Richard D. Erb (United States) resigned as Executive Director for the UnitedStates, effective May 31, 1984.

Teruo Hirao (Japan) resigned as Executive Director for Japan, effective July 27,1984.

Hirotake Fuji no (Japan) was appointed Executive Director for Japan, effectiveJuly 28, 1984.

Tadaie Yamashita (Japan), formerly Alternate Executive Director to Teruo Hirao(Japan), was appointed Alternate Executive Director to Hirotake Fujino (Japan),effective July 28, 1984.

Gerhard Laske (Federal Republic of Germany) resigned as Executive Director forthe Federal Republic of Germany, effective August 31, 1984.

Bernd Goos (Federal Republic of Germany) was appointed Alternate ExecutiveDirector to Guenter Grosche (Federal Republic of Germany), effective Sep-tember 1, 1984.

Guenter Grosche (Federal Republic of Germany), formerly Alternate ExecutiveDirector to Gerhard Laske (Federal Republic of Germany), was appointedExecutive Director for the Federal Republic of Germany, effective Septem-ber 1, 1984.

Mary K. Bush (United States), formerly Alternate Executive Director to Richard D.Erb (United States), was appointed Alternate Executive Director to Charles H.Dallara (United States), effective October 5, 1984.

Charles H. Dallara (United States) was appointed Executive Director for theUnited States, effective October 5, 1984.

Alvaro Donoso (Chile) completed his term of service as Executive Director forArgentina, Bolivia, Chile, Paraguay, Peru, and Uruguay, effective Octo-ber 31, 1984.

Jose L. Feito (Spain) completed his term of service as Alternate Executive Directorto Miguel A. Senior (Venezuela), effective October 31, 1984.

Giovanni Lovato (Italy) completed his term of service as Executive Director forGreece, Italy, Malta, and Portugal, effective October 31, 1984.

Kerry G. Morrell (New Zealand) completed his term of service as AlternateExecutive Director to A.R.G. Prowse (Australia), effective October 31, 1984.

N'Faly Sangare (Guinea) completed his term of service as Executive Director forBotswana, Burundi, Ethiopia, The Gambia, Guinea, Kenya, Lesotho, Liberia,Malawi, Nigeria, Sierra Leone, Sudan, Swaziland, Tanzania, Uganda, Zambia,and Zimbabwe, effective October 31, 1984.

140


APPENDIX V (continued). CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

Miguel A. Senior (Venezuela) completed his term of service as Executive Directorfor Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Spain,and Venezuela, effective October 31, 1984.

Mario Teijeiro (Argentina) completed his term of service as Alternate ExecutiveDirector to Alvaro Donoso (Chile), effective October 31, 1984.

Ahmed Abdallah (Kenya) was appointed Alternate Executive Director to E.I.M.Mtei (Tanzania), effective November 1, 1984.

Abderrahmane Alfidja (Niger) was re-elected Executive Director by Benin, BurkinaFaso, Cameroon, Cape Verde, the Central African Republic, Chad, theComoros, the Congo, Djibouti, Equatorial Guinea, Gabon, Guinea-Bissau,Ivory Coast, Madagascar, Mali, Mauritania, Mauritius, Niger, Rwanda, SaoTome and Principe, Senegal, Togo, and ZaVre, effective November 1, 1984.

Tariq Alhaimus (Iraq) was reappointed Alternate Executive Director to MohamedFinaish (Libya), effective November 1, 1984.

Nikolaos Coumbis (Greece), formerly Alternate Executive Director to GiovanniLovato (Italy), was appointed Alternate Executive Director to Salvatore Zecchini(Italy), effective November 1, 1984.

Jacques de Groote (Belgium) was re-elected Executive Director by Austria,Belgium, Hungary, Luxembourg, and Turkey, effective November 1, 1984.

Tom de Vries (Netherlands) was reappointed Alternate Executive Director to J.J.Polak (Netherlands), effective November 1, 1984.

Mohamed Finaish (Libya) was re-elected Executive Director by Bahrain, Iraq,Jordan, Kuwait, Lebanon, Libya, Maldives, Oman, Pakistan, Qatar, Somalia,the Syrian Arab Republic, the United Arab Emirates, the Yemen Arab Republic,and the People's Democratic Republic of Yemen, effective November 1,1984.

J.E. Ismael (Indonesia) was re-elected Executive Director by Burma, Fiji, Indo-nesia, the Lao People's Democratic Republic, Malaysia, Nepal, Singapore,Thailand, and Viet Nam, effective November 1, 1984.

Jaafar Ahmad (Malaysia) was reappointed Alternate Executive Director to J.E.Ismael (Indonesia), effective November 1, 1984.

A.S. Jayawardena (Sri Lanka) was reappointed Alternate Executive Director toR.N. Malhotra (India), effective November 1, 1984.

Brian Jensen (Peru) was appointed Alternate Executive Director to Fernando L.Nebbia (Argentina), effective November 1, 1984.

Robert K. Joyce (Canada), formerly Executive Director for Antigua and Barbuda,the Bahamas, Barbados, Belize, Canada, Dominica, Grenada, Ireland,Jamaica, St. Lucia, and St. Vincent, was elected Executive Director byAntigua and Barbuda, the Bahamas, Barbados, Belize, Canada, Dominica,Grenada, Ireland, Jamaica, St. Christopher and Nevis, St. Lucia, and St.Vincent, effective November 1, 1984.

Omar Kabbaj (Morocco) was reappointed Alternate Executive Director toGhassem Salehkhou (Islamic Republic of Iran), effective November 1, 1984.

Alexandre Kafka (Brazil) was re-elected Executive Director by Brazil, Colombia,the Dominican Republic, Ecuador, Guyana, Haiti, Panama, Suriname, andTrinidad and Tobago, effective November 1, 1984.

Luke Leonard (Ireland) was reappointed Alternate Executive Director to Robert K.Joyce (Canada), effective November 1, 1984.

Arne Linda (Sweden) was reappointed Alternate Executive Director to John Tvedt(Norway), effective November 1, 1984.

R.N. Malhotra (India) was re-elected Executive Director by Bangladesh, Bhutan,India, and Sri Lanka, effective November 1, 1984.

141



E.I.M. Mtei (Tanzania), formerly Alternate Executive Director to N'Faly Sangare(Guinea), was elected Executive Director by Botswana, Burundi, Ethiopia,The Gambia, Guinea, Kenya, Lesotho, Liberia, Malawi, the People's Republicof Mozambique, Nigeria, Sierra Leone, Sudan, Swaziland, Tanzania, Uganda,Zambia, and Zimbabwe, effective November 1, 1984.

Fernando L. Nebbia (Argentina) was elected Executive Director by Argentina,Bolivia, Chile, Paraguay, Peru, and Uruguay, effective November 1, 1984.

Guillermo Ortiz (Mexico) was appointed Alternate Executive Director to PedroPerez (Spain), effective November 1, 1984.

Pedro Perez (Spain) was elected Executive Director by Costa Rica, El Salvador,Guatemala, Honduras, Mexico, Nicaragua, Spain, and Venezuela, effectiveNovember 1, 1984.

J.J. Polak (Netherlands) was re-elected Executive Director by Cyprus, Israel, theNetherlands, Romania, and Yugoslavia, effective November 1, 1984.

A.R.G. Prowse (Australia) was re-elected Executive Director by Australia, Korea,New Zealand, Papua New Guinea, the Philippines, Seychelles, SolomonIslands, Vanuatu, and Western Samoa, effective November 1, 1984.

Cesar Robalino (Ecuador) was reappointed Alternate Executive Director toAlexandre Kafka (Brazil), effective November 1, 1984.

Antonio V. Romualdez (Philippines) was appointed Alternate Executive Directorto A.R.G. Prowse (Australia), effective November 1y 1984.

Ghassem Salehkhou (Islamic Republic of Iran) was re-elected Executive Directorby Afghanistan, Algeria, Ghana, the Islamic Republic of Iran, Morocco, andTunisia, effective November 1, 1984.

Heinrich G. Schneider (Austria) was reappointed Alternate Executive Directorto Jacques de Groote (Belgium), effective November 1, 1984.

wa Bilenga Tshishimbi (ZaTre) was reappointed Alternate Executive Director toAbderrahmane Alfidja (Niger), effective November 1, 1984.

John Tvedt (Norway) was re-elected Executive Director by Denmark, Finland,Iceland, Norway, and Sweden, effective November 1, 1984.

Wang Enshao (China) was reappointed Alternate Executive Director to ZhangZicun (China), effective November 1, 1984.

Salvatore Zecchini (Italy) was elected Executive Director by Greece, Italy, Malta,and Portugal, effective November 1, 1984.

Zhang Zicun (China) was re-elected Executive Director by China, effectiveNovember 1, 1984.

Tadaie Yamashita (Japan) resigned as Alternate Executive Director to HirotakeFujino (Japan), effective December 12, 1984.

Masahiro Sugita (Japan) was appointed Alternate Executive Director to HirotakeFujino (Japan), effective December 13, 1984.

John Tvedt (Norway) resigned as Executive Director for Denmark, Finland,Iceland, Norway, and Sweden, effective December 31, 1984.

Arne Linda (Sweden), formerly Alternate Executive Director to John Tvedt(Norway), was appointed Alternate Executive Director to Hans Lundstrom(Sweden), effective January 1, 1985.

Hans Lundstrom (Sweden) was elected Executive Director by Denmark, Finland,Iceland, Norway, and Sweden, effective January 1, 1985.

Tom de Vries (Netherlands) resigned as Alternate Executive Director to J.J. Polak(Netherlands), effective January 15, 1985.

142



J. de Beaufort Wijnholds (Netherlands) was appointed Alternate Executive Directorto JJ. Polak (Netherlands), effective January 16, 1985.

R.N. Malhotra (India) resigned as Executive Director for Bangladesh, Bhutan,India, and Sri Lanka, effective February 3, 1985.

A.S. Jayawardena (Sri Lanka), formerly Alternate Executive Director to R.N.Malhotra (India), was appointed Alternate Executive Director to Arjun K.Sengupta (India), effective February 4, 1985.

Arjun K. Sengupta (India) was elected Executive Director by Bangladesh, Bhutan,India, and Sri Lanka, effective February 4, 1985.

A.R.G. Prowse (Australia) resigned as Executive Director for Australia, Korea,New Zealand, Papua New Guinea, the Philippines, Seychelles, SolomonIslands, Vanuatu, and Western Samoa, effective February 15, 1985.

Antonio V. Romualdez (Philippines), formerly Alternate Executive Director toA.R.G. Prowse (Australia), was appointed Alternate Executive Director to C.R.Rye (Australia), effective February 16, 1985.

C.R. Rye (Australia) was elected Executive Director by Australia, Korea, NewZealand, Papua New Guinea, the Philippines, Seychelles, Solomon Islands,Vanuatu, and Western Samoa, effective February 16, 1985.

Cesar Robalino (Ecuador) resigned as Alternate Executive Director to AlexandreKafka (Brazil), effective February 28, 1985.

Hernando Arias (Panama) was appointed Alternate Executive Director toAlexandre Kafka (Brazil), effective March 1, 1985.

Arne Linda (Sweden) resigned as Alternate Executive Director to Hans Lundstrom(Sweden), effective March 10, 1985.

Henrik Fugmann (Denmark) was appointed Alternate Executive Director to HansLundstrom (Sweden), effective March 11, 1985.

wa Bilenga Tshishimbi (ZaTre) resigned as Alternate Executive Director toAbderrahmane Alfidja (Niger), effective March 21, 1985.

143



The following served at certain times during 1984/85 as Temporary Alternate ExecutiveDirectors to the Executive Directors indicated:

Temporary AlternateExecutive Director

Samir Ramez Abiad (Lebanon)Ali Asghar Agah (Iran, Islamic Republic of)

Eric Michael Ainley (United Kingdom)E.A. Ajayi (Nigeria)

Hassan Alaoui-Abdallaoui (Morocco)Jose Roberto Novaes de Almeida (Brazil)

Ignazio Angeloni (Italy)

Hernando Arias Garcia (Panama)Chandi J. Batliwalla (India)

Wolf-Ruediger Bengs(Germany, Federal Republic of)

Romeo Lopez Bernardo (Philippines)Janet Bui loch (United Kingdom)

Mohamed Camara (Guinea)

Gabriel R. Castellanos (Guatemela)Kutsan Celebican (Turkey)

Mohamed Bahaa Chatah (Lebanon)Chen Jian (China)

Luc E.J.M. Coene (Belgium)Silvio E. Conrado (Nicaragua)Joaqufn de la Herran (Spain)

Jaime Delgadillo (Bolivia)Alimata Kone Diaby (Ivory Coast)

Lubin Kobla Doe (Togo)J. Julio Dreizzen (Argentina)

Samir Fouad El-Khouri (Lebanon)Miriam Eran (Israel)Gazi Ercel (Turkey)

Christian Flamant (France)Ingimundur Fridriksson (Iceland)

Giorgio Gomel (Italy)Vinjamuri Govindarajan (India)

Detlev Hammann (Germany, Federal Republic of)

Kai Aaen Hansen (Denmark)

Nadeem Ul Haque (Pakistan)Sabir Mohamed Hassan (Sudan)

Glen David Hodgson (Canada)Jerry Hospedales (Trinidad and Tobago)

Liviu lonescu (Romania)

Executive Director for whomTemporary Alternate Served

Mohamed Finaish (Libya)Ghassem Salehkhou (Iran, Islamic Republic of)Yusuf A. Nimatallah (Saudi Arabia)E.I.M. Mtei (Tanzania)Ghassem Salehkou (Iran, Islamic Republic of)Alexandre Kafka (Brazil)Giovanni Lovato (Italy)Salvatore Zecchini (Italy)Alexandre Kafka (Brazil)R.N. Malhotra (India)Guenter Grosche (Germany, Federal Republic of)

A.R.G. Prowse (Australia)Nigel Wicks (United Kingdom)N'Faly Sangare (Guinea)E.I.M. Mtei (Tanzania)Pedro Perez (Spain)Jacques de Groote (Belgium)Mohamed Finaish (Libya)Zhang Zicun (China)Jacques de Groote (Belgium)Miguel A. Senior (Venezuela)Pedro Perez (Spain)Alvaro Donoso (Chile)Abderrahmane Alfidja (Niger)Abderrahmane Alfidja (Niger)Fernando L. Nebbia (Argentina)Yusuf A. Nimatallah (Saudi Arabia)JJ. Polak (Netherlands)Jacques de Groote (Belgium)Bruno de Maulde (France)John Tvedt (Norway)Giovanni Lovato (Italy)R.N. Malhotra (India)Arjun K. Sengupta (India)Gerhard Laske (Germany, Federal Republic of)Guenter Grosche (Germany, Federal Republic of)John Tvedt (Norway)Hans Lundstrom (Sweden)Mohamed Finaish (Libya)N'Faly Sangare (Guinea)E.I.M. Mtei (Tanzania)Robert K. Joyce (Canada)Alexandre Kafka (Brazil)JJ. Polak (Netherlands)

144


APPENDIX V (concluded). CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

Temporary AlternateExecutive Director

Abdel Rehman Ismael (Mauritius)Joseph Mills Jones (Liberia)

Antti Kalervo Juusela (Finland)

Hirotaka Kobayashi (Japan)

Serge Kolb (Luxembourg)Hak-Sung Lee (Korea)

Meg Lundsager (United States)Wolfgang Moerke (Germany, Federal Republic of)

Rachld Msadek (Tunisia)James A.K. Munthali (Malawi)

Kazuya Murakami (japan)Barry S. Newman (United States)

Georges E.L. Nguyen (France)Jean-Christian Obame (Gabon)

Yoshio Okubo (Japan)Enok Olsen (Norway)

John Kobina Orleans-Lindsay (Ghana)Ishwari Raj Panday (Nepal)

Pal Peterfalvy (Hungary)George W.K. Pickering (Canada)

Eduardo Portas (Mexico)Mohammed Zia Masoom Qureshi (Pakistan)

Tawfik Ramtoolah (Mauritius)Mukhlis Rasyid (Indonesia)

Janardana Reddy (Fiji)David J. Robinson (United Kingdom)

Jesus E. Rodrfguez Nunez (Venezuela)

Cristian Alfonso Salinas Cerda (Chile)

A.A. Scholten (Netherlands)Shao Zhengkang (China)

Douglas I.S. Shaw (Canada)Tanya Sirivedhin (Thailand)

Sakorn Sornyanyontr (Thailand)Avigdor Steinberg (Israel)

Elwaleed M. Taha (Sudan)Donald Charles Templeman (United States)

Norbert Toe (Burkina Faso)Livio Tornetta (Italy)

Alan Jeffrey Tregilgas (Australia)A. Vasudevan (India)

Mario Alejandro Weitz (Argentina)

John Calvin Williams (United States)Ali Yasseri (Iran, Islamic Republic of)

Zakaria bin Ismail (Malaysia)

Executive Director for whomTemporary Alternate Served

Abderrahmane Alfidja (Niger)N'Faly Sangare (Guinea)E.I.M. Mtei (Tanzania)John Tvedt (Norway)Hans Lundstrom (Sweden)Teruo Hirao (Japan)Hirotake Fuji no (Japan)Jacques de Groote (Belgium)A.R.G. Prowse (Australia)C.R. Rye (Australia)Charles H. Dallara (United States)Gerhard Laske (Germany, Federal Republic of)Ghassem Salehkhou (/ran, Islamic Republic of)E.I.M. Mtei (Tanzania)Hirotake Fuji no (Japan)Charles H. Dallara (United States)Bruno de Maulde (France)Abderrahmane Alfidja (Niger)Teruo Hirao (Japan)John Tvedt (Norway)Hans Lundstrom (Sweden)Abderrahmane Alfidja (Niger)J.E. Ismael (Indonesia)Jacques de Groote (Belgium)Robert K. Joyce (Canada)Miguel A. Senior (Venezuela)Mohamed Finaish (Libya)Abderrahmane Alfidja (Niger)J.E. Ismael (Indonesia)J.E. Ismael (Indonesia)Nigel Wicks (United Kingdom)Miguel A. Senior (Venezuela)Pedro Perez (Spain)Alvaro Donoso (Chile)Fernando L. Nebbia (Argentina)J.J. Polak (Netherlands)Zhang Zicun (China)Robert K. Joyce (Canada)J.E. Ismael (Indonesia)J.E. Ismael (Indonesia)J.J. Polak (Netherlands)Yusuf A. Nimatallah (Saudi Arabia)Richard D. Erb (United States)Charles H. Dallara (United States)Abderrahmane Alfidja (Niger)Salvatore Zecchini (Italy)A.R.G. Prowse (Australia)R.N. Malhotra (India)Arjun K. Sengupta (India)Alvaro Donoso (Chile)Fernando L. Nebbia (Argentina)Richard D. Erb (United States)Ghassem Salehkhou (Iran, Islamic Republic of)J.E. Ismael (Indonesia)

145


Appendix

VIAdministrative Budget

Administrative Budget as Approved by the Executive Board for the Financial Year Ending April 30, 1986Compared with Actual Expenses for the Financial Years Ended April 30, 1984 and 1985

(Values expressed in SDRs) 1

Object of Expense

I. PERSONNEL EXPENSESSalariesOther personnel

expenses

Total

II. TRAVEL EXPENSESBusiness travelOther travel

Total

III. OTHER ADMINISTRATIVEEXPENSES

CommunicationsBuilding occupancyBooks and printingSupplies and equipmentData processing servicesMiscellaneous

Total

TOTAL 2

Financial YearEnded

April 30, 1984

ActualExpenses

78,993,602

53,554,860

132,548,462

12,986,92510,153,155

23,140,080

6,384,8358,621,4761,657,0644,253,202

10,103,4245,231,959

36,251,960

191,940,502

Financial YearEnded

April 30, 1985

RevisedBudget

91,111,358

60,434,147

151,545,505

14,517,86411,888,468

26,406,332

6,868,81613,305,6232,031,4405,291,824

25,245,4315,689,452

58,432,586

236,384,423

ActualExpenses

89,931,088

59,651,824

149,582,912

13,748,78011,317,691

25,066,471

6,868,67510,356,057

1,862,2824,388,655

24,185,3855,689,423

53,350,477

227,999,860

Financial YearEnding

April 30, 1986

Budget

100,437,454

66,312,653

166,750,107

17,376,77513,274,700

30,651,475

6,013,67215,941,8092,139,7727,413,144

22,969,5924,872,799

59,350,788

256,752,370

1 The administrative budget is expressed in terms of U.S. dollarsand converted to SDR equivalents.

2 Net administrative expenses for the financial year ended April 30,1984 totaled SDR 188,940,478 after a deduction of the amountreimbursed to the General Resources Account by assessments leviedon the net cumulative allocations of participants in the SDR Depart-

ment (SDR 3,000,024). For the year ended April 30, 1985, netadministrative expenses amounted to SDR 224,399,859 after a de-duction of SDR 3,600,001 reimbursed to the General ResourcesAccount by assessments levied on the net cumulative allocations ofparticipants in the SDR Department.

146


Appendix

VIIComparative Statement of Income and Expense

(Values expressed in SDRs)


1983 1984 1985

OPERATIONAL INCOME1

Periodic chargesReceived in SDRsAmounts receivable

Total

Interest on holdings of SDRsReceived in SDRsAmounts receivable

Total

Other operational chargesReceived in SDRs

Total Operational Income

OPERATIONAL EXPENSE'Remuneration

Paid in SDRsPaid in members' currenciesAmounts payable

Total

Interest on borrowingPaid in SDRs Paid in members' currenciesAmounts payable

Total

Less: net income from temporaryinvestments held in theBorrowed Resources SuspenseAccounts

Other

Total Operational Expense

NET OPERATIONAL INCOME

NONOPERATIONAL EXPENSE

Administrative budget expenseFixed property expenseNet valuation adjustment loss (gain)Cumulative effect on prior years (to

April 30, 1982) of changing the methodof accounting for compensated absencesand accumulated termination grants

TOTAL

NET INCOME (Loss)

1,282,417,980262,993,780

1,545,411,760

444,258,572

444,258,572

55,627,079

2,045,297,411

18,571,289962,550,264

981,121,553

156,910,948417,316,875260,668,454

834,896,277

27,513,391

1,788,504,439

256,792,972

1 65,31 5,8273

15,480,167(427,641)

11,029,770

191,398,123

65,394,849

1,909,632,764454,168,294

2,363,801,058

146,926,226224,704,421

371,630,647

56,564,842

2,791,996,547

610,796,7857,770,453

667,752,311

1,286,319,549

129,059,065792,541,653435,258,494

1,356,859,212

117,014,821

11,216

2,526,175,156

265,821,391

1 88,940,478 3

3,869,486(47,973)

192,761,991

73,059,400

2,472,230,010496,91 7,81 62

2,969,147,826

381,178,39497,116,224

478,294,618

34,616,178

3,482,058,622

1,292,674,84114,738,003

413,788,828

1,721,201,672

385,524,449793,340,648398,223,677

1,577,088,774

10,570,875

2,351

3,287,721,922

194,336,700

224,399,859 3

535,014(742,676)

224,192,197

(29,855,497)

1 Income and expense in the General Department are recorded on the accrual basis and some amounts recorded ina financial year may not be settled until the following financial year. Consequently, amounts will differ from thoseshown in the financial statements of the SDR Department (Appendix VIII) which are reported on the basis of paymentsactually made.

2 Does not include SDR 56,417,013 of charges accounted for as deferred income in financial year 1985.3 After deduction of SDR 2,500,002 for financial year 1983, SDR 3,000,024 for financial year 1984, and

SDR 3,600,001 for financial year 1985, reimbursed to the General Resources Account by assessments levied on thenet cumulative allocations of participants in the SDR Department.

147


Appendix

VIIIFinancial Statements of the General

Department, SDR Department,Supplementary Financing FacilitySubsidy Account, Trust Fund, and

Staff Retirement Plan

REPORT OF THE EXTERNAL AUDIT COMMITTEE

Washington, D.C.June 28, 1985

AUTHORITY AND SCOPE OF THE AUDIT

In accordance with Section 20(b) of the By-Laws of the International MonetaryFund we have audited the financial statements of the Fund for the year endedApril 30, 1985, covering the

—General Department (including the General Resources Account, BorrowedResources Suspense Accounts, and Special Disbursement Account),

—SDR Department, and—Accounts Administered by the Fund, which consist of the Supplementary

Financing Facility Subsidy Account and the Trust Fund.The audit was conducted in accordance with international auditing standards

and, accordingly, included reviews of accounting and control systems, tests ofaccounting records, evaluation of the extent and results of work performed by theInternal Auditor, and other audit procedures.

AUDIT OPINION

In our opinion, the financial statements of the General Department (includingthe related supplemental schedules one through four), the SDR Department, andthe Accounts Administered by the Fund have been prepared in accordance withgenerally accepted accounting principles applied on a basis consistent with that ofthe preceding year, and give a true and fair view of the respective financial positionsand the allocations and holdings of SDRs as at April 30, 1985, and of the financialresults of operations and transactions during that year.

EXTERNAL AUDIT COMMITTEE:

/s/ M. Ijadur Rahman, Chairman (Bangladesh)/s/ Nicodemusjordanides (Greece)/s/ Jay M. Weinstein (United States)

148


APPENDIX VIII (continued)

INTEF

ASSETS

Currencies and Securities (Notes 2 and 5)SDR Holdings (Note 3) . .Gold Holdings (Note 4)Borrowed Resources Held in Suspense . .Charges Receivable and Accrued (Note 5)Accrued Interest on SDR HoldingsOther Assets

Total Assets

^NATIONAL MONETARY FUND

GENERAL DEPARTMENT

BALANCE SHEET

as at April 30, 1985


(Note 1)

19855

95,994,2194,615,7473,620,396

203,407932,071

97,11623,489

105,486,445

1984

93,574,6816,436,7303,620,396

601,642786,931224,704

20,873

105,265,957

QUOTAS, RESERVES, AND LIABILITIES

QuotasSubscriptions of Members

Reserves (Note 6)

LiabilitiesBorrowing (Note 7) .Remuneration Payable (Note 5)Accrued Interest PayableOther Liabilities and Deferred Credits (Note 5)

Total Quotas, Reserves, and Liabilities

89,301,800

1,043,919

14,202,990413,789397,076126,871

105,486,445

89,236,300

1,073,774

13,791,229667,752435,258

61,644

105,265,957

The accompanying notes and Schedules 1-4 are an integral part of the financial statements.

/s/ W. O. HABERMEIER Isl J. DE LAROSIERETreasurer Managing Director

149




GENERAL DEPARTMENT

STATEMENT OF INCOME AND EXPENSE

for the year ended April 30, 1985


(Note!)

1985 1984


OPERATIONAL INCOMEPeriodic chargesDeduct: Income deferred

Net periodic charges (Note 5)Interest on SDR holdingsService chargesOther

3 025 56556,417

2,969 148478 295

30,2994,3717

3,482,059

2 364 552751

2 363 801371 63150820

5,744

2,791,996

OPERATIONAL EXPENSE

Remuneration (Note 5)Interest on borrowing, net of income from temporary investments held in

Borrowed Resources Suspense Accounts (SDR 10,571 in 1985 andSDR 1 1 7,01 5 in 1 984)

Other operational expense

Net Operational Income

1 721 202

1,566,5182

3,287,722

194,337

1,286 320

1,239,84511

2,526,176

265,820

ADMINISTRATIVE EXPENSE (Note 9)PersonnelTravelOther, netFixed property (Note 1 )

Total Administrative Expense

NET INCOME (LOSS)

149,58325,06649,008

535

224,192

(29,855)

132,54923,14033,2033,869

192,761

73,059

150

.


APPENDIX VIM (continued)


GENERAL DEPARTMENT

STATEMENT OF CHANGES IN RESERVES



(Note!)

SPECIAL RESERVE (Note 6)Balance at beginning of the yearNet income (loss)

Balance at end of the year

1985 1984

708 194 635 135(29,855) 73,059

678 339 708 194

GENERAL RESERVE (Note 6)Balance at beginning and end of the year

TOTAL RESERVES

365,580

1,043,919

365,580

1,073,774


151




GENERAL DEPARTMENT

NOTES TO THE FINANCIAL STATEMENTS

General Department

Under the Articles of Agreement, the General Departmentconsists of the General Resources Account, the Special Dis-bursement Account, and the Investment Account. The In-vestment Account had not been activated at April 30, 1985.The General Department also includes Borrowed ResourcesSuspense Accounts, the establishment of which was authorizedby the Executive Board in May 1981.

General Resources Account

Assets held in the General Resources Account comprise(i) currencies of the Fund's member countries (includingsecurities), (ii) SDR holdings, and (iii) gold.

Each member is required to pay to the Fund the amount ofits initial quota and subsequent increases partly in the member'sown currency and the remainder in the form of reserve assets,except that for the increases proposed in 1978, members werepermitted to pay the entire increase in their own currencies.A member's quota cannot be increased until it consents to theincrease and pays the subscription in full.

The Fund makes its resources available to its members byselling SDRs or currencies to members in exchange for theirown currency in accordance with Fund policies on the useof its resources. Use of the Fund's resources by a member isdependent on the member having a balance of payments need.

When members make purchases, they undertake to repur-chase, within the period specified by the Fund, the Fund'sholdings of their currencies against the payment to the Fundof SDRs or the currencies of other members specified by theFund. The Fund's policies on the use of its resources, whichindicate the time period for which purchases may be outstand-ing, are intended to assure that use of its resources is temporaryand will be reversed within time periods specified by the Fund.

The composition of the Fund's holdings of members' cur-rencies changes as a result of the Fund's operations andtransactions, including purchase and repurchase transactionin currencies as noted above. The currency holdings reflectboth the counterpart of purchases by those members that havea need to use the Fund's resources, and also the currenciesof those members whose balance of payments and reservepositions are determined by the Fund on a quarterly basis tobe sufficiently strong for their currencies to be used in all theFund's operations and transactions in accordance with thepolicies of the Fund.

A member has a reserve tranche in the Fund to the extentthat the Fund's holdings of its currency, excluding holdingswhich reflect the member's use of Fund credit, are less thanthe member's quota. A member's reserve tranche is regardedas a part of the member's external reserves and a member maypurchase up to the amount of its full reserve tranche at anytime. Reserve tranche purchases are not regarded as a use ofFund credit.

Members may make use of Fund resources under variouspolicies and the amount of such use is related to a member'squota in the Fund. Under the credit tranche policy, the credit

is at present made available to members in a range consistingof four tranches or segments, each equal to 25 percent of amember's quota. A first credit tranche purchase is defined asone that raises the Fund's holdings of a member's currency inthe credit tranche from 0 to 25 percent of quota. Subsequentpurchases are made in three successive tranches, each equalto 25 percent of quota, to a level of no more than 100 percentof quota. Purchases in these three tranches are referred to asupper credit tranche purchases. Higher conditionality accom-panies the use of Fund credit in the upper tranches.

Members experiencing balance of payments difficulties mayenter into stand-by arrangements with the Fund under whichthe Fund commits itself to provide resources to be madeavailable over periods of up to three years from the date ofthe arrangements. Purchases under these arrangements in theupper credit tranches depend upon the member's meeting theperformance criteria included in the arrangements.

In addition to purchases under the Fund's credit tranchepolicies, members may use the Fund's resources under deci-sions on:

• Compensatory financing—to assist members, particularlyprimary exporters, encountering payments difficulties pro-duced by temporary export shortfalls attributable to circum-stances beyond their control and in addition, at their option,to assist members encountering payments difficulties producedby an excess in the cost of their cereal imports.

• Buffer stock financing—to assist members in connectionwith the financing of international buffer stocks of primaryproducts.

• Extended Fund facility—to provide, through extendedarrangements of up to three years, medium-term assistance tomembers to make structural adjustments in their economies.Purchases under these arrangements depend upon the mem-ber's meeting the performance criteria included in the arrange-ments.

• Supplementary financing facility and the policy on en-larged access—to make resources available under stand-byand extended arrangements, in addition to those available inthe credit tranches or under the extended Fund facility, tomembers facing serious payments imbalances that are large inrelation to their quotas. These policies are temporary and maybe utilized only in conjunction with the use of resources inthe upper credit tranches.

Members that purchase resources from the Fund undertaketo repurchase the Fund's holdings of their currencies againstthe payment to the Fund of SDRs or the currencies of othermembers specified by the Fund. Reserve tranche purchasesmade after April 1, 1978 are not subject to repurchase. Underthe Fund's repurchase policies, purchases in the credit tranches,under the compensatory financing facility, and under thebuffer stock facility, are to be repurchased in quarterly install-ments beginning three years, and ending not later than fiveyears, after the date of purchase; repurchases of purchasesfinanced with borrowed resources under the supplementaryfinancing facility or the enlarged access policy are to be made

152



in semiannual installments beginning three and one-half years,and ending not later than seven years, after the date ofpurchase; and repurchases under the extended Fund facility(other than purchases financed with borrowed resources underthe supplementary financing facility or policy on enlargedaccess) are to be made in semiannual installments beginningfour years, and ending not later than ten years, after the dateof purchase. However, a member is entitled to repurchase atany time holdings of its currency on which the Fund leviescharges, and is expected to make repurchases prior to theperiods mentioned above as and when its balance of paymentsand reserve position improves.

Borrowed Resources Suspense Accounts

Borrowed Resources Suspense Accounts have been estab-lished in order to hold, transfer, convert, and invest (i) cur-rencies borrowed by the Fund before they are transferredto the General Resources Account for use in transactions oroperations; and (ii) currencies received by the Fund in repur-chases financed with borrowed resources before repaymentsto lenders can be made. Members are not obligated to maintainthe SDR value of their currencies held by the Fund in theBorrowed Resources Suspense Accounts, and as far as prac-ticable, the currencies are invested in SDR-denominatedobligations.

At April 30, 1985 borrowed resources held in suspenseamounted to SDR 203.41 million (SDR 601.64 million atApril 30, 1984) and included accrued income of SDR 0.87million (SDR 5.01 million at April 30, 1984).

Special Disbursement Account

The Special Disbursement Account was activated onJune 30, 1981. The Fund administers a Trust Fund, establishedin 1976 to provide balance of payments assistance on conces-sional terms to certain members. This Trust Fund is at presentbeing wound up and resources received by the Trust Fundafter April 30,1981 are transferred to the Special DisbursementAccount, of which up to SDR 750 million is to be placed tothe Supplementary Financing Facility Subsidy Account. AtApril 30, 1985 SDR 401.19 million (SDR 174.92 million atApril 30, 1984) had been received into the Special Disburse-ment Account from the Trust Fund and placed to the Supple-mentary Financing Facility Subsidy Account. There were noresources held in the Special Disbursement Account atApril 30, 1985 and at April 30, 1984.

1. Accounting Practices

Unit of Account

The accounts of the General Department are expressed interms of the SDR. At present, the currency value of the SDRis determined daily by the Fund by summing the values inU.S. dollars, based on market exchange rates, of a basket offive specified currencies, as follows:

Currencies

U.S. dollarDeutsche markFrench francJapanese yenPound sterling

Amount

0.540.460.74

340.071

Members' currencies are valued in terms of the SDR on thebasis of the representative rate of exchange determined inaccordance with the Rules of the Fund. Gold with depositoriesis valued on the basis that one SDR is equivalent to 0.888671gram of fine gold.

Basis of Accounting

The Fund maintains its books of accounts on an accrualbasis and, accordingly, recognizes income as it is earned andrecords expenses as they are incurred except that incomefrom charges from members that are overdue in their obligationsto the Fund by six months or more is deferred and is recognizedas income only when paid unless the member has remainedcurrent in the payment of charges when due (see Note 5). Itis the practice of the Fund to make all calculations on thebasis of the exact number of days in the accounting period.

The established policy of the Fund is to charge as an expenseof each accounting period the total costs incurred for fixedproperty, furniture, and equipment. For the year endedApril 30, 1985, the cost of property, furniture, and equipmentcharged as an expense amounted to SDR 17 million(SDR 7.05 million in 1984), of which SDR 16.5 million isincluded in other administrative expense (SDR 3.2 million in1984).

2. Currencies and Securities

Each member has the option to substitute nonnegotiable andnon-interest-bearing securities for the amount of its currencyheld by the Fund in the General Resources Account that is inexcess of 1/4 of 1 percent of the member's quota. Thesesecurities, which are part of the Fund's currency holdings,are encashable by the Fund on demand.

Changes in the Fund's holdings of members' currencies andsecurities for the year ended April 30, 1985 were as follows:

In millions of SDRs

April 30, April 30, Net1984 1985 Change

89,236 89,302 66

31,742 34,973 3,231

(27,415) (28,290) (875)

12 9 (3)

Members' quotasMembers' use of Fund

creditMembers' reserve

tranchesAdministrative currency

balances

Currencies and securities 93,575 95,994 2,419

Each member is obligated to maintain the value of theFund's holdings of its currency in terms of the SDR except forholdings which may be held in Borrowed Resources SuspenseAccounts, the Special Disbursement Account, and the In-vestment Account. Whenever the Fund revalues its holdingsof a member's currency, an account receivable or an accountpayable is established for the amount of currency payable byor to the member in order to maintain the value of the Fund'sholdings of the currency in terms of the SDR. The balancesof the accounts receivable or payable are reflected in theFund's total currency holdings. At April 30, 1985 accounts

153



receivable to maintain SDR values of currency holdingsamounted to SDR 16,990.80 million and accounts payableamounted to SDR 981.99 million (SDR 12,542.42 million andSDR 728.95 million at April 30, 1984). At June 24, 1985, theamounts receivable were SDR 4,195.16 million and amountspayable were SDR 330.74 million.

The Fund's holdings of members' currencies at April 30,1985 are shown in Schedule 1.

3. SDR Holdings

SDRs are reserve assets created by the Fund and allocatedto members participating in the SDR Department. AlthoughSDRs are not allocated to the Fund, the Fund may acquire,hold, and dispose of them through the General ResourcesAccount. SDRs held by the Fund are received from its membersin the settlement of their financial obligations to the Fund(quota payments, repurchases, and charges) and may be usedby the Fund in transactions and operations between the Fundand its members (sold to members in purchases or transferredto members in the settlement of remuneration and interest onFund borrowing). The Fund earns interest on its SDR holdingsat the same rate as all other holders of SDRs.

4. Gold Holdings

At April 30, 1985 the Fund held 3,217,341 kilograms ofgold at designated depositories.

5. Fund Operations

For the year ended April 30, 1985, members' purchasesamounted to SDR 6,289 million, of which SDR 229 millionwere reserve tranche purchases. Over the same period, re-purchases by members and use of debtor currencies totaledSDR 2,845 million, including repurchases of SDR 16 millionrelating to purchases made prior to the Second Amendmentand attributed to the reserve tranche. The members' purchasessubject to repurchase are shown in Schedule 2.

Changes in the outstanding use of Fund credit under variousfacilities for the year ended April 30, 1985, were as follows:

In millions of SDRs

Regular facilitiesCompensatory

financingBuffer stock

financingExtended Fund

facilitySupplementary

financing facilityEnlarged access

Total

April 30,1984

5,197

7,304

375

5,568

6,9206,378

31,742

Pur-chases

1,230

1,248

—

1,020

—2,562

6,060

Repur-chases

916

1,062

138

59

61044

2,829

April 30,1985

5,511

7,490

237

6,529

6,3108,896

34,973

the Fund on each purchase involving use of Fund resourcesother than reserve tranche purchases.

The Fund also charges a stand-by fee payable at the beginningof each 12-month period, on the undrawn balance of a stand-by or extended arrangement. This fee is refunded proportionalto purchases made under the arrangement. If the full amountof the arrangement is not drawn, the balance of the stand-byfee is taken into income by the Fund upon the expiration ofthe arrangement. Stand-by fees included in other income forthe year ended April 30, 1985 amounted to SDR 4.3 million(SDR 5.7 million in 1984).

The Fund pays remuneration on a member's remuneratedreserve tranche position. A remunerated reserve tranche po-sition is the amount by which the Fund's holdings of a member'scurrency (excluding holdings that derive from the use of Fundcredit) is below the "norm." The norm is an amount equal to75 percent of the member's quota on April 1, 1978 plus thetotal of subsequent increases in the member's quota. Formembers that joined the Fund after April 1, 1978, the normis determined by adding the proportion of the member's quotaequal to the average of the norm of all other members on thedate the member joined the Fund and the total of subsequentincreases in the member's quota.

At April 30, 1985, the total holdings on which the Fundlevied charges amounted to SDR 34,973 million (SDR 31,74million in 1984) and total creditor positions on which theFund paid remuneration amounted to SDR 22,211 million(SDR 21,200 million in 1984).

During the year ended April 30, 1985 the Fund extendedthe deferral of recognition as current income of amounts frommembers that are overdue in meeting payments to the Fund.Charges receivable from members that are late by six monthsor more in discharging financial obligations to the Fund andalso are not current in paying charges when due are reportedas deferred income until actually settled. At April 30, 1985,four members were more than six months late in dischargingfinancial obligations to the Fund and also were not current inpaying charges. At that date, the total amount of chargesreceivable from these members, reflected in the balance sheetas charges receivable and accrued and as deferred credits,amounted to SDR 62.8 million, of which SDR 56.4 millionrepresented the addition to deferred income for the year thenended.

Amounts receivable by the General Department of the Fundfrom members overdue in payments to the Fund for six monthsor more were as follows:

In millions of SDRs

April 30

Periodic Charges and Remuneration

The Fund levies charges, which are payable periodically,on its holdings of a member's currency that derive from themember's use of Fund credit. A service charge is levied by

Number of membersUse of Fund resources:

TotalRepurchases overdueOverdue six months or more

Charges:TotalOverdueOverdue six months or more

1985

717.9111.057.8

62.844.213.4

1984

99.531.922.7

12.811.78.3

154

4 3



6. Reserves

The Fund determines annually what part of its net incomeshall be placed to the General Reserve or to the SpecialReserve, and what part, if any, shall be distributed. The Articlesof Agreement do not limit the use that the Fund may make ofthe General Reserve, and permit the Fund to use the SpecialReserve for any purpose for which it may use the GeneralReserve, except distribution. Any administrative deficit for anyfinancial year must be written off first against the SpecialReserve.

7. Borrowing

Outstanding borrowing by the Fund was as follows:

In millions of SDRs

April 30, Borrow- Repay- April 30,

Supplementaryfinancing facility

Enlarged access

1984

6,9156,876

13,791

ment 1985

2,1522,152

676 6,2391,064 7,9641,740 14,203

Scheduled repayments of outstanding borrowing by the Fundare shown in Schedule 3.

Supplementary Financing Facility

The supplementary financing facility became operational inMay 1979. The Fund entered into borrowing agreements with14 members, or institutions within their territories, and withthe Swiss National Bank, under which the lenders agreed tomake resources available to the Fund, at call, up toSDR 7,784 million through February 1984 to finance purchasesby members under this facility. Borrowing by the Fund underthese agreements is to be repaid in installments between threeand one-half to seven years after the date of borrowing. Interestpaid by the Fund on amounts borrowed under the borrowingagreements is based on the average yield on U.S. Governmentsecurities with a constant maturity of five years.

Enlarged Access

The policy on enlarged access became operational in May1981. The Fund has entered into borrowing agreements withvarious members, or institutions within their territories, theBank for International Settlements, and the Swiss NationalBank, under which the lenders have agreed to make resourcesavailable to the Fund, up to SDR 15,305 million, to financepurchases by members under the policy. The maturities ofborrowing by the Fund under these agreements vary from threemonths to seven years. Interest paid by the Fund on amountsborrowed under these agreements is at variable rates of interestwhich are established periodically, and are related to marketinterest rates, based on Eurocurrency deposit rates and weightedaverage yields of domestic instruments denominated in thefive currencies in the SDR valuation basket.

General Arrangements to Borrow (GAB)

Under the General Arrangements to Borrow the Fund mayborrow up to specified amounts from adherents when supple-

mentary resources are needed to forestall or to cope with animpairment of the international monetary system. The GABfirst became effective from October 24, 1962 and has beenrenewed until December 25, 1988.

In February 1983, the Fund approved an enlargement of theGAB to SDR 17 billion including provision for the adherenceof the Swiss National Bank as a participant, and for associatedarrangements with nonparticipants (SDR 1.5 billion). It alsoapproved amendments that would allow the Fund to borrowunder the GAB in certain circumstances in order to financepurchases by nonparticipants. These changes, including oneassociated agreement with the Saudi Arabian Monetary Agency(SDR 1.5 billion), became effective on December 26, 1983when all ten participants had notified the Fund of theirconcurrence in the amendments and in the increased creditlimits. The Swiss National Bank adhered to these arrangementsin April 1984.

Borrowing Guidelines

The Fund has established guidelines for borrowing, whichprovide that the Fund will not allow the total of outstandingborrowing, plus unused credit lines, to exceed the range of50 to 60 percent of the total of Fund quotas. Since all GABlines of credit are unlikely to be called upon at the same time,the total of outstanding borrowing shall include either out-standing borrowing by the Fund under the GAB, or two thirdsof the total credit lines under the GAB and associated agree-ments, whichever is the greater. The borrowing guidelines aresubject to review by the Executive Board. Total outstandingborrowing and unused credit lines, calculated in accordancewith these guidelines, at April 30, 1985 were equal to 36.6percent of quotas (38.6 percent of quotas at April 30, 1984).

8. Commitments Under Stand-By and ExtendedArrangements

At April 30, 1985, 30 arrangements were in effect andundrawn balances under these arrangements amounted toSDR 5,543.1 million. These arrangements are listed in Sched-ule 4.

9. Administrative Expenses

The Fund incurs administrative expenses primarily for sal-aries, travel, and other administrative needs, which are ex-pended in accordance with an administrative budget approvedby the Executive Board. Expenses for building are authorizedoutside of the annual administrative budget. The Fund isreimbursed for expenses incurred in administering the SDRDepartment.

The Fund has certain commercial deposits and receivablesrelating to its administrative activities. These deposits andreceivables are not subject to the maintenance of valueobligations.

The Fund pays various allowances to or on behalf ofExecutive Directors and staff including the employer's contri-bution to the Staff Retirement Plan. All contributions to thePlan and all other assets, liabilities, and income of the Planare held separately outside of the General Department andcan be used or incurred only for the benefit of the participantsin the Plan and their beneficiaries. The employer contributesthat part of the costs and expenses of the Plan not provided

155

inghg



by the contributions of the participants. In addition, experiencegains and losses of the Plan, as determined by the actuaryengaged by the Pension Committee, are amortized over a per-iod of 15 years. The unamortized experience losses at April 30,1985 amounted to SDR 56.3 million (calculated at the SDRvalue of the U.S. dollar on that date). Payments over the next15 years to amortize the actuarial experience losses areestimated to be approximately SDR 71 million (at the April 30,1985 SDR/US$ rate), of which SDR 7.9 million was paid onMay 1, 1985.

Contributions by the employer to the Staff Retirement Fundfor the year ended April 30, 1985 amounted to SDR 27.6

million (SDR 27.5 million in 1984), including SDR 7.7 milliofor the amortization of actuarial experience losses (SDR 6.9million in 1984) and SDR 2.2 million to fund cost of livingsupplements to beneficiaries (SDR 4.5 million in 1984).

The Fund staff is entitled to accumulated annual leave, upto a maximum of 60 days, which may be commuted into acash payment upon termination of employment. In addition,upon the completion of five years' service, each member ofthe staff is entitled to a termination grant, subject to maximumamounts based on years of service after July 1979. The Fundhas elected to account for these amounts as an expense asthey are earned.

156



Schedule 1


GENERAL DEPARTMENT

QUOTAS, FUND'S HOLDINGS OF CURRENCIES, MEMBERS' USE OF FUND RESOURCES, AND RESERVE TRANCHE POSITIONS



Fund's Holdings of Currencies1

AfghanistanAlgeriaAntigua and BarbudaArgentinaAustralia




CameroonCanadaCape VerdeCentral African RepublicChad





Gambia, TheGermany, Federal Republic ofGhanaGreeceGrenada

Quotas

86,700623,100

5,0001,113,0001,619,200

775,60066,40048,900

287,50034,100

2,080,4009,500

31,3002,500

90,700

22,1001,461,300

31,600137,00042,700

92,7002,941,000

4,50030,40030,600

440,5002,390,900

394,2004,500

37,300

84,10069,700

711,0008,0004,000

112,100150,700463,40089,0001 8,400

70,60036,500

574,9004,482,800

73,100

17,1005,403,700

204,500399,900

6,000

Total

81,885457,613

4,9992,745,1281,424,493

393,52055,51925,438

676,56375,535

1,586,92613,58229,281

1,931149,945

9,2815,666,802

24,067211,003

33,561

92,5082,424,829

3,55053,48033,006

1,235,5012,088,303

394,2034,501

36,833

261,44167,144

500,1676,765

14,323

342,627414,729507,154185,75123,411

140,59446,943

439,2173,177,437

73,075

42,2332,525,007

681,703318,503

9,864

Percent ofQuota

94.47.3.4

100.0246.6

88.0

50.783.652.0

235.3221..5

76.3143.093.677.23

165..3

42.0387.8

76.2154.0

78.6

99.882.478.9

1795.9107.9

280.587.3

100.0100.098.7

310.996.370.384.6

358.1

305.6275.2109.4208.71227.2

199.1128.6

76.470.9

100.0

247.046.7

333.479.6

164.4

Use of FundResources

———

1,632,110—

——

411,45843,591

—5,975

——

59,223

4,205,400—

74,000—

——

23,1682,663

795,000————

177,3192,1111

——

10,329

230,525264,000

43,75096,748

5,002

69,98018,250

———

25,155—

477,200—

3,862

ReserveTranche

4,817165,487

1—

194,722

382,08210,88223,47322,403

2,1577

493,5231,8962,024

5704

12,836—

7,535—

9,156

196516,202

950111264

—302,600

——

482

—4,675

210,8371,2377

9

—————

—7,8212

135,6981,305,877

28

392,878,696

181,399

—

157



Schedule 1(continued)




Iran, Islamic Republic ofIraqIrelandIsraelItaly

Ivory CoastJamaicaJapanJordanKampuchea, Democratic

KenyaKoreaKuwaitLao People's Democratic RepublicLebanon

LesothoLiberiaLibyan Arab JamahiriyaLuxembourgMadagascar






Quotas

108,00057,9007,500

49,20044,100

67,800530,700

59,6002,207,7001,009,700

660,000504,000343,300446,600

2,909,100

165,500145,500

4,223,30073,90025,000

142,000462,800635,30029,30078,700

15,10071,300

515,70077,00066,400

37,200550,600

2,00050,80045,100

33,90053,600

1,165,500306,60061,000

37,3002,264,800

461,60068,20033,700

849,500699,00063,100

546,300102,200

65,90048,400

330,900440,400376,600

Total

249,03169,41010,994

120,948127,362

200,1011,502,705

77,0845,687,1921,244,142

589,238504,008220,440446,606

1 ,808,946

763,255756,920

2,767,764131,30437,494

533,0902,034,773

289,14635,42559,871

13,854282,447272,202

64,793213,332

146,007650,868

1,998112,994

14,637

63,111212,226

3,573,0481,397,180

61,000

34,2271,422,950

461,59168,21773,540

849,496233,672

31,3521,707,676

369,410

70,65416,156

995,3611,154,489

918,835

Percent ofQuota

230.6119.9146.6245.8288.8

295.1283.2129.3257.6123.2

89.3100.064.2

100.062.2

461.2520.2

65.5177.7150.0

375.4439.7

45.5120.976.1

91.7396.152.884.1

321.3

392.5118.299.9

222.432.5

186.2395.9306.6455.7100.0

91.862.8

100.0100.0218.2

100.033.449.7

312.6361.5

107.233.4

300.8262.1244.0


141,0251 1 ,5003,494

71,74583,307

132,299972,000

21,5003,966,500

306,862

————

—

597,754611,354

—57,40012,500

402,6181,571,972

6,125—

211,153——

146,931

1 1 1 ,00259,611

—70,875

—

29,1991 58,644

2,407,5051,090,581

—

2,622

—7

48,400

——

1,249,938267,208

10,100—

664,431730,361571,900

ReserveTranche

——

2

70

——

4,025487,020

72,425

70,765—

122,985—

1,100,160

2—

1,455,551—

7

11,550—

346,154—

18,833

1,24810

243,49812,208

—

2,196159,352

38,683

30,494

23—18

1

5,693841,863

19—

8,560

12465,329

31,79788,568

14

5,35232,249

16,32629,666

158

2




Schedule 1(concluded)

QatarRomaniaRwandaSt. Christopher and NevisSt. Lucia

St. VincentSao Tom£ and PrincipeSaudi ArabiaSenegalSeychelles



SwedenSyrian Arab RepublicTanzaniaThailandTogo

Trinidad and TobagoTunisiaTurkeyUgandaUnited Arab Emirates


Viet NamWestern SamoaYemen Arab RepublicYemen, People's Democratic Republic ofYugoslavia

ZaireZambiaZimbabwe

Totals

Quotas

114,900523,40043,800

4,5007,500

4,0004,000

3,202,40085,1003,000

57,90092,400

5,00044,200

915,700

1 ,286,000223,100169,70049,30024,700

1 ,064,300139,100107,000386,60038,400

170,100138,200429,10099,600

202,600

6,194,00017,918,300

163,8009,000

1,371,500

1 76,8006,000

43,30077,200

613,000

291,000270,300191,000

89,301,800

Total

78,1581,422,804

34,4814,4969,149

4,8093,999

1,168,104302,859

2,997

130,73622,883

7,5661 77,499

1,590,737

927,532538,977775,00649,30031,968

806,701139,103128,087

1,097,84687,318

42,595110,088

1,775,589402,395

75,426

4,258,5557,719,478

390,6097,420

871,581

205,19514,42853,04992,576

2,520,098

941,140963,621440,815

95,994,219

Percent ofQuota

68.0271.8

78.799.9

122.0

120.2100.036.5

355.999.9

225.824.8

151.3401.6173.7

72.1241.6456.7100.0129.4

75.8100.0119.7284.0227.4

25.079.7

413.8404.0

37.2

68.843.1

238.582.463.5

116.1240.5122.5119.9411.1

323.4356.5230.8


899,399——

1,649

809——

218,719—

72,846—

3,060133,293745,000

321,849605,301

9,000

——

21,070740,03549,117

——

1,378,757306,306

—

——

226,800——

28,3958,4279,750

15,3751 ,907,090

650,137693,331249,845

34,972,600

ReserveTranche

36,744

9,32252

22,034,306

9655

2469,522

497

69,966

358,4695,981

—

1,742

257,601——

28,792206

127,50728,11432,275

3,522127,177

1,935,48010,207,199

—1,581

499,926

5—

3—

—

1331

28,290,392

1 Includes nonnegotiable, non-interest-bearing notes which members are entitled to issue in substitution for currency.2 Less than SDR 500.

159




GENERAL DEPARTMENT

MEMBERS' PURCHASES SUBJECT TO REPURCHASE BY YEAR OF SCHEDULED REPURCHASEI



Ordinary Resources Borrowed Resources

Schedule 2

Financial YearEnding April 30

1986198719881989199019911992199319941995

Totals

CreditTranches

1,014,1451,418,2931,679,6141,025,056

373,592—————

5,510,700

ExtendedFund

Facility

192,843408,860637,491976,829

1,060,5311,041,302

930,378716,593473,900113,251

6,551, 9782'3

Compen-satory

Financing

1,503,6942,505,3522,270,096

921,306289,706

—————

7,490,154

BufferStock

Financing

13,589101,413118,901

2,970——————

236,873

Supple-mentary

Financing

1,169,8391,577,9561,583,2591,149,226

653,453176,613

————

6,310,346

EnlargedAccess

304,025793,650

1,756,0262,194,9781,927,2131,455,701

464,074———

8,895,667

Total

4,204,3792

6,805,5248,045,3876,270,3654,304,4952,673,6161,394,452

716,593473,900113,251

35,001, 96223

1 A member is entitled to repurchase at any time holdings of its currency subject to charges and is expected to make repurchases as and whenits balance of payments and reserve position improves.

2 This total includes SDR 6.244 million reserve tranche purchases made prior to April 1, 1978 which are subject to repurchase.3 The total of members' purchases subject to repurchase exceeds the outstanding use of Fund credit by SDR 29.39 million because certain

purchases made prior to the Second Amendment of the Articles of Agreement effective on April 1, 1978 which do not represent the extensionof Fund credit must be repurchased in accordance with the repurchase terms then in effect.

160



Schedule 3


GENERAL DEPARTMENT

SCHEDULED REPAYMENTS OF FUND BORROWING



Periods of Repayment1

Financial YearsEnding April 30

1986

1987

1988

19.89

1990

199.1

1992.

Totals

SupplementaryFinancing

Facility

1,200,856

1,657,731

1,585,795

1,152,145

519,015

123,788

—

6,239,330

EnlargedAccess

Resources

424,1022

1,114,1532

2,452,4052

1,650,000

1,338,000

760,000

225,000

7,963,660

Total

1,624,958

2,771,884

4,038,200

2,802,145

1,857,015

883,788

225,000

14,202,990

1 Dates of repayment are the dates provided in the borrowing agreements between the Fund and lenders, including maximum periods ofrenewals which are at the Fund's option. The borrowing agreements also permit earlier repayments in certain circumstances.

2 Includes short-term borrowing with original maturities not exceeding three years.

161



Schedule 4


GENERAL DEPARTMENT

STATUS OF STAND-BY ARRANGEMENTS AND EXTENDED ARRANGEMENTS



Member

STAND-BY ARRANGEMENTS

ArgentinaBelizeCentral African RepublicCosta RicaDominica

Dominican RepublicEcuadorGhanaHaitiIvory Coast

JamaicaKenyaLiberiaMadagascarMali

MauritaniaMauritiusNigerPhilippinesSenegal

SomaliaSudanTogoWestern SamoaYugoslavia

ZaVreZambia

EXTENDED ARRANGEMENTS

BrazilMalawiMexico

Date of Arrangement

December 28, 1 984December 3, 1984July 6, 1984March 13, 1985July 18, 1984

April 15, 1985March 11, 1985August 2 7, 1984November 7, 1 983August 3, 1984

June 22, 1984February 8, 1 985December 7, 1984April 23, 1985December 9, 1983

April 12, 1985March 1, 1985December 5, 1984December 14, 1984January 16, 1985

February 22, 1985June 25, 1984May 7, 1984July 9, 1984April 18, 1984

April 24, 1985July 26, 1984

March 1 , 1 983September 1 9, 1 98January 1, 1983

Expiration

March 27, 1986March 31, 1986JulyS, 1985April 12, 1986July 17, 1985

April 14, 1986March 10, 1986December 31, 1985September 30, 1985May 2, 1985

June 21, 1985February 7, 1986June 6, 1986April 22, 1986May 31, 1985

April 11, 1986August 31, 1986December 4, 1 985June 13, 1986July 15, 1986

February 21, 1986June 24, 1985May 6, 1985July8, 1985May 15, 1985

April 23, 1986April 30, 1986

February 28, 1 986September 1 8, 1 98December 31, 1985

Totals

Total AmountAgreed

1,419,0007,125

15,00054,000

1,400

78,500105,500180,00060,00082,750

64,00085,20042,78029,50040,500

12,00049,0001 6,000

615,00076,600

22,10090,00019,0003,375

370,000

162,000225,000

3,925,330

4,239,375100,000

3,410,625

7,750,000

11,675,330

UndrawnBalance

1,182,5004,7507,000

30,000430

50,47584,400

120,00039,00020,690

36,00055,40034,28026,000

—

9,60035,0009,600

530,00054,000

20,10070,000

—843

90,000

122,000145,000

2,777,068

1 ,496,25066,000

1,203,745

2,765,995

5,543,063

162



The accompanying note is an integral part of the financial statements.

/s/ W. O. HABERMEIER /s/ J. DE LAROSIERETreasurer Managing Director


SDR DEPARTMENTSTATEMENT OF ALLOCATIONS AND HOLDINGS


(In thousands of SDrs)Rs)

ALLOCATIONS

Net cumulative allocations of SDRs to participantsCharges due but not paid (Note)

HOLDINGS

ParticipantsWith holdings above allocations

AllocationsNet receipt of SDRs

With holdings below allocationsAllocationsNet use of SDRs

Total holdings by participants

General Resources AccountPrescribed holders

19855

21,433,3305,348

21,438,678

9,881,0743,490,643

13,371,717

11,552,2568,118,755

3,433,501

16,805,218

4,615,74717,713

21,438,678

19484

21,433,3301,8038

21,434,368

8,424,7892,114,823

10,539,612

13,008,5418,587,585

4,420,956

14,960,568

6,436,73037,070

21,434,368

163




SDR DEPARTMENTSTATEMENT OF RECEIPT AND USE OF SDRs



Participants


PrescribedHolders

Total

1985 1984

Total holdings at beginning of financial yearReceipt of SDRs

Transfers among participants and prescribed holders:Transactions with designationTransactions by agreementOperations:

LoansSettlement of financial obligations

Net interest on SDRsTransfers from participants to General Resources Ac-

count:RepurchasesChargesQuota paymentsInterest on SDRsAssessment on SDR allocation

Transfers from General Resources Account to partici-pants and prescribed holders:

PurchasesRepayments of Fund borrowingInterest on Fund borrowingRefunds and adjustmentsIn exchange for currencies of other members

Acquisitions to pay chargesRemuneration

14,960,568 6,436,730 37,070 21,434,368 21,458,910

2,152,4192,671,817

66,75723,903

322,606

34,213

70,3133,1393

717,2232,927,354

14,213605,883

3,588

2,594,549129,207445,839

13,838

953,3581,952,454

Total receipts 11,326,747 4,268,261 107,719

Use of SDRsTransfers among participants and prescribed holders:

Transactions with designationTransactions by agreementOperations:

LoansSettlement of financial obligations

Transfers from participants to General Resources Ac-count:

RepurchasesChargesQuota paymentsAssessment on SDR allocation

Transfers from General Resources Account to partici-pants and prescribed holders:

PurchasesRepayments of Fund borrowingInterest on Fund borrowingRefunds and adjustmentsIn exchange for currencies of other members

Acquisitions to pay chargesRemuneration

Charges in the SDR Department:Net charges dueCharges not paid when dueSettlement of unpaid charges

Total usesTotal holdings at end of financial year

2,152,4192,706,030

66,75794,216325,799

717,2232,927,354

14,213605,8833,588

2,594,549129,207445,83913,838

953,3581,952,45415,702,727

2,401,9883,175,159

628,934565,465187,845

391,7062,159,2316,194,759146,9262,974

3,875,794787,429201,65925,807

329,7391,573,34722,648,762

2,152,4192,637,676

15,23787,014

717,2232,927,354

14,2133,588

931,683-38,505

34,1959,482,097

16,805,218

2,594,549129,207445,839

13,837

953,3581,952,454

6,089,2444,615,747

2,152,41968,354 2,706,030

51,520 66,7577,202 94,216

717,2232,927,354

14,2133,588

2,594,549129,207445,839

13,837

953,3581,952,454

931,683-38,505

34,195127,076 15,698,417

17,713 21,438,678

2,401,9893,175,159

628,934565,464

391,7062,159,2306,194,759

2,974

3,875,794787,429201,65925, 807

329,7391,573,347

334,772-12,709

37,25122,673,30421,434,368

The accompanying note is an integral part of the financial statements.

164

5


APPENDIX VIM (continued)


SDR DEPARTMENT

NOTE TO THE FINANCIAL STATEMENTS

SDR Department

All transactions and operations involving SDRs are con-ducted through the SDR Department. SDRs do not constituteclaims by holders against the Fund to provide currency, exceptin connection with the termination of participation or liqui-dation. SDRs are allocated by the Fund to members that areparticipants in the SDR Department in proportion to theirquotas in the Fund. Three allocations were made in 1970,1971, and 1972, totaling SDR 9.3 billion. Three furtherallocations were made, in 1979, 1980, and 1981, totalingSDR 12.1 billion. The Fund is empowered to prescribe certainofficial entities as holders of SDRs: to date, 14 institutionshave been prescribed as holders. These prescribed holders donot receive allocations and cannot use or receive SDRs indesignation.

Uses of SDRs

Participants and prescribed holders can use and receiveSDRs in transactions and operations by agreement amongthemselves. Participants can also use SDRs in operationsinvolving the General Resources Account, such as the paymentof charges and repurchases. In addition, the Fund ensures, bydesignating participants to provide freely usable currency inexchange for SDRs, that a participant can use its SDRs toobtain such currency if it has need because of its balance ofpayments or its reserve position or development in its reserves.A participant is not obliged to provide currency for SDRsbeyond the point at which its holdings of SDRs in excess ofits net cumulative allocation are equal to twice its netcumulative allocation. A participant may, however, providecurrency in excess of the obligatory limit or any agreed higherlimit.

Interest, Charges, and Assessment

Interest is paid to each holder on its holdings of SDRs andcharges are levied at the same rate on each participant's netcumulative allocation plus any negative balance of the partici-pants or unpaid charges. The SDR interest rate is determinedby reference to a combined market interest rate, which is aweighted average of yields or rates on short-term instrumentsin the capital markets of France, the Federal Republic ofGermany, Japan, the United Kingdom, and the United States.Effective August 1, 1983, the SDR interest rate is determinedon a weekly basis and interest on SDR holdings is paid andcharges on net cumulative allocations are collected on aquarterly basis. Interest and charges are settled by creditingand debiting individual holdings accounts on the first day ofthe subsequent quarter. The Fund is required to pay interestto each holder, whether or not sufficient SDRs are receivedin payment of charges. At April 30,1985 the amount of unpaidcharges amounted to SDR 5.3 million from three members,of which SDR 2.3 million from one member was overdue forsix months or more.

The combined market interest rate used to determine theSDR interest rate is calculated each Friday, using the yieldsor rates of that day. The SDR interest rate, which is set equalto the combined market interest rate, enters into effect on thefollowing Monday and applies until the end of the followingSunday.

The expenses of conducting the business of the SDR De-partment are paid by the Fund from the General ResourcesAccount, which is reimbursed in SDRs at the end of eachfinancial year. For this purpose, the Fund levies an assessment,at the same rate for all participants, on their net cumulativeallocation.

165





SUBSIDY ACCOUNT

BALANCE SHEET


(In thousands of SDRs)(Note 1)

ASSETS

CurrenciesInterest-earning deposits (Note 2)Accrued income

Total

19855

50241,992

10,015

252,057

19844

1298,372

2,250

100,634

RESOURCES AND LIABILITIES

Resources — Account balanceBorrowing (Note 3)

Total

252,057

252,057

96,0344,600

100,634

The accompanying notes are an integral part of the financial statements.

/s/ W. O. HABERMEIER /s/ J. DE LAROSIERETreasurer Managing Director

166





SUBSIDY ACCOUNT

STATEMENT OF CHANGES IN RESOURCES



(Note 1)

Balance at beginning of year

Transfers from Special Disbursement Account

Contributions (Note 1)

Investment income.

Exchange valuation gain

Balance before subsidy payments

Subsidy payments (Note 4)

Balance at end of year

1985

96,034

226,273

5,559

13,801

305

341,972

89,915

252,057

1984

28,075

126,116

5,880

4,347

79

164,497

68,463

96,034


167





SUBSIDY ACCOUNT


Purpose

The Supplementary Financing Facility Subsidy Account,which is administered by the Fund, was established in De-cember 1980 to assist low-income developing members tomeet the cost of using resources made available through theFund's supplementary financing facility and under the policyon exceptional use. The assets of the Supplementary FinancingFacility Subsidy Account are separate from the assets of allother accounts of or administered by the Fund and are notused to discharge liabilities or to meet losses incurred in theadministration of other accounts. The Supplementary Financ-ing Facility Subsidy Account became operational in May 1981and the first subsidy payments were made in December of thatyear. The resources of the Account arise from contributionsand loans from members, interest income earned on invest-ments, and transfers of amounts received in interest and loanrepayments from the Trust Fund through the Special Disburse-ment Account.


Unit of Account

The accounts of the Supplementary Financing Facility Sub-sidy Account are expressed in terms of the SDR. At present,the currency value of the SDR is determined by the Fund bysumming the values in U.S. dollars, based on market exchangerates, of a basket of five specified currencies, as follows:

CurrenciesU.S. dollarDeutsche markJapanese yenFrench francPound sterling

Amount0.540.46

340.740.071

Basis of Accounting

The accounts are maintained on an accrual basis and,accordingly, income is recognized as it is earned and expenses

are recorded as they are incurred. It is the practice of theFund to make all calculations on the basis of the exact numberof days in the accounting period.

Contributions

Contributions to the Supplementary Financing Facility Sub-sidy Account are made in currencies which are valued interms of SDRs on the basis of exchange rates against the SDRat the time of receipt. Cumulative contributions to the Sup-plementary Financing Facility Subsidy Account at April 30,1985 amounted to SDR 52.57 million.

2. Interest-Earning Deposits

To avoid exchange risks, the assets of the Account, pendingtheir disbursement, are held in the form of interest-earningSDR-denominated time deposits.

3. Borrowing

Certain members made loans to the Fund in its capacity astrustee of the Supplementary Financing Facility Subsidy Ac-count. These loans, which were without interest, were repaidin December 1984.

4. Subsidy Payments

The amount of the subsidy is calculated as a percentageper annum of the average daily balances in each year of theFund's holdings of recipient members' currencies subject tothe schedule of charges applicable to the supplementaryfinancing facility and the policy on exceptional use. The rateof subsidy to be paid is determined by the Fund in the light ofthe resources available and the subsidy may not exceed theequivalent of 3 percent per annum of the currency holdingsto which the supplementary financing facility and exceptionaluse charges apply, nor reduce the effective charge on suchholdings below the rate of charge which would have beenapplicable had they been acquired under the Fund's policieson the regular use of its resources.

168




TRUST FUND

BALANCE SHEET



(Note 1)

ASSETS

Loans (Note 2)Accrued interest on loans (Note 4)Investments, at cost (which approximates market value)Accrued interest on investments

Total

1985

2 649 5804 8894 063

126

2,658,658

1984

2 861 9164 7643 824

134

2,870,638

TRUST RESOURCES AND LIABILITIES

Trust resourcesLiabilities —

Undistributed profits fromsale of gold (Note 3)

Deferred income (Note 4)Borrowing (Note 5Accrued interest on borrowing

Total

2,651,792

4 026639

2,1974

2.658,658

2 864 491

3 811

2 3324

2.870.638


Is/ W. O. HABERMEIER /s/ J. DE LAROSIERETreasurer Managing Director

169



Income:Interest income on loans (Note 2)

Deduct income deferred (Note

Investment incomeExchange valuation gain (loss)

Less — Interest expense on borrowing

Net income


TRUST FUND

STATEMENT OF INCOME AND EXPENSE



(Note!)

4)

1 (Note 5)

1985 1984

13805 14678639 —

13,166 14,678

411 3678 (15)

13,585 15,03011 12

13.574 15.018


170

5




TRUST FUND

STATEMENT OF CHANGES IN TRUST RESOURCES


(In thousands of SDRs)(Note!)

1985 1984

Balance beginning of yearNet income

Balance before transfers to the SpecialDisbursement Account

Transfers to the Special DisbursementAccount (Note 6)

Balance, end of year

2 864 49113,574

2,878,065

226,273

2,651,792

2 975 58915,018

2,990,607

126,116

2,864,491


171



INTERNATIONAL MONETARY FUNDTRUST FUND


Purpose

The Trust Fund, which is administered by the Fund asTrustee, was established in 1976 to provide balance of pay-ments assistance on concessional terms to eligible membersthat qualify for assistance. The resources of the Trust Fund areseparate from the assets of all other accounts of or administeredby the Fund and are not used to discharge liabilities or to meetlosses incurred in the administration of other accounts.


Unit of Account

The accounts of the Trust Fund are expressed in terms ofthe SDR. At present, the currency value of the SDR isdetermined daily by the Fund by summing the values in U.S.dollars, based on market exchange rates, of a basket of fivespecified currencies, as follows:

CurrenciesU.S. dollarDeutsche markFrench francJapanese yenPound sterling

Amount0.540.460.74

340.071

Basis of Accounting

The accounts are maintained on an accrual basis and,accordingly, income is recognized as it is earned and expensesare recorded as they are incurred except that income frominterest from members that are overdue in their obligations tothe Fund by six months or more is deferred and is recognizedas income only when paid unless the member has remainedcurrent in the payment of interest when due (see Note 4). Theexpenses of conducting the business of the Trust Fund thatare paid from the General Department of the Fund arereimbursed by the Trust Fund on the basis of an estimate ofthese expenses. Following the termination of the Trust Fundon April 30, 1981, residual administrative costs have beenabsorbed by the Fund's General Department. It is the practiceof the Fund to make all calculations on the basis of the exactnumber of days in the accounting period.

2. Loans

Loans were made from the Trust Fund to those eligiblemembers that qualifed for assistance in accordance with theprovisions of the Trust Fund Instrument. The final loan dis-bursements were made on March 31, 1981. Each loan dis-bursement is repayable in ten semiannual installments whichshall begin not later than the end of the first six months of thesixth year, and be completed at the end of the tenth year afterthe date of disbursement, except that most of the final loandisbursements made to members on March 31, 1981 thatamounted to about 0.4 percent of quotas are to be repaid ina single installment not later than ten years after the date ofthat disbursement. Interest on the outstanding loan balancesis charged at the rate of V2 of 1 percent per annum.

3. Direct Distribution of Profits

The Fund decided that the Trustee make, through the TrustFund, the direct distribution of part of the profits from the saleof gold for the benefit of developing members. The share ofeach developing member in this direct distribution of profitswas calculated on the basis of its share in total Fund quotasas at August 31, 1975 and on the basis of the actual profitsrealized in the gold auctions.

The direct distribution of profits has been completed, exceptthat an amount of US$3,990,776, representing the share ofDemocratic Kampuchea, will continue to be held in the TrustFund until relations with that member have been restored.

4. Deferred Income

At April 30, 1985, two members were late by six monthsor more in discharging their obligations to the Fund and werealso not current in paying interest on Trust Fund loans whendue. For these two members the recognition of income frominterest on the outstanding loans is being deferred until suchtime as the overdue interest is actually paid. At April 30,1985, the total amount of deferred income, reflected in thebalance sheet as accrued interest on loans and as deferredincome amounts to SDR 0.64 million. At April 30, 1985, totaloutstanding loans to these members amounted to SDR 128.0million, of which SDR 15.9 million was overdue and SDR 8.1million was overdue for six months or more.

5. Borrowing

One beneficiary of the direct distribution of profits from theTrust Fund has lent a part of its entitlements to the Trust Fund.The amounts borrowed by the Trust Fund are repayable in fiveequal annual installments beginning not later than the end ofthe sixth year after the date of borrowing. Interest on theamounts outstanding is paid at the same rate as interest ischarged on Trust Fund loans, provided that the rate shall notbe less than V2 of 1 percent per annum.

6. Termination and Transfer of Resources

The Fund, as Trustee, decided that upon the completion ofthe final loan disbursements, the Trust Fund shall be terminate.as of April 30, 1981. After that date, the activities of the TrustFund have been confined to the completion of any unfinishedbusiness of the Trust Fund and the winding up of its affairs.

The resources of the Trust Fund held on the terminationdate or subsequently received by the Trustee will be employedfirst to satisfy current administrative expenses, second to payinterest and principal as it falls due on loan obligations, andthird to make transfers to the Special Disbursement Account,the first SDR 750 million of which will flow through to theSupplementary Financing Facility Subsidy Account. At April 30,1985 SDR 401.19 million had been transferred through theSpecial Disbursement Account to the Supplementary FinancingFacility Subsidy Account.

172



REPORT OF THE EXTERNAL AUDIT COMMITTEE

STAFF RETIREMENT PLAN

Washington, D.C.June 28, 1985

AUTHORITY AND SCOPE OF THE AUDIT

In accordance with Section 20(b) of the By-Laws of the International MonetaryFund, we have audited the financial statements of the Staff Retirement Plan for theyear ended April 30, 1985, which consist of statements of

—Accumulated Plan benefits and net assets available for benefits,—Changes in accumulated Plan benefits, and—Changes in net assets available for benefits.The audit was conducted in accordance with international auditing guidelines

and, accordingly, included reviews of accounting and control systems, tests ofaccounting records, evaluation of the extent and results of work performed by theInternal Auditor, and other audit procedures.

AUDIT OPINION

In our opinion, the financial statements have been prepared in accordance withgenerally accepted accounting principles, applied on a basis consistent with thatof the preceding year, and give a true and fair view of the financial status of theStaff Retirement Plan as at April 30, 1985 and of the changes in financial status forthe year then ended.

EXTERNAL AUDIT COMMITTEE:

/s/ M. Ijadur Rahman, Chairman (Bangladesh)/s/ Nicodemus Jordanides (Greece)/s/ Jay M. Weinstein (United States)

173





STATEMENT OF ACCUMULATED PLAN BENEFITS AND NET ASSETS AVAILABLE FOR BENEFITS


(In thousands of U.S. dollars)(Note!)

1985 1984


Isl W. O. HABERMEIER /s/ J. DE LAROSIERETreasurer Managing Director

Accumulated Plan benefits (Note 1):Actuarial present value of accumulated Plan benefits

Vested benefitsRetired participantsOther participants

Nonvested benefits

Total actuarial present value ofaccumulated Plan benefits

Net assets available for benefits:Investments, at current value (Notes 1 and 3)

Portfolio denominated in U.S. dollarsPortfolio denominated in other currencies

Receivables:ContributionsAccrued interest and dividends (Note 1 )Other

Cash at banks

Total assets

Liabilities:Accounts payable

Net assets available for benefits

Excess of net assets available for benefitsover actuarial present value of accumulatedPlan benefits

139 40011 7,50046,900

303,800

425,33881,051

506,389

9375,123

711

6,771

17

513,177

1,108

512,069

208,269

1 20 700104,50043,200

268,400

346,05768,676

414,733

1113,6721,251

5,695

32

420,460

919

419,541

151,141

174





STATEMENT OF CHANGES IN ACCUMULATED PLAN BENEFITS


(In thousands of U.S. dollars)

(Note 1)

1985 1984

Actuarial present value of accumulatedPlan benefits at beginning of year

Increase (decrease) during the year attributable to:Benefits accumulatedIncrease for interest due to decrease

in discount periodBenefits paid

Net increase

Actuarial present value of accumulatedPlan benefits at end of year (Note 1 )

268,400

23,483

26,100(14,183)

35,400

303,800

238,700

17,748

23,300(11,348)

29,700

268,400


175

5


APPENDIX VIII (continued]



STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS


(In thousands of U.S. dollars)

(Note 1)

1985 1984


Investment income (Note 1):Net gain in current value

of investments (Note 3)InterestDividends

Contributions (Note 2):International Monetary FundParticipantsParticipants restored to serviceNet transfers from retirement plans

of other international organizations

Total additions

Benefits:PensionsWithdrawal benefitsCommutation benefitsDeath benefits

Total payments

Net additions

Net assets available for benefits at:Beginning of year

End of year— April 30, 1 985

36,52920 70011,917

69,146

28 2949,057

46

168

37,565

106,711

11 ,4841 0601 606

33

14,183

92,528

419,541

512,069

79814,5449,539

24,881

28 8608,357

74

170

37,461

62,342

10,038784172354

11,348

50,994

368,547

419,541

176






Description of Plan

Genera/

The Staff Retirement Plan (Plan) is a defined benefit pensionplan covering nearly all staff members of the InternationalMonetary Fund (employer). All assets and income of the Planare the property of the employer and are held and administeredby it separately from all its other property and assets and areto be used solely for the benefit of participants and retiredparticipants or their beneficiaries. The account is valued inU.S. dollars.

Benefits

Participants are entitled to an annual pension beginning atnormal retirement age (65). The amount of the pension isbased on number of years of service and highest average grossremuneration. Participants who have reached the age of 55may retire with a reduced pension (or with an unreducedpension if the sum of their age and years of service equals 90or more). The Plan also provides for disability retirement anddeath benefits to a surviving spouse and minor children. Upontermination before age 55 a participant with at least threeyears of eligible service may elect to receive either a withdrawalbenefit (accumulated contributions of the participant plus anamount equal to a percentage of such accumulated contri-butions, the percentage being based on number of months ofeligible service) or a deferred pension to commence after theparticipant has reached the age of 55. A participant entitledto receive a normal, early retirement, or deferred pension mayelect to commute up to one third of his or her pension, andreceive a lump sum amount in lieu of the amount of pensioncommuted. A participant entitled to receive a disability pensionmay elect to commute one third of the early retirement pensionthat would otherwise have been applicable.

Contributions

As a condition of employment, regular staff members arerequired to participate in the Plan and to contribute 7 percentof their gross remuneration to the Plan. Certain other categoriesof staff members may elect to participate in the Plan. Theemployer meets the administrative costs of the Plan, such asactuarial, management, and custodial fees, and is to contributeany additional amounts not provided by the contributions ofparticipants to pay costs and expenses of the Plan not otherwisecovered. In financial year 1985, these administrative costswere approximately $2.9 million ($2.4 million in 1984).


Valuation of Investments

Investments in securities listed in stock exchanges are valuedat the last reported sales price on the last business day of the

accounting period. Over-the-counter securities are valued attheir bid price on the last business day of the year. Purchasesand sales made by U.S. investment managers are recorded onthe settlement date basis, and transactions made by theinternational investment managers are recorded on the tradedate basis.

Accumulated Benefits—Vested and Nonvested

The actuarial value of vested benefits is shown for twocategories. For retired participants, the amount shown equalsthe present value of the benefits expected to be paid over thefuture lifetime of the pensioner, and, if applicable, the survivingspouse of the pensioner. For other participants, the amountshown equals the present value of the deferred pension earnedto the valuation date for a participant, or, if greater, the valueof the withdrawal benefit for that participant, summed overall participants. For the purpose of determining the actuarialvalue of the vested benefits at the-end of the Plan year, it isassumed that the Plan will continue to exist but that participantswill not earn pension benefits beyond the date of the calcu-lation.

The amount of nonvested benefits represents the total of thewithdrawal benefits for all participants with less than threeyears of eligible service.

Investment Income

Dividend and interest income from investments are recordedas earned.

2. Funding Policy

The employer makes normal contributions to the Plan equalto 14 percent of gross remuneration. Whenever the cost ofliving for a financial year increases, pensions shall be aug-mented by a pension supplement, which shall be the lesser ofthe increase in the cost of living for the financial year or 2percent. If the increase in the cost of living for a year exceeds2 percent, pensions shall be augmented by an additionalsupplement to be paid from contributions from the employerequal to the difference between 2 percent and the increase inthe cost of living. The employer has the right for good causeto reduce the additional supplement to not less than 1 percent.

Plan Termination

In the event of the termination of the Plan by the employer,the assets of the Plan shall be used to satisfy all liabilities toparticipants, retired participants, and their beneficiaries andafter payment of all liabilities of the Plan. Any remainingbalance of the assets shall be returned to the employer.

177


APPENDIX VIII (concluded)

3. Investments

A summary of investments showing book and market valuesis as follows (in thousands of U.S. dollars):

1985 1984

BookValue

MarketValue

BookValue

MarketValue

127,601 131,092

23,106 24,495

66,179

22,617

64,581

22,064

Portfolio denomi-nated in U.S.dollars:U.S. Government

securitiesCorporate bonds

and debenturesCommon and

preferred stocks 204,640 240,648 166,913 185,623Short-term invest-

ments 29,091 29,103 73,645 73,789

384,438 425,338 329,354 346,057

74,857 81,051 55,344 68,676

459,295 506,389 384,698 414,733

Portfolio denomi-nated in othercurrencies

The net gain in the current value of investments representsthe gain (loss) realized during the year from the sale ofinvestments, the unrealized appreciation (depreciation) of themarket value of investments, and, for investments denominatedin currencies other than U.S. dollars, valuation differencesarising from exchange rate changes of other currencies againstthe U.S. dollar. These net gains, in thousands of U.S. dollars,were as follows:

Portfolio denominated in U.S.dollars

Portfolio denominated in othercurrencies

Net market gainNet exchange valuation loss

Net gain

1985

39,996

2,102(5,569)

36,529

1984

(11,522)

12,493(173)

798

The net exchange loss was calculated by converting thebook value of securities in currencies other than U.S. dollarsto U.S. dollars at the exchange rates in effect at both thebeginning and the end of the accounting period (or at the timea security was purchased or sold if this occurs during theaccounting period) and subtracting one from the other todetermine the exchange gain or loss.

At April 30, 1985, 11.9 percent of the net assets availablefor benefits were held in the Grantham, Mayo, Van OtterlooManaged Market Trust, which has underlying investments inapproximately 300 equity issues. There were no other invest-ments which represented 5 percent or more of the net assetsavailable for benefits.

4. Actuarial Valuation

The most recent valuation of the Plan by the actuary engagedby the Pension Committee was made as at April 30, 1984.Actuarial assumptions used in the valuation were (a) lifeexpectancy of participants as based on the 1960 United NationsService Tables, (b) certain percentages of staff, differing bysex, would retire at each age between 55 and 65, and (c) anassumed average rate of return on investments of 6 percentper annum. The purpose of the annual valuation is to deter-mine, on the basis of the actuarial assumptions used, the levelof additional employer contributions necessary to fund expe-rience losses and cost of living increases beyond the first 2percent. It is further assumed that the Plan will continue toexist and that participants will continue to earn pension benefitsbeyond the date of the valuation until the date of withdrawal,disability, death, or retirement. This valuation therefore differsfrom that in which the actuarial value of vested benefits isdetermined (Note 1).

Experience gains and losses of the Plan, as determined bythe actuary, are amortized over a period of 15 years. The mostrecent valuation (at April 30, 1984) showed an experiencegain of $2.4 million for the year then ended. Unamortizedexperience losses amounted to $55.8 million at April 30,1985, of which $7.8 million was paid by the employer onMay 1, 1985.

178


Appendix

IXClassification of Countries

The revised classification scheme adopted in the World Economic Outlook, April1985 was used in the preparation of this Report. The details of this classificationscheme are given below.

Industrial countries comprise:

Australia France Luxembourg SwitzerlandAustria Germany, Fed. Rep. of Netherlands United KingdomBelgium Iceland New Zealand United StatesCanada Ireland NorwayDenmark Italy SpainFinland Japan Sweden

The developing countries include all other Fund members (as of January 1, 1985)together with certain essentially autonomous dependent territories for whichadequate statistics are available.1 The regional breakdowns of data for "developingcountries" conform to the regional classification used in the Fund's InternationalFinancial Statistics, with the oil exporting countries included in their respectiveregions. It should be noted that, in this classification, Egypt and the Libyan ArabJamahiriya are part of the Middle East, not Africa.

The analytical groupings in this classification are (1) countries grouped bypredominant export; (2) countries grouped by financial criteria; (3) countries groupedby other criteria; and (4) countries grouped by the former classification criteria.The accompanying table presents a breakdown of these analytical groupingsaccording to the proportion of developing country gross domestic product (GDP),exports of goods and services, and level of indebtedness. These groupings aredescribed below.

The first analytical criterion used to group developing countries is by predominantexport category. Four categories are distinguished: fuel (Standard International TradeClassification—SITC 3); other primary commodities (SITC 0, 1, 2, 4, and diamondsand gemstones); manufactures (SITC 5 to 8 less diamonds and gemstones); and"services and remittances." On the basis of data for 1980, countries are assignedto that commodity grouping which accounts for 50 percent or more of their exports.Specifically, countries are assigned to the "services and remittances" category iftheir receipts on these transactions account for at least half of their exports of goodsand services. If countries do not meet this criterion, they are assigned to that tradecategory (of the three listed above) which accounts for at least half of their totalmerchandise exports.2

1 It should be noted that the term "country" used in this Report does not in all cases refer to aterritorial entity that is a state as understood by international law and practice. The term also coverssome territorial entities that are not states but for which data are maintained and provided internationallyon a separate and independent basis.

2 Two countries that did not meet any of the above criteria were assigned to that trade category whichaccounted for the largest share of their exports.

179


APPENDIX IX (continued). CLASSIFICATION OF COUNTRIES

Given these definitions, the fuel exporters comprise:

AlgeriaBahrainCongoEcuadorGabonIndonesia

Iran, Islamic Rep. ofIraqKuwaitLibyan Arab JamahiriyaMexicoNigeria

OmanQatarSaudi ArabiaSyrian Arab Rep.Trinidad and

Tobago

TunisiaUnited Arab

EmiratesVenezuela

The primary product exporters, that is, countries whose exports of agricultural andmineral primary products other than fuel accounted for over 50 percent of theirtotal exports in 1980, comprise:

AfghanistanArgentinaBangladeshBelizeBeninBhutanBoliviaBotswanaBrazilBurmaBurundiCameroonCentral African Rep.ChadChileColombiaComorosCosta Rica

DjiboutiDominican Rep.El SalvadorEquatorial GuineaEthiopiaFijiGambia, TheGhanaGuatemalaGuineaGuinea-BissauGuyanaHaitiHondurasIvory CoastJamaicaKenyaLao People's Dem. Rep.

LiberiaMadagascarMalawiMalaysiaMaliMauritaniaMauritiusMoroccoMozambiqueNicaraguaNigerPapua New GuineaParaguayPeruPhilippinesRwandaSao Tome and PrincipeSenegal

Sierra LeoneSolomon IslandsSomaliaSouth AfricaSri LankaSt. Christopher

and NevisSudanSurinameSwazilandTanzaniaThailandTogoTurkeyUgandaUruguayZaYreZambiaZimbabwe

The exporters of manufactures (i.e., those countries or areas whose exports ofmanufactures accounted in 1980 for over 50 percent of total exports) include:

ChinaHong KongHungary

IndiaIsraelKorea

RomaniaSingaporeViet Nam

Yugoslavia

The service and remittance countries, that is, those countries whose receipts fromservices (such as tourism) and private transfers (such as workers' remittances)amount to at least 50 percent of their exports of goods and services, comprise:

Antigua andBarbuda

BahamasBarbadosBurkina FasoCape VerdeCyprusDominica

EgyptGreeceGrenadaJordanKampuchea,

DemocraticLebanonLesotho

MaldivesMaltaNepalNetherlands

AntillesPakistanPanamaPortugal

SeychellesSt. LuciaSt. VincentVanuatuWestern SamoaYemen Arab Rep.Yemen, People's

Dem. Rep. of

The last three categories taken together are referred to as the "non-fuel exporters/'A second set of analytical groupings of developing countries is based on financial

criteria. These pertain to all developing countries except the eight Middle Easternoil exporters for which external debt statistics are either not available or are smallin relation to external assets. Because of these exclusions, disaggregations bypredominant export category of this developing country subgroup do not includedata for the fuel exporters. Moreover, coverage of the Middle Eastern region inthese cases is limited to the "non-oil" countries of the region.

Within this subgroup of developing countries and areas, two types of distinctionsare made. The first distinguishes among countries and areas on the basis of theirpredominant type of creditor. Those countries that obtained at least two thirds of

180


APPENDIX IX (continued}. CLASSIFICATION OF COUNTRIES

their external borrowings from 1978 to 1982 from commercial creditors are definedas market borrowers. The group includes:

AlgeriaAntigua and

BarbudaArgentinaBahamasBoliviaBrazilChileColombia

CongoCyprusEcuadorGabonGreeceHong KongHungaryIndonesiaIvory Coast

KoreaMalaysiaMexicoNigeriaPanamaPapua New GuineaParaguayPeruPhilippines

PortugalSingaporeSouth AfricaSurinameTrinidad and

TobagoUruguayVenezuelaYugoslavia

Among the market borrowers, a subgroup of major borrowers is distinguished. Thisgroup comprises those seven countries with the largest total outstanding externalindebtedness. These countries are:

ArgentinaBrazil

IndonesiaKorea

MexicoPhilippines

Venezuela

Official borrowers comprise those countries, except China and India, that obtainedtwo thirds or more of their external borrowings from 1978 to 1982 from officialcreditors. The countries are:

AfghanistanBahrainBangladeshBhutanBurkina FasoBurmaBurundiCape VerdeCentral African Rep.ChadComorosDjiboutiDominicaDominican RepublicEl Salvador

Equatorial GuineaFijiGambia, TheGhanaGrenadaGuatemalaGuineaGuinea-BissauGuyanaHondurasJamaicaJordanLao People's Dem. Rep.LiberiaMadagascar

MalawiMaldivesMaliMaltaMauritaniaNepalNetherlands AntillesNicaraguaPakistanRwandaSao Tome and PrincipeSenegalSeychellesSierra LeoneSomalia

St. LuciaSt. VincentSudanSwazilandSyrian Arab Rep.TanzaniaTogoUgandaViet NamWestern SamoaYemen Arab Rep.Yemen, People's

Dem. Rep. ofZaVreZambia

China and India, which satisfy the criterion for this grouping, have been excludedbecause of the twin circumstances that these two countries, first, are large enoughto significantly affect the group composites and, second, have experienced devel-opments that are at variance with those of most other countries in the group. Chinaand India are, therefore, implicitly grouped with those developing countries whoseexternal borrowing in 1978-82 was more or less evenly divided between officialand commercial creditors.

A second financial distinction is based on whether countries have or have notexperienced debt-servicing difficulties in the recent past. Countries that haveexperienced debt-servicing difficulties are defined as those countries which incurredexternal payments arrears during the period 1981 to 1983 or rescheduled their debtduring the period from 1981 to mid-1984 as reported in the relevant issues of theFund's Annual Report on Exchange Arrangements and Exchange Restrictions.Countries classified as not having experienced debt-servicing difficulties are definedas all other developing countries excluding the eight Middle Eastern oil exporters.

Several other analytical groups are also used in the Report. One of these is thegroup of low-income countries, which comprises 43 countries whose per capitaGDP, as estimated by the World Bank, did not exceed the equivalent of $410 in1980. The countries in this group are:

AfghanistanBangladeshBeninBhutanBurkina FasoBurma

BurundiCape VerdeCentral African

Rep.ChadChina

ComorosEquatorial GuineaEthiopiaGambia, TheGhanaGuinea

Guinea-BissauHaitiIndiaKampuchea,

DemocraticKenya

181


APPENDIX IX (continued). CLASSIFICATION OF COUNTRIES

Lao People'sDem. Rep.

MadagascarMalawiMaldivesMali

MauritaniaMozambiqueNepalNigerPakistanRwanda

Sao Tom£ andPrincipe

Sierra LeoneSomaliaSri LankaSudan

TanzaniaTogoUgandaViet NamZaTre

References to the small or smaller low-income countries refer to the above groupless China and India.

Reference is also made to subgroups that reflect a combination of regional andanalytical criteria. The most common of these groups are: (1) sub-Saharan Africa,which comprises all African countries except Algeria, Morocco, Nigeria, SouthAfrica, and Tunisia; (2) Middle Eastern oil exporters, which includes:

Iran, IslamicRep. of

Iraq

KuwaitLibyan Arab

Jamahiriya

OmanQatarSaudi Arabia

United ArabEmirates

and (3) the group of non-oil Middle Eastern countries, which refers to all MiddleEastern countries except the eight oil exporters listed above, namely:

BahrainEgyptIsrael

JordanLebanon

Syrian Arab Rep.Yemen Arab Rep.

Yemen, People'sDem. Rep. of

In the classification used in Fund publications until recently, the developingcountries were divided into two groups—"oil exporting countries" and "non-oildeveloping countries/' The countries included under the heading oil exportingcountries were:

AlgeriaIndonesiaIran, Islamic

Rep. of

IraqKuwaitLibyan Arab

Jamahiriya

NigeriaOmanQatarSaudi Arabia

United ArabEmirates

Venezuela

The remaining countries, grouped under the heading non-oil developing countries,were further disaggregated into subgroupings based primarily on the character ofthe countries' economic activity and on the predominant composition of theirexports.

Except where otherwise specifically indicated, the Union of Soviet SocialistRepublics and other nonmember countries of Eastern Europe, Cuba, and NorthKorea are excluded from the tables in this Report. Also, it has not been possible toinclude in the tables a number of small countries or territories for which trade andpayments data are not available.

182


APPENDIX IX (concluded). CLASSIFICATION OF COUNTRIES

Developing Countries: Shares of Various Subgroups in Aggregate GDP,Exports of Goods and Services, and Debt Outstanding, 1 980

(In percent)

Memorandum:Number of

Exports of Goods Countries inGDP and Services Debt1 Each Subgroup

Developing countries 100.0 100.0 . . . 131By region

Africa 13.7 14.2 16.6 48Asia 31.4 25.1 23.8 26Europe 10.5 7.5 11.9 8Middle East 16.7 36.7 . . . 16Western Hemisphere 27.7 16.4 40.3 33

By predominant exportFuel exporters 32.4 49.8 . . . 20Non-fuel exporters 67.6 50.2 75.0 111

Primary product exporters 33.1 21.6 44.8 72Exporters of manufactures 29.0 23.0 21 .3 11Service and

remittance countries 5.5 5.6 8.9 28

By financial criteriaDeveloping countries2 86.0 67.5 100.0 123

Market borrowers 51.4 49.1 67.7 35Of which,

Major borrowers 28.0Official borrowers 7.2 5.1 10.8 59Countries with recent debt-

servicing difficulties 42.8 26.6 59.5 58Countries without debt-

servicing difficulties 43.3 41.0 40.5 65

By miscellaneous criteriaSmall low-income countries 5.6 2.8 8.3 41Sub-Saharan Africa3 4.6 4.0 7.3 43Middle Eastern oil exporters 14.0 32.5 . . . 8Non-oil Middle Eastern

countries 2.7 4.3 7.4 8

By alternative analytical categoriesOil exporting countries 24.0 43.9 . . . 12Non-oil developing countries 76.0 56.1 86.6 119

1 In percent of outstanding debt of developing countries, excluding those listed in footnote 2.2 Excluding the Islamic Republic of Iran, Iraq, Kuwait, the Libyan Arab Jamahiriya, Oman, Qatar,

Saudi Arabia, and the United Arab Emirates.3 Excluding Nigeria and South Africa.

183

17.8 41.7 7


Index

Letters are used as follows: c for chart, n for footnote, and t for table.

ABU DHABISupplementary financing facility, 103t

AFGHANISTANExchange arrangements, 48t, 102tSDRs, 104t

AFRICABalances of payments, 16t, 19, 20c, 23Commercial bank borrowing, 23, 24, 183Debt rescheduling, 82Economic policies, 14Exchange rates, 38, 39International reserves, 23, 52Official development assistance, 27, 29Official borrowing, 23, 24Output, 2, 10t, 11, 12, 13c, 14, 183Prices, 12t, 14Sub-Sahara, 12t, 13c, 14, 23, 27, 28, 29,

182, 183Trade, 14, 21, 183

ALGERIAExchange arrangements, 48t, 92tSDRs, 104t

ANTIGUA AND BARBUDAArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 92tSDRs, 104t

ARGENTINAArticle VIII obligations, acceptance of,

108tCompensatory financing facility, use of,

70Exchange arrangements, 48t, 92tOfficial debt rescheduling, 82Purchases from Fund, 68, 70, 98tSDRs, 104tStand-by arrangement with Fund, 68, 96t

ARTICLES OF AGREEMENTArticle IV, consultations with members,

81Article VIII, members accepting

obligations of, 81 n, 82, 108tArticle XIV, 81, 82Article XXVI, Section 2(a), ineligibility to

use general resources, 74

ASIABalances of payments, 16t, 19, 20c, 23,

52Commercial bank borrowing, 23, 24Economic policies, 13Exchange rates, 38, 39International reserves, 23t, 52Official borrowing, 24Output, 10t, 12, 13, 26, 183Prices, 12t, 13Trade, 21, 26, 183

AUSTRALIAArticle VIII obligations, acceptance of,

108tCapital flows, 32Economic policies, 32, 36Exchange arrangements, 36, 48t, 92tInterest rates, 32Output, 6SDRs, 77, 104tSupplementary financing facility subsidy

account, contribution to, 80t

AUSTRIAArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 92tSDRs, 104tSupplementary financing facility, 103tSupplementary financing facility subsidy


BAHAMASArticle VIII obligations, acceptance of,


BAHRAINArticle VIII obligations, acceptance of,


BANGLADESHCompensatory financing facility, use of,

70Exchange arrangements, 48t, 92tExtended arrangement with Fund, 102tPurchases from Fund, 70, 98tRepurchases from Fund, 100tSDRs, 104tSupplementary financing facility subsidy

account, beneficiary, 81 1

BANK FOR INTERNATIONALSETTLEMENTS (BIS)

Borrowing agreement with Fund, 73Fund relations with, 84Prescribed holder of SDRs, 76nSupplementary financing facility subsidy

account investments, 81

BARBADOSExchange arrangements, 48t, 92tPurchases from Fund, 108tSDRs, 104t

BELGIUMArticle VIII obligations, acceptance of,

108tBorrowing agreement with Fund, 73Economic policies, 36

European Monetary System, 95t(n)Exchange arrangements, 48t, 92tGeneral Arrangements to Borrow, lending

to, 72tSDRs, 104tStand-by arrangement with Fund, 97t(n)Supplementary financing facility, 103tSupplementary financing facility subsidy

account, lending and repaymentto, 80

BELIZEArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 92tPurchases from Fund, 98tSDRs, 104tStand-by arrangement with Fund, 96t

BENINExchange arrangements, 48t, 92tSDRs, 104t

BHUTANExchange arrangements, 48t, 92tSDRs, 104t

BOARD OF GOVERNORSInterim Committee on the International

Monetary System (InterimCommittee), communiques, 125-31

Joint Ministerial Committee of the Bankand the Fund on the Transfer of RealResources to Developing Countries(Development Committee),communiques, 132—35

Role in SDR allocations, 63

BOLIVIAArticle VIII obligations, acceptance of,

108tBuffer stock facility, use of, 70Exchange arrangements, 37, 41, 48t, 92tPurchases from Fund, 70Repurchases from Fund, 100tSDRs, 104tSupplementary financing facility subsidy

account, beneficiary, 81 1Technical assistance by Fund, 83

BORROWING BY FUNDBank for International Settlements, 73Belgium, 73Enlarged access to Fund resources, 67t,

68, 69, 72-73Extended arrangements, financing of, 69General Arrangements to Borrow, 67t, 72Guidelines for, 71, 72Interest on, 74, 75, 78t, 79, 103tJapan, 73Oil facility, 67tRepayment of, 103t

185


INDEX

Saudi Arabia, 73Stand-by arrangements, financing of, 68Supplementary financing facility, 67t, 72,

75, 103t

BOTSWANAExchange arrangements, 48t, 92tSDRs, 104t

BRAZILBuffer stock financing facility, use of, 70Compensatory financing facility, use of,

70Exchange arrangements, 48t, 92tExtended arrangement with Fund, 69,

102tInternational reserves, 52Purchases from Fund, 70, 98tRepurchases from Fund, 100tSDRs, 104t

BUDGET OF FUND, 146BUFFER STOCK FINANCING FACILITY

Access limits, 69, 70Charges, 103tInternational Sugar Agreement, expiration,

70Purchases by members, 66t, 67t, 68t, 70Purpose, 70Repurchases by members, 70, 100t-101t

BURKINA FASOExchange arrangements, 48t, 92tSDRs, 104t

BURMAExchange arrangements, 48t, 92tPurchases from Fund, 98tRepurchases from Fund, 100tSDRs, 104t

BURUNDIExchange arrangements, 48t, 92tRepurchases from Fund, 100tSDRs, 104t

CAMEROONExchange arrangements, 48t, 92tPurchases from Fund, 98tSDRs, 104t

CANADAArticle VIII obligations, acceptance of,

108tBalance of payments, 1 6t, 1 8c, 1Direct investment, 7tEconomic policies, 5tEmployment, 8Exchange arrangements, 17c, 19, 33,

34c, 35c, 48t, 92tGeneral Arrangements to Borrow, lending

to, 72tInterest rates, 35cOutput, 5, 6c, 7tPrices, 7t, 8SDRs, 77, 104tSupplementary financing facility, 103tTrade, 1 9

CAPE VERDEExchange arrangements, 48t, 92tSDRs, 104t

CAPITAL MARKETSAccess of developing countries to, 24,

26, 27, 37, 49, 50, 52, 57 62Balance of payments adjustment,

financing of, 49, 57-58, 62Exchange rate effects on, 31, 32, 33, 36

Integration and liberalization of, 29, 32,33, 35, 36, 43

International bond markets, 58, 59-60International liquidity, role in providing,

49, 50, 57, 58, 60Restrictions, 36Speculative flows, 33

CENTRAL AFRICAN REPUBLICExchange arrangements, 48t, 92tPurchases from Fund, 98tRepurchases by members, 100tSDRs, 104tStand-by arrangement with Fund, 96t

CENTRALLY PLANNED ECONOMIES,58t(n), 59t

CHADExchange arrangements, 48t, 92tPurchases from Fund, 98tRepurchases from Fund, 100tSDRs, 104t

CHILEArticle VIII obligations, acceptance of,

108tExchange arrangements, 37, 48t, 92tPurchases from Fund, 68, 98tSDRs, 104t

CHINAClassification by Fund, 181Economic policies, 13Exchange arrangements, 37, 48t, 92tOutput, 10, 13Prices, 13SDRs, 104t

CLASSIFICATION OF COUNTRIES, 179-83

COLOMBIAExchange arrangements, 48t, 92tSDRs, 104t

COMMERCIAL BANK LENDING TODEVELOPING COUNTRIES

Amount of debt outstanding, 21, 22tBalance of payments adjustment, role in,

21-22, 57Debt reschedulings, 21, 24, 46, 47, 57,

59, 60, 82Decline in, 21-22, 31, 58, 59Fund's role in promoting, 28, 46, 57Grace periods, 60Indebtedness and export credit cover

policies, Managing Director'sstatement, 116-19

Interest rate spreads, 24, 58-59, 60Major borrowers, 181Maturity structure, 24, 59, 60Reserve acquisition, role in, 50Role in supporting Fund adjustment

programs, 46Western Hemisphere, 24, 59

COMMODITY PRICES, 14, 15t, 20

COMOROSExchange arrangements, 48t, 92tPurchases from Fund, 98tSDRs, 104t

COMPENSATORY FINANCING FACILITYAccess limits, review, 69Cereal import costs, Executive Board

Decision on, 69, 70Charges, 103tExecutive Board review of, 69Purchases by members, 66t, 67, 68t, 69,

70, 98t-99t

Purpose, 69Repurchases by members, 67, 70,

100t-101t

CONDITIONALLY, 43, 63, 113CONGO

Exchange arrangements, 41, 48t, 92tPurchases from Fund, 98tSDRs, 104t

CONSULTATIONS WITH FUND MEMBERS,46, 81-82

COSTA RICAArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 92tExtended arrangement with Fund, 102tOfficial debt rescheduling, 82Purchases from Fund, 98tRepurchases from Fund, 100tSDRs, 104tStand-by arrangement with Fund, 68, 96t

COUNTRIES, CLASSIFICATION OFSee CLASSIFICATION OF COUNTRIES

CREDIT TRANCHECharges, 103tPurchases from Fund, 28, 66t, 67, 68,

98t-99tRepurchases from Fund, 67, 70,

100t-101t

CYPRUSExchange arrangements, 37, 48t, 92tRepurchases from Fund, 100tSDRs, 104t

DENMARKArticle VIII obligations, acceptance of,

108tEuropean Monetary System, 95t(n)Exchange arrangements, 48t, 92tOutput, 6SDRs, 104tSupplementary financing facility subsidy


DEVELOPING COUNTRIESBalances of payments, 2, 14-15, 16t,

19-20, 21-24, 25, 27, 28, 40-42,52, 57, 59

Capital movements, 19, 22t, 23, 24Commercial bank borrowing, 21-22, 23t,

46,57,58,82, 183Commercial bank deposits, 58Debt rescheduling and restructuring, 2,

19, 21, 23-24, 46, 59, 60, 82Economic policies, 2, 11, 21, 25, 27,

44-45Employment, 27Exchange rates, 9, 23, 37-42, 45-46Fund credit, use of, 21, 22t, 23, 65t, 67,

68Interest rates, 20, 27International bond placements, 59International reserves, 19, 21, 22, 23, 48,

50, 51t, 52, 53, 54t, 55t, 56, 57, 58,62

Investment, 11, 27Official borrowing, 24, 57, 82, 183Official development assistance, need for,

2, 29Output, 1, 2, 9-12, 26, 27, 183Prices, 11-12, 20, 27SDRs, 77, 79Structural adjustment, 46

186


INDEX

Trade, 2, 10, 15t, 21, 25, 26, 27, 29,183

Fuel ExportersBalances of payments, 16t, 19, 20t, 21Exchange rates, 38, 39cOutput, 9, 10t, 183Prices, 12Trade, 14, 15t, 20, 21, 183

Non-Fuel ExportersBalances of payments, 1, 16t, 19, 20tCapital formation, 10Investment, 10Output, 9, 10, 11 c, 183Prices, 12tTrade, 9, 10, 11 c, 14, 15t, 20, 183Wages, 9

Exporters of ManufacturesExchange rates, 38, 39cOutput, 10t, 13, 27, 183Trade, 21, 183

Low-Income CountriesClassification, 181-82Debt-servicing difficulties, 46Economic policies, 28Official development assistance,

27, 28, 46Output, 2, 183Trade, 183Use of Fund credit, 64

Market BorrowersBalances of payments, 16t, 22,

23, 27-28, 57Classification, 181Debt, external, 22, 24, 27, 57,

58, 183Exchange rates, 42International reserves, 23Output, 183Trade, 183

Major BorrowersExchange rates, 42Output, 10t, 183

Official BorrowersBalances of payments, 16t, 22,

23, 28, 57Classification, 181Debt, external, 24, 183Economic policies, 28Exchange rates, 42International reserves, 23Official development assistance,

need for, 28Output, 183Prices, 28Trade, 183Use of Fund credit, 28

Primary Product ExportersBalances of payments, 28, 38Classification, 180Exchange rates, 38, 39cOfficial borrowing, 28Output, 10t, 183Trade, 21Use of Fund credit, 28

Service and Remittance CountriesClassification, 180Exchange rates, 38, 39cOutput, lOt, 183Trade, 21, 183

Non-Oil Developing CountriesClassification, 182International reserves, 51 1Output, 183SDRs, 51tTrade, 183

Oil Exporting CountriesBalances of payments, 52Classification, 182International reserves, 51 1Output, 13, 183SDRs, 51 1Trade, 13, 183

DEVELOPMENT COMMITTEECommuniques, 132-35

DJIBOUTIArticle VIII obligations, acceptance of,

108tExchange rate, 92tSDRs, 104t

DOMINICAArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 92tExtended arrangement with Fund, 102tPurchases from Fund, 98tRepurchases from Fund, 100tSDRs, 104tStand-by arrangement with Fund, 68, 96tSupplementary financing facility subsidy


DOMINICAN REPUBLICArticle VIII obligations, acceptance of,

108tBuffer stock financing facility, use of, 70Exchange arrangements, 48t, 49, 92tExtended arrangement with Fund, 69,

102tPurchases from Fund, 98tRepurchases from Fund, 70, 1 0OtSDRs, 104tStand-by arrangement with Fund, 96t

ECUADORArticle VIII obligations, acceptance of,

108tDebt restructuring, 60, 82Exchange arrangements, 48t, 92tPurchases from Fund, 98tSDRs, 104tStand-by arrangement with Fund, 96t

EGYPTClassification by Fund, 1 79Exchange arrangements, 37, 41, 48t, 92tExtended arrangement with Fund, 102tRepurchases from Fund, 100tSDRs, 104t

EL SALVADORArticle VIII obligations, acceptance of,

108tExchange arrangements, 47, 48t, 92tRepurchases from Fund, 100tSDRs, 104t

ENLARGED ACCESS TO FUNDRESOURCES

Access limits, modification, 64, 69Borrowed resources suspense accounts,

73Borrowing by Fund for, 72-73, 79Charges, 75, 103t, 110-11Establishment, 69

Executive Board Decisions, 69, 110-11Extended Fund facility, financing of, 69Extension of, 111Ordinary and borrowed resources, use of,

67, 68Purchases from Fund, 66t, 98t-99tPurpose, 69nRepurchases from Fund, 67, 100t-101t

EQUATORIAL GUINEAExchange arrangements, 47, 48t, 92tRepurchases from Fund, 100tSDRs, 104t

ETHIOPIAExchange arrangements, 48t, 93tRepurchases from Fund, 100tSDRs, 105t

EUROPEBalances of payments, developing

countries, 16t, 19, 20c, 23Capital formation, 25Commercial bank borrowing, developing

countries, 23, 24Economic policies, 25Employment, 1, 6, 7, 8t, 25Exchange rates, developing countries, 38,

39International bond placements, 58International reserves, developing

countries, 23t, 52Investment, 6Output, 1, 5-6, 7, 31

developing countries, 10t, 12-13Prices, 7t

developing countries, 12t, 13Trade, developing countries, 21

EUROPEAN MONETARY SYSTEM (EMSEconomic policies, 36, 44European currency units (ECUs), role as

reserve currency, 53, 54, 55t, 56European Monetary Cooperation Fund,

52, 54Exchange rates, 35, 44, 48t(n), 49, 95n

realignment, 35, 36Gold holdings, 52, 54Operation of, 36, 44Participants, 95t(n)

EXCHANGE MARKETSOfficial intervention, 18, 33-34, 35, 44,

50, 56; working group on, 44

EXCHANGE RATESAdjustment of, policies for, 45-46Arrangements, 39-40, 41t, 41c, 47-49,

92t-95tBalance of payments effect on, 37Capital flows effect on, 31, 32-33, 35,

36,43Currency preference shifts, effects on, 44Domestic economies' effect on, 35, 37Effect on balance of payments, 30, 31,

40_42, 45Effect on interest rates, 31, 33European Monetary System, 32, 35, 44,

95t(n)Fiscal policy's effect on, 31, 33, 35Flexibility, 40, 41t, 41 c, 45, 47Interdependence of, 35List as of June 28, 1985, 92t-95tMonetary policy's effect on, 31, 33, 35Multiple, 40Notification of changes, 47, 82Pattern of, 42Policy strategy effects on, 44-46

187


INDEX

Restrictions, 37, 41, 43, 82Underlying economic conditions' effect

on, 35, 43Variability, continuation of, 33, 34c, 35cSee a/so SURVEILLANCE OVER

EXCHANGE RATE POLICIES andindividual countries

EXECUTIVE BOARDArticle IV consultations, 46-47Buffer stock facility, review of, 70Cereal import costs, review of, 69Changes in membership, 85, 140-45Compensatory financing facility, review

of, 69Developing countries' indebtedness and

export credit cover policies,Managing Director's statement,116-19

Enlarged access policy, review of, 64, 69Exchange arrangements, quarterly reports,

82Extended Fund facility, review of, 69General Arrangements to Borrow,

revision, 72Liquidity position of Fund, review of, 70,

71List of Executive Directors and voting

power, 85, 136-39Notification of exchange rate changes, 47Operational budgets, 71Performance criteria and phasing of

purchases, 69, 114-15Possible further SDR allocations, review

of, 63Role in SDR allocations, 63SDR holdings of Fund, review of, 71Special Disbursement Account resources

from Trust Fund, forthcomingdiscussion, 81

Surveillance over exchange rate policies,review of implementation, 42, 47,82, 119-23

See a/so EXECUTIVE BOARD DECISIONS

EXECUTIVE BOARD DECISIONSCharges, rate of, 75, 124Compensatory financing of fluctuations in

cereal import costs, renewal, 69,123

Conditionality, guidelines on, review, 113Enlarged access to Fund resources:

charges, 1 1 0-1 1 ; extension of peri.and access limits, 69, 1 1 1

Extended Fund facility, review, 69, 113Fund's income position, review, 74, 124Fund's SDR holdings, reduction of level,

71, 123Ineligibility, publicity upon declaration of,

74, 124Overdue obligations: accounting for

charges on, 64, 73, 115; reportingby Fund of, 74, 1 1 5

Overdue payments to Fund: amendmentof Rule G-4, 1 14; right to purchaseunder stand-by and extendedarrangements, 74, 113

Performance criteria and phasing ofpurchases, relationship: operationalguidelines, 69, 114-15

Purchases, misreporting andnoncomplying, guidelines oncorrective action, 1 1 1-12

Special Disbursement Account,investment, 81, 124

Stand-by and extended arrangements,programs for, review of, 113

Supplementary financing facility subsidyaccount, suspension of transfers andretransfer of surplus, 81, 123

Surveillance over exchange rate policies,review of implementation, 1 19-23

EXTENDED FUND FACILITYArrangements under, 28, 67, 69, 102tBorrowed resources, use of, 69, 102tCharges, 103tEnlarged access to Fund resources, use by

members, 69Establishment, 69Executive Board decision, review of, 69,

113Purchases by members, 64, 66t, 67, 68t,

69Ordinary resources, use of, 69Overdue payments to Fund, suspension of

member's right to draw under, 74,113

Purchases by members, 98t-99tPurpose of, 69Repurchases by members, 70, 100t-101t

EXTERNAL RELATIONS OF FUND, 85

FIJIArticle VIII obligations, acceptance of,

108tCompensatory financing facility, use of,

70Exchange arrangements, 48t, 93tPurchases from Fund, 70, 98tSDRs, 105t

FINANCES OF FUNDAdministered accounts, 80-81, 166-72Borrowed resources suspense accounts,

73Financial statements, 148-78Overdue obligations, 64See a/so GENERAL RESOURCES

ACCOUNT TRANSACTIONS

FINLANDArticle VIII obligations, acceptance of,

108tBalance of payments, 1 9Economic policies, 36Exchange arrangements, 36, 48t, 93tSDRs, 105tSupplementary financing facility subsidy


FRANCEArticle VIII obligations, acceptance of,

108tBalance of payments, 16t, 18, 61 1Direct investment, 7tEconomic policies, 5t, 31, 36Employment, 6European Monetary System, 95t(n)Exchange arrangements, 1 7c, 1 8, 34c,

48t, 93tGeneral Arrangements to Borrow, lending

to, 72tInterest rates, 4c, 59, 77cInternational reserves, 61 1Output, 6c, 7t, 1 8Prices, 7t, 8Role of franc as reserve currency, 53,

54t, 55t, 56, 61 1SDRs, 77, 105t

Supplementary financing facility subsidyaccount, contribution to, 80t

Use of franc as currency peg, 40c, 41t,41c, 48t, 92t-95t

FUEL EXPORTERSSee DEVELOPING COUNTRIE

GABONExchange arrangements, 48t, 93tExtended arrangement with Fund, 102tPurchases from Fund, 98tRepurchases from Fund, 1 0OtSDRs, 105t

GAMBIA, THEExchange arrangements, 48t, 93tRepurchases from Fund, 100tSDRs, 105tStand-by arrangement with Fund, 96tSupplementary financing facility subsidy


GENERAL AGREEMENT ON TARIFFS ANDTRADE (GATT)

Fund relations with, 46, 84Multilateral trade negotiations, 29

GENERAL ARRANGEMENTS TO BORROW(GAB), 72

See a/so BORROWING BY FUND

GENERAL RESOURCES ACCOUNTTRANSACTIONS

Assessments, 104t-107tBorrowing by Fund, 67t, 71-73, 75Charges, 73, 74, 79, 104t-107t; rate of,

74, 75, 103t, 124Interest payments received on, 78tOverdue obligations: accounting

treatment of charges, 64, 73-74,1 15; ineligibility to use generalresources, 74; publicity ondeclaration of ineligibility, 74, 124;reporting by Fund of, 74, 1 15;suspension of right to purchase understand-by and extended arrangements,74, 113

Purchases by members, 28, 64, 65t,67-70, 97t, 98t-99t

Quota payments, 63Remuneration, 73, 74, 78t; rate of, 74,

75, 76t, 77cRepurchases by members, 67, 70, 79,

97t, 100t-101tSDRs: holdings, reduction of, 71, 78t;

receipt of, 78t, 79, 104t-107t;transfers of, 78t, 79, 104t-107t

Usable currencies, 71

GERMANY, FEDERAL REPUBLIC OFArticle VIII obligations, acceptance of,

108tBalance of payments, 16t, 18, 30, 31,

32, 33c, 61tCapital movements, 36Direct investment, 7tEconomic policies, 3, 5t, 31European Monetary System, 95t(n)Exchange arrangements, 15, 17c, 18, 31,

32, 33, 34c, 35c, 36, 48t, 93tGeneral Arrangements to Borrow, 72tInterest rates, 4c, 31, 35c, 59, 77cInternational reserves, 61 1Output, 6c, 7t, 31Prices, 7t, 8Role of deutsche mark as reserve

currency, 53, 54t, 55t, 56, 61 1

188


INDEX

SDRs, 11, 105tSupplementary financing facility, 103tTrade, 18

GHANACompensatory financing facility, use of,

70Exchange arrangements, 37, 40, 48t, 93tPurchases from Fund, 70, 98tSDRs, 105tStand-by arrangement with Fund, 68, 96t

GOLDConvertibility, 49Fund holdings, 67t, 71 nMarket price, 50, 51t(n), 52, 53Official holdings, 50, 51t, 52Sales by Fund, requirements for approval,

71nGREECE

Exchange arrangements, 48t, 93tSDRs, 105t

GRENADAExchange arrangements, 48t, 93tExtended arrangement with Fund, 102tRepurchases from Fund, 100tSDRs, 105t

GROUP OF TEN, 47, 84GUATEMALA

Article VIII obligations, acceptance of,108t

Exchange arrangements, 48t,Repurchases from Fund, 100tSDRs, 105tStand-by arrangement with Fund, 96tSupplementary financing facility, 103t

GUINEAExchange arrangements, 48t, 93SDRs, 105t

GUINEA-BISSAUExchange arrangements, 48t, 93tPurchases from Fund, 98tRepurchases from Fund, 100tSDRs, 105t

GUYANAArticle VIII obligations, acceptance of,

108tExchange arrangements, 37, 47, 48t, 93tExtended arrangement with Fund, 102tIneligibility to use Fund resources, 74Repurchases from Fund, 100tSDRs, 105tSupplementary financing facility subsidy


HAITIArticle VIII obligations, acceptance of,

108tExchange arrangements, 41, 48t, 93tExtended arrangement with Fund, 102tRepurchases from Fund, 100tSDRs, 105tStand-by arrangement with Fund, 96t

HONDURASArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 93tExtended arrangement with Fund, 102tRepurchases from Fund, 1 0OtSDRs, 105t

HUNGARYExchange arrangements, 48t, 93tPurchases from Fund, 68, 98t

SDRs, 105tStand-by arrangement with Fund, 96tTechnical assistance by Fund, 83

ICELANDArticle VIII obligations, acceptance of,


INCOME AND EXPENSES OF FUND,64-65, 73-75, 147

INDIAClassification, 181Exchange arrangements, 48t, 93tExtended arrangement with Fund, 69,

102tOutput, 10Repurchases from Fund, 100tSDRs, 105tSupplementary financing facility subsidy


INDONESIABuffer stock facility, use of, 70Exchange arrangements, 38, 48t, 93tFund's holdings of currency, reduction

in, 70International reserves, 52Purchases from Fund, 70Repurchases from Fund, 100tSDRs, 105t

INDUSTRIAL COUNTRIESBalances of payments, 1, 14-15, 16-19,

26, 30, 31,33c, 60, 61tCapital movements, restrictions on

reduced, 36Classification, 179Commercial bank borrowing, 58, 62Commercial bank deposits, 58tEconomic situation and policies, 2-5, 24,

25-26, 50Employment, 1, 6-8, 25, 26, 29, 46Exchange rates, 17c, 26, 30, 35Fiscal policy, 3, 31, 46Fixed investment, 6, 7t, 25Fund credit, use of, 65tInflation, 8-9, 25, 33, 46Interest rates, 1, 3, 4c, 5, 9, 33, 59International bond placements, 58, 59International reserves, 50, 51t, 52, 53,

54t, 55t, 56, 60, 61 1, 62Monetary policy, 2-3, 9, 25, 31Official development assistance, need to

enlarge contributions, 29Output, 1, 5-6, 7t, 9, 25, 29Prices, 1, 7t, 8, 9, 11, 33SDRs, 77, 79Structural adjustment, 46Trade, 1, 14, 15t, 21; protectionist

policies, 25, 29Wages, 3, 4, 9, 25-26

INTERIM COMMITTEECommuniques, 125-31Compensatory financing and buffer stock,

access limits, 69Enlarged access policy, 64, 69Further SDR allocations, consideration of,

63,66Surveillance over exchange rate policies,

review of, 43, 47Trust Fund repayments, use of resources

from, 64

INTERNATIONAL BANK FORRECONSTRUCTION ANDDEVELOPMENT

5ee WORLD BANK

INTERNATIONAL COOPERATION, 28-29;Fund's role in, 28, 57

INTERNATIONAL ORGANIZATIONS, 58t(n)Fund relations with, 84-85

INTERNATIONAL PAYMENTS, 14-15See a/so DEVELOPING COUNTRIES and

INDUSTRIAL COUNTRIES: Balancesof payments

INTERNATIONAL RESERVESAcquisition, 50, 57Adequacy, 62Distribution, 52, 53, 56Expansion, 49, 52Evolution of, 49, 50-53Foreign exchange, 50, 51t, 52, 54t, 55t,

56currency composition, 53—56official holdings, 51t, 54t, 55t, 56t, 57

Fund-related assets, 50, 51t, 52, 53, 62-63

Fund's role in providing, 62-63Gold, 49, 50, 51t, 52-53Growth: rate, 52; sources of, 49, 60-62Holdings: by members, 51t; official,

50, 51tRelation to trade, 62Role of capital markets, 57-58

INTERNATIONAL TRADEExchange rate effects on, 37, 38Prices, 14, 15t, 20Protectionism, 1,2, 14, 25, 27, 29, 36,

46Restrictions, 26, 29, 37, 41Terms of trade, 14, 15t, 20Value, 15tVolume, 15t

IRAN, ISLAMIC REPUBLIC OFExchange arrangements, 48t, 93tSDRs, 105t

IRAQExchange arrangements, 48t, 93tSDRs, 105t

IRELANDArticle VIII obligations, acceptance of,

108tEuropean Monetary System, 95t(n)Exchange arrangements, 48t, 93tOutput, 6SDRs, 105t

ISRAELExchange arrangements, 48t, 93tPrices, 1 3SDRs, 105t

ITALYArticle VIII obligations, acceptance of,

108tBalance of payments, 1 6t, 18Economic policies, 5t, 36Employment, 6European Monetary System, 36, 95t(n)Exchange rate, 7c, 34c, 93tFixed investment, 7tGeneral Arrangements to Borrow, lending

to, 72tInterest rates, 59Prices, 8SDRs, 77, 105t

189


INDEX

IVORY COASTBuffer stock financing facility, use of, 70Exchange arrangements, 48t, 93tExtended arrangement with Fund, 102tPurchases from Fund, 70, 98tRepurchases from Fund, 100tSDRs, 105tStand-by arrangement with Fund, 96t

JAMAICAArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 49, 93tExtended arrangement with Fund, 102tOfficial debt rescheduling, 82Purchases from Fund, 98tRepurchases from Fund, 100tSDRs, 105tStand-by arrangement with Fund, 96t

JAPANArticle VIII obligations, acceptance of,

108tBalance of payments, 1, 14, 16, 18, 26,

30, 31, 32, 33c, 61tBorrowing arrangements with Fund, 73Capital movements, 32Economic policies, 3, 5t, 26, 31Employment, 8Exchange arrangements, 15, 17c, 31,

33c, 34c, 35c, 48t, 93tFixed investment, 6, 7t, 26, 32General Arrangements to Borrow, lending

to, 72tInterest rates, 3, 4t, 26, 31, 35c, 77cInternational reserves, 52, 61 1Output, 5, 6c, 7t, 8, 26, 31Prices, 7t, 8, 31Role of yen as reserve currency, 53, 54t,

55t, 61tSDRs, 105tSupplementary financing facility, 103tTrade, 16, 18, 26

JOINT MINISTERIAL COMMITTEE OF THEBANK AND THE FUND ON THETRANSFER OF REAL RESOURCES TODEVELOPING COUNTRIES

See DEVELOPMENT COMMITTEE

JORDANCompensatory financing facility, use of,

70Exchange arrangements, 48t, 93tPurchases from Fund, 70, 98tSDRs, 105tTechnical assistance by Fund, 84

KAMPUCHEA, DEMOCRATICQuota, 75nSDRs, 105t

KENYAExchange arrangements, 48t, 93tExtended arrangement with Fund, 1 02tPurchases from Fund, 98tRepurchases from Fund, lOOtSDRs, 105tStand-by arrangement with Fund, 96tSupplementary financing facility subsidy


KIRIBATIMembership in Fund, application, 66

KOREACompensatory financing facility, use of,

70

Exchange arrangements, 48t, 93tPurchases from Fund, 68, 70, 98tRepurchases from Fund, 100tSDRs, 105tStand-by arrangement with Fund, 96t

KUWAITArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 93tSDRs, 105tSupplementary financing facility, 103t

LAO PEOPLE'S DEMOCRATIC REPUBLICExchange arrangements, 48t, 93tRepurchases from Fund, 100tSDRs, 105t

LEBANONExchange arrangements, 48t, 93tSDRs, 105t

LESOTHOExchange arrangements, 48t, 93tSDRs, 105t

LIBERIAExchange arrangements, 48t, 93tOfficial debt restructuring, 82Purchases from Fund, 98tRepurchases from Fund, 100tSDRs, 105tStand-by arrangement with Fund, 96tSupplementary financing facility subsidy


LIBYAN ARAB JAMAHIRIYAClassification, 179Exchange arrangements, 41, 48t, 93tSDRs, 105t

LIQUIDITY POSITION OF FUND, 64, 65,66, 70-71

LUXEMBOURGArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 93tEuropean Monetary System, 95t(n)SDRs, 105tSupplementary financing facility subsidy

account, lending and repayment to,80

MADAGASCARExchange arrangements, 48t, 93tPurchases from Fund, 98tRepurchases from Fund, 100tSDRs, 105tStand-by arrangement with Fund, 96tSupplementary financing facility subsidy


MALAWIBuffer stock financing facility, use of, 70Compensatory financing facility, use of,

70Exchange arrangements, 37, 47, 48t, 93tExtended arrangement with Fund, 69,

102tPurchases from Fund, 70, 98tRepurchases from Fund, 70, 100tSDRs, 105tSupplementary financing facility subsidy


MALAYSIAArticle VIII obligations, acceptance of,

108t

Buffer stock financing facility, use of, 70Exchange arrangements, 41, 48t, 93tPurchases from Fund, 70Repurchases from Fund, 70, 100tSDRs, 105t

MALDIVESExchange arrangements, 47, 48t, 93tSDRs, 105t

MALIExchange arrangements, 48t, 93tPurchases from Fund, 98tRepurchases from Fund, 100tSDRs, 105tStand-by arrangement with Fund, 96t

MALTAExchange arrangements, 48t, 93tSDRs, 105t

MAURITANIAExchange arrangements, 48t, 94tPurchases from Fund, 98tRepurchases from Fund, 100tSDRs, 105tStand-by arrangement with Fund, 96tSupplementary financing facility subsidy


MAURITIUSBuffer stock financing facility, use of, 70Exchange arrangements, 48t, 94tOfficial debt restructuring, 82Purchases from Fund, 98tRepurchases from Fund, 70, 100tSDRs, 105tStand-by arrangement with Fund, 96t

MEMBERSHIP IN FUNDMozambique, new member, 66St. Christopher and Nevis, new member,

66Tonga, new member, 66

MEXICOArticle VIII obligations, acceptance of,

108tDebt reschedulings and restructuring, 60,

82Exchange arrangements, 37, 38, 48t, 94tExtended arrangement with Fund, 69,

102tInternational reserves, 52Official debt restructuring, 82Purchases from Fund, 68, 98tSDRs, 105t

MIDDLE EASTBalances of payments, 16t, 19, 20c, 23t,

52Classification, 182, 183Commercial bank borrowing, 23t, 24Exchange rates, 38, 39International reserves, 23t, 52Official borrowing, 23tOutput, lOt, 12, 13Prices, 12t, 13Trade, 13, 21

MOROCCOExchange arrangements, 48t, 94tExtended arrangement with Fund, 102tPurchases from Fund, 98tRepurchases from Fund, 100tSDRs, 105tStand-by arrangement with Fund, 96t

MOZAMBIQUEExchange arrangements, 47, 48t, 94tMembership in Fund, 66

190


INDEX

Official debt rescheduling, 82Purchases from Fund, 98tQuota, 66SDRs, 105t

NEPALExchange arrangements, 48t, 94tRepurchases from Fund, lOOtSDRs, 106t

NETHERLANDSArticle VIII obligations, acceptance of,

108tEuropean Monetary System, 95t(n)Exchange arrangements, 48t, 94tGeneral Arrangements to Borrow, lending

to, 72tInterest rates, 31Prices, 9, 31Role of guilder as reserve currency, 53,

54t, 55t, 56SDRs, 106tSupplementary financing facility, 103tSupplementary financing facility subsidy


NEW ZEALANDArticle VIII obligations, acceptance of,

108tBalance of payments, 1 9Economic policies, 32, 36Exchange arrangements, 36, 48t, 49, 94tInterest rates, 32Output, 6Purchases from Fund, 68, 98tSDRs, 106t

NICARAGUAArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 94tRepurchases from Fund, 100tSDRs, 106t

NIGERExchange arrangements, 48t, 94tOfficial debt restructuring, 82Purchases from Fund, 98tSDRs, 106tStand-by arrangement with Fund, 96t

NIGERIAExchange arrangements, 37, 41, 48t, 94tSDRs, 106tSupplementary financing facility, 103t

NON-FUEL EXPORTERSSee DEVELOPING COUNTRIES

NON-OIL DEVELOPING COUNTRIESSee DEVELOPING COUNTRIES

NORWAYArticle VIII obligations, acceptance of,

108tBalance of payments, 1 9Economic policies, 36Exchange arrangements, 36, 48t, 94tInterest rates, 36International reserves, 52Output, 6SDRs, 106tSupplementary financing facility subsidy


OFFICIAL MULTILATERAL LENDING TODEVELOPING COUNTRIES

Balance of payments adjustment, role in,23, 50, 57, 62

Debt reschedulings and restructuring, 24,46, 60, 80; Fund staff participationin, 82

Fund's role in promoting, 28, 46, 57, 66Indebtedness and export credit cover

policies, Managing Director'sstatement, 116-19

OIL EXPORTING COUNTRIESSee DEVELOPING COUNTRIE

OIL FACILITYPurchases by members, 66t, 68tSubsidy account, 65t

OMANArticle VIII obligations, acceptance of,


PAKISTANExchange arrangements, 48t, 94tExtended arrangement with Fund, 102tRepurchases from Fund, 100tSDRs, 106tSupplementary financing facility subsidy


PANAMAArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 94tPurchases from Fund, 98tRepurchases from Fund, 100tStand-by arrangement with Fund, 96tTechnical assistance by Fund, 83

PAPUA NEW GUINEAArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 94tRepurchases from Fund, 70, lOOtSDRs, 106t

PARAGUAYExchange arrangements, 37, 48t, 94tSDRs, 106t

PARIS CLUB, 46, 82

PERUArticle VIII obligations, acceptance of,

108tExchange arrangements, 47, 48t, 94tCompensatory financing facility, use of,

70Extended arrangement with Fund, 102tOfficial debt restructuring, 82Purchases from Fund, 68, 70, 98tRepurchases from Fund, 100tSDRs, 106tStand-by arrangement with Fund, 96t

PHILIPPINESExchange arrangements, 48t, 49, 94tExtended arrangement with Fund, 102tOfficial debt restructuring, 82Purchases from Fund, 98tRepurchases from Fund, 100tSDRs, 106tStand-by arrangement with Fund, 68, 96tSupplementary financing facility subsidy


POLANDExternal debt, Fund participation in

meetings on, 82Membership in Fund, application, 66

PORTUGALExchange arrangements, 48t, 94tPurchases from Fund, 98tSDRs, 106tStand-by arrangement with Fund, 96t

PUBLICATIONS OF FUND, 85, 109

QATARArticle VIII obligations, acceptance of,


QUOTAS OF FUND MEMBERSEighth General Review, 52, 68Increases, 52New quotas established for Mozambique

and St. Christopher and Nevis, 66Payment in SDRs, 52, 68Total, 66

RESERVE TRANCHEPositions of members, 67n, 67t, 71Purchases by members, 67-68, 98t-99t

ROMANIAExchange arrangements, 48t, 94tRepurchases from Fund, 100tSDRs, 106t

RULES AND REGULATIONSAmendments: Rule G-4, 114; Rule

l-6(4)(a), 124; Rule 1-6(5), 110-11

RWANDAExchange arrangements, 48t, 94tSDRs, 106t

ST. CHRISTOPHER AND NEVISArticle VIII obligations, acceptance of,

108tExchange arrangements, 47, 48t, 94tMembership in Fund, 66Purchases from Fund, 98tQuota, 66SDRs, 106t

ST. LUCIAArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 94tRepurchases from Fund, 100tSDRs, 106t

ST. VINCENTArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 94tPurchases from Fund, 98tRepurchases from Fund, 100tSDRs, 106t

SAO TOME AND PRINCIPEExchange arrangements, 48t, 94tSDRs, 106t

SAUDI ARABIAArticle VIII obligations, acceptance of,

108tEnlarged access policy, borrowing

agreement for, 52, 72-73Exchange arrangements, 48t, 94tGeneral Arrangements to Borrow,

associated borrowing arrangementwith, 72; lending in association with,72t

International reserves, 52

191


INDEX

SDRs, 106tSupplementary financing facility, 103tSupplementary financing facility subsidy

account, contribution to, 80tTechnical assistance by Fund, 84

SDRsAllocations, 62-63, 65-66, 79, 104t-

107tAssessments, 1 04t-1 07t;

use in payment of, 78tAssets denominated in, 79, 80Charges, 78, 104t-107tHoldings: by Fund, 52, 71, 74; reduction

in, 71, 76, 79; by General ResourcesAccount, 67t, 71, 78t, 104t-107t; bymembers, 51t, 52, 53, 76, 79, 104t-107t

Interest rate on, 74, 75, 76, 77cPayment of interest by Fund, use in, 78tPrescribed holders of, 76-77, 107tPurchases from Fund, 77, 78t, 79, 98t-

99tQuota increases, use in payment of, 52,

68,71,75-76,78, 79Reconstitution, 78tRemuneration paid to Fund members, 78tRepayment of lenders by Fund, use in,

78t, 79Repurchases from Fund, 78, 79Role in international economy, study of,

63Transactions and operations, 77;

summary of, 104t-107tTransfers: among participants and

prescribed holders, 78t, 79, 104t-107t; by agreement, 76, 78-79; toand from General ResourcesAccount, 78t, 79, 104t-107t; withdesignation, 76, 77, 78t, 104t-107t

Uses: as currency peg, 39, 40c, 41t,41 c, 47, 48t, 80, 92t-95t; in loansand settlements, 79

Valuation basket, 71

SDR DEPARTMENTParticipants, 66, 104t-107tPrescribed holders, 76, 79, 107tPrescribed operations, 78tTransfers: among participants and

prescribed holders, 78t; byagreement, 76, 78; with designation,77, 78t

SENEGALExchange arrangements, 48t, 94tExtended arrangement with Fund, 102tOfficial debt restructuring, 82Purchases from Fund, 98tRepurchases from Fund, 100tSDRs, 106tStand-by arrangement with Fund, 96tSupplementary financing facility subsidy


SEYCHELLESArticle VIII obligations, acceptance of,


SIERRA LEONEExchange arrangements, 41, 47, 48t, 94tExtended arrangement with Fund, 102tRepurchases from Fund, 100tSDRs, 106t

Stand-by arrangement with Fund, 96tSupplementary financing facility subsidy

account, beneficiary, 81 1SINGAPORE

Article VIII obligations, acceptance of,108t

Exchange arrangements, 48t, 94tInternational reserves, 52SDRs, 106t

SOLOMON ISLANDSArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 94tRepurchases from Fund, 100tSDRs, 106tStand-by arrangement with Fund, 96t

SOMALIAExchange arrangements, 48t, 94tOfficial debt restructuring, 82Purchases from Fund, 98tRepurchases from Fund, lOOtSDRs, 106tStand-by arrangement with Fund, 96t

SOUTH AFRICAArticle VIII obligations, acceptance of,


SPAINBalance of payments, 1 9Economic policies, 52Exchange arrangements, 48t, 52, 94tInternational reserves, 52SDRs, 77, 106t

SPECIAL DRAWING RIGHTSSee SDRs

SPECIAL DRAWING RIGHTSDEPARTMENT

See SDR DEPARTMENT

SRI LANKABuffer stock facility, use of, 70Exchange arrangements, 48t, 94tExtended arrangement with Fund, 102tPurchases from Fund, 70Repurchases from Fund, 100tSDRs, 106tStand-by arrangement with Fund, 96tSupplementary financing facility subsidy


STAFF OF FUND, 85

STAND-BY ARRANGEMENTS FOR FUNDMEMBERS

Balance of payments adjustment, role in,28

Borrowed resources, use of, 68, 96tCommitments under, 65t, 67, 68-69Enlarged access to Fund resources, use by

members, 68, 98t-99tIn financial year 1984/85, 28, 96tOrdinary resources, use of, 68, 98t-99tOverdue payments to Fund, suspension of

member's right to draw under, 74,113

Performance criteria and phasing ofpurchases, relationship, 69, 114—15

Purchases under, misreporting andnoncomplying, guidelines forcorrective action, 111-12

Repurchases by members, 70Summary of, 97t

SUDANExchange arrangements, 48t, 94tExtended arrangement with Fund, 102tOfficial debt restructuring, 82Purchases from Fund, 99tRepurchases from Fund, 100tSDRs, 106tStand-by arrangement with Fund, 96tSupplementary financing facility subsidy

account, beneficiary, 81 .

SUPPLEMENTARY FINANCING FACILITYBorrowing by Fund for, 72, 79, 103tCharges, 75, 103tEstablishment, 80Purchases by members, 66t, 68t, 81 1Purpose, 70nRepayments by Fund to lenders, 72, 79,

103tRepurchases by members, 70, 100t-101tSubsidy account, 65t, 80-81; suspension

of transfers and retransfer of surplus,81, 123

Switzerland, lending for, 72

SURINAMEArticle VIM obligations, acceptance of,


SURVEILLANCE OVER EXCHANGE RATEPOLICIES

Article IV: consultations' role in, 46-^7,81 ; reports, content of, 46—47

Collaboration with GATT on, 46Developing countries, 43, 46Effectiveness of, assessment, 43^6Enhanced surveillance, 47, 66Executive Board decision on, 42, 119-23Executive Board review of, 42-43, 46Implementation by Fund, 28-29, 35, 42-

43, 46-47Industrial countries, 43, 46Intervention, effects on, 44Policy strategy, effects on, 44Procedures for, adaptation of, 47Relation to debt reschedulings, 46Role of Fund Managing Director in, 43,

47Structural adjustment, 46World economic outlook exercise's role

in, 47

SWAZILANDBuffer stock financing facility, use of, 70Exchange arrangements, 48t, 94tRepurchases from Fund, 70, lOOtSDRs, 106t

SWEDENArticle VIII obligations, acceptance of,

108tBalance of payments, 1 9Economic policies, 36Exchange arrangements, 36, 48t, 95tGeneral Arrangements to Borrow, lending

to, 72tInterest rates, 36SDRs, 106tSupplementary financing facility subsidy


SWITZERLANDBalance of payments, 61 1General Arrangements to Borrow:

association with, 72; lending to, 72t;

192


INDEX

participation in, 72International reserves, 61 1Prescribed holder of SDRs, 76nPrices, 9Role of franc as reserve currency, 53,

54t, 55t, 56, 61 1SDRs, prescribed holder of, 106tSupplementary financing facility, 103tSupplementary financing facility

subsidy account,contribution to, 80t

SYRIAN ARAB REPUBLICExchange arrangements, 48t, 95tSDRs, 106t

TANZANIAExchange arrangements, 37, 48t, 95tRepurchases from Fund, 101tSDRs, 106tSupplementary financing facility

subsidy account,beneficiary, 81 1

TECHNICAL ASSISTANCE BY FUND, 66,82-84

THAILANDBuffer stock financing facility, use of, 70Exchange arrangements, 47, 48t, 95tPurchases from Fund, 70Repurchases from Fund, 101tSDRs, 106t

TOGOExchange arrangements, 37, 48t, 95tOfficial debt restructuring, 82Purchases from Fund, 99tRepurchases from Fund, 101tSDRs, 106tStand-by arrangement with Fund, 96tSupplementary financing facility

subsidy account,beneficiary, 81 1

TONGAMembership in Fund, 66

TRINIDAD AND TOBAGOExchange arrangements, 37, 48t, 95tSDRs, 107t

TRUST FUNDLoans, 65tRepayment by members, 80; overdue, 74Termination, 80See a/so SUPPLEMENTARY FINANCING

FACILITY: Subsidy account

TUNISIAExchange arrangements, 48t, 95tSDRs, 107t

TURKEYExchange arrangements, 48t, 95tPurchases from Fund, 99tRepurchases from Fund, 101tSDRs, 107tStand-by arrangement with Fund, 96t

UGANDAExchange arrangements, 37, 40, 48t, 49,

95tRepurchases from Fund, 101tSDRs, 106tStand-by arrangement with Fund, 96tTechnical assistance by Fund, 83

UNITED ARAB EMIRATESArticle VIII obligations, acceptance of,


UNITED KINGDOMArticle VIII obligations, acceptance of,

108tBalance of payments, 16t, 18-19, 61 1Direct investment, 7tEconomic policies, 3, 5tEmployment, 6Exchange arrangements, 15, 17c, 32-33,

34c, 35c, 48t, 95tGeneral Arrangements to Borrow, lending

to, 72tInterest rates, 3, 4c, 35c, 77cInternational reserves, 61 1Output, 6, 7t, 31Prices, 7t, 8Role of pound sterling as reserve

currency, 53, 54t, 55t, 56, 61 1SDRs, 77, 107t

UNITED STATESArticle VIII obligations, acceptance of,

108tBalance of payments, 1, 14, 15, 16, 18,

25, 26,30, 31,32, 33c,61tCapital movements, 26, 31, 32Commercial bank deposits, 31Direct investment, 6, 7t, 25Economic policies, 3, 5t, 25, 26, 31Employment, 6, 8, 25Exchange arrangements, 1, 15, 17c, 24,

25, 26, 30-31, 32, 33, 34, 35c, 48t,53, 95t

Fiscal policy, 25, 31General Arrangements to Borrow:

borrowing from, 72; lending to, 72tInterest rates, 1, 3, 4c, 25, 26, 31, 35c,

53, 59, 77cInternational reserves, 52, 61 1Monetary policy, 31Output, 1, 5, 6c, 7t, 25, 31Prices, 7t, 8Role of dollar as reserve currency, 53,

54t, 55t, 56, 61 1SDRs, 107tSupplementary financing facility, 103tTrade, 9, 14, 16, 21, 25Use of dollar as currency peg, 39, 40c,

41 1, 41 c, 47, 48t, 92t-95t

URUGUAYArticle VIII obligations, acceptance of,

108tExchange arrangements, 48t, 95tPurchases from Fund, 99tSDRs, 107tStand-by arrangement with Fund, 96t

VANUATUArticle VIII obligations, acceptance of,


VENEZUELAArticle VIII obligations, acceptance of,

108tDebt reschedulings and restructuring, 60,

82Exchange arrangements, 38, 48t, 95tInternational reserves, 52

SDRs, 107tSupplementary financing facility, 103t

VIET NAMExchange arrangements, 48t, 95tIneligibility to use Fund resources, 74SDRs, 107t

WESTERN HEMISPHEREBalances of payments, 13, 16t, 19, 20c,

23,52Capital movements, 23t, 52Commercial bank borrowing, 13, 23, 24Economic policies, 13Exchange rates, 38, 39International reserves, 23, 52Official borrowing, 23tOutput, 10t, 11, 12, 13Prices, 1 2t, 1 3Trade, 21

WESTERN SAMOAExchange arrangements, 48t, 95tPurchases from Fund, 99tRepurchases from Fund, 101tSDRs, 107tStand-by arrangement with Fund, 96t

WORLD BANKFund relations with, 28, 84; Fund

consultation reports, coverage, 46SDRs: prescribed holder of, 76n; use as

unit of account, 80n

YEMEN ARAB REPUBLICExchange arrangements, 48t, 95tPurchases from Fund, 99tSDRs, 107t

YEMEN, PEOPLE'S DEMOCRATICREPUBLIC OF

Exchange arrangements, 48t, 95tSDRs, 107t

YUGOSLAVIAExchange arrangements, 48t, 95tOfficial debt restructuring, 82Purchases from Fund, 68, 99tRepurchases from Fund, 101tSDRs, 107tStand-by arrangement with Fund, 96t

ZAIREExchange arrangements, 37, 40, 48t, 49,

95tExtended arrangement with Fund, 102tPurchases from Fund, 99tRepurchases from Fund, 101tSDRs, 107tStand-by arrangement with Fund, 68, 69,

96t

ZAMBIAExchange arrangements, 37, 48t, 95tExtended arrangement with Fund, 102tOfficial debt restructuring, 82Purchases from Fund, 99tRepurchases from Fund, 101tSDRs, 107tStand-by arrangement with Fund, 68, 96tSupplementary financing facility subsidy


ZIMBABWEBuffer stock financing, use of, 70Exchange arrangements, 48t, 95tRepurchases from Fund, 70, 101tSDRs, 107tStand-by arrangement with Fund, 96t

193
