SDRs, Currencies, and Gold : Seventh Survey of New Legal Developments

Joseph Gold

• Publisher: INTERNATIONAL MONETARY FUND
• eBook ISBN:
  9781451944624
• Year: 1987

NONE

Currencies

Surveillance over Exchange Rate Policies

The Fund has adopted three published decisions on surveillance over the exchange rate policies of members since the publication of Pamphlet No. 40 in 1983. The basic decision on surveillance provides that the Executive Board shall review annually the general implementation of the Fund’s surveillance.⁴⁸ In addition, the Executive Board must review the basic decision on surveillance at intervals of two years and at such other times as consideration of it is placed on the agenda of the Executive Board.⁴⁹ The three new decisions are reproduced in Appendix B. Some of the main propositions included in the decisions are summarized below. They are mostly procedural rather than substantive law, but substantive law, it has been said, tends to be secreted in the interstices of procedure in primitive societies.

1. The decisions emphasize the desirability of the symmetrical treatment of members with smaller economies or members using the Fund’s resources and the issuers of major currencies. Many of the international economic difficulties of recent years have been associated with the pronounced swings in exchange rates between major industrial countries and with repercussions on the rest of the world of the low levels of economic activity and high interest rates prevailing in major industrial countries. According to the view of many Executive Directors, these developments resulted from domestic policy stances in major industrial countries that, according to these Directors, did not sufficiently promote the convergence of favorable economic conditions and that failed to take account of the implications of these stances for other countries and for the international monetary system as a whole. “Most Directors felt that this failure to integrate international interests, rather than any deliberate attempt to manipulate exchange rates or the international monetary system, was the real problem.”⁵⁰

The language of the sentence quoted above recalls Article IV, Section 1(iii), which imposes on members the obligation to

avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.

The implication of the last sentence of the preceding paragraph is that the manipulation referred to in Article IV, Section 1(iii) is not a breach of the obligation imposed by that provision unless there is a kind of mens rea. A judgment on whether or not there is a breach cannot be determined by objective criteria alone. Even if intent were absent, economic conditions might be the same as if there had been intent. For this reason, the deduction was drawn (“[t]herefore”) that “the Fund had to form a view on the domestic policies needed to foster a smooth working of the system and had to attempt to persuade its members to follow such policies.”⁵¹ The Fund must use its influence to eliminate unfavorable economic conditions and must not confine itself to the elimination of breaches of obligation.

The Fund’s duty under Article IV, Section 3(a) is indeed twofold: not only to oversee the compliance of members with their exchange rate obligations but also to “oversee the international monetary system in order to ensure its effective operation.” That those duties may necessitate a view on the domestic policies of members has been made clear in the Fund’s basic decision on surveillance:

3. The Fund’s appraisal of a member’s exchange rate policies shall be based on an evaluation of the developments in the member’s balance of payments against the background of its reserve position and its external indebtedness. This appraisal shall be made within the framework of a comprehensive analysis of the general economic situation and economic policy strategy of the member, and shall recognize that domestic as well as external policies can contribute to timely adjustment of the balance of payments. The appraisal shall take into account the extent to which the policies of the member, including its exchange rate policies, serve the objectives of the continuing development of the orderly underlying conditions that are necessary for financial stability, the promotion of sustained sound economic growth, and reasonable levels of employment.⁵²

2. The Fund should warn against the dangers of protectionism. The coverage and analysis of trade policy matters should be expanded in Article IV consultation reports, without trespassing on the jurisdiction of the General Agreement on Tariffs and Trade (GATT). The focus in Article IV reports should be on the impact of a member’s trade measures on domestic adjustment and the exchange rate and on the economy of the member’s trading partners.

3. Article IV consultation reports should deal extensively with policies on, and developments in, external indebtedness.

4. Article IV consultations should be scheduled with improved regularity, particularly for members whose economies have a substantial impact on other countries, members whose programs are supported with the Fund’s resources, and members in situations about which there are doubts about medium-term economic stability. For most of the members for which a stricter schedule should apply, the objective should be an interval between consultations of no more than 12 months, with a grace period of perhaps 3 further months. For members not on a stricter schedule, the maximum limit should be two years, although a member in this group would be entitled to request annual consultations. The experiment of semiannual reviews or miniconsultations should be tried if a member’s economic situation was changing rapidly.

5. Military hostilities would warrant a delay in holding consultations, but the case for delay for political reasons, such as elections, because a member was reformulating its economic policies, was less clear. If delay occurs, it should be fitted into the grace period of three months whenever possible.

6. To ensure the symmetrical or evenhanded treatment of all members and to reflect the concern expressed about the possibility of competitive devaluations, an experimental procedure has been endorsed of alerting the Executive Board to all large changes in real effective exchange rates (that is, to large changes in competitiveness based on exchange rates), whatever a member’s exchange arrangement may be. The changes are those that occur in real terms (that is, in the value of a member’s currency against a weighted average of the currencies of trading partners), whether in the form of depreciation or appreciation, and whether these changes take place at a single stroke or are the result of cumulative changes over time. The amount of the change in exchange rate for a member’s currency (“the threshold”) that is the subject of notice to the Executive Board is 10 percent or more in the period since the latest occasion on which the Executive Board discussed the member’s exchange rate policy. In most cases, the latest occasion would be the last Article IV consultation. Reports by the Fund’s staff on Article IV consultations provide the necessary data and describe the indicators of competitiveness for a member that are used in judging whether the threshold has been overstepped. This new procedure is in addition to pre-existing procedures for notifying the Executive Board of changes in nominal exchange rates.

For the purpose of notices on changes in the real effective exchange rate, the focus of the index is on the comprehensive international cost and price competitiveness of each member.⁵³ An increase in the level of the index shows a loss in comprehensive cost and price competitiveness. A notice is not in itself evidence that an exchange rate is becoming inappropriate, nor is the absence of a notice in itself evidence that an exchange rate continues to be appropriate. Similarly, a notice, or the absence of a notice, does not in itself connote that a breach of any of the obligations included in Article IV has occurred or that these obligations are necessarily being observed. Notices may include an analysis and appraisal of the change. A notice may induce the Managing Director as Chairman of the Executive Board⁵⁴ to place the notice on the agenda of the Executive Board for discussion.⁵⁵ An Executive Director is entitled to have any item, including a notice, placed on the Board’s agenda.⁵⁶ According to the Fund’s Annual Report 1985,⁵⁷ notices had not led to discussions by the Executive Board, although they had often served to sharpen the focus of discussion of exchange rate policy when the Executive Board was conducting an Article IV consultation or considering a request for use of the Fund’s resources shortly after a notice had been issued.

Three indices are used for the calculation of real effective exchange rates. Different indices apply to three groups of countries: industrial countries; countries, including the first group, in which the share of manufactures in total production and exports is sizable and for which the relevant data are readily available; and countries that are mainly producers and exporters of primary commodities. If reliable data for making the calculation of real effective exchange rates are lacking for a country in this third group, the calculations are based on the nominal effective exchange rate. The indices are subject to refinement as experience is gained.⁵⁸ As part of the monitoring process, the Fund’s staff provides the Executive Board with quarterly reports containing charts and tables of data on indicators of real effective exchange rates. The period covered by the indicators extends over several years, in order to permit the examination of changes in a medium-term perspective.

7. The monitoring process outlined above is an aspect of the Fund’s duty to form a view on the appropriateness of members’ exchange rate policies. It is often difficult to determine with quantitative precision the extent to which an exchange rate is “out of line,” but if the Fund concludes that a rate has this characteristic, “the Fund must express that view in the first instance to the authorities of the countries directly involved.”⁵⁹ This statement probably means that the Managing Director or staff communicates this view to the authorities so as to get their reaction before the issue is taken up with the Executive Board.

8. Surveillance is not confined to the Fund’s consultations with individual members; it must be conducted multilaterally as well so that global issues can be examined. The Executive Board’s debates on the World Economic Outlook and the Fund’s more active role in looking for solutions to the problems of external debt and protectionism in multilateral contexts are among the opportunities that are mentioned for pursuing a multilateral approach to surveillance.

9. A medium-term approach, on balance of payments prospects in particular, has been endorsed, so that surveillance is not confined to present conditions and short-term expectations.

10. The subject of objective indicators as aids to an examination of the appropriateness of exchange rates or even as conclusive or presumptive evidence of the necessity for adjustment, including possibly a change in exchange rate, was discussed by the Interim Committee of the Board of Governors on Reform of the International Monetary System and Related Issues (the Committee of Twenty) in connection with the return to a more flexible par value system. Annex I to the Outline of Reform in the Committee’s report, which recorded the state of the discussion reached but did not express agreed views of the Committee, dealt with possible indicators based on movements in reserves.⁶⁰ The Committee proposed, however, that during “the interim period,” which was thought to be the period before return to a par value system, “an immediate step” could be that

(a) the Fund will seek to gain further experience in the use of objective indicators, including reserve indicators, on an experimental basis, as an aid in assessing the need for adjustment, but will not use such indicators to establish any presumptive or automatic application of pressures.⁶¹

The Board of Governors endorsed this proposal in its Composite Resolution No. 29–10, dated October 2, 1974.⁶²

The subject of objective or other indicators has arisen again in the review of surveillance. Opinions on them have been divided, but the staff has been urged to adopt an experimental approach in studying the concept and exploring it with interested authorities.

11. The procedure of “enhanced surveillance” has emerged, by which the Fund can monitor a member’s economic policies more frequently than under ordinary surveillance procedures when a member is no longer using the Fund’s resources and the member has entered into a multi-year rescheduling arrangement with commercial banks to which it is indebted. The procedure is designed to facilitate a member’s transition to normal access to commercial financing. The Managing Director’s summing up of the Executive Board’s 1985 review of the implementation of surveillance procedures includes the following principles for enhanced surveillance:

(1) The Fund should be selective in acceding to requests for enhanced surveillance. Some Executive Directors cautioned against the Fund’s involvement in arrangements for this procedure over too long a period.

(2) Some Executive Directors considered the procedure to be appropriate mainly for countries in which strong adjustment policies were well under way.

(3) The Fund would continue to consider the endorsement of a member’s adjustme...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• References to Articles of Agreement
• References to Rules and Regulations
• References to Decisions of the Executive Board
• Table of Cases Cited
• Prefatory Note
• SDRs
• Currencies
• Gold
• Résumé
• Appendices
• Notes
• Consolidated List of Cases Cited
• Consolidated List of Topics