Reproduction of Material in the IMF Survey IMF Survey 2003
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IMF Survey Supplement on the Fund September 1999 Contents
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IMF adapts to changing global environment to meet member countries' needs After a series of financial crises between mid-1997 and early 1999, which for a time raised fears of a global recession, there has recently been a marked improvement in financial market conditions and most of the economies that were affected by the crises have begun to recover. Although there are a number of remaining global downside risks, growth appears to have bottomed out at 21/2 percent in 1998, in what appears to have been the mildest of the four world economic slowdowns of the past three decades. In Southeast Asia, where the first crises occurred, the countries most directly affected—Korea, Indonesia, Malaysia, and Thailand—are all showing signs of recovery. In Russia, despite many difficulties, the government implemented policies that have helped stabilize the economy. In Latin America, Brazil took swift action to stem the crisis affecting its economy. In these and other areas, the IMF has been directly involved—providing policy advice to its 182 member countries, extending financial support for soundly formulated adjustment and reform programs, offering contingent financing to countries affected by financial contagion, granting low-cost assistance to the poorest and most indebted of its member countries, and taking steps to strengthen the international financial system, including by promoting transparency and good governance in its members. Despite the signs of progress, many challenges remain. Continuing recovery depends on sound policies at the national level and also on a healthy global economic environment. Globalization, characterized by increasingly integrated financial markets, accompanied by freer capital flows across national borders, is now accepted as a permanent and beneficial feature of the world economy. All participating countries can benefit—enjoying more investment and a better standard of living—although many have been left out of this progress. The crises gave powerful impetus to proposals to strengthen the architecture of the international financial system and commanded much of the Executive Board's attention in 1998 and the first half of 1999. The proposals addressed, among other issues, transparency and accountability; internationally accepted standards of good practice in economic, financial, and business activities; capital market liberalization; the role of the private sector in forestalling and resolving crises; and improvements in financial market supervision. The IMF made considerable progress in these areas and also devoted much of its time to discussing ways to strengthen its support of member countries, particularly the poorest and most heavily indebted. Developments in the world economy World output growth slowed to 21/2 percent in 1998 from 41/4 percent in 1997, largely as a result of the emerging market crises and the deepening recession in Japan. Global growth is projected to pick up moderately in 1999 and to be only slightly below its long-term average in 2000. Commodity prices fell across the board in 1998, with the price of oil declining more than 30 percent for the year as a whole, depressing growth in the oil-producing countries of Africa and the Middle East. The prices of other commodities weakened steadily and were partly responsible for a sharp slowdown in growth in Latin America in the second half of the year. Although the price declines lowered global inflation, they also reduced real incomes and domestic demand in many commodity-exporting developing countries. Oil prices began to recover in March 1999, partly in response to signs of economic recovery in Asia but also because of supply constraints by many producing countries. Among the crisis-affected countries in Asia, output growth was negative for 1998 in Hong Kong SAR, Indonesia, Korea, Malaysia, and Thailand, but economic activity picked up toward the end of the year in Korea and Malaysia, and in early 1999 in Indonesia, Thailand, and Hong Kong SAR. The Philippines also experienced a slight drop in output in 1998, mainly because of the impact of bad weather on agricultural production. Real GDP grew by 73/4 percent in China in 1998, but economic activity was weak in Singapore, which was hard hit by the crisis. In early 1999, the Russian economy began to recover from its low point of September 1998, with the rise in oil prices and macroeconomic policies helping to improve the fiscal position and balance of payments. Output declined by 41/2 percent in 1998 as a whole, and inflation picked up somewhat in late 1998 and early 1999, with the ruble remaining under pressure. The Russian crisis spilled over to neighboring transition countries, depressing economic activity in many of these, but its impact on Central and Eastern European economies was limited and mostly temporary. In the developing countries as a group, growth slowed to 31/4 percent in 1998 from 53/4 percent in 1997; growth increased slightly in Africa, to 31/2 percent. Most Latin American countries, which had coped well with the financial pressures stemming from the Asian crisis, were more negatively affected by the Russian crisis. Brazil came under particularly heavy pressure because of concerns about its large fiscal deficit and the sustainability of its exchange rate peg. These led Brazil to adopt a flexible exchange rate regime in January 1999. Pressures did not abate until March 1999, when the government took steps to strengthen its fiscal and monetary policies under its IMF-supported program. This helped confidence to recover in Latin American countries generally. The economies of several Central American countries, especially Honduras and Nicaragua, were devastated by Hurricane Mitch in October 1998, prompting emergency support from the IMF. Among the industrial countries, divergences in economic performance became more pronounced in 1998. Japan's economy contracted by 23/4 percent, largely because of weakness in private demand and in the emerging market economies of East Asia. In contrast, the U.S. economy continued to grow strongly, expanding by almost 4 percent for the second successive year in 1998. In Canada, growth slowed in 1998 as a whole, but picked up toward the end of the year. Unemployment in the United States reached a 29-year low of 41/4 percent in early 1999. In Europe, the third stage of European Economic and Monetary Union began on January 1, 1999, when 11 countries adopted the euro as their currency. Growth in the euro area, which picked up in 1997, slowed significantly in late 1998, particularly in Germany and Italy, before beginning to recover in early 1999. Outside the euro area, growth in the U.K. economy slowed markedly during 1998, but showed signs of recovery by mid-1999. Inflation remained low in the advanced economies, partly reflecting low-cost imports from Asia and declining commodity prices. IMF in 1998/99 In its 1998/99 fiscal year, ending on April 30, 1999, the IMF continued to deal with the fallout from the Asian crisis and the subsequent crises affecting Russia and Brazil and their repercussions, which presented the institution with additional challenges and underscored the risks of financial contagion. During August–October 1998, most emerging market economies temporarily lost access to private financing amid fears of a global credit crunch, before calm returned to financial markets by the end of the year. As a result of the ongoing financial market turbulence during the year, the demand for IMF financing continued to be heavy—amounting to $30 billion—and the IMF resorted to borrowing on two occasions. Its resources subsequently dipped to a very low level in December 1998–January 1999, but were augmented by the increase in members' quotas that took effect in late January. The IMF was thus able to provide a high level of assistance to its member countries during the year. The largest users of IMF resources in 1998/99 were Brazil and Russia, although a number of other countries also used relatively large amounts, including Bulgaria, Indonesia, Korea, Pakistan, the Philippines, Thailand, and Ukraine. As of April 30, 1999, 9 Stand-By Arrangements, 12 Extended Arrangements, and 35 Enhanced Structural Adjustment Facility Arrangements were in effect with member countries. In the face of continuing uncertainties in Russia, the IMF approved, on July 28, 1999, a 17-month Stand-By Arrangement for $4.5 billion to enable Russia to tackle the root causes of the crisis—including persistent fiscal imbalances, structural rigidities, and financial sector weaknesses. Reform of the international financial architecture The IMF has recently taken a number of initiatives that will enable it to assist members that have experienced difficulties over the past year and to better meet the challenges of a globalized economy. These initiatives (relating to governance, transparency, and crisis prevention) fall under the rubric of strengthening the international financial system. In late April 1999, the IMF created the Contingent Credit Lines to prevent crises by shoring up market confidence in countries that are pursuing strong economic policies but that may be vulnerable to balance of payments problems stemming from financial contagion. To increase the transparency of its own operations as well as those of its members, the IMF has launched a pilot project—which will be reviewed after one year—under which the reports prepared by IMF staff at the conclusion of Article IV consultation discussions with individual members are released when the member country concerned agrees. In another move intended to increase public awareness of its activities—and to demonstrate its commitment to greater openness—the IMF released, for the first time in June 1999, a summary of the Executive Board's work program. In April, the IMF and the World Bank reviewed the HIPC (Heavily Indebted Poor Countries) Initiative with a view to strengthening its framework so as to bring greater relief to this group of countries. The Executive Board stressed the urgency of securing full financing for the HIPC Initiative, whose cost was projected to double, and for continuing the ESAF. The Executive Board also agreed to modify the policy on postconflict emergency financial assistance to take into account the special circumstances of postconflict countries.
Strengthening the international financial system The financial crises in East Asia in 1997–98, followed by those in Russia and Brazil in 1998–99, have underscored the need for changes in the global financial system that will reduce the risks posed by institutional weaknesses and volatile capital flows and extend the benefits of globalization to those countries that have not yet benefited from the new economic environment. Reforms that would strengthen the "architecture" of the international financial system were a major focus of the Executive Board's attention in 1998/99. Promoting transparency, accountability Greater transparency fosters better decision making and economic performance by member countries and international institutions and is thus an important pillar in a strengthened international financial system. In the past two years, the Executive Board has taken steps to improve the transparency of the IMF's activities and its members' policies. In March and April 1999, the Board approved additional initiatives to enhance transparency, including establishing a presumption that member countries would release documents that describe the polices they intend to implement in connection with their requests for financial support from the IMF (Letters of Intent and Memorandums of Economic and Financial Policies) as well as their economic objectives and policies (Policy Framework Papers). Standards and codes of good practice The IMF is seeking to foster the development, dissemination, and adoption of internationally accepted standards, or codes of practice, for economic, financial, and business activities. During 1998/99, the IMF made considerable progress in this area, including in strengthening the Special Data Dissemination Standard, and in drafting a Code of Good Practices on Transparency in Monetary and Financial Policies, in collaboration with other international financial institutions, a representative group of central banks, and academics. In discussing the role of the IMF in relation to standards in March 1999, the Board recognized that the IMF has expertise that would allow it to assess members' observance of international standards in the four core areas of data dissemination, transparency of fiscal policy, transparency of monetary and financial policies, and—working with other organizations—banking supervision. It agreed to consider this issue further at a later date. Strengthening financial systems Strengthening financial systems, including through better financial market supervision and appropriate mechanisms for managing bank failures, is an essential element of the new architecture. To this end, the IMF, together with other international organizations, has stepped up its efforts to develop and disseminate international principles and good practices of sound financial systems. In September 1998, the IMF and the World Bank established the Financial Sector Liaison Committee to enhance their collaboration, which is seen as crucial in the effort to strengthen financial systems. The committee, whose objective is to ensure that the two institutions deliver high-quality, sound, and timely advice to countries, has developed guidelines and procedures for the IMF and the World Bank to share information and incorporate internationally recognized standards and sound practices in their work programs. Capital account issues Financial integration, including capital account liberalization, offers substantial benefits but also carries risks. In 1998/99, the Board discussed capital account liberalization on two occasions and in March 1999 reviewed members' experiences with the use of capital controls in the context of the recent financial crises. Directors noted that, in the countries most seriously affected by crisis, liberalization had been poorly sequenced or inadequately supported by economic policies, financial regulation, and oversight and that monetary and exchange rate policies had been inconsistent, leading to an accumulation of imbalances. Subsequently, these countries were vulnerable to external shocks or a loss of confidence. While supporting a further liberalization of capital flows, Directors discussed the use and effectiveness of capital controls over outflows and inflows. They broadly recognized that controls over inflows, particularly those designed to influence their composition, might be justifiable, but only in countries with appropriate policies. Most Directors concluded that controls on capital outflows were not an effective policy instrument in a crisis. The IMF would continue to review countries' experiences with capital controls and with liberalizing different components of the capital account and draw conclusions for best practices. Private sector involvement Involving the private sector in crisis prevention and resolution is critical for bringing order to the adjustment process, limiting moral hazard, strengthening market discipline, and helping emerging market borrowers protect themselves against volatility and contagion. It is clear that measures to involve the private sector have to be in place to make it easier to resolve balance of payments pressures in an orderly way should a crisis occur. In 1998/99, the Executive Board considered various proposals on private sector involvement and agreed that more had to be done to create market-based incentives and instruments to get the private sector involved. Possible approaches include modifying the terms of sovereign bond contracts to encourage collective action in addressing distressed debt, establishing forums for discussions between debtors and creditors, and formalizing contact with representatives of the private financial community to provide a forum to renegotiate debt, if needed. Exchange rate issues Since the establishment of the IMF, the international monetary and financial system has changed profoundly, raising broad systemic issues. In a preliminary discussion of IMF-supported programs in East Asia, one lesson that emerged was that the pegged exchange rates of the countries affected may have led borrowers and creditors to perceive that they were implicitly protected against losses stemming from currency risks. It was noted, however, that a more flexible exchange rate regime was not a panacea. Regardless of the regime, vulnerabilities would continue to exist, and standards for strengthened financial systems and improvements in transparency would continue to be necessary. The Executive Board planned to discuss exchange rate issues before the 1999 Annual Meetings, focusing on the volatility of the exchange value of major currencies, the scope for measures to moderate such volatility, and the consequences for the exchange rate policies of emerging market economies.
Articles of Agreement shape IMF structure The IMF's organizational structure is set out in its Articles of Agreement, which entered into force in December 1945. The Articles provide for a Board of Governors, an Executive Board, a Managing Director, and a staff of international civil servants. Since the mid-1970s, the Executive Board has received ministerial guidance from the Interim Committee of the Board of Governors on the International Monetary System (the Interim Committee) and the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (the Development Committee). Board of Governors. The highest authority of the IMF resides in its Board of Governors, which consists of one Governor and one Alternate Governor appointed by each member country. The Board of Governors, whose members are usually drawn from ministers of finance or heads of central banks, normally meets once a year, but may meet or vote by mail at other times. Interim Committee. The Interim Committee provides ministerial guidance to the Executive Board. Composed of 24 IMF governors, ministers, or other officials of comparable rank, the Interim Committee meets twice a year and reports to the Board of Governors on the management and functioning of the international monetary system and on proposals to amend the Articles of Agreement. Development Committee. The Development Committee, also composed of 24 members—finance ministers or other officials of comparable rank—advises and reports to the Boards of Governors of the World Bank and the IMF on development issues. Executive Board. The Board of Governors has delegated many of its powers to the IMF's Executive Board, the IMF's permanent decision-making organ. The Executive Board, which generally meets three times a week at the IMF's headquarters in Washington, consists of 24 Executive Directors who are appointed or elected by member countries. It deals with a wide variety of policy, operational, and administrative matters, including surveillance of members' exchange rate policies, provision of IMF financial assistance to member countries, and discussion of systemic issues in the global economy. Managing Director. Selected by the Executive Board, the IMF's Managing Director chairs the Executive Board and serves as head of the organization's staff. Under the direction of the Executive Board, the Managing Director is responsible for conducting the ordinary business of the IMF. The Managing Director serves a five-year term and may be reelected to successive terms. Staff. The Articles of Agreement require that staff appointed to the IMF demonstrate the highest standards of efficiency and technical competence and reflect the organization's diverse membership. Of the organization's approximately 2,200 staff members, 123 nationalities are represented.
Quotas define members' financial and organizational relations with IMF On joining the IMF, each member country is assigned a quota, which represents its subscription of capital to the IMF and is expressed in SDRs. Members' quotas, in addition to providing the IMF with the financial resources it needs to lend to members in financial difficulty, serve several other functions. They determine members' representation on the Executive Board and their voting power in the IMF; each member has 250 basic votes plus 1 additional vote for each SDR 100,000 of quota. Quotas also determine how much balance of payments assistance members can normally obtain from the IMF and how much members receive from the IMF in any allocations of SDRs that may take place. Determination of initial quotas The initial quotas of the original members of the IMF were determined at the Bretton Woods Conference in 1944. Those of subsequent members have been determined by the IMF's Board of Governors, on the basis of principles consistent with those applied to existing members. When a country applies for membership, the IMF analyzes data on its economy (GDP, current account transactions in its balance of payments, and official reserves) and calculates a quota range (calculated quota). The staff then recommends a quota for the country that is within the range of quotas of existing members whose economic size and characteristics are comparable. A membership committee of the Executive Board considers the staff's recommendations on the quota and other terms and conditions of membership. The committee prepares a report for adoption by the Executive Board, which forwards a membership resolution to the Board of Governors for approval. The country becomes a member of the IMF when it signs the IMF's Articles of Agreement. It becomes eligible to use the IMF's resources when it has paid its quota subscription and has met all other requirements of the membership resolution. Review and adjustment of quotas Under the Articles of Agreement, the Board of Governors is required to conduct a general review of members' quotas at intervals of not more than five years. The review provides an opportunity to assess the adequacy of quotas in terms of both members' needs for balance of payments assistance and the ability of the IMF to finance those needs. A general review also allows for adjustments of members' quotas to reflect changes in their relative positions in the world economy. Thus, the main issues dealt with in general reviews have typically included both the size of an overall increase in quotas and the combination of equiproportional and selective adjustments within the overall increase. A member may request at any other time that the Board of Governors consider an adjustment of its quota. When quotas are increased, members normally pay 25 percent of their increase in SDRs, although the IMF may prescribe payment in whole, or in part, in other members' currencies, with their concurrence; members pay the balance of the quota increase in their own currency. A member's quota cannot be increased until the member has consented to and paid for the increase. Eleventh General Review The Eleventh General Review of Quotas was completed in January 1998 and took effect on January 22, 1999, when members whose quotas represented more than 85 percent of the total of IMF quotas on December 23, 1997 had consented to the increases. Under the Eleventh Review, total IMF quotas will rise to SDR 212.0 billion from SDR 145.6 billion when all members have completed payment of their quota increases. The main considerations underlying the size of the overall increase in quotas were the growth of world trade and payments; the scale of potential payments imbalances, including those that might stem from sharp changes in private capital flows; the prospective demand for IMF resources in support of members' economic programs; the rapid globalization and liberalization of trade and payments, including the capital account, that had characterized the development of the world economy since the previous quota increase in 1990; and the weakening of the IMF's liquidity position as a consequence of the continued heavy demand for IMF resources.
Surveillance helps members identify and correct problems quickly Central to the IMF's purposes and operations is the mandate, under its Articles of Agreement, to oversee the international monetary system. To fulfill this function, the IMF is charged with exercising surveillance over the exchange rate policies of its members. It does this through analysis of the appropriateness of each country's economic and financial policies for achieving orderly economic growth and assessment of the implications of these policies for the global economy. The surveillance process is intended to identify issues and problems in a timely manner, so that members can implement suitable corrective measures more quickly. In recent years, fundamental shifts in the global economy—such as the rapid growth of private capital markets, increased regional and monetary integration, and the implementation of current account convertibility and market-oriented reform in many countries—have heightened the importance of effective and timely surveillance. These transformations are being mirrored in increased responsibilities for the IMF. Traditionally, IMF surveillance has focused on encouraging countries to correct macroeconomic imbalances, reduce inflation, and institute key trade, exchange, and other market reforms. But increasingly, and depending on the situation in each country, much broader structural and institutional reforms have been seen as necessary for countries to establish and maintain private sector confidence and lay the groundwork for sustained growth. These areas include strengthening the efficiency of the financial sector, improving data collection and disclosure, making government budgets and monetary and financial policy more transparent, promoting the autonomy and operational independence of central banks, and promoting legal reforms and good governance. Tools of surveillance The IMF carries out its surveillance responsibilities primarily through regular consultations, called Article IV consultations, with individual member countries and through multilateral discussions held in the context of the Executive Board's World Economic Outlook reviews and its annual discussion of developments in international capital markets and financial systems. More recently, the IMF has conducted regional surveillance through its discussion of developments in the European Economic and Monetary Union (EMU) and in the West African Economic and Monetary Union (WAEMU). Article IV consultations. Article IV consultations, the main form of collaboration between the IMF and its members, allow the IMF to systematically review each member's economic developments and policies. An IMF staff team visits the country, collects economic and financial information, and discusses with the authorities the economic developments since the last Article IV consultation, as well as the monetary, fiscal, and structural policies that the country is following. The staff's report forms the basis for an Executive Board discussion. Following the discussion, the Chairman of the Board summarizes the views expressed in the meeting. This "summing up" is communicated to the country's authorities. The IMF may, if the country agrees, release a Public Information Notice (PIN) on the basis of the summing up.
In recent years, surveillance has taken more account of regional, social, industrial, labor market, income distribution, governance, and environmental issues, which may also affect a country's economic performance. With the increasing global integration of financial markets, the IMF is also taking more explicit account of capital account and financial and banking sector issues. In March 1999, the Executive Board agreed to additional initiatives to enhance the transparency of its members' policies and of IMF policy advice to them, including procedures for the public release of PINs following Executive Board discussions of policy papers and a closed-end pilot project for the voluntary release of Article IV staff reports. In 1998/99, the IMF concluded 125 Article IV consultations, 91 of which resulted in the issuance of a PIN. Multilateral surveillance. World Economic Outlook discussions provide the Executive Board with a framework for reviewing members' policies from a multilateral perspective, monitoring and analyzing the global economic situation, and assessing prospects for the international economy under various policy assumptions. The IMF's International Capital Markets report provides an opportunity for the Executive Board to review developments in financial markets and their implications for the world economy. Other means of surveillance. Surveillance may also take the form of financial arrangements that are intended to be precautionary, informal staff-monitored programs, and enhanced surveillance.
Regional issues In April 1998, the IMF welcomed the creation of European Economic and Monetary Union (EMU) as one of the most important international monetary developments in the post-Bretton Woods period. EMU was expected to have powerful implications for the international monetary system, based on the promise of a dynamic and integrated economy of 300 million people. In September 1998, the Executive Board discussed the implications of EMU for IMF surveillance and noted that EMU, and particularly the adoption of a single monetary policy under the responsibility of an independent European Central Bank, had important implications for IMF surveillance. As economic policies of the euro area would have important effects on other countries, Directors agreed that the IMF's responsibility to conduct surveillance over members' external and exchange rate policies required intensifying discussions with European Union (EU) and euro-area institutions, especially the European Central Bank. It was therefore decided that discussions with the representatives of the relevant EU institutions would need to take place as part of Article IV consultations with individual euro-area countries.
In May 1998, the Executive Board discussed strengthening IMF surveillance of regional developments in Africa by establishing a formal dialogue between the IMF and the regional institutions in the WAEMU area. Although the economic performance of WAEMU members has improved since the January 1994 devaluation of their common currency—the CFA franc—Directors felt that these countries would continue to perform well only by pursuing sound macroeconomic polices and intensifying their structural reforms. The 1994 currency realignment improved the region's competitiveness and led to a strong increase in the growth of output and exports, but Directors agreed that the evolution of competitiveness indicators should be kept under close review. Directors also encouraged strong efforts to broaden convergence in the region, which they felt would promote stability and growth. Finally, to enhance surveillance, they emphasized that it was essential to improve the timely availability of reliable data on the national accounts, domestic debt, and balance of payments. Lessons from the Asian crisis In March 1998, the Executive Board undertook its regular review of members' policies in the context of surveillance, this time focusing on the lessons from the Asian crisis. Directors noted that the IMF's performance in identifying emerging tensions in crisis-affected countries at an early stage had been mixed. With hindsight, it was clear that, in some of the affected countries, vulnerabilities had been underestimated, including by the markets. At the same time, some other emerging market economies had taken timely and sustained policy measures in the face of market pressures, including with IMF advice, and had been able to fend off spreading turmoil successfully. Some Directors stressed that it was unrealistic to expect IMF surveillance to detect all problems early and prevent all crises and that the contagion effects of the crisis, which first broke out in Thailand, were, to a large extent, unpredictable. Nevertheless, they encouraged the staff, in exercising surveillance, to place increased emphasis on the risks of contagion effects.
Members commit to reform in exchange for IMF financial support When it provides financial support to a member country, the IMF must be sure the member is pursuing policies that will ameliorate or eliminate its external payments problem. The explicit policy commitment that members make to implement remedial measures in return for the IMF's support is known as "conditionality." This commitment also ensures that members are able to repay the IMF in a timely manner, which in turn allows the IMF's limited pool of financial resources to be made available to other members with a balance of payments problem. IMF financing, and the important role it plays in helping a country secure other financing, enables the country to adjust in an orderly way without resorting to measures that would harm its own or other countries' prosperity. Conditions for IMF financial support may range from general commitments to cooperate with the IMF in setting policies, to the formulation of specific, quantified plans for financial policies. IMF financing from its general resources in the "upper credit tranches" (that is, where larger amounts are disbursed in return for implementation of remedial measures) is disbursed in stages. The IMF requires a "letter of intent," which outlines a government's policy intentions during the period of the adjustment program; the policy changes it must take before the arrangement can be approved; performance criteria, which are objective indicators for certain policies that must be satisfied on a quarterly, semiannual, or in some instances monthly basis for drawings to be made; and periodic reviews that allow the Executive Board to assess the consistency of policies with the objectives of the program. Conditionality is flexible Although IMF conditionality is linked to specific performance criteria, it does not rely on rigid operational rules. The Board's guidelines on conditionality
How conditionality works The IMF recognizes that no one reform model suits all members. Thus, each member country, in close collaboration with the IMF staff, designs its IMF-supported program. The process involves a comprehensive review of the member's economy, including the causes and nature of the balance of payments problems, and an analysis of the policies needed to achieve a sustainable balance between the demand for, and the availability of, resources. IMF-supported programs emphasize certain key aggregate economic variables—domestic credit, the public sector deficit, international reserves, and external debt—and crucial elements of the pricing system— including the exchange rate, interest rates, and, in some cases, wages and commodity prices—that significantly affect the country's public finances and foreign trade and the economy's supply response. During a Stand-By or an Extended Fund Facility Arrangement (EFF) or during an arrangement under the Enhanced Structural Adjustment Facility (ESAF), the IMF monitors a member's reform program through performance criteria selected according to the economic and institutional structure of the country, the availability of data, and the desirability of focusing on broad macroeconomic variables, among other considerations. Performance under IMF-supported reform programs is also monitored through periodic reviews by the IMF Executive Board. Growth-oriented adjustment Although macroeconomic policies designed to influence aggregate demand continue to play a key role in IMF-supported adjustment programs, it is widely recognized that measures to strengthen the supply side of the economy are frequently essential to bring about a sustained return of external viability and sound growth. Among the IMF-supported policy adjustments that member countries make to enhance the growth potential and flexibility of their economies are measures to
Social safety nets For more than a decade, the IMF has addressed the social dimensions of economic policies in its discussions with members. The IMF has often advised members on social safety nets, the equity aspects of overall economic policy, and the composition of public spending—encouraging them to reallocate expenditure from unproductive to growth-enhancing outlays. The IMF's growing interest in social policy issues stems from its recognition that reform programs are more likely to be viable in the long run if they emphasize equity and human resource development. Most bilateral consultations with members now consider the implications of their policies on poverty, health, education, and employment. IMF-supported programs with low-income members under the ESAF give significant attention to social issues. For example, countries entering into an ESAF Arrangement may be asked to tackle poverty by accelerating economic growth and improving the delivery of basic services to the neediest segments of their populations. To help cushion the poorest members of society against subsidy cuts, ESAF-supported programs often suggest protecting or even increasing spending on essential social services. Although other organizations, including the World Bank, have more of a mandate to address social issues, the IMF has sought to contribute to the task of improving equity by (1) ensuring that a social agenda is defined, (2) working with governments and other agencies to prepare a policy framework that ensures coherence among a country's economic and social objectives, and (3) encouraging the International Labor Organization's approach—involving representatives of workers and employers along with governments—in discussions of major changes in economic policy. Recently, the IMF reviewed social spending in 31 low-income countries that had received support through the ESAF. The results for 1986–97 indicate that these countries, as a group, made good progress in raising public social expenditures and improving social indictors. Despite such progress, social policy implementation has been hindered in many countries by poor data, a lack of administrative ability, weak political commitment, vested interests, and limited foreign assistance. Ultimately, consideration of the human costs involved during reform is essential for the reform effort to succeed.
IMF financing helps members pursue sound policies
The IMF offers financial assistance to members to help them correct balance of payments problems and to soften the impact of reform. The IMF's financing is provided through both its general resources and its concessional financing facility (Enhanced Structural Adjustment Facility (ESAF)), which is administered separately. The extension of IMF credit is subject to Executive Board approval and, in most cases, to the member's commitment to take steps to address the causes of its payments imbalance. A member's access to IMF resources is set in proportion to its quota.
Members using the IMF's general resources "purchase" (or draw) SDRs or other members' currencies by paying an equivalent amount of their own currency. The IMF levies charges on these drawings and requires that, within a specified time, members "repurchase" (or buy back) their own currency from the IMF using other members' currencies or SDRs. Concessional financing under the ESAF is provided in the form of low-interest loans and under the Initiative for Heavily Indebted Poor Countries (HIPC) in the form of grants. Credit tranche policies The most basic form of IMF financial support is provided under the credit tranche policy. A country experiencing balance of payments difficulties can draw an amount equivalent to the first 25 percent of its quota (or "first credit tranche") by demonstrating that it is taking reasonable steps to overcome its balance of payments problems. Financing under the second, third, and fourth credit tranches ("upper credit tranches") is normally associated with a Stand-By or an Extended Arrangement with the IMF. Regular facilities Stand-By Arrangements. Under a Stand-By Arrangement, a country implements, usually for one to two years, a program that includes macroeconomic policy changes to resolve its balance of payments problems. The country, in consultation with the IMF staff, designs the program to achieve its goals. To receive the financing, the member must meet performance criteria that mark its successful implementation of the program. These criteria—which allow both the member and the IMF to assess progress and may signal the need for further corrective policies—generally cover ceilings on government budget deficits, credit, and external debt, as well as targets for reserves. The country repays the money it has borrowed over 31/4–5 years. In 1998/99, the IMF approved commitments under seven Stand-By Arrangements totaling SDR 14.3 billion. The largest new Stand-By Arrangement, SDR 13.0 billion for Brazil, included SDR 9.1 billion available until December 1999 under the Supplemental Reserve Facility. New Stand-By Arrangements were also approved for Bosnia and Herzegovina (SDR 61 million), El Salvador (SDR 38 million), Uruguay (SDR 70 million), and Zimbabwe (SDR 131 million). The Stand-By Arrangement for Indonesia was augmented by SDR 1.0 billion. As of April 30, 1999, nine countries had Stand-By Arrangements from the IMF, with total commitments of SDR 32.7 billion and undrawn balances of SDR 8.6 billion. Extended Fund Facility (EFF). The IMF provides financial support to its members for longer periods and in generally larger amounts under the Extended Fund Facility. Extended Arrangements, which normally run for three years but can be extended for a fourth, are designed to correct balance of payments problems that stem largely from structural problems and take longer to correct. The repayment period is 41/2–10 years. In 1998/99, the IMF approved commitments under five Extended Arrangements totaling SDR 14.1 billion. The largest new Extended Arrangement was SDR 4.7 billion for Indonesia; it was later augmented by SDR 0.7 billion. Extended Arrangements were also approved for Bulgaria (SDR 0.6 billion), Jordan (SDR 0.1 billion), and Ukraine (SDR 1.6 billion). The Extended Arrangement for Russia was augmented by SDR 6.3 billion, but was subsequently canceled in March 1999. As of April 30, 1999, 12 countries had Extended Arrangements, with commitments of SDR 11.4 billion and undrawn balances of SDR 7.3 billion. In 1998/99, new commitments of IMF resources under Stand-By and Extended Arrangements amounted to SDR 28.4 billion, of which nearly one-half was approved for Brazil and about one-fifth each for Indonesia and Russia. Special facilities Buffer Stock Financing Facility. Under this facility, the IMF helps members that are heavily dependent on commodity exports to meet their financial commitments under international agreements designed to smooth volatile commodity prices. No drawings have been made under this facility for the past 15 years. Compensatory and Contingency Financing Facility (CCFF). The compensatory element of the CCFF provides timely financing to members experiencing temporary shortfalls in export earnings or an excess in cereal import costs, attributable to circumstances largely beyond their control. This element of the facility has been used particularly by commodity exporters. The contingency element helps members with IMF arrangements keep their adjustment programs on track when they are faced with unexpected adverse external disruptions, such as declines in export prices and increases in import prices or in international interest rates. Receipts from tourism and workers' remittances may also be covered if they are a significant component of the member's current account. During 1998/99, four countries—Azerbaijan, Jordan, Pakistan, and Russia—drew a total of SDR 2.6 billion under the CCFF.
Supplemental Reserve Facility (SRF). In December 1997, the Executive Board established the Supplemental Reserve Facility in response to the unprecedented demand for IMF resources resulting from the Asian crisis. The SRF is intended to help member countries experiencing exceptional balance of payments problems created by a large short-term financing need. Such a need may result from a sudden and disruptive loss of market confidence and take the form of pressure on the member's capital account and reserves. Assistance is available when there is a reasonable expectation that strong adjustment policies and adequate financial support will enable a country to correct its balance of payments difficulties in a short time. The SRF is likely to be used when a country's outflows are large enough to create a risk of contagion that could potentially threaten the international monetary system. In approving a request for the use of resources under the SRF, the IMF takes into account the financing provided by other creditors. To minimize moral hazard, a member using resources under the SRF is encouraged to maintain the participation of both official and private creditors until the pressure on its balance of payments eases. Financing under the SRF, available in the form of additional resources under a Stand-By or an Extended Arrangement, is committed for up to one year and is generally available in two or more drawings. The first drawing is available when financing is approved, normally at the same time the corresponding arrangement is approved. Countries drawing under the SRF are expected to repay within 1–11/2 years of the date of each purchase. The Board may, however, extend this repayment period by up to one year. For the first year, members are subject to a surcharge of 300 basis points above the regular rate of charge on IMF loans. This surcharge is increased by 50 basis points at the end of that period and every six months thereafter until it reaches 500 basis points. The IMF first activated the SRF in December 1997, committing SDR 9.95 billion to Korea as part of its Stand-By Arrangement. In July 1998, the IMF committed SDR 4 billion to Russia under the SRF as part of the augmentation of its Extended Arrangement, and in December 1998, SDR 9.1 billion was committed to Brazil under the SRF as part of its Stand-By Arrangement. Contingent Credit Lines. In April 1999, the Board endorsed the creation of Contingent Credit Lines as a precautionary line of defense to help members with fundamentally sound and well-managed economies that may be threatened by balance of payments problems arising from a sudden and disruptive loss of market confidence caused by contagion (see box, page 16).
Concessional Facility Enhanced Structural Adjustment Facility (ESAF). This facility was established in 1987 as a successor to the Structural Adjustment Facility (SAF), created in 1986, and was extended and enlarged in February 1994. Through the ESAF, the IMF provides concessional financial support for low-income member countries with persistent balance of payments problems. ESAF resources are intended to support strong medium-term structural adjustment programs. Eligible members seeking ESAF resources must develop, with the assistance of the staffs of the IMF and the World Bank, a policy framework paper (PFP) outlining a three-year adjustment program. The PFP, which is a document of the national authorities, is updated annually; it describes the authorities' economic objectives, strategies for achieving those objectives, and associated external financing needs and major sources of financing. The PFP is intended to ensure a consistent framework for economic policies and to attract financial and technical assistance in support of the adjustment program. Adjustment measures under ESAF-supported programs are expected to strengthen a country's balance of payments position substantially and foster growth during the three-year period. Monitoring under ESAF Arrangements is conducted through quarterly financial and structural benchmarks. In 1998, the structure of ESAF Arrangements was modified to allow closer monitoring through semiannual or quarterly performance criteria, reviews, and disbursements. ESAF loans are usually disbursed semiannually, initially upon approval of an arrangement and subsequently based on the observance of performance criteria and after the completion of a review. ESAF loans are repaid in 10 equal semiannual installments, beginning 51/2 years and ending 10 years after the date of each disbursement. The interest rate on ESAF loans is 0.5 percent a year. In 1998/99, the IMF approved 10 new ESAF Arrangements with commitments totaling SDR 0.9 billion—for Albania, Bolivia, the Central African Republic, The Gambia, Guyana, Honduras, the Kyrgyz Republic, Rwanda, Tajikistan, and Zambia. Six ESAF Arrangements were augmented by a total of SDR 0.1 billion. As of April 30, 1999, 35 ESAF Arrangements were in effect. Cumulative commitments under all SAF and ESAF Arrangements approved since 1986 (excluding undisbursed amounts under expired and canceled arrangements) totaled SDR 11.1 billion as of April 30, 1999, compared with SDR 10.3 billion a year earlier. Total ESAF disbursements in 1998/99 amounted to SDR 0.8 billion, compared with SDR 1.0 billion in 1997/98, bringing cumulative SAF and ESAF disbursements through April 30, 1999, to SDR 9.0 billion. Since April 30, 1999, four new ESAF Arrangements have been approved: for Ghana (SDR 155 million), Mali (SDR 46.7 million), Mauritania (SDR 42.5 million), and Mozambique (SDR 58.8 million). The current ESAF Arrangement for Albania was also augmented by SDR 10 million and that for Georgia, by SDR 5.6 million.
Financing the ESAF Trust. The resources to finance lending in support of ESAF Arrangements are kept separate from the general resources of the IMF and are administered by the IMF as Trustee of the ESAF Trust. ESAF operations are conducted through three accounts with separate functions. The ESAF Trust borrows resources through the Loan Account for onlending to eligible members under ESAF Arrangements, with the maturity of drawings on lenders coinciding with the maturity of loans to ESAF borrowers. Lenders have extended loans to the ESAF Trust on different interest rate terms: market rates in most cases, free of interest in one case, and highly concessional rates in some others. Most lenders making loans at market-related interest rates have made separate contributions to reduce the interest rate charged to borrowers. Subsidy contributions (including a contribution from the IMF's Special Disbursement Account in 1994) are channeled through the Subsidy Account and have taken the form of direct grants or deposits at concessional interest rates. These funds are invested by the Trust, with the subsidy contribution on the latter being equal to the interest rate differential. Resources are set aside in the Reserve Account to provide security for lenders' claims on the Trust against the risk of nonpayment by borrowers. The resources in the Reserve Account result mainly from repayments of SAF loans and the part of ESAF loans financed with SAF resources that ultimately originated from the profits of gold sales undertaken by the IMF in 1976–81. Making the ESAF self-sustaining. Based on the broad agreement that the ESAF is, and will remain, the centerpiece of the IMF's support for the poorest countries, including in the context of the HIPC Initiative, the Executive Board in 1996 agreed on a framework for the continuation of ESAF operations. Under current projections, available ESAF resources are expected to be fully committed by end-2000. A self-sustained ESAF, with a commitment capacity of about SDR 0.8 billion a year, would begin in the year 2005, or perhaps earlier, financed from the IMF-owned resources set aside in the Reserve Account, which will become available as ESAF lenders are repaid. This leaves an interim period of about four years during which financing of an estimated SDR 1.4 billion "as needed" would have to be mobilized to cover interest subsidies. In addition, financing needs for special ESAF operations under the proposed enhanced HIPC Initiative are estimated to be SDR 2.6 billion, "as needed."
Other IMF policies and procedures In specific circumstances that cannot be adequately addressed under its regular and special facilities, the IMF extends financing to member countries under several special mechanisms. These include the Emergency Financing Mechanism, support for currency stabilization funds, and emergency assistance to members facing balance of payments difficulties arising from sudden and unforeseeable natural disasters or following civil conflicts. Emergency Financing Mechanism (EFM). The EFM consists of procedures that allow for quick Executive Board approval of IMF financial support while ensuring the conditionality necessary to warrant such support. It is to be used in rare circumstances representing, or threatening, a crisis in a member's external accounts that requires an immediate IMF response. The EFM was established in September 1995 and was used in 1997 for the Philippines, Thailand, Indonesia, and Korea and in July 1998 for Russia. Support for currency stabilization funds. In September 1995, the IMF decided to make available financial support for the establishment of currency stabilization funds to help bolster confidence in countries' exchange-rate-based stabilization strategies—preferably, an exchange rate peg with relatively narrow margins or a preannounced crawl. So far, however, the IMF has not provided this type of assistance to any member country. For a currency stabilization fund to play its intended role, economic policies must be tight enough for inflation to be compatible with the targeted exchange rate anchor; thus, little use of the currency stabilization fund for exchange market intervention is to be expected. IMF support for a currency stabilization fund would be conditional on
Emergency assistance. The IMF can provide emergency financial assistance to a member facing balance of payments difficulties caused by a natural disaster. Emergency assistance is available through outright purchases, usually limited to 25 percent of quota, provided that the member is cooperating with the IMF to find a solution to its payments problems. In 1995, the policy on emergency assistance was expanded to cover countries emerging from political turmoil, civil unrest, or armed international conflict that are unable to implement regular IMF-supported programs because of damage to their institutional and administrative capacity. In addition to the quick-disbursing emergency financial assistance, the IMF also provides macroeconomic policy advice and technical assistance designed to restore the country's ability to implement policy. In April 1999, the Executive Board discussed ways to enhance assistance to postconflict countries and agreed on steps to improve the terms of emergency financial assistance to postconflict countries. It also agreed that the IMF, in implementing its strategy on overdue financial obligations, would take into account the special difficulties faced by postconflict countries in arrears. During 1998/99, the IMF provided emergency post-conflict assistance totaling SDR 19 million to the Republic of Congo and Sierra Leone, and emergency assistance totaling SDR 202 million to help Bangladesh, the Dominican Republic, Haiti, Honduras, and St. Kitts and Nevis cope with natural disasters.
IMF involvement emphasizes policy guidance and adequate financial support
Commercial bank debt operations The IMF continues, on a case-by-case basis, to support operations to reduce the debt and debt service owed to commercial banks. It evaluates proposed packages in light of the strength of the member's economic policies, the likelihood that the country would regain access to credit | ||||||||||||||||||||||||||||||||||||||||||
