IMF Executive Board Reviews Multiple Currency Practices Policy and Considers Reforms
IMF News, June 10, 2019
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- Published: June 10, 2019
Background and purpose of the review
- Executive Board discussion held on February 1, 2019, reviewed the Fund’s policy on multiple currency practices (MCPs) and initial reform proposals.
- Objective: limit circumstances in which Fund members may introduce and maintain multiple exchange rates to promote orderly exchange arrangements and a stable system of exchange rates.
- Historical context: prohibition of MCPs is one of the original provisions of the Fund’s Articles of Agreement and was last extensively reviewed in 1981.
Definition, scope, and current rules
- MCP occurs when official action results in an exchange transaction on the member’s territory taking place at an exchange rate spread that does not reflect normal commercial realities.
- Spot transactions: current policy establishes a uniform permissible spread of up to 2 percent for all countries.
- Non-spot transactions: permissible spread not quantified; should not exceed normal commercial costs and risks vis‑à‑vis spot transactions.
- Policy purview has broadened to capture actions that give rise to actual exchange rate spreads exceeding permissible thresholds and those that have the potential to do so.
Approval regime and transitional arrangements
- Under current policy, Fund members are prohibited from engaging in MCPs unless:
- maintained under the transitional arrangements of Article XIV upon joining the Fund, or
- temporarily approved by the Fund’s Executive Board for periods of 12 months for BOP or non‑BOP reasons.
Executive Board assessment — key findings
- Directors agreed economic and legal reasons remain to retain the MCP policy as a cornerstone of the Fund’s framework for exchange rates; MCPs can be distortionary, create unfair competitive advantage, and hamper trade and investment.
- Recognized operational challenges in implementation and significant changes in foreign exchange markets (greater experience with flexible exchange rates; deepening and standardization; development of hedging products; improvements in data availability).
- Consensus that the policy needs rules that reflect market realities, can be applied consistently, and are simple and easily understood.
- Support for refocusing the policy on measures that are material and for preserving the core principle that official action should not cause unreasonable deviations in foreign exchange spreads compared to normal commercial costs and risks.
Specific reform endorsements and clarifications
- Scope of official action:
- Clarify focus primarily on actions that segment foreign exchange markets.
- Broad agreement to exclude from future MCP coverage: foreign exchange auctions that conform to best practice, illegal parallel markets, and the use of official exchange rates based on the market exchange rates of the previous day.
- Removal of illegal parallel markets from MCP analysis should be complemented by reasonable efforts by authorities to eliminate such markets and stronger emphasis on exchange restrictions in Fund surveillance.
- Potentiality doctrine:
- Endorsement to eliminate finding MCPs based on potentiality; an MCP should arise only if official action resulted in an actual exchange rate spread on the member’s territory exceeding the permissible margin.
- Support for excluding broken cross‑rates from policy remit.
- Capital account linkages:
- Most Directors: MCPs applying solely to the capital account are not a breach under Article VIII, Section 3 and are not subject to Fund approval.
- Agreement to clarify linkages between the MCP policy and the Institutional View (IV) on liberalization and management of capital flows; where MCPs also constitute capital flow management measures, they should be assessed under the IV (policy advice, without changing members’ rights and obligations under the Articles of Agreement).
- Some Directors open to considering inclusion of MCPs on capital account transactions within Fund jurisdiction under Article VIII, Section 3, noting materiality and distortionary effects.
- Permissible spreads and benchmarks:
- Support to replace the fixed two‑percent rule with a country‑specific market‑based norm applied uniformly across the membership.
- Proposed benchmark: the range between the most depreciated and most appreciated exchange rates in the wholesale market on a given day.
- Most Directors agreed that a two‑percent tolerance margin around the mid‑point of this range would avoid capturing insignificant deviations, though a few Directors preferred a higher margin.
- Non‑spot transactions to be treated analogously using staff‑proposed methodologies.
- Implementation: most Directors supported retaining that a single breach constitutes an MCP; some Directors called for flexibility based on materiality.
- Temporary approval for non‑BOP reasons:
- Many Directors endorsed removing the possibility of temporary approval for MCPs maintained for non‑BOP reasons to better align MCP and exchange restriction approval policies.
- Many other Directors considered allowing MCPs for non‑BOP purposes in certain situations; calls to review the policy on exchange restrictions in light of MCP changes.
- Remedial framework for unapproved MCPs:
- Most Directors favored preserving the current cooperative approach (surveillance, program conditionality, technical assistance) to encourage elimination of unapproved MCPs.
- Some Directors saw scope for more transparent reporting on unapproved MCPs.
- A few Directors open to considering a remedial framework for prolonged MCPs; others requested further analysis on need and modalities.
Implementation and next steps
- Staff will present a proposed new MCP policy to the Executive Board shortly, based on Board guidance.
- Directors supported transitional arrangements to allow adequate time for member countries to adjust policies before the revised MCP policy becomes operational.
- Directors requested further consultation, a formal proposal incorporating their views, a guidance note for staff with implementation details, and periodic reviews of the new MCP policy and its implementation.
Press Release No. PR 19203, June 10, 2019, IMF Communications Department.
