International Monetary Fund (Hansard, 4 May 1977)

§ Mr. Healey

Yes. I am glad to report that the meeting unanimously agreed upon steps to increase substantially the resources available to the International Monetary Fund for lending to Member countries. I am confident that the Managing Director and the Executive Board will now be able to complete negotiations to implement these decisions and thus enable the IMF to contribute in a practical way towards tackling the problems of recovery from recession.

Following is the text of the Communiqué issued at the end of the meeting:

Press Communiqué of the Interim Committee of the Board of Governors on the International Monetary System

1. The Interim Committee of the Board of Governors of the International Monetary Fund held its eighth meeting in Washington, D. C. on April 28–29, 1977 under the chairmanship of Mr. Willy De Clercq, Minister of Finance of Belgium. Mr. H. Johannes Witteveen, Managing Director of the Fund, participated in the meeting. The following observers attended during the Committee's discussions: Mr. G. D. Arsenis, Director, New York Office, UNCTAD; Mr. Mahjoob A. Hassanain, Chief, Economics Department, OPEC; Mr. Pierre Languetin, General Manager, National Bank of Switzerland; Mr. René Larre, General Manager, BIS; Mr. Emile van Lennep, Secretary General, OECD; Mr. Olivier Long, Director General, GATT; Mr. Robert S. McNamara, President, IBRD; Mr. François-Xavier Ortoli, Vice-President, CEC; and Mr. Cesar E. A. Virata, Chairman, Development Committee.

2. The Committee discussed the world economic outlook and the functioning of the international adjustment process.

The Committee noted the expansion of activity that has taken place in the world economy over the past year and welcomed the improvement in economic outlook during recent months following cessation of the "pause" in the industrial countries. The Committee 182W expressed concern, however, about the persistence of high levels of unemployment, especially among young people, and high levels of inflation in many countries.

I. On the broad question of the economic policy options and priorities of member countries, the Committee agreed on the following conclusions:

(a) Policies of demand management in most countries must emphasise the need to deal with problems of inflation and the balance of payments. These policies are being guided by the conviction that measures to combat inflation and, where necessary, to strengthen the external position are not only necessary in present circumstances but also will make for a better record over time in terms of economic growth and employment.
(b) At the same time, special efforts should be made to improve market access for the exports of the developing countries and to increasee the flow of official development assistance. Any tendencies toward protectionist trade policies cannot be considered acceptable from an international point of view and should be strongly resisted; indeed, increased attention should be paid to the need to reduce the existing restrictions on trade. Success in the current negotiations in Geneva would make an important contribution to this end.

II. The Committee drew the following conclusions from its review of the international adjustment process:

(a) The need for adjustment remain large and, as experience shows, delays in dealing with them can be very costly. It will take international co-operation, and determined action by surplus as well as deficit countries, to make continuing progress with respect to adjustment. An encouraging development is that a number of countries, both large and small, developed and developing, have adopted programs to strengthen their external positions, often in the context of stand-by arrangements approved by the Fund.
(b) Strategies of adjustment must include emphasis on conservation of energy, on elimination of domestic sources of inflation particularly in the deficit countries, and on improvement in cost-price relationships among countries. It is important that industrial countries in relatively strong payments positions should ensure continued adequate expansion of domestic demand, within prudent limits. Moreover, these countries, as well as other countries in strong payments positions, should promote increased flows of long-term capital exports.
(c) Given the persistence of large payments imbalances, important demands for the Fund's resources can be expected to materialise. The Committee found good grounds for believing that expansion of the Fund's rôle as a financial intermediary could contribute significantly to promotion of international adjustment and to maintenance of confidence in the continued expansion of the world economy and in the effective functioning of the international financial system.

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3. The Committee reviewed the developments in international liquidity and in the financial activities and resources of the Fund. In this connection, it had the benefit of a report of the Managing Director summarising the discussions that the Executive Directors have had to date on these subjects. As a result of this review, the Committee reached the following conclusions:

The Committee recognised that there was an urgent need for a supplementary arrangement of a temporary nature that would enable the Fund to expand its financial assistance to those of its members that in the next several years will face payments imbalances that are large in relation to their economies.

The Committee agreed that some of the main features of this supplementary arrangement would be as follows:

(i) The Fund would establish substantial lines of credit in order to be able to assist members to meet their needs for supplementary assistance.
(ii) Access to assistance under the supplementary arrangement should be available to all members and should be subject to adequate conditionality, and such assistance should normally be provided on the basis of a stand-by arrangement covering a period longer than one year.
(iii) The Fund should pay interest on amounts borrowed under the lines of credit at market-related interest rates, and charges by the Fund for the use by members of resources borrowed by it under these lines of credit should be based on these rates. The possibility of a subsidy related to the rates of charge that would be payable by low-income countries should be explored.
(iv) The claims of lenders under the supplementary arrangement should be appropriately liquid.

The Committee welcomed the willingness of a number of countries in a position to lend to the Fund to collaborate with it on arrangements for supplementary credit and urged the Managing Director to complete, as soon as possible, his discussions with potential lenders on terms and conditions and amounts. It further requested the Executive Directors to take the necessary steps for making such an arrangement operative as soon as possible.

4. The Committee considered the main issues relating to the Seventh General Review of Quotas. It was agreed that, in view of the expansion of members' international trans actions and the need for the Fund to be able to give balance of payments assistance to members on a larger scale than would be avail able on the basis of quotas under the Sixth General Review, there should be an adequate increase in the total of quotas pursuant to the Seventh General Review. On the question of distribution of quotas, one view was that in order to conclude the Seventh Review at an early date, increases should be equiproportional to the quotas that will result from the Sixth General Review. Another view, however, was that a few special adjustments should be made for those members whose quotas are seriously out of line with their relative positions in the world economy, and in this connection 184W some emphasis should be placed on increases that would strengthen the Fund's liquidity. The Committee urged the Executive Directors to pursue their work and to prepare a report, together with draft recommendations to the Board of Governors, on increases in the quotas of members under the Seventh General Review for consideration by the Committee at its next meeting.

5. The Committee also considered the question whether a further allocation of SDRs would be advisable at the present time. The Committee noted that the Executive Directors have been discussing this question and agreed to request them to give further consideration to all aspects of this matter and to report to the Committee at its first meeting in 1978.

The Committee also agreed to request the Executive Directors to review the characteristics and uses of the SDR so as to promote the purposes of the Fund, including the objective of making the SDR the principal reserve asset in the international monetary system.

6. Although the Committee discussed the proposals for supplementary credit, the Seventh Quota Review and any allocation of SDRs separately as indicated above, members of the Committee attached importance to the interrelationships among them and particularly to the overall effect of the decisions as a whole.

7. The Committee noted with satisfaction the work of the Executive Directors on the implementation of Article IV of the Proposed Amendment of the Articles of Agreement, and welcomed the consensus reached by them on the principles and proecdures for the guidance of members and for the exercise of surveillance by the Fund over the exchange rate policies of members in the period after the Second Amendment has become effective. The Committee endorsed these principles and procedures, and agreed that they will make an important contribution to the effective functioning of the international monetary system in the future.

8. The Committee noted that so far no more than 24 members of the Fund having about 32 per cent. of the total voting power have notified the Fund of their acceptances of the proposed Second Amendment of the Fund's Articles and that very few members have given their formal consents to increases in their quotas under the Sixth General Review of Quotas. The Committee expressed its concern at this delay and urged all members that have not yet accepted the proposed Second Amendment to complete as soon as possible the arrangements that would enable them to take this action and to increase their quotas under the Sixth General Review.

9. The Committee agreed to hold its ninth meeting in Washington on 24th September 1977.