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T H E I M F I N 1 9 9 7 / 9 8
C H A P T E R V
The Asian Crisis
A s the formative event of the financial year, the
Asian financial crisis absorbed a large proportion of the
Malaysia, and the Philippines. In all of these countries,
acute exchange market pressures eventually led to the
Executive Board’s time. Directors met frequently—at adoption of more flexible exchange rate arrangements
times, daily—to be briefed on and discuss develop- and sizable depreciations of their currencies, as well as
ments in the countries at the center of the crisis and to sharp declines in asset values.
guide the work of staff and management with those In August 1997, several Directors during the Board
countries’ authorities. IMF-supported adjustment pro- discussion stressed the importance of containing exter-
grams, involving very large financial support, for nal current account deficits and reducing the reliance
Indonesia, Korea, and Thailand were approved by the on foreign borrowing—especially short-term borrow-
Board. The Board also conducted several in-depth ing denominated in foreign currency—to diminish the
reviews—particularly during its World Economic Out- risk of disruptive changes in market sentiment. In this
look and International Capital Markets discussions, and regard, Directors noted that the adoption of a strong
in the context of examining the record of IMF surveil- adjustment program by the Thai authorities and the
lance in the region (see Chapter VI)—of the broader solid demonstration of regional and international
questions prompted by the crisis: its origin, the appro- cooperation would pave the way for a restoration of
priate response of policy, the appropriate role of the confidence and a gradual return to Thailand’s charac-
international community, and the lessons to be drawn teristically strong economic performance. Several
from the experience. This chapter focuses primarily on Directors observed that to restore economic and finan-
the Board discussions on these broader issues through cial market stability, it was crucial for all countries in
the end of the financial year (end-April 1998). High- the region to pursue sound macroeconomic and struc-
lights of the IMF’s response to the crisis are detailed in tural policies, strengthen financial supervision, and
Box 1, and summaries of the evolution of IMF-sup- enhance transparency through timely disclosure of eco-
ported adjustment programs for Thailand, Indonesia, nomic and financial data.
and Korea (updated through mid-July 1998) are at the By the time of subsequent World Economic Out-
end of the chapter. look discussions, the crisis had deepened and spread to
Korea. In reviewing the reasons for the eruption of tur-
Origin and Evolution bulence and its unexpectedly strong spillover to other
The Asian financial crisis took place against the back- countries, Directors noted that a number of elements
drop of severe financial market pressures in several had played a role. These included, somewhat ironically,
Asian economies, linked in part to concerns about their the strong economic performance of the affected coun-
weak financial systems, large external deficits, inflated tries in recent decades, which had helped attract large
property and stock market values, maintenance of rela- capital inflows during the 1990s. The inflows had ulti-
tively fixed exchange rates, and overdependence on mately put heavy demands on economic policies and
short-term capital flows—which tended to be allocated institutions, including those intended to promote mon-
to less-productive investment. In addition, shifts in etary stability and financial sector soundness. The
competitiveness associated with wide swings in the strength of past performance, moreover, was felt by
yen/dollar exchange rate were also a contributing fac- many Directors to have contributed to initial delays in
tor. The pressures were most acute in Thailand, where the implementation of remedial action. External influ-
fragilities in the financial sector heightened concerns ences had also played an important role. The apprecia-
about the sustainability of the pegged exchange rate tion of the U.S. dollar—to which the currencies of
arrangement. Spillover effects from the crisis were felt most of these countries were pegged—and slower
by other countries in the region, notably Indonesia, export market growth had contributed in 1996–97 to
ANNUAL REPORT 199 8 23
THE IMF IN 1997/98
Box 1
The IMF’s Response to the Asian Crisis
In seeking to restore confidence in the
region in the wake of the Asian crisis, Commitments of the International Community and Disbursements of the
the IMF responded quickly by: IMF in Response to the Asian Crisis, as of July 23, 19981
• helping the three countries most (Billions of U.S. dollars)
affected by the crisis—Indonesia, Commitments
________________________________________________ IMF
Korea, and Thailand—arrange pro-
Country IMF Multilateral2 Bilateral3 Total Disbursements
grams of economic reform that
could restore confidence and be sup- Indonesia 11.2 10.0 21.14 42.3 5.0
ported by the IMF. The Philippines’ Korea 20.9 14.0 23.3 58.2 17.0
existing IMF-supported program Thailand 4.0 2.7 10.5 17.2 2.8
was extended and augmented in Total 36.1 26.7 54.94 117.7 24.8
1997, and a Stand-By Arrangement
was approved in 1998; 1IMF commitments to the Philippines are not included.
• approving some SDR 26 billion of 2World Bank and Asian Development Bank.
3Bilateral contributions to Indonesia and Korea were a contingent second line of defense.
IMF financial support for reform
4Estimate; amount of new commitments not finalized as of July 23, 1998.
programs in Indonesia, Korea, and
Thailand and spearheading the
mobilization of some $77 billion of
member countries in terms of • provided staff support to coordinate
additional financing commitments
approval time and access. This was efforts by international creditor
from multilateral and bilateral
followed by close monitoring of per- banks and debtors in the affected
sources in support of these reform
formance under the programs on a countries to resolve the severe pri-
programs in 1997. In mid-1998, the
continuing basis and the approval of vate sector financing problems at the
IMF’s committed assistance for
a number of adaptations to the origi- heart of the crisis;
Indonesia was augmented by SDR 1
nal programs in light of developing • posted on the IMF website—with
billion, with an estimated $5 billion
circumstances; the consent of the governments of
from multilateral and bilateral
• created the Supplemental Reserve Indonesia, Korea, and Thailand—
sources. Of the commitments to all
Facility to help members experienc- their Letters of Intent, describing in
three countries, some SDR 18 bil-
ing exceptional balance of payments detail their IMF-supported pro-
lion had been disbursed by the IMF
difficulties owing to a large short- grams, so that details of the pro-
by July 23, 1998. (See table.); and
term financing need resulting from a grams would be readily available to
• intensifying its consultations with
sudden loss of market confidence; all interested parties; and
other members both within and out-
• stepped up coordination with other • reinforced means of communication
side the region that, although not
international financial institutions, with officials and support for their
necessarily requiring IMF support,
notably the World Bank and the efforts at consensus building
were affected by the crisis and
Asian Development Bank, and with through the appointment of former
needed to take policy steps to ward
bilateral donors, to augment interna- IMF Deputy Managing Director
off contagion.
tional support for the affected coun- Prabhakar Narvekar as Special Advi-
To implement its response to the cri- tries’ economic reform programs; sor to the President of Indonesia;
sis, the IMF: • strengthened its dialogue with a vari- the establishment of resident repre-
• used the accelerated procedures ety of constituencies in the program sentative posts in Korea and Thai-
established under the Emergency countries, including consultations land (in addition to the existing post
Financing Mechanism and the with opposition and labor groups in Indonesia); and the work of the
exceptional circumstances clause to and extensive contacts with the press IMF’s new Asia and Pacific Regional
meet the exceptional needs of the and the public; Office (see Chapter VI).
worsening the external positions and growth perfor- mentals no longer supported them—constraining the
mance of the countries in deepest crisis. Also, interna- response of monetary policy to overheating pressures.
tional investors, in their drive for higher rates of return, Investors had also viewed pegged exchange rates as
had underestimated the risks in some emerging market implicit guarantees of exchange value, which, together
economies. with implicit guarantees of support to the banking sec-
Directors agreed, however, that policy weaknesses tor, had encouraged external borrowing and excessive
in the affected countries had been the most important foreign exchange exposure, often at short maturities.
contributor to the sudden shifts in market sentiment. Inadequate banking regulation, supervision, and pru-
In particular, inflexible exchange rate arrangements dential rules had contributed to the inefficient inter-
had been maintained for too long—even when funda- mediation of these funds, resulting in fragile balance
24 ANNUAL REPORT 1998
THE ASIAN CRISIS
sheets of many banks and nonfinancial corporations. external short-term loans in cases where the repay-
Excessive government intervention and problems ment of such loans risked worsening downward
with data availability had also—to varying degrees— pressures on the exchange rate.
impeded market discipline on resource allocation and • Weaknesses in the financial sector needed to be
on the volume of capital investment, further distorting addressed through bold and comprehensive mea-
the deployment of capital inflows from abroad as well sures to dispel uncertainties. Although it was neces-
as domestic financial resource intermediation. Signifi- sary to ensure adequate protection for small deposit
cant delays in confronting the problems and adopting holders, insolvent institutions had to be closed to
the requisite monetary policy and structural reform facilitate an early restoration of confidence. Weak
measures had compounded the affected countries’ but viable institutions had to be restructured and
economic difficulties and the associated contagion recapitalized in ways that were fully transparent and
effects. did not inappropriately shield creditors and equity
holders from losses or exacerbate problems of moral
Appropriate Policy Response hazard.
At their December 1997 discussion, Directors empha- • Public and corporate governance had to be strength-
sized that the main responsibility for resolving the ened to enhance transparency and accountability,
turmoil in Asia rested with the affected countries. and data—especially financial and banking sector
Hesitation in implementing the needed adjustment indicators—had to be provided on an accurate and
and reform measures would only worsen the crisis and timely basis.
exacerbate overshooting in financial markets and con- Directors noted in December 1997 that the pro-
tagion to other countries. In this context, a number longed crisis in Southeast Asia and East Asia had
of Directors questioned the adequacy of the commit- raised the prospect that other emerging market
ments of the authorities in some of the affected countries, which had already experienced some
countries, arguing that this had added to market tur- spillovers, could experience an intensification of
bulence. All Directors agreed that bold actions to financial market pressures. While reform efforts had
address key policy weaknesses were indispensable for been strengthened considerably among developing
restoring confidence and preparing the ground for a countries in recent years, a number of countries
solid rebound from the current difficulties. They remained vulnerable to reversals of market sentiment.
stressed four areas for action: The policy requirements in these countries were similar
• Domestic and foreign investors needed to be reas- to those in the countries that had already been affected.
sured that macroeconomic stability would be In addition, several Directors thought that some other
restored. Directors agreed that the required degree emerging market countries should consider whether
and composition of fiscal adjustment had to strike a greater exchange rate flexibility might help to reduce
balance between several objectives, including the the risk and cost of possible speculative attacks on their
need to contribute sufficiently to current account currencies. Directors agreed that, whichever exchange
adjustment and to meet the costs of financial system arrangement countries chose to follow, protection
restructuring, while avoiding excessive compression against currency market turmoil was likely only if it
of domestic demand. Some Directors questioned the were fully supported by strong macroeconomic policies
need for significant tightening of fiscal policy since and robust financial systems.
the Asian economies in crisis generally did not suffer During their March 1998 discussion, Directors
from fiscal imbalances. affirmed their support for the programs put in place to
• Monetary policies had to be kept sufficiently firm restore confidence in the affected countries, including
to resist excessive depreciation of the exchange rate measures to strengthen financial sectors, correct macro-
and its inflationary consequences, while ensuring economic imbalances, and improve data availability,
that domestic demand was not unduly squeezed transparency, and governance. Such measures were
and the banking sector not overly strained. Some seen as the most effective means of addressing the
Directors stressed the need for a strong, early mon- causes of the crisis, limiting and reversing currency and
etary tightening to restore market confidence stock market overshooting, and restoring sustainable
quickly, while the requisite banking and other struc- growth.
tural reform measures were getting under way. Directors observed that delays in adopting and
Directors agreed that as confidence was restored, implementing reform packages had, in some countries,
monetary conditions should be allowed to ease— heightened the panic, deepened the crisis, and delayed
with a gradual lowering of interest rates—to help its resolution. Delays in implementing critical reforms
support activity, but they emphasized the danger of in Indonesia, in particular, had put stabilization and
premature easing. It was important to encourage recovery in doubt. Korea and Thailand, in contrast,
financial institutions and corporations to roll over had made good progress in stabilizing financial mar-
ANNUAL REPORT 199 8 25
THE IMF IN 1997/98
kets and in beginning to rebuild confidence through international financial institutions, and the official
concrete, timely measures backed by the strong resolve sector should not assume the burden of financial sup-
and the consistent message conveyed by the authori- port alone; private sector creditors should play a part
ties. Directors broadly agreed that the Asian crisis as well.
countries would record substantial turnarounds in Concerns about the IMF’s ability to contain finan-
their current account balances in 1998, from deficit to cial crises and about moral hazard were reflected in the
surplus, as domestic demand declined and improved Executive Board’s decision, in December 1997, to
international competitiveness boosted net exports. adopt the Supplemental Reserve Facility (SRF) (see
Nevertheless, many Directors emphasized that the Chapter VIII). SRF financing carries higher interest
affected countries had to continue to undertake the rates than are charged on other IMF financing to
necessary adjustment, especially in restructuring finan- encourage early repayment, to minimize the risk of
cial systems. moral hazard, and to ensure that only those countries
with a compelling need will seek recourse to the facil-
Role of the International Community ity. In addition, the decision establishing the new facil-
While financial market conditions remained unsettled, ity states that a member using IMF resources under the
a number of Directors emphasized during their decision is encouraged to seek to maintain participation
December 1997 discussion that the authorities in the of creditors, both official and private, until the pressure
major industrial countries should be cautious in con- on the balance of payments ceases. It also states that all
sidering any further tightening of monetary policy. options should be considered to ensure appropriate
Most Directors felt that further tightening should be burden sharing. Similarly, in their February 1998 dis-
put on hold, particularly given the prospect in most cussion of IMF policy on sovereign arrears to private
cases of continuing subdued inflation. Some Directors creditors (see Chapter VIII), Directors emphasized the
felt, however, that domestic monetary policy should need to involve private creditors at an early stage of the
aim solely at dealing with the condition of the domes- crisis to ensure adequate burden sharing and limit
tic economy. moral hazard.
Directors called for resolute action by the Japanese At its April 1998 meeting, the Interim Committee,
authorities to address the strains in Japan’s financial while noting the difficult issues involved, requested the
sector, including through the closure of insolvent Board to intensify its consideration of possible steps to
institutions, and the well-targeted use of public funds strengthen private sector involvement, suggested differ-
to assist in urgently needed restructuring. Most Direc- ent mechanisms for meeting this objective, and asked
tors also called for modest expansionary fiscal measures the Board to report on all aspects of its work in these
in Japan to help avoid any further withdrawal of fiscal areas at the fall meeting of the Committee.
stimulus until recovery was reestablished. Directors
also emphasized the need to speed up deregulation Early Lessons from Experience
to enhance domestic investment opportunities, In their regular review of members’ policies in the
thereby reducing Japan’s persistently large external context of IMF surveillance, Executive Directors drew
surplus. several major lessons from the Asian financial crisis
Directors welcomed the fact that, despite the seri- (see Chapter VI). In addition, during their March
ousness of the issues confronting many of the Asian 1998 World Economic Outlook discussion, Directors
economies, growth in North America and Europe had pointed to the need for the international community
been sustained and was likely to provide support for the to make greater efforts to identify emerging vulnera-
global economy in the period ahead. This meant that bilities for preemptive action; at the same time, they
the economies in difficulty would benefit from a rela- recognized that it was impossible to detect all
tively favorable external environment. Directors incipient banking and exchange market crises. They
stressed that, given the medium-term growth potential thought that study of the Asian financial crisis could
of the countries at the center of the crisis, they could provide useful inputs for developing “vulnerability
reasonably expect to regain market confidence once indicators” and early warning signals of imminent
their authorities had addressed structural weaknesses— crises. Some Directors, however, were concerned
especially in the financial sector. about the reliability of such indicators in view of the
In discussing the role of the international organiza- complexity of the elements contributing to crises.
tions in helping contain the crisis, several Directors They stressed that the recent experience amply demon-
were concerned about the possible moral hazard strated the importance of accurate and timely provi-
implications of the current crisis resolution mecha- sion of information and, therefore, underscored the
nisms. They stressed the importance of ensuring to need for continued improvements in the coverage,
the maximum extent that IMF financing did not timeliness, and quality of financial statistics, including
serve to bail out private creditors. The IMF, other indicators of bank profitability, interest rate spreads,
26 ANNUAL REPORT 1998
THE ASIAN CRISIS
levels of nonperforming loans, and indicators of com- support the necessary improvement in the large cur-
petitiveness. They also called for further study of the rent account deficit, and cover the interest costs of
contagion process. financial restructuring;
One lesson that Directors drew from the crisis was • a new framework for monetary policy in line with
that countries had to prepare carefully for the liberal- the new managed float regime; and
ization of capital account transactions to enjoy the • structural initiatives to increase efficiency, deepen
benefits of access to global markets while reducing the the role of the private sector in the Thai economy,
risk of disruption. Important preconditions for success- and reinforce its outward orientation, including civil
ful liberalization were consistent domestic policies, a service reform, privatization, and initiatives to attract
sound financial system, and the removal of economic foreign capital.
distortions, as well as progress in transparency and dis- The program was modified in a Letter of Intent on
closure on the part of governments and financial insti- November 25, 1997, in light of the baht’s subsequent
tutions. Some Directors suggested that emerging larger-than-expected depreciation, a sharper slowdown
market countries—at least during a period of transition than anticipated in the economy, and severe adverse
that might have to be relatively long—should adopt regional economic developments. The modifications
market-based safeguards aimed at limiting the exposure included:
of financial and corporate sectors to reversals of short- • additional measures to maintain the public sector
term capital movements. This would reduce the risk surplus at 1 percent of GDP;
that capital inflows could become a source of difficulty, • establishment of a specific timetable for implement-
rather than a benefit. ing financial sector restructuring, including strategies
Some Directors also remarked that, while currency for the preemptive recapitalization and strengthen-
pegs had served many countries well, it was important ing of the financial system; and
to weigh the costs and benefits of these arrangements in • acceleration of plans to protect the weaker sectors of
the future, and in some cases design exit strategies. society.
Some other Directors, however, cautioned, that a move The program was further modified in a Letter of
toward greater exchange rate flexibility should not be Intent on February 24, 1998, and again on May 26,
regarded as a prescription for averting a financial crisis. 1998, to give clear priority to stabilizing the exchange
Attention had to be paid to ensuring the consistency of rate while limiting the magnitude and the negative
the overall policy framework in order to maintain confi- social impact of the larger-than-expected economic
dence and avoid excessive currency depreciation; this downturn and to set the stage for Thailand’s return to
included the establishment of an alternative monetary the international financial markets. The modifications
anchor or inflation target and a preemptive strengthen- provided, among other things, for:
ing of the banking system. • accelerating financial system restructuring, including
the privatization of the four banks in which the
Thailand, Indonesia, and Korea: Evolution authorities had intervened;
of IMF-Supported Adjustment Programs • adjusting fiscal policy targets from a targeted public
sector surplus of about 1 percent of GDP to a deficit
Thailand of 3 percent of GDP, allowing automatic stabilizers
The Asian financial crisis started in Thailand with the to work, and in part to finance higher social
baht coming under a series of increasingly serious spending;
attacks in May 1997, and the markets losing confidence • ensuring an adequate availability of credit to help
in the economy. In the face of these pressures, the foster an economic recovery, while maintaining a
authorities ceased on July 2 to maintain the exchange tight monetary stance to support exchange rate
rate peg. And on August 20, 1997, the Executive stability;
Board approved financial support for Thailand of up to • improving governance in both the corporate and
SDR 2.9 billion, equivalent to 505 percent of Thai- government sectors;
land’s quota, over a 34-month period. • strengthening the social safety net;
The initial program of economic reform featured: • bringing the legal and regulatory framework, includ-
• financial sector restructuring, focusing first on the ing the bankruptcy law, in line with international
identification and closure of unviable financial insti- standards and consistent with the smooth implemen-
tutions (including 56 finance companies), interven- tation of corporate debt restructuring and the overall
tion in the weakest banks, and the recapitalization of economic program; and
the banking system; • further deepening the role of the private sector,
• fiscal measures equivalent to about 3 percent of including through initiatives to attract foreign capital.
GDP, to shift the consolidated public sector deficit Table 4 shows selected economic indicators for
into a surplus of 1 percent of GDP in 1997 /98, to Thailand.
ANNUAL REPORT 199 8 27
THE IMF IN 1997/98
Indonesia
Table 4 The shift in financial market senti-
Thailand: Selected Economic Indicators, as of July 23, 1998 ment that originated in Thailand
1995 1996 19971 19982
exposed structural weaknesses in
Indonesia’s economy, notably the
Percent change weakness of the banking system and
Real GDP growth 8.8 5.5 –0.4 –4.0 to –5.5 the large amount of unhedged short-
Consumer prices (end of period) 7.4 4.8 7.7 10.0 term foreign debt owed by the cor-
Percent of GDP; a minus sign signifies a deficit porate sector. On November 5, 1997,
Central government balance 3.0 2.4 –0.9 –2.4 the Executive Board approved finan-
Current account balance –7.8 –7.9 –2.0 6.9 cial support of up to SDR 7.3 billion,
Billions of U.S. dollars equivalent to 490 percent of Indone-
External debt 82.6 90.5 91.8 89.7 sia’s quota, over the next three years.
Of which: short-term debt 41.1 37.6 29.9 22.8
The initial program of economic
Percent of GDP
reform envisaged:
External debt 49.1 49.9 59.6 72.5
• stabilizing the rupiah by retaining
Data: Thai authorities; and IMF staff estimates. Central government balance data are for financial a tight monetary policy;
years (October 1 to September 30). • financial sector restructuring,
1Estimate.
2May 1998 program. including closing unviable institu-
tions, merging state banks, and
establishing a timetable for dealing
with remaining weak institutions
* * * and improving the institutional, legal, and regulatory
Chronological Highlights framework for the financial system;
• structural reforms to enhance economic efficiency and
1997 transparency, including liberalization of foreign trade
August 11 With negotiations on an adjustment and investment, dismantling of domestic monopolies,
program well advanced, the IMF con- and expanding the privatization program; and
venes a meeting of interested countries • fiscal measures equivalent to about 1 percent of GDP
in Tokyo; total support pledged for in 1997 /98 and 2 percent in 1998/99, to yield a pub-
Thailand eventually reaches about lic sector surplus of 1 percent of GDP in both years,
$17.2 billion. to facilitate external adjustment and provide resources
August 20 The Board approves an SDR 2.9 billion to pay for financial restructuring. The fiscal measures
Stand-By Arrangement for Thailand included cutting low-priority expenditures, including
and releases a disbursement of SDR 1.2 postponing or rescheduling major state enterprise
billion. infrastructure projects; reducing government subsi-
October 17 The Board reviews the Stand-By dies; eliminating value-added tax (VAT) exemptions;
Arrangement under the Emergency and adjusting administered prices, including the
Financing Mechanism procedures. prices of electricity and petroleum products.
November 25 Thailand issues a Letter of Intent detail- Against the background of a continuing loss of con-
ing additional measures. fidence in the Indonesian economy and further sharp
December 8 The Board completes the first review declines in the value of the rupiah, owing in part to a
under the Stand-By Arrangement and lack of progress in implementing the program and to
disburses SDR 600 million. uncertainty with respect to the government’s commit-
1998 ment to the program, the Indonesian authorities
February 24 Thailand issues a Letter of Intent announced a reinforcement and acceleration of the pro-
describing further measures. gram in a new Memorandum of Economic and Finan-
March 4 The Board completes the second review cial Policies on January 15, 1998. Key reinforcing
under the Stand-By Arrangement and measures included:
disburses SDR 200 million. • canceling 12 infrastructure projects and revoking or
May 26 Thailand issues new Letter of Intent. discontinuing financial privileges for the IPTN’s
June 10 The Board completes the third review (Nusantara Aircraft Industry’s) airplane projects and
under the Stand-By Arrangement, the National Car project;
approving a disbursement of SDR 100 • strengthening the bank and corporate sector restruc-
million and concluding the 1998/99 turing effort, including the subsequent announce-
Article IV consultation. ment of a process to put in place a framework for
28 ANNUAL REPORT 1998
THE ASIAN CRISIS
creditors and debtors to deal on a voluntary, case-by- program by the Executive Board; and provision for
case basis with the external debt problems of Indone- frequent reviews of the program by the Board.
sian corporations, the establishment of the Indonesian The government issued a Second Supplementary
Bank Restructuring Agency (IBRA), and a govern- Memorandum of Economic and Financial Policies on
ment guarantee on bank deposits and credits; June 24, 1998, after the economic situation was made
• limiting the monopoly of the national marketing worse and the economic program driven off track by
board (BULOG) to rice, deregulating domestic social disturbances and political change in May. The
trade in agricultural produce, and eliminating restric- envisaged measures gave high priority to strengthening
tive market arrangements; the social safety net, comprehensively restructuring the
• adjusting the 1998/99 budget—to provide for a banking system, and repairing the weakened distribu-
public sector deficit of about 1 percent of GDP—in tion system. They included:
order to accommodate part of the impact on the • increasing social expenditure to 7.5 percent of
budget of the economic slowdown; and GDP, with provision for, among other things,
• taking steps to alleviate the suffering caused by the food, fuel, medical, and other subsidies (to be
drought, including ensuring that adequate food sup- phased out after the economy had begun to
plies were available at reasonable prices. improve); the expansion of employment-generat-
Subsequently, owing to policy slippages, continuing ing programs, supported by the World Bank,
uncertainty about the government’s commitment to Asian Development Bank, and bilateral donors;
elements of the program, and other developments, the and aid to students;
rupiah failed to stabilize, inflation picked up sharply, • measures to limit the budget deficit to 8.5 per-
and economic conditions deteriorated. The govern- cent of GDP, a level that could be financed with
ment issued a Supplementary Memorandum of Eco- foreign funds, including cuts in infrastructure
nomic and Financial Policies on April 10, 1998, projects and improvements in the efficiency of
adapting the macroeconomic policies to the deterio- state-run operations;
rated economic situation and further expanding the • rehabilitating and strengthening the distribution
structural and banking reforms agreed in January. The system, following the disruption caused by social
envisaged measures included: disturbances, to ensure adequate supplies of essen-
• a substantial strengthening of monetary policy aimed tial commodities—including the establishment of
at stabilizing the rupiah; a special monitoring unit to identify potential
• accelerated bank restructuring, with IBRA to con- shortages of foodstuffs or distribution bottlenecks;
tinue its takeover or closure of weak or unviable • restructuring the banking system by strengthen-
institutions and be empowered to issue bonds to ing relatively sound banks—partly through the
finance the restoration of financial viability for quali- infusion of new capital—while moving swiftly to
fied institutions; the elimination of existing restric- recapitalize, merge, or effectively close weak
tions on foreign ownership of banks; and the banks, and maintaining the commitment to guar-
issuance of a new bankruptcy law; antee all depositors and creditors. The authorities
• an extensive agenda of structural reforms to increase would also establish a high-level Financial Sector
competition and efficiency in the economy, reinforc- Advisory Committee to advise on the coordina-
ing the commitments made in January and including tion of actions for bank restructuring;
the further privatization of six major state enterprises • establishing an effective bankruptcy system, as an
already listed and the identification of seven new essential part of the corporate debt-restructuring
enterprises for privatization in 1998/99; strategy envisaged by the June 4 agreement
• accelerated arrangements to develop a framework with between the government and creditor banks on
foreign creditors to restore trade financing and resolve debt restructuring; and
the issues of corporate debt and interbank credit; • strengthening the monitoring of the economic
• strengthening the social safety net through the tem- program.
porary maintenance of subsidies on food and other Table 5 shows selected economic indicators for
essentials, through support for small and medium- Indonesia.
sized enterprises, and through public works pro- * * *
grams; and
• enhancing the implementation and credibility of the Chronological Highlights
program through daily monitoring of the reform pro- 1997
gram by the Indonesian Executive Committee of the November 5 The Executive Board approves a Stand-
Resilience Council, in close cooperation with the By Arrangement for Indonesia authoriz-
IMF, the World Bank, and the Asian Development ing drawings of up to SDR 7.3 billion,
Bank; substantive actions prior to approval of the and disburses SDR 2.2 billion.
ANNUAL REPORT 199 8 29
THE IMF IN 1997/98
financing for the program will be
Table 5 made available, in part through an
Indonesia: Selected Economic Indicators, as of July 23, 1998 informal arrangement among bilat-
eral creditors that involves debt
1995 1996 19971 19982
rescheduling or the provision of new
Percent change money—for total additional financ-
Real GDP growth 8.2 8.0 4.6 –13 to –14 ing of more than $6 billion, includ-
Consumer prices (end of period) 9.0 6.6 11.6 80.6 ing the increase in IMF financing.
Percent of GDP; a minus sign signifies a deficit
Central government balance 0.9 1.2 –0.9 –8.5
Korea
Current account balance –3.2 –3.3 –1.8 1.6 Over a number of decades, Korea
Billions of U.S. dollars transformed itself into an advanced
External debt 107.8 110.2 136.1 135.0 industrial economy. Economic over-
Of which: short-term debt 9.5 13.4 18.8 ... heating, however, led to an increase
Percent of GDP in structural problems; in particular,
External debt 53.3 48.5 64.5 162.7 the financial system was undermined
by excessive government interference
Data: Indonesian authorities; and IMF staff estimates. Fiscal and external sector data are for in the economy, close linkages
Indonesian fiscal years (April 1 to March 31).
1Estimate.
between banks and conglomerates,
2June 1998 program. an inadequate sequencing of capital
account liberalization, and the lack
of prudential regulation that should
accompany liberalization. As the
1998 Asian financial crisis spread in the latter part of 1997, a
Mid-January IMF management visits Jakarta to con- loss of market confidence brought the country close to
sult with President Suharto on an accel- depleting its foreign exchange reserves. On December 4,
eration of reforms already agreed under 1997, the Executive Board approved financing of up to
the program, after further depreciation SDR 15.5 billion, equivalent to 1,939 percent of
of the rupiah. Korea’s quota in the IMF, over the next three years.
January 15 Indonesia issues Memorandum of Eco- The initial program of economic reform featured:
nomic and Financial Policies on addi- • comprehensive financial sector restructuring that
tional measures. introduced a clear and firm exit policy for weak finan-
cial institutions, strong market and supervisory disci-
January 26 The IMF welcomes Indonesia’s plans
pline, and more independence for the central bank.
for a comprehensive program to reha-
The operations of nine insolvent merchant banks
bilitate the banking sector and put into
were suspended, two large distressed commercial
place a framework for creditors and
banks received capital injections from the govern-
debtors to deal, on a voluntary and
ment, and all commercial banks with inadequate cap-
case-by-case basis, with the external
ital were required to submit plans for recapitalization;
debt problems of corporations.
• fiscal measures expected to yield savings equivalent
April 10 Indonesia issues a Supplementary Memo- to about 2 percent of GDP to make room for the
randum of Economic and Financial Poli- costs of financial sector restructuring in the budget,
cies on additional measures. while maintaining a prudent fiscal stance. Fiscal mea-
May 4 The Board completes the first review sures included widening the bases for corporate,
under the Stand-By Arrangement and income, and value-added taxes;
disburses SDR 734 million. • efforts to dismantle the nontransparent and ineffi-
June 24 Indonesia issues a Second Supplementary cient ties among the government, banks, and busi-
Memorandum of Economic and Finan- nesses, including measures to upgrade accounting,
cial Policies on additional measures. auditing, and disclosure standards, to require that
July 15 The Board completes the second review corporate financial statements be prepared on a con-
of the Stand-By Arrangement, disburs- solidated basis and certified by external auditors, and
ing SDR 734 million, and approves an to phase out the system of cross guarantees within
increase in IMF financing under the conglomerates;
Stand-By Arrangement by SDR 1 bil- • trade liberalization measures, including setting a
lion. The IMF also announces that timetable to eliminate trade-related subsidies and an
additional multilateral and bilateral import diversification program, as well as streamlin-
30 ANNUAL REPORT 1998
THE ASIAN CRISIS
ing and improving the trans-
parency of import certification Table 6
procedures; Korea: Selected Economic Indicators, as of July 23, 1998
• capital account liberalization mea-
1995 1996 1997 19981
sures to open up the Korean
money, bond, and equity markets Percent change
to capital inflows, and to liberalize Real GDP growth 8.9 7.1 5.5 –1 to –2
foreign direct investment; Consumer prices (end of period) 4.7 4.9 6.6 8.2
• labor market reform to facilitate Percent of GDP; a minus sign signifies a deficit
the redeployment of labor; and Central government balance 0.3 0.3 0.0 –1.7
• the publication and dissemination Current account balance –1.9 –4.7 –1.9 7.3
of key economic and financial Billions of U.S. dollars
data. External debt 119.7 157.5 154.4 163.3
As described in a Letter of Intent Of which: short-term debt 78.7 100.0 68.4 39.6
of December 24, 1997, the program Percent of GDP
was intensified and accelerated as External debt 26.4 32.5 34.9 51.5
the financial crisis in Korea wors-
ened and concerns about whether Data: Korean authorities; and IMF staff estimates. Data are for financial years (January 1 to
December 31).
international banks would roll over 1May 1998 program.
Korean short-term external debt
placed additional pressures on inter-
national reserves and the won.
Announcement of the strengthened program was immediate dangers of disruptions to the financial
accompanied by the start of negotiations between the system;
Korean government and creditor banks to extend the • increasing the range and amounts of financial instru-
maturities of short-term interbank debts. The mea- ments available to foreign investors, increasing the
sures included: access of Korean companies to foreign capital mar-
• further monetary tightening and the abolition of the kets, and liberalizing the scope for mergers and
daily exchange rate band; acquisitions in the corporate sector; and
• speeding up the liberalization of capital and money • introducing a number of measures to improve cor-
markets, including the lifting of all capital account porate transparency, including strengthening the
restrictions on foreign investors’ access to the oversight functions of corporate boards of directors,
Korean bond market by December 31, 1997; and increasing accountability to shareholders, and intro-
• accelerating the implementation of the comprehen- ducing outside directors and external audit
sive restructuring plan for the financial sector, committees.
including establishing a high-level team to negotiate In a Letter of Intent of May 2, 1998, the Korean
with foreign creditors and reducing the recourse of authorities updated the program of economic reform
Korean banks to the foreign exchange window of in view of the progress made in resolving the external
the central bank. financing crisis, on the one hand, and the even weaker
A Letter of Intent dated January 7, 1998, provided outlook for economic activity, on the other. Positive
additional details of the Korean government’s external developments included the conclusion of the restruc-
and reserve management strategies and further articu- turing of $22 billion of Korean banks’ short-term for-
lated the financial sector reform program. eign debt, a successful return to international capital
In a subsequent Letter of Intent of February 7, markets through a sovereign global bond issue of $4
1998, the macroeconomic framework was further billion, the shifting of the current account into sub-
revised and the policies that the government intended stantial surplus, and an increase in usable reserves to
to pursue for 1998 were set out. These policies, formu- more than $30 billion. The measures cited in the Let-
lated against the background of the January 29 agree- ter of Intent included:
ment between the Korean authorities and a group of • accommodation of a larger fiscal deficit of about 2
creditor banks on a voluntary debt exchange, included: percent of GDP in 1998, in light of weaker growth
• targeting a fiscal deficit of about 1 percent of GDP and through the operation of automatic stabilizers;
for 1998 to accommodate the impact of weaker eco- • measures to strengthen and expand the social safety
nomic activity on the budget and to allow for higher net, including through a widening of the coverage
expenditure on the social safety net; of unemployment insurance and increases in mini-
• moving forward to implement a broader strategy of mum benefit duration and levels, as well as a tem-
financial sector restructuring, having contained the porary lowering of minimum contribution periods;
ANNUAL REPORT 199 8 31
THE IMF IN 1997/98
• formation of an appraisal committee, including ommend to the Board a significant
international experts, to evaluate the recapitalization acceleration of the resources available to
plans of undercapitalized commercial banks; Korea—in light of Korea’s Letter of
• publication by August 15, 1998, of regulations to Intent and in the context of the
bring Korea’s prudential regulations closer to interna- progress between Korean and interna-
tional best practices, including by strengthening com- tional banks in dealing with Korea’s
pliance with existing guidelines concerning foreign external debt—and notes that the
exchange maturity mismatches; and World Bank and ADB will disburse
• further phased liberalization of the capital account, $5 billion before the year’s end.
including loosening restrictions on foreign exchange December 30 The Board approves a request by Korea
transactions, foreign ownership of certain assets, and for a modification of the schedule of
ceilings on foreign equity investment in nonlisted drawings, bringing forward part of the
companies. amounts originally scheduled for Febru-
Table 6 (previous page) shows selected economic ary and May 1998, but without chang-
indicators for Korea. ing overall access to IMF resources, and
* * * disburses SDR 1.5 billion.
Chronological Highlights 1998
January 7 Korea issues a Letter of Intent describ-
1997
ing additional measures.
December 3 The IMF notes the successful conclu-
January 8 The Board concludes the second biweekly
sion of staff discussions with the Korean
review of the Stand-By Arrangement and
authorities and the pledges of support
disburses SDR 1.5 billion.
coming from the World Bank, ADB,
and countries in the group of potential January 29 The government, Korean domestic
participants in the supplemental financ- financial institutions, and international
ing support package for Korea. banks announce a debt-rescheduling
agreement.
December 4 The Board approves an SDR 15.5 bil-
lion Stand-By Arrangement for Korea February 7 Korea issues a Letter of Intent on addi-
and releases a disbursement of SDR 4.1 tional measures.
billion. February 17 The Board completes the first quarterly
December 18 The Board concludes the first biweekly review of the Stand-By Arrangement
review of the Stand-By Arrangement and and disburses a further SDR 1.5 billion.
releases a further SDR 2.6 billion, acti- May 2 Korea issues a Letter of Intent describ-
vating the IMF’s new Supplemental ing additional measures.
Reserve Facility. May 29 The Board completes the second quar-
December 24 Korea issues a Letter of Intent, provid- terly review of the Stand-By Arrange-
ing for an intensification and accelera- ment, disbursing an additional SDR 1.4
tion of its program. The Managing billion and concluding the 1998 Article
Director announces his intention to rec- IV consultation.
32 ANNUAL REPORT 1998
C H A P T E R V I
Surveillance
C entral to the IMF’s purposes and operations is
the mandate, under its Articles of Agreement, to “exer-
analyzing the economic situation and evaluating the
stance of policies. This report is then discussed by the
cise firm surveillance over the exchange rate policies of Executive Board. At the end of the discussion, the
members.” To carry out this mandate, the IMF exer- Chairman of the Board summarizes the views expressed
cises surveillance through both multilateral and bilat- by Directors during the meeting. This “summing up”
eral means. Multilateral surveillance consists of is transmitted to the country’s authorities. It is then
Executive Board reviews of developments in the inter- released to the public—at the option of the country—
national monetary system based principally on the in the form of a Press (now “Public”) Information
staff’s World Economic Outlook reports and through Notice (see Box 3). During 1997 /98, the IMF con-
periodic discussions of developments, prospects, and cluded 136 Article IV consultations (Table 7).
key policy issues in international capital markets. Bilat- To ensure more continuous and effective surveil-
eral surveillance takes the form of consultations with lance, the Board supplements this systematic monitor-
individual member countries, conducted annually for ing of individual country developments with regular
most members, under Article IV of the IMF’s Articles informal sessions—sometimes monthly, or even more
of Agreement. The Board supplements this systematic frequently—on significant developments in selected
monitoring of individual country and global develop- countries and regions. It also meets regularly to discuss
ments with informal related discussions. world economic and financial market developments.
Traditionally, the IMF’s main focus in surveillance These continuing assessments by the Board inform and
has been to encourage countries to correct macroeco- guide the work of IMF staff on member countries and
nomic imbalances, reduce inflation, and undertake key are communicated to national authorities by Executive
trade, exchange, and other market reforms. But Directors.
increasingly, and depending on the situation in each
country, a much broader range of institutional mea- Other Means of Surveillance
sures has been seen as necessary for countries to estab- Surveillance through Article IV consultations is the
lish and maintain private sector confidence and lay the main channel for collaboration between the IMF and
groundwork for sustained growth (see Box 2). In its members. In addition, for members facing balance
1997 /98, in addition to its discussions of regular Arti- of payments difficulties, formal financial arrangements
cle IV consultations, the Board met a number of times for the immediate use of IMF resources provide a
to develop guidance in each of these areas. framework for more intensive collaboration (see Chap-
ter VIII). In some cases, members collaborate with the
Article IV Consultations in 1997/98 IMF in other ways, such as precautionary financial
Consultations under Article IV of the IMF’s Articles of arrangements, informal staff-monitored programs, and
Agreement are held with each member country, for the enhanced surveillance.
most part, every year. An IMF staff team visits the • Precautionary Arrangements. Members agree with
country, collects economic and financial information, the IMF on a Stand-By or Extended Arrangement
and discusses with the authorities the economic devel- but do not intend to use resources committed under
opments and the monetary, fiscal, and structural poli- these arrangements unless circumstances warrant.
cies they are following. The staff generally prepares a The country has the right, however, to draw on the
concluding statement for discussion with the authori- resources provided it has met the conditions agreed
ties at the end of the visit; in some instances, the con- in the arrangement. Such arrangements help mem-
cluding statement is released to the public. On its bers by providing a framework for economic policy
return to headquarters, the staff team prepares a report and highlighting the IMF’s endorsement of its poli-
ANNUAL REPORT 199 8 33
THE IMF IN 1997/98
veillance, this time focusing on the
Box 2 lessons for surveillance from the
Second-Generation Reforms Asian crisis. In their review, Direc-
Although macroeconomic stability, lib- semination of economic and finan- tors noted that the IMF’s perfor-
eralization, and the basic institutional cial data to reduce the risk of disrup- mance in identifying emerging
framework of a market economy are tive changes in investor confidence tensions in crisis-affected countries at
essential for strong growth, the IMF’s when economic or financial prob- an early stage had been mixed.
experience with its member countries lems appear; In the case of Thailand, the IMF had
has shown that deeper and broader- • helping members improve gover- expressed serious concerns about
based reforms are necessary to achieve nance by establishing a simple and
economic developments beginning
high-quality growth that is sustainable transparent regulatory environment
in 1996—concerns conveyed to the
and more equitably shared. Such and a professional and independent
reforms—so-called second-generation judicial system that will uphold the authorities in several ways, including
reforms—cover a number of areas rule of law, including property rights; through confidential contacts at the
highlighted most recently by the Asian • assisting members in redefining the highest level. Indeed, the IMF
financial crisis. role of the state in the economy as a appeared to have been more aware
The IMF, in collaboration with the positive force for private sector activ- of the risks in Thailand’s economic
World Bank, has been contributing to ity, including through the restruc- policy course than had most market
second-generation reforms in member turing and privatization of observers. In other cases in Asia,
countries through its surveillance state-owned enterprises and by gen- however, the IMF—while having
(along with other international organi- erally reducing government inter- identified critical weaknesses, partic-
zations as appropriate), technical assis- vention in areas where market forces
ularly in the financial sector—had
tance, and financing, on several fronts: provide greater efficiency;
• helping members strengthen the • helping improve the quality of pub-
been taken by surprise, owing in part
efficiency and robustness of their lic expenditure in member countries, to the lack of access to requisite
financial sectors, including through for example, through greater atten- information and also to an inability
appropriate prudential oversight; tion to education and health spend- to see the full consequences of the
• helping members enhance the trans- ing; and combination of structural weaknesses
parency of fiscal policy and practices • helping members promote greater in the economy and contagion
and the quality, timeliness, and dis- flexibility of labor markets. effects. In particular, in the case of
Korea, the IMF had not attached
sufficient urgency to the financial
cies, thereby boosting confidence in them. They also tensions that had begun developing in early 1997.
assure the country that IMF resources will be avail- With hindsight it was clear that the affected coun-
able if needed and provided the agreed conditions tries’ vulnerabilities had been underestimated, includ-
are met. ing by the markets. Directors also remarked that some
• Informal Staff-Monitored Programs. IMF staff moni- other emerging market economies had taken timely
tor the country’s economic program and regularly and sustained policy measures in the face of market
discuss progress under that program with the pressures and had been able to fend off spreading tur-
authorities; however, there is no formal IMF moil successfully. In those cases, close IMF surveillance
endorsement of the member’s policies. had been helpful. Some Directors stressed that it was
• Enhanced Surveillance. This also does not constitute unrealistic to expect IMF surveillance to detect all
formal IMF endorsement of a member’s economic problems early and prevent all crises, and that the con-
policies. Rather, the emphasis is on close and formal tagion effects of the crisis in Thailand were, to a large
monitoring by the IMF. The procedure was initially extent, unpredictable. Nevertheless, they encouraged
established to facilitate debt-rescheduling arrange- the staff, in exercising surveillance, to place increased
ments with commercial banks but has been used emphasis on the risks of contagion effects.
occasionally in other situations. Directors agreed that the experience of the past nine
In a few cases, the intensified monitoring described months had provided valuable lessons for the IMF and
above has been a prelude to an IMF-supported adjust- for the international financial community. Events were
ment program. More often, monitoring provides the still unfolding, and many issues would need revisiting,
authorities with a framework to reassure interested third including the design and implementation of IMF-
parties, such as donors, creditors, or financial markets. supported programs; the role of the IMF and other
official financing for these programs; collaboration
Lessons for Surveillance from the between the IMF and other international institutions,
Asian Crisis especially the World Bank; the role of the private sector
In March 1998, the Executive Board undertook its reg- in crisis situations; and the IMF’s policy on public
ular review of members’ policies in the context of sur- information. To this end, it was agreed early in the new
34 ANNUAL REPORT 1998
SURVEILLANCE
financial year 1998/99 that a review
of the experience with IMF pro- Box 3
grams in the Asian crisis countries Enhancing Information on Article IV Consultations
should be undertaken before the Since May 1997, the Executive Board PINs are issued on a voluntary
October 1998 Annual Meetings to has been issuing Press (now “Public”) basis, at the request of countries seek-
address questions of program orien- Information Notices (PINs) following ing to make public the views of the
tation and design, implementation, the conclusion of Article IV consulta- IMF on their policies and prospects.
and, to the extent possible, early tions with members. PINs set out: Of the 136 consultations completed
program results. The experience • a background description of the during 1997 /98, 77 resulted in the
country’s economic situation at the issuance of PINs (see Table 7). The
with the Asian crisis countries would
time of the consultation; full text of PINs is available on the
also be examined in 1998/99 as part
• the Board’s assessment of that situa- IMF’s website (http:/ /www.imf.org).
of the world economic outlook exer- tion and the country’s policies as Collections of PINs are also being
cise and in the context of the annual detailed in the Chairman’s summing published three times a year in a new
report on international capital mar- up of the Board’s discussion; and IMF publication, IMF Economic
kets. The lessons from the Asian • a table of selected economic Reviews; the first issue was released in
experience would be reflected in sev- indicators. May 1998.
eral papers addressing various aspects
of strengthening the architecture of
the international monetary system, focusing on the that access to highly sensitive data or data for which
availability and the dissemination of economic data, appropriate standards were not yet universally adopted,
transparency in members’ policies and in IMF surveil- such as prudential indicators, had to be handled care-
lance, and the role of international standards in assess- fully. Directors particularly stressed the importance of
ing countries’ policies and practices. There would also compiling timely and accurate data on short-term
be further Board discussion on establishing appropriate external debt, while recognizing that this would require
incentives for international financial flows by involving substantial statistical efforts on the part of most coun-
the private sector in forestalling or resolving financial tries concerned. It was agreed that, in cases where
crises. The IMF would be incorporating lessons from countries were unable to collect the required data,
the Asian crisis in its continuing work on orderly and technical assistance—including from the IMF in its
appropriately sequenced capital account liberalization. areas of competence—was important. In the meantime,
In addition, the experience with World Bank–IMF more attention should be paid to using and improving
collaboration, notably in the area of financial sector existing data sources, including data from the Bank for
reform, would be reviewed with the aim of identifying International Settlements.
areas with scope for improvement. More generally, considering the changing architec-
In March 1998, looking at IMF surveillance, Direc- ture of the international financial system and the variety
tors identified five main lessons. of data sources, some Directors felt that the IMF
needed to begin work with other international organi-
Lesson One zations, including national regulatory authorities and
The effectiveness of surveillance depended critically on market participants, toward developing a conceptual
the timely availability of accurate information. Direc- framework for data compilation and dissemination.
tors saw some improvement since 1995 in members’ Directors strongly urged the staff to bring to the Board’s
provision of data, both to the IMF and to the markets, attention cases where its inability to obtain the necessary
but felt that further progress was essential. The Asian data had hampered effective surveillance, and they sug-
crisis had revealed the critical importance of certain gested that ways to strengthen the IMF’s reaction to
data that had not been available, either because the such cases be explored. Some Directors suggested that
authorities had been reluctant to provide them, such as consideration be given to not concluding Article IV
reserve-related liabilities of the central bank, or because consultations where members’ willingness to provide
systems did not exist to produce timely data, such as the IMF with the data required for surveillance was in
that on private short-term debt. The crisis had also question. This view was endorsed by the Interim Com-
demonstrated that adequate provision of data to the mittee, which in its April 1998 meeting recommended
public was important for promoting transparency and that if persistent deficiencies in disclosing relevant data
strengthening market confidence. Directors empha- to the IMF seriously impede surveillance, conclusion of
sized that further efforts to strengthen members’ provi- Article IV consultations should be delayed.
sion of data to the IMF and to the public could be
realized through the Special Data Dissemination Stan- Lesson Two
dard; in both domains, the monitoring of compliance The focus of surveillance had to extend beyond short-
had to be strengthened. Several Directors cautioned term macroeconomic issues, while remaining appropri-
ANNUAL REPORT 199 8 35
THE IMF IN 1997/98
Table 7
Article IV Consultations Concluded in 1997/98
Country Board Date PIN Issued Country Board Date PIN Issued
Algeria June 27, 1997 July 23, 1997 India July 2, 1997 July 16, 1997
Angola October 8, 1997 — Indonesia July 9, 1997 —
Antigua and Barbuda December 3, 1997 December 17, 1997 Iran, Islamic
Argentina February 4, 1998 February 23, 1998 Republic of January 30, 1998 —
Armenia February 6, 1998 March 12, 1998 Ireland July 2, 1997 July 25, 1997
Israel February 11, 1998 March 10, 1998
Aruba May 19, 1997 May 27, 1997
Austria June 13, 1997 June 20, 1997 Italy March 13, 1998 —
Bahamas, the March 13, 1998 March 31, 1998 Jamaica September 8, 1997 October 2, 1997
Bahrain March 4, 1998 — Japan July 25, 1997 August 13, 1997
Bangladesh August 18, 1997 — Jordan April 23, 1998 —
Kazakhstan June 20, 1997 —
Barbados January 30, 1998 February 25, 1998
Belarus August 21, 1997 — Kiribati June 2, 1997 —
Belgium February 23, 1998 March 3, 1998 Kuwait October 15, 1997 February 3, 1998
Belize May 12, 1997 June 5, 1997` Kyrgyz Republic December 12, 1997 —
Bolivia September 10, 1997 September 19, 1997 Laos June 16, 1997 —
Latvia March 23, 1998 April 14, 1998
Botswana March 13, 1998 April 10, 1998
Brazil February 11, 1998 March 13, 1998 Lebanon December 12, 1997 —
Brunei Darussalam October 6, 1997 — Lesotho February 4, 1998 —
Bulgaria July 23, 1997 July 29, 1997 Lithuania June 25, 1997 July 14, 1997
Burundi October 8, 1997 — Madagascar September 10, 1997 October 28, 1997
Malawi September 12, 1997 —
Cambodia April 27, 1998 —
Cameroon January 7, 1998 January 21, 1998 Malaysia September 5, 1997 —
Canada January 30, 1998 February 19, 1998 Malaysia1 April 20, 1998 April 27, 1998
Cape Verde February 20, 1998 March 10, 1998 Maldives January 26, 1998 —
Chad June 13, 1997 July 15, 1997 Mali December 22, 1997 April 1, 1998
Malta May 23, 1997 —
Chile February 11, 1998 February 20, 1998
China, People’s Mauritania July 14, 1997 August 27, 1997
Republic of June 30, 1997 — Mexico September 2, 1997 —
Colombia June 6, 1997 — Moldova April 20, 1998 May 27, 1998
Comoros October 8, 1997 — Mongolia July 30, 1997 September 3, 1997
Costa Rica March 18, 1998 May 14, 1998 Morocco March 6, 1998 March 31, 1998
Côte D’ Ivoire March 17, 1998 — Mozambique April 7, 1998 April 30, 1998
Czech Republic February 13, 1998 March 6, 1998 Namibia October 22, 1997 —
Djibouti May 21, 1997 — Nepal May 28, 1997 June 13, 1997
Dominica May 23, 1997 June 27, 1997 Netherlands June 12, 1997 July 1, 1997
Dominican Republic August 21, 1997 September 17, 1997 New Zealand November 7, 1997 January 12, 1998
Ecuador September 3, 1997 — Nicaragua March 18, 1998 April 9, 1998
Egypt January 7, 1998 — Niger July 28, 1997 —
El Salvador February 20, 1998 April 6, 1998 Norway February 23, 1998 March 9, 1998
Equatorial Guinea February 2, 1998 — Pakistan October 20, 1997 November 4, 1997
Eritrea July 28, 1997 — Panama December 10, 1997 December 22, 1997
Estonia December 17, 1997 December 24, 1997 Papua New Guinea January 23, 1998 —
Ethiopia November 21, 1997 — Paraguay October 10, 1997 October 22, 1997
Finland July 14, 1997 July 23, 1997 Peru June 25, 1997 —
France October 22, 1997 November 4, 1997 Philippines March 27, 1998 —
Gabon May 21, 1997 — Poland March 16, 1998 March 30, 1998
Gambia, the October 6, 1997 — Portugal October 17, 1997 November 7, 1997
Germany August 25, 1997 August 29, 1997 Qatar June 23, 1997 —
Ghana October 31, 1997 December 1, 1997 Russian Federation May 16, 1997 —
Greece August 1, 1997 — São Tomé and Príncipe July 16, 1997 —
Grenada October 6, 1997 October 22, 1997 Senegal July 28, 1997 August 26, 1997
Guinea April 3, 1998 April 29, 1998 Sierra Leone May 5, 1997 —
Guinea-Bissau March 6, 1998 March 26, 1998 Singapore February 20, 1998 March 16, 1998
Guyana December 22, 1997 — Slovak Republic February 13, 1998 —
Hong Kong SAR January 26, 1998 February 16, 1998 Slovenia January 9, 1998 January 26, 1998
Hungary September 8, 1997 — South Africa July 11, 1997 August 25, 1997
36 ANNUAL REPORT 1998
SURVEILLANCE
Table 7 (concluded)
Country Board Date PIN Issued Country Board Date PIN Issued
Spain March 16, 1998 April 6, 1998 Turkey July 9, 1997 August 5, 1997
Sri Lanka July 23, 1997 August 5, 1997 Turkmenistan May 21, 1997 —
St. Kitts and Nevis June 18, 1997 June 26, 1997 United Arab Emirates October 8, 1997 —
St. Vincent December 3, 1997 December 17, 1997 Uganda April 8, 1998 June 11, 1998
Sudan February 27, 1998 April 13, 1998 Ukraine August 25, 1997 —
Suriname June 4, 1997 — United Kingdom October 27, 1997 November 6, 1997
Sweden August 22, 1997 September 2, 1997 United States July 28, 1997 August 4, 1997
Switzerland February 20, 1998 March 6, 1998 Uruguay June 20, 1997 —
Tajikistan December 19, 1997 — Uzbekistan July 30, 1997 —
Tanzania December 3, 1997 December 23, 1997 Vietnam February 2, 1998 —
Thailand June 13, 1997 — Yemen October 29, 1997 —
Togo January 21, 1998 February 19, 1998 Zambia October 8, 1997 —
Tunisia May 23, 1997 June 5, 1997 Zimbabwe May 21, 1997 —
1Malaysia’s 1998/99 Article IV consultation was advanced to April 20, 1998.
ately selective. There had been increased coverage and selective capital account liberalization. In this area, too,
analysis of key structural policies, especially financial Directors stressed the critical importance of accurate
sector policies, in emerging market economies since and timely data. A few speakers proposed that consulta-
1995. Problems in the financial sector were often com- tion reports systematically address progress toward capi-
plex and long in gestation, however, and many Direc- tal account liberalization. Some other Directors thought
tors felt that the IMF needed to develop more expertise that the experience of the previous nine months sug-
in their analysis, including by expanding staff resources gested that selective, well-targeted capital controls could
with the relevant experience. Noting that the IMF’s play a useful role in reducing a country’s vulnerability.
comparative advantage was in analyzing macroeco- Most Directors, however, were skeptical that introduc-
nomic developments, some Directors felt that financial ing controls in economies with already relatively open
sector restructuring should be left to other institutions, capital accounts could be helpful, beyond perhaps pro-
especially the World Bank. Others considered that, in viding temporary breathing space to put in place more
the context of the Asian crisis, such a distinction had fundamental adjustment policies.
not always been easy to draw, and that the initial inten-
sive role of the IMF in all aspects of the financial sector Lesson Three
reforms had been essential. Collaboration with other In an environment of increased financial and trade flows
institutions, it was agreed, had to be close and aimed at between countries, IMF surveillance at the country level
avoiding duplication of efforts, especially those of the should pay greater attention to policy interdependence
World Bank, as well as national supervisory authorities and to the risks of contagion. How policies in systemi-
and the BIS. Several Directors emphasized the useful- cally or regionally important countries affect other
ness of developing standards in a variety of areas that countries should receive closer attention, Directors
could help in the conduct of surveillance and provide remarked. At the same time, the vulnerability of domes-
information to markets; they suggested that IMF sur- tic conditions to external developments should be
veillance could usefully encourage members to adapt examined in bilateral consultations, with the objective of
their practices in line with international standards, such urging early, forceful action to mitigate the risks of con-
as those laid out in the Basle Committee on Banking tagion. Directors noted that multilateral surveillance
Supervision’s Core Principles on Banking Supervision. could help in identifying potential spillover effects; they
The vulnerability of many emerging market underlined the importance of more fully integrating the
economies to large capital flows was seen as underlining IMF’s multilateral surveillance exercises with its bilateral
the importance, also, of close IMF surveillance over cap- dialogue with members and ensuring that the available
ital account issues. Some Directors stressed the need to staff expertise in capital market and financial sector
monitor carefully the sequencing and the pace of moves issues was fully used in bilateral surveillance. Many
toward capital account liberalization. In particular, IMF Directors also supported a more frequent and systematic
surveillance should focus on the risks posed by the exchange of views between staff and market participants
potential reversal of large capital flows, the rapid accu- as part of surveillance; they considered that, in relevant
mulation of short-term external debt, and the impact of cases, staff reports should include a summary assessment
ANNUAL REPORT 199 8 37
THE IMF IN 1997/98
lic warnings would increase the effec-
Box 4 tiveness of surveillance. They were
IMF Regional Office for Asia and the Pacific particularly concerned that the threat
The establishment of a new Regional deputies from ministries of finance of publicity would jeopardize the
Office for Asia and the Pacific in Tokyo and central banks of 14 economies frank dialogue between the IMF and
reflects the importance of the Asia- across the region. It is the principal member countries and that public
Pacific region in the global economy new grouping aimed at strengthen- warnings could accelerate crises
and for the work of the IMF. The ing surveillance, enhancing coopera- rather than prevent them.
Director of the Office, Kunio Saito, tion, and promoting financial
administers a staff of 10. The main stability in the region. The Regional Lesson Five
functions of the Office include the Office provides the Secretariat for
The effectiveness of IMF surveillance
following: this Group.
• Regional Policy Forums. The Office • Financial Market Surveillance. The depended crucially on the willingness
is responsible for the IMF’s dialogue Office monitors and analyzes finan- of members to take its advice. A can-
with Asian policymakers that is con- cial markets in the region with a did dialogue and the ability of the
ducted through various regional pol- view to ensuring that the IMF has IMF to focus on the issues of impor-
icy forums, including the Manila timely and comprehensive knowl- tance to individual members were
Framework Group, Asia-Pacific Eco- edge of market developments and vital for effective surveillance. In
nomic Cooperation (APEC), Associ- trends. This analysis deepens the addition, Directors emphasized the
ation of South East Asian Nations IMF’s understanding of economic opportunity for IMF staff to harness
(ASEAN), and the Executives’ developments in the region and is an the opinions of the international
Meeting of East Asian and Pacific important element in strengthening
community by engaging in regional
Central Banks and Monetary surveillance.
Authorities (EMEAP), and for facili- The Office also undertakes a wide
forums more actively; they believed
tating regional and mutual surveil- range of external relations activities, the IMF should work closely with
lance activities. The Manila and facilitates the delivery of technical such forums in Asia and elsewhere
Framework Group brings together assistance and training in the region. (Box 4). Some Directors noted the
importance of peer pressure both in
regional forums and through the
of market sentiment. A few Directors cautioned that Board. Directors welcomed the IMF’s involvement in
such contacts should take into account the confidential- the discussions of the Asia-Pacific Economic Coopera-
ity of the IMF’s dialogue with members. tion Council and the Second Manila Framework Meet-
ing in Tokyo.
Lesson Four
The crucial role of credibility in restoring market confi- Government Transparency and
dence underscored the importance of transparency. In Accountability
this regard, Directors welcomed the decision by the The IMF has long provided advice and technical assis-
authorities in Indonesia, Korea, and Thailand to release tance to help foster good governance in member
the Letters of Intent to the IMF detailing their adjust- countries, including by promoting public sector trans-
ment programs. Several Directors also welcomed the parency and accountability. In recent years, increased
fact that an increasing number of countries were agree- attention has been focused on issues associated with
ing to the release of Press (now “Public”) Information good governance. In particular, in its Declaration on
Notices, summarizing the content of Article IV consul- Partnership for Sustainable Global Growth, adopted in
tations in the Board, and felt that it would be desirable September 1996, the IMF’s Interim Committee identi-
if as many countries as possible could agree to do so. fied “promoting good governance in all its aspects,
Some Directors felt that the IMF could go further in including ensuring the rule of law, improving the effi-
disseminating its views on the economic policies of its ciency and accountability of the public sector, and tack-
members; they suggested revisiting the issue of publica- ling corruption” as essential for helping economies
tion of staff reports for Article IV consultations. Some prosper. Similarly, at its April 1998 meeting, the Interim
other Directors, however, advocated a more cautious Committee, in an effort to enhance the accountability
approach, noting that maintaining confidentiality was and credibility of fiscal policy as a key feature of good
key to effective surveillance. A few Directors also sup- governance, adopted a Code of Good Practices on Fis-
ported the suggestion that if, after a period of time, a cal Transparency: Declaration on Principles.
member continued to ignore IMF warnings expressed In 1997 /98, the IMF’s Executive Board met a num-
confidentially, the IMF should, as a last resort, make ber of times to develop guidance for the institution
use of the provision of Article XII, Section 8, of its regarding governance issues and a code of good prac-
Articles of Agreement, to make its concerns known to tices for member countries in the area of fiscal
the public. But most Directors doubted that more pub- transparency.
38 ANNUAL REPORT 1998
SURVEILLANCE
Good Governance macroeconomic adjustment policies, Directors recog-
In a discussion of the IMF’s role in governance issues in nized that governance issues could influence macroeco-
May 1997, Executive Directors strongly endorsed the nomic performance and the effectiveness of those
importance of good governance for economic efficiency policies. Thus, conditionality could be attached to pol-
and growth. It was observed that the IMF’s role in this icy measures relating to governance if those measures
area was evolving pragmatically as more was learned were necessary for the achievement of the program’s
about the contribution that greater attention to gover- objectives.
nance issues could make to macroeconomic stability and In the wake of the May discussion, on July 25,
sustainable growth in member countries. Directors 1997, the Executive Board adopted guidelines address-
strongly supported the role the IMF had been playing ing the IMF’s role in governance issues.8 The guide-
in this area in recent years through its policy advice and lines seek to promote greater attention by the IMF to
technical assistance and welcomed the aim of ensuring a governance issues, in particular through:
more comprehensive treatment, in the context of both • a more comprehensive treatment in the context of
Article IV consultations and IMF-supported programs, both Article IV consultations and IMF-supported
of governance issues within the IMF’s mandate and adjustment programs of those governance issues
expertise. Directors stressed the need for evenhanded- within the IMF’s mandate and expertise;
ness in the treatment of governance issues in all member • a more proactive approach in advocating policies and
countries. Directors also felt the IMF’s efforts to the development of institutions and administrative
encourage good governance had to be supported by systems that eliminate the opportunity for bribery,
enhanced collaboration with other multilateral institu- corruption, and fraudulent activity in the manage-
tions—in particular, the World Bank—to make better ment of public resources;
use of complementary areas of expertise. • an evenhanded treatment of governance issues in all
Governance issues were, first and foremost, the member countries; and
responsibility of national authorities, Directors stressed. • enhanced collaboration with other multilateral insti-
Wherever possible, IMF staff should build on the will- tutions, in particular the World Bank, to make better
ingness of those authorities to address such issues. The use of complementary areas of expertise.
IMF’s mandate did not allow the institution to assume
the role of an investigative agency or guardian of finan- Transparency in Budgetary Operations
cial integrity in member countries. Fiscal transparency can be defined as openness toward
Directors emphasized that the IMF’s involvement in the public at large about government structure and
governance should focus on its economic aspects. The functions, fiscal policy intentions, public sector
IMF could contribute to good governance principally accounts, and projections. It means ready access to reli-
in two spheres: improving the management of public able, comprehensive, timely, understandable, and inter-
resources and supporting the development and mainte- nationally comparable information on government
nance of a transparent and stable regulatory environ- activities—including those activities undertaken outside
ment conducive to efficient private sector activities. In the government sector—so that the electorate and
this context, Directors emphasized the potential bene- financial markets can accurately assess the government’s
fits of such reforms as enhancing the transparency and current and future financial position. Noting that fiscal
accountability of public sector activities and providing a policy is a key focus of IMF surveillance, and with the
level playing field for the private sector. In addressing aim of strengthening the approach of governments to
governance issues, the IMF should be guided by an fiscal policy issues, the Executive Board took up the
assessment of whether the issue in question would have questions of transparency in government operations
significant current or potential impact on macroeco- and fiscal policy rules in October 1997. And in April
nomic performance in the short and medium term. 1998, the Board agreed on a draft code of good prac-
Directors cautioned that the IMF should remain apolit- tices in the area of fiscal transparency for submission to
ical in its dealings on issues relating to governance. At the Interim Committee.
the same time, they acknowledged that a clear delin- In their October 1997 discussion, Directors agreed
eation between the economic and political dimensions that transparency in government operations was con-
of governance was often difficult in practice: what was ducive to fiscal discipline, sound public sector manage-
important was that the IMF’s advice be based on solid ment, good governance, and improved macroeconomic
economic considerations within its mandate. performance. Moreover, in a globalized economy,
Directors emphasized that weak governance that where the costs of loss of market confidence had
threatened macroeconomic performance should be
tackled early on in reform efforts. Although the
requirement to safeguard IMF resources was primarily 8Published as IMF, Good Governance: The IMF’s Role (1997); also
addressed through the implementation of appropriate available at http://www.imf.org.
ANNUAL REPORT 199 8 39
THE IMF IN 1997/98
become increasingly clear, fiscal transparency helped At the same time, Directors cautioned that fiscal
instill confidence in a government’s economic policies. rules were not a panacea. Good economic performance
Fiscal transparency entailed setting out clear fiscal depended on the political will to implement sound
objectives, building clear institutional arrangements policies; simply promulgating rules without building
(including a proper budgetary process), using transpar- the political consensus to put in place the implied
ent and widely accepted accounting methods, and pro- sound policies was unlikely to yield the desired results.
viding timely and reliable information. The view was also expressed that it might be difficult in
The IMF should continue to help its members practice for fiscal policy rules to embody all the proper-
achieve greater fiscal transparency through surveillance, ties of the model rule outlined by the staff (i.e., that it
technical assistance, and program design, Directors be well-defined, transparent, adequate, consistent, sim-
agreed. Improving fiscal transparency was a multiyear ple, flexible enough to accommodate exogenous shocks
endeavor, and the priorities for improving transparency and cyclical fluctuations in activity, enforceable, and
could differ among countries. Therefore, the IMF efficient).9 Moreover, attempts at complying with a fis-
should pay due regard to the specific circumstances of cal rule through excessive reliance on tax rate increases
individual countries. Some Directors stressed that the and unsustainable or cosmetic expenditure cuts, or
IMF’s involvement in fiscal transparency should focus one-off measures, might tend to be counterproductive.
on issues of macroeconomic significance, and they Directors indicated that there were circumstances in
noted the need for an evenhanded approach. which fiscal rules could prove useful for countries to
Directors supported greater emphasis in the staff’s institutionalize better macroeconomic policies. Where
surveillance work on promoting transparency in gov- members were interested in formulating fiscal rules, or
ernment operations. Many favored asking the staff to incorporating them in the design of adjustment pro-
prepare a brief manual of good practices for fiscal trans- grams, Directors believed that the IMF should be pre-
parency, while some Directors expressed reservations pared to provide policy advice and technical assistance.
about establishing “best practices.” Some others con- Code of Good Practices on Fiscal Transparency. Fol-
sidered that the staff could gradually accumulate an lowing further work by the staff in light of the October
inventory of transparent practices in the context of 1997 discussion, a draft code of good practices on fiscal
Article IV consultations. Many Directors cautioned transparency was submitted for the Board’s considera-
about the resource implications of any such initiative. tion in April 1998. The underlying rationale was that
Timely and comprehensive reporting of public sector fiscal transparency could lead to better-informed public
accounts was also important. To this end, Directors debate about the design and results of fiscal policy,
urged that the coverage of fiscal accounts be extended make governments more accountable for the imple-
to the general government level and include informa- mentation of fiscal policy, and thereby promote good
tion on off-budget operations and the cost of quasi-fis- governance, strengthen credibility, and mobilize popu-
cal activities. Also, cash-based recording should be lar support for sound macroeconomic policies. Because
supplemented with accrual-based recording of transac- of the IMF’s fiscal management expertise, it was well
tions. Where possible, the authorities should publish placed to take the lead in promoting greater trans-
information on guarantees and unfunded public sector parency in this area. The draft presented to the Board
liabilities. Noting that discretionary tax relief, tax set out specific principles and practices that a govern-
exemptions, and arbitrary tax administration were ment could implement to ensure that:
among the most important problems affecting fiscal per- • roles and responsibilities in the government are
formance in many countries, Directors also stressed the clear;
need for transparent and stable tax systems and for esti- • information on government activities is provided to
mates of tax expenditures as part of the budget process. the public;
Fiscal Policy Rules. In October 1997, the Executive • budget preparation, execution, and reporting are
Board also discussed the strengths and weaknesses of undertaken in an open manner; and
fiscal policy rules. These included such permanent • fiscal information is subjected to independent assur-
restraints on fiscal policy as balanced budget or deficit ances of integrity.
rules, borrowing rules, and debt or reserve rules. Many Directors generally welcomed the draft code. Most
Directors commented favorably on the potential useful- saw merit in reaching a consensus on the broad princi-
ness of such rules in strengthening or restoring policy ples and essential elements of a transparent approach to
credibility in specific circumstances. Some also noted fiscal management and stressed the importance of mov-
the usefulness of fiscal rules and limits in the context of ing ahead with a proposed manual to address some of
common currency areas, citing the benefits for fiscal
convergence in the European Union that had accrued
from the fiscal reference values under the Maastricht 9Published as IMF, Fiscal Policy Rules, IMF Occasional Paper 162
Treaty. (1998).
40 ANNUAL REPORT 1998
SURVEILLANCE
the practical issues that could arise.
They also suggested that the code be Box 5
subject to periodic review and Code of Good Practices on Fiscal Transparency:
revision. Declaration on Principles
Directors pointed out that imple- The Code’s main provisions are as Open Budget Preparation,
mentation of the code should be tai- follows: Execution, and Reporting
lored to individual country • Budget documentation should spec-
Clarity of Roles and Responsibilities ify fiscal policy objectives, the macro-
circumstances, with recognition of
• The government sector should economic framework, the policy
the legitimate differences in
be clearly distinguished from the basis for the budget, and identifiable
approach that countries might take
rest of the economy, and policy major fiscal risks.
to improving fiscal transparency. For and management roles within • Budget estimates should be classified
countries with weaker institutions or government should be well and presented in a way that facili-
binding legal constraints, progress defined. tates policy analysis and promotes
toward achieving fiscal transparency • There should be a clear legal and accountability.
consistent with the code might take administrative framework for fiscal • Procedures for the execution and
time. The IMF had to be prepared management. monitoring of approved expendi-
to provide technical assistance, in tures should be clearly specified.
cooperation with other international Public Availability of Information • Fiscal reporting should be timely,
organizations, to those countries • The public should be provided with comprehensive, and reliable and
full information on the past, current, identify deviations from the budget.
that requested it.
and projected fiscal activity of
At its April 1998 meeting, the government. Independent Assurances of Integrity
Interim Committee adopted the • A public commitment should be • The integrity of fiscal information
Code of Good Practices on Fiscal made to timely publication of fiscal should be subject to public and
Transparency—Declaration on Prin- information. independent scrutiny.
ciples (Box 5; the full text is repro-
duced in Appendix VI), recognizing
that implementation would be affected by diversity in data dissemination practices of members that subscribe
fiscal institutions, legal systems, and implementation to the SDDS (Box 6).
capacity.
Members’ Provision of Information to the IMF
Data Issues In December 1997, the Board conducted its third
Economic policymakers and financial institutions and review of progress by members in providing data to the
markets—public and private—rely on information. IMF for surveillance. Directors noted the provision of
When underlying information about the true economic core indicators by member countries to the IMF had
and financial situation of countries, banks, and enter- continued to improve modestly (this refers to data on
prises is poor, when disclosure of available information exchange rates, international reserves, reserve or base
is limited, and when potentially damaging information money, broad money, interest rates, consumer prices,
can be disguised or withheld, national and international exports and imports, external current account balance,
financial systems work less efficiently. Thus, the inter- overall government balance, gross domestic product or
national community encourages the development and gross national income, and external debt). But they
promulgation of sound information practices, in accord expressed concern that some members did not provide
with broadly accepted international norms. these data regularly or in a timely way, and that, in a
For its part, the IMF has paid increasing attention in number of cases, lags in data provision had continued or
recent years to data issues—the comprehensiveness, even increased. Directors urged members to improve
quality, frequency, and timeliness of the data that the timeliness and frequency of their data reporting.
members provide to it, and the data that members dis- Recent experience had also suggested that the core
seminate to the public. To guide members in the latter, indicators needed to be complemented by other data in
the Board has endorsed a two-tiered approach: a Spe- light of the circumstances of individual countries, so as
cial Data Dissemination Standard (SDDS), established to increase the effectiveness of surveillance in the
in March 1996, to guide member countries that have period between Article IV consultations and to identify
or might seek access to international financial markets, emerging financial market tensions. Directors identified
and a General Data Dissemination System (GDDS), reserve-related liabilities, central bank derivative trans-
approved by the Board in December 1997, to guide all actions, private sector external debt, and prudential-
member countries. In September 1996, the IMF type bank indicators as desirable supplementary data.
opened an electronic bulletin board on the Internet Within these broad categories, Directors identified a
that provides public access to information about the number of specific data items—including forward
ANNUAL REPORT 199 8 41
THE IMF IN 1997/98
for the Special Standard and the
Box 6 General System. Some Directors sug-
Dissemination Standards Bulletin Board gested that staff papers indicate
The DSBB is a tool for market analysts board and actual data on national clearly data adjustments to help iden-
and others who track economic growth, data sites have been established, tify for the authorities the data defi-
inflation, and other economic and finan- enabling users to move directly from ciencies and required improvements.
cial developments in countries around the bulletin board to current economic
the world. It describes the statistical and financial data on an Internet site Members’ Dissemination of
practices—such as methodologies and maintained by the subscriber. (The Data to the Public
data release calendars—of countries sub- links do not indicate IMF endorse- Review of Special Data Dissemination
scribing to the Special Data Dissemina- ment of the data.) The bulletin
Standard. In their first review of the
tion Standard (SDDS) in key areas: the board can be accessed on the
real, fiscal, financial, and external sec- Internet at http://dsbb.imf.org, Special Data Dissemination Standard,
tors. It also describes steps subscribers or through the IMF’s website, in December 1997, Directors noted
have taken to improve practices to move http://www.imf.org. that the number of subscribers (43)
toward full observance of the SDDS by Subscribers to the SDDS as of had been about as expected and
the end of the transition period. the end of April 1998 are listed below; hoped that, over time, more mem-
Beginning in April 1997, electronic those for which hyperlinks were in bers would subscribe. They wel-
links (hyperlinks) between the bulletin place are indicated by an asterisk: comed the growing external use of
the Dissemination Standards Bulletin
Argentina* France Korea Singapore* Board, especially since the introduc-
Australia Germany Latvia Slovak Republic tion of hyperlinks from the bulletin
Austria Hong Kong SAR* Lithuania Slovenia* board to national data sites (see Box
Belgium Hungary Malaysia South Africa* 6). Directors believed the SDDS pro-
Canada* Iceland Mexico* Spain
Chile India Netherlands Sweden
vided incentives and a structure for
Colombia* Indonesia Norway Switzerland* improvements in data dissemination
Croatia Ireland Peru* Thailand practices; subscribers’ views on their
Czech Republic Israel* Philippines Turkey* initial experience with the Special
Denmark Italy Poland United Kingdom*
Standard had been generally positive.
Ecuador Japan* Portugal United States
Finland Directors agreed that the propos-
als for updating the SDDS were
timely, given the economic and
financial developments in Southeast
transactions (outright or arising from swaps), the matu- Asia and elsewhere. They endorsed the procedures for
rity structure of external debt, the composition of modifying the SDDS, which were in keeping with the
short-term external debt, information on foreign consultative and transparent process underlying the Spe-
exchange reserves, and information on the financial sec- cial Standard. These entailed the shifting of the data
tor. Some Directors suggested that the definition of components for countries’ reserve-related liabilities from
core data should be expanded to include these addi- an “encouraged” to a “prescribed” component and
tional data, given their critical importance in identifying adding a prescribed component for net commitments
emerging tensions at an early stage. And some Direc- under derivative positions. Some Directors expressed
tors suggested consideration of a common standard for reservations in this regard, pointing to definitional prob-
timeliness and frequency of data provided to the IMF. lems and issues of confidentiality.
On the related issue of data quality, inadequate cov- Directors agreed that the procedure for modifying
erage and deficiencies in compilation methods had the SDDS to include indicators of financial soundness
often compromised the usefulness of the reported data should await the development of standards for the dis-
and posed problems for the design and monitoring of closure of macroprudential data and should draw on
members’ programs, particularly with regard to the work of other organizations, including the BIS.
national accounts, government finance, and balance of They also agreed to consider in the next review of the
payments statistics. Directors therefore urged the staff SDDS the possibility of establishing a more precise
to continue its work on the assessment of data quality. timetable for the dissemination by subscribing coun-
Several Directors stressed the high cost of technical tries of data on international investment positions,
assistance and suggested monitoring recipient coun- which would include data on the short-term external
tries’ implementation of recommendations. Directors indebtedness of the private nonbank sector.
agreed that efforts to improve data quality must be part Directors considered that in the period ahead, the
of a broad effort to build solid statistical frameworks in credibility of the IMF and of the SDDS subscribers
member countries, consistent with efforts undertaken would depend on ensuring that subscribers had imple-
42 ANNUAL REPORT 1998
SURVEILLANCE
mented the necessary changes to their dissemination between the General System and the Special Standard.
practices so that they would fully comply with the These links were particularly helpful to countries that
Special Standard by the end of 1998. Noting that a wished to use participation in the GDDS as a step
number of current subscribers had made limited toward subscription to the SDDS. Most Directors sup-
progress in completing the outstanding actions, Direc- ported including in the General System a set of sociode-
tors urged members to implement rapidly their mographic indicators because of the importance of these
announced transition plans and asked staff to give pri- data in assessing economic developments in many coun-
ority to assisting subscribers in successfully concluding tries. Some Directors reiterated that the responsibility
the transition period. Directors agreed it would be pru- for developing social indicators should be left mainly to
dent for members intending to subscribe during 1998 other international organizations, and some expressed
to assess carefully the likelihood of fully observing the doubts about the appropriateness of including these
Special Standard by the end of the transition period. data in the GDDS. Directors agreed that the IMF
On the same point, in its April 1998 meeting, the should cooperate closely with regional and other inter-
Interim Committee emphasized the importance of sub- national organizations in developing social indicators.
scribers being in full observance of the standards by the The Board acknowledged that, as aspects of open-
end of the transition period in December 1998. ness and transparency, the issues of access and integrity
In discussing how to deal with possible nonobser- were important dimensions of the GDDS. The princi-
vance by a subscriber after the end of the transition ples embodied in these dimensions were not yet stan-
period, some Directors cited the need to differentiate dard practice in many countries, and it was therefore
between minor and serious breaches; Directors agreed appropriate that the General System focus on develop-
to reconsider the issue of possible nonobservance dur- ing these dimensions in the practices of data compiling
ing the next review of the SDDS. Although some and disseminating agencies.
Directors suggested exploring some form of cost recov- Most Directors supported a phased approach in
ery, the Board agreed that, for the present, the costs implementing the GDDS, focusing first on education
associated with the Special Standard and maintenance and training through appropriate documentation, semi-
of the associated bulletin board should not be borne by nars, and workshops (Box 7). The Board recognized
users on the grounds that the wide reach of the bulletin that the General System was an ambitious project, both
board benefited the entire international community. for the IMF and for countries that might wish to par-
General Data Dissemination System. In contrast to ticipate, and many Directors agreed that a longer-term
the Special Data Dissemination Standard, whose focus approach to implementing the General System was
is on dissemination in countries that generally already appropriate, taking into account the substantial
meet high standards of data quality, the General Data resource costs to the IMF and to countries, as well as
Dissemination System aims primarily to improve the the absorptive capacity of participating countries.
quality of data for all members. It focuses on the devel-
opment and dissemination of a full range of economic, Strengthening IMF-Bank Collaboration on
financial, and sociodemographic data with objectives Financial Sector Reform
for comprehensive statistical frameworks—comprising The IMF and World Bank have long collaborated on
national accounts for the real sector, central govern- financial sector issues (see also Appendix IV). In
ment accounts for the fiscal sector, a broad money sur- August 1997, the Board discussed this collaboration,
vey for the financial sector, and balance of payments stressing that it was crucial to maximizing the effective-
accounts for the external sector, as well as a set of ness of both institutions in helping countries strengthen
sociodemographic indicators. In December 1997, in their financial systems and saw improving this coopera-
approving the proposal to establish the GDDS, Direc- tion as an urgent priority.
tors recognized that it was an important step for all Although the 1989 agreement between the IMF
IMF members—not only in guiding the provision of and the World Bank on Bank-IMF collaboration in
data to the public, but also in encouraging improve- assisting member countries in their respective areas of
ments in the quality and accessibility of data. expertise continued to provide an appropriate overall
Directors recognized that for many countries framework, Directors felt that the roles of the two insti-
improvements in data quality were a necessary precursor tutions on financial sector issues needed to be clarified
to enhanced dissemination of data to the public and and collaboration procedures improved. They stressed
that the GDDS was a useful framework for developing a the role of collaboration in ensuring that emerging
broad range of statistics. Directors favored the General financial sector problems in all countries are promptly
System’s focus on a set of core frameworks and indica- identified, that each institution would take the lead in
tors, supplemented by improved data systems and cate- its own areas of primary responsibility, that duplication
gories; this made the General System relevant to a broad of activity in areas of mutual interest be avoided, and
range of countries and provided a clear set of links that the IMF’s macroeconomic analysis and the Bank’s
ANNUAL REPORT 199 8 43
THE IMF IN 1997/98
assessing exchange rates and strate-
Box 7 gies for moving from a fixed to a
How the GDDS Will Work flexible exchange rate regime (“exit
Participation in the General Data Dis- phase will include eight regional semi- strategies”).
semination System (GDDS), which is nars and workshops, beginning in mid-
voluntary, consists of three steps: 1998 and ending in the fall of 1999, Exchange Rate Assessments and
• commitment to using the GDDS for up to 120 member countries. Fol- IMF Surveillance
as a framework for statistical lowing the training phase, IMF staff In discussing the methodology of
development; will work directly with member coun- exchange rate assessments and its
• designation of a country coordina- tries to assist them in assessing their
application in IMF surveillance over
tor; and practice against those of the GDDS
major industrial countries, the Board
• preparation of descriptions of current and developing plans for improvement.
statistical production and dissemina- As of April 1998, some 25 countries emphasized in October 1997 that the
tion practices, and plans for short- had indicated preliminary interest in IMF, as the central institution of the
and long-term improvements in the GDDS by appointing a country international monetary system, must
these practices that could be dissemi- coordinator. Formal invitations to par- continuously seek to strengthen its
nated by the IMF on the Internet. ticipate have been sent to all member analysis and surveillance over
The GDDS will be implemented in countries that have not subscribed to exchange rate policies. The IMF had
two phases. The first will focus on edu- the Special Data Dissemination Stan- the advantage of a global perspective
cation and training, and the second on dard (SDDS) following completion of and a blend of technical expertise and
direct country work. The training guidance materials on the GDDS. practical policy experience that
enabled its staff to add value in
advancing the analytical framework
sectoral policy recommendations be fully coordinated. and making judgments on exchange rate issues. In this
In this context, the two institutions would also have to context, Directors also pointed to the need for coopera-
pay due regard to the responsibility of the Basle Com- tion with the academic community.
mittee in the area of banking supervision. Directors concurred with the view that the macro-
Many Directors remarked that they would have economic balance methodology used by IMF staff (Box
liked a clearer delineation of the spheres of responsibil- 8) complemented rather than substituted for the vari-
ity of the two institutions, while recognizing that over- ous measures of international competitiveness and
lap in some areas—especially banking supervision and financial market conditions that had traditionally played
regulation, and banking legislation—was probably a major role in IMF surveillance over members’
unavoidable. Most Directors stressed that banking sys- exchange rates and exchange rate policies. Directors
tem restructuring was the primary responsibility of the generally agreed it was not possible to identify precisely
World Bank. Nevertheless, many Directors felt that the “equilibrium” values for exchange rates and that point
IMF had to play a role in banking system restructuring estimates of notional equilibrium rates should generally
in crisis situations, especially in countries where it had be avoided. Nevertheless, they agreed that a rigorous,
been more actively involved. They emphasized, how- systematic, and transparent methodology was impor-
ever, that those instances were expected to be rare, that tant to underpin IMF surveillance. They considered the
the IMF’s involvement in such cases should be tempo- existing methodology to be a useful starting point.
rary, and that the implementation of restructuring pro- Directors emphasized that it was essential to con-
grams should be handled by the Bank. In light of the sider the appropriateness of exchange rates against the
IMF’s mandate, some Directors expected the IMF to background of prevailing cyclical positions and the
focus on the macroeconomic implications of such attainment of overall macroeconomic objectives. Devia-
reforms. But Directors hoped that the Bank, by tions of exchange rates from their medium-term equi-
strengthening its financial sector activities—including librium levels might be warranted, and even helpful, in
the establishment of the Financial Sector Board— cases of divergence in the cyclical positions of the major
would be better able to respond quickly and flexibly to industrial countries. For these reasons, Directors advo-
help design financial sector restructuring programs in cated a case-by-case approach in considering what
crisis situations. Directors also emphasized the Bank’s actions, if any, should be taken when exchange rates
role—and early involvement—in helping to identify appeared to deviate substantially from their medium-
specific benchmarks for banking system restructuring to term equilibrium values.
be incorporated in IMF financial programs. Many Directors considered that the current
methodology for assessing exchange rates could be
Exchange Rate Issues applied more broadly, in particular to nonindustrial
The Board considered two surveillance-related countries of regional importance with access to interna-
exchange rate issues in 1997/98: the methodology for tional capital markets. Some Directors recognized,
44 ANNUAL REPORT 1998
SURVEILLANCE
however, that data deficiencies and
the diversity of economic conditions Box 8
might limit the applicability of the A Methodology for Exchange Rate Assessments
methodology in the case of emerg- Oversight of members’ exchange rate saving-investment balance consistent
ing and developing economies. policies is at the core of the IMF’s sur- with medium-run fundamentals,
veillance mandate. The methodology including the assumption that coun-
Exit Strategies: Policy Options used for assessing the appropriateness tries were operating at potential
for Countries Seeking Greater of current account positions and output;
Flexibility exchange rates for major industrial • calculating the amount by which the
countries embodies four steps: exchange rate would have to
In January 1998, in their discussion
• applying a trade-equation model to change, other things being equal, to
of a staff paper10 on strategies for
calculate the underlying current equilibrate the underlying current
exiting from relatively fixed account positions that would account position with the medium-
exchange rate regimes to regimes of emerge at prevailing market term saving-investment norm; and
greater exchange rate flexibility, exchange rates if all countries were • assessing whether the estimates of
Directors acknowledged that the producing at their potential output exchange rates consistent with
choice of exchange rate regime was a levels; medium-term fundamentals suggest
complex issue that depended on the • using a separate model to estimate a that any currencies are badly mis-
specific circumstances of individual normal or equilibrium level of the aligned.
countries. Particularly relevant were
the structural characteristics of the
economy and its historical inflation performance, the therefore desirable to consider the best ways to engi-
degree of vulnerability to shocks and the nature of neer an exit.
those shocks, the extent of export and import diversifi- Directors emphasized that careful attention needed
cation, and the degree of capital account liberalization to be given, when exiting a peg, to the design of the
and exposure to global capital markets. More generally, new macroeconomic policy framework. In light of the
whatever regime was chosen, macroeconomic and many, often complex, considerations in the decision to
structural policies needed to be credibly consistent with exit—even from a position of strength—Directors
the regime, and the authorities needed to be transpar- believed that the IMF could play an important role in
ent about policy objectives and how they intended to providing timely and candid advice to member coun-
achieve them. tries on the appropriate exit strategy and the timing of
Several Directors noted that currency pegs, currency such action. Too rapid an abandonment of the peg
unions, or currency boards have served countries well could be as harmful to credibility as too protracted a
in a number of cases, including small, open economies defense of the peg was to the level of foreign exchange
and a number of developing and transition economies, reserves. It was suggested that the IMF’s regular Article
at least at some stage of their development and stabi- IV consultations with its member countries should,
lization efforts. In the case of transition economies, a when appropriate, give greater priority to discussing
few Directors noted that the balance of costs and bene- these issues.
fits tended to shift in favor of greater exchange rate Most Directors agreed that if a case for moving to a
flexibility as inflation subsided and the transition flexible regime existed, the best time to do so was dur-
proceeded. ing a period of relative calm in exchange markets or
Most Directors were of the view that the increasing when there were pressures for appreciation of the cur-
globalization of financial markets had made pegged rency, rather than when the exchange rate was under
regimes more difficult to manage. Many Directors par- downward pressure. They noted, however, that much
ticularly cited the heightened risk posed by fixed rates judgment was involved and it was often difficult to
in encouraging unhedged exposure by borrowers. make such a decision when times were good and there
While some countries, with the appropriate supportive seemed no reason to tinker with an apparently success-
policies, would continue to benefit from a fixed rate— ful regime.
it being emphasized that there was no presumption There was no question, Directors agreed, that it
that all countries would be better off with flexible was much more difficult to exit a peg during a crisis,
rates—Directors noted that some countries with fixed when some degree of exchange rate volatility was
or relatively fixed exchange rate regimes might now likely. To minimize depreciation and bolster policy
wish to move to more flexible arrangements. It was credibility in such circumstances, it was essential that a
country implement a strong and credible package of
policy measures, including macroeconomic policies
10Published as IMF, Exit Strategies: Policy Options for Countries and accelerated structural reforms, and ensure the
Seeking Greater Flexibility, IMF Occasional Paper 168 (1998). complementarity of those measures. Directors also
ANNUAL REPORT 199 8 45
THE IMF IN 1997/98
stressed the need for an alternative policy framework regulation could include short-term foreign currency
after the exit to provide an anchor for inflation borrowing by domestic corporations and reporting
expectations. requirements for foreign financial institutions.
Directors differed on how much macroeconomic
policy should be tightened in these circumstances. Monetary Policy in Dollarized Economies
Some pointed to the recent situation in East Asia as “Dollarization,” the holding by residents of a large
one where early and concerted monetary policy actions share of their assets in instruments denominated in for-
had not been sufficiently strong to prevent a continu- eign currency, is common in developing and transition
ing slide in a number of currencies in the region. Some countries. Among countries that have undertaken IMF-
other Directors noted that very high interest rates supported adjustment programs over the past 10 years,
could increase pressures on already fragile banking and almost half could be regarded as dollarized and a signif-
corporate sectors in most of these countries and could icant number of the others as largely dollarized.
risk accentuating the resulting economic contraction. In a review of the economic effects of dollarization
For similar reasons, some Directors argued that a more in January 1998, the Board agreed that in a globalized
flexible approach to fiscal policy might be desirable in economy with increasingly free capital movements and
some cases, especially in countries where fiscal policy deregulated financial markets, most countries experi-
had been on a sustainable footing before the crisis. enced some degree of dollarization—whether in the
The difficulties posed by financial sector problems form of currency substitution, asset substitution as part
for the choice of exchange rate regime were discussed of currency diversification of asset holdings, or a com-
at some length. Directors noted that financial fragility bination of the two. Several Directors saw this as a
made the defense of a pegged rate through higher benign feature of the modern economic environment,
interest rates more problematic, since higher rates to which all countries should adapt. Others were less
would exacerbate debt-servicing problems and further sure, citing such issues as the policy adaptations
weaken the financial sector. As East Asia illustrated, required to cope with the challenges posed by currency
however, depreciation of the currency after a long substitution. Although Directors agreed that dollariza-
period of exchange rate stability could also endanger tion was an important feature in the advanced countries
the soundness of financial and nonfinancial institu- as well—and would become even more so with the
tions, to the extent that they had tended not to hedge introduction of the euro—their discussion centered on
foreign currency exposures. The ideal solution was the effects of dollarization in developing and transition
clearly to strengthen prudential regulations and super- economies. In many of these countries, dollarization
vision, and limit unhedged exposure, before the exit. indicated a lack of confidence in the ability of the
Directors were divided on whether the absence of such domestic currency to perform its functions effectively.
measures merited delaying a needed move to greater
exchange rate flexibility. Some pointed mainly to the Benefits and Risks of Dollarization
further weakening of the financial and corporate sec- Dollarization was seen as presenting both benefits and
tors associated with the defense of the peg, while oth- risks for developing countries. In some circumstances,
ers noted that in some cases it was essential to begin foreign currency deposits could promote the growth of
financial restructuring and reduce unhedged foreign the domestic financial sector, for example, by allowing
currency exposure before any large exchange rate domestic banks to compete with cross-border accounts.
depreciation. Several Directors suggested that further Dollarization was sometimes the only effective way to
analysis of second-best policies for countries with less remonetize an economy in cases of extreme price insta-
than robust financial sectors would be helpful, includ- bility and capital flight. But, especially in weak and
ing ways to strengthen banking and prudential stan- immature financial systems, dollarization could increase
dards and establish clear bankruptcy legislation as risks in the financial sector. Such risks could stem from
rapidly as possible. a deterioration in the quality of the foreign currency
A number of Directors saw merit in imposing selec- loan portfolio in the case of a sharp devaluation of the
tive capital controls to limit the severity of the currency domestic currency, as well as from the limited ability of
depreciation in the aftermath of an exchange rate crisis, the central bank to act as the lender of last resort.
as well as to reduce the risks of crises in the first Countries with large cash holdings of foreign money
instance. Several other Directors, however, cautioned would also lose seigniorage revenues.
that such controls were likely to be ineffectual beyond With regard to the implications of dollarization for
the short run and could even prove counterproductive, exchange rate and monetary policy, Directors noted
by leading to a surge in capital outflows. A better that the likely higher volatility of money demand in
approach, these speakers felt, was to strengthen pru- economies with high currency substitution would tend
dential regulation and supervision of financial and non- to make the exchange rate more unstable and limit the
financial institutions. Areas to be governed by such effectiveness of monetary policy. Several Directors
46 ANNUAL REPORT 1998
SURVEILLANCE
favored the adoption of a fixed rate or a currency board their view, measures to improve the attractiveness of
arrangement supported by appropriate macroeconomic the domestic currency were generally preferable to
policies to handle these types of monetary shocks. A those for discouraging the use of foreign currency.
number of Directors, however, stressed that the degree Thus, Directors broadly agreed that dollarization
of currency substitution was only one of many elements should not be tackled by restricting residents’ ability to
to be taken into account in choosing an exchange rate maintain accounts in foreign currency or imposing
regime; also significant were such considerations as the punitive reserve requirements on foreign currency
importance of real shocks, the degree of capital mobil- deposits. Such measures would be counterproductive,
ity, the scope for fiscal adjustment, and the overall weakening financial intermediation or leading to capital
macroeconomic situation. outflows. Interest rate liberalization, measures to
What of the effects of dollarization for inflation? increase financial deepening, an effective domestic pay-
Although this was essentially an empirical question ments system, and an independent monetary authority
without a unique answer, Directors felt that the rele- were the best avenues for limiting dollarization over
vance of foreign currency aggregates should not be dis- the medium term. Also important—particularly in
counted and despite measurement difficulties, these countries with weak financial systems—was an appro-
aggregates should be included among the broader set priate sequence of financial liberalization measures,
of indicators monitored by the monetary authorities. supported by strong macroeconomic policies. Although
Some Directors thought that certain dollarized Directors recognized that indexed financial instruments
economies could suitably adopt an inflation-targeting could also limit dollarization, the risks of promoting
framework for monetary policy. inflationary inertia had to be carefully weighed when
Directors generally preferred that monetary contemplating such instruments.
operations be conducted in domestic currency. They
recognized, however, that monetary instruments Dollarization and the Design of
denominated in foreign currency could be useful in IMF-Supported Adjustment Programs
highly dollarized economies where the bulk of credits The Board stressed the need to consider the prevalence
and interbank operations were already denominated in of dollarization in designing adjustment programs sup-
that currency. Similar qualifications applied to the pro- ported by the IMF. Although dollarization had not
vision of foreign currency interbank settlement on the seriously hampered the attainment of growth and infla-
books of the central bank. In this regard, however, tion objectives, Directors argued that velocity and the
Directors advised that such operations be backed by money multiplier appeared to be more variable in dol-
ample international reserves, as well as effective mea- larized economies, pointing to potential problems in
sures to limit settlement risk. selecting intermediate monetary aggregates.
Special vigilance was needed to limit prudential risk In the Board’s view, programs should continue to
in highly dollarized economies, Directors stressed. apply conditionality in a way that would take into
Because of the impact of dollarization on credit risk, as account the presence of dollarization, rather than
well as risks to the banking system, dollarization argued attacking it directly, and to address the more funda-
for banks in developing countries to exceed Basle mental policies needed to restore confidence and the
guidelines for capital adequacy. Directors noted that a long-term credibility of the domestic currency. Pro-
central bank had limited ability to act as a lender of last grams should continue to focus on the underlying
resort in foreign currency and that sizable currency causes of dollarization, the development of domestic
reserves and contingent credit lines could usefully con- financial systems, and, where necessary, the adoption of
tribute to limiting systemic liquidity risk in these cir- prudential measures. Noting that the costs of dollariza-
cumstances. While recognizing the difficulties in tion might outweigh the benefits, a few Directors saw
monitoring limits on foreign exchange positions given greater merit in pursuing an active de-dollarization
the sophistication of financial markets, Directors strategy. In view of the uncertain duration of foreign
stressed the importance of closely monitoring off-bal- currency deposits in the banking system, the Board
ance-sheet operations, as well as the maturity and com- generally agreed that domestic banks’ reserves with the
position of foreign exchange exposures. central bank against foreign currency deposits be con-
Most Directors agreed that the focus of monetary sidered part of the central bank’s liabilities for purposes
policy should be on macroeconomic stabilization. In of measuring net international reserves.
ANNUAL REPORT 199 8 47
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