Charles Applegate and Susan Fennell
Governors at the 1985 Annual Meetings generally felt that despite the past year’s significant progress toward better economic and financial conditions in the industrial and developing countries, the fragility of the world economic recovery and the persistence of the debt problem were continuing causes for concern. Delegates saw the need to manage the debt problem successfully as the principal challenge facing both debtor and creditor countries, and one that could only be met through cooperation among industrial and developing countries. In that connection, Governors stressed the importance of growth-oriented policies. The President of the World Bank, A.W. Clausen, in his address to the Governors at the start of the meetings, expressed the widely held view that the world economy was at a turning point; the first half of the decade had begun with global recession but had ended with recovery. He stressed that 1985 was the beginning of a period that must mark a shift from the rigors of recession to development and sustained growth.
Developments and priorities
Governors agreed that, since the previous Annual Meetings, progress had been made in some crucial areas: inflation had been reduced in the major industrial countries as well as in a number of developing countries, interest rates had declined, and economic growth in the industrial world had become more balanced. The agreement reached in September 1985 by France, the Federal Republic of Germany, Japan, the United Kingdom, and the United States aimed at ensuring that their exchange rates better reflected fundamental economic conditions, represented an important step toward closer cooperation and policy coordination among the major industrial countries, and was a promising response to rising protectionist pressures. Governors also noted that a number of debtor countries had made difficult adjustment efforts and that the external position of some of these countries had improved, with the economies of non-oil developing countries as a group growing by 5.6 percent in 1984, while experiencing the lowest external current account deficit in two decades.
However, Governors stressed that the world economic outlook was clouded by uncertainties. In the industrial world as a whole, economic growth had slowed by more than had been expected and unemployment remained high, while the pattern of external current account positions among major countries was unsustainable. In many debtor countries, inflation was not yet under control and adjustment had been achieved only at the cost of a contraction of imports and slow growth. Moreover, real interest rates had remained high by historical standards and external debt servicing continued to impose a heavy burden on many developing countries. The slowing of the recovery in industrial countries, the consequent shrinking of their markets and resurgence of protectionist pressures, together with the further weakening of primary commodity prices, had resulted in a slowdown of export expansion in developing countries from 8.5 percent in 1984 to an estimated 0.25 percent in 1985. The plight of sub-Saharan Africa, which had been virtually untouched by the international recovery, was stressed by all Governors. Reflecting these concerns, the Ministers of the Group of 24 (who had met just before the Annual Meetings) drew attention in their communiqué to the adverse economic, social, and political effects of the adjustment process on many developing countries.
In addressing the policy priorities for the coming years, Governors agreed with the Fund’s Managing Director, Jacques de Larosière, who noted in his opening address that “the critical challenge at present is to firm up the path of durable expansion in the world economy.” Only when growth became more robust could the debt problem be solved.
Governors stressed that industrial countries needed to build on the progress already achieved to secure widespread, sustainable, noninflationary economic growth, not only to alleviate their unemployment problems but to provide the base for a resumption of the development momentum in indebted countries. Key to an improvement of economic growth and employment in industrial countries was a reduction of fiscal imbalances. The elimination of structural rigidities, an improvement in the investment climate, and a reduction in current account imbalances would also be important to ensure a durable economic recovery. Governors welcomed recent efforts by the US Government to reduce that country’s budget deficit and noted that successful action to bring about a significant and sustained reduction in the deficit would facilitate a further decline in international interest rates. Such a decline would help to stimulate recovery in the industrial world and to ensure an orderly solution to the debt problem. Many Governors also believed that with the slowdown of economic growth in the United States, other industrial countries with strong external positions and good inflation records, such as Germany and Japan, should take a role in spurring economic growth worldwide.
Speakers urged the developing countries to persevere with domestic policies to reduce structural rigidities, lower inflation, increase the role of the private sector, mobilize domestic savings, encourage investment, and reverse capital flight. However, Governors argued that many of these countries had gone as far as they could in adjusting their economies, in terms of the social and political costs, without a further substantial injection of external finance. They called on donor governments, bilateral and multilateral agencies, and commercial banks to increase the flow of resources to support the adjustment efforts of indebted countries.
Many Governors put forward proposals on how capital flows to indebted countries could be increased. The three-point proposal presented by the Governor for the United States, indicating the need for a shift from crisis management of the debt problem to an approach aimed at stimulating sustained growth in the medium term, received particular attention. The three elements of this approach were the adoption by the principal debtor countries of comprehensive macroeconomic and structural policies, supported by international institutions, to promote growth and balance of payments adjustment; a continued central role for the Fund, in conjunction with a stronger role and greater structural adjustment lending by the World Bank and other multilateral development banks; and increased lending by commercial banks.
The growth of protectionist pressures in many countries was seen as a major factor inhibiting the adjustment efforts of developing countries. As one Governor put it, “the rise of protectionist pressures is the major and most immediate danger to the world economy.” The slowdown in world trade and the increasing number of trade restrictions had limited the ability of developing countries to generate export revenues and service their external debt. Accordingly, Governors stressed that governments must not only resist protectionist pressures but also make progress in rolling back existing barriers. Governors welcomed the proposed new round of trade negotiations within the framework of the General Agreement on Tariffs and Trade.
Role of the Fund
All Governors recognized the important role of the Fund in providing and helping to mobilize financial resources in support of adjustment programs adopted by debtor countries. Some Governors were concerned about the degree to which Fund-supported programs emphasized austerity measures; they stressed the need to tailor adjustment programs to the specific circumstances of individual countries, bearing in mind the social and political difficulties of meeting the conditions associated with the use of Fund resources. Governors from debtor and creditor countries alike agreed that Fund-supported adjustment programs should aim at strengthening sustainable growth.
In view of the uncertainties in the world economy and the serious payments difficulties that many member countries continued to face, delegates welcomed recommendations made by the Interim Committee, at its meeting on the eve of the Annual Meetings, that the Fund maintain its enlarged access policy (assistance to members facing payments imbalances that are large in relation to quota) in 1986. However, many Governors expressed disappointment that the access limits under that policy had been reduced, even if by modest amounts. Other speakers pointed out that as the enlarged access policy had been established in 1981 as a temporary facility, in response to the particularly difficult circumstances in a number of member countries, the marginal reduction in access limits agreed by the Interim Committee was appropriate as an indication of its temporary nature.
The importance of Fund surveillance in encouraging policy coordination and economic convergence in the industrial countries and promoting improved conditions for world economic growth was emphasized by all delegates. They pointed out that policies in the major industrial countries were instrumental in creating an international environment that could be conducive to economic expansion in the developing world.
Governors shared the view of the Interim Committee that access limits for the Fund’s special facilities should remain unchanged in 1986. There was a call by many Governors for an easing of the conditions associated with drawings under the compensatory financing facility. A number of delegates proposed that a new facility should be established to provide financing to offset the high cost of interest payments on external debt.
Recognizing that the Fund’s resources were limited, delegates emphasized the valuable catalytic role played by the institution in mobilizing additional capital flows. Many Governors considered the recently introduced practice of enhanced surveillance (more frequent Article IV surveillance, at their request, of countries undergoing multiyear debt-rescheduling, with reports made available to creditor banks) as a way to extend the Fund’s ability to encourage commercial banks to maintain financing to heavily indebted countries, and to facilitate the restoration of normal creditor-debtor relationships. However, Governors also stressed that, in the words of one, the procedure “should be used only at a member’s request and under exceptional circumstances.”
Governors expressed unanimous approval of the agreement reached by the Interim Committee on the use of Trust Fund loan repayments. Under the scheme proposed by the Committee, funds would be used to support structural adjustment and growth in the poorest countries (see Box). Speakers emphasized the special need for these concessional resources by the very poor countries of sub-Saharan Africa. An indication by the Governors for China and India that their countries would refrain from using the reflows in 1985-91 was widely commended. Ensuring close Fund-Bank collaboration over Trust Fund reflows and in other aspects of the institutions’ work was essential, many Governors considered. In the words of one delegate, these funds “may form the basis for an important contribution to structural adjustment in many of the poorest member countries. [They] may also be instrumental in furthering closer collaboration between the Bank and the Fund, while maintaining the fundamental character of the two institutions.”
Trust Fund reflows
The Trust Fund, which was established in May 1976 from part of the proceeds from the sale of one sixth of the Fund’s gold, provided highly concessional assistance in the form of loans to low-income countries to support programs of balance of payments adjustment. Upon termination of the Trust Fund in April 1981, SDR 400 million of repaid loans and interest received was used to finance a subsidy account for the Fund’s supplementary financing facility. At its October 1985 meeting, the Interim Committee proposed that the resources to become available in 1985–91, following repayments of loans made by the Trust Fund, should be used to provide additional balance of payments assistance on concessional terms to low-income countries that face protracted balance of payments problems, and are implementing economic programs designed to promote structural adjustment and growth in a medium-term framework. The terms envisaged for the use of the resources are similar to those applied to loans from the original Trust Fund, which currently bear interest at a rate of ½ of 1 percent a year and are to be repaid in ten semiannual installments after a grace period of five years. In light of the guidance provided by the Interim Committee, the Fund’s Executive Board will present recommendations to the Committee before its Spring 1986 meeting.
Interim Committee meeting
The Interim Committee on the International Monetary System met on October 6–7, 1985, under the Chairmanship of Onno Ruding, Minister of Finance of the Netherlands. The Committee:
• noted that while progress in the world economy had been made on a number of fronts, many uncertainties remained;
• stressed the importance of noninflationary policies consistent with sustained output growth in industrial countries, the renewal of growth in the developing world through adjustment efforts, and adequate flows of finance to support such efforts;
• noted, in reviewing the debt situation, that while a number of countries had carried out prudent policies, allowing them to maintain access to capital markets, and some others had made policy improvements that strengthened their external position, recent developments had adversely affected the external positions of developing countries;
• reaffirmed the key role of the Fund in promoting adjustment, in providing balance of payments financing, and in helping to mobilize financial resources for the debtor countries;
• agreed that protectionism constituted a major threat and expressed the firm determination of their governments to preserve an open trading system;
• recognized that, in view of the uncertainties that remained in the world economy and the serious payments difficulties still faced by many member countries, there was a need to maintain the Fund’s enlarged access policy, with only a modest reduction in the access limits for the coming year;
• confirmed that the required support for an SDR allocation in the current period was lacking, and urged the Fund’s Executive Board to pursue its planned review on the role of the SDR, as a matter of priority, and to submit its report for consideration by the Committee at its next meeting;
• proposed that the repayments pertaining to loans made by the Trust Fund should be used to provide additional balance of payments assistance on concessional terms to low-income countries implementing economic programs designed to promote structural adjustment in a medium-term framework;
• requested the Fund’s Executive Board to study the issues raised in the reports on the international monetary system presented by the G-10 and G-24, with a view to facilitating a substantive consideration of the issues by the Committee at its next meeting.
The functioning of the international monetary system and the reports on this subject by the Group of 10 and the Group of 24 received much attention. Subjects covered by both reports included the present exchange system, Fund surveillance, the management of international liquidity, and the role of the Fund; the report of the Group of 24 also addressed itself to the debt problem and the transfer of resources to developing countries. Governors called upon the Fund’s Executive Board to consider the G-10 and G-24 recommendations in the coming months, so as to provide the basis for substantive consideration of the issues and the proposals at the Interim Committee’s next meeting, in April 1986.
As at previous Annual Meetings, there were differences of view on the long-term global need to supplement existing reserves through an allocation of SDRs. Most Governors favored such an allocation, which they felt would help to alleviate the liquidity problems of debtor countries and to make the SDR the principal reserve asset. Some speakers considered that because the existence of a global liquidity shortage had not been demonstrated, an allocation of SDRs was not warranted at present. Nevertheless, there was general support for an in-depth study to be undertaken by the Fund staff, for consideration by the Executive Board in coming months, on the role of the SDR in all its aspects, within the international monetary system.
Role of the Bank, IDA, and IFC
Governors reaffirmed their confidence in the ability of the Bank and its affiliates to help bring about renewed economic growth in the developing countries: they called on the Bank to play a larger role in alleviating the debt problem; they urged that the resources available to IDA be increased; and—noting the important role of private direct investment in the development process—many Governors applauded IFC’s capital increase and enlarged investment program, and adopted the convention to establish a Multilateral Investment Guarantee Agency (MIGA).
Delegates praised the Bank’s flexibility in adapting its programs to changes in the world economic environment and in the needs of the developing countries. However, commenting on the seriousness of the debt problem and its implications for the world economy, many Governors urged the Bank to do more to address this problem. A number of Governors encouraged an increasing use of sector and structural adjustment loans, especially to heavily indebted countries. Several stressed that this type of lending should continue to be tied to policy reform, since the adjustment measures made by borrowing countries were as important as the resource inflows themselves. The possibility of closer coordination with other multilateral development banks was also mentioned as a means to increase resource flows to countries carrying out adjustment programs. Some Governors urged the Bank to preserve its focus on traditional project lending for long-term development.
Concern was expressed about the decline in the Bank’s commitments in fiscal year 1985 to a level below that of the previous year. Many speakers called for a substantial expansion in lending, to permit the Bank to respond more effectively to the needs of its members and to stimulate the flow of capital from other sources. There was broad support for Bank management’s projections for a three-year lending program of $40–45 billion in fiscal years 1986–88.
There was also widespread agreement that in order to carry out its responsibilities and expand its lending program, the Bank should not be constrained by lack of capital or borrowing authority. Most Governors indicated that they favored a general capital increase for the Bank and said that it was time to begin looking at the timing, modalities, and level of such an increase. Many urged that discussions on this with the Bank’s Executive Board start as soon as possible. Suggestions were made for substantial increases—for example, a doubling of the Bank’s capital.
In addition to a higher level of lending, a number of Governors supported an expanded role for the Bank in improving economic growth in developing countries through such means as more policy advice, additional support for adjustment and reform, and a stronger catalytic role in mobilizing aid and private resources.
While greater collaboration between the Bank and the Fund was encouraged by numerous Governors, several of them added that the two institutions should continue to maintain their separate identities and should avoid cross-conditionality (whereby actions of one institution are made preconditions for actions by the other)—a point that was reiterated by both the Development Committee and the Chairman of the Meetings, Senegal’s Minister of Economy and Finance, Mamoudou Touré.
Many Governors commented on the IDA Deputies’ mid-term review of the Seventh Replenishment of IDA (IDA7) at a meeting which preceded the Annual Meetings. A number of them expressed regret that it had not been possible to supplement the $9 billion committed under the Seventh Replenishment, which had represented a decline in both real and nominal terms. The Governors hoped that IDA8 would be significantly larger than IDA7. There was general satisfaction that the deputies had agreed to begin discussions on IDA8 early in 1986 with the aim of reaching agreement by the time of the 1986 Annual Meetings.
The crisis in sub-Saharan Africa continued to preoccupy the Governors. Bank President A.W. Clausen pointed out that, despite the upturn in the world economy, output in sub-Saharan Africa had declined in 1984 for the third year in succession. The seriousness of Africa’s debt burden was also noted; in some countries debt service amounted to well over one half of export earnings. It was generally agreed that efforts to reverse the economic decline in Africa must continue to have high priority for the Bank and IDA.
There was praise for the speed with which the Special Facility for sub-Saharan Africa had been set up and funds mobilized. The Facility, which became effective in July 1985, provides additional financial assistance in support of policy reform measures in selected IDA-eligible countries. There was a call for additional contributions, especially from countries that had not yet contributed. Governors also approved the allocation of $150 million from the Bank’s net income to the Special Facility.
The importance of increasing private capital flows to the developing countries was a theme taken up by many Governors, and the IFC’s role in this regard was noted. Governors expressed their approval both of IFC’s capital increase and the proposed expansion of its investments. Since cofinancing could augment the flow of private capital for economic development, a number of Governors voiced their approval of the Bank’s cofinancing program.
A further step to encourage private capital flows was taken when Governors approved the convention to establish a Multilateral Investment Guarantee Agency (see page 54 of this issue—Ed.). Korea became the first member nation of MIGA when its Finance Minister signed the Agency’s convention. Mr. Clausen expressed confidence that MIGA would be a significant factor in the enhancement of international private direct investment.
In his opening speech, Mr. Clausen stated that this would be his last address to the Board of Governors as the Bank’s President, noting that he had intended from the outset to serve a single five-year term. He received a prolonged standing ovation by the Governors and was warmly praised for his leadership over the past years, which many said were among the most difficult in the Bank’s history. The Chairman of the Meetings thanked Mr. Clausen for his hard work and sound leadership, saying that the problems facing the Bank’s member countries would be much more daunting than they were today were it not for Mr. Clausen’s efforts.
The 1985 Annual Meetings closed with the sense that definite progress had been made toward solving the difficult problems of the debtor countries: agreement had been reached on the use of Trust Fund reflows to provide financing to the poorest countries and on the establishment of MIGA for the promotion of direct foreign investment in the developing countries. Governors generally agreed that the debtor countries must grow out of debt. This would require the achievement of sustained, noninflationary world economic growth through the pursuit of appropriate policies in the developing world and better convergence of policies in the industrial countries, within the framework of an improved world trade environment.
As the Chairman commented, the task ahead for each member country and for the Fund and the Bank was “to unite in our efforts and work together to achieve the conditions required for sustained growth and harmonious development throughout the world.”
Development Committee meeting
The Development Committee or, to give its full title, the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries, met on October 7, 1985, under the Chairmanship of Ghulam Ishaq Khan of Pakistan. The Committee:
• concluded that the Bank had an increasingly important role to play in restoring growth in heavily indebted middle-income countries, and asked the Bank for a report, to be considered at the Committee’s next meeting, on how these countries could achieve sustained growth;
• expressed strong support for a substantial expansion of the Bank’s lending program, to help it to respond more effectively to the needs of borrowers and to stimulate flows of capital to developing countries from other sources;
• agreed that the Bank should have the capacity to increase its lending and should not be constrained by lack of capital or borrowing authority. The Committee therefore asked the Bank’s management to begin discussions with the Executive Board on resource requirements over the next five years, including a possible general capital increase, and to report on progress at the next Committee meeting;
• urged that a successful and adequate Eighth Replenishment for the IDA be achieved by September 1986;
• noting with great concern the increasing number of African countries with debt and resource problems, urged the Bank and the Fund to improve their cooperation in developing consistent advice on policies to reduce poverty and promote growth in sub-Saharan Africa (while avoiding cross-conditionality) and requested the Bank to prepare a study on the resource problems of the region for discussion at the next Committee meeting;
• agreed that continued broadly based adjustment efforts, including structural reforms as well as additional concessional flows, were needed for these countries to recover and resume per capita income growth;
• expressed support for the findings of the Task Force on Concessional Flows, urging that these findings be taken into account by all countries concerned and by the Bank, which was asked to prepare a report to the Committee on progress made;
• called on governments to resist protectionism and applauded the decision in the General Agreement on Tariffs and Trade to prepare for a new round of multilateral trade negotiations.