INTERNATIONAL MONETARY FUND (IMF) REFORM: PAST SOLUTIONS, CURRENT PROPOSALS
CRS Report for Congress
International Monetary Fund (IMF) Reform:
Past Solutions, Current Proposals
Updated May 28, 1999
Patricia A. Wertman
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
This report examines past reforms of the International Monetary Fund (IMF) as expressed in
amendments to the IMF’s Articles of Agreement, or basic charter. It also summarizes the
legislation passed by the 105 Congress with regard to the IMF. Finally, it briefly discussesth
current proposals to reform te IMF. This report will not be updated.
International Monetary Fund (IMF) Reform: Past Solutions,
Major changes in the International Monetary Fund (IMF) and the international
monetary system have been reflected in amendments to the IMF’s Articles of
Agreement, its “constitution.” Changes to the IMF’s Articles require an 85%
majority of the voting power, giving the United States, with 17.56% of the vote, a
veto. Under the Bretton Woods Agreement Act (P. L. 79-171, 22 U.S.C. 286), any
proposed changes to the IMF’s Articles require congressional approval. Thus, by
extension, the U.S. Congress has a veto power over changes to the IMF’s Articles.
Beyond the specific issues of amending the IMF’s Articles, legislation enacted by the
role, and any proposed changes in the “architecture” of the international monetary
system. Finally, some proposals that do not involve amending the IMF’s Articles
might also be expressed in legislation.
The IMF’s Articles have been amended three times and, appropriately, the
changes have been designated the First, Second, and Third Amendments. The First
Amendment created the “Special Drawing Right” (SDR), an international reserve
asset issued by the IMF. The Second Amendment was the first and, so far, only
comprehensive rewrite of the IMF’s Articles of Agreement. It legitimized the floating
exchange rate system that replaced the “fixed” exchange rate Bretton Woods system
in the early 1970s. The Third Amendment, approved in 1992, addressed the problem
of a build-up of arrears that were owed by the poorer countries and that threatened
the IMF’s own liquidity.
The period 1997-1999 has been one of enormous economic and financial turmoil.
An examination of the history of amendments to the IMF’s charter, however, shows
much that is familiar, including: increased levels of cross-border capital flows,
increased economic integration, increased market-pricing of exchange rates, the
preeminence of the market over the regulator, and financial innovation.
The significant difference is the extent to which emerging market countries,
transitional economies, and the poorer less developed countries have become a part
of the global economy. This has been abetted by major advances in communications
technology. These changes turned a financial crisis in Thailand into a global crisis.
A number of proposals are emerging that are intended to reform the IMF and the
“architecture” of the international monetary system. A proposed Fourth Amendment,
like the Third Amendment, reflects the number of transitional and poor countries that
form the IMF’s membership and loan base. The Fourth Amendment would provide
additional liquidity to some 39 member countries by permitting a targeted allocation
of SDRs. This would require congressional approval, but not U.S. budgetary funding.
Finally, a controversial proposal to amend the IMF’s Articles of Agreement to allow
it to oversee the orderly liberalization of capital accounts has emerged. Agreement
on the text, however, has not been reached.
This report will not be updated.
The First Three Amendments: A Brief History..........................2
The 105 Congress and the IMF: Laying the Groundwork.................5th
IMF Reform: Current Proposals for Amending the IMF’s Articles...........8
Reforming the “Architecture” of the International Monetary System: Emerging
Proposals ................................................. 10
Conclusion ................................................... 11
List of Tables
Table 1. Reports on the IMF and Related Topics as Mandated by
P. L. 105-277.............................................13
International Monetary Fund (IMF) Reform: Past
Solutions, Current Proposals
The IMF was founded more than 50 years ago, in 1945, when 29 countries
signed its original Articles of Agreement. Today the IMF, with a nearly universal
membership of 182 countries, is still the centerpiece of the world financial system.
That system, however, underpins a world economy that is vastly different from the
war-torn and underdeveloped world of the immediate postwar era. Thus, as the
world economy has changed, the IMF has also had to change.
Major changes in the IMF and the international monetary system have been
reflected in amendments to the IMF’s Articles of Agreement. These have been
amended three times and, appropriately, the changes have been designated the First,
Second, and Third Amendments. The first two amendments were driven by systemic
changes, while the Third Amendment was driven by an institutional problem, a build-
up of loan arrears to the IMF itself. Likewise, some of the proposals emerging out
of the recent global financial crisis are likely to be expressed as and embodied in
amendments to the IMF’s Articles of Agreement.
Under the IMF’s rules, amendments to the IMF’s Articles require approval by
an 85% majority of the IMF’s total voting power. This requirement gives the United
States, with 17.56% of the total voting power, veto authority over changes in the
IMF’s Articles. More importantly, under the Bretton Woods Agreement Act (P. L.
79-171, 22 U.S.C. 286), any proposed amendment to the IMF’s Articles of
Agreement requires congressional approval. Thus, by extension, the U.S. Congress
has a veto power over any proposed changes in the IMF’s Articles of Agreement.
Beyond the specific issue of amending the IMF’s Articles, the U.S. Congress is
certain to play an active oversight role in regard to any proposed changes in the
structure of the IMF or in the “architecture” of the international monetary system.
Finally, some proposals that do not involve an amendment to the IMF’s Articles might
also be expressed in legislation.
This report provides a brief history of past reforms to the IMF’s Articles of
Agreement. It also examines, briefly, actions taken by the 105 Congress and someth
of the new proposals for reforming the IMF and the “architecture” of the international
monetary system. Two paired and related questions underlie the analysis: What
aspects of the present debate represent a continuation of earlier trends? What is new
about the present debate? Thus, the report is intended to provide to the Congress an
understanding of the historical context and a partial framework for understanding the
emerging reform debate.
This report will not be updated.
The First Three Amendments: A Brief History
The First Amendment to the IMF’s Articles of Agreement, effective in 1969,
resulted from a systemic problem with regards to liquidity. The exchange rate system
established at Bretton Woods was a gold-dollar standard, that is, all major currencies
were convertible at fixed rates into the U.S. dollar, which, in turn, was convertible
into gold at the fixed price of $35 per fine ounce. An expansion in international trade
and economic growth required an increase in international liquidity, that is, an
increase in central bank holdings of the two major international reserve assets, gold
and the U.S. dollar.
By the 1960s, with the economic recovery of Europe well advanced, the slow
growth in gold supplies was hampering the growth of international reserve assets. As
a result, the system became largely dependent on the other major international reserve
asset, the U.S. dollar. The expansion of dollar reserves, in turn, was dependent on an
outflow of dollars from the United States. An increase in dollar reserves, thus,
depended on the continuation of a large U. S. balance-of-payments deficit. The U.S.1
deficit was largely caused by huge long-term capital transfers from both the public and
private sectors. Continued U.S. deficits, however, were turning the dollar “shortage”
of the immediate postwar years into a dollar “glut.”
The international monetary system had become dependent upon the continuation
and expansion of the U.S. balance-of-payments deficit for the provision of adequate
liquidity to support international trade and economic growth — a major systemic
problem. This systemic reliance on the U.S. dollar as a reserve asset gave rise to the
so-called Triffin dilemma, after economist Robert Triffin: If, on the one hand, the
United States did not curb its deficit, there would eventually be a crisis of confidence
in the U.S. dollar because the United States would eventually have insufficient gold
reserves to convert outstanding foreign holdings of dollars into gold, as the Bretton
Woods system required. If, on the other hand, the U.S. did curb its deficit, the
creation of international reserves would be inadequate to support expanded world
trade and economic growth. Stated another way, the choice was between instability
The response to the Triffin dilemma was the First Amendment to the IMF’s
Articles of Agreement. The First Amendment created a new international reserve
The balance of payments is a statistical statement summarizing the economic transactions,1
during a given period, usually one year, between the residents of one country and the rest of
the world. The balance of payments is based on double-entry book keeping. Thus, it must
always balance, that is, statistically, its total is always “0.” When analysts speak of a deficit
(-) or a surplus (+), they are referring to specific components of the balance of payments. In
the 1960s and 1970s, analysts of the U.S. balance of payments position tended to focus on the
sum of two specific components of the balance of payments: the current account and the long-
term capital account. The current account is the net balance of payments arising from the
export and import of goods and services, together with “unilateral transfers,” the latter
including gifts, emigrants’ transfers, and remittances. The capital account represents the net
transfer of short- and long-term financial movements, including loans, credits, direct and
portfolio investment. Long-term is defined as more than one year. A deficit (-) on current
account must always be financed by a surplus (+) on capital account.
asset, the “Special Drawing Right” (SDR). Then sometimes referred to as “paper2
gold,” the SDR was to stand along with the U.S. dollar and gold as an international
reserve asset. It was intended to sever the link between dollar surpluses and the
creation of international liquidity.
By the time of the ratification of the First Amendment, events in the world
economy were already moving beyond the liquidity issues of the 1960s. Instead, the
focus was now on the adjustment process, both with regard to balance-of-payments
adjustment in general and exchange rate adjustment in particular. A large and
prolonged U.S. balance of payments deficit was mirrored by its counterpart, large
surpluses in the balance of payments of other major industrial countries. As a result,
much of the 1960s was characterized by substantial currency instability as liberalized
capital flows brought about repeated exchange rate crises in the, supposedly, “fixed”
exchange rate Bretton Woods system.
In 1970, a resumption in capital outflows from the United States, which had
briefly been reversed in 1968 and 1969, reflected a continuation of inflation within
the U.S. domestic economy and declining confidence in the U.S. dollar. Foreign
central banks increasingly became reluctant holders of U.S. dollars and began
exchanging their dollar reserves for U.S. gold holdings. This led to U.S. suspension
of gold convertibility on August 15, 1971. At the so-called Smithsonian meeting in
December 1971, the finance ministers of the major industrial countries realigned their
exchange rates and the United States devalued the dollar by raising the official price
of gold from $35 to $38 per fine ounce. With continued currency instability,
however, the Bretton Woods system of fixed exchange rates finally collapsed amidst
a generalized “floating” of the major currencies in March 1973. The major purpose
of the IMF as originally conceived at Bretton Woods — to maintain fixed exchange
rates — was, thus, at an end.
The Second Amendment to the IMF’s Articles of Agreement was the upshot of
the collapse of the Bretton Woods system of fixed exchange rates and the generalized
floating of the world’s major currencies in March 1973. The Second Amendment was
ratified on April 1, 1978. It was the first and, so far, the only comprehensive rewrite
of the IMF’s Articles. It enshrined the floating-rate exchange rate system that was
already in place; officially ended the international monetary role of gold (although
gold remains an international monetary asset); and, nominally, but unsuccessfully,
made the SDR the world’s “principal reserve asset.”
From the vantage point of today’s international financial turmoil, it is important
to note that the crisis of the early 1970s:
!was underpinned by increased capital account liberalization, that is, by the
liberalization of financial flows between countries, in this case between the
major industrial countries, beginning in the late 1950s;
For more information on the SDR, see CRS Report 97-738 E, The IMF’s Proposed Special2
Drawing Rights’ (SDRs) Allocation: A Background Paper, by Patricia A. Wertman.
!reflected increasing levels of world trade and economic growth and, therefore,
greater economic integration;
!terminated a fixed exchange rate regime for the major currencies and replaced
it with floating exchange rates;
!was market-driven and, thus, to some extent placed regulators and financial
officials in the position of playing “catch up” to systemic change; and
!involved an early postwar example of financial innovation, that is, the
emergence of the Eurodollar and other offshore currency markets.
Thus, in some sense, the recent global financial crisis looks not like something wholly
new, but, rather, like a continuation and expansion of existing trends.
A major effect of the demise of the system of fixed exchange rates among the
major industrial countries was that the IMF virtually ceased lending to the major
industrial countries after 1978, when the United States drew its reserve tranche.3
Decolonization, however, meant that many newly emerged developing countries had
become IMF members, substantially altering the IMF’s membership base. Other
developments also helped to change the character and direction of the IMF. The
1973-1974 run up in international oil prices as a result of concerted action by the
Organization of Petroleum Exporting Countries (OPEC) created large international
payments imbalances. While the major industrial countries were able to finance their
balance-of-payments deficits in private financial markets, the oil-importing developing
countries turned to the IMF and to the major private commercial banks, which needed
to “recycle” these so-called petrodollars, that is, to put to work the financial surpluses
that they were receiving as deposits from the oil-exporting nations.
By fostering the build-up of external debt among the developing countries, the
1970s’ petrodollar crisis, in turn, set the stage for the Third World debt crisis that
began in August 1982 with a default by Mexico. With U.S. support, perhaps
insistence, the IMF was placed at the center of the strategy to solve the 1980s’ debt
crisis. Similarly, in the 1990s, it was placed at the center of Western efforts to assist
the formerly Communist nations that are now making the difficult transition to market
economies. Thus, by February 28, 1999, the IMF’s total loan portfolio — an amount
totaling about $88.4 billion (SDR 64.7 billion) — was comprised solely of loans to
developing countries and transitional economies.
Arguably, the changed composition of the IMF’s loan portfolio led to the Third
Amendment of the IMF’s Articles of Agreement. Beginning in the early 1980s, the
IMF began to experience difficulties with the overdue repayment of its loans. Since
the IMF is a revolving fund, arrears impair its ability to continue making loans, raise
The United Kingdom was the last of the G-10 industrial countries (the G-7 countries, which3
include the United States, Germany, Japan, France, United Kingdom, Italy, and Canada, plus
Belgium, Netherlands, and Sweden) to borrow from the IMF. Its last use of Fund credit
occurred in 1982.
the cost of its loans to borrowers, and potentially constitute a threat to the IMF’s own
The IMF undertook several steps both to resolve and prevent problems with
arrears. The Third Amendment, which entered into effect on November 11, 1992,
was the most important of the steps the IMF took to resolve its problem with arrears.
It applies only to IMF members that have already been declared ineligible to use the
IMF’s general resources because of arrears in their payments to the IMF. The Third
Amendment allows the IMF’s Executive Board to decide, by a 70% majority of the
total voting power, to suspend the voting and certain related rights of any ineligible
member persisting in arrears. Suspension is an intermediate step between a
declaration of ineligibility and compulsory withdrawal. As of April 1998, the
Executive Board had suspended the voting and related rights of two IMF members,
the Democratic Republic of the Congo and Sudan. The arrears problem peaked in
1992 and has since been substantially reduced. It is important to note that some of
these arrears arise from political causes, for example, the breakup of Yugoslavia.
Finally, the changed character of loan recipients meant that, beginning, at least,
with the “Baker Plan” in 1985 (as a somewhat arbitrary marker), IMF loans4
increasingly involved structural or microeconomic conditionality along with the more
traditional macroeconomic conditionality. In the view of some, particularly loan
recipients, IMF conditionality has, thus, become more extensive and intrusive. This
has also certainly made IMF conditionality more controversial.
The 105 Congress and the IMF: Laying theth
Congress is responsible for authorizing and appropriating all U.S. financial
commitments to the IMF. With the passage and signing of the “Omnibus
Consolidated and Emergency Supplemental Appropriations Act for FY 1999" (H.R.
The dollar equivalent of SDR 10,622.5 million for U.S. participation in the IMF quota
increase is scored in the FY 1999 budget as $14.5 billion; the SDR 2,462 million
funding required for U.S. participation in the “New Arrangements to Borrow”5
(NAB), as $3.4 billion.
On October 8, 1985, U.S. Secretary of the Treasury James A. Baker, III, speaking at the joint4
annual meeting of the IMF and the World Bank in Seoul, Korea, made a proposal for solving
the international debt problem. A key aspect of the proposal was its recognition of and
emphasis on the structural aspects of the debt problem. It was this microeconomic emphasis
that represented a major policy shift from earlier approaches to the problem. For additional
information see CRS Report 97-661 E, U.S. International Debt Strategy: The “Brady Plan”
Revisited, by Patricia A. Wertman.
For more information on the quota increase and the NAB, see CRS Report 98-56 E, The5
International Monetary Fund’s (IMF) Proposed Quota Increase: Issues for Congress, and
CRS Report 97-468 E, The IMF’s Proposed New Arrangements to Borrow (NAB): An
Overview, both by Patricia A. Wertman.
In an unprecedented move, the 105 Congress stipulated that the newlyth
appropriated funds could not be made available until 15 days after the Secretary of the
Treasury and the Chairman of the Federal Reserve Board provided written
notification that the major shareholders had publicly agreed to act to implement
specific policies within the IMF. Specifically, conditionality on IMF loans is to
promote policies that liberalize restrictions on trade in goods and services, that
eliminate the practice of government-directed lending on noncommercial terms, and
that establish a legal basis for nondiscriminatory treatment in insolvency proceedings.
In addition, the IMF is to begin making its Executive Board minutes and loan
documents (Letters of Intent, Memoranda of Understanding, and Policy Framework
Papers) publicly available. Finally, when a country is experiencing a short-term loss
of confidence, IMF loans are to carry shorter maturities and bear higher interest rates,
a requirement that is now embodied in the IMF’s new Supplemental Reserve Facility
A number of statements issued on October 30, 1998 by the IMF’s major
shareholders (the G-7 countries) are taken as fulfilling this requirement for a public
declaration of support for the specified policies. Certification was sent to Congress
on November 2, 1998. The NAB entered into effect on November 17, 1998. The
quota increase became effective on January 22, 1999.
Historically, requests for funding the IMF have been the occasion for vigorous
congressional oversight of the IMF’s policies, programs, and performance. At the
same time, congressional oversight also has been limited largely to those occasions
when funding has been requested. Thus, the last previous instance of intensive
oversight occurred in 1992, when the quota increase that immediately preceded this
one was approved. In P. L. 105-277, however, the 105 Congress laid theth
groundwork for a much more active and continuous oversight of the IMF, particularly
with regard to the emerging issue of international financial reform. This was achieved
in a number of ways, notably including:
!establishing, for a duration of six months, an International Financial Institution
Advisory Commission with a broad mandate to advise and report to Congress
on international financial issues, especially system reform;
!requiring an annual report and testimony by the Secretary of the Treasury on
the state of the international financial system, IMF reform, and compliance
with IMF agreements;
!providing for annual audits of the IMF by the General Accounting Office
!instructing the Secretary of the Treasury to seek to establish a permanent
advisory committee to the Interim Committee of the IMF that would consist
of elected members of the national legislatures of the five countries that
appoint members to the IMF’s Executive Board, including the United States,
which is the IMF’s largest shareholder.
These provisions are amplified by additional reporting requirements, notably by two6
reports on the “architecture” of the international monetary system, due on July 15 of
the newly enacted legislation opens up the IMF for congressional examination to an
P.L 105-277 mandates that the International Financial Institution Advisory
Commission include eleven members. The House and Senate majority and minority
leadership appoint the commission members, originally to have been not later than 45
days after enactment of the law, that is, by October 21, 1998. Four of the 117
appointees must have been officers or employees of the Executive Branch prior to
January 20, 1992, but no more than two of these are to have served under Presidents
from the same political party. The Commission could contribute to a broader and
fuller discussion of international financial issues at this critical time.
Finally, P .L. 105-277 also included a significant number of policy prescriptions
or “admonitions” regarding the IMF and its programs. Although it remains to be seen
exactly what the impact of these provisions will be, it would appear that, given their
broad-ranging nature, they are likely to strengthen the IMF and expand its activities.
This is, perhaps, ironic given the extreme controversy that surrounded the IMF’s
performance in the on-going global financial crisis during the last Congress.
P. L. 105-277 instructed the U.S. Executive Director to the IMF to use the
“voice and vote” of the United States to advocate policies within the IMF that would,
among other things, promote exchange rate stability and avoid competitive
devaluations; promote market-oriented reform and trade liberalization; open domestic
markets to competition and deregulation; strengthen social safety nets; encourage the
opening of markets to agricultural commodities; strengthen the financial systems of
developing countries and promote sound banking practices; facilitate the development
of domestic bankruptcy laws and burden-sharing by private creditors; strengthen the
IMF’s crisis-prevention mechanisms and surveillance; promote good governance,
including reductions in excessive military spending; improve core labor standards;
promote environmental protection; and promote credit to small business. Much of
this suggests a much more intrusive IMF.
A list of the reporting requirements is contained in table 1 at the end of this report.6
On February 12, 1999, the Democratic Leader of the Senate and the Minority Leader of the7
House announced the appointment of Richard L. Huber, Jerome L. Levinson, Jeffrey D.
Sachs, Esteban Torres, and Paul A. Volcker to the International Financial Institution Advisory
Commission. Members proposed by the Majority apparently include Charles W. Calormiris,
Alan Meltzer, Lawrence Lindsay, Edward Fuelner, and Manley Johnson.
IMF Reform: Current Proposals for Amending the
In September 1997, a proposal to again amend the IMF’s Articles of Agreement
— the Fourth Amendment — was adopted by the Board of Governors of the IMF.
The proposed Fourth Amendment, like the Third Amendment, reflects the IMF’s
position as a lender to developing and transitional economies. It would permit a8
special, one-time targeted allocation of SDRs. The last allocation of SDRs was
approved in 1978 and allocated in 1979-1981. Since then 39 countries have joined
the IMF. In addition, some countries that were IMF members at the time of the last
allocation did not participate. Finally, as a result of past quota increases, some
members that did participate in the last allocation now have very low ratios of
cumulative SDR allocations to their total quotas. On the grounds of equity, therefore,
the IMF’s Executive Board recommended that a one-time “targeted” SDR allocation
be undertaken. IMF Articles, however, require the nondiscriminatory treatment of
all IMF members. Thus, to undertake a targeted and, therefore, discriminatory SDR
allocation, the IMF’s Articles must be amended. While the proposed amendment
would provide additional international reserve assets to the recipients, it is largely
peripheral to the immediate reformist debate that has arisen out of the recent global
The proposed Fourth Amendment has, however, important long-term
implications for the stability of the international financial system. By easing the
external financing constraint on the poorer countries, it will hasten the day when they
can achieve healthy economic growth. In this respect, the proposal is a companion
to the proposal to sell IMF gold in support of the HIPC (“Highly Indebted Poor
Countries”) debt relief initiative of the World Bank and the IMF, which also would9
ease the external financial constraint on a select group of poor countries. Finally, the
proposed Fourth Amendment might well be seen as part of the IMF’s continuing
effort to address the needs of and the problems arising from the poorer countries that
are a part of its membership. In this strictly limited sense, the proposed Fourth
Amendment is a linear descendent of the Third Amendment.
The Fourth Amendment would require congressional approval, but, to date, has
not been brought before the U.S. Congress for consideration. As of February 9,
For more information on the SDR, see CRS Report 97-738 E, The IMF’s Proposed Special8
Drawing Rights’ (SDRs) Allocation: A Background Paper, by Patricia A. Wertman. This
report was written prior to its adoption by the IMF’s Executive Board.
For more information on IMF gold sales, see CRS Report 96-810 E, International9
Monetary Fund (IMF) Gold Auctions: Current Proposal, History, and Congressional Role,
by Patricia A. Wertman. The proposal was initially stalled by the objections of the German
and Italian governments. These two governments have now dropped their opposition, and the
proposal has been revitalized by renewed support from the U.S. government and its linkage
to the HIPC initiative.
the amendment. Because SDRs are created by the IMF, this proposal would not10
involve any budgetary funding by the United States.
A far more controversial proposal would amend the IMF’s Articles to permit the
IMF to play a central role in capital account liberalization issues. This proposal has
been under study for some time. On September 21, 1997, the IMF’s Interim
Committee stated that the IMF’s central role in the international monetary system and
its near universal membership made it uniquely placed to help assure that the
liberalization of capital flows occurred in an orderly manner, backed both by adequate
national policies and a solid multilateral system for surveillance and financial
support. The Interim Committee recommended a phased, but comprehensive11
approach that would tailor capital account liberalization to the circumstances of
individual countries. It recommended that the Executive Board complete its work on
the proposed amendment, which would extend, as needed, the IMF’s jurisdiction
“through the establishment of carefully defined and uniformly applied obligations
regarding the liberalization of [capital account] movements.” 12
The proposed amendment would turn the IMF’s de facto authority in this area
into de jure authority and would represent a counterpart to the authority that it has
had on current account issues since 1945. Some dispute whether this change is
necessary. Others are more concerned about whether capital account liberalization
per se is a desirable goal. Still others have been concerned about what constitutes an
orderly process of liberalization: must a country, for example, wait until certain
“preconditions” are met; how can standards for banking supervision and soundness
be ensured at the international level; and what are the problems and consequences of
uncontrolled short-term capital flows. The IMF held a seminar on March 9-10, 1998
to further study this issue. In April 1998, the Interim Committee reaffirmed its views.
Provisional agreement on that part of the amendment dealing with the IMF’s purposes
has been reached. Significantly, however, in its October 1998 communiqué, the13
Interim Committee “encouraged [the IMF] to continue its work, in the context of its
surveillance activities and adjustment programs,” but made no mention of the14
proposed amendment even while mentioning the proposed Fourth Amendment and
other measures to strengthen the IMF. This very important issue, therefore,
apparently remains unresolved.
Phone conversation with the IMF on February 9, 1999.10
Interim Committee Statement on Liberalization of Capital Movements Under an Amendment11
of the IMF’s Articles, as adopted, Hong Kong SAR, September 21, 1997, published in IMF.
Annual Report, 1998, p. 75.
Ibid, p. 77.13
IMF. Interim Committee. Communiqué of the Interim Committee of the Board of14
Governors of the International Monetary Fund, October 4, 1998. IMF Press Release No.
Reforming the “Architecture” of the International
Monetary System: Emerging Proposals
The Mexican financial crisis of 1994-1995 began a process of examining and
rethinking the structure or “architecture” of the international monetary system. This
process has been substantially accelerated by the current global financial crisis. An
early product is the “New Arrangements to Borrow” (NAB), which went into effect
on November 17, 1998. Nevertheless, the process appears to be in its early stages.
In addition to capital account liberalization issues, several other areas in which work15
is under way include:
!Standards: This denotes the development and dissemination of internationally
accepted norms to raise the transparency of economic policy and to enable
financial markets to better assess borrowers’ creditworthiness. An IMF code
on fiscal transparency has been completed; one on monetary and financial
policies is under development. Other international areas where codes are
sought include corporate governance, accountancy, and insolvency regimes.
!Transparency: This issue has become something of a “buzzword” that has
achieved “motherhood-and-apple pie” status. Nobody is, in theory, against it,
but agreement on specific proposals is certain to be substantially more difficult.
Apropos of the importance of capital flows in the current crisis, agreement on
the need for timely and detailed disclosure of international reserve positions;
external debt positions; and short-term capital flows, including private flows,
is a priority. Greater transparency regarding the position of private financial
market participants, including hedge funds, is also being sought by regulatory
and supervisory authorities. Finally, the IMF itself is becoming more
transparent — an issue that was very much at the forefront of congressional
oversight of the IMF last year.
!Private Sector Contributions: The Interim Committee has noted that greater
participation of the private sector in preventing and resolving financial crises
is important and has asked the IMF to study the use of market-based
mechanisms to cope with sudden shifts in investor sentiment. This issue is
central to dealing with the problem of “moral hazard,” that is, perverse
incentives that encourage precisely the kind of behavior that they are intended
to prevent, in this case high-risk/high-return lending in the expectation that, if
the loans went “bad,” the lenders would be made whole by a rescue package
backed by the IMF. The moral hazard issue has been important and
controversial in connection both with the Mexican “bailout” of early 1995 and
with the more recent financial rescue packages in Asia and in Russia.
!Capital Account Liberalization: Since international capital flows contribute
to the efficient allocation of economic resources, capital account controls
This section is drawn, in part, from IMF. Interim Committee. Communiqué of the Interim15
Committee of the Board of Governors of the International Monetary Fund, October 4, 1998.
IMF Press Release No. 98/47.
present difficulties. As noted in the previous section, however, the prudent and
orderly liberalization of capital flows is one of the most important issues under
study. Sound banking supervision and financial regulation, although nominally
a “standards issue,” is also deeply connected to the issue of capital account
In all of these areas the IMF is certain to be working with other major international
institutions, such as the World Bank and the Bank for International Settlements (BIS).
The items that have been mentioned above are already under consideration, are
often extremely technical, and are likely to take considerable time to achieve. Reform
of the international monetary system is, however, also certain to receive broader
discussion. Proposals may be expected to cover virtually the entire spectrum: On the
one end of the spectrum, some suggest turning the IMF into a lender of last resort.16
A lender of last resort, nearly always a country’s central bank, provides liquidity, in
the form of emergency credit, to the financial system to forestall a panic or the
collapse of the banking or financial system. Adoption of such a proposal might well
require providing additional funding for the IMF. On the other end of the spectrum,
some would like to eliminate the IMF. 17
The period 1997-1999 has been one of enormous economic and financial turmoil.
The IMF has been at the center of efforts to deal with this global crisis, as it was in
earlier periods of financial turmoil. An examination of the history of the amendments
to the IMF’s Articles of Agreement shows that much about today’s crisis is familiar,
!increased levels of cross-border capital flows,
!increased economic integration,
!increased market-pricing of exchange rates,
!the preeminence of the market over the regulator, and
Stanley Fischer, Deputy Director of the IMF, published a paper on this topic on January16
3, 1999. The paper, On the Need for an International Lender of Last Resort, is available on
the IMF’s web site (http://www.imf.org). In addition, see also, Soros, George. To Avert the
Next Crisis. Financial Times, January 4, 1999, p. 18.
See, for example, Schwartz, Anna J. Time to Terminate the ESF and the IMF. Cato17
Institute. Foreign Policy Briefing, No. 48, August 26, 1998, and Schultz, George P., William
E. Simon, and Walter B. Wriston. Who Needs the IMF? Wall Street Journal, February 3,
The significant difference between today and earlier periods is the extent to which
emerging market countries, transitional economies, and the poorer less developed
countries have become a part of the global economy. This has been abetted by major
advances in communications technology. These differences turned a liquidity crisis
in one of the world’s smaller economies into a global financial crisis. The emerging
debate over reforming the IMF and the international monetary system is certain to
seek to address these systemic characteristics, both old and new.
Table 1. Reports on the IMF and Related Topics as Mandated by P. L. 105-277
AgencyPeriodicitySubject/Mandate in Brief Summary
U.S. TreasuryContingent: Prior to DisbursementReport on Certification as to whether IMF funds are supporting loans or guarantees
of IMF Loan Funds (Noto specified Korean industries: semiconductors, steel, automobiles, shipping, and
disbursements have occurred sincetextile and apparel industries
enactment of P. L. 105-277)
International Financial InstitutionOne-time event, upon terminationBroad mandate to advise & report to Congress on future role and responsibilities of
Advisory Commissionof its work (6 months after its firstinternational financial institutions
meeting, estimated to be not later
than July 3, 1999)
U.S. TreasuryWithin 3 months after end ofReport on desirability and feasibility of implementing the recommendations of the
International Financial InstitutionInternational Financial Institution Advisory Commission
Advisory Commission’s work
(estimated to be not later than
October 3, 1999) and then annually
for 3 years
iki/CRS-RL30132U.S. Treasury Within 6 months, (i.e., by April 20,Report on progress made toward strengthening IMF procedures for monitoring the
g/w1999), with data to be provideduse of its funds by borrowing countries
s.orupon request of appropriate
://wikiU.S. Treasury QuarterlyReport on IMF standby or other loan programs, with specific identification of IMFloans to which the policies of Sec. 601(4) apply (i.e., effectively, countries receiving
httploans from the Supplementary Reserve Facility (SRF))
U.S. TreasuryJuly 15, 1999 and July 15, 2000Report on the progress of efforts to reform the architecture of the international
U.S. TreasuryMarch 15, 1999 and semiannuallyReport on IMF stabilization programs that involve funds from the U.S. Exchange
thereafterStabilization Fund (ESF)
U.S. TreasuryAnnually, not later than October 1Report on the state of the international financial system, IMF reform, and
of each yearcompliance with IMF agreements (to be followed by testimony not later than March
1 of each year)
General AccountingAnnually, beginning June 30, 1999Report on financial condition of the IMF; status and any noncompliance,
Office (GAO)renegotiation, defaults, arrears, and yields on IMF loans; description of export
policies of IMF borrowers
Source: Prepared by CRS.