SUNS #4289 Monday 28 September 1998


FINANCE: IMF HOLDS ITS COURSE ON CAPITAL CONVERTIBILITY

Washington, Sep 24 (IPS/Abid Aslam) -- Unfaced by the turmoil on the world's financial markets, and the world economic crisis, the International Monetary Fund, while making some noises over short-term flows, has not abandoned but is pursuing the aim of capital account liberalization.

This is evident from a news briefing by a senior IMF official on the forthcoming annual FUND/Bank meetings, to be preceded by the policy-making meeting of the Interim Committee.

The world economy is "in a mess" but that is not the fault of the International Monetary Fund (IMF), says a senior Fund official, who did not want to be identified.

Rather, countries brought upon themselves the financial ruin of the past year, spurred by rapid outflows of 'hot money', according to the official.

Ways have to be found to "civilise the financial markets" but the Fund remains committed to contentious proposals to push further 'capital account liberalisation' in borrowing countries, he said.

Briefing reporters Thursday in advance of the 53rd annual meetings of the IMF and World Bank, the official said questions about investment liberalisation would be high on the agenda of finance officials' talks Sep. 29-Oct. 8.

The Fund had "launched a major effort...to explain to the countries that they have more to benefit by opening capital accounts than to lose, providing of course that they put their house in order," he
explained.

However, "these are the kind of messages which frequently are taken only halfway by the countries. They take the attractive things and they attract capital. As for the disciplines which should be attached to it, they tend to tell you, 'manana' or 'boukra'," he added, using the Spanish and Arabic words for 'tomorrow'.

He further defended his agency against critics, who have said that the Fund violated its founding Articles of Agreement by pushing liberalisation, and that it was moving to amend the document in order to sweep aside an obligation to support investment controls as a means of protecting countries from the ravages of capital flight.

IMF managers - prodded by the United States and other leading shareholders - have pursued an amendment to the agency's Articles of Agreement that would make promoting open capital markets one of its basic purposes. This would give it legal basis to do with members' financial systems what it was originally set up to do with their foreign exchange and trade regimes.

However, under Article VI of the Fund's founding document, agreed in 1944 and effective as of the following year, IMF "members may exercise such controls as are necessary to regulate international capital movements." Furthermore, the Fund "may request a member to exercise controls to prevent" its resources from being used to meet a "large or sustained" outflow of capital - and can even suspend members if they refuse.

"Article VI commits the IMF to supporting national policies. (IMF Managing Director Michel) Camdessus is sworn to uphold it. But it is ignored," said Cambridge University economist and British securities regulator John Eatwell.

David Felix, professor emeritus at Washington University, recently went further, arguing in a written commentary that the Fund had abandoned its members in favour of financial speculators.
The IMF's founders "contended that the dynamics of unregulated international financial markets tend inexorably to the dominance of short-term speculation and increasing financial instability" and built capital controls into the system to protect national economies, Felix said. "By contrast, the present policy line views hot money surges as the financial markets' mode of purging countries of 'unsound' economic policies and practices."

By altering its Articles of Amendment, the IMF would brush aside Article VI once and for all, Eatwell warned last week, during a visit to Washington.

"He is wrong," the senior IMF official declared Thursday. "We are not seeking at this stage an amendment to get rid of Article VI." Rather, Fund staff were readying "an amendment to Article I," which laid out the Fund's basic purposes.

Such an amendment would strip countries of the right to opt out of the liberalisation process, some officials from developing countries feared, because Article I contained the instruction that "the Fund
shall be guided in all its policies and decisions by the purposes set forth in this Article."

The Fund official played down those fears and emphasised his agency's commitment to "orderly and well-sequenced" capital account liberalisation. "This is the philosophy of our present efforts, and I must say that it is a philosophy shared by the immense majority of our membership," he said.

There remained, however, "a handful of countries, less than a handful, who are of a slightly different view and could be tempted by unilateral options in this domain."

Fund officials, under criticism from some developing countries for exposing them to 'hot money', also have been under pressure from the United States and other leading financial powers to press on with capital markets liberalisation. Over the past year, they have placed increasing emphasis on pursuing liberalisation in a gradual and well thought-out manner.

"Given that there are limits to the pace at which financial sectors can be strengthened, policy-makers need to undertake an orderly opening of their financial systems and may need to consider imposing temporary measures to restrain certain types of inflows," the Fund said, in a report released Tuesday.

Some observers welcomed that statement as the clearest indication yet that the IMF had shifted its position and was willing to let countries set their own pace.

Others, however, saw it as offering only some freedom of pace - not direction.