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Exchange Rate Arrangements and Currency Convertibility: Developments and Issues WORLD ECONOMIC AND FINANCIAL SURVEYS Exchange Rate Arrangements and Currency Convertibility Developments and Issues Prepared by a Staff Team led by R. Barry Johnston with Mark Swinburne Alexander Kyei Bernard Laurens David Mitchem Inci Otker Susana Sosa Natalia Tamirisal INTERNATIONAL MONETARY FUND Washington, DC 1999 ©International Monetary Fund. Not for Redistribution © 1999 International Monetary Fund Production: IMF Graphics Section Figures: Theodore F. Peters, Jr. Typesetting: Joseph Ashok Kumar ISBN 1-55775-795-X ISSN 0258-7440 Price: US$25.00 (US$20.00 to full-time faculty members and students at universities and colleges) Please send orders to: International Monetary Fund, Publication Services 700 19th Street, N.W., Washington, D.C. 20431, U.S.A. Tel: (202) 623-7430 Telefax: (202) 623-7201 E-mail: [email protected] Internet:http://www.imf.org recycled paper ©International Monetary Fund. Not for Redistribution Contents Page Preface vii List of Abbreviations ix Part I I Overview 1 II Convertibility of Currencies for Current International Payments and Transfers 6 The IMF's Jurisdictional View of Exchange Restrictions 6 Trends in Exchange Controls on Payments for Current Account Transactions and Current Transfers 9 Coordinating Exchange and Trade Liberalization 11 Bilateralism and Regionalism 11 Procedures for Acceptance of Obligations of Article VIII, Sections 2, 3, and 4 12 III Controls on Capital Movements 14 Information on Capital Controls 14 Structure of Capital Controls 14 Trends in Controls on Capital Movements 17 Promoting Capital Account Liberalization 19 IV Developments in Exchange Rate Arrangements and Markets 23 Characteristics of Members' Exchange Rate Regimes According to the IMF Classification Scheme 23 Shortcomings of the Existing Classification Scheme and Proposed Modification 28 Factors Underlying the Evolution of Exchange Rate Regimes 38 Developments in Foreign Exchange Markets 40 Part II V Phasing Exchange and Trade Liberalization 49 Relationship Between Exchange and Trade Measures 49 Selected Countries' Experience with Exchange and Trade Liberalization 51 Summary of Country Experiences and Conclusions on Phasing Exchange and Trade Liberalization 63 Appendix. Exchange and Capital Controls as a Trade Barrier 67 VI Capital Account Liberalization in Selected Asian Crisis Countries 70 Overview of Liberalization in Indonesia, Korea, and Thailand 70 Growth of Short-Term Liabilities 74 Conclusion 78 iii ©International Monetary Fund. Not for Redistribution CONTENTS Appendix. Changes in the Exchange System in Five Asian Economies, June 1997-March 1998 78 VII Indices of Exchange and Capital Controls and Relationships with Economic Development 83 Literature Review 83 Methodological Approach and Data 84 Country Indices 89 Correlation Analysis 90 Sensitivity Analysis 94 Conclusion 96 VIII Recent Technical Assistance on Exchange Systems, 1994-97 97 Main Focus of Recent Technical Assistance 97 Liberalization of the Regulatory Framework 97 Interbank Foreign Exchange Market Development 97 Reserve Management 103 Appendix. Main Instances of Technical Assistance on Exchange Systems, 1994-97 104 IX An Operational View of the Foreign Exchange Market 107 Market Structure and Trends 107 Market Behavior and Policy Interactions 111 Conclusion 118 Part III Stastical Appendix 123 Boxes Section IV 1. Exchange Rate Classifications 24 2. New IMF Exchange Rate Classification System 36 3. Multiple Exchange Rate Systems 45 VI 4. Indonesia: Capital Account Liberalization, 1985-96, and Capital Controls, 1997 71 5. Korea: Capital Account Liberalization, 1985-96, and Capital Controls, 1997 72 6. Thailand: Capital Account Liberalization, 1985-96, and Capital Controls, 1997 76 VII 7. Structure of Indices of Exchange and Capital Controls 85 VIII 8. List of Key Institutional and Operational Reforms for Foreign Exchange Market Development 100 9. Decision-Making Hierarchy in Reserve Management 103 10. A Day of Spot Market Making 112 Biblography 169 Tables Section II 1. IMF Members with Article XIV Status at End of 1997 7 2. Members with Article VIII Status Maintaining Exchange Restrictions or Practices Subject to Approval by the IMF 8 3. Exchange Controls on Payments and Transfers for Current International Transactions 9 iv ©International Monetary Fund. Not for Redistribution Contents 4. Developments in Regional Payment Arrangements 12 III 5. Types of Capital Transactions Possibly Subject to Controls 15 6. Structure of Controls by Country Group, End of 1997 17 7. Technical Assistance on Exchange Systems and Conditionality Under IMF-Supported Program, 1994-97 20 IV 8. Exchange Rate Arrangements as of December 31, 1997 25 9. Evolution of Pegged Exchange Rate Regimes in Official Versus De Facto Classification 29 10. New IMF Exchange Rate Classification as of December 31, 1997 34 11. Exchange Rate Regime and Various Aspects of Exchange Systems, End of 1997 40 12. Exchange Rate Regime Response to Capital Inflows 41 13. Summary Features of Forward Exchange Markets in Selected Developing Countries, End of 1997 44 IV 14. Summary of the Nature of Members' Multiple Exchange Rate Regimes, End of 1997 46 V 15. Phases of Exchange and Trade Reforms in China, 1979-97 52 16. Individual Indicators of the Extent of Liberalization for China 53 17. Phases of Exchange and Trade Reforms in India, 1991-97 55 18. Individual Indicators of the Extent of Liberalization for India 56 19. Phases of Exchange and Trade Reforms in Korea, 1961-97 58 20. Individual Indicators of the Extent of Liberalization for Korea 59 21. Phases of Exchange and Trade Reforms in Mexico, 1983-97 60 22. Individual Indicators of the Extent of Liberalization for Mexico 61 23. Phases of Exchange and Trade Reforms in Russia, 1992-97 62 24. Individual Indicators of the Extent of Liberalization for Russia 63 25. Reform Sequence Matrix for China 64 26. Reform Sequence Matrix for India 64 27. Reform Sequence Matrix for Korea 65 28. Reform Sequence Matrix for Mexico 65 29. Reform Sequence Matrix for Russia 66 30. Summary Statistics 68 31. Correlations 68 32. Estimation Results 69 VI 33. Indices of Categories of Controls on Current Payments and Transfers, 1996 87 34. Indices of Categories of Capital Controls, 1996 88 35. Indices of Exchange Controls, 1996 90 36. Correlations 93 37. Data and Sources for Correlation Analysis 94 VIII 38. Conditionality in IMF Programs and Technical Assistance in Exchange System, 1994-97 98 IX 39. Foreign Exchange Trading Revenues 111 Appendix Al. Restrictions Maintained by Countries with Article XIV Status, 1997 123 A2. Restrictions Maintained by Countries with Article VIII Status, 1997 125 A3. Total External Payments Arrears, 1993-97 126 A4. Regional Payment Arrangements, December 1997 127 A5. Members Accepting Article VIII, Sections 2, 3, and 4, and Nature of Restrictions Maintained, 1994-971 128 A6. Country Groupings 130 A7. Evolution of Exchange Rate Regimes in Transition Economies 131 A8. Changes in Exchange Arrangements, First Quarter 1994-Fourth Quarter 1997 132 A9. Changes in Exchange Rate Arrangements Affecting the Official Classification and Other Currency Adjustments, 1994-December 31, 1997 134 A10. Exchange Rate Bands in Selected Countries 151 V ©International Monetary Fund. Not for Redistribution CONTENTS All. Exchange Rate Regimes and Indices of Exchange and Capital Controls, 1996 153 A12. Foreign Exchange (FX) Market Development, Mid-1997 154 Figures Section I 1. Trends in Trade, Capital Flows, and Exchange Controls 4 II 2. Number of Countries That Have Accepted the Obligations of Article VIII, Sections 2, 3, and 4 6 3. Exchange Measures on Current Account Transactions 1985-97 10 III 4. Capital Account Measures by Country Group 16 IV 5. Exchange Rate Arrangements of Member Countries 27 6. Expanded IMF Classification of Exchange Rate Arrangements as of December 31, 1997 30 7. Exchange Rate Arrangements: Comparison of IMF Classification, De Facto Arrangements, and Choices of Monetary Anchors as of December 31, 1997 31 8. Evolution of Exchange Rate Regimes—Expanded Classification 33 VII 9. Index of Controls on Current Payments and Transfers, 1996 91 10. Index of Capital Controls, 1996 91 11. Index of Exchange and Capital Controls, 1996 92 12. Controls on Current Payments and Transfers and Capital Movements 95 13. Exchange and Capital Controls and GNP Per Capita 95 14. Exchange and Capital Controls and Tariff Barriers 96 The following symbols have been used throughout this volume: ... to indicate that data are not available; — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist; between years or months (for example, 1995-96 or January-June) to indicate the years or months covered, including the beginning and ending years or months; / between years (for example, 1995/96) to indicate a fiscal or financial year. "Billion" means a thousand million; "trillion" means a thousand billion. "Basis points" refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to V\ of 1 percentage point). "n.a." means not applicable. Minor discrepancies between constituent figures and totals are due to rounding. As used in this volume the term "country" does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis. vi ©International Monetary Fund. Not for Redistribution Preface This
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