Statement by the Governor of the Fund for the Syrian Arab Republic—Abdul Halim Khaddam
It gives me pleasure at the outset to offer our thanks to the Government and people of Denmark for their genuine hospitality and unfailing courtesy and for the remarkable efforts they have made in order to ensure the success of our deliberations here.
The Annual Meetings of such a distinguished gathering provide one with a unique opportunity to offer one’s views on some of the issues that are relevant to the development of the international economy in general and the international monetary system in particular.
I. During the last Annual Meeting, the distinguished Managing Director announced that the Fund would study the possibility of the improvement of the adjustment process of balance of payments disequilibria, including the use of limited exchange rate flexibility. The announcement was presumably and partly made in response to growing demands in academic and banking circles to introduce various regimes of exchange rate flexibility as a method to bring about a more prompt and effective adjustment in international payments.
The outcome of the Fund studies is with us and is contained mainly in the report of the Executive Directors entitled The Role of Exchange Rates in the Adjustment of International Payments.
The report contains valuable analysis, and we agree on the whole with the policy implications of such analysis. We subscribe to the Executive Directors’ views in their rejection of the systems of (1) floating exchange rates; (2) parities agreed with the Fund but allowing substantially wider margins; and (3) automatic adjustment of parities on the basis of a predetermined formula. Our reasons for such rejections are substantially the same as those stated in the report on pages 42–46. The same reasons lead us to reaffirm our belief that the basic principles of the Bretton Woods system are sound, and should be maintained and strengthened; that exchange rate stability (and not rigidity) at a realistic level is an essential condition for the balanced expansion of international trade; that changes in parities must be made in order to correct fundamental disequilibria; that changes in the par value of a member’s currency may be made only on the proposal of the member; and that parity changes are matters that concern the international community as a whole and should therefore be governed by agreed international procedures.
We think that the shortcomings of the present par value system are not due to inherent defects in the system as such but to the lack of its effective implementation, and that reform should ensure mainly the effective implementation of the principles of the present system, and especially the prompt and effective adjustment of exchange rates in cases of fundamental disequilibria.
We note, however, that the Executive Directors have not adopted a final position with regard to the introduction of a slightly wider margin of fluctuations around parity. The alleged main benefit of such a measure is that it will induce equilibrating short-term capital movements, provided there is confidence in the existing parity. My delegation thinks that such a measure is irrelevant so far as its adoption by the majority of developing countries is concerned, precisely because of the narrowness of their domestic money markets, the fact that their capital movements are strictly controlled, and because the pressure on their balance of payments is of a nature that cannot be contained by such a measure. Moreover, the adoption of slightly wider margins by the developed countries may have unfavorable effects on the developing countries. These may take the following forms: (1) the creation of difficult problems of portfolio management for those countries that maintain a multiple reserve asset system; (2) the possible fluctuations around par against the nonintervention currency in a destabilizing and/or disequilibrating manner; and (3) the possible creation of disturbances in the financial and economic relations among developing countries that are members of regional groupings.
We are aware that the question of slightly widening the margins around par is one of the issues upon which the Executive Directors have not yet finally decided. We therefore urge them to give due weight in their future studies to the interests of developing countries and also that the measures that may be prescribed and recommended should not adversely affect these interests.
II. This year has been one of the most eventful for the Fund, in the sense that during it special drawing rights were allocated and the Resolution permitting the adjustment of quotas following the fifth quinquennial review was adopted by the Board of Governors. During last year’s Annual Meeting my delegation, in company with other delegations from developing countries, argued that the distribution of SDRs in direct proportion to quotas would be inequitable, and urged by way of redressing this inequity (1) the consideration of the establishment of a link between the allocation of the new reserve asset and the provision of additional development financing to developing countries, and (2) the adjustment of quotas under the Fifth General Review of Quotas in a manner that would give the developing countries a larger share in total Fund quotas.
We thought and still think that the adjustment of quotas in the manner we proposed does not rest only on equity considerations but on the fact that, other things being equal, developing countries are more in need of conditional and unconditional liquidity. This is because they are exceptionally vulnerable to balance of payments fluctuations; they have only limited flexibility in adjusting imports; and they do not generally have access to alternative short-term credit facilities. It is to be noted, here, however, that the calls for considering the establishment of the link and the adjustment of the quotas of developing countries in the manner proposed above were embodied in operative paragraphs (2) and (3) of the Resolution on “International Monetary Reform,” which was adopted last year by the U. N. General Assembly. It is regrettable, however, that, with the notable exception of Italy, the attitude of the developed countries toward the establishment of the link is still negative. We are also very disappointed that the recent general adjustments of quotas have led to a slight decline in the developing countries’ share in total Fund quotas instead of a rise in this share as called for by the aforementioned General Assembly Resolution.
III. As the latest Report of the World Bank makes clear the net total financial resource transfer from DAC countries as a percentage of the GNP of these countries has declined in 1969. Moreover, the official component of this transfer declined from 0.49 per cent in 1964 to an estimated 0.39 per cent in 1969. The Report states that “had the level of 0.49 per cent been maintained throughout the period, almost $3.9 billion would have been added to net official flows between 1964 and 1969, including $1.8 billion in 1969 alone.” In addition, the terms of development finance have tended to harden; the proportion of grants in total official flows is declining; while the use of the practice of tying aid to procurement in the donor country is growing. This regressive trend is highly regrettable, particularly in view of the increasing capacity of the developing countries to make better utilization of development assistance. It is possible that balance of payments constraints in developed countries played an important role in bringing about this unsatisfactory state of affairs in the field of development assistance. We seriously hope, however, that with the allocation of SDRs this constraint will be alleviated, and that genuine progress would take place toward achieving the 1 per cent target and improving the over-all terms of development finance.
IV. The final point I would like to raise is connected with supplementary financing, which is designed to protect the development plans of developing countries from declines in their export proceeds below reasonable expectations. . . .
First we believe that supplementary financing should not be at the expense of basic development finance; that is to say, resources devoted to supplementary finance should constitute an addition to those devoted to basic finance. Second, we hope that the Bank would be able to develop an objective criterion for measuring export shortfalls from reasonable expectations, because we believe that the more discretion the supplementary financing agency has in determining export shortfalls the less assured the developing countries would be of the protection of their development plans against the effects of such shortfalls. In this connection we suggest that the experience of the Fund in determining shortfalls from the medium-term trend for the purpose of compensatory finance should be taken into consideration.
September 22, 1970.
