Article IV of the Fund’s Articles of Agreement: An Overview of the Legal Framework; June 28, 2006

INTERNATIONAL MONETARY FUND

Article IV of the Fund’s Articles of Agreement: An Overview of the Legal Framework

Prepared by the Legal Department

In consultation with the Policy Development and Review Department

Approved by Sean Hagan

June 28, 2006

I. Introduction

1. This paper provides an overview of the legal framework of Article IV of the Fund’s

Articles of Agreement. It is designed to assist the Executive Board in its consideration of the

steps that could be taken to provide members with more specific guidance as to their

obligations under Article IV.

2. The present version of Article IV was incorporated into the Articles by the Second

Amendment of the Articles of Agreement in 1978. It established a new code of conduct for

exchange arrangements in the wake of the collapse of the par value system. Under the

original par value system, a member’s choice as to how it valued its currency against the

currency of other members was very limited: the value had to be expressed in terms of gold,

either directly or through the U.S. dollar. A member’s ability to modify the value of its

currency against this common denominator was also limited: beyond a specified limit, a

member that changed the par value of its currency without the concurrence of the Fund

became ineligible to use the Fund’s resources, and the Fund would concur only if it was

satisfied that the change was necessary to correct a “fundamental disequilibrium”. An

important purpose of Fund financial assistance was to enable members to maintain the par

value of their currencies in circumstances where they were subject to balance of payments

pressures.

3. By legalizing a member’s freedom to choose whatever exchange arrangement it

wished—including floating—the Second Amendment represented a complete departure

from the par value system, which had been the central feature of the Articles. While the

provisions of the present Article IV continue to reflect the view that a country’s exchange

rate policies are a matter of international concern, the approach taken is of a fundamentally

different nature. The rationale underlying the obligations of members set forth in the present

Article IV, Section 1 may be summarized as follows.

- 2 -

• First, there is a recognition that a member should not resist an adjustment to its

exchange rate if such an adjustment is needed in response to underlying

conditions. There was a concern that the par value system had created rigidity

without stability, with members failing to adjust—or delaying adjustment—even

in circumstances of fundamental disequilibrium. This rigidity was perceived as

having hampered the balance of payments adjustment of many members and the

achievement of the sustainable equilibrium of the overall system. The assumption

underpinning the Second Amendment was that if exchange rates reflected

underlying conditions, the overall system would be more stable, even if this

resulted in fluctuations in members’ exchange rates. Reflecting this approach, a

key obligation under the original Article IV—the requirement to collaborate to

promote “exchange stability”—was modified in the Second Amendment to

become the requirement to collaborate to promote a “stable system of exchange

rates.” The stated objective is to achieve the stability of the system— not the

stability of exchange rates as such—and such stability would be best served if

exchange rates were permitted to fluctuate in response to underlying conditions.

• Second, given the important relationship between a member’s domestic policies

and its exchange rate, the stability of the overall system of exchange rates is

enhanced by the pursuit of domestic policies that create the underlying

conditions for economic and financial stability. While fluctuations of exchange

rates would be inevitable—particularly with respect to those members that chose

to float their currencies—erratic disruptions and disorderly developments in

exchange rates would be limited if members pursued appropriate economic

policies. In recognition of this relationship between domestic policies and the

exchange rate system, the Second Amendment introduced obligations with

respect to members’ domestic policies. However, as will be discussed in this

paper, these obligations are of a particularly “soft” nature, out of a recognition

that members should not have to give up a significant degree of sovereignty with

respect to policies that, while they may have an international impact, are of a

domestic nature.

• Finally, with respect to members’ exchange rate policies, members should avoid

pursuing policies that are designed to either interfere with the adjustment

process or gain an unfair competitive advantage over other members. In

particular, a specific obligation under Article IV, Section 1 is the requirement that

members “avoid manipulating exchange rates or the international monetary

system in order to prevent effective balance of payments adjustment or to gain an

unfair competitive advantage.” As will be discussed, this obligation is broad

enough to include both overvalued and undervalued exchange rates. Moreover,

unlike the obligations with respect to domestic policies, members’ exchange rate

obligations are of a “hard” nature, reflecting the international nature of these

policies. As will be discussed in Section II of this paper, the potential

applicability of the obligation to avoid manipulation is constrained by the need to

determine intent; this determination, however, is made independently by the Fund

and is not based exclusively on the member’s representation of its motives.

- 3 -

4. While the present Article IV sets forth obligations of members, it also sets forth

obligations for the Fund. Under Article IV, Section 3(a), the Fund is required to oversee the

international monetary system to ensure its effective operation and to oversee the compliance

of each member with its obligations under Article IV. Because of the particular importance

of members’ exchange rate obligations, the Articles give the Fund even more specific

direction with respect to how members’ compliance with these obligations is to be

monitored: Article IV, Section 3(b) requires the Fund to exercise firm surveillance over the

exchange rate policies of members and to adopt specific principles for the guidance of

members with respect to those policies. As a means of fulfilling this requirement, the Fund

adopted the principles contained in the 1977 Decision on Surveillance over Exchange Rate

Policies (the “1977 Decision”), which is a subject of the present review. To enable the Fund

to perform its surveillance obligation, Article IV, Section 3(b) also requires each member to

provide the Fund with the information necessary for this purpose and to consult with the

Fund upon request.

5. The remainder of this paper examines those provisions of Article IV that are of the

greatest relevance to the present review. Section II provides an overview of Article IV,

Section 2, which sets forth the rights of members with respect to their choice of exchange

arrangements. Section III analyses members’ obligations under Article IV, Section 1 to

collaborate with the Fund to assure orderly exchange arrangements and to promote a stable

system of exchange rates. Section IV examines the Fund’s surveillance responsibilities

under Article IV, Section 3 and, in that context, discusses both: (a) the present relationship

between the 1977 Decision and members’ exchange rate obligations; and (b) the scope for

evolution of this relationship. Section V offers conclusions.

6. Any examination of Article IV must be prefaced with an acknowledgement of the

challenge of interpreting its provisions. Unlike other provisions of the Second Amendment,

the substance of Article IV was effectively negotiated by a small group of members outside

the Executive Board and represented a delicate political compromise among these members.

When the text was presented to the Executive Board by these members, it was generally

understood that the scope for substantive change was very limited, notwithstanding the fact

that a number of Executive Directors—and staff—expressed concern regarding the

vagueness and ambiguity of a number of its terms. As a result, there is very little legislative

history to illuminate the meaning of the provisions. As was noted by the Executive Director

of one of the members that authored the text, it was envisaged that greater precision would

emerge over time:

“[P]recision and purity of language—obviously desirable goals—were most difficult

to achieve when a compromise was involved. That some terms were vague was of

course a matter of some importance, as it was experience gained by their use that

would give them precise meanings. Surely some of the terms used by the framers at

Bretton Woods were considered vague in 1944, but they had sharpened and acquired

- 4 -

precision as time had progressed. The [proposed] text had evolved over many hours

of negotiation, and he would be reluctant to see any changes made”.

7. Since the adoption of the Second Amendment and the 1977 Decision, the Fund has

not sought to elucidate the meaning of members’ obligations under Article IV for purposes

of its bilateral surveillance activities. As will be described in this paper, however, the Board

could choose to place greater reliance on the legal framework of Article IV, but in a manner

that continues to ensure flexibility and the maintenance of the cooperative nature of the

Fund.

II. Exchange Arrangements Under Article IV, Section 2

8. Before examining the scope of members’ freedom with respect to their choice of

“exchange arrangements”, it is important to have an understanding of the meaning of this

term. While the term “exchange arrangement” is not specifically defined under the Articles,

the use of the term in Article IV, Section 2 indicates that it refers to the overall method that a

member uses to determine the value of its currency against other currencies (see Box 1). For

example, a decision to peg one’s currency against a specified currency of another member

would represent one type of exchange arrangement, while the decision to freely float would

represent another type of exchange arrangement.

Box 1. Article IV, Section 2 of the Fund’s Articles of Agreement

Section 2: General exchange arrangements

(a) Each member shall notify the Fund, within thirty days after the date of the second amendment of

this Agreement, of the exchange arrangements it intends to apply in fulfillment of its obligations under

Section 1 of this Article, and shall notify the Fund promptly of any changes in its exchange

arrangements.

(b) Under an international monetary system of the kind prevailing on January 1, 1976, exchange

arrangements may include (i) the maintenance by a member of a value for its currency in terms of the

special drawing right or another denominator, other than gold, selected by the member, or (ii)

cooperative arrangements by which members maintain the value of their currencies in relation to the

value of the currency or currencies of other members, or (iii) other exchange arrangements of a

member’s choice.

five percent majority of the total voting power, may make provision for general exchange arrangements

without limiting the right of members to have exchange arrangements of their choice consistent with the

purposes of the Fund and the obligations under Section 1 of this Article.

Statement of Mr. Wahl, EBM/75/203, December 22, 1975, p. 17.

- 5 -

9. However, an issue that is central to any analysis of Article IV is the nature of the

distinction between the term “exchange arrangements” and “exchange rate policies”, the

latter term being used in Article IV, Section 3 in the context of the Fund’s surveillance

activities. Although the term “exchange rate policies” is also not defined, principles of

statutory construction require that these two terms be given different meanings from each

other.

In that regard, it has been noted that “exchange arrangements refer to a broad

classification or framework of a member’s exchange system, while the term ‘exchange rate

policies’ refer to the actions or inactions of members in the operation of their arrangements”.

However, where the line is drawn between these two terms depends on the exchange

arrangement adopted by the member. For example, a member may notify the Fund that its

exchange arrangement under Article IV, Section 2 is one where its currency is allowed to

float, subject to periodic intervention in amounts to be determined from time to time in the

light of developing economic conditions. It has been understood that, in this circumstance, a

member’s policy as to how it would approach intervention decisions would constitute its

exchange rate policy rather than its exchange arrangement.

However, in circumstances

where a member chooses an exchange arrangement that involves pegging its currency to the

currency of another member (or a basket of currencies), it has also been understood that the

“exchange arrangement” includes not only the currencies being used, but also the rate being

used for this purpose.

However, and as will be discussed further in Sections III and IV of

this paper, the fact that, in this case, the exchange rate forms part of the exchange

arrangement does not deprive the Fund of its jurisdiction over this rate when it determines

whether the member is fulfilling its obligations regarding its exchange rate policies.

10. Article IV, Section 2 gives members considerable freedom in the choice of their

exchange arrangements. Of the types of exchange arrangements that members may choose,

Article IV, Section 2 expressly contemplates the pegging of a member’s currency to the

SDR, the pegging to another denominator, and “cooperative arrangements under which

“[W]hen the legislature uses certain language in one part of the statute and different language in another, the

court assumes that different meanings were intended.” N.J. Singer, Statutes and Statutory Construction, (6

Edition 2000), p. 194.

Sir Joseph Gold, Exchange Rates in International Law and Organization (American Bar Association, 1988),

p. 113. As a general matter, the extensive writings of Sir Joseph Gold, former General Counsel of the Fund,

provide an invaluable resource to any examination of the meaning of Article IV. Among other things, he was

consulted on the preparation of the draft text of Article IV before it was presented to the Executive Board and,

therefore, has some knowledge of the authors’ intentions that are not evident in the rather sparse legislative

history of Article IV. Other publications of Sir Joseph Gold that are of relevance to this topic include

Interpretation: The IMF and International Law (Kluwer Law International, 1996); Developments in the

International Monetary System, the International Monetary Fund and the International Monetary Law Since

1971 (Martinus Nijhoff, 1983); Legal and Institutional Aspects of the International Monetary System: Selected

Essays, Volume II (IMF, 1983); Legal Effects of Fluctuating Exchange Rates (IMF, 1990).

Implementation of The Second Amendment—Notification of Exchange Arrangements under Article IV,

Section 2, SM/77/277, November 28, 1977, p. 2.

Id.

- 6 -

members maintain the value of their currencies in relation to the value of another member’s

currency or a group of currencies”. However, the list set forth in Article IV, Section 2 is

illustrative rather than exhaustive and it is specifically provided that a member may use

“other exchange arrangements of a member’s choice”.

11. The only type of exchange arrangement that is specifically precluded under

Article IV, Section 2 is one that relies on gold as the denominator. This prohibition reflects

a principal objective of the Second Amendment, which was to reduce the role of gold in the

international monetary system.

12. Members are required to provide an accurate notification to the Fund regarding

their exchange arrangements and of any changes they make to them. This notification is

for the information of the Fund; the Fund’s consent is not required for a member’s initial

choice of exchange arrangement, nor for subsequent changes. Changes must be notified

“promptly” and the Board has interpreted this as requiring notification within three days of

the modification.

Shortly after the adoption of the Second Amendment, the Board set out

guidelines on the types of changes to an exchange arrangement that would require

notification.

13. Notwithstanding the broad freedom that members have in this area, a member’s

choice of exchange arrangement must be consistent with its obligations under the Articles.

A member cannot put in place an exchange arrangement that would give rise to a breach of

an obligation under the Fund’s Articles. For example, a member could not maintain an

exchange arrangement that gave rise to a multiple currency practice that was inconsistent

with Article VIII, Section 3.

14. Perhaps of even greater relevance for this review, a member could not put in place

an exchange arrangement that would give rise to a breach of its obligations under

Article IV, Section 1, the content of which will be discussed in detail in the next section.

Indeed, this limitation is expressly referred to in various sections of Article IV, including:

(i) Article IV, Section 2(a) (which provides that each member shall notify the Fund of “the

exchange arrangements it intends to apply in fulfillment of its obligations under [Article IV,]

Section 1”), (ii) Article IV, Section 2(c) (which refers to “the right of members to have

exchange arrangements of their choice consistent with the purposes of the Fund and the

obligations under Article IV, Section 1”), and (iii) Article IV Section 3 (which, in the context

of the Fund’s surveillance responsibilities, refers to “other exchange arrangements of a

member’s choice consistent with the purposes of the Fund and Article VI Section 1”).

See Chairman’s Summing Up, Annual Review of the Implementation of Surveillance (EBM/82/44), April 9,

1982, p. 13.

Notification of Exchange Arrangements under Article IV, Section 2, Decision No. 5712-(78/41), adopted

March 23, 1978.

Although the legislative history of Article IV is not extensive, there was also some analysis of this issue when

the draft provision was discussed in the Executive Board. In particular, the then General Counsel noted that “the

freedom of members to choose was protected although, of course, they remained subject to the obligations of

(continued…)

- 7 -

15. The fact that a member’s obligations under Article IV, Section 1 may limit the

ability of a member to exercise a right that is specifically recognized under the Articles has

been discussed in other contexts. Most importantly, the Articles specifically confer upon

members the right to exercise controls on capital movements.

However, it has been

understood that a member may not impose capital controls if such controls are used to

manipulate the member’s exchange rate “in order to prevent balance of payments adjustment

or to gain an unfair competitive advantage over other members” within the meaning of

Article IV, Section 1.

III. The Obligations of Members under Article IV, Section 1

16. This section examines the obligations of members under Article IV, Section 1,

perhaps the most complex provision of the Fund’s Articles (the text is set forth in Box 2).

For analytical purposes, it is helpful to divide Article IV, Section 1 into three parts. The first

part contains a rather lengthy preamble to the general obligation of Article IV. (The text of

the preamble does not, on its own, constitute an obligation). The second part sets forth the

general obligation itself; namely, the requirement of each member to undertake “to

collaborate with the Fund and other members to assure orderly exchange arrangements and to

promote a stable system of exchange rates.” Finally, the third part identifies four specific

obligations whose performance is judged to be of particular relevance to the general

obligation to collaborate. Each part will be discussed in turn.

A. The Preamble

17. By setting forth the “essential purpose” and a “principal objective” of the

international monetary system, the preamble may be understood as identifying the broader

economic benefits that flow from members’ adherence to their obligations under

Article IV, Section 1. The “essential purpose” of the international monetary system is

Article IV, Section 1.” See EBM/75/206, December 23, 1975, p. 15. See also, Surveillance over Exchange Rate

Policies; Legal Aspects of the Discussion of SM/77/33, SM/77/59, March 21, 1977, p. 1.

Article VI, Section 3.

Under the 1977 Decision, one of the “developments” that “might indicate the need for discussion with a

member” regarding the observance of the principle relating to exchange rate manipulation includes the

introduction of or substantial modification for balance of payments purposes of restrictions on, or incentives for,

the inflow or outflow of capital. See also, statements by the General Counsel during the 1977 Executive Board

discussions of the 1977 Decision in which he clarified that the imposition of capital controls or the capital flows

that could occur in the absence of such controls could be legally used as an indicator justifying a need for

discussion between the Fund and the member of the appropriateness of the member’s exchange policies. The

General Counsel reasoned that as with other provisions of the Articles, the members’ freedom in terms of capital

controls was circumscribed by the member’s obligations under Article IV. EBM/77/9, January 17, 1977, p. 10;

EBM/77/10, January 19, 1977, pp. 7, 9, and 17. See also EBM/77/10, January 19, 1977, pp. 16–18 for the

discussion of the same issue during the Board discussions of the 1977 discussions.

- 8 -

identified as “provid[ing] a framework that facilitates the exchange of goods, services and

capital among countries and sustains sound economic growth”. Moreover, a principal

Box 2. Article IV, Section 1 of the Fund’s Articles of Agreement

Section 1: General obligation of members

Recognizing that the essential purpose of the international monetary system is to provide a framework

that facilitates the exchange of goods, services, and capital among countries, and that sustains sound

economic growth, and that a principal objective is the continuing development of the orderly underlying

conditions that are necessary for financial and economic stability, each member undertakes to collaborate

with the Fund and other members to assure orderly exchange arrangements and to promote a stable

system of exchange rates. In particular, each member shall:

i. endeavor to direct its economic and financial policies toward the objective of fostering

orderly economic growth with reasonable price stability, with due regard to its

circumstances;

ii. seek to promote stability by fostering orderly underlying economic and financial

conditions and a monetary system that does not tend to produce erratic disruptions;

iii. avoid manipulating exchange rates or the international monetary system in order to

prevent effective balance of payments adjustment or to gain an unfair competitive

advantage over other members; and

iv. follow exchange policies compatible with the undertakings under this Section.

objective of the system is “the continuing development of the underlying conditions that are

necessary for financial and economic stability”. The assumption underlying the preamble is

that, to the extent that members observe their general obligations set forth in Article IV,

Section 1, they will enhance the effective functioning of the international monetary system

and, thereby, contribute to the realization of the broader economic benefits identified in this

text.

18. The identification of these broader economic benefits in the preamble does not

mean that the achievement of these benefits has become a purpose of the Fund. The

preamble sets forth the purposes of the international monetary system—not those of the

Fund. While the achievement of these broader benefits could have been incorporated into

Article I as a purpose of the Fund at the time of the Second Amendment, this would have

been understood as a significant expansion of the Fund’s mandate, something which the

drafters wished to avoid. It certainly would have increased the tension with other provisions

of the Articles. For example, to the extent that the facilitation of the exchange of capital

became a purpose of the Fund, such a purpose would have been difficult to reconcile with

members’ general right to maintain capital controls under Article VI, Section 3.

19. Although the text of the preamble does not give rise to obligations, it can be used as

a tool to interpret those obligations that are set forth in Article IV, Section 1. Similarly, it

provides a useful means of understanding the scope of the Fund’s surveillance

- 9 -

responsibilities under Article IV, Section 3. In particular, the definition of the essential

purpose of the international monetary system is of relevance when examining the Fund’s

responsibility to “oversee the international monetary system”, which is generally referred to

as “multilateral surveillance”.

B. The General Obligation: The Undertaking to Collaborate

20. As noted, the general obligation of Article IV is to “collaborate with the Fund and

other members to assure orderly exchange arrangements and to promote a stable system of

exchange rates”. Before analyzing in detail the content of this obligation, it is important to

examine its relationship with the four specific obligations that follow it, two of which relate

to domestic policies and two of which involve external policies. Importantly, the sentence

that links the general obligation to the specific obligations reads “In particular, each member

shall:”. Based on the use of the term “in particular” in this sentence, it may be concluded that

the four specific obligations, while they represent “particularly” important steps that

members must take to fulfill their general obligation to collaborate, are not the only such

steps that must be taken; i.e. the general obligation of collaboration is broader in scope than

the sum total of the four specific obligations.

A contrary interpretation—one which would

conclude that the specific obligations exhaust the content of the general obligation—would

render the general obligation redundant, contrary to general principles of statutory

construction.

21. The above conclusion is of considerable relevance when one considers the concept

of “collaboration”, particularly in light of the way this term was understood and used prior

to the Second Amendment. Prior to the Second Amendment, Article IV, Section 4(a)

provided as follows:

“Each member undertakes to collaborate with the Fund to promote exchange stability,

to maintain orderly exchange arrangements with other members and to avoid

competitive exchange alterations.”

22. The collaboration undertaking set forth in the above provision was relied upon as a

basis for the Fund to call on members to take specific actions or refrain from taking

specific actions. While such a call could—and, on occasion, did—constitute a requirement

(with the implication that failure by a member to heed the call could give rise to a breach of

the obligation of collaboration), the Fund often exercised its authority under this provision by

making recommendations, preferring a “softer” means of guiding the membership as to their

Sir Joseph Gold, Exchange Rates in International Law and Organization (American Bar Association, 1988),

p. 104.

“A statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or

superfluous”; Norman J. Singer, Statutes and Statutory Construction, at pp. 185–86. Moreover, as is noted by

Sir Joseph Gold, former General Counsel of the Fund, such an interpretation of “in particular” is also supported

by the interpretation that has been given to the term in other provisions of the Articles; See Exchange Rates in

International Law and Organization, at p. 104.

- 10 -

obligations under the Articles. It was understood that failure to abide by such

recommendations would not constitute a breach of the obligation to collaborate.

The Fund

made considerable use of this collaboration obligation during the period between the

breakdown of the par value system and the Second Amendment as a means of limiting

exchange rate instability and competitive depreciation (see Box 3). Following a similar

approach, the Fund could rely on the collaboration undertaking set forth in the present

Article IV, Section 1 as a basis for either requiring or recommending that members take— or

refrain from taking—those actions that, while not included in any of the specific obligations

listed in Article IV, Section 1, are considered by the Fund to be necessary—in light of

changing circumstances—to assure orderly exchange arrangements and to promote a stable

system of exchange rates.

23. Indeed, in one respect the collaboration undertaking contained in Article IV,

Section 1 is broader that the pre-Second amendment version. While the earlier version only

required collaboration with the Fund, the present Article IV, also specifically requires

members to collaborate with each other. Although, as in many other aspects of Article IV,

Section 1, the legislative history provides little guidance as to the intent of this expansion, it

is clear that the need for co-operation among members in the conduct of their policies had

become increasingly relevant by the time of the Second Amendment.

It should be

emphasized, however, that, although this provision specifically contemplates collaboration

among members, it is the Fund—and not its members—that has the exclusive authority to

determine whether such collaboration satisfies the requirements of Article IV, Section 1.

As noted by Sir Joseph Gold, it was recognized that, if members did not adhere to recommendations, the

Fund could revisit the issue and determine whether a firmer approach was needed. “Although provisions

imposing obligations to collaborate are expressed in mandatory terms, the IMF has assumed that the exacting

administration authorized by such a provision permits a less rigorous approach, without any sacrifice of

authority should firmer administration of it become advisable”; Interpretation: The IMF and International Law,

at p. 337.

The expansion of the obligation to collaborate to includes collaboration among members may have been

inspired by certain arrangements that existed at the time of the Second Amendment, such as the “snake” and the

practice of pegging to certain leading currencies. The “snake” was an arrangement between several European

countries by which each participant maintained a fixed relationship between its currency and the currency of

other participants, with narrow margins for transactions involving these currencies.

- 11 -

Box 3. Duty to Collaborate under Article IV, Section 4(a) of the original Articles of Agreement

Prior to the Second Amendment, Article IV, Section 4(a) set forth a general obligation to collaborate as

follows: “Each member undertakes to collaborate with the Fund to promote exchange stability, to

maintain orderly exchange arrangements with other members, and to avoid competitive exchange

alterations”. On a number of occasions, the Fund relied on this provision to either call on or

recommend to members that they take certain actions or refrain from taking actions in order to achieve

the objectives set forth in this provision. For example:

1. 1947 Decision on Multiple Currency Practices. Notwithstanding the express language of

Article XIV, Section 2, which allowed members to maintain and adapt to changing circumstances (and,

in some cases, to introduce) restrictions on payments and transfers for current international transactions

at their discretion during the post-war transitional period, the Fund decided that members were required

to obtain the approval of the Fund before introducing or adapting multiple currency practices pursuant

to their duty to collaborate with the Fund under Article IV, Section 4(a). Specifically, the sense of the

meeting was that “the provisions in Article XIV, Section 2, regarding the transitional period did not

modify members’ obligations under Article IV, Section 4, irrespective of the particular exchange device

involved.”

The Board adopted a decision approving the text of a communication to be sent to all

members on multiple currency practices. This communication required a determination by the Fund of

the consistency of the member’s proposed action (i.e. either introduction or adaptation of a multiple

currency practice) with Article IV, Section 4(a) and indicated that a duty to consult with and obtain the

approval of the Fund is implicit in both Article IV, Section 4(a) and in Article XIV, Section 2.

.2/

2. Recommendations made during 1971–74 Regarding Exchange Rate Policies. During the period

of 1971–74, the Executive Board adopted a number of decisions designed to provide guidance to

members as to how they should conduct their exchange rate policies in an environment when the par

value system was no longer fully operational. For example, in 1971 the Fund adopted—and, in 1973,

subsequently revised—decisions aimed at establishing a system corresponding to the par value system

but with greater flexibility. The decisions identified practices that members “may wish to follow in

present circumstances consistently with Article IV, Section 4(a)...” (emphasis added). The decisions did

not impose an obligation but, rather, indicated that members would be “deemed to be acting in

accordance with Article IV, Section 4(a)” with regard to the introduction of wider margins by a member

or the communication of a central rate with wider margins, if they followed the practices spelled out in

the decisions.

On June 13, 1974, the Board adopted a decision and its attached memorandum (the

Guidelines for the Management of Floating Exchange Rates), which focused on the intervention

policies to be followed by members with a floating exchange system. The decision “recommend[s],

pursuant to Article IV, Section 4(a) that, in present circumstances, members should use their best

endeavors to observe the guidelines set forth and explained in the memorandum.”

________________________________________________________

See EBM/47/237, December 18, 1947.

See EBM/47/237, December 18, 1947 and Executive Board Document No. 235, Revision 2,

Attachment 8.

See Decision No. 3463-(71/126) on Central Rates and Wider Margins—Temporary Regime and

Decision No. 4083-(73/104), adopted respectively December 18, 1971 and November 7, 1973.

See Decision No. 4232-(74/67), adopted June 13, 1974, and Annex I attached to Executive Board

Decision No 4232-(74/67).

- 12 -

24. The nature of the actions that members must take to satisfy the obligation of

collaboration can only be determined in light of the objectives of this collaboration: to

“promote orderly exchange arrangements and a stable system of exchange rates”. Each of

these objectives is examined in turn, beginning with “a stable system of exchange rates”

because its intended meaning—although still somewhat obscure—is perhaps easier to

ascertain than that of “orderly exchange arrangements.”

25. A Stable System of Exchange Rates. As was noted in the Introduction, by the time of

the Second Amendment, there was a concern that the par value system had created rigidity

without stability, with members failing to adjust—or delaying adjustment—even in

circumstances of fundamental disequilibrium. It was believed that, in the medium term, the

overall monetary system would operate more effectively—and, accordingly, be in a better

position to achieve its purposes—if exchange rates were permitted to move in response to

underlying conditions, particularly if these underlying conditions benefited from the pursuit

of appropriate domestic economic policies. It is for this reason that the objective of

collaboration set forth in the original Article IV—the requirement to collaborate to promote

“exchange stability”—was modified in the Second Amendment to become the requirement to

collaborate to promote a “stable system of exchange rates.” The present objective is to

achieve the stability of the system—not stability of exchange rates as such—and the

underlying assumption is that such stability is best achieved if exchange rates reflected

underlying conditions that, in turn, are directed towards achieving economic and financial

stability, as indicated in the preamble to Article IV, Section 1.

As will be seen, the

important relationship between domestic economic policies and the effective operation of the

international monetary system is made explicit in the specific obligations of Article IV,

Section 1.

26. Even if a member’s exchange arrangement includes a specified exchange rate, the

member’s ability to choose this rate would be constrained by its obligation under

Article IV, Section 1 to collaborate with the Fund to promote a stable system of exchange

rates. As noted in the previous section, in circumstances where a member has pegged its

currency to other currencies, the value at which this pegging is to occur has been understood

as part of a member’s exchange arrangement that requires notification to the Fund.

Notwithstanding the fact that a member has a general right to select the exchange

arrangements of its choice, in these circumstances this right would be limited by the

exchange rate obligations set forth in Article IV, Section 1. Moreover, and as is discussed in

the following section, these rates would be the subject of Fund surveillance under Article IV,

Section 3(b).

27. Orderly Exchange Arrangements. As noted in the previous section, exchange

arrangements are generally understood as referring to the overall framework that a member

The reference to “exchange stability” in the purposes of the Fund under Article I was left intact out of a

reluctance on the part of members to change the language of the purposes in the context of the Second

Amendment of the Articles. See Joseph Gold, Developments in the International Monetary System, the

International Monetary Fund and the International Monetary Law Since 1971 (Martinus Nijhoff, 1983),

at p. 216.

- 13 -

uses to determine the value of its currency against other currencies. Prior to the Second

Amendment, members undertook to collaborate to “maintain orderly exchange arrangements

with other members”. This text was generally understood as supporting the maintenance of

the par value system which, as noted in the Introduction, only allowed members to value

their currencies in terms of gold, either directly or through the U.S. dollar. Given the freedom

accorded to members in the choice of their exchange arrangements, it may seem somewhat

surprising that “orderly exchange arrangements” was retained as one of the objectives of the

duty to collaborate under the revised Article IV. Although the legislative history is silent on

the question, it must be assumed that, notwithstanding the continuity of language, it was

intended that the underlying meaning of this objective would change in a manner that takes

into account the change made to the other objective of the obligation to collaborate (i.e., the

change from “exchange stability” to a “stable system of exchange rates”, and the broad

freedom given to members to put in place exchange arrangements of their choice). As noted

above, even where the exchange arrangement actually includes a specified exchange rate, the

right of the member to select this component would be constrained by its obligations

regarding a stable system of exchange rates. However, the question arises as to whether the

overall methodology chosen for calculating the value of the member’s currency (rather than

the specified rate in question) could give rise to an arrangement that is “disorderly” within

the meaning of Article IV, Section 1. One example would appear to be a multiple exchange

rate system arising from segmented markets, even one which arises from capital transactions

and, accordingly, is not inconsistent with a member’s obligations under Article VIII, Section

C. The Specific Obligations

28. Article IV, Section 1 identifies four specific obligations whose performance is

considered to be of particular relevance to the general obligation to collaborate. To the

extent that a member breaches one of these specific obligations, it would also be in breach of

the general obligation of collaboration. However, adherence to these specific obligations

does not necessarily mean that the member will always be in compliance with the general

obligation. As noted above, the Fund has the authority to call upon the member to take

additional action—or to refrain from taking certain actions—that it considers appropriate in

light of the obligation to collaborate. Each of these specific obligations is discussed in turn.

Direction of Economic and Financial Policies (Article IV, Section 1(i))

29. Article IV, Section 1(i) requires each member to “endeavor to direct its economic

and financial policies toward the objective of fostering orderly economic growth with

reasonable price stability, with due regard to its circumstances.” As discussed above, this

From the very beginning of the Fund, it was recognized that multiple currency practices, by virtue of the fact

that they constitute a system of exchange rates, raise issues under Article IV, Section 4(a). In one paper, it was

noted that “[T]he proposal to introduce a new multiple currency practice necessarily involves a threat to

exchange stability or orderly exchange arrangements or constitutes a possible exchange alteration.” See Certain

Aspects of the Jurisdiction of the Fund over Multiple Currency Practices, (note to Committee on Spreads and

Multiple Currency Practices, June 3, 1947), at p. 6.

- 14 -

specific obligation reflects the view that, although exchange rates should be permitted to

move in line with underlying conditions, the stability—and overall predictability—of the

system of exchange rates would be enhanced through the pursuit of appropriate economic

policies. Accordingly, this obligation describes the types of domestic policies that would be

appropriate for this purpose. In that regard, it recognizes that the exchange rate system will

only be stable on a sustainable basis if domestic policies are directed towards economic

growth—albeit the type of growth that is “orderly” and is accompanied by “reasonable price

stability”. Relative to the pre-Second Amendment text of Article IV, which focused

exclusively on policies relating to exchange rates and exchange arrangements (i.e., external

policies), this provision is significant because it extends members’ obligations—and

therefore the Fund’s jurisdiction—to domestic policies. It should be emphasized, however,

that this obligation is a particularly weak one—precisely because it does relate to domestic

policies. As noted above, members are only required to “endeavor” to direct domestic polices

towards the “objective” of fostering orderly economic growth and with “due regard to the

circumstances”.

30. The legislative history of the phrase sheds some light on the phrase “fostering

orderly economic growth with reasonable price stability”. Earlier drafts of this provision

placed greater emphasis on price stability relying on the phrase “orderly economic growth

within the context of reasonable price stability”. The change to “orderly economic growth

with reasonable price stability” gave somewhat greater emphasis to growth .

Promotion of Stability (Article IV, Section1(ii))

31. Article IV, Section 1(ii) requires each member to “seek to promote stability by

fostering orderly underlying economic and financial conditions and a monetary system

that does not tend to produce erratic disruptions”. Although the language of this provision

is not explicit, the drafting history indicates that the policies referred to in this provision are

domestic rather than external policies. In particular, efforts in the Executive Board to insert

the word “exchange” before stability were rejected.

Moreover, the reference to “a monetary

system” in Article IV, Section 1(ii) may be contrasted with the reference in the preamble to

Article IV, Section 1 to the “international monetary system.” Reflecting the focus on

domestic policies, the obligation is similar in nature to that of Article IV, Section 1(i);

namely, it is very soft: members are required to “seek” to promote stability by “fostering”

underlying economic and financial conditions. As with Article IV, Section 1(i), the

assumption is that, by fostering orderly underlying economic conditions and a stable

monetary system at the domestic level, members help ensure orderly exchange arrangements

and a stable system of exchange rates. With respect to the phrase a “monetary system that

does not tend to produce erratic disruptions”, it is not clear whether the phrase “erratic

Sir Joseph Gold, Exchange Rates in International Law and Organization, p. 106.

EBM/75/207, December 23, 1975, p. 29. More generally, for a discussion of the distinction between

domestic and exchange rate policy obligations under Article IV, Section 1, see Sir Joseph Gold, Exchange Rates

in International Law and Organization, p. 107.

- 15 -

disruptions” only refers to disruptions in exchange rates or whether it has a broader meaning.

At a minimum, and consistent with the general philosophy that underlies Article IV,

Section 1, it would cover erratic disruptions in exchange rates that are not the result of

orderly underlying economic and financial conditions.

Exchange Rate Manipulation (Article IV, Section 1(iii))

32. As noted above, Article IV, Section 1 also establishes specific obligations

respecting a member’s external policies. The first of these is set out in Article IV, Section 1

(iii) which requires members to “avoid manipulating exchange rates or the international

monetary system in order to prevent effective balance of payments adjustment or to gain an

unfair competitive advantage over other members.” Unlike members’ obligations respecting

domestic policies, this provision establishes a “hard” obligation that prohibits specific

conduct, reflecting the view that such policies are a more central concern of the international

community.

33. Article IV, Section 1(iii) is a relatively complex provision and not all of its terms

are easily understood— or easily applied. In particular, it is not clear what type of activity

was intended to be covered by the phrase “manipulating the international monetary system”

(as distinguished from the other prohibited activity, that of manipulating “exchange rates”).

In addition, the determination as to whether the competitive advantage obtained by a member

through manipulation is “unfair” would require the exercise of considerable judgment.

34. Notwithstanding the above, a number of the key elements of Article IV,

Section 1(iii) are sufficiently clear to provide guidance as to how the provision was

intended to be applied. Its interpretation is facilitated by the fact that the Executive Board

considered its application in the context of the preparation of the 1977 Decision which was

adopted by the Executive Board after the Board of Governors’ adoption of the Second

Amendment (but before the Second Amendment entered in force). Drawing on these

discussions, the following observations can be made with respect to Article IV, Section 1(iii).

(a) First, there are different ways in which a member could potentially “manipulate”

exchange rates within the meaning of Article IV, Section 1(iii). For example, it could occur

through excessive intervention in the exchange markets or through the imposition of capital

controls. Moreover, manipulation would not necessarily require that official intervention—

whatever its form—result in the movement of the exchange rate. In some cases, the

manipulation may be designed to prevent movement in the rate.

(b) Second, the term “in order to prevent balance of payments adjustment” is

sufficiently broad to cover situations where a member is manipulating its exchange rate in

a manner that makes it either overvalued or undervalued.

Article IV, Section 1(iii) if the determination is made that the member manipulated its

exchange rate for the purpose of preventing effective balance of payments adjustment. The

fact that the measure has the effect of preventing adjustment is not sufficient—the use of the

phrase “in order to” means that a determination of intent is required. This does not mean,

- 16 -

however, that the Fund is required to accept the member’s own representation of its motives.

In terms of the way the Fund determines intent, the discussion surrounding the 1977

Decision is of relevance. As is contemplated under the 1977 Decision, certain developments

could be identified that would trigger discussion with the authorities; e.g. “protracted large-

scale intervention in one direction in the exchange market”. At that point, the Fund would

ask the member to explain the motivation behind its actions. The Fund would give the

member the opportunity to represent the purpose of the measure and the Fund would give

this representation the benefit of any reasonable doubt. Ultimately, however, the Fund would

make an independent assessment whether the member’s representation was correct, taking

into account all available and relevant information regarding the member’s exchange rate

policy. On that basis, the Fund would make a determination as to whether the actions in

question were being taken for one of the purposes identified in Article IV, Section 1(iii). As

was explained in a staff paper that was prepared for purposes of the discussions surrounding

the 1977 Decision, this is the approach that the Fund generally followed in other contexts

when determining whether a measure has been introduced for “balance of payments

purposes”.

Exchange Policies Compatible with Undertakings of Article IV, Section 1 (Article IV,

Section 1(iv))

35. Finally, Article IV, Section 1(iv) requires members to “follow exchange policies

compatible with the undertakings” of Article IV, Section 1. Since this provision addresses

aspects of a member’s external policies, it establishes a “hard” obligation that is expressed in

terms of achieving results, not merely “endeavoring” or “seeking” to achieve results. In

terms of the meaning of this obligation, however, this provision is the least specific of all of

the obligations identified under Article IV, Section 1 and the legislative history reveals that,

at the time of its adoption, there was some uncertainty as to its meaning.

36. A threshold issue is the intended meaning of “exchange policies”. Since the term is

different from “exchange rate policies”, it must be assumed that the obligation is intended to

cover a different category of external policies that is broader than “exchange rate policies”.

One possibility is that it is intended to ensure that members’ use of exchange controls is

consistent with these undertakings. Among other things, such an interpretation would serve

to confirm that, while members have the general right to maintain exchange controls that are

consistent with their obligations under Article VIII, they may not do so if these controls are

used in a manner that is inconsistent with their obligations under Article IV. However,

although there was some discussion of the meaning of this provision (see below), there is no

evidence that it was intended to include exchange controls.

See Surveillance over Exchange Rate Policies: Balance of Payments Purposes, SM/77/97, April 28, 1977. To

illustrate this approach, the paper referred to the Fund’s interpretation of “for balance of payment purposes”

clauses in the context of Fund arrangements.

See EBM/75/205, December 23, 1975,, pp. 17–20.

- 17 -

37. Although the term “exchange policies” is sufficiently broad to cover exchange rate

policies, it is not clear how this provision was intended to interact and supplement the

other specific obligations set forth in Article IV, Section 1. In terms of its relationship with

members’ obligations regarding domestic policies, one interpretation would be that a

member should follow exchange rate policies that support a member’s ability to pursue the

types of domestic policies that are identified in these provisions. Such an interpretation

would create the result, however, of members’ having to adhere to “firm” obligations

regarding external policies in order to fulfill their “soft” obligations relating to domestic

policies. Moreover, during the Executive Board meeting where the draft of this provision

was discussed,

the Economic Counsellor expressed concern that this interpretation could

yield results that have the “opposite” effect of the overall thrust of Article IV, Section 1;

namely it could subordinate the stability of the exchange rate system to domestic policy

priorities. Specifically, he noted that the philosophy underlying Article IV, Section 1 was

that, by adhering to their obligations to pursue appropriate domestic economic policies, the

exchange rate system would be more stable. However, he expressed concern that Article IV,

Section 1(iv) could be interpreted as meaning, for example, that a member should pursue an

exchange rate policy that promoted domestic price stability—even if that exchange rate was

overvalued. Although the text was retained, the Executive Director of one of the authoring

members acknowledged that this provision would need to be interpreted “loosely” and, in

any event, could not be used to justify the maintenance of unrealistic exchange rates.

38. At least with its application to exchange rate policies, perhaps Article IV,

Section 1(iv) can be most easily interpreted as requiring members to follow exchange rate

policies that support the general obligation set forth in Article IV, Section 1; namely, the

obligation “to collaborate with the Fund and other members to assure orderly exchange

arrangements and to promote a stable system of exchange rates”. In contrast to the specific

obligation regarding exchange rate manipulation—which is an obligation of restraint—this

obligation is one that would also require members to take positive measures in this area. This

interpretation would appear to be supported by the 1977 Decision. Specifically, while the

first principle set forth in that decision is clearly designed to provide guidance regarding the

manipulation obligation (indeed, it simply restates the text of Article IV, Section 1(iii)), the

two remaining principles address intervention policies, exhorting members to: (a) “intervene

in the exchange market to counter disorderly conditions” (consistent with the general

obligation to promote a stable system of exchange rates) and (b) “take into account in their

intervention policies the interests of other members” (consistent with the general obligation

to collaborate with “other members”).

39. Irrespective of the interpretation of Article IV, Section1(iv), if the Fund wishes to

provide further guidance to members as to those exchange rate obligations under Article

IV, Section 1 that go beyond the obligation to avoid exchange rate manipulation, it may

rely directly on the general obligation to collaborate to promote a stable system of

exchange rates. As is discussed earlier, and consistent with the approach that was adopted

See EBM/75/205, December 23, 1975, p. 17.

- 18 -

prior to the adoption of the Second Amendment, the Fund could call on members to pursue

such exchange rate policies that it views as being necessary to achieve the objective of

achieving a stable system of exchange rates. In this regard, and as noted earlier, the specific

obligations contained in Article IV, Section 1(i) through (iv), while being of particular

importance with respect to the Fund’s jurisdiction under Article IV, do not exhaust it.

IV. The Fund’s Responsibilities Under Article IV, Section 3

40. Article IV, Section 3(a) sets forth two distinct obligations for the Fund. The first

requires the Fund to “oversee the international monetary system to ensure its effective

operation”. This provision provides the basis for the Fund’s multilateral surveillance

activities, which include the World Economic Outlook and the multilateral consultation

process that was recently initiated. The second obligation requires the Fund to “oversee the

compliance of each member with its obligations under Article IV, Section 1”. Accordingly,

this general oversight obligation applies not only to the general obligation to collaborate but

also to all of the specific obligations enumerated in Article IV, Section 1(i) through (iv),

including the obligations regarding domestic policies.

41. However, because of the particular importance of members’ obligations regarding

their exchange rate policies, Article IV provides the Fund with more specific direction as

to how it is to oversee members’ compliance with these obligations. (See Box 4).

Specifically, Article IV Section 3(b) provides that, in order to fulfill this general oversight

function, the Fund shall “exercise firm surveillance over the exchange rate policies members

and shall adopt specific principles for the guidance of all members with respect to those

policies.” As a means of enabling the Fund to carry out this function, each member is

required to: (a) provide the Fund with the information necessary to conduct surveillance over

such policies; and (b) when requested by the Fund, to consult with the Fund regarding its

exchange rate policies. The requirement of the Fund to adopt specific principles in this area

provides the legal basis for the principles contained in the 1977 Decision, which specifically

provides that it is has been adopted in order for the Fund to perform its responsibilities under

Article IV, Section 3(b) (i.e., firm surveillance over exchange rate policies) rather than the

more general obligation under Article IV, Section 3(a) (which requires the Fund to oversee

all of members’ obligations under Article IV, Section 1).

- 19 -

Box 4. Article IV, Section 3 of the Fund’s Articles of Agreement

Section 3. Surveillance over exchange arrangements

(a) The Fund shall oversee the international monetary system in order to ensure its effective

operation, and shall oversee the compliance of each member with its obligations under Section 1 of this

Article.

(b) In order to fulfill its functions under (a) above, the Fund shall exercise firm surveillance over the

exchange rate policies of members, and shall adopt specific principles for the guidance of all members

with respect to those policies. Each member shall provide the Fund with the information necessary for

such surveillance, and, when requested by the Fund, shall consult with it on the member’s exchange rate

olicies. The principles adopted by the Fund shall be consistent with cooperative arrangements by which

members maintain the value of their currencies in relation to the value of the currency or currencies of

other members, as well as with other exchange arrangements of a member’s choice consistent with the

purposes of the Fund and Section 1 of this Article. These principles shall respect the domestic social and

political policies of members, and in applying these principles the Fund shall pay due regard to the

circumstances of members.

42. When considering the existing principles mandated under Article IV,

Section 3(b)—and any possible modifications to such principles—the following should

be noted.

43. First, the specific principles mandated by Article IV, Section 3(b) are only required

with respect to those obligations under Article IV, Section 1 that deal with “exchange rate

policies”. Accordingly, and in light of the analysis set forth in the previous section, these

obligations comprise members’ obligations under Article IV, Section 1(iii) and (iv) and any

exchange rate actions the Fund may call on members to take pursuant to the general

obligation to collaborate in the promotion of a stable system of exchange rates under

Article IV, Section 1. While it is open for the Fund to adopt principles for the guidance of

members in complying with their obligations respecting domestic policies under Article IV,

Section 1(i) and (ii)(or any other domestic policies that the Fund may determine are

necessary in light of the general obligation to collaborate), it is not required to do so.

Consistent with the above, the 1977 Decision focuses on members’ exchange rate policies,

albeit with an explicit recognition that there is a close relationship between these policies and

domestic policies.

As was noted in a recent paper, however, the surveillance process has

As is evident from the section of the 1977 Decision entitled “Principles of Fund Surveillance over Exchange

Rate Policies,” exchange rate policies have been understood by the Executive Board as embracing a broad range

of external policies that are specifically pursued for balance of payments purposes; e.g. “the introduction of or

substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or

outflow of capital.” Moreover, to the extent that certain domestic policies are also pursued for balance of

payments purposes, the indicators suggest that these would also be included; specifically, “the pursuit, for

(continued…)

- 20 -

increasingly focused on those policies of members that relate to their performance of

domestic policy obligations under Article IV, Section 1; i.e., Article IV, Section (i) and (ii).

44. Second, since the principles to be adopted under Article IV, Section3(b) are

intended to provide “guidance” as to how a member’s exchange rate policies will be

consistent with its obligations under Article IV, Section 1, failure to abide by these

principles would not necessarily mean that a member is in breach of these obligations.

Under the existing 1977 Decision, and as noted in Section II of this paper, the principle that

specifically addresses exchange rate manipulation (Principle A) simply repeats the language

of Article IV, Section 1(iii). Accordingly, a determination that a member has not adhered to

this principle would effectively constitute a determination that a member is in breach of its

obligations under the Articles. (The “guidance” is effectively provided by the list of

“developments” which, under terms of the decision, “might indicate the need for discussion

with a member”). In contrast, however, there is no evidence that the remaining principles

(Principles B and C ) were ever understood as actually constituting obligations under

Article IV, Section 1, either under the general collaboration obligation set forth in that

provision or under Article IV, Section 1(iv) (which requires members to pursue exchange

policies that are consistent with their undertakings under Article IV, Section 1). However, to

the extent that a member’s policies are in harmony with these principles, the Fund would be

precluded from finding that a member is in breach of these obligations.

45. Third, to the extent that the Fund wishes to revise and update its principles on

those exchange rate policies that are unrelated to manipulation for balance of payments

purposes, such a step could be taken on the basis of the Fund’s authority to require or

recommend that members pursue – or refrain from pursuing – specified exchange rate

policies pursuant to their general obligation to collaborate to promote a stable system of

exchange rates.

Consistent with the approach followed prior to the Second Amendment,

the Fund could decide that, in lieu of identifying exchange rate action that would constitute

obligations under the general obligation to collaborate set forth in Article IV, it would issue

recommendations with respect to such actions. Failure to adhere to such recommendations

would not, in and of itself, constitute a breach of the obligation under the Articles.

balance of payments purposes, of monetary and other domestic financial policies that provide abnormal

encouragement or discouragement to capital flows.” However, domestic policies pursued for these specific

purposes should be distinguished from domestic policies that only have this effect. The latter category would not

be considered “exchange rate policies” within the meaning of the 1977 Decision.

Biennial Review of the Implementation of the Fund’s Surveillance and the 1977 Surveillance Decision—

Modalities of Surveillance

, Appendix 1 (SM/04/212, July 2, 2004).

Consistent with general principles of statutory construction, any call by the Fund for members to pursue

particular exchange rate policies—or to refrain from pursuing certain policies—could not be so general as to

make the specific obligations set forth in Article IV, Section 1 redundant. For example, a call to members to

avoid all forms of exchange rate misalignment (irrespective of the motivation) would effectively render Article

IV, Section 1(iii) redundant.

- 21 -

46. Finally, while the principles under Article IV, Section 3(b) must be consistent with

members’ exchange arrangements, they are not intended to provide guidance with respect

to these exchange arrangements. As noted in this paper, members’ rights regarding their

choice of exchange arrangements are qualified by their obligations under Article IV,

Section 1. Specifically, to the extent to which the member’s exchange arrangement includes a

specified exchange rate, the scrutiny of this rate in light of a member’s obligation to promote

a stable system of exchange rates is a proper subject of the principles issued under Article

IV, Section 3(b). However, there also may be situations where Fund is of the view that the

underlying methodology relied upon by the members for valuing their currencies (rather than

the rate itself) constitutes a “disorderly exchange arrangement” within the meaning of

Article IV, Section 1. While the Fund could issue guidelines to members as to what type of

arrangements would be considered disorderly, these guidelines would be issued under

Article IV, Section 1 rather than Article IV, Section 3(b).

V. Conclusions

47. Since the adoption of the Second Amendment and the 1977 Decision, the Fund has

refrained from elucidating the meaning of members’ obligations under Article IV for

purposes of its bilateral surveillance activities. Taking into account the substance of these

obligations, as described in this paper, the Executive Board could choose to place greater

reliance on the legal framework of Article IV, but in a manner that continues to ensure

flexibility and the maintenance of the cooperative nature of the Fund. Specifically:

48. With respect to members’ exchange rate policies, the principles that the Fund is

required to adopt to provide guidance to members in this area could be updated in a manner

that takes into account the substance of members’ obligations under Article IV, Section 1.

One of these obligations prohibits exchange rate manipulation for the purposes identified in

Article IV and further guidance could be given as to how this obligation will be applied in

practice, taking into account developments since 1977. As has been described in this paper,

however, the obligations relating to exchange rate policies are not limited to members’

obligations regarding exchange rate manipulation for balance of payments reasons. The Fund

could, for example, make specific recommendations regarding other exchange rate policies it

believes members should adopt as a means of complying with the their general obligation to

“collaborate with the Fund and other members to. . .promote a stable system of exchange

rates”.

49. With respect to members’ exchange arrangements, while this term is not specifically

defined under the Articles, its use in Article IV, Section 2 confirms that it is intended to

include the overall method that a member uses to determine the value of its currency against

other currencies (e.g. pegging vs. floating). While the Articles confirm that members may

choose whichever exchange arrangement they wish (other than one that relies on gold as the

denominator), members must exercise this freedom in a manner that is consistent with their

obligations under the Articles. First, members must provide an accurate notification to the

Fund regarding their exchange arrangements and any changes to those arrangements. Second,

in circumstances where a member has actually specified the exchange rate that it will use

when implementing its exchange arrangement and this forms part of the member’s

- 22 -

notification, the rate specified is subject to members’ obligations regarding their exchange

rate policies, discussed above. Finally, a member’s exchange arrangement must be consistent

with its general obligation under Article IV “to collaborate with the Fund to assure orderly

exchange arrangements”.

50. With respect to members’ domestic policies. Article IV identifies certain domestic

policy obligations, the adherence to which is considered to be of particular importance to the

members’ general obligation to collaborate with the Fund to assure orderly exchange

arrangements and to promote a stable system of exchange rates. As discussed in the paper,

while these policies are of international concern because of their impact on external stability,

the relevant obligations are of a “soft” nature, requiring efforts rather than the achievement

of results. To the extent that the Fund were to identify other domestic policies that members

should take pursuant to the general obligation of collaboration, any such obligations would

also need to be of a similarly soft nature. Any guidelines or principles that would be adopted

for this purpose would be adopted under Article IV, Section 1 rather that Article IV,

Section 3(b), the latter dealing with exchange rate policies.