RESTRICTEDWORLD TRADE
ORGANIZATIONWT/BOP/R/65
24 October 2002
(02-5835)
Committee on Balance-of-Payments Restrictions
NOTE ON THE MEETING OF 2 OCTOBER
1. The Committee met on 2  October 2002, under the Chairmanship of
Ambassador Anda Cristina Filip (Romania), to continue its work on outstanding implementation
issues according to paragraph 12(b) of the Doha Ministerial Declaration. The agenda for the meeting
was contained in WTO/AIR/1902 and Corr.1.  The Committee also resumed consultations with the
Government of Bangladesh;  the report on these co nsultations has been circulated in WT/BOP/R/64.
2. The Chairperson drew the attention of the Committee to a Note by the Secretariat on “Reserve
Adequacy” (WT/BOP/W/21) that had been prepared in response to a request made at the previous
meeting.
3. The representative of the Secretariat said that, as requested by the Committee, the Secretariat
had reviewed the factors and elements taken into account by the IMF in its statements to the
Committee on a consulting country’s monetary reserve position and on financial aspects of other
matters covered in consultations with the country.  The Secretariat had also taken care to look at howpositions had changed in the past ten years, in light of the financial crises that had occurred in the
1990s.
4. The Secretariat  had  found, to the extent there was ever an informal rule-of-thumb on reserve
adequacy of three months of import cover, that with the rise in private capital flows the focus of
reserve adequacy on trade – and the rule-of-thumb of 3 months of import cover – had increasinglycome to be regarded as out-of-date for many countries consulting in the Committee on Balance-of-
Payments Restrictions (BOPs Committee). In particular, the crises that had affected emerging market
countries in the 1990s highlighted the point that capital flows were important in financing the balance-
of-payments and that access to these private capital flows was often uncertain and subject to rapid
reversal.  Such reversals could contribute to a liquidity squeeze and could result in, or aggravate,external crises.
5. As a result, the Secretariat  reported that IMF staff analysis today pointed to the conclusion
that from a crisis prevention perspective, the most relevant indicator of reserve adequacy for emerging
market countries was the ratio of international reserves to short-term external debt by remaining
maturity (paragraphs 67 and 68).  The IMF found that higher levels of reserves would be preferable incountries with problematic characteristics – e.g., weak macroeconomic fundamentals (such as large
current account deficits that raised financing needs and overvalued exchange rates that could lead to
capital outflows), high levels of short-term public domestic debt (especially where there were no
effective capital controls or other mechanisms that created captive markets), derivative positions of
the public sector, and weak banking systems that could contribute to capital flight.  The IMF also
noted certain considerations that could  limit the need for reserves (listed in paragraph 68).
6. The Secretariat’s understanding of the consultations that had been held in the BOPs
Committee since the establishment of the WTO was th at the IMF contributions to the Committee, and
the Committee itself, had reflected this new approach towards the determination of the adequacy of a
consulting country’s level of monetary reserves.  It was an approach that would appear to have the
following key characteristics:WT/BOP/R/65
Page 2
• The case of each consulting country was likely to be different, so the determination of reserve
adequacy needed to be undertaken case-by-case;
• Reserve adequacy needed to take account of a consulting country’s external debt by
remaining maturity, so that predictable liabilities could be covered by the monetaryauthority’s holdings of offsetting foreign assets.
• Reserve adequacy was only one indicator of a consulting country’s balance-of-payments
situation.  It needed to be considered in the broader context of the country’s current andprojected macroeconomic and financial situation.
7. The Secretariat drew the Committee's attention to language contained in the IMF's March
2001 “Guidelines for Foreign Exchange Reserve Management” which had been reproduced inparagraph 66 of the Secretariat Note.  Slightly amending the language to place it in the context of the
Committee’s responsibilities would produce the following:
"Relevant factors for assessing the adequacy of reserves include a
country’s monetary and exchange arrangements, and the size, nature
and variability of its balance-of-payments and external position.
Financial risks associated with a country’s external debt position and
the volatility of its capital flows should receive particular attention,especially for economies with sufficient but not fully certain access
to international markets."
8.  The representative of India told the Committee that her authorities were still examining the
Secretariat Note and would provide substantive comments at the next meeting. A preliminary
examination of the background paper showed the gradual change in the approach of the IMF in theBOPs Committee – i.e. from being analytical in the 1970’s it had today become fairly prescriptive.
Paragraph  20 of the Secretariat paper showed that the IMF de-linked the level of monetary reserves
from trade restrictions in the 1980s.  Where foreign debt built up to unsustainable levels, it had
focused on the importance of alternative adjustment measures to restore balance of payments
equilibrium and had not viewed debt servicing difficulties as a reason for prolonging maintenance oftrade restrictions. Paragraph  23 went on to explain that, since 1995, the IMF had focused in particular
on the adequacy of alternative measures to restore balance of payments equilibrium. The IMF was
requested to comment on India’s balance-of-payments position for the second time in 1997, wherein it
recommended that “…Early action and a clear timetable for removing the continuing QRs on
consumer goods imports – together with liberalization of the system of reservation for small-scaleunits of many manufactured products – would help reduce distortions to investment incentives and
encourage the emergence of an efficient, export-oriented consumer goods industry. Moreover, in the
Fund's judgement, the external situation can be well managed using macroeconomic policy
instruments without recourse to QRs.  The Fund's vi ew, therefore, is that QRs should be removed over
a relatively short period; the tariff levels applied to previously restricted consumer goods imports
could initially be kept close to the top end of the existing tariff structure, but tariffs should be scaled
back gradually over a pre-set timetable”.
9. India raised the question as to whether the IMF was not only supplanting the role of the BOPs
Committee but also providing the Panel/Appellate Body with the means to severely circumvent the
Committee route in deciding the adequacy of India's balance-of-payments position. She quoted
Article XV which stated that Members "shall accept all findings of statistical and other facts presented
by the Fund relating to foreign exchange, monetary reserves and balance of payments, and shall
accept determination of the Fund as to whether action by a Member in exchange matters is in
accordance with the terms of exchange agreement with the Fund".   The Fund's role did not extend, in
India’s view, to setting timetables for the remova l of QRs (although India recognized that the Fund
could comment that QRs were no longer justified based on reserve position alone), much less toWT/BOP/R/65
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commenting on a system of reservations for the small scale sector. These were issues that belonged in
the domestic policy domain, and there could be a number of policy objectives other than just the
balance of payments situation, for Members to have reservation policies of this type.
10. She noted that the change in the IMF’s evaluation of reserve adequacy followed the changing
pattern of foreign exchange flows internationally.  While continuing to measure adequacy in terms of
“months of imports”, adequacy was judged in terms of short-term debt, access to capital markets,
stability of capital markets, current account deficits and other such macro-economic parameters.  The
IMF Executive Board in its document “Issues in Reserves Adequacy and Management” had
stated "did this mean that the traditional rule of thumb of 3 months of imports of goods and services is
no longer useful?  It was likely that reserves would continue to be expressed in terms of imports,
especially for countries with limited access to capital markets, because this continued to be
universally available and easily interpretable.  However, the motivation for the level of reserves heldshould be justified in broader terms …  Such an approach, in practice, could be expected to lead to a
much wider range of observed levels of reserves, when expressed in terms of imports, and a much
greater focus on reporting and comparing reserves in terms of other measures, such as short-term
debt.”  While a comprehensive evaluation of the reserve adequacy of a Member should include all
sources of foreign exchange receipts which boosted the quantum of reserves available in terms of“months of imports”, India’s experience was that no weight had been given to the developmental
aspect, i.e. the impact on the domestic industry of the removal of QRs in a short time-frame.  In fact,
with the increase of capital flows and integration of trade, investment and financial markets, the
number of variables involved in an assessment of adequacy of reserves had increased multi-fold,
making it all the more difficult to prescribe simple trade liberalisation-based solutions for reservemanagement or economic growth.
11. Thus, the role of the IMF had become more prescriptive even as the number of variables
affecting the balance-of-payments had increased. Furthermore, the IMF was commenting on domestic
policy (such as reservation policy) which had only an indirect effect on the balance-of-payments.  In
this context, her Government considered a review by the Committee necessary in order to re-establish
the role of the Membership.  She hoped Members would reflect on the question of whether WTO
Members wished to relegate the balance between development and trade liberalization to the IMF or
retain their sovereign rights through a participatory manner by achieving consensus in the Committee.
In India’s view, the report of the IMF should be primarily used by the Balance of payments
Committee in its own examination of the consulting Member's justification for quantitative
restrictions rather than using it as a mandate for immediate removal of QRs.   She recalled that at
Doha, Ministers had reaffirmed that Article XVIII of the GATT 1994 was a special and differentialtreatment provision for developing countries and that recourse to it should be less onerous than to
Article XII of the GATT 1994.  This reaffirmation needed to be translated into an Understanding to
ensure it served its purpose. It had to be understood that macroeconomic policies had an interface with
development policies and that it was not possible to view them as watertight compartments.  A
developing country Member was free to devise its developmental policy and tools to meet itsdevelopmental objectives and it was the prerogative of the Member to explain the linkage of such
measures to its overall macroeconomic framework.   
12. The representative of the United States thanked the Secretariat for an informative and well-
researched paper on reserve adequacy and said that it provided a good overview of the IMF’s role
under the balance-of-payments procedures under GATT and WTO.  In particular, the paper showedhow the IMF had increasingly looked at balance-of -payments criteria that involved not only import
coverage but capital account positions and domestic policies that have an impact on a country’s
balance-of-payments,.  taking into account the significant rise in capital flows and the shift in
Member’s exchange rate policies towards more flexib le systems.  He considered that the WTO should
not criticize the IMF for the role it played, the WTO relied heavily on the expertise and advice of theIMF, which would perhaps be beyond the Committee’s capabilities.  Nor was it advisable to steer theWT/BOP/R/65
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advice given.  If India felt that the IMF had stepped beyond its mandate, it would be more appropriate
to voice this in the IMF itself.
13. The representative of the European Communities also congratulated the Secretariat for its
excellent background paper and, like the speaker before him, considered that the IMF’s past advice
was not a subject for criticism.  He expressed the view that there was nothing fundamentally wrongwith the way Article XV  operated  and the advice of the IMF was crucial. He considered it important
to look at the advice and the criteria used and recognized that there had been a development and a
broadening of the picture.  Turning to what could be done in the Committee to make the criteria
clearer, he noted  that the Secretariat had suggest ed some ideas of a forward-looking nature- on which
the EC would come back to- to find common ground on future procedures and perhaps incorporate
these in a more formal way.  In his view, the question was what the Committee could do vis-a-vis
Article XV and what to expect from the IMF.
14. The representative of Brazil said that her Government was still reflecting on the issues and
reserved its position on tirets 1 and 3.  She was pleased to note that Members agreed that it was up to
the Committee to decide whether reserves were adequate for the invocation of Article XVIII:B.  The
role of the IMF was crucial, in providing valuable  technical advice, but the Committee had to evaluate
the macroeconomic and development situation in arriving at its decision.
15. The representative of India said she had not implied criticism of the IMF but her intention
was to focus Members’ attention on the role of the Committee:  the IMF provided input and it was for
Members to make use of the input; a debate was needed and other factors  had to be taken into
account. India hoped to focus the work on Article XV.
16. The representative of Canada noted the case by case approach taken by the IMF and that the
approach had evolved over time and took into account changing trends.
17. The representative of Japan agreed with previous speakers that Article XV clearly specified
the division of labour between the WTO and the IMF, that any criticism levied against the IMF should
be expressed in the appropriate forum and that clarification of criteria used in the assessment of the
balance-of-payments situation was a useful exercise.
18. The Chairperson then gave the floor to the representative of the IMF (see Annex) .
19. The Chairperson, noting that the Committee was in a process of reflection,  pointed out that a
report to the TNC would need to be prepared before the next meeting of the Committee on
18 November and asked for guidance from Members.  In order to arrive at a possible outcome on
tiret 3, she suggested that  an overview of the variety of views might include the following:
reaffirming the advisory role of the IMF in the Committee, clarifying the need for a case-by case
evaluation using up- to- date criteria and reaffirming the importance the Committee attaches to theproviso  in Article XVIII:11.
20. The representative of the European Communitie s suggested that a results-oriented approach
might warrant some informal consultations before the next meeting. The Chairperson considered that
this would be an appropriate way to proceed and said a draft would be circulated for discussion before
the end of the month.WT/BOP/R/65
Page 5
ANNEX
Statement by the representative of the IMF
1. The international financial crises that affected emerging markets in the nineties highlighted
again the  important role of reserves for macroeconomic management. Notably these crises
underscored that holding and managing sufficient reserves is essential for a country to be able to
prevent and weather external crises, especially those crises stemming from the capital account. The
experience contributed to a widespread realization that a current account-based approach to assessing
reserve adequacy was no longer adequate for coun tries whose capital accounts were subject to large,
sudden reversals of capital flows. In response, proposals were made by various policymakers to focus
the assessment on what is often the largest and most volatile category of capital account flows: short-
term debt—in particular by remaining maturity.1
2. Against this background, the IMF’s Executive Board discussed the approach to assessing
reserve adequacy on May 9, 2000, based on a staff paper on Debt and Reserve- Related Indicators ofExternal Vulnerability. That paper contains an extensive discussion of the various reserve adequacy
measures and the empirical and analytical support for these measures. A key point in the paper was
that “From a crisis prevention perspective, the most relevant indicator of reserve adequacy for
emerging market countries is the ratio of international reserves to short-term external debt by
remaining maturity. Indeed this ratio empirically outperforms other indicators, including ratios of
reserves to imports or to broad money.”
2
3. In its discussion, the IMF’s Board endorsed the view that the ratio of short-term debt to
reserves3 could be a particularly useful indicator for assessing reserve adequacy; and that a ratio of 1
is a starting point for the evaluation of reserve adequacy, especially for countries with significant, but
not fully certain, access to international capital markets. The IMF’s Directors underscored that suchassessment should take into account country-specifi c factors. Among such factors, Directors stressed
the importance of choice of the exchange rate regime and the flexibility of domestic interest rates.
They also stressed the regulatory regime and incentive structure within which the private sector
operates, including the extent to which debt is hedged, to gauge the risks of widespread private sector
debt problems. Moreover, Directors stressed the need to take into account other sources of demand on
reserves, including the potential for capital flight by residents, derivative exposure, and short-term
public debt to residents.
                                                     
1 The focus on short-term debt was proposed by Mr. Greenspan, Chairman of the United States Federal
Reserve Board, and Mr. Guidotti; see for example, Alan Greenspan, Efforts to Improve the Architecture of the International
Financial System,  May 20, 1999, Testimony before the Committee on Banking and Financial Services, U.S. House of
Representatives, and Alan Greenspan, Currency Reserves and Debt , remarks before the World Bank Conference on Recent
Trends in Reserves Management, Washington, D.C., April 29, 2000, www.bog.frb.fed.us.
2 As discussed in SM/00/65 (see footnote 3), these results were found in tests of the Fund’s Early Warning
System model and research on the depth of crisis (Matthieu Bussiere and Christian Mulder, External
Vulnerability in Emerging Market Economies: Th e Trade-Off Between Fundamentals and Liquidity , IMF
Working Paper, WP/99/88, 1999). The latter work also found support for the ratio of one and provides specificparameters for augmenting the reserve ratio in the presence of a current account deficit and an appreciatedexchange rate. These results can be used both in analyzing reserve adequacy and in gauging externalvulnerability during systemic shocks. Evidence for short-term  debt over reserves as a crisis indicator is also
found in, Short-Term Capital Flows , 1999, a paper prepared for the World Bank ABCDE conference by Dani
Rodrik and Andrés Velasco; Jason Furman and Joseph E. Stiglitz, Economic Crises: Evidence and Insights from
East Asia , Brookings Papers on Economic Activity , No. 2, 1998, pp. 1-114.
3 Short-term debt should be measured by remaining maturity, and should cover both public and private
sector debt, and all debt instruments to nonresidents, regardless of the currency of denomination.WT/BOP/R/65
Page 6
4. Since then the IMF has been working on assisting its members in the assessment of reserve
adequacy and in focusing reserve adequacy assessments on capital account vulnerability. In a follow-
up paper in to the Executive Board in October 2001, the staff summarized the outreach with members
and drew the logical implications for investing rese rve assets and managing risk, i.e., the implications
for currency composition of debt and reserves, and scope for moving along the risk return frontier.4
The paper also summarized the key elements in reserve adequacy assessments for countries without
access to international capital markets. It highlighted the need to supplement basic import coverage
measures with analysis of past volatility and the potential for shocks, especially those that affect
current account flows. In discussing this pape r, IMF Directors, looking forward, called for
consideration of reserve adequacy in the broader context of liquidity management, that is the
interaction between reserves and debt management. Following this call, a paper on external liquidity
management is scheduled for Board discussion by end-2002. The paper will review the use of thereserves indicator based on the short-term debt in detecting more recent emerging market country
crises, discuss the need to take domestic foreign currency debt into account, and examine the
implications of debt management for reserve adequacy.
5. The Fund staff has conducted a significant amount of outreach on the reserve adequacy
framework and organized a range of seminars, courses, and roundtables in close cooperation withother institutions, notably the World Bank, to discuss the effective reserve management and
investment strategies. For example, during the 2001 Spring Meetings, the Fund and the Bank
organized a forum on policy issues in international reserves for governors of central banks and other
high level participants.
5 Other recent activities included the presentation of the IMF’s reserve
adequacy framework to regional seminars for central banks in Asia, Europe, Africa, and LatinAmerica, in Bangkok, Istanbul, Paris, and Cartagena. Many of the reserve managers of central banks
of WTO members, including India’s, participated in these conferences. Over the past two years, IMF
staff have presented the reserve adequacy framework in courses for reserve managers and other
central banks hosted by the World Bank and the Federal Reserve Bank of New York. In addition, the
IMF has prepared reserve management guidelines to provide guidance on institutional elements ofreserve management. Extensive outreach activities have taken place on these guidelines as well.
6. The Fund’s approach to reserve adequacy and management has gained wide acceptance.
Feedback from this outreach confirms that emerging market countries generally supported the
focusing of the assessment of reserve adequacy on capital account vulnerability. They viewed the
ratio of reserves to short-term debt as a useful indicator that could guide the analysis of reserve
adequacy. Many emerging market countries have started to incorporate considerations pertaining to
the capital account into their operational systems of reserve adequacy analysis (e.g., Colombia,Hungary, Israel), and several have begun deriving the benchmarks for reserve asset management from
this framework (including e.g., Colombia). Discussions with country authorities suggest that while the
proposed approach to reserve adequacy analysis is generally relevant for emerging market countries,
its practical application, particularly the selection of an appropriate benchmark and the design of
stress tests, needs to be tailored to country-specific circumstances.
                                                     
4 See Debt- and Reserve-Related Indicators of External Vulnerability , (SM/00/65, 3/23/00), The Acting
Chairman's Concluding Remarks on Debt- and Rese rve-Related Indicators of External Vulnerability ,
(BUFF/00/69, 5/9/00), and Report of the Managing Director to the IMFC on the IMF in the Process of Change ,
(IMFC/Doc/3/01/10, 4/25/01).  Guidelines for Foreign Exchange Reserve Management , (SM/ 01/264, 8/17/01).
See also Issues in Reserve Adequacy and Management, (SM/01/311, 10/16/01).
5 The then First Deputy Managing Director of the IMF, Stanley Fischer, outlined the new framework in
his opening remarks. IMF/World Bank “International Reserves: Policy Issues Forum”, April 28, 2001. This is in
addition to the outreach on the reserve management guidelines described in Guidelines for Foreign Exchange
Reserve Management , (SM/01/264, 8/17/01).WT/BOP/R/65
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7. In Article IV consultations (the Fund’s regular surveillance of its members’ economic
policies) and discussions with countries with IM F-supported programs, Fund staff regularly discuss
with the authorities their reserve objectives. Virtually all staff reports for countries with significant,
but uncertain, access to private capital markets now include the ratios of reserves to short-term debt in
addition to the reserves-to-import ratio, and so do many other countries.
8. The IMF’s approach to reserve adequacy, and its country-specific nature, as outlined above,
has been well summarized in the note on reserve adequacy by the WTO Balance of payments
Committee’s secretariat (WT/balance of payments/W/20). The note documents how this approach has
informed the judgments on the consulting countries’ reserve position that the IMF has regularly
provided to the Committee on Balance of payments Re strictions, in accordance with the provisions of
GATT Article XV:2 and GATS Article X11:5(e).
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