RESTRICTEDWORLD TRADE
ORGANIZATIONWT/TF/COH/S/2
18 June 1999
(99-2481)
COHERENCE IN GLOBAL ECONOMIC POLICY-MAKING:
WTO COOPERATION WITH THE IMF AND THE WORLD BANK
The Treatment of "Monetary Reserves" in
WTO Balance-of-Payments Committee Consultations
Note by the Secretariat
1. This Note has been prepared in response to a request to the Secretariat to clarify the way in
which the composition of monetary reserves has been treated in WTO Balance-of-Payments (BOP)
Committee consultations.  The request arose in the context of concerns expressed by a delegation that,when considering the level and adequacy of the monetary reserves of a consulting Member, the BOP
Committee should take into consideration the extent of short-term, and potentially volatile, reserve-
related foreign liabilities.
2. The Note has been prepared by the WTO Secretariat, after consultation with the IMF staff.
I. SUMMARY
3. WTO balance-of-payments provisions and procedures provide a basis for the BOP Committee
to take account of not only the level of a consulting Member's foreign exchange reserves, but also
their adequacy in the light of reserve-related foreign liabilities and other factors.  In several of the
consultations held since 1995, the consulting Member and the statement of the IMF have each drawn
the BOP Committee's attention to this specific aspect, including the sensitivity of the level of reserves
(measured in terms of months of import cover) to  short-term capital outflows.  When invited to
express its view on the adequacy of a consulting Member's reserve level, the IMF has taken accountof factors, such as the composition of reserves and the term-structure of foreign debt, which might
leave the reserve level subject to a threat of serious decline.  The BOP Committee records show that
when the issue of reserve-related foreign liabilities has been brought to the Committee's attention, it
has been discussed in relation to the adequacy of the consulting Member's reserve level, although it
has not always been possible for Committee members to reach agreement on its significance.
4. Various "rules of thumb" can be used to try to gauge the adequacy of a Member's level of
monetary reserves at any given time.  None of th em is entirely satisfactory, and none can compensate
for a thorough review of all components of the balance-of-payments situation in the specific
circumstances that prevail at the time of a consultation in the BOP Committee.
II. WTO BALANCE-OF-PAYMENTS PROVISIONS AND PROCEDURES
5. The use of trade restrictions for balance-of-payments purposes is governed by Articles XII
and XVIII:B and the Understanding on the Balance-of-Payments Provisions of GATT 1994, Article
XII of the GATS, and the 1979 Declaration on Trade Measures Taken for Balance-of-Payments
Purposes.  In addition, Article XV:2 of GATT 1994 states:  "In all cases in which [WTO Members]
are called upon to consider or deal with problems concerning monetary reserves, balances ofWT/TF/COH/S/2
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payments or foreign exchange arrangements, they shall consult fully with the International Monetary
Fund.".
6. Subject to specified conditions, Article XII:2 of GATT 1994 permits a Member to adopt or
maintain import restrictions "(i) to forestall the im minent threat of, or to stop, a serious decline in its
monetary reserves, or (ii) in the case of a [Member] with very low monetary reserves, to achieve areasonable rate of increase in its reserves.   Due regard shall be paid in either case to any special
factors which may be affecting the reserves of [the Member] or its need for reserves…".  Article
XVIII:9 of GATT 1994 contains very similar language
1.  In addition, it addresses the situation in
which a developing country Member resorts to trade restrictions "… to ensure a level of reserves
adequate for the implementation of its programme of economic development".  Article XII of the
GATS permits restrictions on trade in services "In the event of serious balance-of-payments and
external financial difficulties", and it too recognizes that ".. particular pressures on the balance-of-payments of a Member in the process of economic development or economic transition may
necessitate the use of restrictions to ensure, inter alia , the maintenance of a level of financial reserves
adequate for the implementation of its programme of economic development or economic transition.".
7. Agreed procedures for consultations in the BOP Committee include a "plan of discussion",
which covers four broad headings
2.  The first of these is the "balance-of-payments position and
prospects" of the consulting country, with subheadings that include "the balance-of-payments
situation and the level  of reserves; special considerations affecting the availability or the need for
reserves; and factors, external or internal, affecting the various elements of the balance-of-payments".
8. The consulting country has the opportunity to submit data to the BOP Committee on its
balance-of-payments situation, including on the level and composition of its foreign exchangereserves, in the background material it provides and in the introductory statement it makes at its
consultation
3.
9. The IMF participates in the BOP Committee.  Article XV:2 (Exchange Arrangements) of
GATT 1994 states that in reaching their final decision in cases involving the criteria of Article XII:2
and Article XVIII:9, WTO Members "shall accept the determination of the Fund as to whatconstitutes a serious decline in [the consulting country's] monetary reserves, a low level of reserves or
a reasonable rate of increase in reserves and as to the financial aspects of other matters covered in the
consultations".
   In the case of both full and simplified consultations, the IMF makes available recent
data on the balance-of-payments situation of the consulting country.  In the case of full consultations,
the IMF is invited in addition to make a statement, that is approved by the IMF Executive Board for
transmittal to the WTO BOP Committee, in which it reports on the economic and external situation
and domestic policy responses of the consulting country, developments in both the current and thecapital account as well as their causes, and changes or trends in reserves since the last consultations or
during the period under review.  The IMF is also invited to make a recommendation on whether the
level of reserves is adequate.
                                                     
1 It reads:  "(a) to forestall the threat of, or to st op, a serious decline in its monetary reserves, or (b) in
the case of a [Member] with inadequate monetary reserves to achieve a reasonable rate of increase in itsreserves.".
2 BISD 18S/48-53.
3 The WTO Secretariat also provides background mate rial, but focused primarily on the trade measures
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III. IMPROVING DATA AVAILABILIT AND MONITORING
10. A key factor determining the extent to which it is possible to take full account in BOP
Committee consultations of the adequacy of a consulting Member's level of monetary reserves is the
availability of full data on reserve-related liabilities and other potential drains on reserves.
11. The IMF is examining closely the treatment of  reserves in the context of its work on
strengthening the international financial architectu re.  This work involves examining the various
measures to gauge adequacy of reserve coverage, especially capital account-based measures, and the
consistency of measurement across countries.  The IMF staff increasingly monitors the level of
reserves over short-term debt by remaining maturity for emerging market economies.  This also
involves securing improvements in the comprehensiveness of data on short-term debt, notably
nonresident ownership of domestically issued instruments.
12. The Executive Board of the IMF recently agreed to strengthen the IMF's Special Data
Dissemination Standard (SDDS) , notably with respect to the collection of more comprehensive and
disaggregated statistics on international reserves and external debt, and procedures for monitoring
observance of the standard.  National authorities that have subscribed to the SDDS are expected to
observe the revised standard on reserves by 31 March 2000, and technical assistance is being provided
to help IMF Members implement the SDDS.  The new template for the standard on internationalreserves includes detailed information on reserve assets and information on reserve-related liabilities
and other potential drains on reserves.  The SDDS  prescription is for the dissemination of full data
corresponding to the template on international reserves on a monthly basis, with a lag of no more than
one month;  data on total reserve assets is prescribed for dissemination on a monthly basis with a lag
of no more than one week.  The dissemination of data for the full template on a weekly basis, with aone week lag, is to be encouraged.
IV. CONSULTATIONS IN THE WTO BOP COMMITTEE
13. Since the entry into force of the WTO, 15  Members have consulted in the BOP Committee.
Discussion of the composition of monetary reserves has figured in the consultations of 4 Members.
What follows is a summary of the main points raised  in those consultations with regard to the level
and composition of reserves.
SOUTH AFRICA
14. South Africa consulted in the BOP Committee in 1995 over its use of an import surcharge for
balance-of-payments purposes
4.  Reserves at the time stood at about 6 weeks of import cover.
15. In his opening statement, the representative of South Africa noted, inter alia , that at the time
of South Africa's last consultation in 1993 gross reserves had stood at only about six weeks of importcover.  In the following nine months up to elections in April 1994, net reserves (including gold) had
been depleted entirely and gross reserves had consisted only of short-term borrowing facilities utilised
by the Reserve Bank.  Following the election, net capital inflows had resumed, initially principally of
a short-term nature but later shifting to more me dium-term maturities, allowing the Reserve Bank to
reduce its short-term liabilities.  Following the improvement in net reserves and the narrowing of thediscount between the financial and the commercial  Rand exchange rates, the Government abolished
the dual currency system in March 1995.  Given uncertainties about how financial markets would
react, particularly following the impact of Mexico's currency crisis on emerging markets, the
Government had decided to delay abolition of the import surcharge until October 1995.
                                                     
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16. The IMF representative noted, inter alia , that the major source of capital inflow in 1994 had
been short-term borrowing by commercial banks, although some longer-term funds were raised in
December with South Africa's successful return to inte rnational capital markets.  In the first quarter of
1995, net international reserves rose to 2 weeks of  import cover and gross reserves to 4.8 weeks of
import cover.  Nevertheless, reserve levels remained inadequate.
17. In its conclusions, the BOP Committee recognized that, because of the volatility of capital
flows, the overall balance-of-payments situation re mained tenuous, with a low level of international
reserves.  It welcomed South Africa's commitment to fully abolish the import surcharge on 1 October
1995 and to disinvoke the balance-of-payments provisions.
BRAZIL
18. Brazil consulted in the BOP Committee in 1995 over  its use of an import quota for balance-of-
payments reasons5.  At the time of the consultation, reserves  stood at nearly 12 months of import cover.
19. In his opening statement, the representative of Brazil noted, inter alia , that as a result of the
volatility of capital flows exacerbated by the Mexican crisis, the level of Brazil's reserves must
necessarily be analysed in the light of their composition.  One of the characteristics of the 1990s had
been the growth of highly volatile, international po rtfolio investments.  Any instability or threat of
instability in a financial market had immediate repercussions on these capital flows.  That explained
the risks, for emerging markets such as Brazil, of financing balance-of-payments deficits mainly
through short-term capital inflows.  In two critical months, December 1994 and March 1995, Brazil's
reserves had declined by US$ 7.3 billion.  A sufficiently high level of reserves was required to
preserve the country's credit worthiness and to avoid a rush to withdraw short-term capital.  To
restructure the reserves and keep them at high leve ls, as Brazil had been doing, was therefore a macro-
economic policy objective applied on the basis of the principles of due diligence and reasonableness.
In June 1994, 66.4% of Brazil's reserves corresponded to short-term capital assets, demonstrating the
persistence of the balance-of-payments difficulties in spite of the level of reserves.
20. The import quota on automobiles which had been introduced along with other measures to
promote investment, production and exports of automobiles had as its first objective to deal with the
composition of the reserves, reducing their volatile short-term components and increasing medium
and long-term investments.  That objective was of utmost importance in view of the risks involved in
financing of balance-of-payments deficits through short-term portfolio investments.
21. The IMF representative noted, inter alia , that the surplus in the capital account of Brazil's
balance-of-payments had declined sharply in the first half of 1995, mainly because of large capital
outflows associated with the Mexican crisis.  High nominal interest rate differentials, and possibly areduction in perceived exchange rate risk following the exchange rate band adjustment in late-June, had
prompted large foreign portfolio investment and foreign borrowing by Brazilian residents.  On account
of renewed capital inflows in July and August, reserv es increased again to about 12 months of projected
import cover and the overall balance-of-payments wa s expected to register a surplus of US$6.5 billion
for the year.  The build-up in intern ational reserves to high levels reflected large inflows of potentially
volatile capital and was dependent on the behaviour of  portfolio flows, which had shown sizable swings
during 1995.  However, trade restrictions were not  appropriate to address Brazil's macroeconomic
problems.
22. In the course of the BOP Committee's discussions, the representative of Brazil added that an
assessment of the balance-of-payments situation based on ratios of months' of imports to total reserveswas static and ex-post, and did not take account of the impact of the globalization of international
                                                     
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financial markets on short-term capital movements.  In a currency attack reserves could fall very
rapidly;  for example, in both March and April 1995, US$500 million of reserves had been lost in a
single day by Brazil.  Operators in financial markets based their expectations on the ability of
developing countries to fund annual, current account deficits of over 2.5 per cent of their GDP and on
the exposure of their portfolio positions.  Based on those considerations, the amount of financeallocated to Brazil, like other emerging markets, had shrunk in February and March 1995.  His
authorities had reacted to the unpredictability created by the fast erosion of reserves early in the year
by effective fiscal and monetary policies, adjustment in the exchange rate, tariff increases and finally
the introduction of the import quota which should be seen as a precautionary measure in response to
the adverse developments earlier in the year.
23. Most Members considered that the evolution of Brazil's international reserve position did not
indicate a threat of "a serious decline" in Brazil's monetary reserves.  In their view, the level ofreserves appeared adequate to deal with temporary adjustment difficulties associated with the
implementation of the Real Plan and the turmoil in capital markets seen in early 1995.  They
maintained that the import restrictions could not be justified under Article XVIII:9 and requested their
early removal.  One Member said that the volatility of capital flows in early 1995 had proved temporary
and Brazil's reserves had not reached a level that constituted a critical balance-of-payments situation.Another said the WTO balance-of-payments provisions were not designed to address a crisis situation
associated with a potentially volatile capital account.
24. Some Members stated that the Brazilian authorities' assessment of the balance-of-payments
situation deserved sympathetic consideration.  It was not always opportune to take into account only
the number of months' of imports covered by total reserves;  the structure of the reserves and thelikely movement of its various components were also important.  While it might be argued that
Brazil's balance-of-payments had not reached a critical situation in terms of the Understanding, no
Member's interests would be served if a critical  situation were allowed to develop to unmanageable
levels before any remedy was sought.  They therefore considered that the "critical situation" in the
Understanding should be read in conjunction with Article XVIII:9(a) which allowed import measures"to forestall the threat of a serious decline" in monetary reserves.
25. In its conclusions, the BOP Committee noted that rapid declines in reserves in
December 1994 and March 1995 reflected both current account deficits and temporary outflows of
short-term capital.  It recognized the need seen by Brazil to maintain an adequate level and structure of
reserves to preserve its credit-worthiness, to take st eps in time to prevent a critical balance-of-payments
situation from arising and, in particular, to avoid a "r ush" to withdraw short-te rm capital.  It noted the
IMF's statement that Brazil's international reserv es stood currently at 12 months of imports and that
potentially volatile, short-term capital inflows had contri buted to the increase in the level of reserves.
Brazil maintained that its balance-of-payments positi on required the import quota  in order to forestall
the threat, as foreseen in Article XVIII:9(a), of a serious decline in its monetary reserves.  Two
delegations thought it advisable to take preventive ac tion instead of letting a critical situation develop
6.
Some Members, however, found that there was no cri tical balance-of-payments situation.  Still others
were of the view that there was no threat, as foreseen in Article XVIII:9(a), of a serious decline in
Brazil's monetary reserves.  The Committee was of the view that the circumstances did not justify the
introduction of the import quota and requested Brazil to withdraw it.
INDIA
26. India consulted in the BOP Committee in 1995 and 1997 over its use of quantitative
restrictions for balance-of-payments purposes7.  At end-1995, India's reserves stood at about 6½
                                                     
6 One Member associated itself with this view in the concluding session.
7 WT/BOP/R/11, 22 and 32.WT/TF/COH/S/2
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months of import cover;  at the time of the final consultation in July 1997, reserves stood at nearly 6
months of import cover.
27. In his introductory statement in 1995, the representative of India noted, inter alia , that the
strong surge in foreign portfolio investments during much of 1993 and 1994 had slackened in 1995 in
the wake of the crisis witnessed in some other emerging markets.  Because of these and other factors,there had been a significant drawdown of foreign currency reserves from US$ 20.8 billion to about
US$ 17.2 billion during the financial year.  In the context of widening trade and current acc ount
deficits, deceleration in flows of portfolio invest ment, rising debt service, falling reserves and
heightened volatility of capital flows and foreign exchange markets, it would be neither prudent nor
feasible to consider the general lifting of quantitative restrictions on imports at this stage.
28. The IMF representative said, inter alia , that India's external position had recovered from the
crisis of 1990/91.  Foreign exchange reserves were around $19 billion at end-September 1995, about
6½ months of import cover.  Factors behind the build-up in reserves were a surge in private capital
inflows following the liberalization of restrictions  on inward foreign investment and the resumption of
rapid export growth.  While the scale of portfolio inflows had subsided since late 1994, consistent
with a general reappraisal of emerging markets by investors in the wake of the Mexico crisis, it was
encouraging that foreign direct investment had co ntinued to increase.  In view of India's heavy
investment needs, the current account deficit was expected to widen further to the range of 2-3 per
cent of GDP, but such a path should be sustainabl e in view of the improved prospects for private
capital inflows, including direct investment.  The debt-service ratio would be lowered from 27 percent
in 1994/95 to under 20 percent by the end of the decade, while international reserves would be
maintained at comfortable levels.
29. In the course of the BOP Committee's discussions in 1995, many Members remarked that
while India's external position appeared to be stable, the overall balance-of-payments remained
structurally weak.  Foreign capital inflow, of which portfolio investment constituted a high
proportion, was the main source of the positive balance in the capital account in 1994/95, and several
Members noted that such flows had proven to be volatile and reversible as a result of adversedevelopments in financial flows to emerging markets in the past year.  Noting that a widening trade
deficit during 1995/96 had a negative impact on the stab ility of India's reserves, these Members shared
the view expressed by the Indian delegation that an a ssessment solely of the level of reserves in terms of
months of imports of goods and services was inade quate in view of uncertainties created by financial
liberalization and the new conditions in capital markets;   reserves should also be assessed in the light of
their composition.  They considered that India was justified in adopting a cautious pace in trade
liberalization, and must continue using Article XV III:B in completing its agenda of economic reforms.
30. Many other Members noted that India had attracted significant inflows of foreign capital as a
result of financial reform and high interest rates;  thus, the current account deficit was offset by large
inflows of foreign direct and portfolio investment, leading to a substantial increase of India's foreign
exchange reserves compared to 1991.  The recent fall  in capital inflows, rather than the widening of
the current account deficit, contributed to the projected deterioration in the overall balance-of-payments for 1995/96.  The stability of the overa ll balance-of-payments in the past two years showed
that India's current level of reserves was comfortable and sustainable.  The medium-term prospects for
India's balance-of-payments situation appeared sound, and the reserve position could be kept at
comfortable levels provided adequate macroeconomic policies were continued.  India currently faced
no threat of a serious decline in its reserves in terms of Article XVIII:B, nor a critical balance-of-payments position in terms of the Understanding;  therefore there were no balance-of-payments
grounds for continuing import restrictions.
31. In response, the representative of India stated, inter alia , that there had been growing pressure
on the overall balance-of-payments in recent months, arising from both the current and capitalWT/TF/COH/S/2
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accounts.  Notwithstanding the relative growth of Indi a's reserves in terms of months of import cover,
the situation had become more fragile.  Because of its size and complexity, India's need for reserves
should be recognized to be greater than the sta ndard of three to four months of import cover.
32. In the conclusions to these consultations, many Members supported India's continued use of
import restrictions under Article XVIII:B in view of the uncertainty and fragility they perceived inIndia's balance-of-payments position.  Many other Members stated that India's balance-of-payments
position was comfortable, that India did not currently face the threat of a serious decline in foreign
exchange reserves as set out in Article XVIII:9, and that therefore India was not justified in its
continued recourse to import restrictions for balance-of-payments reasons.
33. At the resumption of the consultations in 1997, the representative of India noted, inter alia ,
that reserves stood at about 4 months of import cover.  Foreign direct investment and portfolio
investment had emerged as the dominant components of the capital account.  However, the volatilityof the domestic stock market was being reflected in the behaviour of portfolio investment by foreign
institutional investors, and the deceleration in e xport growth, rapid growth in petroleum imports, and
potential capital outflow associated with the rede mption of US$2.2 billion wort h of India Development
Bonds were some important factors that needed to  be taken into account in the evaluation of the
adequacy of India's foreign exchange reserves.
34. The IMF representative said, inter alia , that since February 1996, exchange market pressures
had eased as import growth has slowed and privat e capital inflows strengthened.  The Reserve Bank
had been able to replenish international reserves in advance of large amortization payments that fell
due in early 1997.  For 1996/97 as a whole, the balance of payments was expected to register a small
surplus.  Gross international reserves were expe cted to increase by year-end to a comfortable
5 months of import cover, a level that was also sizable in comparison to the stock of short-term debt
and the cumulative stock of portfolio equity infl ows.  Looking to the medium-term, the current
account deficit was likely to continue to widen, reflecting the impact of rising infrastructure
investment and continued trade liberalization, notwithstanding good prospects for exports as the
economy became more open.  Private capital inflows should remain buoyant, with rising foreigndirect investment complementing portfolio flows a nd external borrowing.  In the IMF's judgement,
the external situation could be well managed using macroeconomic policy instruments without
recourse to QRs.
35. In reply to subsequent questions, the IMF representative stated that, in the Staff's view:  (i)
there had not, over the past year, been a serious decline in India's foreign exchange reserves; (ii)
reserves appeared to be at a comfortable level in relation to imports and to the stock of short-term
debt, rather than an inadequate or very low level.  With continued broadly sound macroeconomicpolicies, India should be able to meet all external payment requirements without difficulties, and to
weather the consequences of possible external shoc ks without undue disruption;  (iii)  India was not
faced with the threat of a serious decline in its monetary reserves;  on the contrary, barring major
unforeseen shocks India's reserves should continue to increase in 1997 and in the medium-term, and
the balance-of-payments could be expected to benefit from a steep decline in amortization of theexceptional financing obtained to meet the 1990-91 crisis.  While the current account deficit might
widen as a result of import growth related to investment, this should be comfortably financed by
rising private capital inflows;  (iv) current quantitative restrictions imposed by India were not
necessary to achieve a reasonable rate of increase in reserves.
36. During discussions in the BOP Committee, some Members considered that India did not face
a balance-of-payments problem, noting that, with reference to the conditions specified in
Article XVIII:9, there was neither a threat of serious decline in India's reserves nor were monetary
reserves inadequate.  While acknowledging that all countries needed to monitor their external
accounts, they remarked that reserves were at a comfortable level of 5 months of imports.  TheyWT/TF/COH/S/2
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seconded the view of the IMF that the balance-of-payments deficit did not compromise India's
external viability and that the external situation was manageable using macroeconomic policy
instruments.  They expressed the view that the balance-of-payments provisions should be disinvoked
and the quantitative restrictions removed.
37. Some other Members took the view that, in spite of impressive results in the balance-of-
payments situation, prospects suggested the need for caution and prudence in the management of
India's external accounts in light of the pressure exerted on the balance-of-payments through the fiscal
deficit.  They drew attention to volatile elements (private transfers, short-term debt and portfolio
investment) in the structure of the balance-of-pay ments, wide fluctuations in capital flows, a
continued high debt ratio, slowing export growth, a surge in oil imports and the consequent possible
fragility of the balance-of-payments.  They suggested that India could continue to have recourse to
Article XVIII:B of GATT 1994 and the associated Understanding.
38. In concluding, the Committee took note of the IMF's statement that India's current monetary
reserves were not inadequate and that there was no threat of a serious decline in India's monetary
reserves.
39. When consultations resumed again in June 1997, the representative of India said in his
introductory statement, inter alia , that the current foreign exchange reserve position should be viewed
in the context of India's future development needs.  Article XVIII:B was closely related to
development needs as it provided for the maintenance of quantitative restrictions for balance-of-
payments purposes “in a manner which takes full account of the continued high level of imports likely
to be generated by their programmes of economic development”.  The phase-out plan that India had
presented balanced the twin considerations of progressive removal of quantitative restrictions onimports, and avoidance of undue risks to the balance of payments within its overall programme for
economic development.  With regard to the latter, the balance-of-payments crisis of 1990-91, as well
as the reserve loss of US$3 billion in 1995-96, were still fresh in public memory.  The authorities did
not want to risk any precipitate decline in India's reserves triggering a balance of payments crisis.
Paragraphs 2, 8, 9 and 11 of Article XVIII clearly brought out the fact that the development needs of adeveloping country have to be taken fully into a ccount while assessing the adequacy or otherwise of
foreign exchange reserves.  The strength of the balance of payments position of a developing country
could not be related to the total value of imports during the past two or three years alone.  Nor would
it be correct to project the growth of foreign exchange reserves on the basis of recent trends.  The
Committee must take into account the enormous reso urces required to build the infrastructure for
future rapid economic growth.
40. The IMF representative stated, inter alia , that gross official reserves had increased to nearly
six months of import cover in March 1997, and for 1997/98 the balance-of-payments was expected to
register another sizable surplus.  The current account deficit was projected to widen, but strong private
capital inflows were likely to continue, with a num ber of international equity issues in the pipeline
and further liberalization of portfolio flows. External commercial borrowing limits had also been
raised and borrowing norms eased.  Gross official reserves were expected to continue to increase.  Itremained the IMF’s view that the external situation could be well managed using macroeconomic
policy instruments alone; QRs were not n eeded for balance-of-payments adjustment.
41. In the BOP Committee's discussions, some Members referred to the IMF's statement that
India's monetary reserves were adequate and did not face a threat of serious decline, and noted that
Article XV:2 states that "in reaching their final d ecision in cases involving the criteria set forth in
paragraph 2(a) of Article XII in paragraph 9 of Article XVIII, [Members] shall accept the determination
of the Fund as to what constitutes a serious decline in the [Member's] monetary reserves, a very low
level of its monetary reserves or reasonable rate of increase in its monetary reserves, and as to the
financial aspects of other matters covered in consultation in such cases".  Some other Members statedWT/TF/COH/S/2
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that India's current account deficit remained chronic, the balance-of-payments situation remained
fragile inter alia  because of the high incidence of volatile capital inflows and short-term liabilities on
India's external account, and that the recent improvement in the balance-of-payments derived from
portfolio inflows, short-term deposits and remitta nces from Indians residing overseas and did not
constitute a source by means of which India could ma intain equilibrium in its balance-of-payments on a
sound and lasting basis.  They referred to the provisions of Article XVIII:B whereby a developing
country Member with a balance-of-payments problem caused by the expansion of its internal markets
and instability in its terms of trade should be able to  maintain import restrictions in order to safeguard its
external financial position and to ensure a level of reserves adequate for implementation of its
programme of economic development.
SLOVAK REPUBLIC
42. The Slovak Republic consulted in the BOP Committee in 1997 over its use of an import
surcharge for balance-of-payments reasons8.  At the time of the consultation, reserves stood at about 3
months of import cover.
43. In his opening statement, the representative of the Slovak Republic noted, inter alia, that the
Government  had applied trade measures and invoked Article XII of GATT 1994 in order to safeguardits balance-of-payments position and to forestall the imminent threat of serious decline in its monetary
reserves.  Short-term capital inflows had increased sharply in the first four months of 1997, but had
been reversed suddenly in May in the face of speculation over a possible exchange rate devaluation.
Foreign exchange reserves had fallen below 3 months import cover, and a high share of reserves was
accounted for by short-term assets and corresponding liabilities, leaving the reserve position fragileand volatile.
44. The IMF representative noted, inter alia , that in May 1997, the Slovak crown had faced a
speculative attack, precipitated in part by contag ion effects from the turmo il in the Czech exchange
market, but also against the background of a large curre nt account deficit.  In the past, the deficit had
been mostly financed by medium and long-term credits.  There was, however, a marked increase inshort-term credits in the first quarter of 1997, and reserve cover had fallen gradually to less than
3½  months of import cover from about 4½ months in 1995.  Although by October official foreign
reserves had recovered to stand at their pre-May crisis  level, this could deteriorate rapidly as the current
account deficit remained high and turbulence in international capital markets had limited access to
external borrowing.  While recognizing the pressing need to deal with the persistently large current
account deficit, the IMF regretted the imposition of the import surcharge while fiscal policy remained
expansionary, and urged the authorities to immediat ely tighten fiscal policy and to initiate the phased
removal of the surcharge, preferably ahead of the announced schedule.
45. In its conclusions, the BOP Committee recognized that the Slovak Republic was facing
balance-of-payments difficulties with a low level of reserves.  It agreed that the Slovak Republic
should be deemed in compliance with its oblig ations under GATT 1994 provided it adhered to its
modified time-schedule to phase-out the import surcharge by 1 October 1998.
V. ADEQUACY OF RESERVES
46. The adequacy of a Member's monetary reserves in the context of the application of the WTO
balance-of-payments provisions was addressed by the dispute settlement panel that examined the case of
India – Quantitative Restrictions on Imports of  Agricultural, Textile and Industrial Products
9.  The IMF
                                                     
8 WT/BOP/R/40.
9 WT/DS90/R, 6 April 1999.  It should be noted th at India has appealed against the dispute settlement
panel's findings:  WT/DS90/11.WT/TF/COH/S/2
Page 10
replied to a number of questions put to it by the Pane l, of which the following bear directly on the issue
of adequacy of monetary reserves.  They help to indicate how the IMF typically arrives at a judgement
on this matter in the context of its par ticipation in the BOP Committee of the WTO.
47. [As of 18 November 1997, the date of establishment of the Panel] Was India experiencing an
inadequate, or a very low, level of monetary reserves?
At about six months of imports of goods and non–factor services, India’s reserves appeared to
provide sufficient external liquidity and a reasonable degree of protection against unforeseen external
shocks. In particular, reserves were sufficient to deal with debt service payments and potential
outflows of portfolio investment, covering 2½ times the amount of maturing debt obligations in the
next twelve months and 1½ times the stock of short–term debt and cumulative inflows of portfolio
investment. Therefore, it is the Fund’s view that the level of foreign currency reserves on November
18, 1997 was adequate10.
48. In connection with responding to these questions, could the IMF indicate what would have
constituted a serious decline in India’s monetary reserves, what would have constituted an
inadequate, or a very low, level of monetary reserves for India, and what would have constituted a
reasonable rate of increase in India’s monetary reserves?
A considerable degree of subjective judgment is involved in an assessment of the adequacy of
the level and rate of change of reserves. The Fund’s view on this question is based on the size of
existing and potential claims on reserves, examined in the context of the country’s economic
circumstances. In the case of India, policy has pr udently aimed at ensuring that reserve coverage is
ahead of the sum of outstanding short–term liabili ties (by remaining maturity) and potential outflows
of portfolio investment. As of November 1997, short–term liabilities (by remaining maturity) and the
stock of portfolio investment (after marking–t o–market) were estimated at about US$16 billion.
Hence, a decline in reserves to significantly below this level would be considered serious, and such
levels could be deemed inadequate or very low. In case reserves were deemed to be inadequate at this
threshold, any increase in reserves that would br ing them above this level should be considered
reasonable11.
49. Were there any special factors, within the me aning of GATT Article XVIII:9, affecting India’s
reserves and its need thereof, that the IMF considers relevant?
With respect to special factors, within th e meaning of GATT Article XVIII:9, the Fund
understands the following factors to be relevant. With  the exception of net forward liabilities totalling
US$1.4 billion at end–November 1997, there were neither contingent liabilities nor any unusuallyhigh obligations affecting India’s reserves. With regard to prospective developments in debt–service
payments, amortization and interest payments in 1997/98 and 1998/99 were expected to return to
lower levels after peaking in 1995/96 and 1996/97
12.
50. In its own submission to the Panel, India sugges ted four alternative indicators to evaluate the
adequacy of its foreign currency reserves which in its  view would be more appropriate than the measure
used by the IMF.  These were:
(a) import coverage of at least 6 months;
                                                     
10 Ibid, paragraph 3.361
11 Ibid, paragraph 3.363
12 Ibid, paragraph 3.366WT/TF/COH/S/2
Page 11
(b) import coverage of three months plus 50% of debt service payments plus one months'
imports and exports to account for leads and lags;
(c) short-term debt and portfolio stock should not exceed 60% of reserves and
incremental short-term debt and portfolio liabilities should be accompanied by
equivalent increases in reserves; and
(d) foreign assets to currency ratio should not be less than 40% and a desirable level
would be 70%.
51. The Panel did not comment on the relative methodological merits of any of these alternative
indicators proposed by India, and noted that Indi a had not done so either, nor had India explained why
one or other of them would be superior to the method used by the IMF in this particular case.
52. On the basis of a review of the cases referred to above, it would appear that no single formula
can be expected to provide a satisfactory indication suited to all circumstances of the adequacy of aMember's level of reserves.
53. "Rules of thumb" that have been used in the past, such as a certain number of months of
import cover, were designed primarily with current account considerations in mind, often in the
context of a Member maintaining a fixed exchange rate peg.  With more and more WTO Members
opting to allow their exchange rates to float, thei r need to maintain a particular level of monetary
reserves in order to help defend, when necessary, their exchange rate may be reduced.  However, it is
not possible to be categorical on this point;  Members with floating exchange rates and weak banking
systems may nevertheless need to maintain significant reserves.
54. With more and more WTO Members participating actively on international capital markets,
capital account developments have taken on increased importance for many Members in prudentmanagement of their overall balance-of-payments situation, as the recent "emerging markets"
financial crisis has shown.  One implication of this is that trade restrictions are a less suitable tool for
managing balance-of-payments problems, where these relate to capital account as opposed to current
account developments.  At the same time, what constitutes an adequate level of monetary reserves for
these Members to be able to withstand both cyclical and unanticipated shocks deriving from capitalaccount developments needs to be assessed on a case-by-case basis.  Internal guidance in the IMF for
assessing reserve adequacy has increasingly emphasized that a close focus on short-term debt by
remaining maturity (including nonresident deposits, and nonresident ownership of domestically issued
instruments) is generally warranted.  Moreover, in assessing available reserve levels, the derivative
and contingent asset and liability position of the authorities (especially vis-à-vis  nonresidents) needs
to be considered.
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