UNITED NATIONS
ECONOMIC AND SOCIAL COUNCIL
Distr, GENERAL
E/FCA/CM.11/23 12 February 1985 Original: ENGLISH
\
ECONOMIC COMMISSION FOP AFRICA Sixth meetinr of the Technical Preparatory Committee of the WholeArusha, United Republic of Tanzania 15-22 April 1985
Item 7 of the provisional apenda*
COMMISSION FOR AFRICA
Twentieth session of the Commission/
Eleventh meeting of the Conference of "inisters
Arusha, United Republic of Tanzania
25-2* April 1985
Iter« S o-p the provisional agenda*
ESTABLISHING THF AFRICAN MONETARY FUND : iQCRESS REPORT
E/ECA/CM.ll/1/Rev.l M85-499
F/ECA/CM.11/23
A. INTRODUCTION*
1. The need has Inn? been felt for an African Monetary pund to serve as an autonomous institution to deal with monetary and financial matters of critical importance to African economic development. However, the recent developments in
international monetary and financial relations have underscored the urgency for
such an institution. This urpency has cotne about because:(a) The domestic monetary institutions have increasingly faced difficulties in their policy formulation and implementation in the wake of extreme pressures from international factors;
(b) Therw has been steady increases in the halance-of-payments problems^
due largely to drastic reduction in the foreipn exchange reserves of most African
countries largely as a result of the poor earning power of the primary export commodities in the world market;(c) The increased outflow of capital and other resources through many forms
of leakages, including the activities of foreign investors;(d) The increased level of-external indebtedness largely prompted by the decrease in the flow of official development assistance (ODA) to Africa; and
(e) The persistently high interest rates in the industrialized countries
which has escalated the cost of borrowing thereby exacerbating the external debt
crisis of the African countries. .
2. It is basically in response to these problems that the Assembly of Heads of
State and Government of the Organization of African Unity at their Economic Summit held in Lapos (Nigeria) in April 1980, decided that an African Monetary Fund;.should be established. They accordingly directed that "a hiph-level expert group Should be set up as soon.as possible to study and recommend the modalities for the establishment of an African Monetary Fund and submit its report theron to the Ministerial Follow-up Committee on International Trade and Finance for AfricanDevelopment not later than 1982". .
3. Pursuant to that decision, the first meeting -of an Intergovernmental Group
of Experts from Ministeries of Finance and Central Ranks was held in Addis* Ababa
(Fthiopia) from 4 to 7 October 1982. A progress Report was submitted to the Fourth meeting of TE^COW and the Ninth meeting of the Conference of Ministers of the Commission held in Addis Ababa i- April/"ay 1Q83 (F/ECA/CM.9/9). The experts established the terms of reference for the study and agreed that the feasibility studv be jointly undertaken by five institutions, namely: the Economic Commission for Africa (ECA), the Organization of African .Unity (OAU), the African Development Bank (AOB), the African Centre for Monetary Studies (ACMS) and the African Institute for Fconomic Development and Planning (IDEn),
*This progress reoort is also being submitted as an "Executive Summary" to the forthcoming Twenty-First session of the Assembly of Heads of State and Government of the Organization of African Unity,
E/HCA/CM.11/23 2
4. On the basis of technical studies orepared hv these institutions, a feasi bility study entitled "Concepts, Issues and Mechanism for the EstablishTPent of
an African Monetary Fund" was prepared. The issues raised in this renort are derived from such a study.B. ADVANTAGES'FOR'ESTABLISHING AF AFRICAN MONET'W FWin
5. Talcing into account the problems outlined in the previous section, the ^ advantages of creating an African' Monetary Fund cannot be overeinphasized. The most daunting challenge in the fiold of money anH finance is the evolution of
guidelines on inonetarv and financial policies at the national and regional: j levels that are capable of assisting the countries to emerge from the current
economic crisis. There is an urgent need to provide an adequate basis for the elaboration of policies aimed at facilitating the achievement of a self-reliant,
internally generated process of development. The contribution of the monetaryand financial sector to economic development and integration in Africa will be enhanced by well thought-out monetary and macro-financial strategies directed
at some of the basic issues.
6. The importance of establishing of an African Monetary Fund can be seen in
terms'of its expected role and impact on Africa's socio-economic developmentprocess. For both political and economic reasons, the establishment of an African Monetary Fund is of fundamental and historical significance in the attainment of collective self-reliance. Several' factors need to be highlighted to indicate the advantages which the African countries would derive from its
establishment. These include (a) access to an African autonomous monetarysystem to deal with problems in an African context; (b) possibility of having a common unit of accounting especially for intra-African transactions; (c) new sources of additional, credit tranche and capital resources; (d) the opportunity
to have an African monetary policy and an African-oriented adjustment programme;(e) exchange rate surveillance; .(£) technical support programmes, and (p) employment creation. Some of these aspects which are described briefly in the next few
paragraphs, do form the core of the objectives of A.MF. The AMF will also provide the necessary confidence in the African monetary policy for purposes of enhancing a faster rate of economic growth.
C. OBJECTIVES OF THE AFRICAN MONETARY FUN"
7. The objectives of the Dropos,ed African Monetary Fund have been designed taking into account the special needs of African today and for many years t'o^
come. In designing such obiectives, great care has been taken to avoid duplicat ing or conflicting with the obiectives of the International Monetary Fund (IMF), As such, the AMF is intended to be a truly African organization catering for
African needs within an African monetary and financial environment.8. Essentially, the objectives of the African Monetary Fund, while taking
into account those of other international and regional institutions, are specifically based on the prevailing monetary and financial conditions pecularto the African region. If the African Monetary Fund is to make a meaningful
contribution towards solving those problems, its orientation* purpose and,
functions should be directed to resolving the critical problems facing African
E/ECA/CM.11/23 3
countries. In broad terms, the central objectives of the African Monetary Fund should consist of laying down monetary and financial foundations including . management and definition o-f rules for ironetarv conduct with a view to achieving co-ordination of macro monetary and financial policies.
The following are the objectives proposed for the African Monetary Fund:
(a) To contribute to the economic development and social advancement of its member States bv promoting confidence in the African monetary system through monetaryand financial co-operation at the African regional level, and to serve as a consultative machinery, for enhancing a more balanced economic prowth in the member States;
(b) To assist in providing financing for balance-of-^payments support to
member States experiencing deficits in their current account balances with a view
to correcting such imbalances and safeguardinp their economic growth through appropriate policy adjustment which take into account the critical development needs of the member States concerned;(c) To promote stability of the African currencies through exchange rates surveillance and the establishment of exchange rate stabilization programmes at the national, subregional and regional levels;
(d) To promote the liberalization of exchange control regulations and eventual elimination of payments restrictions among the African countries through the promotion of convertibility of national currencies and acceptable par values and to facilitate the linkage of existing subregional clearing and payments arrangements for the purposes of enhancing intra-African trade and co^operation;
(e) ..'To. assist member States in instituting appropriate long-term restructuriz- ation and stabilization programmes specifically geared to deal with the African
socio-economic crisis arising from long-term effects of balance-of-payments problems and especially geared to capital mobilization and a more rational use of development resources;
(f) To provide a machinery for the harmonization of monetary, currency and banking legislations and practices among African countries, harmonize the issue and convertibility of national currencies, including the use of common unit of
account and to desien mechanisms for overcoming the problems arising from the
multiplicity of currencies and currency zones with a view to the eventual establish ment of an African common currency;
(g) To provide technical assistance and advisory services to member States on fiscal, taxation and budgetary policies and on the development of appropriate domestic and monetary institutions to deal with effective management and utiliz ation of financial resources for socio-economic development;
(h) To co-ordinate and harmonize the position of member States in international negotiations on monetary and financial issues so as to maximize their common
interests and to contribute more effectively to the solutions of the world monetary
problems".
E/ECA/CM.11/23 Page 4
(i) To undertake such other functions snd activities as may be provided for in the Articles of Agreement establishing the African Monetary Fund,fi
D. SIZE OF AUTHORIZED-CAPITAL ■ - , =. ■-■ -
9. In determining the authorized capital of the proposed African Monetary Fund, a few considerations were taken into account. Firstly, experience with African regional organizations indicates that most of these depend entirely on their own capital subscriptions to maintain their operations,, Secondly, the borrowing , capacity of an institution and its credit worthiness are sometimes determined by the resources at its disposal.
Two fundamental proposals are made for consideration by the Assembly of Heads of State and Government of OAU concerning the capital of the AMF.
These are:
(a) That the initial authorized camtil of the African Monetary Fund be fixed at US$3 billion;
(b) That the African Monetary Fund be open to external subscriptions by approved international organizations and bilateral or multilateral agencies, or any other institutions as may be approved from time to time,
10. It is essential to stress that the size of the authorized capital of any financial institution is a critical limiting or enhancing- factor in the
institution's ability to effectively achieve its stated objectives. The financial resources at the disposal of AMF constitute an important element of the factors that enable it to play the role of a fundamental tool for solving the problems for which it was created. The total capital of the African Monetary Fund may be
determined by the expected Volume of business to be conducted or assistance it is to render to members as well as the ability of the member countries to subscribe to such capital,
11. This figure is suggested bearing in mind the possible Participation in the subscriptions by other international ss well as the African regional and sub- regional institutions. Under this scenario, it is proposed that one-third of the shares (or US$1 billion) would be reserved for external participation'and two- thirds (or US$2 billion) for members. There are a number of distinct advantages to be derived from opening membership and ownership of t'he'Fund to external
organizations. External participation in the African Monetary Fund would earn the required confidence and credibility among lenders and it would increase its credit- worthiness. Through external subscriptions to the capital, the resources at the disposal of the Fund would be larger and its assistance to members would correspond ingly be increased,
12. If it is agreed that external participation is desirable, the African countries would be required'to contribute only two-thirds {?/$) of the shares
(or US$2'billion). Hie'contributions could be envisaged in two ways. First, with
respect to the US$ 2 billion, it is important to stress that the African member
countries would not be expected to pay the whole US&2 billion at once. Accordingly, of this sum, one-third (1/5) or US$667 million) could constitute the paid-in portionF./ECA/rM, 11/23 5
while the balance of US$1,335 million vould be the callable capital. In such a case, the African member countries will ^e required to pay only US$667 million over a period of Pive ve.irs. If one assumes that ill African countries would become members, then a straight irathenatical formula would give a contri bution of about $13.3 million over five years for each country or about $1,28 million a year. In reality, the subscriptions would-be calculated according to an agreed formula and it can be areued that, this would not be a very big price to pay for an important organization such as the African Monetary Fund.
13. In order to understand more clearly, the.determination of the initial capital of the AMF, it is essentially to briefly review the experiences of similar in
stitutions. For instance, in the case of the Andean Reserve Fund the original authorized capital was US$240 million in 1976 but was increased to US$320 million in 1982 only after about 7 years of operation. The Andean.Reserve Fund has a membership of five countries but it was found necessary to increase its capital to cover the needs of its member countries. It seems clear that while the figure of US$3 billion for the *MF is large, there are 50 independent nations in Africa.
Therefore, one cannot over-exajrperate; tbeir -requirements.
14. The other relevant example is that of the Arab-Monetary Fund. This was established in 1975 with an initial authorized; capital o-P 250 million Arab accounting Dinars (AAO) (SDR 750 million) all of which was to be subscribed and payable by member countries. The Arab Monetary Fund has 21 members and a good
number of them with large foreign exchange reserves from their oil revenues.However, by 1979, the Fund staff, as well as a number of experts and economists,
expressed the view that the resources of the Arab Monetary Fund were inadequateand proposed that the authorized capital he increased to AAD 1.052 billion the equivalent of SDR 3.156 billion. The auestion of the size of the initial
authorized capital applies to all is therefore of paramount importance.15. The decision on the method to be used to determine the capital subscriptions
to any organization is a political matter. Therefore, in this study, an attempt has been made to allocate capital subscriptions on the assumptions that the members would use a given formula. The allocation of subscriptions may be made according to the United Nations formula, the Organization of African Unity formula or theAfrican Development Bank formula. Thus, in proposing of methods for allocating
AMF's capital stock among member countries, some indicators have been considered on the basis of the available information and the capacity to define each member countieTs economic indicators: gross domestic product, cross domestic product adjusted for population and foreign trade.16. It is essential to determine how the contribution of each member to the capital stock will be determined. This will be based on the assumption that all
the presently 50 independent states will become members. Assuming that US$3
billion is accepted as the initial authorized capital, the allocation of the authorized capital stock amonp the African members would depend on available external funds. The opening up of the capital stock to non-African institutions would naturally reduce t>\e payments obligations by its members who will still retain the control. The division of the authorized capital stock into paid-in and callable capital as well as its spreading over a period of five years, further reduce the payments burden on the African members.Pape 6
17. It is recognized t?i^t the t^t^l nnon/nt to I? subscribed hv tbe
is quite burdensome. TM.s is true oven if t^'' nav^ents ire strand, nut over a
"eriod of five years. T*ie financial NrH^n is ?lso crucinl ^articulTly
considering tbe fact that hiiinco-o^-^ayr^nts ^roMeris ^acin1- African countries in t^3 recent '~ast to^t^er v.'ifh ^xtern^l ^o^ts b'we ve^n i-ncreisinr, however, tbe est^Mishrcnt nP t'1^ fl"!F is vrry vit"l ^or ^^ric's economic ind
*»nd 'hence t^e relatively lirrc initi-1! ci^itnl stocv is essential to
such ^ufonoTpy. Th^r^forc,1 tbf s^raa^in* nr ^nv^onts nver n -^eri^r1 o^ ^ivc years takes account op nay^.ents. 'H^icuJties ^s veil n^ t^e rict tb^t t^e ?'s¥ vould
become fully o^errition^i Hurin.' t>?t ^^i^,
F C^T^P'1!^ FnT1 ■Prw-^MpiMr; ^Y THF
IB. In settlor out t^c: criterin- f^r lrn^in<*, by t^p "^ric^n f*6netary Fun^, two considerations have to be t.RT'en into nccount:
(a) The jipr-^ to have an ^^ricnp rv/re'i irstitutior; whic*1 wotild ' su^^icient flexibility in its IotHti/* *olicy to tnV_c luc rormizn.nce o^ the sreci^l ^roMe^s facing its members in ^.n interdependent world of depressed commodity prices, incrensin'- inflation ?ind interest r^tes, declininr volumes of vorld trade, incre^isinr protectionist tert^epci^s, '"ountirr external debts an^
chronic Kilance-of-^av^ents deficits, ^uc^ ah institution Trust also ta?;'o into account the current serious social ™n'& economic crtsis ^aci^r the
African countries; and
_ (b) The nee-4 to ensure that the ^^rican "nnet^rv pund will maintain it's credibility an^ vill inspire c^n^idencp o^ the international coi«rnunitv t^rou^h the adoption of sound nni prudent lcndin^ ^olici-is, nnd that it is not ^ortrayed as an institution ^or e?sy credit.
IP. The African "Vmetarv Fund vTi.ll iriitiillv bnve the facilities:
(a) balance-o^-^ayrrcnts ^in^Tici^r for n^r^al balance-of-"aypents (b) Stpnd-bv financing irran^ejpents ^r countries ex^eriencinr severe
roVleins suc^ as the e?^octs o^ the irrm^ht. an-i other natural (Usasters;
(c) Special ^inancirff arrari^e^onts f^r intra-^rican tra^e;
(d) S'vpcip1 *■<■»{>' fip^ncinr iT^ci3iti^s to -^n^l vith financing of acute food shortares experienced ^v Tie^Ver ^tntes. In addition, there- would be special facility funds to re created ^ronj-tipe-tn-time to deal with specific "robleris.
There will also be a facility cor tnodiur and lon^-ter™ ^irancin1" to ^eal with lone—tern* "rohlenis arisin" fron chronic or severe ^nlance-of-'^vments problems.
'20. The criteria po^ fin^ncin^ vh.H Ve determined ^y the Board of Governors ' based on the specific needs of the Africn countries, basically so^io of tbe
followinr Vii
E/ECA/CM.11/23 7
(a) The ^"^lyin^ country must have accented to the Articles o-p A<reement of th?j African Monetnrv Fund a.t least six months Trior to submission of an application for tem^or^ry fin^nciil "ssistanco to T-Mress. the Kil-ince-of-
(h) Export shortfalls ■ wMch result in balanco-o-^-^py-Tients deficits!,must be-directly related to adverse market conditions for the **rinci~>al export . commodities or services of the T"^lyinr* country an' tbe size of the'trade deficit toust be substantially greater than the available ^orei^n ^xchanre reserves,:
Fx^ort-earainps shortfalls msy be established on th(* fcnsis of the.-average •■earnings
•for a twelve-month ">erio'J ^recedin" the a-'^lic^tinri measured p.psitist' the average earnings for a threeUvear T»eriod before, thn year o*
(c) The escalation in import "rices ftli"i*rle for consideration must be in in>*">orts that constitute the ma tots' ^oo-^s and sorvices in general and must have a hi^h nrorortion o* output related intermediate and capital roods. Hirb priority would be friven to imports of capital anc1 inter^odiite ^oods directly related to the country's develonment ^lans. The method op defininp escalation; in i^
•rrices is similar to tb^»t usod in defining export shortfalls;
(d) The naxiTnTiTr amount av3iln>le to a countrv under any facility would bo determined by n number of factors, such as, its r-redeterpined auota. in the A11^, the level of econoric development1, total resources set aside by the A?'P for use under this facility and the extent to whic*1 the a-^lyinr country would have had access to other facilities o^ the A"^F and 'ravn resources from other internatioml financial institutions for a similar
(e) To the extent that there is ,?ti imort-content associated vith the use of the resources of the aup under any facility or support, priority in procurement contracts should be "iven to ^^rican markets on the basis o^ an evaluation of
">ros^ects for availabilities from African countries. -For any imports which, must be- procured from outside Africa, ^ioritv woul-1 Ke riven to markets o^ countries which; sti^^ort t^e A*'^ with capital subscriptions in the form of bond Purchases for-example; and
(f) T^e African vonotary Fund may CTuarantee i thir-d-narty loa-n to an ' African country instei^ o^ iisinr- its resources ■ or it c^ulH provide r^nrt of the loan in conduction witb a third-r^arty contributibr. In tMs case, the conditions
to be fulfilled for the use of resources under the ^irst financing facility must
(<?) The a'^licant country must satisfy ftMP;-as to its requirements and that such funds would be utilized specifically to address ^alance-of-^Tyments
or tem^or?.ry shortfalls in ex^<vrt earninrs and what measures it has taken to resolve the.temporary imbalance in the current account.
E/ECA/CM.11/23
21. .The African "onetary pimd will h*>vc three Msic functions: (a) Executive functions; (b) "eroilatorv -functions and (c) Consultative ^unctions. The
executive functions relate to the day-to-^ay running op tho organization as required under its articles o" ' rreornent. The rerulatorv functions include cowers to influence the financial and monetarv policies o? its members and to impose--certsin conditions or penalties on any of them not complying with the provisions of the agreement. The regulatory functions wy also include surveil
lance o^ critical ns^ects such as currency or exch^mre rate of fluctuations
especially if these woul^ imrtin^e u^on the rights anf1 ■nrivilenres of other members.
The consultative functions relate to its responsibility to consult with and to be consulted by member States on any of its oMactives i* it is deemed to be in the interest of such a n>en*-er to do so.
22. In terms of its organization, the African Monetary Fund will have the followinr organs: (a) Board of Governors; (h) ^oarrl op Rxecutive Directors;
(c) a President <mrf at least one Vice-president; and (d) the Secretariat, 23. The Board o* Governors will be the highest decision-makin? orpan of the African Monetary Pund. ^11 the cowers of the African "onetary Fund shall be vested in the Board of Governors which would determine the Fund's general policy orientation, sunervis^ its activities and nolicy im^lRTnentation, dele^atin^ the management and operations whether related to adjustment Policies or loans to the other organs of the Fund, a*; the highest authority o^ the African Monetary Fund, the Board of Governors shall be composed of Persons oi?the highest cualification, competence and experience in ™onetarv and. financial matters. Each member State
shall appoint a Governor an^ an Alternate who shall be a Minister of finance and
a Governor of a Central ?ank respectively. ■■■-.■■
2<t, The. Board'of Governors shall a^noirt' a ^oard of Executive Directors as may be. provided in its Articles of Agreement. Tt i^ "'ro^ose'1 that there be a total of. not more than twelve (12) Executive Hirectors and twelve (12) Alternate
Pirectors. nf these, two p.) m^Y be reserve^ for external participation and ten
(10) for African niemberso F.ich Executive Pirector shall serve ^or a period o^three years. He shall he assisted by an Mternate nirector who shall also serve for a similar period tut shall auto^aticallv >-e eli"it\le to replace him as
Executive Director at the ox"iry of- that period. ' ■
25. The mechanism for the nomination o^ the Fxecutive directors an*' their Alternates is a cop"-licaterf matter. Countries whic*» su^scri^e larne amounts of the share capital are normally allowed to anoint one Executive Director.
The rest are [routed according to an arreed formula. '!ovrever, it is "ro^osed that all members of the African Monetary Fund shall ^e entitled, to participate in the election of the ten Executive directors and their Alternates who shall be nationals of African countries. It is ^ro^osc1 that such elections be based on the AHB/-*nF formula which has already been accented by the African countries.
H/FCA/OM1/2S
G. SI WAS Y OF CONCLUSIONS
26. The establishment of an African "onetary Fund is a critical eleirent in the achievement of collective self-reliance called for in the Laros plan of Action. There is an urgent need for an African monetary system that can instil confidence of its members as well as assure those outside the re?ion of Africa's ability to institute better and effective monetary and financial systems. The African "onetary Fund will be advantageous in many respects. Annart from the traditional balance-o^-payments support ^unctions, the African Monetary Fund will
■provide a system for 'naaranteein^ loans contracted by its members with external creditors and will also be instrumental in ^ro^otinr intra-African trade. The African Monetary Fund is also exr-ected to ^lav a si^i^icant rclc- in mobilizing resources for lonp-term restructuring or the countries that have deepening and chronic imbalances in their current account deficits and will strengthen the '\frican position in international monetary an^ financial negotiations. There is therefore an ureent need *"or political su™iort to *>e t'iven in the early establish ment of this institution.
27. The issues ^resented in tMs summary are elaborated in detail in the feasi bility study by the Co-oneratinr Secretariats referred to earlier. This main feasibility report was discussed at a meetin" o^ intergovernmental proup of experts and officials from Ministries of ^iriance and Central Ranks, which was held in Addis Ababa, ?5 to 2? "arch 1985. ^he report of the exnerts meetinr, together with the feasibility study are available.
28. The ECA Conference of Ministers will be followed in ''ay by a Joint meeting of "inisters of Finance and Governors of Central "anks to consider the feasibility report and ador>t the recommendations and nro^osals covering all the issues raised in the feasibility study. Their recommendations will form the basis for nre^arin" the draft Articles of Agreement on the African Monetary Fund.
An executive summary on this matter will be submitted to the Twenty-First Assembly of ^eads of State and Government with ar^ro^riate recommendations.
29. The peneral expectations are that the draft Articles of Agreement will be finalized early in 1086 ^or sitmature durinp the last half of that year, and that the African Monetary Fun-^ should co«ie into existence sometime in
