The Acting Chairman’s Summing Up—Overdue Financial Obligations—De-Escalation of Remedial Measures Under the Strengthened Cooperative Strategy—Further Considerations, Executive Board Meeting 99/79, July 22, 1999

In the follow-up to their discussion on March 19, 1999, Executive Directors further considered issues concerning the deescalation of remedial measures under the Fund’s Strengthened Cooperative Strategy. Directors agreed that it was appropriate to establish clear understandings regarding how de-escalation would proceed, so as to further strengthen incentives for members to cooperate with the Fund in solving the problem of their overdue obligations to the Fund. An effective de-escalation process should serve to encourage the member to quickly initiate efforts to reform its economy and establish a solid record of payments to the Fund, with the ultimate objective of full clearance of arrears and regaining access to the Fund’s financial resources. A number of Directors emphasized that the de-escalation strategy should be viewed in a broader context that encompasses the clearance of arrears, including, when necessary and appropriate, a rights accumulation program (UP) or some other program aimed at clearing all arrears to the Fund.

In this regard, Directors agreed that, from a legal and practical point of view, until such time as the member cleared its overdue obligations to the Fund in full, it would be appropriate to consider lifting only a declaration of noncooperation and a suspension of voting rights, as opposed to other remedial measures in the timetable.

Directors agreed that the starting point for de-escalation would be a determination by the Executive Board that a member had credibly begun, or adequately strengthened, its cooperation with the Fund, as evidenced by a sustained track record of performance regarding economic policies and payments to the Fund, with prospects of its continuation. With regard to policies, Directors agreed that there should be reasonable assurance that the member’s satisfactory policies were likely to be sustained, so as to give confidence that they would lead to a resolution of the arrears problem. As regards payments to the Fund, it would be expected that the member had been making substantial payments for a sustained period, at least equivalent to newly maturing obligations. In this regard, some Directors called for flexibility, especially in difficult cases of post-conflict countries, recalling the recent Board decision to judge the level of payments needed to sustain cooperation in post-conflict cases on a case-by-case basis. Directors agreed that for members already cooperating with the Fund, as a transitional feature, the Executive Board could take into account a member’s record of cooperation and prospects for continued cooperation on a case-by-case basis, in determining the starting point for de-escalation.

Directors agreed that, once a determination had been made that the member had credibly begun to cooperate with the Fund, it would be desirable to establish an evaluation period to assess the member’s commitment to resuming a normal relationship with the Fund and to test whether the member’s cooperation is sustainable. Directors agreed that, at the outset of the evaluation period, it would be open to the Executive Board to formulate a program of actions and measures that a member would be expected to implement before the lifting of remedial measures would be considered, and to specify the beginning and approximate length of the evaluation period. During the evaluation period, the Board would not proceed, nor recommend proceeding, to the next remedial measure, provided that the member’s performance with respect to policies and payments to the Fund remained satisfactory. Moreover, it would be expected that the member’s cooperation on policies and payments would strengthen progressively as a basis for reversal of remedial measures.

Directors agreed with the general principle that the time period between the starting point and the lifting of a remedial measure would be set in proportion to the severity of the measure to be lifted. A caseby-case approach would be appropriate, with cooperation assessed in the context of a staff-monitored or other program, In the case where a member’s voting and related rights had been suspended, an evaluation period of about two years’ duration would be considered as a guideline before the Board would consider lifting (by a 70 percent majority of the total voting power) the suspension of the member’s voting and related rights in the Fund. Depending on the circumstances of the case, a somewhat longer or shorter evaluation period could be appropriate. This evaluation period would be needed to establish a substantial and convincing track record of cooperation and to reduce the chance of having to reimpose this sanction. Directors were of the view that, since the lifting of a declaration of noncooperation has no legal or procedural effect under the Fund’s Articles, consideration could be given to removing a declaration of noncooperation before voting rights were restored, to provide a positive signal. However, successful completion of about one year of the evaluation period would be required before the Board would consider the lifting of this measure by a simple majority vote, although the period could be shortened where performance warranted. A similar evaluation period would apply in cases in which a declaration of noncooperation had been issued but the member’s voting rights had not been suspended. Many Directors stressed that the timetable suggested by the staff would serve as a guideline and not a rigid rule. A number of Directors were of the view that the resumption of technical assistance and restoration of a resident representative to the country at an early stage could, in some cases, be highly beneficial in strengthening cooperation.

Following the removal of one or more remedial measures, most Directors agreed that, if a member subsequently failed to sustain its cooperation with the Fund, remedial measures could be introduced again at a more accelerated pace than that called for under the timetable of remedial measures, taking into account the sequencing of measures required by the Fund’s Articles.

BUFF/99/90

August 30, 1999