Providing reliable currency convertibility

Convertibility is not an end in itself but a means to attain certain goals, for example, as an external discipline on economic policies or the transmission of international price signals to local producers and consumers. It also creates serious obligations for, and may, under certain circumstances, limit the autonomy of monetary policy. It was felt that the attainment of credibility in the context of sound macroeconomic policies is a necessary element of sustainable convertibility. The establishment of domestic and external balances and a general manifestation of the health of the national economy are crucial factors in currency convertibility.

Full convertibility is a state of meeting international obligations without resort to exchange controls. Special importance should be attached to the existence of an equilibrium exchange rate, because certain acceptance of a non-convertible currency is always subject to the condition that its holder accepts any exchange rate, however unfavourable.

Equal importance may be attached to the micro- and macroeconomic consequences of convertibility. On the micro-economic side, the most salient elements are the linkage between domestic and international prices and the consequent efficient allocation of resources. On the macroeconomic side, convertibility puts pressure on countries to avoid bad policy measures that they would have been inclined to follow, had inconvertibility persisted.

Given the current level of global capital market integration, convertibility is a prerequisite for the mobilization of resources on these markets.

Adverse external effects such as fluctuations, particularly sharp declines, in international prices for commodities and raw materials, to which developing countries are highly vulnerable, can limit the positive results of convertibility. The tackling of these problems, although it fell beyond the scope of the current session, was an issue to be raised.

As to the interaction between regional payments arrangements and convertibility, currency convertibility is an issue that is closely relevant to the clearing and payments arrangements as it is a means to support both regional cooperation and global integration, goals that are complementary rather than exclusive.

Although global convertibility seems to contradict, to a certain degree, participation in payments arrangements, the latter still affords four major advantages: deferred payments, credit access functions (if they are coupled with credit lines and swap arrangements), transitory mechanisms towards global convertibility and the enhancement of monetary cooperation among participants.

Limited convertibility is a useful transitory arrangement for countries which wish to create global convertibility in the long run . The positive aspects of limited convertibility such as learning from consultation with neighbouring countries, the symmetry of obligations and the merits of monetary cooperation, should be highlighted. In the long term, this monetary and fiscal cooperation should lead to converging levels of convertibility. In the short term, the payments systems will function well if they use market exchange rates for the determination of the central rates, or, ideally, if they already had real regional convertibility before the creation of the payments systems.

Given the length of the period required for a complete transition from inconvertibility to full convertibility (a period which can extend to decades), the room for limited convertibility, particularly within the framework of payments arrangements and settlement mechanisms, remains ample. Nevertheless, limited convertibility should not foster the postponement of the necessary economic adjustments in the member countries. Further, it is equally important to establish new payments arrangements with moderate goals and practical mechanisms.