POLAND AND IMF MEMBERSHIP

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87R00529R000200160021-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 31
• Document Creation Date: December 22, 2016
• Document Release Date: July 7, 2010
• Sequence Number: 21
• Publication Date: August 21, 1984
• Content Type: MEMO

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The Director of Central Intelligence
Washington, D.C. 20505
National Intelligence Council
NIC No. 04804-84
21 August 1984
MEMORANDUM FOR: Acting Director of Central Intelligence
FROM: George Kolt
National Intelligence Officer for Europe
SUBJECT: Poland and IMF Membership
1. In response to the Polish government's recent release of most
political prisoners, the USG has agreed to lift two sanctions: the bans
on scientific and cultural exchanges and on Polish airline flights to the
US. The US has also suggested that it might be ready to drop its
opposition to the renewal of Polish negotiations with the IMF over
membership. I suggest. that you discuss the IMF issue with the Secretary
of State and with Mr. McFarlane. My personal belief is that it would be
premature to support Poland-IMF negotiations now.
2. The Polish application to join the IMF has been in abeyance since
December 1981 when the imposition of martial law forced an IMF delegation
to leave Warsaw. Simultaneously the USG made the renewal of these
negotiations (as well as the lifting of the other sanctions it imposed)
contingent upon Jaruzelski meeting three basic conditions. The USG has
gradually lifted its sanctions as Jaruzelski moved to satisfy the form
although not the essence of these conditions. Thus, he
--lifted Martial Law . . . but in such a way as to keep most of
its control features alive in new legislation.
--Freed the majority of political prisoners . . . but on
conditions that seem to guarantee there will be new political prisoners
before the year is out.
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--Has been fairly conciliatory towards the Church . . . but
remained steadfastly opposed to any sort of dialogue which might put
limits on his power.
3. Still, we are now at a stage where we are discussing measures
that would again allow some Western credits to flow into Poland - in the
IMF case about $2 billion in the next 18 months. Those inside and
outside government who argue that the US should drop its opposition to
the renewal of IMF negotiations believe the Polish government needs new
credits so badly it could be made to accept IMF conditions that would in
effect bring about economic and political reform.
4. I agree that in some circumstances outside sources of financial
support can influence an East European governments actions. Indeed, the
USG sanctions probably have had an effect in mitigating and undoing some
of the worse aspects of Jaruzelski's crime of 13 December 1981. But I do
not think that IMF negotiators can now push the Jaruzelski regime into a
positive direction:
-- The regime's top priority remains political control. It is
highly unlikely to agree to any economic reforms which
could undermine that political control.
-- As we wrote in our recent NIE on Eastern Europe, ". . the
West almost certainly will not itself be able to create the
conditions that give rise to East European moves toward
economic flexibility and independence. Postwar history
. suggests that the initiative for change in Eastern Europe
must arise in the main from within." Polish society is
certainly more than ready for initiatives for change. But
the regime is not. Although there probably are some
proponents of change within the government, I do not think
that even the support of IMF negotiatiors would allow them
successfully to press their arguments in the security
minded Jaruzelski regime.
5. The proponents of INF negotiations would undoubtedly reply that
the USG would only be agreeing to the start of negotiations: IMF
membership -- and money -- would come only if the Polish government would
meet the IMF conditions. But we must keep in mind that, once
negotiations start, the US government, in effect, will pretty much lose
control of the process to the international servants in the IMF. And,
when the issue comes up for a vote, it will be harder to recreate a
United Western opposition to Polish membership (IMF membership issues are
decided by majority rules, with each nation voting shares based on its
financial contribution. Thus the US controls 19.2% of the vote).
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6. In sum, I do not think that the time is ripe for the USG to
support the renewal of negotiations over Polish membership in the IMF.
Proposed talking points for your discussion of this issue with the
Secretary of State and with Mr. McFarlane are attached.
George Kolt
Attachment
1. Talking Points
2. DDI Report Dtd 28 June 84;
Poland and the IMF
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MEMO FOR: Acting DCI
FROM: George Kolt
NIO/EUR
SUBJECT: Poland and IMF Membership
Distribution:,
0
NIC No. 04804-84
21 August 1984
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- DCI
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- NIO/E (/o att
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- D/EURA (w/o att
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- EURA/EE (w/o att 2)
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- NIO/EUR chrono (w/o att)
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- NIO/EUR sub file
NIO/EUR/GKOLT(21 August 84)
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NIC No. 04804-84/1
21 August 1984
Proposed Talking Points for ADCI Meeting
with Secretary of State Shultz and
National Security Advisor McFarlane
--The USG has suggested it would consider dropping its opposition to
the renewal of negotiations over Polish mebership in the IMF if the
Polish government implemented its pledge to free all political prisoners.
--In my judgment this would be a mistake:
First, Jaruzelski is freeing prisoners under conditions
that seemingly guarantee there will be more arrests before
the years is out.
Second, I disagree with the argument that IMF negotiators
could push the regime toward meangingful economic and
consequently political reform. As we wrote in our recent
NIE on Eastern Europe, the initiative for change in
Eastern Europe must arise in the main from within."
Jaruzelski regime's top priority is political control.
Although there probably are some proponents of change
within the government, I do not think that even the support
of IMF negotiators would allow them to successfully press
their arguments in the security-minded Jaruzelski regime.
Third, we must keep in mind that once IMF negotiations
start we are likely to loose almost all control over the
process to the negotiators and to other nations.
--In sum, I believe IMF negotiations at this time are unlikely to
yield the results we would want. Thus, I do not think the time has come
to drop our opposition to these negotiations.
SECRETI
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Central Intelligence Agency
DIRECTORATE FOR INTELLIGENCE
28 June 1984
Poland and the IMF
Summary
The issue of Polish membership in the IMF is
receiving increased attention in the West.
Although Poland's dormant application could be
revived soon, some technical problems--such as
sizable arrears--are likely to prevent its quick
approval. Once a member, Poland could receive an
estimated $2 billion in credits the first year.
To draw most of these funds, however, Warsaw would
have to agree to implement a strong adjustment
program that might include restraints on wage
increases, hikes in retail prices, and cuts in
enterprise subsidies. Warsaw has been unwilling
to impose tough measures in these areas, but might
do more in response to IMF prodding. The Fund
would not insist on systemic reforms since it
considers these outside its purview. But IMF
pressures on Poland to promote efficiency and
greater reliance on market forces would bolster
the arguments of reformers in Warsaw. Polish
membership in the Fund would not dilute
significantly US voting strength in the
organization.
-------------------------
This memorandum was prepared b East European Division,
Office of European Analysis. It was requested y Paula Dobri an sk i , Deputy
Director, European and Soviet Offices, National Security Council. Commentc
and questions are welcome and should be addressed to
Chief, East European Division, EURA~
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Poland and the IMF
There are some signs that Poland's membership bid to join
the IMF may soon be revived. This paper briefly explores the
numerous issues involved with such an event. It begins by
examining the IMF in general and discussing some of the basic
problems the Fund has had with centrally planned economies. The
paper next explores some of the specific issues that would apply
to Polish membership, drawing on the Fund's experiences with
other'East European countries, and concludes with a short section
The IMF - An Introduction
The purpose of the IMF is to promote economic and financial
cooperation among its members in order to facilitate the
expansion and balanced growth of international trade. The Fund
seeks, in particular, to reduce the intensity and duration of any
disequilibrium in a member country's international balance of
payments. To this end, the IMF promotes exchange rate stability,
assists in the establishment of a multilateral system of
payments, and works to eliminate foreign exchange restrictions.
Membership in the IMF is open to any sovereign state that is
prepared to fulfill the obligations of membership laid out in the
Articles of Agreement (see Box 1). The decision to admit a
country resides with the Board of Governors (comprised of one
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Box 1
Procedure for Membership
1. Informal contact may be made between a prospective applicant
and the -IMF in order to acquaint the country with its likely
duties and responsibilities. (The managing director of the
IMF can send a staff team to answer questions and offer
technical assistance.)
2. These talks are followed up with a letter of application
addressed to the Managing Director of the Fund, submitted by
an official acting on instructions of his government.
3. The Managing Director places the application before the
Executive Directors, (the decision-making body of the IMF)
who appoint a special committee to discuss membership in
detail with the applicant. The committee essentially draws
up a "resolution of acceptance" that spells out the
prospective applicants':
--
quota in the Fund; the quota determines the prospective
member's voting power and sets limits on financial
assistance;
--
subscription
(equalivalent
hard currency
of currency and its date of payment
to the quota with one-fourth payable in
and three-fourths payable in the
applicant's currency);
--
par value of the country's currency and various exchange
rate issues; .
--
date when transaction with the Fund may begin; and
--
procedures for acceptance of membership.
4. Once the staff's work is approved by the Executive Directors,
the application is passed on to the Board of Governors. The
Board of Governors accepts membership by a simple majority of
the votes, though "voting" is weighted to reflect the size of
the member. (At present votes are allocated on the basis of
250 votes each plus 1 vote for each 100,000 SDRs of a
member's quota.)
5. The applicant usually has six months to accept membership but
a longer period may be granted in special cases. If the
applicant accepts, it must deposit an "instrument of
acceptance" that states it has taken the necessary steps to
enable it to carry out all obligations under the Articles of
Agreement and the "resolution of acceptance." Finally, the
applicant signs the Articles of Agreement.
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representative from each member), though the application is first
placed before the Executive Directors1. The Directors--in
consultation with the applicant--work out the terms of membership
and pass along their recommendations to the Board of Governors.
The Board of Governors seldom rejects the Executive Directors'
recommendations because difficulties are usually ironed out
before the application is formally submitted. The Executive
Directors can block a membership bid by refusing to proceed with
the formal investigation of an applicant.
Once a member, the country can draw "temporarily" on Fund
resources "under adequate safeguards" to help correct balance of
payments difficulties (see Box 2). The IMF sets "conditions" for
the use of its resources to help ensure that the country can
overcome its balance of payments difficulties within a reasonable
period of time, and to enable it to sustain financial equilibrium
without continued reliance on Fund resources. These conditions
are negotiated with member countries and must be agreed on before
applications for use of IMF resources are forwarded to the
Executive Directors. Conditionality is progressive, however, and
a country may draw considerable resources from the Fund before
having to contend with particularly tough IMF demands, especially
if the borrower can point to external factors beyond its control
as the reason for its financial problems. Only when a country
seeks credits extending beyond the second or third credit
tranches does the Fund require extensive and onerous adjustment
1 Comprised of representatives of the six member countries with the largest
quotas plus 16 other Directors representing the other members of the IMF 25X1
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Type of
Credit
Percent of
uotal
Reserve Tranche
25
First Tranche
25
Upper Tranches
50-100
Standby or
Extended
1402
Compensatory
Financing Facility
83-105
Buffer Stock
Financing Facility
45
Commonly Used IMF Facilities
Box 2.
Conditions of
Recipient
Demonstrate balance of payments need.
Demonstrate balance of payments need and
show the Fund that reasonable efforts are
being made to solve the problems.
Demonstrate "substantial" justification
of need and agree to conditions worked out
with the Fund. Program duration is
usually up to one year.
Demonstrate serious balance of payments
needs over an extended period of time.
These facilities are made available for up
to three years subject to strict
conditions worked out with the Fund.
Usually involving structural adjustments.
Demonstrate temporary balance of
payments need due to circumstances
beyond the member's control. This
facility primarily applies to countries
exporting primary products but also has
been extended to include excessive costs
of cereal imports.
Demonstrate balance of payments need
related to participation in
arrangements to finance approved
international buffer stocks of primary
products.
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1 A member's "quota" is denominated in Special Drawing Rights (SDR as of May
1984,= $1.047) and is determined by "the member's economic characteristics
relative to other members of comparable size."
2 Under special circumstances, the Fund can approve stand-by or extended
arrangements in excess of the limits.
source: The IMF's International Financial Statistics, June 1984.
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programs as "conditions" for using its resources.
IMF adjustment programs focus largely on demand-management
policies, particularly on fiscal, monetary, and exchange rate
measures aimed at balancing domestic demand with available
resources. The programs establish quantitative performance
criteria that set targets for:
-- net domestic assets of the banking system,
-- gross convertible international reserves,
-- short-term foreign debt, or possibly total debt, and
-- trade or current account balances.
In addition, IMF programs include four "restrictive" measures
that prohibit the borrower from:
-- imposing or intensifying restrictions on payments and
transfers for current international transactions,
-- introducing or modifying multiple currency practices,
-- concluding bilateral payments agreements that are
inconsistent with the Fund's Articles, and
-- imposing or intensifying import restrictions for balance
of payments purposes.
Finally, the Fund requires a "Letter of Intent" drawn up by the
borrowing country that specifies the quantitative targets to be
met over the duration of the program and outlines the policies
the country plans to adopt in order to achieve the goals of the
program and to meet performance criteria.
The IMF seeks to tailor its programs and conditions to take
into account the particular concerns and institutions of
different members. Conditionality also has changed recently as
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the Fund finds itself strapped for resources and reeling from
criticisms that its supervision of debtor nations has been far
too lax. Thus, the Fund has broadened the concept of
conditionality and more frequently proposes that a country commit
itself to "supply side" measures. The . IMF programs also now
focus more on microeconomic causes of balance of payments
problems in addition to traditional reliance on macroeconomic
adjustment policies. The Fund does not try to impose reforms
that would alter the basic structure of a member's economy or
insist on changes in the allocation of GNPJ
Problems with Centrally Planned Economies
Debates dating back to Bretton Woods have focused on whether
centrally planned economies (CPEs) belong in the IMF. Critics
argue that the economic distortion inherent in such economies--
unrealistic export prices, multiple exchange rates,
nonconvertible currencies--make it very difficult for the Fund to
help devise programs that would correct balance of payments
problems. The East European countries, for their part, have had
political reservations about dealing with an organization that is
controlled by the developed capitalist countries and that demands
certain economic policies as a condition for its credits. They
also have been reluctant to provide the economic data required
under article VIII of the Fund's basic provisions, largely
because they regard such information as state secrets
Despite these issues, the IMF has not prevented states with
centrally planned economies from becoming members. The Fund
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argues that it can better promote international monetary
cooperation and world financial stability if it allows all
countries to become members. Moreover, the Fund preserves its
neutrality regarding the institutional arrangements of its member
countries and stresses that its policies are formulated with "due
regard to the domestic social and political objectives, the
economic priorities, and the circumstances of members." Thus
Poland, Czechoslovakia, and Yugoslavia were founding members of
the IMF, while Romania (1972) and Hungary (1982) joined later.
Both Poland and Czechoslovakia eventually withdrew--in 1950 and
1955 respectively--after disputes with the Fund over the
provision of economic information
Poland's Membership Status
Poland showed interest in rejoining the Fund beginning in
the mid-1970s, but did not announce its intentions until November
1981. For seeing few major stumbling blocks, Warsaw fully
expected to gain membership by the fall of 1982, at the latest.
The Polish declaration of martial law in December 1981 and the
subsequent imposition of Western sanctions derailed the Polish
application. Although IMF technical teams visited Warsaw in
1982, Warsaw's application was shelved by the Fund's Executive
Directors.
There are signs that Poland's application for membership
soon may be revived. Some Western governments view it as one of
the carrots they can offer Warsaw, especially in response to any
political concessions by the Jaruzelski regime. Other
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governments consider IMF membership necessary to force the Poles
to impose a meaningful stabilization program and thus to help
ensure that Warsaw eventually. repays its long overdue debts. For
its part, Warsaw seems eager to receive IMF loans and the Polish
delegation to.the Paris Club repeatedly has brought up membership
as a condition for their agreement to a rescheduling accord. As
recently as mid-June, the Poles' list of demands to the Paris
Club included IMF membership.
It is not clear, however, how seriously Poland is
considering membership, even if the Fund's Executive Directors
are willing to take up the matter again. We have no information
to suggest that Warsaw has directly prodded the Fund about moving
along its application. Polish requests to the Paris Club may be
just a bargaining ploy or may reflect only the desires of some
officials in the Ministry of Finance who are known to favor
membership.
Possible Soviet opposition could stall a Polish membership
application. Moscow reportedly approved Poland's membership
drive in 1981, probably out of a calculation that IMF financal
assistance could help reduce Moscow's costs of propping up the
foundering Polish economy. But Moscow might be far less
agreeable this time around. The Soviet Union is trying to draw
its allies closer together and to seek solutions to the region's
economic difficulties through CEMA integration. In particular,
Moscow has criticized--either directly, or indirectly through
close allies such as Czechoslovakia--some East European countries
for maintaining too many economic ties with the West. Such
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dependency, according to Moscow, has resulted in the unwarranted
intrusion of "international financial institutions" into the
internal affairs of these sovereign states. In addition,
unconfirmed reports continue to surface that Moscow has offered
Poland considerable economic incentives to turn eastward. Even
if all sides--Warsaw, Moscow, and Western governments--eventually
give the green light to a Polish application, formal membership
proceedings would probably take at least six months
Poland's application probably would not be hindered by the
traditional issues that have been raised over CPEs, such as
multiple exchange rates, nonconvertible currencies, or the
release of information. Romania's admission in 1972--and to a
much lesser degree Hungary's entry in 1982--shows that the Fund
is willing to ignore, at least temporarily, currency and exchange
rate issues and to tolerate some stinginess with official data.
Moreover, Poland is regarded as one of the more open communist
regimes when it comes to publishing statistics. In recent years
Warsaw has even supplemented open source material with more
detailed economic memoranda to its creditors.
Warsaw's large arrears owed Western governments--presently
over $7 billion and climbing daily--could pose a problem. The
IMF probably would require Poland to settle these accounts before
granting any sizable credits and possibly before allowing
membership.2 Both Romania and Yugoslavia have had trouble with
the Fund over arrears; Romania, for example, was forced to delay
2 Arrears are technically a violation of the IMF Articles which states "no 25X1
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making of payments and transfers for current international transactions."
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The IMF probably would not force Poland to pay all arrears
immediately, but might insist that it work out a tentative
settlement of outstanding claims. Romania resolved its dispute
with the Fund. by paying off some claims and incorporating others
into rescheduling agreements. Warsaw probably could handle the
majority of its arrears this way--it already has agreed with its
Paris Club creditors to a schedule for paying 1981 arrears. An
additional problem, however, is the sizable claims owed creditors
not included in current rescheduling talks. Warsaw would
probably find it difficult to make the downpayment of several
hundred million dollars needed to resolve its disputes over
a drawing until it had made arrangement to cover them.
Poland could experience problems in paying the subscription
required for membership.3 Warsaw would have to make a hard
currency downpayment of about $225 million, based on our estimate
that its quota would be around $900 million (give or take 10
percent). This payment can be withdrawn later by the member and
used without any strings attached, so it does not represent a
permanent loss, but it does temporarily tie up Poland's very
arrears.
limited funds.
3 New members are required to pay a subscription to the IMF equal to their
"quota," with 75 percent payable in domestic currency and 25 percent due in
gold or hard currencies. The average hard currency subscription paid by
existing members is closer to 22 percent. Hungary paid only 22 percent when
it joined, arguing successfully that it should pay the average. Poland's
subscription might be less and could be paid in installments--if exceptional
circumstances exist--but it probably could not justify paying much less than
the current average.
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An IMF Program for Poland
Poland presumably would begin immediately to draw funds.
Though precise numbers are hard to determine at this stage,
Warsaw possibly could draw about $2'.2 billion in hard currency
credits during the first 12 to 18 months. These would include:
$225 million from the reserve tranche;
$225 million from the first credit tranche;
$450 million from the compensatory financing facility;
-- $1.3 billion from the first year of a 3-year stand-by
program.
Technically, Warsaw's maximum eligibility is higher but the above
figures represent the amount it is likely to receive (see
The Poles possibly could draw about $900 million (including
the return of the $225 million subscription payment) before
encountering tough IMF conditions. When the Poles seek credits
under a standby program, the IMF probably would compel Warsaw to
devise and implement a comprehensive stabilization program. The
severity of Poland's problems, as well as the increasingly tough
attitude of the Fund suggest that the two sides will have trouble
agreeing on stabilization measures. In recent dealings with
other East European countries, the IMF has demanded more
restrictive and austere policies, probably because its earlier
Fund programs and advice failed to keep Romania and Yugoslavia
from rescheduling (see Appendix 1). Moreover, the IMF has been
publicly criticized in the press by bankers for the softness of
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Table 1
Estimated IMF Assistance to Polandl
Type of Percent Amount Conditions
Credit Of Quota (US$ Million) for Poland
Reserve Tranche 25 225 Demonstrate balance of payments
need.
First Credit Tranche 25 225 Demonstrate "substantial"
justification of need and agree
to conditions worked out with
the Fund. Program duration is
usually up to one year.
Compensatory Financing 50 450 Demonstrate an export shortfall,
Facility not necessarly related to
primary product production
difficulties. Other CPEs have
used it but have not drawn the
limit.
Standby or Extended 140 1,260 Adhere to relatively strong IMF
mandated stabilization program.
TOTAL $2,160
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1 Estimates based on assumed quota of $900 million. The exact quota is determined
by "the members economic characteristics relative to those of other members of
comparable size.
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its East European programs. The IMF is unlikely to grant Warsaw
time just to "tinker" with its economic problems.
Although each IMF program is unique, recent stand-by
arrangements concluded with other East European members point to
the likely provisions of such a program for Poland. In addition
to the usual "restrictive clauses" included in all programs (see
page 4), the Fund will seek to impose:
-- targets for balances on hard currency trade and current
account balances;
-- limits on net hard currency debt;
-- a target level for minimum hard currency reserves; and
-- limits on net domestic assets of the banking system.
Annual or quarterly targets for these criteria will be agreed
upon with Warsaw. In addition, the Fund is likely to urge
simplification of the foreign trade and exchange systems and will
advise Warsaw of the benefits to be gained for efficiency from
greater reliance on market mechanisms in preference to
administrative controls. Other specific criteria will depend on
how the Poles describe their economic policies in their "Letter
of Intent." The Fund probably will push for Warsaw to impose
greater domestic austerity in order to shift resources to the
external sector. Consequently, the IMF may try to persuade
Warsaw to reduce the planned growth of investment and
consumption. The IMF also will look at ways to increase domestic
supplies, and will focus on wage and price policies, interest
? rate hikes, and budget subsidies.
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We believe that Poland will have great difficulty agreeing
to an IMF stabilization program that would allow it maximum
access to IMF credits. Warsaw would find it hard.to accept
required conditionality. Some Polish officials--particularly in
the Ministry of Finance--have argued that Polish reform measures
adopted in 1982 would go far toward meeting IMF demands for
stabilization program. In our view, the seminal reforms will do
little to ensure achievement of any reasonably stringent
performace criteria. Although some Poles would like to use the
Fund as a scapegoat for imposing tough austerity measures, the
regime probably will be very unwilling to accede to very tough
IMF demands. If this is true, Poland will try to raise the
facilities of the IMF that require easier conditionality. Use of
these facilities would yield Poland some $900 million in the
first year, still a considerable amount of financing.
It is still questionable as to whether and to what extent
the Polish regime will choose to follow Fund recommendations.
East European members of the IMF have reacted differently to the
Fund's guidance. Hungary appears to be working quite closely and
amicably with Fund officials, but Budapest has been reforming its
economy for most of the last 16 years and is eager to implement
further reforms. On the other hand, Bucharest has mechanically
implemented some price and exchange rate adjustments demanded by
the Fund, but the changes have not led to major improvements in
economic performance, largely because they have not been
accompanied by any reduction in the regime's tight administrative
controls over the economy. Yugoslavia has accepted some
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IMF recommendations while arguing against others, but, as with
Hungary, the impetus for economic reform comes from domestic
sources. In Poland's case, the regime might agree to policies
but then not follow through-in their implementation. If
performance criteria are not met, the IMF will have to decide how
tough it wants to be.
Other Benefits of Membership
Membership in the IMF can provide other indirect benefits to
Poland--including membership in the World Bank and an improved
credit rating--but these rewards may not be as great as Warsaw
believes.
World Bank. Poland almost certainly would seek World Bank
membership after joining the Fund. Advantages do exist, but the
gains are not as great nor as immediate as those from being in
the Fund. Poland would be eligible to bid on construction
projects financed by the World Bank in other member countries.
Such contracts could provide some net inflows to the trade and
service accounts over the longer term. Warsaw also could tap the
bank for various project loans to help modernize key sectors of
the economy, although it would not obtain very favorable interest
rates because of its high per capita income. Yugoslavia,
Romania, and more recently, Hungary, have used such loans,
especially to finance energy-related projects. Budapest, for
example, has drawn over $400 million in these loans in its first
two years of membership.
Improved Credit Standing. Foreign creditors generally are
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more receptive to rescheduling the debts of a country that is
receiving IMF funds and following an IMF stabilization package.
The recent rescheduling packages for Yugoslavia and Romania have
been made conditional on these countries signing and adhering to
IMF programs. Moreover, IMF technical expertise often has proven
invaluable in aiding both sides during rescheduling
negotiations. For example, the IMF was instrumental in helping
the Romanian financial team overcome its inexperience and, at
times, incompetence during the early stages of the first
rescheduling talks.
IMF membership might not have much of an impact, however, on
Poland's current efforts to reschedule debt payments. The banks
and Poland are close to concluding a multiyear agreement that
would cover most, if not all, remaining debts and leave little
work for the Fund. Serious rescheduling talks with the Paris
Club have only resumed, but they could be well advanced by the
time Poland joins the Fund. Moreover, political factors--rather
than economic--have delayed Paris Club negotiations.
The IMF could play an important role in future debt
reschedulings. Poland's seemingly insurmountable debt troubles
suggest that Warsaw will be unable to meet. its rescheduled
obligations when they come due. The rescheduling of
"reschedulings" is rare, so the Fund might find itself breaking
new ground in this area.
Finally, IMF membership might aid Poland's never-ending
search for "new money," whether as part of rescheduling
agreements or outside of these formal packages. Though unlikely
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to be large, some new money might be more readily available if
Poland were in the Fund.
Implications for the US
US support for IMF membership alone probably would not lead
to an immediate improvement in US-Polish relations. Earlier this
year, Foreign Minister Olszowski told the Polish parliament that
improved relations depend upon the US dropping its policy of
discrimination toward Poland, ending its interference in Polish
domestic affairs, halting its propaganda attacks, and
compensating Poland for the damages caused by the sanctions. The
Jaruze l sk i regime might try, however, to use continued US
opposition to Polish IMF membership to drive a wedge between the
US and its allies at the Paris Club.
Polish membership in the Fund could raise some troublesome
voting issues for US representatives. The Gramm Ammendment,
passed in late 1983, compels the US to vote against aid to
"communist dictatorships" unless the money will help facilitate
the flow of labor and capital, will ease balance of payments
problems, and is in the best interest of the majority of the
people in the country. While the ammendment was not a hindrance
to US voting on the recent Hungarian and Yugoslav packages, the
case of Poland could prove more troublesome.
The admission of Poland would not seriously dilute US voting
strength in the IMF. Poland's voting share would be just around
1 percent (given a quota of $900 million), and would cause the US
voting strength to drop only marginally from 19.2 to 19
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percent. Even the combined voting strength of all four East
European members would be less than three percent. The US would
retain its veto over crucial decisions pertaining to the
structure of the Fund, which require 85 percent of the votes for
approval. Moreover, the US and its allies would retain more than
the 70 percent majority vote required on other key operational
issues.
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Appendix I
The following are more detailed assessments of the use of
Fund resources by the individual East European members of the
Yugoslavia Belgrade has been a member of the IMF since its
inception and has drawn on several of the Fund's credit
facilities over the years. Early drawings were modest but
increased somewhat in the 1960s when Yugoslav attempts to achieve
more rapid growth helped cause growing inflationary pressures and
balance of payments difficulties. The Fund granted Yugoslavia
relatively small standby credits in 1965 and in 1971, worth under
$100 million each. These credits were modest compared to
Yugoslavia's quota, and Belgrade was required only to demonstrate
that it had a balance of payments need and was making "reasonable
efforts" to solve its problem.
Yugoslavia also derived what could be considered
"nonpecuniary" benefits from the Fund. Technical advice
accompanying the financial support in 1965 aided Yugoslavia in
its drive to implement market-oriented reforms. In the early
1970s, IMF financial support made it easier for Yugoslavia to
adopt a series of constitutional amendments that further
decentralized economic decision-making. In both instances,
however, the driving force for reform was local demands for more
autonomy from Belgrade.
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The onset of the second oil price shock and Western
recession in the late 1970s exacerbated Yugoslavia's persistent
balance of payments problems.and forced Belgrade to seek IMF
standby programs every year since 1979. In addition, Yugoslavia
has drawn over $1 billion from the Fund's special Oil and
Compensatory Financing Facilities. Few conditions are imposed
under these facilities since the credits are granted to help
overcome external shocks or other factors beyond the borrower's
control. The policy measures outlined in standby programs in
1979 ($90 million), 1980 ($260 million) and the first two years
of the 1981-83 agreement ($1.8 billion) largely aimed at
controlling the growth of domestic demand.
Since the final year of the 1981-83 standby credit there
appears to be some toughening of IMF conditionality. This
reflects the failure of the Yugoslavs (and, implicitly, earlier
Fund programs) to improve significantly their hard currency
accounts, as well as the tougher conditions associated with
purchases in the higher credit tranches. The criteria for the
last year of the 1981-83 standby, for example, included monthly
devaluations of the dinar. This year's IMF program--a one-year
standby worth nearly $400 million--is a significant departure
from previous programs. Performance criteria were expanded
considerably. Along with the usual criteria found in most
programs, this agreement also includes:
-- a deadline for the lifting of a price freeze,
-- minimum prices for items under federal control such as
railroad services and electricity, oil and gas prices,
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-- continued monthly adjustments in nominal exchange rates,
-- quarterly increases in interest rates on bank deposits,
and
limits on payments to ailing enterprises.
Belgrade has been far cooler to these recent IMF dictates
than in the past. Debates with the Fund over the 1984 standby
credit, for example, were prolonged and--at times--hostile. At
several points during the negotiations, Yugoslav officials went
so far as to announce they were considering a "black option," an
economic program under which Yugoslavia would "go it alone"
without Western financial assistance. The differences were
eventually resolved because Belgrade recognized that the economy
would suffer without Fund help and that continued squabbling with
the IMF could delay negotiations over debt relief. Belgrade may
yet seek to soften some of the IMF demands in its future
negotiations, especially if it perceives favored treatment for
some Latin American debtors. Yugoslav differences with the IMF
have centered not so much on what the Fund wishes to accomplish,
as on the pace of the adjustment effort. Most Yugoslav leaders
agree that the features of the IMF program fall well within the
bounds of Yugoslavia's own long-term stabilization program. They
share the apprehension of many LDCs, however, that the IMF wishes
program's call for liberalizing price controls
The Fund has become very insistent about Yugoslav adherence to
this new agreement. In mid-May, Yugoslavia's first disbursement
was delayed until Belgrade demonstrated it was complying with the.
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to do too much, too quickly, especially in light of domestic
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Romania. Bucharest's experience with the Fund parallels
that of Yugoslavia. Romania has made extensive use of the
Compensatory Financing Facility, citing floods, an earthquake,
and a chemical refinery explosion as unforseen events that
contributed to worsening trade performances. Two standby credits
were drawn in 1975 and 1977, but few strings were attached. The
IMF noted shortcomings in the Romanian economy--particularly,
price, interest rate and exchange rate distortions--but failed to
Romania's financial position began to deteriorate sharply in
1980-81, largely due to rising oil-import bills. The Fund helped
by granting Bucharest a $1.3 billion standby arrangement for
1981-84. Yet the Fund underestimated the severity of Romania's
financial problems and the harsh banker reaction to Romania's
plight, which led to a sharp pullout of most short-term credits
in 1981. No sooner had the ink dried on the 1981 agreement than
the IMF was forced to suspend drawings under the standby as
arrears accumulated. The standby arrangement was amended in 1982
to include a clause specifically detailing how arrears were to be
handled. IMF pressure was critical in persuading Ceaucesau to
agree to debt rescheduling, and IMF advice was useful in
press Bucharest into undertaking significant changes.
The IMF also began pushing harder for Bucharest to correct
deficiencies that the Fund had long wanted redressed. The Fund
successfully prodded Bucharest during 1982-83 to boost prices,
negotiating the terms of rescheduling.
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especially those in the energy sector, and to eliminate most
multiple exchange rates. Finally the IMF program in 1983
requested that Romania undertake four studies outlining further
changes in prices, interest rates, exchange rates, and the cost
of capital.
eventually balked at the IMF program. In the fall
of 1983 it informed a visiting IMF team that it would not
complete the studies nor raise energy prices. The Fund withheld
further disbursements until a settlement could be reached. The
IMF subsequently agreed that Romania could draw the remaining
credits for 1983, but, with Romanian agreement, canceled the rest
of the standby accord. This prevented Romania from drawing
Bucharest's most recent dealings with the IMF provide an
interesting contrast to those of Yugoslavia. On the one hand,
the IMF pushed Bucharest to do far less than Belgrade was asked
to do. For example, Romania raised most prices as suggested by
the Fund, but still retained administrative controls. This
contrasts sharply with Fund dictates that Belgrade "free"
entirely a number of goods from federal control. On the other
hand, even the limited pressures applied to Romania apparently
went too far for those commanding this more "orthodox" centrally
planned economy. Bucharest--in part because of its more secure
previously scheduled credits in the first half of 1984
Hungary. Budapest's experience might seem to be more
relevant as a case study to help understand the issues involved
in membership for Poland since its economy is centrally planned
financial position--opted to shun further IMF help.
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and it just joined the IMF in 1982. But Hungary's debt problems
do not approach Poland's and it has already started to implement
Budapest's application for IMF membership came in late 1981
at a time when its payments position was weakening due to poor
export performance and high interest charges on its outstanding
debt. Hungarian officials told the US Embassy that they
announced their intentions to Moscow but did not seek advice,
believing Moscow would go along because of Eastern Europe's
deteriorating financial position. Moreover, Budapest wanted to
get ahead of Poland, which the Hungarians felt would run into
difficulties and thus delay their own bid. By the time Hungary
was admitted in May 1982, it had survived--with help from Western
central banks and the Bank for International Settlements--a
severe liquidity crisis, brought on by the sudden withdrawal of
over $1 billion in short-term credits by Western, CEMA, and OPEC
a comprehensive reform program.
Still in need of new credits to meet its borrowing
requirements, Hungary immediately sought IMF assistance. It was
granted its first 13-month stand-by arrangement for $500 million
on 8 December 1982. While the IMF team praised Hungary's
ambitious structural reform program, the Fund's overriding
priority in the 1983 program was to help Hungary overcome its
liquidity crisis. For this reason, the terms of the agreement
called largely for increased administrative controls on demand,
including stricter government regulation of prices and wages.
Budapest performed reasonably well during the period, although it
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fell short of fulfilling several of the key program targets.
Sympathetic to Hungary's plight, the IMF noted that continued
excess demand was caused largely by the government's attempts to
free up the economy--an example of the difficulties in moving
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Hungary currently is at the mid-point of its second 12-month
standby agreement totalling $440 million. The objectives of this
year's program remain are similar to the the first program. But
now that Hungary's financial crisis has eased, the Fund is
advising a faster pace for reform. Moreover, the Fund has left
open the possibility of replacing the present 12-month
arrangement with an 18 month program if Hungary demonstrates that
meaningful new reform measures will be taken by 1985. 25X1
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