IMF: Currency Exchange, Convertibility and Sovereign Relief

Dispute settlement (ISDS) is one of the most controversial features of international investment law.
Investors can bring claims directly against host states in international arbitration tribunals, often
without using local procedures. The number of disputes has risen in recent years, with ICSID being
the most popular form. ICSID awards are binding and final and are automatically enforceable in the
courts of all ICSID signatory states. New dispute settlement procedures have been put forward
including the EU’s Investment Court System. There are also state-to-state systems and informal
ones aimed at avoiding full arbitration.

Introduction
All financial transactions between states (including those related to trade and investment) require an
international legal framework for payment. The primary impediments to this system are:
• Currency rate fluctuation: uncertainties in the value of a currency
• Restrictions on convertibility of currency: the ability to access currency in a particular
jurisdiction
• Balance of payments disequilibrium: states become insolvent

International Monetary Fund (IMF)

Created in 1944, currently 189 MS. Objectives: growth in international trade to ensure full
employment, increased standard of living, and productive use of resources. Aims to promote stablity
in global economic system. Encourage currency exchange stability and promotes currency
convertibility. Acts as a “lender of last resort” to states to create liquidity in the supply of money.
Engages in information collection, dissemination and surveillance. Members obligations contained
in IMF Articles of Agreement.

Voting and Quotas

Art III: A MS quota’s determines it voting weight, its membership fees, its access to financing and
its allocation of IMF currency (the SDR). Quotas are based on a state’s economic size – a departure
from theory of sovereign equality of states. Different voting majorities are required for different
type of decisions. The latest quota review was concluded in 2010 and the quota increases became
effective in 2016, doubling quota resources to about $700b.

Structural Issues
Board of Governors: 1 from each country – meets once a year
Executive Board: 24 Directors each representing a single country of groups of countries (Chair is
IMF Director)
Staff: Approx. 2700 from 150 countries.
Total quotas: US $7b (SDR 480 billion)
The largest borrowers: Greece, Ukraine, Pakistan, Egypt
Surveillance consultations: 124 in 2015, 132 in 2016, 140 in 2017
Capacity development spending: US$332 million in 2017, over 25% of the IMF’s total budget

Objective 1: Maintain Stable Exchange Rates

Art. IV: Members are obligated to collaborate with the IMF and other members to assure a stable
system of exchange rates.
Members must follow exchange policies which are conducive to economic stability, orderly growth
and reasonable price stability. Members cannot manipulate the value of their own currency in order
to gain competitive advantage (prohibits currency wars). IMF will oversee every Member’s
fulfilment of these obligations.
Objective 2: No restrictions on currency conversion
Art VIII: There must be a system of unhindered transfers of payment between residents and non-
residents of each MS. Currencies must be freely convertible into one another. There should be no
restrictions on how a currency may be used or where it may be held. Discrimination in currency
convertibility is prohibited. Free transfer of currency is critical to international investment law
(return on profits from abroad). Members are entitled to break this rule where currency is scarce
(e.g. capital flight).

Objective 3: Sovereign loans

Art V: The IMF will provide financial assistance to countries that experience serious financial and
economic difficulties: bailouts. Money for this purse will be drawn from the reserve contributed to
by all of the IMF MS. Loans are short-term and intended to redress Members’ balance of payment
problems, state which are spending more than they earn. Seeking an IMF loan is viewed by states as
a last resort and is often obtained in conjunction with loans from other sources, e.g. European
Central Bank.

IMF Loan Data

Loan resources available to low-income countries were increased in 2009 (after the financial crisis).
Average limits under the IMF’s loan facilities were doubled. Access limits under the IMF’s lending
facilities were reviewed and increased again in 2016. Zero interest rates on loans were extended
through the end of 2018. The interest rate on emergency financing has been extended permanently
set at zero. The 2014 exercise to replenish loan resources that support the IMF’s lending has so far
raised more than $16b.

Loan Conditionality
The IMF’s funds are made available subject to certain conditions which involve state reforms ro
redress economic problems.
• Arts I, IV and V requires that the IMF maintain adequate safeguards regarding the use of its
resources.
• Conditions on the laons are individually negotiated will vary according to each member’s
circumstances
• Conditions are usually concerned with revenue generation and administrative efficiency
• Could include: preventing tax avoidance, lowering pension age, decreasing size of
government

Loan Conditionality – Guidelines

The responsibility for the design and implementation of a states conditionality policies is on the
state itself. Policies must consider the domestic and social policy objectives of the member. The
overriding purpose is balance of payments equilibrium. Conditions prescribed by the fun are
macroeconomic. Conditionality must not intrude into the political affairs of the member.
Conditionality is controversial because it represents a surrender of economic sovereignty.

Special Drawing Rights (SDR)

Art XV: The Special Drawing Right exists as a reserve asset that objectively regulates international
liquidity (1 SDR approx. $1.5).
Total global allocations are currently about SDR 200b (approax $300b). Members may exchange
their SDRs of the real currency belonging to another nation. Exchanges may be done through the
IMF or through direct agreement with another MS. An amount of SDRs is allocated to each
Member each year based on the IMF’s assessment of its economic strength. SDR facility has not
been popular, partly due to problems in initial SDR allocation levels.
IMF Official Visit _ Uruguay 2018
Official visit under Art IV to a member country:
Uruguay’s economy is resilient because of strong institutions, prudence and ample reserves,
moderate growth with high inflation, but low levels of investment. More structural reforms are
advocated, including more deficit reduction and public spending. Good uncoupling from region
(Arg and Brazil) through trade ties with China as well as trade diversification. IMF suggests
decrease in public debt, commitment to fiscal sustainability, more efficient social spending. Too
must spending on pensions and inflation-linked wages. Public enterprises need to be managed more
effectively. Peso adaptability will cushion shocks of global down town. Improved use of technology
for financial transactions. Emphasis on improved competitiveness.

Dispute Settlement
No formal system for the settlement of dispute regarding adherence to or breach of IMF obligations.
Limited facility exists for the interpretation of IMF obligations:
• Questions of interpretation may be raised with the Executive Board
• Appeals from this decision may be made to the Committee of Interpretation of the Board of
Governors
Recourse to the ICJ is thought to be available. A teleological (purposeful) approach will be taken to
interpretation. There is an internal IMF tribunal for employment issues relating to its staff.

Enforcement of Obligations
Reputational sanctions:
The IMF can publish reports about a member’s non-compliance

Formal sanctions Art XXVI:

Declaration of Ineligibility: the IMF can declare that member cannot use its loan resources
Suspension of Voting Rights: the member can no longer vote in IMF decisions.
Expulsion: forced withdrawal from IMF

Coordination between the IMF and the WTO (and RTAs)

GATT Art VII: Valuation for cutoms purposes, with currency conversions must be consistent with
IMF rules.
GATT Art XV: WTO parties should cooperate with IMFF regarding exchange rate questions
Consultations with the IMF regarding exchange rates, acceptance of IMF decisions regarding
exchange rates.
Monetary issues are very politically sensitive and the WTO may be an unsuitable forum for such
disputes.
The TPP (forerunner to CPTPP) was supposed to have a chapter on currency manipulation – no
current FTAs have covered currency issues.
USMCA has a currency chapter based on consultations and discussions (not binding).