WORLD TRADE
ORGANIZATIONWT/BOP/W/21
12 September 2002
(02-4830)
Committee on Balance-of-Payments Restrictions
RESERVE ADEQUACY
Note by the Secretariat
I. INTRODUCTION
1. This Note has been prepared in response to a request by the Committee on
Balance-of-Payments Restrictions at its meeting on 10 June 2002, in the context of the Committee's
work on outstanding implementation issues under paragraph 12(b) of the Doha Ministerial
Declaration.1
2. To facilitate discussions on Tirets 1 and 3 of Job(01)/152/Rev.1, the Secretariat was requested
to prepare a background Note on the factors and elements taken into account by the IMF in itsdetermination of what constitutes a serious decline in a country's monetary reserves, a very low level
of its monetary reserves or a reasonable rate of increase in its monetary reserves, and as to the
financial aspects of other matters covered in consultations with the country by the IMF in such cases.
It was requested to pay particular attention to how the determinations by the IMF, and the criteria
used by them for assessing the adequacy of fore ign exchange reserves, had been affected by the
financial crises witnessed in the last few years, and by the changing nature of the external
vulnerability of developing countries, in particular the volatility of capital flows, and the requirements
to secure consistency between policies regarding the current and the capital account.  It was asked to
describe how these determinations and criteria helped meet the requirements of the proviso  and the
Ad Note to GATT Article XVIII:11.
II. THE ROLE OF THE IMF IN THE CONSULTATIONS OF THE COMMITTEE ON
BALANCE-OF-PAYMENTS RESTRICTIONS
3. The role of the IMF in the consultations of the Committee on Balance-of-Payments
Restrictions (BOPs Committee) is set out in GATT Article XV:2 and GATS Article X11:5(e). Both
Articles require the BOPs Committee to accept "... all findings of statistical and other facts presented
by the IMF relating to foreign exchange, monetary reserves and balance-of-payments".  In addition, in
the case of GATT Article XV, the IMF is asked to provide a determination "as to what constitutes a
serious decline in the [consulting] contracting party's monetary reserves, a very low level of its
monetary reserves, or a reasonable rate of increase in its monetary reserves, and as to the financial
aspects of other matters covered in consultation in such cases".  In the case of GATS
                                                     
1 WT/BOP/R/63, paragraph 4.This document has been prepared under the Secretariat's own
responsibility and without prejudice to the positions of Members
and to their rights and obligations under the WTOWT/BOP/W/21
Page 2
Article X11:5(e), the BOPs Committee shall base its conclusions "... on the assessment by the Fund of
the balance-of-payments and the external financial situation of the consulting country".
4. The IMF has regularly provided information to the BOPs Committee on each consulting
country's recent economic developments, focusing in particular on macroeconomic indicators that are
linked to the country's current and prospective balance-of-payments situation.  This has been used
extensively in the BOPs Committee's discussions  on the parts of its consultation dealing with
"balance-of-payments position and prospects" and "alternative measures to restore equilibrium",
which in turn has been an important input to the Committee's consideration of the justification for the
institution, maintenance, or intensification of trade restrictions for balance-of-payments purposes.
5. The IMF is not asked to contribute directly to the BOPs Committee's assessment of the
justification for trade restrictions, nor is it asked to comment on the matters covered by the proviso
and the Ad Note to GATT Article XVIII: 11.
A. IMF C ONTRIBUTIONS TO CONSULTATIONS OF THE BALANCE -OF-PAYMENTS COMMITTEE :
1970-2001
6. Between 1970 and 2001, the BOPs Committee conducted 224 consultations with Member
countries.  Reports of these consultations are contained in the document series BOP/R/--, and since
1995 in the series WT/BOP/R/--.  Most of those consultations have been held under the Committee's
full consultation procedures, for which the IMF has contributed both a statement, which is reproducedin full in the Committee's reports, and its own consultation report on recent economic developments in
the consulting country.
7. The IMF statement to the BOPs Committee has regularly covered the following factors:
• recent developments in the real sector of  the economy (e.g., investment, aggregate demand,
output, growth and inflation);
• how developments in the real sector relate to the financial sector and to the macroeconomic
situation, in particular the IMF's assessment of the internal macroeconomic imbalance that iscausing the balance-of-payments problem focusing on fiscal, monetary, and exchange rate
policies;
• the current and prospective balance-of-payments position, focusing on the trade and current
accounts, and since the early-1980s on capital account developments too;
• a description of the trade and exchange restrictions in place, and of any steps being taken to
intensify or liberalize them;
• information on the consulting country's relations with the IMF, in particular whether an IMF
programme is in place or under negotiation.
8. The IMF has included in its statement, where applicable, reference to external factors
affecting adversely the consulting country's balance-of-payments situation and prospects.  Examples
have been the effects of the energy crisis of the 1970s, and more generally overseas trade barriers and
changes in the terms of trade on a consulting country's import prices and export earnings.  It has
typically reviewed these factors in the context of their effect in weakening the consulting country'sbalance-of-payments situation, in creating more uncertain balance-of-payments prospects, and in
some cases in justifying more time to phase-out trade restrictions for balance-of-payments purposes.
9. The IMF has also included in its statement, where applicable, information on the consulting
country's level of foreign debt and its foreign debt service obligations. This became a regular featureWT/BOP/W/21
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of IMF statements from the late-1970s, as a larger number of consulting countries gained access to
international capital markets and raised their levels of foreign borrowing. The IMF has provided
information on gross and net international monetary reserves, and where applicable it has drawn
attention to the relative importance of short-term foreign debt in a consulting country's overall foreign
debt profile.  This has been placed in the context of the country's balance-of-payments adjustment
policies and financing needs, and has been described in terms of the relative importance of foreignborrowing in bolstering the level of monetary reserves and in creating offsetting foreign exchange
liabilities.
10. The IMF statement has regularly provided statistics and other information on the consulting
country's level of monetary reserves, usually expressed in value terms, often also in terms of
equivalent months of import cover, and sometimes in relation to the total size of external transactions.
This information has been presented typically in the context of the expected evolution of the
consulting country's balance-of-payments and foreign debt situation, in particular whether thebalance-of- payments is expected to continue to deteriorate and place pressure on the level of reserves
or to start improving, whether accumulated foreign liabilities are placing the level of monetary
reserves under pressure, and whether further foreign borrowing presents a viable and sustainable
option to finance the balance-of-payments and bolster the level of monetary reserves.  The static
picture of reserve holdings and adequacy has therefore been combined in the IMF statement with adynamic assessment of expected changes in reserve holdings.
11. Many countries consulting in the BOPs Committee have held monetary reserves equivalent to
about 3 months of import cover.  In their own statements to the BOPs Committee, these countries
sometimes referred to this level of monetary re serves as the minimum level which their monetary
authorities regarded as prudent.  Some consulting countries have held much lower levels of monetaryreserves at the time of their consultation in the BOPs Committee, in certain cases equivalent to less
than 1 month's import cover, while others have held much higher levels of monetary reserves; reserve
holdings of 6-7 months of import cover have not been unusual, and in some cases monetary reserves
stood at 11-12 months of import cover at the time of the BOPs consultation.  There is some evidence
of consulting countries wishing to hold a higher level of monetary reserves in the 1990s than in the1970s and 1980s, in light of their concern about the volatility of capital flows following periods of
financial crisis.  However, the evidence is not overwhelming, in part perhaps because the countries
concerned were not, by and large, emerging market economies that were vulnerable to large inflows
and outflows of speculative foreign capital.
B. IMF S
TATEMENTS IN THE 1970 S
12. Most IMF statements in the 1970s drew a direct  link between the consulting country's level of
monetary reserves and its use of trade restrictions for balance-of-payments purposes.  Generally, the
IMF followed closely the language contained in GATT Article XV:2 and referred to whether the trade
restrictions under consideration in the BOPs Comm ittee did or did not go beyond the extent necessary
to stop a serious decline or to achieve a reasonable rate of increase in the level of monetary reserves.
13. There was no clear correlation between any specific level of monetary reserves (3 month's
import cover, for example) and the IMF's conclusion on the use of trade restrictions.  In most cases, alow level of monetary reserves corresponded to the IMF's assessment of a weak balance-of-payments
situation in the consulting country and led it to conclude that "trade restrictions in effect do not go
beyond those necessary to prevent a decline in monetary reserves" or "trade measures are not
unwarranted".
14. However, there were a significant number of instances in which that correspondence did not
hold.  In some cases the IMF noted that notwithstanding a low level of monetary reserves the
consulting country's balance-of-payments situation was strengthening and was expected to continue to
do so, and it encouraged the country to begin or to accelerate the liberalization of its trade restrictionsWT/BOP/W/21
Page 4
maintained for balance-of-payments purposes.  In some others, notwithstanding a high level of
monetary reserves, the IMF pointed to an expected weakening of the balance-of-payments situation
and concluded that the country concerned was justified in continuing to apply trade restrictions for
balance-of-payments purposes.  In some cases, the IMF placed the liberalization of trade restrictions
in a broader context of the consulting country's investment and economic development programme.
15. Examples of conclusions in IMF statements in the 1970s illustrating these points are:
• "The gross international reserves of the banking system although low, are adequate to sustain
current trade and payments needs."
• "While the current level of gross international reserves would not appear to be a constraint
towards continuing on the path of planned import liberalization, it cannot be considered
excessive in the light of expected current account developments. In view of the above the
remaining restrictions in effect do not go beyond that necessary to prevent a decline inmonetary reserves." (Gross reserves were over 4 month's import cover)
• "The relatively favourable balance-of-payments prospects should be seen against the
background of a steady decline in recent years in the level of gross official reserves as aproportion of imports. The Fund would welcome further progress towards easing restrictions
on trade and payments. In the meantime, the Fund considers that the overall restrictivenessof [the] import regime does not go beyond what is necessary to prevent a decline in
international reserves." (Gross reserves stood at 6 week's import cover)
• "At present, the overall balance-of-payments position  continues to be strong and international
reserves are high, and there appears to be scope for continuation of the recent trend towards
liberalization. An appropriate balance between policies to increase investment and measuresto reduce further import protection would improve productive efficiency, reduce domestic
shortages, and promote economic development." (Gross reserves were at 10 month's import
cover).
16. In only one instance in the 1970s did the IMF conclude that the use of trade restrictions for
balance-of-payments purposes was no longer justified. In that case, the level of monetary reserves
stood at 10 months of import cover. It concluded:
• "The Fund believes that in view of [the] balance-of-payments and reserve position,
restrictions on imports can no longer be justified on balance-of-payments grounds."
C. IMF S
TATEMENTS IN THE 1980 S AND 1990 S
17. IMF statements and supporting documentation in the 1980s and 1990s continued to provide
extensive information on recent developments in the real sector of each consulting country's economy,
on the stance of its macroeconomic policies, and on its balance-of-payments position and prospects.
They provided information on trade restrictions and exchange restrictions in place.  By the mid-1980s,
many consulting countries had had trade restrictions for balance-of-payments purposes in place for
five or more years.  The IMF statement began regu larly to draw attention to the fact that these
measures alone could not be expected to restore balance-of-payments equilibrium, and pointed to their
cumulative adverse effects on resource allocation.
18. IMF statements provided information, where applicable, on external factors affecting a
consulting country's balance-of-payments situation and prospects.  Overseas market access barriers
and changes in the terms of trade continued to be highlighted by the IMF where relevant.  In addition,
it drew attention in some cases to the importance of increased concessional lending by a consulting
country's development partners in helping to finance the current account of the balance-of-payments.WT/BOP/W/21
Page 5
19. IMF statements regularly provided information on a consulting country's level of monetary
reserves, placing this in the context of the balance-of-payments situation and prospects and the
sustainability of current levels of foreign debt. The foreign debt situation of many consulting countries
became an increasingly prominent feature of IMF statements.  In addition to providing data on the
debt situation, including on the maturity profile of foreign debt, the IMF factored foreign debt
liabilities into its balance-of-payments projections for a consulting country.  Where the currentbalance-of-payments situation, including the level of monetary reserves, was affected by potentially
volatile movements in short-term capital, the IMF pointed this out.  In some cases, the IMF
emphasized the importance of cooperative contributions by private lenders to an orderly work-out of a
country's foreign debt problem.
20. Since the early 1980s, the IMF statements have no longer drawn a direct link between the
level of monetary reserves and the use of trade restrictions for balance-of-payments purposes.
Instead, the conclusion of the IMF statement has focused on the availability and adequacy ofalternative measures to restore balance-of-payments equilibrium, and related this, rather than the level
of monetary reserves, to the continued use of trade restrictions.  In this regard, for example, in cases
where a build-up of foreign debt to unsustainable levels has been a feature of the IMF's analysis of a
consulting country's balance-of-payments situation, it has focused on the importance of alternative
adjustment measures to restore balance-of-payments equilibrium and has not viewed debt servicingdifficulties as a reason for prolonging the maintenance of trade restrictions.
21. A typical conclusion to IMF statements in the 1980s and 1990s has been:  "Trade restrictions
may be warranted on a temporary basis while more fundamental adjustment measures take effect".
Or, in cases where the prospect is for a consulting country's balance-of-payments situation to improve
on the basis of alternative adjustment measures:  "There is scope for resuming/accelerating theremoval of trade restrictions".
22. Examples of conclusions in IMF statements between 1980 and 1995 are:
• "Notwithstanding a sizeable increase in external borrowing, the overall balance
deteriorated significantly and gross official foreign exchange reserves declined to the
equivalent of less than 3 weeks imports. The Fund hopes that the improvement in the
current account that would be fostered by the pursuit of a tighter policy stance wouldallow a more liberal administration of import licences and establish the basis for a gradual
reduction of trade restrictions."
• "While [the level of official reserves] represents a relatively high proportion of imports,
[it] must be seen against the background of some special factors of uncertainty,
considerable dependence on short-term capital inflows, and a relatively large amount ofexternal debt. The Fund hopes that the authoritie s, by strengthening the adjustment effort,
will be better placed to further liberalize the exchange and trade system."
• "The Fund believes that the projected improvement in the external current balance and the
expected availability of financing from official and private sources as confidence on the
part of foreign private lenders recovers should make it possible to increase holdings ofreserves, while permitting the removal of the import restrictions."
• "The Fund believes that with a determined adjustment programme and the support and
cooperation of the international financial community, conditions will have been createdfor the restoration of a liberal trade and payments system."
• "Adjustment efforts will need to continue over the medium-term, and a significant
increase in concessional external assistance from bilateral and multilateral sources wouldWT/BOP/W/21
Page 6
contribute to the success of such efforts. As the economic recovery takes hold, the
authorities would be in a better position to ease exchange and trade restrictions."
• "The Fund believes it would be unfortunate if the attainment of ... growth and external
objectives were to be obstructed by the imposition of trade barriers in its export markets.The Fund welcomes ... progress towards relaxation of restrictions and hopes that, with the
continued pursuit of appropriate economic policies and the cooperation of its tradingpartners, the liberalization process can be further accelerated."
• "The Fund welcomes the efforts being made by the authorities to address economic and
financial imbalances, and hopes that these adjustment efforts will be continued to allowfor a further liberalization of the exchange and trade system."
• "[the] comprehensive adjustment programme pr ovides the basis for a major liberalization
of the restrictive trade and payments system; the Fund has emphasized the need toimplement the planned measures on schedule, and has stressed the importance of taking
further measures to liberalize the trade and payments system."
• "Given that the medium-term outlook of the economy and of the balance-of-payments
remains extremely difficult, the Fund urges the authorities to undertake a strong andcomprehensive adjustment programme with greater action at an early stage.  Such a
programme could prepare the ground for the achievement of sustainable economicgrowth, lower inflation, viability of the balance-of-payments over the long term, and the
elimination of exchange and trade restrictions."
• "The steady implementation of [adjustment] policies will strengthen the underlying
balance-of-payments position and thus permit a further reduction in the restrictiveness of
the exchange and trade system.  To be effective, however, they will need to becomplemented by adequate aid flows and unhampered access to foreign markets."
D. IMF S
TATEMENTS SINCE 1995
23. Since the entry into force of the WTO, the BOPs Committee has held 21 full consultations
with 13 Members. IMF statements and supporting documentation have covered much the sameground as in the 1980s and 1990s, and the same factors would appear to have been taken into account
by the IMF in its assessment of the level of monetary reserves and the financial aspects of other
matters covered in the BOPs Committee's consultations.  Where applicable the IMF has provided a
comprehensive description of a consulting country's debt profile and debt service obligations, and
related this to the balance-of-payments prospects and the adequacy of the level of monetary reserves.In its conclusions, the IMF has focused, in particular, on the adequacy of alternative measures to
restore balance-of-payments equilibrium.
(i) Consulting Member:  Hungary
2
24. Hungary consulted in the BOPs Committee in 1995 and 1996.
25. At the 1996 consultation, the IMF noted that the fiscal and external current account deficits
had declined sharply, structural reform had gained momentum, and stronger external performance had
facilitated a sizeable decline in net external debt.  A surge in direct investment and other private
capital inflows had boosted gross official reserves to a level equivalent to 9½ months of import cover
at end-1995.  The improvement in the balance of payments had continued in 1996, but official
reserves had declined because of early repayments of official debt and the relocation abroad of some
                                                     
2 WT/BOP/R/3 and R/17.WT/BOP/W/21
Page 7
of the foreign exchange deposits held by commercial banks.  However, this development has no
implications for the underlying external position, and at end-June reserves stood at the still
comfortable level of about 8 months of import cover.  The IMF concluded:
"In summary, the adjustment program undertaken since early 1995
has yielded important results in terms of macroeconomic
stabilization.  Most notably, the external position has strengthenedsubstantially over the last eighteen months and the objective of
containing the current account deficit to less than US$2 billion in
1996 appears feasible.  The recent reduction in the import surcharge
ahead of the original schedule is welcome.  Furthermore, the
authorities' continued commitment to fiscal consolidation and
structural reform bodes well for 1997, and should facilitate the
elimination of the import surcharge by July 1997."
(ii) Consulting Member:  Slovak Republic
3
26. The Slovak Republic consulted in the BOPs Committee in 1995, 1996, 1997, 1999 and 2000.
27. At the 1996 consultation, the IMF noted that Slovakia had made significant progress in its
economic management and performance, and that it was continuing to liberalize its current and capital
account transactions.  The balance-of-payments had strengthened in 1995, and foreign currencyreserves had increased to a level equivalent to 4.4 months of import cover.  The main development in
1996 had been an unexpectedly large and rapid turnaround in the current account, reflecting mainly
continued high import growth, while exports stagnated.  The IMF noted that Slovakia had a
substantially liberalized trade system, but continued to maintain a 10 per cent import surcharge on
consumer goods, which had been imposed in 1994 to deal with a temporary deterioration of theexternal accounts.  The authorities had delayed the elimination of the surcharge, mainly because of
balance-of -payments concerns.  The IMF maintained that financial policies, rather than the import
surcharge, were the most appropriate tools to respond to balance-of-payments difficulties.  The IMF
concluded as follows:
"To conclude, the Slovak authorities have made important progress
in the transition to a market economy. Tighter financial policies and
further structural adjustment are needed to consolidate these
achievements, and to ensure a more robust external position. The
Fund regrets the Slovak authorities' decision not to phase out the
import surcharge in 1995 when the situation was especiallypropitious. It urges the authorities to reconsider their decision by
beginning to phase out the surcharg e immediately with a view to its
prompt elimination."
28. At the 1997 consultations, the IMF noted that a large current account deficit had emerged in
1996 and persisted in 1997.  Macroeconomic attempts to correct this had been undermined by lax
fiscal policy.  Reserve cover had fallen gradually to less than 3½ months of import cover.  It noted
that in May 1997, the Slovak Crown had faced a speculative attack, precipitated in part by thecontagion effects from the turmoil in the Czech exchange market, but also against the background of
the large current account deficit.  Slovakia maintained a substantially liberalized trade regime.  The
original import surcharge had been replaced in May 1997 by an import deposit scheme, which in turn
was replaced in July 1997 by another import surcharge.  The authorities had announced the import
surcharge would be temporary, steadily phased out, and eliminated at end-1998.  The IMF concluded:
                                                     
3 WT/BOP/R/4, R/15, R/40, R/48 and R/52.WT/BOP/W/21
Page 8
"In consultations with Slovakia, the Fund has urged the authorities not to impose trade
restrictions and to rely instead on an appropriate mix of macroeconomic policies to deal with
the large external imbalance.  The surcharge cannot be a substitute for appropriate fiscal
tightening to reduce the external deficit to a sustainable level.  The Fund urges the authorities
to immediately tighten fiscal policy and to initiate the phased removal of the surcharge,
preferably ahead of the announced schedule."
29. At the 1999 consultations, the IMF noted that notwithstanding a large external imbalance,
fiscal and monetary policy had been expansionary in 1998.  With only modest foreign direct
investment, the persistence of large external current account imbalances had resulted in an
exceptionally rapid increase in Slovakia's external indebtedness to about 60 per cent of GDP at
end-1998.  About 40 per cent of this was short-term debt.  The currency had come under strong
pressure, and international reserves had been reduced to an uncomfortably low level of 2½ months of
import cover, equivalent to 49 per cent of short-term external debt.
30. Fiscal policy had been tightened in 1999, sufficiently to be instrumental in bringing about a
halving of the external current account deficit.  In addition, reflecting their balance-of-payments
concerns, the authorities had decided to improve an import surcharge of 7 per cent, to be reduced over
time and phased out by the end of 2000.  The new fiscal package has contributed to favourable
developments in financial markets.  Foreign exch ange inflows had helped replenish international
reserves, which had risen to 2.3 months of import cover, equivalent to 79 per  cent of short-term
external debt, but the IMF expected international re serves to remain at an uncomfortably low level in
1999.  The IMF concluded:
"In its consultations with Slovakia, the Fund has indicated its regret
over the imposition of the import surcharge – preferring additionalfiscal expenditure cuts instead – and continues to urge the authorities
to phase out the import surcharge quickly. Staff has stressed that
while an import surcharge is an instrument that countries have on
occasion resorted to when they faced balance-of-payments and fiscal
problems, its introduction distorts international trade and underminesefficiency and longer-run adjustment. Thus, if the authorities insisted
on introducing a surcharge, staff urged them, consistent with Fund
advice to other member countries, to keep the surcharge low (24 per
cent) and to eliminate it quickly (within 6-9 months of its
introduction) according to a pre-determined phase-out schedule, withthe time being used to strengthen expenditure consolidation. In
concluding the Article IV Consultation with the Slovak Republic on
July 21, 1999, Executive Directors of the Fund also expressed regret
over the imposition of the surcharge, and urged that it be phased out
quickly."
31. At the consultation in 2000, the IMF statement noted that Slovakia had made significant
progress in stabilizing the economy and accelerating st ructural reform.  There had been a considerable
easing of balance-of-payments difficulties.  The current account deficit was halved in 1999, and had
narrowed further in 2000.  Official international reserves at end-August 2000 reached the equivalent
to 3.6 months of import cover, boosted by borrowing abroad.  The IMF concluded:
"The authorities have adhered to their proposed timetable for the
elimination of the import surcharge, reducing it from 7 per cent to 5per cent in January 2000 and to 3 per cent in July 2000.  Their
intention is to eliminate the surcharge by January 1, 2001.  The Fund
had indicated its regret over the imposition of the importWT/BOP/W/21
Page 9
surcharge-having preferred additional fiscal expenditure cuts instead
and strongly supports its removal."
(iii) Consulting Member:  Brazil4
32. Brazil consulted in the BOPs Committee in 1995.
33. In its statement, the IMF noted that successful implementation of the Real Plan  had left
Brazil’s current account roughly in balance in 1994 and the overall balance-of-payments with asurplus, reflecting in part large inflows of portfo lio and other short-term foreign capital.  Beginning in
late-1994, the overall balance-of-payments had deteri orated and moved into deficit, reflecting the
expansion of domestic demand, the effect of trade li beralization measures, and the real appreciation of
the currency, as well as capital outflows associated w ith the Mexican crisis.  On the basis of current
policies, the overall balance-of-payments was expected to register a surplus in 1995 on account of
renewed inflows of capital, but, the IMF noted, th e implied build-up in international reserves was
dependent on the behaviour of portf olio flows, which had shown si zeable swings during 1995.  Gross
international reserves had declined as a result of  the deteriorating trade balance and large capital
outflows in the wake of the Mexican crisis, but the decline stopped in the second quarter as capital
inflows resumed, and reserves increased at end- August to 12 months of  projected 1995 merchandise
imports owing to a sharp increase in capital inflows in July and August.  High nominal interest rate
differentials, and possibly a reduction in perceived exchange rate risk following the exchange rate bandadjustment in late-June, had prompted large fore ign portfolio investment and foreign borrowing by
Brazilian residents.  In response to the strong cap ital inflows, the authorities had raised taxes on
investment by foreigners in fixed-income instruments and on bond placements abroad, and had
prohibited new investment by foreigners in stock op tions and future markets.  Notwithstanding these
restrictions, Brazil's gross international reserves s hould remain close to 12 months of imports at end-
1995.  The IMF concluded as follows:
"In the presence of an initial strong pickup in domestic demand, the
policy mix has led to high real interest rates and a marked
deterioration of the external trade balance.  While international
reserves have risen to high levels, this reflects large inflows ofpotentially volatile capital.  During 1995 the Brazilian authorities
have resorted to trade restrictions, which are not appropriate to
address Brazil's macroeconomic problems.  Rather than resort to such
restrictions, a substantial strengthening of the public finances is
fundamental if inflation is to be lowered further and a worsening ofthe trade deficit is to be reversed in an efficient and sustainable way.
Moreover, a tighter fiscal stance would help reduce interest rates by
enhancing the credibility of the authorities' inflation-reduction policy
and would take some of the burden of stabilisation from monetary
policy.  ….  Brazil's recent resort to trade restrictions, including
quantitative restrictions on vehicle imports, is of particularly serious
concern because of the distortionary nature of the restrictions.  Forthese reasons, the trade restrictions should be removed at the earliest
feasible date."
(iv) Consulting Member:  Sri Lanka
5
34. Sri Lanka consulted in the BOPs Committee in 1995.
                                                     
4 WT/BOP/R/7.
5 WT/BOP/R/8.WT/BOP/W/21
Page 10
35. In its statement, the IMF noted that Sri Lanka’s economic performance had been adversely
affected since mid-1994 by policy slippages.  Developments in the balance-of-payments reflected the
deterioration in the economic situation, which had it s roots in a large fiscal deficit and rapid credit
expansion.  Until late-1994, Sri Lanka had experi enced unprecedented foreign inflows, including
sizeable aid flows, large remittances from overseas wo rkers, and foreign direct and portfolio investment.
These inflows led to overall balance-of-payments su rpluses and allowed a significant increase in gross
official reserves to about 5 months of imports.  Howe ver, the overall balance shifted to a deficit in the
first seven months of 1995, reflecting both a large cu rrent account deficit and a slowing of private
capital inflows.  Reserves had fallen to 4½ months of  import cover.  External prospects were uncertain
for the remainder of 1995 and 1996.  The IMF concluded as follows:
"In conclusion, achievement of Sri Lanka's long-term objective of
poverty elimination through high levels of sustainable growth will
depend on structural improvements and macroeconomic stability.The recent deterioration in the balance of payments will be arrested
on an enduring basis only by a substantial strengthening of the public
finances.  In this regard, licensing restrictions on selected agricultural
products will do little to correct the fundamental macroeconomic
imbalances, while distorting resource allocation.  Developments thusfar in 1995 suggest that progress toward Sri Lanka's long-term
objectives will be delayed.  For 1996, the authorities need to take
steps to formulate a budget and to frame a complementary monetary
policy, that could accompany an aggressive programme of structural
reform, including the timely elimination of the remaining importlicensing restrictions."
(v) Consulting Member:  India
6
36. India consulted in the BOPs Committee between 1995 and 1997.
37. At the 1995 consultation, the IMF pointed to India's fiscal situation and its need for structural
reform as two major areas of concern relating to its balance-of-payments situation, and to Indiameeting its full  growth potential.  It noted that foreign exchange reserves were equivalent to around
6½ months of import cover.  Factors behind the build-up in reserves were a surge in private capital
inflows following the liberalization of restrictions  on inward foreign investment and the resumption of
rapid export growth.  The scale of portfolio inflows had subsided since late-1994, consistent with a
general reappraisal of emerging markets by investors in the wake of the Mexico crisis, but foreigndirect investment had continued to increase.  With continued prudent macroeconomic management,
India's medium-term balance-of-payments prospect s looked sound.  In view of heavy investment
needs, the current account deficit was expected to widen further, but this should be sustainable in
view of the improved prospects for private capi tal inflows, including direct investment.  The
debt-service ratio would be lowered to under 20 percent by the end of the decade, while international
reserves would be maintained at comfortable levels.
38. The IMF’s conclusions with respect to trade restrictions were:
"On the external front, the process of trade liberalization needs to be
completed.  Tariff levels are still high and need to be brought down
further.  Even more important, the quantitative restrictions on imports
of consumer goods need to be eliminated, and replaced by tariffs at
moderate levels.  Excessive protection has hindered the developmentof this important sector of the economy.  Some phasing of this
                                                     
6 WT/BOP/R/11, R/22 and R/32.WT/BOP/W/21
Page 11
process may be appropriate in view of recent exchange market
pressures, the potential volatility of private capital inflows, and the
need to provide adequate time for adjustment of certain domestic
industries.  Nevertheless, the transition to a tariff-based import
regime with no quantitative restrictions could reasonably be
accomplished within a period of two years."
39. At the first consultation in 1997, the IMF noted that after several years of surplus India's
balance-of-payments had moved into deficit in 1995/96.  The current account deficit had widened as
rapid import growth related to rising domestic demand more than offset a continued strong export
performance.  While portfolio equity inflows had sl owed, direct investment continued to rise.  The
authorities had responded to several episodes of downward pressure on the exchange rate through
intervention supported by steps to tighten liquidity, while taking administrative measures to
discourage speculative activities.  Since February 1996, exchange market pressures had eased asimport growth slowed and private capital inflows strengthened.  Against this background, the Reserve
Bank of India had been able to replenish international reserves in advance of large amortization
payments that fell due in early 1997.  Gross international reserves were expected to increase by
year-end to a comfortable 5 months of imports, a level that was sizeable also in comparison to the
stock of short-term debt and the cumulative stock of portfolio equity inflows.
40. Looking to the medium-term, the current account deficit was likely to continue to widen,
reflecting the impact of rising infrastructure investment and continued trade liberalization,
notwithstanding good prospects for exports as the economy became more open.  Private capital
inflows should remain buoyant, with rising foreig n direct investment complementing portfolio flows
and external borrowing.  Further capital account liberalization would contribute to fostering suchinflows, with priority being given to direct and portfolio investment.  Provided that macroeconomic
policy was prudent, this outlook should be fully consistent with continued external viability.  Indeed,
a gradual rise in the current account deficit up to 3-4 per cent of GDP would still be compatible with
bringing the debt service ratio to well under 20 per cent over the next few years.  However, caution
would be needed to avoid progressing too far along the path of increased reliance on foreign savingsuntil fiscal consolidation was well advanced.
41. The IMF’s conclusions were:
"Trade reform should also be a particular priority.  Substantial
progress has been made over the past five years, reflected in a
lowering of the average import-weighted tariff from 87 per cent in1990/91 to under 23 per cent in 1996/97.  Nevertheless, tariffs remain
high by East Asian standards, and – notwithstanding some recent
progress – quantitative restrictions (QRs) still cover most of the
consumer goods sector.  While the lowering of tariffs on raw
materials and intermediate products in the 1996/97 budget was
welcome, one implication is that the already high effective rates of
protection for the consumer goods sector have increased.  Earlyaction and a clear timetable for removing the continuing QRs on
consumer goods imports – together with liberalization of the system
of reservation for small-scale units of many manufactured products –
would help reduce distortions to investment incentives and encourage
the emergence of an efficient, export-oriented consumer goodsindustry.  Moreover, in the Fund's judgement, the external situation
can be well managed using macroeconomic policy instruments
without recourse to QRs.  The Fund's view, therefore, is that QRs
should be removed over a relatively short period;  the tariff levels
applied to previously restricted consumer goods imports couldWT/BOP/W/21
Page 12
initially be kept close to the top end of the existing tariff structure,
but tariffs should be scaled back gradually over a pre-set timetable."
42. When consultations resumed later in 1997 to consider India’s phase-out plan, the IMF noted
that its overall assessment of India’s economic performance  remained broadly unchanged.  The
balance-of-payments had recorded a sizeable surplus in 1996/97 while the current account deficit
remained around 1½ per cent of GDP.  There had b een a sharp slowdown in export growth, but import
growth had also slowed significantly.  Meanwhile , there were strong inflows of private portfolio
investment and direct foreign investment.  Gross of ficial reserves had increased to about 6 months of
import cover.  For 1997/98, the balance-of-payments was expected to register another sizable surplus.
The current account deficit was projected to widen, but strong private capital inflows were likely to
continue.  Gross official reserves were expected to rise further to about 6½ months of import cover.
43. Over the medium-term, the current account deficit was likely to continue to widen as
infrastructure investment accelerated.  Further capital account liberalization should encourage privatecapital inflows, and emphasis should be placed on promoting further portfolio investment and foreign
direct investment.  With continued prudent macro economic policies – and especially significant fiscal
adjustment – a current account deficit rising to 3-4 per cent of GDP would be consistent with the
authorities' target of maintaining a debt service ratio below 20 per cent.
44. The IMF’s conclusions were:
"Some further progress has also been made with trade liberalization
in recent months.  With the lowering of import duties in the 1997/98
budget, the peak duty rate is now 40 per cent and the average
(import-weighted) duty rate is slightly above 20 per cent.  However,
the 2 per cent import surcharge is still in place, while duty rates stillremain high by East Asian standards.  Moreover, while the recent
Export-Import Policy for 1997-2002 moved about one sixth of the
remaining number of items off the restricted import list, quantitative
restrictions (QRs) still cover a significant part of the consumer goods
sector.  A time-bound programme for eliminating the remaining QRswould reduce distortions to investment and promote an efficient,
export-oriented consumer goods industry.  …..  It remains the Fund’s
view that the external situation can be well managed using
macroeconomic policy instruments alone; QRs are not needed for
balance of payments adjustment and should be removed over arelatively short time period.  The tariffs applied to previously
restricted consumer good imports could initially be kept close to the
top of the existing tariff structure, but should be gradually scaled
back according to a pre-set timetable."
(vi) Consulting Member:  Nigeria
7
45. Nigeria consulted in the BOPs Committee in 1996 and 1997.
46. At the 1996 consultation, the IMF cited excessively expansionary fiscal and monetary policies
and inappropriate management of the exchange rate as major contributing factors to Nigeria's
balance-of-payments weakness, and noted that these were exacerbated by a weakening of the terms of
trade.  It noted that gross foreign exchange reserves were low (1.4 months of import cover in 1995
and 2.9 months of import cover in 1996).  It noted also that substantial external payments arrears had
accumulated already and were continuing to do so, that Nigeria's external debt service burden was
                                                     
7 WT/BOP/R/13, R/18 and R/25.WT/BOP/W/21
Page 13
heavy, and that these together had created an external sector imbalance of major proportions.  The
IMF’s conclusions in 1996 were:
"Pending implementation of a comprehensive adjustment program,
Nigeria's external prospects in the short and medium term remain
precarious, owing to its heavy debt service burden, weak
performance of the non-oil export sector, and uncertainty regardingthe future course of oil prices.  It would be essential that a bold and
credible program of measures be undertaken, including unifying the
dual exchange rates, accelerating privatization and public enterprise
reforms, and liberalizing the trade regime.  The Fund staff continues
to be of the view that the steadfast implementation of strong
macroeconomic policies, rather than resort to trade restrictions, is
necessary to achieve lasting improvements.  The Fund staffencourages the early unification of the exchange rates and the
adoption of a specific timetable for the elimination of trade and
exchange restrictions."
47. At the 1997 consultation, the IMF noted that corr ective measures applied by Nigeria in 1995
and 1996 had had some success in restoring macroeconomic stability.  The current account had beenimproving, and gross international reserves were reported to have increased to 5.2 months import
cover.  On the basis of projections that oil prices would remain relatively high, the current account
was projected to remain in surplus over the medium-term, but the capital account was projected to
remain in deficit.  Nigeria’s economic prospects therefore remained fragile.  The Fund concluded as
follows:
"In the Fund’s view, trade and exchange restrictions are not the
appropriate means to tackle the balance-of-payments problem.
Accordingly, the [IMF] Executive Board did not approve the
maintenance of exchange restrictions nor the maintenance of the
multiple currency practice arising from the current dual exchangerate system.  Rather, the Board maintained that the steadfast
implementation of strong macroeconomic policies was required if
improvements in the overall balance-of-payments were to be
sustainable.  The authorities should, without delay, remove
prohibitions on exports and imports, as well as all remainingrestrictions on current international transactions."
(vii) Consulting Member:  Tunisia
8
48. Tunisia consulted in the BOPs Committee in 1996 and 1997.
49. In its 1996 statement, the IMF noted that the weakening of Tunisia’s budget position had
contributed to pressures on the external accounts in 1995.  The overall balance-of-payments had
moved into deficit, and gross official reserves were estimated to have fallen to about 2 months of import
cover by mid-1996.  The IMF concluded as follows:
"In conclusion, the Fund commends the authorities for the sustained
implementation of sound demand management policies and structural
reforms.  The staff agrees with the authorities' approach to aim at
higher growth over the medium term by fostering a market- based,
open, and private sector driven economy, while consolidating
                                                     
8 WT/BOP/R/14 and R/31.WT/BOP/W/21
Page 14
macroeconomic stability.  The authorities in particular need to be
ready to take appropriate action to meet the fiscal target for 1996, in
order to contain the balance-of-payments pressures that have
emerged, and to achieve their external targets.  This strategy should
contribute to the rapid development of the country, the strengthening
of the external position, and the further integration of Tunisia'sgoods, services, and financial markets into the world economy.  The
Fund encourages the authorities to promptly eliminate all remaining
trade restrictions maintained for balance-of-payments purposes."
50. In its 1997 statement, the IMF noted that the current account deficit had narrowed in 1996.
Higher public borrowing from capital markets more than offset a temporary shortfall in grants, and
the overall balance-of-payments registered a surplus which brought gross official foreign exchange
reserves to the equivalent of 3.2 months of import cover by year-end.  Since then, reserves haddeclined to 2.5 months of import cover, reflecting seasonal factors and the timing of foreign
borrowing.  The balance-of-payments outlook for 1997 was encouraging.  Maintaining the current
account deficit at 3 per cent of GDP while stabilising reserves at the equivalent of 3.2 months of import
cover appeared feasible.  The IMF concluded as follows:
"In conclusion, the Fund commends the Tunisian authorities for
maintaining macroeconomic stability while pursuing structural
reforms. The Fund welcomes the authorities’ intention to direct the
medium-term strategy underlying the IXth Economic Development
Plan toward fostering a market-based, open, and private sector driven
economy, while consolidating macroeconomic stability.  Thisstrategy should also contribute to the further integration of Tunisia’s
goods, services and financial markets into the world economy.  In
this regard, the Fund encourages the authorities to promptly eliminate
remaining quantitative trade restrictions maintained for balance of
payments purposes."
(viii) Consulting Member: Pakistan
9
51. Pakistan consulted in the BOPs Committee in 1997 and 2000.
52. At the 1997 consultation, the IMF noted that Pakistan's balance-of-payments continued to be
characterised by a large current account deficit, heavy reliance on short-term financing, and a
relatively weak external reserve position.  The net foreign asset position of the central bankdeteriorated markedly, including a decline in gross of ficial reserves to 3.6 weeks of import cover.  The
government had embarked on a consolidation and intensification of structural reforms and adjustment
efforts, including a re-enforcement of the macroeconomic stabilization effort and structural reforms in
the tax system, in the financial sector, and in the non-financial public sector.  On the fiscal side, this
included tariff reform.  If implemented on a timely basis, the policy package was projected to
contribute to contain the external current account deficit at about the same level as in 1995/96, and
gross official reserves would recover to about 5 weeks of import cover, notwithstanding scheduled
debt service payments.  The IMF concluded as follows:
"The implementation of the new government's reforms initiatives
would constitute a substantial and much needed change in the
structure of the economy.  The reforms would provide a firm basis
for further efforts to enhance the growth potential of the Pakistaneconomy, eliminate chronic structural weaknesses, and improve the
                                                     
9 WT/BOP/R/27 and R/51.WT/BOP/W/21
Page 15
inflation and balance of payments performance.  There are, however,
downside risks.  First, the external outlook remains fragile and the
economy is very vulnerable to unfavourable changes in market
sentiment.  Second, the wide range of the proposed reforms will put a
strain on the country's implementation and administrative capacity.
Third, it is critical that the package of reforms be implemented fullyand on a timely basis.  In particular, any slippage in the broadening
of the bases of the affected taxes would lead to revenue losses that
would need to be immediately compensated by further fiscal efforts.
In view of these risks, Fund staff has stressed to the authorities the
importance of determined policy implementation and high
responsiveness of the policy stance to changes in market sentiment."
53. At the consultations in 2000, the IMF noted that the trade account was projected to improve
significantly despite a sharp deterioration in the terms of trade, because of strong growth in export
volumes.  The current account deficit was expected to decline, and taking into account developments
in the capital account foreign exchange reserves were projected to amount to about 3.7 weeks of
import cover.  The IMF concluded:
"Pakistan needs to achieve high and sustainable economic growth to
reduce the internal and external imbalances in the economy.  This
will require prudent demand management policies, a private
investment friendly environment, and a bold structural reform
program.  The new government's reform agenda and commitment to
improve public finances are encouraging and should be implementedvigorously.  In the near term, however, the external outlook will
remain fragile and financial support from the international
community will be critical.  This support, in turn, will hinge on the
government's ability to start implementing a strong and credible
programme of economic reform, including steps to enhancetransparency and governance."
(ix) Consulting Member: Czech Republic
10
54. The Czech Republic consulted in the BOPs Committee in 1997.
55. The IMF noted that recent economic developments have been characterized by growing
macroeconomic imbalances, which eventually culmin ated in disorderly conditions in the foreign
exchange market in late May 1997, including massive speculative pressures on the exchange rate and
capital outflows.  The Czech authorities had announced fiscal, wage and structural reform policy
measures to address the imbalances.  The outlook was for a modest narrowing of the external
imbalance in 1997-98.  There had been a positive response of portfolio inflows to capital market
reforms, and the deficit should be financeable through a combination of debt and non-debt creating
capital inflows and, in 1997, a draw down of reserves.  Official reserves amounted to about 3½ months
of import cover and were expected to remain at a satisfactory level in relation to imports and toshort-term debt.  The IMF concluded:
"In April 1997, the Czech authorities introduced an import deposit
scheme, which is administered through the import system, applies to
consumer goods and foodstuffs (about 30 per cent of total imports),
and requires a six-month non interest-bearing deposit equal to 20 percent of import value. It was originally  intended to remain in effect for
                                                     
10 WT/BOP/R/33.WT/BOP/W/21
Page 16
about a year. According to IMF staff estimates, the scheme is likely
to raise the cost of affected imports by about 1½-2 per cent on the
assumption that the deposited amount will be borrowed from banks;
however, this does not take into account liquidity constraints and
administrative costs that especially affect small importers. The Fund's
view is that this measure – much like other administrative measuresto reduce imports – is overly complex, has distortionary effects and is
not a substitute for macroeconomic policy action to correct the
economic fundamentals. Rather, macroeconomic policy corrections
should be introduced as soon as possible, so as to facilitate the early
removal of the import deposit scheme."
(x) Consulting Member: Bulgaria
11
56. Bulgaria consulted in the BOPs Committee in 1997 and 1998.
57. At the 1997 consultation, the IMF noted that Bulgaria had joined the WTO in the midst of a
rapidly worsening economic and financial crisis rooted in heavy internal and external indebtedness
and financial indiscipline in the banking and enterprise sectors. The 1996 crisis hit Bulgaria with
unexpected virulence as confidence in the banking system and the currency collapsed.  The balance-
of-payments recorded a large overall deficit, main ly resulting from capital flight and large external
debt service payments.  Official reserves declined to less than 1 month of import cover.  In 1997, the
government had begun implementing a comprehensive stabilization and reform programme, which
was yielding positive results sooner than expected.  Bulgaria had sustained the liberalization of its
trade and exchange rate regime that took place in the early 1990s, and made progress towards
eliminating remaining restrictions.  It had imposed a temporary 5 per cent import surcharge as part ofa stabilisation programme.  Foreign exchange reserves were being rebuilt to a level deemed prudent,
but Bulgaria would still need to rely on the timely disbursement of official external assistance to meet
external debt service obligations.  The IMF concluded:
"In sum, while Bulgaria's prospects have improved significantly over
the past few months, large external debt service and uncertaintiesabout the timing and impact of the restructuring of the enterprise and
banking sectors on the external accounts require vigilant
implementation of the adjustment program and prudent management
of official foreign exchange reserves. The Fund has emphasized that
strong and sustained implementation of appropriate macroeconomicpolicies will restore balance-of-payments viability and eliminate the
need for trade restrictions and has recommended to the authorities
that the import surcharge be phased out entirely, well ahead of the
existing commitment for end-1999."
58. At the 1998 consultation, the IMF noted that the Government had continued to demonstrate a
steadfast commitment to the adjustment programme allowing a restoration of confidence in policies
and attracting significant external support.  Official reserves had rebounded to a comfortable level of4.8 months of import cover.  The current account was broadly in balance during the first half of 1998,
but foreign investment inflows had tapered off sign ificantly reflecting the turmoil in international
markets and a slowdown of privatization.  With trade liberalization continuing, the economy
recovering, and investment projected to increase, the current account was expected to post a small
deficit in 1998 which would widen in subsequent years.  Foreign direct investment and portfolioinflows were expected to remain modest in ligh t of adverse investor sentiment toward emerging
markets.  The IMF concluded:
                                                     
11 WT/BOP/R/34 and R/43.WT/BOP/W/21
Page 17
"The authorities' success in overcoming Bulgaria's balance-of-
payments problems, as reflected in the substantial increase in
international reserves, has permitted them to reduce the import
surcharge as planned and to issue a decree announcing its abolition as
of January 1, 1999, eighteen months ahead of initial commitments.
The Fund commends the authorities for their sustained commitmentto sound economic policies and their preparedness to take bold and
difficult decisions to liberalize trade and allow the early elimination
of the import surcharge. The authorities remain strongly committed
to further trade liberalization, to increasing domestic competition and
creating a favorable environment for investment and growth.  The
three-year program includes significant liberalization of non-tariff
barriers, the elimination of remaining export taxes, and the reductionin average tariffs.  The authorities are actively considering the
acceptance of the obligations under Article VIII, sections, 2, 3, and 4,
of the Fund's articles of agreement in the near future. The Fund
emphasizes that sustained implementation of appropriate
macroeconomic policies and structural reforms will safeguardbalance of payments viability and obviate the need for import
restrictions."
(xi) Consulting Member:  Romania
12
59. Romania consulted in the BOPs Committee in 1998 and 2000.
60. At the 1998 consultation, the IMF noted that Romania’s current account deficit had widened.
Market concerns about its worsening external position – as reflected in down-grading by major rating
agencies and huge spreads on existing sovereign debt – and wariness among multilateral lenders all
contributed to lower debt capital inflows.  As a result of intervention sales as well as debt service
payments, gross foreign reserves declined to 2.2 months of merchandise imports.  On unchanged
policies, the external outlook for 1999  was worrisome.  In late 1998, the Government had announced
its intention to intensify policy efforts, with a view to addressing the underlying causes of the
widening external imbalance and continued economic decline.  The IMF concluded:
"Romania has made significant progress in liberalizing its trade and
exchange systems in recent years.  …  In recent discussions with the
Romanian authorities about the import surcharge, the Fund staff –who had advised against its introduction – urged the authorities to
rely on appropriate macroeconomic policies to address the external
imbalance rather than trade restrictions, and to eliminate the
surcharge by end-1999.  In the meantime, the authorities were urged
to minimize the distortionary effects of the surcharge, in particular by
widening its product coverage."
61. At the consultations in 2000, the IMF noted that Romania had made significant progress in
stabilization and reform over the past two years.  Large corrections of the fiscal accounts and the
exchange rate in 1999 lowered the external current account deficit to a sustainable level, averted a
financial crisis, and set the basis for lower inflation and an export-led recovery of output.  Gross
official foreign reserves  reached 2.7 months of import cover, or 130 per cent of short-term debt, at
end-July 2000.   Provided that policies remained on track, it was expected that the current accountdeficit would be broadly unchanged from the previous year, and official gross foreign reserves would
rise to about 3 months import cover.  The IMF concluded:
                                                     
12 WT/BOP/R/45 and R/53.WT/BOP/W/21
Page 18
"Romania has made significant progress toward liberalizing its
exchange and trade system in recent years.  In 1997, all remaining
quantitative restrictions on exports were eliminated and replaced with
automatic licensing for statistical purposes, and all quantitative
restrictions on imports were removed. On 10 October 1998, the
Romanian authorities imposed a 6 per cent import surcharge, whichwas lowered to 4 per cent at the beginning of 1999 and to 2 per cent
at the beginning of 2000.  In the context of undertakings under the
Fund-supported programme, the authorities have confirmed their
intention to eliminate the import surcharge at the beginning of 2001,
in line with an originally established schedule."
III. RESERVE ADEQUACY IN THE CONTEXT OF WTO DISPUTE SETTLEMENT
PROCEEDINGS
62. In the course of dispute settlement proceedings on India – Quantitative Restrictions on
Imports of Agricultural, Textile and Industrial Products
13, the Panel submitted a series of written
questions to the IMF which the Panel considered relevant to its examination of India’s balance-of-
payments situation.  The questions, and the answers from the IMF, were as follows:
1(a)(i) As of 18 November 1997, the date of establishm ent of the Panel, was India experiencing a
serious decline in its monetary reserves, or facing a threat thereof?
Foreign currency reserves of India’s monetary authorities (the Reserve Bank of India, RBI)
stood at US$25.1 billion (excluding gold) on 21 November 1997.14  This level represented an increase
of US$5.6 billion from a year earlier, and of US$2.8 billion from end–March 1997. 15 Net of forward
liabilities, foreign currency reserves stood at US$23 billion at end–November 1997.
The establishment of the WTO panel coincided with a period of turbulence in the foreign
exchange market in India, with increased fears of  further contagion from the financial crisis in east
and southeast Asia. The facts are as follows:  the rupee faced periodic bouts of downward pressure
beginning in August 1997. These pressures intensified in November 1997. The RBI initiallyintervened heavily in spot and forward markets to pr event large daily fluctuations in the exchange rate
that could have provoked bandwagon effects. Faced with a reserve loss of about US$2.6 billion
(including forward obligations) during November 1997, and continued pressure on the rupee, the RBI
subsequently abandoned active intervention and tightened monetary policy. Thus, with an appropriate
macroeconomic policy response and the containment of contagion, India’s foreign currency reserveson 18 November 1997 did not appear to be under a threat of a serious decline.  Therefore, the question
of whether an imminent threat existed is moot.
1(a)(ii) Was India experiencing an inadequate, or a very low, level of monetary reserves ?
At about 6 months of imports of goods and non–factor services, India’s reserves appeared to
provide sufficient external liquidity and a reasonable degree of protection against unforeseen external
shocks. In particular, reserves were sufficient to deal with debt service payments and potentialoutflows of portfolio investment, covering 2½ times the amount of maturing debt obligations in the
next twelve months and 1½ times the stock of short–term debt and cumulative inflows of portfolio
investment. Therefore, it is the Fund’s view that the level of foreign currency reserves on
November 18, 1997 was adequate.
                                                     
13 WT/DS90/R, 6 April 1999.
14 Data on official reserves are published weekly by the RBI.  On 13 November 1997, foreign currency reserves
were at US$26 billion.  Data on the RBI's outstanding net forward sales or purchases are published monthly.
15 India's financial years runs from 1 April to 31 March.WT/BOP/W/21
Page 19
1(a)(iii) Was India experiencing a reasonable rate of increase in its monetary reserves?
Gross foreign currency reserves fell by US$1.9 billion in November 1997. (Net of the RBI’s
forward obligations, foreign currency reserves fe ll by US$2.6 billion that month.) From a broader
perspective, however, there has been a reasonable rate of accumulation of reserves since India’s
balance-of-payments crisis in 1991. For example, at end–November 1997, reserves were upUS$5 billion from a year earlier. (Net of forward obligations, this increase was US$4.5 billion.)
1(b) In connection with responding to these questions, could the IMF indicate what would have
constituted a serious decline in India’s monetary reserves, what would have constituted an
inadequate, or a very low, level of monetary reserves for India, and what would have
constituted a reasonable rate of increase in India’s monetary reserves?
A considerable degree of subjective judgment is involved in an assessment of the adequacy of
the level and rate of change of reserves. The Fund’s view on this question is based on the size of
existing and potential claims on reserves, examined in the context of the country’s economic
circumstances. In the case of India, policy has pr udently aimed at ensuring that reserve coverage is
ahead of the sum of outstanding short-term liabili ties (by remaining maturity) and potential outflows
of portfolio investment. As of November 1997, short-term liabilities (by remaining maturity) and thestock of portfolio investment (after marking-to-market) were estimated at about US$16 billion.
Hence, a decline in reserves to significantly below this level would be considered serious, and such
levels could be deemed inadequate or very low. In case reserves were deemed to be inadequate at this
threshold, any increase in reserves that would br ing them above this level should be considered
reasonable.
2(a) Could the IMF provide the Panel with any statis tical and other factual information relating to
India’s balance of payments and monetary reserves which might be relevant in order to
enable the Panel to determine whether, as of 18 November 1997, the quantitative restrictions
notified by India as being maintained for ba lance-of-payments reasons did, or did not, exceed
those necessary to forestall the threat of, or to stop, a serious decline in its monetary reserves,or, in case its monetary reserves were inadequate, to achieve a reasonable rate of increase in
its reserves?
India’s overall balance of payments recorded sizable surpluses in 1996/97 and 1997/98, while
the current account deficit remained in the range of 1-1½ of GDP (see attached table). However,export performance in dollar terms has weakened. Exports grew by 2½% in dollar terms in 1997/98,
compared with 4½% in the previous year, markedly below the growth rates recorded in recent years.
In contrast, measured in volume terms the performance of exports has been better. Although the
performance of exports is partly explained by weaker demand in world markets and sector-specific
factors that are expected to be temporary, it has also reflected structural problems such as
infrastructure constraints and the lack of reforms in the small-scale sector. 
16 Imports rose by 5% in
dollar terms in 1997/98 (compared with 10% in 1996/97). Declining oil imports (both in volume anddollar terms) were offset by an increase in non-oil imports (up 12½% for the year), partly in response
to the relaxation of some controls on consumer goods imports.
Despite the slowdown in exports, the external position has remained manageable. Strong
inflows of private capital (both portfolio investment and foreign direct investment) boosted foreign
currency reserves in 1996/97 by US$5.3 billion to US$22.4 billion (5½ months of imports of goodsand non–factor services) at end-March 1997. In 1997/98, robust inflows of portfolio investment in the
                                                     
16 Small–scale units are defined as manufacturing units in which investment in plant and machinery is less than Rs
30 million (about US$700,000). These units enjoy special protection from both domestic and international competition.
About 800 products are reserved for production by small-scale units. The small–scale sector’s products account for roughly
half of all exports.WT/BOP/W/21
Page 20
first half of the year turned to modest net outf lows in the second half, responding to changes in
investor sentiment toward emerging markets following the Asian crisis. Moreover, higher premia for
debt issued overseas by Indian corporations discouraged foreign borrowing. However, rising foreign
direct investment, driven by longer term considerations, helped maintain a comfortable reserve
position.
2(b) Were there any special factors, within the meaning of GATT Article XVIII:9, affecting India’s
reserves and its need thereof, that the IMF considers relevant?
With respect to special factors, within th e meaning of GATT Article XVIII:9, the Fund
understands the following factors to be relevant. With  the exception of net forward liabilities totalling
US$1.4 billion at end-November 1997, there were neither contingent liabilities nor any unusually high
obligations affecting India’s reserves. With regard to prospective developments in debt-service
payments, amortization and interest payments in 1997/98 and 1998/99 were expected to return tolower levels after peaking in 1995/96 and 1996/97.
3. Noting that these restrictions relate mainly to consumption goods, would relaxation or
removal of the restrictions, as of 18 November 1997, have been likely to produce thereupon
"conditions justifying the intensification or institution, respectively, of restrictions under
paragraph 9 of Article XVIII" (Ad Note to Article XVIII:11)?
The Fund’s view remains as indicated in the statement to the WTO Committee on
Balance-of-Payments Restrictions (10-11 June 1997), namely that the external situation can be
managed using macroeconomic policy instruments alone. Quantitative restrictions (QRs) are not
needed for balance-of-payments adjustment and should be removed over a relatively short period oftime. The tariffs applied to previously restricted consumer goods imports could initially be kept close
to the top of the existing tariff structure, but should be scaled back according to a pre-announced
timetable. A time-bound programme for eliminating th e remaining QRs over a relatively short period
would reduce distortions to investment and promot e an efficient, export-oriented consumer goods
sector. The macroeconomic policy instruments would need to be complemented by structuralmeasures such as scaling back reservations on certain products for small-scale units and pushing
ahead with agricultural reforms.
4. Have there been any external or internal developments affecting the Indian economy since the
date of establishment of the Panel that could lead to a modification of the IMF’s answers to
questions 1 to 3?
There has been a deterioration in the economic outlook and market sentiment over the past
few months, and short-term risks have increased. This deterioration stems from both domestic and
external factors. The growth momentum has continued to weaken, the Central Government’s fiscal
position worsened in 1997/98, and investor confidence has abruptly eroded. At the same time the
external environment has become more uncertain. A deeper and more prolonged recession in East
Asia could reduce external demand and make an export recovery more difficult. The imposition ofsanctions following the nuclear tests in May 1998 and continued financial turbulence in the region
have also resulted in greater external vulnerabil ity, including from changes in market sentiment,
although foreign currency reserves remained at a relatively comfortable US$24.1 billion (over
5½ months of imports) at end-June 1998. These uncertainties undoubtedly add to near–term risks and
will require especially close monitoring while the impact of the sanctions and regional developmentswork their way through the economy. In sum, on the basis of developments thus far, the balance of
payments situation is expected to worsen and a decline in reserves (US$2½-4 billion) is anticipated
for 1998/99. Nevertheless, it remains the Fund view that the external situation can be managed using
macroeconomic policy instruments and that quantitative restrictions are not needed for
balance-of-payments adjustment.WT/BOP/W/21
Page 21
5(a) If India immediately removed the remaining quanti tative restrictions referred to above, would
India need to change its development policy in order not to experience a serious decline in its
monetary reserves or the threat of a serious decline in its monetary reserves, or (if India were
to have inadequate monetary reserves) in order to achieve a reasonable rate of increase in its
reserves?
Some problems in import substituting sectors and a temporary decline in reserves cannot be
ruled out in the event India immediately remove d the remaining QRs. As noted in response to
question 2(a), the recent increase in non-oil imports is partly in response to the relaxation of some of
the controls on consumer goods imports over the last  year. However, there would also be considerable
benefits to such a move, if it were implemented in a phased manner over a relatively short period.
First, increased customs revenue from the tariffs applied to previously restricted consumer goods
imports would contribute toward deficit reduction and could provide the necessary resources foressential spending in infrastructure and the social sectors. Second, a more competitive, efficient, and
quality-conscious consumer goods sector could contri bute strongly to export growth. Finally, the
structural measures advocated in response to question 3 would improve the allocation of investment,
promote efficiency, and enhance the growth prospects of the economy.
5(b) Would serious structural adjustment problems, other than balance of payments problems, be
likely to result from the removal of these restrictions?
It is the Fund’s judgment that removal of the QRs on consumer goods imports would enhance
competitive forces and efficiency in the economy, thus promoting trade and growth. Nevertheless,
there would be some inevitable adjustment in protected industries, the consequences of which couldbe exacerbated by existing rigid labour laws for the organized sector. The removal of import
restrictions, however, would also provide fresh impetus for reforms in other areas as the existence of
certain controls on the domestic economy (such as for small-scale units) would become less
meaningful.
IV. RECENT WORK BY THE IMF ON RESERVE ADEQUACY ISSUES
63. In 1999, the Secretariat, after consultation with IMF staff, prepared a Note for the General
Council on "The Treatment of ‘Monetary Reserves’ in WTO Balance-of-Payments Consultations".
17
There, it was noted that the IMF was examining closel y the treatment of reserves in the context of its
work on strengthening the international financial ar chitecture.  This work involved examining the
various measures to gauge adequacy of reserve coverage, especially capital account-based measures,and the consistency of measurement across countries.  The IMF staff increasingly monitored the level
of reserves over short-term debt by remaining maturity for emerging market economies.
64. The Note went on to say that "rules of thumb" that had been used in the past to measure the
adequacy of a Member’s level of monetary reserves, such as a certain number of months of import
cover, were designed primarily with current account considerations in mind, often in the context of a
Member maintaining a fixed exchange rate peg.  With more and more WTO Members opting to allow
their exchange rates to float, their need to maintain a particular level of monetary reserves in order to
help defend, when necessary, their exchange rates may be reduced.  However, it was not possible to
be categorical on this point;  Members with floating exchange rates and weak banking systems may
nevertheless need to maintain significant reserves.
65. With more and more WTO Members participating actively on international capital markets,
capital account developments have taken on increased importance for many Members in prudentmanagement of their overall balance-of-payments situation, as the recent "emerging markets"
financial crisis has shown.  One implication of this was that trade restrictions were a less suitable tool
                                                     
17 WT/TF/COH/S/2, 18 June 1999.WT/BOP/W/21
Page 22
for managing balance-of-payments problems, where these relate to capital account as opposed to
current account developments.  At the same time, what constituted an adequate level of monetary
reserves for these Members to be able to withstand both cyclical and unanticipated shocks deriving
from capital account developments needed to be assessed on a case-by-case basis.  Internal guidance
in the IMF for assessing reserve adequacy had increasingly emphasised that a close focus on short-
term debt by remaining maturity is generally warranted.  Moreover, in assessing available reservelevels, the derivative and contingent asset and liability position of the authorities needed to be
considered.
18
66. Since that Note was distributed, the IMF has developed "Guidelines for Foreign Exchange
Reserve Management" as part of a broader work programme to help strengthen the international
financial architecture, to promote policies and practices that contribute to stability and transparency in
the financial sector, and to reduce external vulnerabilities of its member countries.  The Guidelines
were issued in March 2001.  They state, inter alia , that:
"There are no universally applicable measures for assessing the
adequacy of reserves and the determination of reserve adequacy falls
beyond the scope of these guidelines.  Relevant factors have
traditionally included a country’s monetary and exchange
arrangements, and the size, nature and variability of its balance-of-payments and external position.  More recently, financial risks
associated with a country’s external debt position and the volatility of
its capital flows have received particular attention, especially for
economies with sufficient but not fully certain access to international
markets."
19
67. Prior to issuing the Guidelines, the IMF took stock of changes that had taken place in the
framework for evaluating reserve adequacy, and commented as follows.
"For much of the second half of the twentieth century, the rule of
thumb was that reserves should provide at least 3 months of import
coverage as a minimum desirable target for reserves.  Reserve floorsin many IMF-supported economic programmes have been based on
achieving such a minimum level.  Market participants had also
widely used this rule to gauge reserve adequacy.  Indeed, the median
observed reserve levels during the past fifty years mostly fell in the
range of 3 to 4 months of imports.  Following the spate of financialcrises in the 1990s, reserves in these [crisis-affected] countries
increased substantially, reflecting, among other things, a new
appreciation of the importance of adequate reserves.
"With the rise in private capital fl ows, the focus of reserve adequacy
on trade – and the rule about 3 months import coverage in particular
– had increasingly come to be regarded as out of date for many
countries.  At the same time, the crises that affected emerging marketcountries in the 1990s had driven home the point that capital flows
were important in financing the balance-of-payments and that access
to these private capital flows was often uncertain and subject to rapid
reversal.  Such reversals could contribute to a liquidity squeeze and
can result in or aggravate external crises.
                                                     
18 Ibid, paras 53-54.
19 "Guidelines for Foreign Exchange Reserve Management" IMF, 20 September 2001, available on the
IMF website at www.imf.org.WT/BOP/W/21
Page 23
"Thus, a search had begun for new policy rules to assess reserve
adequacy that reflected capital account and crisis prevention
considerations.  With crisis prevention as the primary objective,
policymakers … took the lead in proposing a new rule of thumb that
targeted coverage of short-term debt by remaining maturity as the
main criterion for setting reserve levels.  … [This rule] provided anatural departing point for considering more complex situations
arising in individual country cases.  [It] should be viewed as a
starting point for analysing reserve adequacy for a country with
significant but uncertain access to capital markets.  Several other
considerations for assessing reserve adequacy also had been found to
be key [ inter alia ] … general empirical analysis strongly suggested
that other fundamentals, notably the current account deficit and realeffective exchange rate misalignments, affected the need for reserves.
….  For countries with limited access to capital markets, the
traditional arguments applied:  without access to private capital,
reserves were needed to absorb and smooth shocks, such as declining
export volumes or increasing import prices.
"Did this mean that the traditional rule of thumb of 3 months of
imports of goods and services is no longer useful?  It was likely that
reserves would continue to be expressed in terms of imports,
especially for countries with limited access to capital markets,
because this continued to be universally available and easilyinterpretable.  However, the motivation for the level of reserves held
should be justified in broader terms …  Such an approach, in
practice, could be expected to lead to a much wider range of
observed levels of reserves, when expressed in terms of imports, and
a much greater focus on reporting and comparing reserves in terms ofother measures, such as short-term debt."
20
68. A more detailed IMF staff analysis of the potential implications of focusing an assessment of
the adequacy of monetary reserves on the capital account was published in October 2001.21  T h e
analysis stated that "from a crisis prevention point perspective, the most relevant indicator of reserve
adequacy for emerging market countries is the ratio of international reserves to short-term externaldebt by remaining maturity. Higher levels of reserves would be preferable in countries with
problematic characteristics – e.g., weak macroeconomic fundamentals (such as large current account
deficits that raise financing needs and overvalued exchange rates that can lead to capital outflows),
high levels of short-term public domestic debt (especially where there are no effective capital controls
or other mechanisms that create captive markets), derivative positions of the public sector, and weak
banking systems that can contribute to capital flight – although it will likely be difficult for such
countries to build reserves.  Considerations that limit the need for reserves include:  the presence of a
flexible exchange rate regime to stem capital flight;  management of the actual exchange rate policy in
a manner that discourages high foreign exchange exposure by the private sector;  a public sector that
borrows in domestic currency from non-residents, and can do so in case of liquidity need;  conditions
that ensure private sector access to foreign capital such as sound private sector risk management and
banking supervision.  To take such additional factors into account and allow a better understanding ofthe interaction between reserve adequacy, vulnerability, and country-specific factors and policies, the
                                                     
20 "Reserves should be adequate to reflect in crease in capital account flows, needed for crisis
prevention", IMF Survey, 19 February 2001.
21 "Issues in Reserves Adequacy and Management", IMF Executive Board Document, prepared by the
Monetary and Exchange Affairs Department and Policy Development and Review Department, 15 October2001, available on the IMF website at www.imf.org.WT/BOP/W/21
Page 24
benchmarking of reserves to short-term debt should be complemented by stress testing of the balance-
of-payments".
__________