The MCP policy is a cornerstone of the legal and policy framework for the Fund’s
jurisdiction over exchange rates.
WHY DOES THE FUND NEED AN MCP POLICY?
13. The prohibition of MCPs was part of a larger effort by the Fund to eliminate
restrictions on current international payments and transfers after the destructive trade wars of the 1930s.10 During this period, which saw a variety of distortive trade barriers followed by waves of retaliatory tariffs, countries frequently established different rates of exchange for selectedcommodities to stimulate exports and suppress imports. To preserve scarce supplies of FX, countries also concluded BPAs with each other using exchange rates that did not reflect market conditions.
These measures disrupted trade, increased economic difficulties, and stimulated destructive spillovers and retaliatory measures between countries.
14. MCPs have historically been used for two main purposes. First, as an attempt to mitigate
BOP pressures. Second, to achieve non-BOP objectives—such as revenue mobilization or allocation of resources to specific entities or sectors—without having to resort to more direct methods of
taxation or subsidies.
As MCPs can, in some cases, be adopted by executive order or central bank
regulation, they have often been used instead of other measures that require legislation.
MCP policy is a cornerstone
. The MCP policy is a cornerstone of the legal and policy framework for the Fund’s
jurisdiction over exchange rates. The term “multiple currency practice” is a misnomer. It is not concerned with the maintenance of more than one currency on a member’s territory, but with the maintenance of multiple exchange rates on a member’s territory.
The obligation of member countries
to refrain from engaging in MCPs is an original provision of the Articles. It has promoted the objective of maintaining orderly exchange arrangements and unified exchange rates.
WHAT IS AN MCP?
6. The Fund’s Articles prohibit members from engaging in MCPs in certain circumstances but do not define the term.
1 They allow the Executive Board, through interpretation and by decision, to give content to the term through the MCP policy.
2 While the content of the policy can be modified to reflect changing realities, the Fund cannot decide not to apply it. Given that the Articles prohibit members from engaging in MCPs, unless otherwise authorized therein, the Fund must apply this provision and enforce compliance with this obligation by its members.
Second, while the 1981 Decision underlying the current policy defines MCPs as exchange rate spreads that actually exceed the applicable thresholds, over time application of the policy has evolved to include official action that could potentially give rise to such spreads, even if they have not emerged in practice (i.e., “potentiality”), unless there is a mechanism in place to keep the spread within the permissible range.
Box 1 provides examples of
exchange measures that typically give rise to an MCP.
Exchange Measures that Give Rise to MCPs
While not exhaustive, the list below describes measures that are typically considered to give rise to MCPs under the current policy.
Different rates for different transactions. The authorities set different exchange rates for different categories of transactions which result in spreads of more than two percent between these rates, or against market rates.
This will occur, for example, when the authorities set an official exchange rate for
governmental transactions (e.g., servicing external debt, other government operations) which differs by more than two percent from prevailing market rates or other official rates.
An MCP will also arise when members impose surrender requirements, whereby certain market participants (e.g., exporters) must sell their FX proceeds at a special rate which differs by more than two percent from the market rate or other
Dual or multiple FX markets. The authorities establish separate exchange markets and the rates at which exchange transactions are conducted by participants in the two markets exceed the permissible
Exchange taxes. A tax payable on exchange transactions is closely enough related to the exchange of currencies to be considered part of the effective exchange rate by increasing the cost of the exchange
1 If such costs imposed by the authorities exceed two percent, an MCP will arise.
Bilateral payments agreements (BPAs). The authorities have an agreement under which two central banks settle current transactions (e.g., imports and exports) between the two countries on pre-defined
dates at specific exchange rates, and the exchange rates used in the agreement differ by more than two percent from those prevailing in the FX markets.
Exchange guarantee schemes. The authorities put in place a scheme to cover exchange risks of certain market participants (e.g., exporters). Depending on the features of the scheme, the compensation for exchange losses is considered to be part of the effective exchange rate that can give rise to an MCP.
2 FX auctions. The authorities allocate FX outside the auction at a different exchange rate than the auction rate, or the auction rate differs from the market exchange rate, and these rates differ by more than two percent. In addition, a multi-price auction also gives rise to an MCP if the rates at which successful bidders are sold FX at the same auction differ by more than two percent.
Import deposit requirements. The authorities require an import deposit to be made before a letter of credit is opened or FX purchased. If the interest rate on the deposits is lower than the prevailing market interest rate, this is considered an additional cost of the FX transaction that can give rise to an MCP.
Multiple Currency Practices and Surveillance
29. Article VIII, Section 3 and Article IV are also closely related. Under Article IV, Fund
members undertake to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates, and to observe several, specific obligations with respect to its domestic economic, financial and exchange rate policies.
For its part, the Fund is required to exercise surveillance over each member’s policies. Article VIII, Section 3 is designed to help further that goal. To assist surveillance, both the Integrated Surveillance Decision (“ISD”) and its predecessors have recognized several indicators which may suggest the need for additional consultations between the Fund and a member in order to ensure that the
member is in compliance with its Article IV obligations. While the obligations under Article VIII, Section 3 are “in addition” to members’ obligations under Article IV, both provisions deal with members’ exchange rate policies. The Second Amendment eliminated the explicit link between the
two articles with respect to permissible spreads (see above) but close links remain. In particular:
• While members have the freedom to determine their exchange rate arrangements, this does not permit members to engage in MCPs.
• If substantial spreads arise in the market but do not give rise to MCPs (e.g., because they do not arise as a result of official action), the Fund may call on a member to consult with it under the obligation to collaborate with the Fund under Article IV.31
• MCPs may be considered in assessing indicators that may signal the need for additional discussion of compliance with the Principles for the Guidance of Members’ Policies under the
• The approval criteria for MCPs echo the provision of Article IV, Section 1(iii) that prohibits members from manipulating exchange rates to gain an unfair competitive advantage over other members.
29 Under Article IV, Section 1, Fund members shall (i) endeavor to direct its economic and financial policies toward
the objective of fostering orderly economic growth with reasonable price stability, with due regard to its
circumstances; (ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a
monetary system that does not tend to produce erratic disruptions; (iii) avoid manipulating exchange rates or the
international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair
competitive advantage over other members; and (iv) follow exchange policies compatible with the undertakings
under Article IV.
30 The Legal Aspects Paper, p. 26.
31 Before the Second Amendment, on several occasions the Fund relied on the members’ obligation to collaborate
set forth in Article IV to either call on or recommend to members that they take certain actions or refrain from taking
actions in order to achieve the objectives set forth in this provision. See Article IV of the Fund’s Articles of Agreement –
An Overview of the Legal Framework, June 28, 2006, pp. 9-11.
30. In principle, both MCPs and exchange restrictions must be covered in Article IV consultations.
32 In light of the importance of MCPs and exchange restrictions for surveillance, as
part of the Article IV consultation staff must determine whether a member has introduced or continues to maintain MCPs or exchange restrictions that require Fund approval or under Article XIV.
MCPs and exchange restrictions are required to be identified in the staff report, and the staff appraisal should make a recommendation concerning Board approval. Staff should inform members
that failure to notify and seek Fund approval would be a breach of their obligation under the Articles.
Box 4. Consultations Under Article IV, Article VIII, and Article XIVConsultations under Articles IV, VIII and XIV:
The Integrated Surveillance Decision (ISD) provides that, in principle, consultations under Article IV shall include the regular consultations under Article VIII and Article XIV, and shall take place annually.
1 During an Article VIII consultation, the Fund assesses any measures (i.e., exchange restrictions and MCPs) maintained by the member which are subject to IMF approval under Article
👉VIII, Sections 2 and 3, and may decide to approve such measures. Under Article XIV, members are required to consult annually as to the further retention of any measures maintained under this article (i.e., those restrictions or MCPs that were in effect on the date it became a member of the Fund). This requirement ceases once the member no longer maintains such measures.👈
The modalities for concluding these consultations differ, as follows:
• Article IV: Article IV consultations are typically concluded by way of a summing up, rather than a formal Board decision.
• Article VIII: Where approval of an exchange restriction or MCP is not being sought, no formal Board decision is taken. The Board makes a finding of an exchange restriction or MCP in the summing up when it endorses the conclusions of staff set forth in the staff appraisal. Where staff recommends approval of measures subject to Article VIII, and the Board agrees, a formal Board decision is taken.
• Article XIV: A formal Board decision is required to conclude the consultation.
IMPLICATIONS OF IMPOSITION OF MCPs
33. An unapproved MCP is a breach of a member’s obligations under the Articles and
therefore could lead to the imposition of sanctions under Article XXVI, Section 2(a), which
sets out possible the legal consequences of a breach of obligation (i.e., ultimately, compulsory
withdrawal). In practice, many Fund members have maintained MCPs which would have required
approval by the Fund, and have either not requested temporary approval for such MCPs, or the
Fund has not approved their maintenance. This places them in breach of their obligations under the
Articles. While it would be possible for the Fund to establish a policy framework under which
members in breach of their obligations respecting MCPs (or exchange restrictions) would be subject
to escalating remedial measures such as a declaration of censure or noncooperation (similar to the
procedure for breaches of obligation under Article VIII, Section 5),38 to date the Fund has opted for a
collaborative approach and has refrained from applying the sanctions available under Article XXVI,
Section 2(a) in such cases.39 Indeed, Management has not to date issued a “complaint” to the
Executive Board, the first step in applying sanctions under Article XXVI, Section 2(a), alleging that a
member has breached its obligations in respect to Article VIII, Section 3.
All found here in THE IMF June update PDF