International monetary reform defined
Agreement on an important package of reforms of vital significance to the future of the international monetary system was reached at a meeting of the Interim Committee of the Board of Governors of the Fund on the International Monetary System in Kingston, Jamaica, on January 7-8, 1976. The reforms include a substantial quota increase for almost all members, as well as an increase in access to the Fund’s resources for all member countries in the period prior to implementation of the increase in their Fund quotas, the establishment of a trust fund for developing countries to be financed through the sale of a portion of the Fund’s gold, the sale of another portion of the gold to all members in proportion to quotas at the official price, and an amendment to the Fund’s Articles of Agreement to legalize floating exchange rates and other changes in the Fund’s Articles. The agreement marks the successful conclusion of the first stage of the reform of the monetary system which had been begun by the Fund’s Governors in a decision taken at the 1971 Annual Meeting held in Washington, D.C.
Development Committee also meets
The Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (the Development Committee) held a one-day meeting in Kingston on January 9, 1976, under the chairmanship of Henri Konan Bédié, Minister of Economy and Finance, Ivory Coast. In its communiqué issued following the meeting, the Development Committee said it had reviewed the current situation and prospects of the developing countries and noted with concern that the non-oil exporting developing countries are likely to incur extraordinarily large current account deficits for the third successive year. (These deficits were estimated by the Committee at $31 billion in 1976, compared with an estimate of $35 billion in 1975.) The Development Committee noted with grave concern that the 6 per cent growth target of the Second Development Decade appears not likely to be met for these countries. Among other things it said it had discussed the means of improving the current situation affecting resource transfers, aid targets and their implementation, current underutilization of productive capacity in the industrial countries in relation to their aid effort, and the status of current commodity issues.
Following the meeting, the new Chairman of the Interim Committee, Mr. Willy de Clercq, the Belgian Finance Minister, told a press conference that the “Committee reached full agreement on all the questions before us.” The Fund’s Managing Director, Mr. H. Johannes Witteveen, commented: “We do not pretend that we have now solved all the problems, but at least I think we are making a major step forward, first by this agreement on the Articles of Agreement, which will be of importance for quite a period, and second, about what we can do now in this year and next year in the very difficult situation in the world economy.”
The Interim Committee agreed that until the effective date of the amendment of the Articles, the size of each credit tranche in the Fund should be increased by 45 per cent. After a member has drawn its gold tranche in the Fund, its total access under the normal credit tranche policies will be increased from 100 per cent to 145 per cent of quota. Mr. de Clercq said that if the needs of members made it advisable, the whole question of the credit tranches would be re-examined later.
The Interim Committee reaffirmed its view that the Fund’s holdings of each member’s currency should be usable in the Fund’s operations and transactions. It agreed that, within the six or seven months after the Board of Governors adopts the Resolution on Quotas, each member shall make arrangements satisfactory to the Fund for the use of the member’s currency in the operations and transactions of the Fund. The Fund’s Executive Directors will, however, have the power to extend this period if necessary.
|Fund member||Amount drawn|
After considering the future role of gold, the Interim Committee agreed that action should be taken to start without delay the implementation of the gold agreement reached at its last meeting on August 31, 1975. This contained a number of measures to ensure that the role of gold in the international monetary system should be gradually reduced. These included the sale of one sixth (25 million ounces) of the Fund’s gold for the benefit of developing countries and the restitution of a further one sixth to all members in proportion to quota. The Committee agreed that gold sales by the Fund should be made in public auctions over a four-year period and it was understood that the Bank for International Settlements would be able to bid in the auctions.
It was also agreed that a trust fund should be established without delay and that its resources would derive from the profits from the sale of the Fund’s gold. This trust fund should be used to provide balance of payments assistance on concessionary terms to members with low per capita incomes, initially those with 1973 per capita incomes not in excess of SDR 300. In addition, the Fund under its amended Articles of Agreement would be able to sell any portion of the gold left after the distribution of 50 million ounces and use the profits either to augment the general resources of the Fund or to make balance of payments assistance available on special terms to developing members in difficult circumstances.
Commenting on the agreement on gold, Mr. Witteveen explained that the Bank for International Settlements would be able to participate in Fund gold auctions on its own account. He stressed that, before amendment of the Articles, the Fund could not sell gold directly to central banks at market prices.
Mr. Witteveen estimated that the value to developing countries of the trust fund, increased access to Fund resources, and the recent liberalization of the Fund’s compensatory financing facility could be on the order of $3 billion a year, in addition to the normal use of the Fund’s credit facilities. The additional access to the Fund’s credit tranches could provide about $1.5 billion, he said, the trust fund could provide between $400 million and $500 million a year, and the liberalization of the compensatory financing facility, which was agreed by the Fund in December, could total some $1 billion.
The Interim Committee endorsed a new Article IV of the Fund’s Articles of Agreement which establishes a system of exchange arrangements that require each member to “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; seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions; 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 follow exchange rate policies compatible with the undertakings under this Section” (General Obligations of Members).
The Fund, under the proposed Article, “shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies.” In return, “each member shall provide the Fund with the information necessary for such surveillance.” The Fund may determine by an 85 per cent majority of total voting power that international economic conditions permit the introduction of a widespread system of exchange arrangements based on “stable but adjustable par values.” Once that system is introduced, members may establish par values for their currencies in terms of the special drawing rights, or another denominator prescribed by the Fund, but not in terms of gold or currency. If a member maintains a par value, then it will have to operate its intervention policies within a wide margin of 4.5 per cent either side of par, or another margin the Fund prescribes by an 85 per cent majority of the total voting power.
|Member||Amount agreed||Amount purchased||Undrawn balance|
|Extended Fund facility|
Augmentation via repurchases.
First phase through June 30, 1976 of three-year arrangement totaling SDR 67.2 million.
Augmentation via repurchases.
First phase through June 30, 1976 of three-year arrangement totaling SDR 67.2 million.
|Other developed countries|
|Central African Rep.||1.69|
|Yemen, People’s Dem, Rep.||4.60|
Explaining the importance of the proposed new exchange arrangements, Mr. Witteveen said: “… It will legalize the present situation where we have floating exchange rates in a number of important countries that have different systems of exchange arrangements.”
The Interim Committee considered a number of remaining matters connected with the amendment of the Articles. These included measures for making the SDR the principal reserve asset in the international monetary system.
The decisions of the Interim Committee would have to be reviewed in the Executive Board of the Fund, explained Mr. Witteveen. He said that he expected this process to take about two months and then the comprehensive draft amendment could be sent to the Board of Governors for their approval and subsequent ratification by national parliaments and legislatures. At the same time the proposed increase in Fund quotas, which would increase the total amount of Fund holdings by approximately one third, or from about SDR 29 billion to SDR 39 billion, would be forwarded to the Governors for approval. This quota increase would also include a doubling of the share in the Fund of the major oil exporting member countries.
SDR rates set
The rate of interest and charges on the special drawing rights (based on a formula adopted in 1974 using weighted short-term market rates), was maintained at 5 per cent on an annual basis during the first half of 1975, Reflecting a decline in these rates as the year progressed, the rate on the SDR was reduced to 3.75 per cent for the second half of 1975. Under the same formula the SDR rate for the first half of 1976 was set at 3.5 per cent. The total of SDRs in existence has remained at SDR 9.3 billion since the last of three allocations on January 1, 1972. During 1975 Portugal became a participant in the Special Drawing Account, as did two new Fund members—Grenada and Papua New Guinea. These brought the number of participants in the Special Drawing Account to 120 countries out of a total Fund membership of 128.
During 1975 total transfers of SDRs were SDR 804 million, compared with SDR 1,037 million in 1974. Transactions with designation, in which the Fund designates countries to provide foreign exchange to users of SDRs, totaled SDR 189 million. Total transfers in 1975 included use of SDR 40 million in transactions by agreement among those European countries that maintain their currencies within narrow margins. Transfers from participants to the Fund’s General Account totaled SDR 335 million in 1975, a large increase over 1974, most of which was associated with payment of charges on purchases under the oil facility. Transfers from the Fund’s General Account amounted to SDR 241 million, which was mostly accounted for by acquisitions to promote reconstitution. As a result of these transfers over the year, the General Account’s holdings increased from SDR 457 million to SDR 551.0 million.
Ian S. McDonald
Record Fund transactions in 1975
The use of Fund resources was at a record level during the 1975 calendar year when total purchases were equivalent to SDR 4,658.1 million, compared with a total of SDR 4,053.1 million in 1974. Repurchases during 1975 totaled SDR 492 million, while net drawings outstanding as of December 31, 1975, totaled a record SDR 9,386.4 million, compared with a total of SDR 5,627.3 million at the end of 1974.
Of total drawings in 1975 the equivalent of SDR 3,043.2 million was drawn by 31 member countries under the oil facility (SDR 867.0 million under the oil facility for 1974 and SDR 2,176.2 million under the oil facility for 1975) and the remainder under the Fund’s regular facilities. As of the end of the year, 12 lenders had agreed to lend the Fund up to the equivalent of SDR 3.12 billion to finance the oil facility for 1975. In addition, on the last day of 1975, the Fund announced approval of two major transactions for the United Kingdom—a purchase of the equivalent of SDR 1,000 million under the oil facility for 1975 and a stand-by arrangement equivalent to SDR 700 million. Actual drawings under these two arrangements were not made in 1975.
On July 7, 1975, the Fund had announced approval of the first arrangement under the extended Fund facility for a member country—with Kenya. This arrangement provides for drawings up to the equivalent of SDR 67.2 million, of which SDR 7.7 million had been purchased as of the end of 1975.