Use of Fund’s Resources and Stand-By Arrangements
Use of Fund’s Resources: Meaning of Article V, Section 3(a) (i)
The word “represents” in Article V, Section 3(a) (i), means “declares.” The member is presumed to have fulfilled the condition mentioned in Article V, Section 3(a) (i), if it declares that the currency is presently needed for making payments in that currency which are consistent with the provisions of the Agreement. But the Fund may, for good reasons, challenge the correctness of this declaration, on the grounds that the currency is not “presently needed” or because the currency is not needed for payment “in that currency,” or because the payments will not be “consistent with the provisions of this Agreement.” If the Fund concludes that a particular declaration is not correct, the Fund may postpone or reject the request, or accept it subject to conditions. The phrase “presently needed” cannot be defined in terms of a formula uniformly applicable to all cases, but where there is good reason to doubt that the currency is “presently needed,” the Fund will have to apply the phrase in each case in the light of all the circumstances.
Decision No. 284-4
March 10, 1948
Use of Fund’s Resources: Meaning of “Consistent with the Provisions of This Agreement” in Article V, Section 3
The phrase “consistent with the provisions of this Agreement” in Article V, Section 3, means consistent both with the provisions of the Fund Agreement other than Article I and with the purposes of the Fund contained in Article I.
Decision No. 287-3
March 17, 1948
Extent of Drawing Rights: Meaning of Article V, Section 3(a) (iii)
The Executive Board, acting pursuant to Article XVIII(a) of the Fund Agreement, interprets the quantitative limit of twenty-five per cent of quota in relation to drawing rights under Article V, Section 3(a) (iii) as follows:
Where the Fund’s holdings of a member’s currency are not less than seventy-five per cent of its quota, and to the extent that such holdings would not be increased above two hundred per cent of its quota, the purchases which the member may make during a period of twelve months ending on the date of a proposed purchase shall be determined as follows:
(a) The total purchases shall not exceed twenty-five per cent of its quota;
(b) Provided that, if the member has made purchases during the period, it may then purchase an amount equal to the difference between twenty-five per cent of its quota and the total of such purchases adjusted on the basis that a repurchase by the member or sale of its currency during the period is deducted from a previous, but not subsequent, purchase or purchases during the period.
Decision No. 451-(55/52)
August 24, 1955
Use of Fund’s Resources and Repurchases
1. The Managing Director has made the following statement which should be the framework for his discussions with members on use of the Fund’s resources:
“The present proposals are designed to provide a practical basis for use of the Fund’s resources in accordance with the purposes of the Fund. When the proposals are agreed they will, of course, have to be carried into effect through actual cases. Decisions will have to be made in accordance with the particular circumstances, and in this manner a body of practical criteria will gradually be built up. However, even at the outset I think it must be clear that access to the Fund should not be denied because a member is in difficulty. On the contrary, the task of the Fund is to help members that need temporary help, and requests should be expected from members that are in trouble in greater or lesser degree. The Fund’s attitude toward the position of each member should turn on whether the problem to be met is of a temporary nature and whether the policies the member will pursue will be adequate to overcome the problem within such a period. The policies, above all, should determine the Fund’s attitude.
“In addition, the Fund should pay attention to a member’s general credit-worthiness, particularly its record with the Fund. In this respect, the member’s record of prudence in drawing, its willingness to offer voluntary repayment when its situation permitted, and its promptness in fulfilling the obligation to transmit monetary reserves data and in discharging repurchase obligations would be important. I would expect that in the years to come, with extended activities of the Fund, we shall be able more and more to rely on the Fund’s own experience, thus providing a further and most useful link between Fund drawings and repurchases.
“After a period of relative inactivity of the Fund, it would be too much to expect that we should be able to solve with one stroke the entire problem of access to the Fund’s resources so that each member would always know how any request would be received by the Fund. We shall have to feel our way. Sometimes a member may want to submit to the Fund a specific request for drawings, with adequate information as to the particular situation which prompts the request. At other times discussions between the member and the Fund may cover its general position, not with a view to any immediate drawing, but in order to ensure that it would be able to draw if, within a period of say 6 or 12 months, the need presented itself. The Fund itself might take the initiative in discussing with one or more members transactions which it believes suitable for the Fund and helpful to the members concerned. In cases where it would appear appropriate and useful, the Fund might arrange drawings to deal with special short-run situations accompanied by arrangements for repurchase in a period not exceeding 18 months.”
2. a. In view of the Executive Board’s interpretation of September 26, 1946, concerning the use of the Fund’s resources, and considering especially the necessity for ensuring the revolving character of the Fund’s resources, exchange purchased from the Fund should not remain outstanding beyond the period reasonably related to the payments problem for which it was purchased from the Fund. The period should fall within an outside range of three to five years. Members will be expected not to request the purchase of exchange from the Fund in circumstances where the reduction of the Fund’s holdings of their currencies by an equivalent amount within that time cannot reasonably be envisaged.
b. The Fund has recently determined that when the charges on the Fund’s holdings of a member’s currency in any bracket have reached a rate of 3½ per cent per annum, the Fund and the member, in accordance with Article V, Section 8(d) “shall consider means by which the Fund’s holdings of the currency can be reduced” (EB Meeting 717, 11/19/51). In the course of consultations arising from purchases of exchange taking place after December 1, 1951, the Fund and the member will agree upon appropriate arrangements to ensure the reduction of the Fund’s holdings of the member’s currency as soon as possible, with the maximum period to be permitted in any such agreed arrangement requiring that within five years of each purchase made by the member there will be an equivalent repurchase of the Fund’s holdings unless they have otherwise been reduced.
c. With respect to each future purchase which raises the Fund’s holdings of the member’s currency from not less than 75 per cent to not more than 100 per cent of its quota, a member whose currency held by the Fund has not been otherwise reduced within three years will be requested by the Fund to agree upon an arrangement providing that within five years of each purchase made by the member there will be an equivalent repurchase of the Fund’s holdings unless they have otherwise been reduced.
d. When unforeseen circumstances beyond the member’s control would make unreasonable the application of the principles set forth in paragraph 2 above, the Fund will consider extensions of time.
e. When requesting use of the resources of the Fund in accordance with the arrangements described above, a member will be expected to include in its authenticated request a statement that it will comply with the above principles.
f. These principles will be an essential element in any determination by the Fund as to whether a member is using the resources of the Fund in accordance with the purposes of the Fund.
3. Each member can count on receiving the overwhelming benefit of any doubt respecting drawings which would raise the Fund’s holdings of its currency to not more than its quota.
4. The Managing Director should communicate with members concerning means to speed the collection and reporting of monetary reserves data and means to reduce the delays in reaching agreement under Rule I-6 in cases where a repurchase obligation has been computed. The Fund should also make it clear that an important element in its judgment respecting the use of its resources will be the co-operation of the member in helping to make Article V, Section 7 effective, including the timely provision of information and the facilitating of settlement.
5. This decision will be effective until December 31, 1953, and will be reviewed by the Executive Board before that date.
Decision No. 102-(52/11)
February 13, 1952
Stand-By Credit Arrangements
The Fund is prepared to consider requests by members for stand-by arrangements designed to give assurance that, during a fixed period of time, transactions up to a specified amount will be made whenever a member requests and without further consideration of its position, unless the ineligibility provisions of the Fund Agreement have been invoked. The following paragraphs set forth the general framework for stand-by arrangements:
1. Stand-by arrangements would be limited to periods of not more than six months. They could be renewed by a new decision of the Executive Board.
2. In considering the request for a stand-by arrangement or a renewal of a stand-by arrangement, the Fund would apply the same policies that are applied to requests for immediate drawings, including a review of the member’s position, policies and prospects in the context of the Fund’s objectives and purposes. The Fund would agree to a stand-by arrangement only for a member that would be in a position to make purchases of the same amount of exchange from the Fund.
3. Such arrangements would cover the portion of the quota which a member would be allowed, under Article V, Section 3, to draw within the period provided in the arrangement. However, this does not preclude the Fund from making stand-by arrangements for larger amounts on terms in accordance with Article V, Section 4.
4. A charge of ¼ of 1 per cent per annum would be payable to the Fund at the time a stand-by arrangement is agreed. This charge would be payable in gold (or United States dollars in lieu of gold) or the member’s currency as specified for other charges by Article V, Section 8(f). In the event that a stand-by arrangement is renewed, a new charge at the rate of ¼ per cent per annum would be payable to the Fund.
5. A member having a stand-by arrangement would have the right to engage in the transactions covered by the stand-by arrangement without further review by the Fund. This right of the member could be suspended only with respect to requests received by the Fund after: (a) a formal ineligibility, or (b) a decision of the Executive Board to suspend transactions either generally (under Article XVI, Section 1(ii)) or in order to consider a proposal, made by an Executive Director or the Managing Director, formally to suppress or to limit the eligibility of the member.
6. In view of the policy of the Fund with respect to drawings within the so-called “gold tranche,” it is not considered likely that members will request stand-by arrangements confined to transactions within the “gold tranche.” Accordingly, the policy set forth in this decision is designed primarily to deal with stand-by arrangements for drawings beyond the “gold tranche.” If at any time a member proposes a stand-by arrangement which would, in part or entirely, involve drawings within the “gold tranche,” the Fund will reconsider the charge set forth in paragraph 4 above as applied to “gold tranche” transactions.
7. This decision will be effective until December 31, 1953, and will be reviewed by the Executive Board before that date.
Decision No. 155-(52/57)
October 1, 1952
I. Use of Fund’s Resources and Repurchases
II. Stand-By Credit Arrangements
I. Use of Fund Resources and Repurchases
The decision taken at Meeting 52/11 on February 13, 1952, relating to use of the Fund’s resources and repurchases, shall continue in effect subject to review by the Executive Board from time to time as circumstances warrant.
II. Stand-by Arrangements
The Fund is prepared to consider requests by members for stand-by arrangements designed to give assurance that, during a fixed period of time, transactions up to a specified amount will be made whenever a member requests and without further consideration of its position, unless the ineligibility provisions of the Fund Agreement have been invoked. The following paragraphs set forth the general framework for stand-by arrangements:
1. Stand-by arrangements will be limited to periods of not more than six months. They can be renewed by a new decision of the Executive Board. If a member believes that the payments problems it anticipates (for example, in connection with positive programs for maintaining or achieving convertibility) can be adequately provided for only by a stand-by arrangement of more than six months, the Fund will give sympathetic consideration to a request for a longer stand-by arrangement in the light of the problems facing the member and the measures being taken to deal with them. With respect to stand-by arrangements for periods of more than six months, the Fund and the member might find it appropriate to reach understandings additional to those set forth in this decision.
2. In considering the request for a stand-by arrangement or renewal of a stand-by arrangement, the Fund will apply the same policies that are applied to requests for immediate drawings, including a review of the member’s position, policies and prospects in the context of the Fund’s objectives and purposes. The Fund will agree to a stand-by arrangement only for a member that is in a position to make purchases of the same amount of exchange from the Fund.
3. There will be specified in each stand-by arrangement the transactions which may be made under that arrangement.
4. A member having a stand-by arrangement will have the right to engage in the transactions covered by the stand-by arrangement without further review by the Fund. This right of the member can be suspended only with respect to requests received by the Fund after: (a) a formal ineligibility, or (b) a decision of the Executive Board to suspend transactions either generally (under Article XVI, Section 1(a) (ii)) or in order to consider a proposal, made by an Executive Director or the Managing Director, formally to suppress or to limit the eligibility of the member.
5. (a) A charge of ¼ of 1 per cent per annum will be payable to the Fund for stand-by arrangements. The charge will be payable in advance for each six months’ period that the arrangement or any renewal is in effect.
(b) Charges for stand-by arrangements will be payable in gold, or U.S. dollars in lieu of gold, or in the member’s currency as specified for other charges by Article V, Section 8(f).
(c) There will be credited against the service charge payable for a transaction under a stand-by arrangement the charges paid for that part of the stand-by arrangement (or renewal of it) for the six months’ period in which the transaction takes place and for the preceding six months’ period; provided that the amount of charge paid for a stand-by arrangement (or renewal of it) for any six months’ period will not be credited more than once in that period and the succeeding six months’ period.
(d) In order to effect a credit against a service charge, the Fund will repay the portion of the charge paid for a stand-by arrangement that is to be credited under (c) above and collect the service charge in full.
(e) If a member notifies the Fund that it wishes to cancel a stand-by arrangement, the Fund will repay to the member a portion of the charge. The portion repaid will represent the charge paid for the period remaining unexpired at the time of cancellation with respect to the maximum amount of the stand-by arrangement that has never been drawn.
(f) Repayment under (d) or (e) above of a charge paid for a stand-by arrangement will be made in gold, U.S. dollars, and the member’s currency in the same proportions as the charge was paid.
6. The Fund will not levy the charge set forth in paragraph 5 above with respect to that part of the stand-by arrangement covering “gold tranche” transactions.
7. This decision shall continue in effect subject to review by the Executive Board from time to time as circumstances warrant.
Decision No. 270-(53/95)
December 23, 1953
Charges for Transactions and Stand-By Arrangements
I. ………………………………………………………………………………………………………
II. A stand-by arrangement shall provide for a fixed amount that can be purchased under it augmented by amounts equivalent to repurchases in respect of drawings made under the stand-by arrangement or made at the time when the stand-by arrangement is entered into, unless when any such repurchase is made the member informs the Fund that it does not wish the stand-by arrangement to be augmented by the amount of that repurchase. In exceptional circumstances, however, a stand-by arrangement may provide for purchases that increase the Fund’s holdings of the currency of the member having the stand-by arrangement up to a specified level, provided that the amounts the member may purchase shall in no case be increased by other members’ purchases of its currency.
III. 1. Paragraph II.5(a) and (c) of Decision No. 270-(53/95) shall be amended to read as follows:
(a) When a stand-by arrangement is entered into or renewed, a charge of ¼ of 1 per cent per annum will be payable to the Fund in advance for the period of the stand-by arrangement or renewal. For any additional drawing rights that arise in the course of a stand-by arrangement, a further charge will be payable to the Fund in advance at the rate of ¼ of 1 per cent per annum calculated on the basis of the amount of the additional drawing rights and the unexpired period of the stand-by arrangement.
(c) There will be credited against the service charge for a transaction under a stand-by arrangement the charges actually paid in respect of that amount under the stand-by arrangement and any stand-by arrangement which preceded it without interval at the rate of ¼ of 1 per cent per annum and up to a maximum of ¼ of 1 per cent on that amount, due allowance being made for any refunds under paragraph II.6 of this decision. For the purpose of calculating such credits and for the purpose of calculating refunds under (e) below, it shall be assumed that drawings are made in respect of drawing rights in the order in which such drawing rights arose.
2. ………………………………………………………………………………………………………
IV. Paragraph II.5(e) of Decision No. 270-(53/95) is amended to read:
If a member notifies the Fund that it wishes to cancel a stand-by arrangement, the Fund will repay to the member a portion of the charge. The portion repaid will represent the charge for the period remaining unexpired at the date of cancellation for the amount that could still be drawn under the stand-by arrangement at the date of cancellation for which the member has paid a charge.
V. The following shall be added to Paragraph II.6 of Decision No. 270-(53/95):
To the extent that a charge has been levied on a part of the stand-by arrangement which falls into the gold tranche in the course of the stand-by arrangement, the Fund will refund the charge on that part for the unexpired period of the stand-by arrangement.
VI. Sections II, III.1, IV, and V above shall apply to stand-by arrangements entered into or renewed after the date of the adoption of this decision.
Decision No. 876-(59/15)
April 27, 1959
Stand-By Arrangements: Refund of Charges
(a) Refunds pursuant to Paragraph II.6 of Executive Board Decision No. 270-(53/95), as amended, of charges paid for stand-by arrangements entered into before the date of this decision will be calculated as of the date of each repurchase, drawing of the member’s currency by other members, or increase of the member’s quota, and will be based on the Fund’s total holdings of the member’s currency as of the date of each such calculation. If no such repurchase, drawing or increase of quota has taken place before the expiration of the stand-by arrangement the calculation will be based on the Fund’s holdings at the end of the quarters of the Fund’s financial year and at the date of expiration.
(b) In determining the Fund’s holdings of a member’s currency for the purposes of all calculations involving charges payable for stand-by arrangements entered into after the date of this decision, no account will be taken of amounts, not in excess of 1/100 of 1% of the member’s quota, in a special account to meet administrative expenses.
Decision No. 1345-(62/23)
May 23, 1962
Stand-By Arrangements
1. There shall be added to the end of paragraph II.4 of Executive Board Decision No. 270-(53/95) the following sentence for use in all future stand-by arrangements:
When notice of a decision of formal ineligibility or of a decision to consider a proposal is given pursuant to this paragraph, purchases under this stand-by arrangement will be resumed only after consultation has taken place between the Fund and the member and agreement has been reached on the terms for the resumption of such purchases.
2. “Prior notice” provisions appearing in existing stand-by arrangements, except for the one approved at EBM/60/53, shall be understood as if the sentence set forth in paragraph 1 above were substituted for such provisions.
Decision No. 1151-(61/6)
February 20, 1961
Use of Fund’s Resources: Limitation and Ineligibility Under Article V, Section 5
The Fund has, in the case of a member which has had a previous exchange transaction with the Fund, power to declare the member ineligible or limit its use of the resources of the Fund if the member is, in the opinion of the Fund, using the resources of the Fund in a manner contrary to the purposes of the Fund.
Decision No. 284-3
March 10, 1948
Use of Fund’s Resources: Postponement and Limitation Under Article V, Section 5
If the Fund receives a request from a member to purchase exchange and either, (1) the Fund is considering sending the member a report pursuant to Article V, Section 5, or (2) the Fund finds when the request is before it that action pursuant to that Section should be considered; then the Fund has the authority, pursuant to Article V, Section 5, of the Fund Agreement, to postpone the transfer as permitted under the provisions of Rules and Regulations G-3 for such time as may reasonably be necessary to decide the question of applying Article V, Section 5, and, if it decides to apply it, to prepare and send to the member a report and subject its use of the Fund’s resources to limitations. Under such circumstances the limitations imposed will apply to the pending request for the purchase of exchange as well as to future requests.
Decision No. 286-1
March 15, 1948
Use of Fund’s Resources: Meaning of “Is Using” in Article V, Section 5
A member “is using” the resources of the Fund within the meaning of Article V, Section 5, where it is either actually disposing of the exchange purchased from the Fund, or, having purchased exchange from the Fund, the Fund’s holdings of its currency are in excess of 75 per cent of its quota.
Decision No. 292-3
March 30, 1948
Currencies to Be Drawn and to Be Used in Repurchases
The Board approves the statement entitled “Currencies to be Drawn and to be Used in Repurchases” (SM/62/62, Revision 2), and this statement shall be incorporated in the Annual Report for 1962.
Decision No. 1371-(62/36)
July 20, 1962
Currencies to be Drawn and to be Used in Repurchases
From the beginning of the Fund’s operations through 1957, drawings were overwhelmingly made in U.S. dollars. Starting in 1958, however, the Fund has increasingly encouraged drawings in other currencies, and this has been facilitated by the introduction of de facto convertibility for the currencies of the main industrial countries. Since the same currencies have become formally convertible under Article VIII in February 1961, repurchases have also begun to be made in these currencies.
Certain practices have been developed which take into account the new situation of the increasing number of currencies usable for the transactions of the Fund. These practices are still in a state of evolution as increased experience is being gained. The following paragraphs set out what may be regarded as appropriate practices to be followed for the time being.
I. Procedure
When a substantial number of currencies other than the U.S. dollar became usable for drawings, the drawing countries began to discuss with the Managing Director what currencies might be drawn. It gradually became the practice that consultation should take place between the drawing country and the Managing Director about the currencies to be drawn, and this practice has now become established in connection with all stand-by arrangements and drawings. Before giving advice to the drawing country, the Managing Director has got into contact with countries whose currencies might be drawn, even in circumstances where speed in arranging the drawing was essential. These consultations and the contacts with the countries concerned have thus become an integral part of the procedure which has been evolved.
In addition, an attempt is being made to indicate from time to time the amounts likely to be drawn and what might be a proper distribution of drawings among different currencies. Since under stand-by arrangements even fairly large drawings may be made suddenly, such indications as will be given can only be tentative and informal but they can, even so, serve a useful purpose in contributing to the maintenance of close contact between the Managing Director and the countries whose currencies may be drawn.
It has been concluded that the Fund has the legal authority to specify the convertible currencies to be used in making repurchases in discharge of obligations to repurchase that do not arise under Article V, Section 7(b), and that, accordingly members are required to obtain the prior agreement of the Fund on the convertible currencies to be used in making such repurchases. Such repurchases must not increase the Fund’s holdings of a member’s currency beyond 75 per cent of that member’s quota or decrease the Fund’s holdings of the repurchasing member’s currency below 75 per cent of that member’s quota.
Until further notice, and in order to maintain conditions which foster repurchases and the revolving character of the Fund’s resources, the Fund will accept any convertible currency fulfilling the conditions set forth in the last sentence above, provided that the repurchasing member has consulted the Managing Director on the currencies, and the amounts of each, to be used by the member in making its repurchase. Before giving his advice, the Managing Director will consult with countries whose currencies could be used in repurchase, and he will also attempt to give advance indications comparable to those relating to the currencies to be drawn. In all of these consultations, the Managing Director’s recommendations will be guided by the principles regarding the currency composition of repurchases set out in Section II below.
The preceding paragraph shall apply to those repurchase obligations outside Article V, Section 7(b) that are entered into after July 20, 1962. Members that entered into such obligations before that date shall be invited to consult the Managing Director on the currencies to be used in discharging these obligations, and the Managing Director will follow the procedure and be guided by the considerations referred to in the preceding paragraph.
The Managing Director will notify the Executive Directors at least two business days before any repurchase under the preceding paragraphs is carried out.
Where consultations with a country are referred to in this document they will normally be conducted with the Executive Director appointed or elected by such country.
II. Criteria for the Selection of Currencies for Drawings and Repurchases
The experience of the Fund in recent years has made it possible to indicate the main considerations which govern the selection of currencies for drawings and repurchases.
Drawings
With regard to the question of the selection of currencies for a particular drawing or for drawings in general, account has been taken of the balance of payments and reserve positions of the countries whose currencies are considered for drawing, as well as of the Fund’s holdings of these currencies.
It has been found in practice that weight has to be given to all these three considerations, with some differentiation according to specific circumstances, and perhaps most particularly according to the size of the transaction or transactions involved.
During periods when aggregate drawings were moderate in amount, little difficulty was experienced in distributing these drawings among countries with reasonably satisfactory balance of payments positions on the basis of the level of these countries’ reserves. When the volume of drawings has been large, it has been necessary to give more importance to the relative balance of payments positions of the countries to be drawn upon, so as to prevent excessive declines in their primary reserves as a result of Fund sales of their currencies. In connection with large drawings, in particular when they are associated with short-term capital movements, it is usually fairly easy to single out the countries whose reserves have benefited from an inflow of capital and to direct drawings more particularly towards the currencies of these countries.
By the attention thus given to the balance of payments position, the Fund has been able to arrange drawings in large measure to offset movements of funds in the exchange markets, and thus contribute to the strengthening of the international payments position. In considering a country’s balance of payments position, seasonal fluctuations have not been allowed great weight, and the Fund has avoided drawing prematurely the currency of a country which is in the process of building up reserves from a relatively low position.
In applying the third consideration, account has to be taken of prevailing circumstances. For example, when the Fund’s holdings of a particular currency have become very low, this has precluded substantial sales of that currency irrespective of the balance of payments and reserve position of the country concerned. In practice, the Fund has taken account of the level of its holdings of any currency well before the point of actual exhaustion, by gradually—rather than abruptly—reducing its sales of that currency on account of this factor.
Small drawings have normally been executed in one currency only, preferably the currency in which the drawing country holds the bulk of its reserves, even in circumstances where the payments position of the reserve center drawn upon has not been strong. Somewhat larger drawings have usually been distributed over more than one currency, but only exceptionally more than three to five currencies have been involved in a single drawing unless it has been a very large one. As far as possible, factors relevant to the particular drawing country, such as closeness of trade and payments relations, have been taken into account in the selection of the currencies to be drawn.
Repurchases
With regard to repurchases, the range of currencies is, as mentioned in Section I above, limited to currencies that are formally convertible and of which the Fund’s holdings are below 75 per cent of the quota. As a result, repurchases in currencies have, until early 1961, been made almost exclusively in U.S. dollars. The U.S. dollar was also, in recent years, a currency that was available in the exchange market at favorable rates which reflected the prevailing balance of payments position.
Increasingly, however, weight has been given, in suggesting the allocation of repurchases among the countries whose currencies can be received in repurchase, to the Fund’s holdings of these currencies compared to quotas. It would seem from the point of view of equity, and also with due regard to the liquidity position of the Fund, that great weight should be given to this criterion. But consideration should also be given, when appropriate, to the prevailing balance of payments position. In the case of relatively small repurchases it has been found practical that they be made in the currency in which a country holds its reserves, provided of course that such currency can be received by the Fund.
III. Conversion
It has been the experience in the Fund that a country drawing one or more currencies, after consultation with the Managing Director, has often wanted to convert either the whole or part of the amount drawn in a particular currency into one or more other currencies depending upon the payments that country has to meet or the currencies it normally holds in its reserves. The conversions thus effected have made it possible for the drawing country to meet its payments obligations and to strengthen its reserves in the most effective manner.
In the case of drawings in dollars, sterling and moderate amounts of certain other currencies, there has been no difficulty in effecting conversion at the going rate by transactions in the exchange market. Since the currencies drawn have generally been strong currencies for which there is a demand in the market, such conversion has generally been carried out without any disturbance to the market. For several currencies, arrangements have often been made between central banks, i.e., between the central banks in the drawing country and in the country whose currency is drawn, which provide for direct conversion into the latter’s main reserve currency at the prevailing market rate without any commission being charged. In certain cases, however, especially when the amounts involved have been large, consideration has been given to the fact that conversion on the market would have affected exchange rates, and in some cases an allowance for this has been made. A preference has been indicated by two central banks for conversion at par, especially for large drawings.
In accordance with normal central banking procedure, whenever a country desires conversion of a currency it is drawing, it would get in touch with the central bank of the country drawn upon in order to reach an understanding on the most convenient way to arrange such conversion. When conversion has presented a country with difficulties, the assistance of the Managing Director has been sought in order to arrive at an appropriate solution.
The practices outlined above for drawings can, mutatis mutandis, be applied when a country needs to obtain a currency in order to make a repurchase from the Fund with that currency.
The Fund will keep the practices with respect to conversion as described above under study, and will re-examine them in the light of further experience.
Compensatory Financing of Export Fluctations
I. The report entitled “Compensatory Financing of Export Fluctuations” is approved for transmittal to the United Nations.
II. The following shall be recorded as the decision of the Executive Board on the compensatory financing of fluctuations in exports of primary exporting countries:
(1) The financing of deficits arising out of export shortfalls, notably those of primary exporting member countries, has always been regarded as a legitimate reason for the use of Fund resources, which have been drawn on frequently for this purpose. The Fund believes that such financing helps these members to continue their efforts to adopt adequate measures toward the solution of their financial problems and to avoid the use of trade and exchange restrictions to deal with balance of payments problems, and that this enables these members to pursue their programs of economic development with greater effectiveness.
(2) The Fund noted in its 1962 Annual Report that trends in prices of basic commodities in the past few years have adversely affected the export earnings of many Fund members, which has increased the strain on their reserves. In view of this and in order to ensure the maximum effectiveness for its support to members—in particular, primary exporting members—that are faced with fluctuations in export proceeds, the Fund is taking the action set forth below.
A. Quotas
(3) The quotas of many primary exporting countries, taken in conjunction with a reasonable use of their own reserves, are at present adequate for dealing with export fluctuations such as have occurred during the past decade. In those instances, however, where adjustment of the quotas of certain primary exporting countries, and in particular of countries with relatively small quotas, would be appropriate to make them more adequate in the light of fluctuations in export proceeds and other relevant criteria, the Fund is willing to give sympathetic consideration to requests for such adjustment.
B. Drawing policies
(4) Under the present policies and practices on the use of Fund resources, any member is given the overwhelming benefit of the doubt in relation to requests for transactions within the gold tranche, and the Fund’s attitude to requests for transactions within the first credit tranche is a liberal one provided the member itself is making reasonable efforts to solve its problems. In the higher credit tranches too, where a member’s policies are consistent with Fund policies and practices on the use of Fund resources in these tranches, the Fund gives assistance, on a substantial scale, toward meeting temporary payments deficits, including deficits arising out of export shortfalls. The policies and practices of the Fund on drawings and stand-by arrangements have been developed in order to help members to meet more effectively their temporary balance of payments difficulties and to enable them, where necessary, to pursue policies aimed at restoring external and internal equilibrium. Fund assistance in accordance with these policies and practices has made an effective contribution to the solution of the difficulties of these members and the achievement of equilibrium. It has often led, moreover, to the provision of further resources from public and private sources for meeting immediate and longer-term needs. In the application of its policies and practices governing the use of its resources, the Fund’s attitude has been a flexible one, and account has been taken of special difficulties facing members.
(5) The Fund has reviewed its policies to determine how it could more readily assist members, particularly primary exporters, encountering payments difficulties produced by temporary export shortfalls, and has decided that such members can expect that their requests for drawings will be met where the Fund is satisfied that
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(a) the shortfall is of a short-term character and is largely attributable to circumstances beyond the control of the member; and
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(b) the member will cooperate with the Fund in an effort to find, where required, appropriate solutions for its balance of payments difficulties.
The amount of drawings outstanding under this decision will not normally exceed 25 per cent of the member’s quota, and the drawings will be subject to the Fund’s established policies and practices on repurchase. When drawings are made under this decision, the Fund will so indicate in an appropriate manner.
(6) In order to implement the Fund’s policies in connection with compensatory financing of export shortfalls, the Fund will be prepared to waive the limit on Fund holdings of 200 per cent of quota, where appropriate. In particular, the Fund will be prepared to waive this limit (i) where a waiver is necessary to permit compensatory drawings to be made under paragraphs (4) and (5) above, or (ii) to the extent that drawings in accordance with paragraph (5) are still outstanding.
Whenever the Fund’s holdings of a member’s currency resulting from an outstanding compensatory drawing under paragraph (5) are reduced, by the member’s repurchase or otherwise, this will restore pro tanto the member’s facility to make a further compensatory drawing under that paragraph, should the need arise.
(7) In order to identify more clearly what are to be regarded as export shortfalls of a short-term character, the Fund, in conjunction with the member concerned, will seek to establish reasonable estimates regarding the medium-term trend of the member’s exports on the basis of appropriate statistical data in conjunction with qualitative information about its export prospects.
(8) The provision of credit to deal with the balance of payments effects of export fluctuations provides immediate relief for a country’s short-term difficulties. In many cases, however, it will also be necessary to introduce measures of a policy character in order to attain a satisfactory and lasting solution to a country’s balance of payments problems. Members generally have actively cooperated with the Fund to find and adopt the measures necessary to this end. Beyond immediate balance of payments difficulties, the primary exporting countries are, in many instances, facing unfavorable long-term export trends, and all are trying to meet the challenge of achieving more rapid and sustained development through a strengthening and broadening of their economies. The last mentioned problem will require action in many fields and over many years by both the primary exporting countries and the industrial countries, separately and in concert, including readier access to the markets of the developed countries for the products of the developing countries and an appropriate and sustained flow of technical and financial assistance to the developing countries. The Fund considers that its activities can provide valuable assistance in helping to establish a climate within which longer-term measures can be more effectively pursued.
Decision No. 1477-(63/8)
February 27, 1963
Gold Collateral Transactions
Where the Fund decides in exceptional circumstances to enter into a gold collateral transaction with a member because this would promote the purposes of the Fund and give the member the opportunity, in consultation with the Fund, to adopt policies, during the period referred to in (a) below, that would be consistent with the policies and practices of the Fund on the use of its resources:
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(a) the period for repurchase of the Fund’s holdings of the member’s currency resulting from the transaction, to the extent that they are not otherwise reduced, shall normally not exceed six months after the transfer of exchange by the Fund;
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(b) the repurchase shall be made with gold or convertible currencies acceptable to the Fund in accordance with its Decision of July 20, 1962;
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(c) the provisions of the pledge agreement shall be on the lines of those set forth in the draft letter annexed to SM/63/30.
Decision No. 1543-(63/39)
July 1, 1963
Draft Letter to Member Entering into a Gold Collateral Transaction
Dear Sir:
On____________, the Fund decided to enter into an exchange transaction with____________in an amount equivalent to US$____________secured by the pledge of gold as collateral, [and granted the necessary waiver under Article V, Section 4,] subject to the conditions set forth in this letter. The amount of____________, equivalent to US$____________and____________, equivalent to US$____________, will be transferred to your account(s) after the steps set forth in Section B below have been taken.
Section A
1. The collateral for the transaction shall consist of gold bars containing fine gold having a value not less than $_________calculated on the basis of US$35 per troy ounce of fine gold. The fine gold content will be determined to the satisfaction of the Fund and at your expense.
2. The gold bars will be transferred by you by way of pledge at a gold depository selected by you from among the Fund’s gold depositories (Federal Reserve Bank of New York, New York; the Bank of England, London; Banque de France, Paris; the Reserve Bank of India, Nagpur, India). You will irrevocably instruct the depository in accordance with the attached exhibit that the gold is to be transferred to, earmarked, and held in a special account in the name of and for the sole account of the International Monetary Fund, that the special account shall be at the sole order of the Fund, and that the depository shall accept and act upon any and all instructions of the Fund with respect to part or all of the gold in the special account. The Fund will arrange with the depository for the establishment of the special account. The depository will not be informed that the gold is held under pledge to the Fund.
3. You will represent to the Fund that the gold is free from any claims, liens or encumbrances in favor of any other party and subject to paragraph 9 below will remain free therefrom during the pledge. You will further represent to the Fund that under your law the gold may be freely pledged and disposed of as provided in this letter.
4. The gold will continue to be owned by you. Accordingly, the Fund will enter the gold on its books in your name, and will not show the gold in its books or accounts as owned by the Fund.
5. Not later than the repurchase date, namely the close of business six months after the value date for transfer of the exchange by the Fund to your account(s), you will repurchase the Fund’s holdings of your currency resulting from the transaction, to the extent that such holdings are not otherwise reduced, with gold in the special account if you so request or with other gold or convertible currencies acceptable to the Fund in accordance with the Fund’s Decision of July 20, 1962.
6. On any reduction at any time of the Fund’s holdings of your currency resulting from the transaction otherwise than by repurchase with gold in the special account, the Fund will, on your request, release to you or to your order at the depository gold from the special account in an amount not exceeding the equivalent of the reduction, provided that the amount of gold remaining in the special account shall not be less than the equivalent of the outstanding balance of the transaction.
7. To the extent that the Fund’s holdings of your currency resulting from the transaction have not been reduced by the close of business on the repurchase date, the Fund will give you notice of the balance due and payable by way of repurchase in respect of the transaction, and you will complete such repurchase with gold in the special account if you so request or other gold or convertible currencies acceptable to the Fund in accordance with the Fund’s Decision of July 20, 1962 not later than the close of business thirty days after the repurchase date. In the absence of such repurchase by the close of business thirty days after the repurchase date, repurchase will be effected with gold in the special account on the instructions of the Fund and without the need for further notice or request to you.
8. Where repurchase is effected with gold in the special account pursuant to paragraph 5 or 7, the gold in the special account will be transferred, on the instructions of the Fund, to the ordinary gold account of the Fund at the depository, which gold shall then be deemed to have been transferred by you to the Fund and shall thereupon be owned by the Fund free from any claim, including any right of redemption. Any surplus balance of gold beyond the full amount of the repurchase will be returned to you but any balance less than one bar will be held under earmark for you pursuant to Rule I-1 of the Fund’s Rules and Regulations.
9. At any time before the repurchase date or the close of business thirty days after the repurchase date, you may, after consulting the Fund, arrange for the sale of the gold in the special account, and the Fund will be prepared to give appropriate instructions to facilitate the sale, provided that on or before the close of business thirty days after the repurchase date the Fund’s holdings of your currency resulting from the transaction will be repurchased with gold or convertible currencies acceptable to the Fund in accordance with the Fund’s Decision of July 20, 1962, and provided further that the gold will not be released from pledge before such repurchase is effected.
10. All charges and costs connected with or resulting from the transfer to the special account (including without limitation transportation, earmarking, and holding), release, and redelivery, as well as converting the gold into good delivery bars if deemed necessary by the Fund under paragraph 1 above or if the gold is transferred to the Fund’s ordinary gold account by way of repurchase will be borne by you.
Section B
The transfer of currencies pursuant to the transaction agreed by the Fund will be made by the Fund after the Fund has received from you:
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(i) acceptance of all of the conditions of this letter; and
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(ii) a copy of the instructions referred to in Section A 2 above; and
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(iii) the representations referred to in Section A 3 above; and, in addition, has received from the depository:
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(iv) confirmation that the depository has established the special account, earmarked the gold, and will act in accordance with Section A 2 above; and
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(v) information satisfactory to the Fund as to the fine gold content of the bars.
Very truly yours,
International Monetary Fund
By: