Article VIII

Nicaragua, with effect from July 20, 1964, Costa Rica, with effect from February 1, 1965, and Australia, with effect from July 1, 1965, accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement, bringing to 27 the number of members which have rendered their currencies convertible under the Articles of Agreement. These countries are listed on page 107.

Proposals for Quota Increases

On February 26, 1965, the Executive Directors adopted a report entitled “Increases in Quotas of Fund Members: Fourth Quinquennial Review,” to be submitted to the Board of Governors. The Report, reproduced in Appendix I, page 124, includes two Resolutions, the First proposing a general increase of 25 per cent, appropriately rounded, of all quotas, and the Second proposing special quota increases for 16 members. The First Resolution had to be voted on as a whole, but, for the Second Resolution, votes could be cast on all or each of the special quota increases. By March 31, 1965, both Resolutions had been adopted by the Governors by more than the required majority of four fifths of the total voting power.

Members may consent to the increases in their quotas at any time before September 25, 1965; this period may be extended by the Executive Directors. The increases will not become effective unless the Fund has determined that members having on February 26, 1965 two thirds of the total quotas have consented to them. If all members consent to the proposed quota increases, total quotas in the Fund will be increased to $21,049 million, exclusive of the increases under the Compensatory Financing Decision after February 26, 1965 which for the purposes of the Resolutions have been treated as if they had been submitted to the Governors before that date.

Size of Quota Increases

The First Resolution proposed that all quotas be increased by 25 per cent, rounded in accordance with the following formula:

• amounts below $500 million are to be rounded to the next higher multiple of $1 million; and

• amounts of $500 million or more are to be rounded to the next higher multiple of $5 million.

The revised quotas are shown in the table on page 129.

Under the Second Resolution, special quota increases were provided for 16 countries, as shown in Table 5.

A member consenting to a special increase under the Second Resolution is expected to request an increase in its subscription to the capital of the Bank corresponding to the special part of its quota increase.

Table 5.

Proposed Increases in Quotas, 1965; Special Increases

(In millions of U.S. dollars)

Table 5.

Proposed Increases in Quotas, 1965; Special Increases

(In millions of U.S. dollars)

Member	Quota on Feb. 26, 1965	New Quota Under First Resolution	New Quota Under First and Second Resolutions
Austria	75	94	175
Canada	550	690	740
Finland	57	72	125
Germany, Federal Republic of	787.5	985	1,200
Greece	60	75	100
Iran	70	88	125
Ireland	45	57	80
Israel	50	63	90
Japan	500	625	725
Mexico	180	225	270
Norway	100	125	150
Philippines	75	94	110
South Africa	150	188	200
Spain	150	188	250
Sweden	150	188	225
Venezuela	150	188	250

View Table

Table 5.

Proposed Increases in Quotas, 1965; Special Increases

(In millions of U.S. dollars)

Member	Quota on Feb. 26, 1965	New Quota Under First Resolution	New Quota Under First and Second Resolutions
Austria	75	94	175
Canada	550	690	740
Finland	57	72	125
Germany, Federal Republic of	787.5	985	1,200
Greece	60	75	100
Iran	70	88	125
Ireland	45	57	80
Israel	50	63	90
Japan	500	625	725
Mexico	180	225	270
Norway	100	125	150
Philippines	75	94	110
South Africa	150	188	200
Spain	150	188	250
Sweden	150	188	225
Venezuela	150	188	250

Gold Payments and Their Alleviation

Before the increase in a member’s quota can become effective, the member is required to pay an additional subscription equal to the increase in its quota, of which 25 per cent must be paid in gold and the remainder in its currency.

Article III, Section 4(a), of the Articles of Agreement provides that a member must pay in gold 25 per cent of any increase in its quota, but that the Fund may reduce this percentage if a member’s monetary reserves are less than its new quota on the date that it consents to a quota increase. The Executive Directors have never used this authority to reduce gold payments. However, in connection with the quota increases under the First and Second Resolutions adopted by the Board of Governors in February 1959² and all increases under the Compensatory Financing Decision of February 1963,³ member countries were offered two alleviation facilities: they could increase their quotas by installments, or they could make special drawings up to an amount equal to their additional gold subscriptions.

The question whether the burden of gold payments should be alleviated was an important one during the Fourth Quinquennial Review of Quotas. The Executive Directors, after considerable discussion, again decided not to exercise the discretion given in Article III, Section 4(a), to reduce the impact of the required gold subscriptions. However, they decided on this occasion, as in 1959, that the facility of increases by installments should be available for increases under the First and Second Resolutions and that special drawings should be available to members in respect of increases under the First Resolution.

Where the installment facility is chosen, each installment of the quota increase will correspond to the amount of additional subscription in gold and currency paid by the member; the member must pay an original installment of its additional subscription, and an equal additional installment in each period of 12 months thereafter; each installment must be one fifth of the quota increase; and the member will have the right to accelerate its payments and quota increase under the original installment schedule.

Any country consenting to a quota increase under the First Resolution may request a drawing for an amount not exceeding 25 per cent of the quota increase. If the drawing is within the gold tranche, the established gold tranche policy and procedure will apply. If it is beyond the gold tranche, this special facility will be available to the member on the basis of its representation that it will encounter undue payments difficulties in making its gold subscription.

Repurchases corresponding to these exchange transactions beyond the gold tranche will normally be effected in equal annual installments to commence one year after the transaction, and to be completed not later than five years after the date of the transaction. However, if the member concerned represents that this schedule would create undue payments difficulties, the Fund may accept the member’s representation that it will repurchase in accordance with the policies which apply to drawings from the Fund generally.⁴

Members’ representations as to needs for drawings beyond the gold tranche or for a rescheduling of their repurchase commitments will not be challenged by the Fund except when it is clearly evident that they are without basis. The Fund will be prepared to grant waivers of the limits prescribed by Article V, Section 3(a)(iii),⁵ in order to facilitate such exchange transactions.

Two arrangements were also made to mitigate the secondary impact of the additional gold subscriptions—i.e., the gold purchases which may be made from the members whose currencies are reserve currencies by other members in connection with their subscriptions to the Fund.

First, a member which requests an exchange transaction as mentioned above is expected to consult the Managing Director on the currency to be drawn under Executive Board Decision No. 1371–(62/36) as mentioned below (p. 35). It is likely that many members which engage in such exchange transactions will use the currencies drawn to purchase gold from the monetary authorities of the countries whose currencies are drawn. They may wish to do this either to pay their additional gold subscriptions to the Fund or to restore the level of their gold holdings if they have already paid the additional subscriptions. Normally, such purchases of gold would be made from reserve currency members. With a view to alleviating the impact which such purchases would have on the gold holdings of the reserve currency members, the Fund will suggest that certain of these drawings, up to the equivalent of $150 million, be made in currencies which the Fund would then replenish by the sale of gold under Article VII, Section 2 (ii). In this way, the Fund’s holdings of the currencies drawn would be replenished up to the amount of these purchases.

Second, in order to provide a further alleviation solely in connection with the quota increases under the two Resolutions, the Fund will make “general deposits” of gold totaling not more than the equivalent of $350 million with its depositories in the United States and the United Kingdom. Approximately $250 million will be placed on general deposit in the United States and $100 million in the United Kingdom. However, if the Fund determines that total sales of gold by these two countries in connection with the additional subscriptions of other members are less than the equivalent of $350 million, the Fund will reduce its general deposits accordingly. The amount of gold in the general deposits will be available to the Fund on demand for the use of or transfer to the Fund. A general deposit may be terminated or reduced at the request of the member in which the deposit is placed. On the occasion of any use of gold, the Fund would normally use, in appropriate proportions, earmarked gold and gold on general deposit in accordance with the good management of its assets.

Purchases and Stand-By Arrangements

During the past fiscal year, the Fund extended financial assistance to more members than in any previous year. Sales of currency exceeded all previous years with the exception of 1961-62, and the amount of stand-by arrangements agreed was almost identical with the record total reached in 1963-64. Purchases from the Fund were equivalent to $1,897.4 million (Table 49, p. 108) and the stand-by arrangements agreed during the year amounted to the equivalent of $2,159.1 million (Table 52, p. 109). Of the 34 members which received support from the Fund, either through direct purchase transactions or in the form of stand-by arrangements, 2 were industrial countries (the United Kingdom and the United States) and 32 were nonindustrial countries. The United Kingdom and the United States accounted for almost 78 per cent of total purchases and for more than 69 per cent of the total made available under stand-by arrangements. Of the members receiving financial assistance, 14 were in the Western Hemisphere, 7 in the Middle East, 6 in Africa, 4 in Asia, and 3 in Europe.

The largest purchase during the fiscal year was made by the United Kingdom early in December 1964; it comprised 11 currencies, totaling the equivalent of $1 billion, the full amount available under the stand-by arrangement. The Fund borrowed the equivalent of $405 million in the currencies of 8 members under the provisions of the General Arrangements to Borrow, and purchased 10 members’ currencies with gold in amounts totaling the equivalent of $250 million (Tables 50 and 51, p. 108). The remainder of the U.K. drawing, equivalent to $345 million, was provided from the Fund’s holdings of currencies. This was the first occasion on which the Fund made use of the General Arrangements to Borrow, which came into effect on October 24, 1962. In addition, Switzerland made available to the United Kingdom on a swap basis Sw F 345 million ($80 million) in accordance with the agreement between Switzerland and the Fund embodied in the exchange of letters of June 11, 1964.⁶

Shortly after the close of the fiscal year, the United Kingdom drew a further $1,400 million from the Fund. In connection with this drawing, made in 11 currencies, the Fund purchased 10 members’ currencies with gold for a total equivalent to $400 million, borrowed the equivalent of $525 million in 8 currencies under the provisions of the General Arrangements to Borrow, and provided the equivalent of $475 million from its own holdings (Tables 50 and 51). Switzerland made available Swiss francs equivalent to $40 million in accordance with its agreement with the Fund.

The currencies to be used when members make purchases from the Fund, or make repurchases other than under Article V, Section 7(b), are selected in accordance with the statement on Currencies to Be Drawn and to Be Used in Repurchases approved by the Executive Directors on July 20, 1962.⁷ Fourteen currencies were supplied during the year to countries making purchases from the Fund, including, for the first time, Australian pounds and Mexican pesos. Eleven of these currencies were also used in repurchases, including for the first time Austrian schillings and Japanese yen. The currency most used, both for purchases and for repurchases, was the deutsche mark, of which $616.3 million was paid out and $283.9 million received in repurchases. Others used extensively for purchases included the French franc, the U.S. dollar, the Canadian dollar, and the Netherlands guilder. Details are given in Table 54, page 113. Details of repurchases under Article V, Section 1(b), are on page 114.

During 1964, the Fund’s holdings of U.S. dollars continued to be above 75 per cent of the U.S. quota, which precluded the Fund from accepting U.S. dollars in repurchase from members, as explained in the 1964 Annual Report, page 11. The stand-by arrangement with the United States for $500 million, entered into in July 1963, expired in July 1964 with an unused balance equivalent to $250 million. In July 1964, the Fund entered into a new stand-by arrangement, also for the equivalent of $500 million. The first purchase by the United States, equivalent to $125 million, was made in February 1964; it was followed by further purchases equivalent to $125 million in June 1964, $150 million in September 1964, $125 million in December 1964, and $75 million in March 1965, totaling the equivalent of $600 million. The currencies purchased by the United States were intended for sale for U.S. dollars at par by the United States to those members of the Fund that keep their international reserves mainly in U.S. dollars and that had to make repurchases from the Fund. By April 30, 1965, 20 members had availed themselves of this facility, to a total of $543.2 million. However, dollars have continued to be purchased from the Fund by other members and this, together with other movements of U.S. dollars, had the effect of reducing the U.S. outstanding balance of drawings to $323 million on April 30, 1965. The U.K. drawing in May, referred to above, reduced this outstanding balance by another $200 million.

For members in need of financial assistance from the Fund, the stand-by arrangement has continued to be a valuable instrument. Five members, Burundi, Korea, Mali, Somalia, and Tunisia, entered into stand-by arrangements with the Fund for the first time. All except 9 of the purchases from the Fund during the past financial year were made under stand-by arrangements. Six of these 9 purchases—those by Cyprus, Iran, Israel, Morocco, Pakistan, and Panama—were within the gold tranche. Purchases by Cyprus, Morocco, and Panama constituted the first drawings by these members on the Fund’s resources, although Morocco had in November 1959 entered into a stand-by arrangement for $25 million, which expired unused a year later.

In order to strengthen the confidence of members in the de facto automaticity of drawings in the gold tranche, the Executive Directors adopted a Decision on August 3, 1964⁸ expediting the procedure for such drawings. This procedure makes it possible to deliver exchange to a member, when it is making a gold tranche drawing, two business days after receipt of the request by the Fund, thus reducing by three business days the normal period for effecting a drawing made under Article V, Section 3, of the Fund Agreement. By April 30, 1965, a total of 9 drawings had been consummated under this new procedure, including the last 4 drawings made by the United States.

With effect from June 1, 1964, the Board of Governors adopted an amendment of the terms and conditions prescribed in the membership resolutions of those members that had not yet agreed initial par values with the Fund. This Resolution authorized the Executive Directors to permit exchange transactions with a member prior to the establishment of an initial par value, under such conditions and in such amounts as might be prescribed by the Executive Directors. Similar terms will be incorporated in future membership resolutions.⁹ By the end of April 1965, Korea and Mali had agreed with the Fund on provisional exchange rates for their currencies for this purpose and had entered into stand-by arrangements. Mali had drawn the equivalent of $9.9 million under its stand-by arrangement.