Chapter 3: Activities of the Fund
- International Monetary Fund
- Published Date:
- September 1971
In the period under review a substantial proportion of the Fund’s activities were related to such operational matters as the use of its General Account resources, transactions and operations in special drawing rights, arrangements for quota increases, regular consultations with member countries, and technical assistance. At the same time, however, broader policy considerations continued to occupy much of the attention of the Executive Directors, management, and staff. Study is presently under way on a number of major issues, including questions related to exchange rate flexibility and short-term capital movements, considerations applied in the determination of quotas, the size and structure of the Executive Board and associated questions, and suggested modifications in the special drawing rights facility. Studies and discussions have also been initiated on proposals for the establishment of a link of some kind between the issuance of special drawing rights and the financing of economic development.
Exchange Rate Developments and Related Issues
In the fiscal year ended April 30, 1971 the Fund concurred in the proposed devaluation of the currencies of Ecuador, Turkey, and Yugoslavia, and in the proposed par value of the new currency unit of Malawi. In addition, China and the Democratic Republic of Congo established initial par values for their currencies by agreement with the Fund. Details are given in Supplementary Note A. As noted in last year’s Annual Report, on May 31, 1970 the Canadian authorities notified the Fund that for the time being Canada would not maintain the exchange rate of the Canadian dollar within the prescribed limits of 1 per cent on either side of the established parity.1
Toward the end of the fiscal year, developments described elsewhere in this Report led to growing pressures in exchange markets. Early in May 1971, five of the Fund’s members took action in the exchange field.
On May 9 the German authorities informed the Fund that in view of the recent situation in foreign exchange markets, including large capital movements, they would not for the time being maintain the exchange rates for the deutsche mark within the established margins. The Netherlands authorities informed the Fund that they had found it necessary to take similar action because of recent movements of foreign exchange and the action of the German authorities.
Noting the circumstances and considerations that had led the German authorities to take the action described, the Fund emphasized the undertaking of members to collaborate with it to promote exchange stability and to maintain orderly exchange arrangements with other members. The Fund welcomed, therefore, the intention of the German authorities to remain in close contact with it, to collaborate with it fully in accordance with the Articles of Agreement, and to resume the maintenance of the limits around par as soon as circumstances permitted. The Fund also stated that it, and in particular the Managing Director, would remain in close consultation with the authorities of the Federal Republic on their resumption of the maintenance of the limits around par, and that the Managing Director would take appropriate initiatives for those consultations. The Fund took a similar approach to the action by the Netherlands and welcomed the intention of the Netherlands authorities to resume the maintenance of the limits around par at the earliest possible moment.
Also on May 9, Austria proposed a change in the par value of the Austrian schilling from S 26 = US$1 to S 24.75 = US$1, an appreciation of 5.05 per cent. This change came under the provisions of Article IV, Section 5(c)(i), of the Fund Agreement under which the Fund shall not object to a proposed change that, together with all previous changes, whether increases or decreases, does not exceed 10 per cent of the initial par value. The Fund accordingly noted the new par value.
On the same date the Fund was informed that the regulations covering the dual foreign exchange market system in the Belgian-Luxembourg Economic Union had been modified. Previously, as a result of various links between the two markets, the Belgian and Luxembourg francs in the free market could stay at a discount, but not at a premium, in relation to the rate in the official market. The regulations thus had the aim of discouraging excessive outflows of capital, but not inflows. Effective May 11, practically all the previous connections between the two markets were severed. As a consequence, the free market rate was permitted to diverge from the rate in the official market in either direction, so that the free market could also be used to discourage excessive capital inflows.
Subsequently, consultations have proceeded along the lines set out on May 9. The Managing Director has remained in close contact with the authorities of Germany, the Netherlands, and Canada, and additional consultations on the basis of staff reports have been arranged. Consultations with Canada, on the basis of staff reports, have taken place on several occasions in 1970 and 1971.
On May 9 the Fund noted that it had given consideration to various ways of coping with the difficulties facing its members. In its consultations with members, and in its continuing work, it would seek to maintain and strengthen the basic principles of the Bretton Woods system. The recent disturbances had demonstrated the need to improve the international adjustment process and to bring about a better coordination among members with respect to their internal and external policies.
Special Drawing Account2
During the period January 1, 1970 to June 30, 1971, special drawing rights have become established as usable and acceptable reserve assets in transactions among participants and in transactions and operations between participants and the General Account; participants have been willing to hold and acquire them and have been able to use them readily to obtain needed foreign exchange.
In 1970, 5 more member countries became participants in the Special Drawing Account, bringing the total number of participants to 110 out of total Fund membership of 117. The combined quotas of the 7 members that are not participants3 comprise only 1 per cent of total Fund quotas.
Allocations made on January 1, 1970 and 1971 were SDR 3,414 million and SDR 2,949 million, respectively, increasing official world reserves by 5 per cent in 1970 and by 3.6 per cent in 1971. Use of special drawing rights by participants in the period January 1, 1970 to April 30, 1971 totaled SDR 1,450 million. Of this use, SDR 808 million was transferred between participants, and SDR 641 million was transferred by participants to the General Account, mainly in repurchase of the participants’ currencies and in payment of charges. SDR 152 million was transferred from the General Account to participants, largely to replenish the Fund’s holdings of their currencies; this left a balance in the General Account of SDR 490 million on April 30, 1971. The total value of all transfers of special drawing rights thus amounted to SDR 1,601 million. Details of the various categories of transfers are shown in Table 56.
Some participants have been both users and receivers of special drawing rights; among them were the United States, the United Kingdom, India, and Italy. Total net use by all participants whose holdings on April 30, 1971 were below their cumulative allocations was SDR 1,111 million. At that date 81 participants had holdings of special drawing rights below their allocations, and 58 of these had used special drawing rights beyond the nominal amounts involved in paying their share of the annual assessments for the cost of operating the scheme. The remaining 28 participants 4 had holdings of special drawing rights in excess of net cumulative allocations totaling SDR 621 million; these excess holdings, plus the General Account’s holdings of SDR 490 million, were the counterpart of the net use by participants of SDR 1,111 million.
Transactions Between Participants
During the period under review participants used their special drawing rights through the process of designation in transfers to other participants for the purpose of obtaining currency and through bilateral arrangements to obtain balances of the user’s own currency. These transactions have all been subject to the requirement of balance of payments need.5 The most frequently used method has been the use of special drawing rights to obtain currency from other participants designated by the Fund. During the 16 months under review, 42 participants used a total of SDR 503 million in this way to obtain currency from 32 participants.
Participants also obtained balances of their own currencies by transferring special drawing rights to other participants willing to receive them. In these transactions the user was subject to the requirement of a balance of payments need, but the recipients of the special drawing rights were not subject to designation by the Fund. Individual transactions of this type have tended to be larger but have involved fewer participants; the United States used a total of SDR 286 million through April 30, 1971 to obtain equivalent amounts of its own currency, chiefly from Belgium and the Netherlands.6 In addition, the United Kingdom transferred SDR 20 million to Germany, making a 16-month total of SDR 306 million for such transactions.
During 1970 and the first four months of 1971, there was a total of 79 transactions in special drawing rights between participants that were subject to the requirement of need. Examination of these transactions showed that for the overwhelming majority the use of special drawing rights had followed a period in which the users’ gross reserves, excluding special drawing rights, had declined. In some instances there had been no decline, but reserves could be considered to be close to minimum working balances. In two instances, where the use appeared not to fulfill the requirement of need in the light of the development of their gross reserves, the participants, with the approval of the Executive Directors, subsequently reversed the use by acquiring special drawing rights from the General Account.
Participants designated by the Fund are obliged to accept special drawing rights, and, as noted, such transactions totaled SDR 503 million in the 16-month period under review. In contrast, special drawing rights may be accepted on a voluntary basis in agreement with other participants and in the transactions and operations with the General Account that are discussed below; these acceptances totaled SDR 456 million in the period.
The designation system has provided for transfers of special drawing rights from over 40 participants with balance of payments need to a wide range of participants with relatively strong balance of payments and reserve positions; 62 per cent of transfers between participants were transacted in this way.
Schedule F of the Fund Agreement sets out the present rules under which participants with sufficiently strong reserve and balance of payments positions are designated to provide currency to those that may need to use their special drawing rights. These rules aim at the harmonization of the ratios of designated participants’ excess holdings of special drawing rights to their official holdings of gold and foreign exchange.
On April 30, 1971, 28 participants had excess holdings of special drawing rights. Of these, 24 were considered to have reserve and balance of payments positions strong enough to enable them to be designated, but 17 were actually included in the current designation plan. The principles and practices employed in designation excluded 3 participants—Belgium, Canada, and the Netherlands—because of their existing high excess holdings ratios and 4 other participants that would have been subject to designation for less than SDR 1 million. The excess holdings ratios of Belgium and the Netherlands had been raised primarily through the bilateral transactions with the United States. Canada’s high ratio was due mainly to its exercise of the option to receive special drawing rights instead of gold when the General Account replenished the Fund’s holdings of Canadian dollars. Other excess holdings ranged from close to zero to 1.0 per cent of the gold and foreign exchange holdings and were thus closely harmonized. Three other participants were also subject to designation—Malta, Spain, and the United Kingdom, the last having previously made net use of special drawing rights. One of the aims of designation is to bring the holdings of net users of special drawing rights into line with those of other participants subject to designation, as the users’ balance of payments and reserve positions strengthen. This has been made difficult in the period under review by marked variations from quarter to quarter in the volume of transactions with designation. In 1970 such transactions totaled SDR 291 million, of which some 85 per cent took place in the first six months of the year. In 1971 the transactions in the first quarter were SDR 207 million and in the second quarter SDR 10 million.
Since the first quarter of 1971 there has, however, been special emphasis on the designation of participants with holdings considerably below their cumulative allocations. The relatively low level of transactions, in conjunction with the restoration of the positions of a few participants, has meant that designation has not channeled special drawing rights proportionately to those participants whose reserves have shown the major increases in the 16-month period; for example, Germany and Japan were designated to receive only SDR 52 million and SDR 24 million, respectively, compared with SDR 90 million received by the United Kingdom and SDR 41 million by India. However, the excess holdings ratios of most participants that were involved in designation were within a close range.
Currencies and Conversions
The principal currency provided by the participants designated in the SDR 503 million of transactions with designation from January 1, 1970 to April 30, 1971 was the U.S. dollar, the equivalent of SDR 392 million being provided in that currency. The equivalents of SDR 26 million and SDR 80 million were provided in French francs and pounds sterling, respectively. The participants using special drawing rights in these transactions requested and obtained SDR 436 million in U.S. dollars, SDR 43 million in sterling, and SDR 19 million in French francs. Relatively small amounts of Belgian francs and Italian lire were also obtained. Since the amounts of U.S. dollars requested exceeded those provided, net conversions from sterling and French francs into U.S. dollars were necessary. It was also necessary, however, for U.S. dollars to be converted into French francs and sterling from time to time, and there were conversions between the last two currencies. Total conversions amounted to the equivalent of SDR 91 million. (See Table 58.)
The conversion procedures agreed with the issuers of the currencies functioned smoothly; provision of the required currency by the designated participants and any associated conversion was always arranged for the same value date. The exchange rates at which the conversions took place were the rates that the Fund had decided were representative of the market rate for the currency on the date of the Fund’s designation instructions.
Transactions and Operations Between Participants and the General Account
By a decision of the Executive Directors, participants have been able to use their special drawing rights without limitation to make repurchases from and to pay charges to the General Account; this decision was reviewed in 1970 and is subject to further review. From January 1, 1970 to April 30, 1971, 44 participants transferred a total of SDR 635 million for these purposes. The United Kingdom transferred SDR 295 million and India SDR 118 million, together accounting for some 65 per cent of these transfers. The amount used in repurchases, SDR 540 million, was some 31 per cent of total repurchases other than those under Article V, Section 7(b), during the period. In payment of charges the Fund received SDR 95 million, about 53 per cent of total charges.
In contrast to the use of special drawing rights that has taken place between participants, transfers to the General Account are not subject to the requirement of need, and the special drawing rights are not exchanged into currency but serve directly as a means of payment. Both these aspects appear to have contributed to the fact that the transfer of special drawing rights to the General Account in repurchases and the payment of charges accounted for a considerable share of all uses by participants. The majority of participants engaging in these transactions had balance of payments problems, but several had rising reserves. Almost all participants that held special drawing rights at the time that a repurchase became due elected to make some use of them, and many used special drawing rights for this purpose only. For some of these participants the use of special drawing rights reflected their generally low holdings of reserves, while for others it seems clear that the relative interest yields of reserve assets have influenced their decisions.
As noted in Table 56, the Fund also received SDR 5 million interest on its General Account holdings of special drawing rights and SDR 2 million from assessments to cover the expenses of conducting the business of the Special Drawing Account. Total transfers from participants to the General Account in the 16-month period were thus SDR 641 million, 40 per cent of all transfers.
During the period January 1, 1970 to April 30, 1971, the Fund transferred some SDR 152 million to participants from the General Account holdings. With the exception of limited amounts transferred to certain participants that had a particular need to acquire special drawing rights, the greater part of these transfers were made to participants that exercised options to receive special drawing rights from the General Account in preference to other reserve assets. In September 1970 and April 1971, the Fund proposed to replenish its holdings of members’ currencies by sales of gold totaling the equivalent of $645 million. Participants involved in these sales were given the option of receiving special drawing rights rather than gold; 4 participants exercised their options for amounts totaling SDR 123 million. In a similar manner the Fund also transferred some SDR 18 million to 15 participants in payment of remuneration on net creditor positions and SDR 9 million to 14 participants in a distribution of net income after the end of the fiscal year 1969/70.
Participants’ Positions, April 30, 1971
Table 10 shows the positions of groups of participants in the Special Drawing Account on April 30, 1971. (Details for individual participants are given in Table 57.) Since the first allocation, 3 industrial countries, principally the United Kingdom and the United States, made net use of special drawing rights in the amount of SDR 378 million. Fifty-five primary producing countries, mainly in less developed areas, made net use of SDR 732 million. The counterpart of net use by these countries is found in the net receipts of SDR 576 million by 10 other industrial countries, SDR 490 million by the General Account of the Fund, and SDR 45 million by 18 other primary producing countries.
The limited volume of designated transactions has permitted less harmonization of excess holdings than might have otherwise occurred. However, the willingness of participants to hold special drawing rights has attested their acceptability as a reserve asset.
Activities of the Fund’s General Account continued at a high level in the period under review, but there was some change in the relative importance of different types of transactions. In the year ended April 30, 1971, creditor, or super gold tranche, positions in the Fund were reduced from the equivalent of $2.7 billion to $1.7 billion. In the same period outstanding Fund borrowing was reduced by the equivalent of $0.7 billion. In contrast to previous years when the financing of purchases (or drawings) was the major preoccupation, the Fund is now more concerned with the choice of currencies to be used in repurchase and the general harmonization of creditor positions.
During the fiscal year 1970/71 the resources of the General Account increased by $7.1 billion, largely as a result of the increase in quotas that was approved by the Board of Governors on February 9, 1970.
Aggregate purchases of currencies from the Fund declined from $3.0 billion in 1969/70 to $1.2 billion in 1970/71, while repurchases, at $1.7 billion, were about the same each year.8 The fiscal year 1970/71 was the first since 1962/63 in which repurchases by members exceeded sales of currencies. The net contraction in the volume of the Fund’s sales of currencies reflected, to a large extent, developments in the pattern of international payments and world liquidity. This was also reflected in a decline in both the number and total amount of stand-by arrangements approved.
In contrast, the Fund conducted very large gold operations in 1970/71. Most of this volume resulted from transactions related to increases in quotas. In part, however, it followed upon the Executive Directors’ decision of December 1969, concerning purchases of gold from South Africa, and on subsequent decisions to sell gold in replenishment of the Fund’s holdings of currencies.
Quotas—Fifth General Review
The Board of Governors Resolution No. 25-3 on “Increases in Quotas of Members—Fifth General Review” provided that no increase in quota should become effective before October 30, 1970 and that members might consent to increases in their quotas up to the maximum amount listed in the Annex to the Resolution not later than November 15, 1971, unless the date was extended by the Executive Directors.9
Of the 116 members listed in the Annex to the Resolution, as amended, 107 consented to increases in their quotas between October 30, 1970 and April 30, 1971; all of these had paid their increased subscriptions to the Fund, so that their new quotas had become effective by the end of the fiscal year.10 No change had been proposed in the quota for one member; the other 8 members—Austria, Korea, Lebanon, Luxembourg, Portugal, Singapore, South Africa, and Tunisia—had not consented to an increase in their quotas by the end of the fiscal year.11 With the exception of Kuwait and the Libyan Arab Republic, which consented to increases of less than the maximum quotas listed in the Annex to the Resolution, all consents were for the maximum amounts. By December 31, 1970 quota increases had become effective for 105 members, of which 102 were participants in the Special Drawing Account and were thus able to receive allocations of special drawing rights on January 1, 1971 on the basis of their increased quotas. A list of changes in Fund quotas during the fiscal year is given in Table 44.
As a consequence of increases in quotas under Resolution No. 25-3 ($7,106 million), the completion of increases by installment under Resolution No. 20-6 on “Increases in Quotas of Members—Fourth Quinquennial Review”12 ($2 million), and the membership of Barbados and the Yemen Arab Republic (with initial quotas of $13 million and $8 million, respectively), total Fund quotas increased by 33 per cent in the year ended April 30, 1971, from $21,349 million to $28,478 million.
Increased Gold Subscriptions
Members paid to the Fund the equivalent of $1,744 million in gold as a result of their increased subscriptions under the Fifth General Review; this was slightly less than the equivalent of 25 per cent of their aggregate increase in quotas. Provision was made in paragraph 5 of the Board of Governors Resolution No. 25-3, that “twenty-five per cent of the increase shall be paid in gold and the balance in the member’s currency, provided, however, that, if on the date when a member consents to any increase under paragraph 1 or paragraph 6 its monetary reserves are less than the new quota to which it has consented, the member may pay in gold that proportion of 25 per cent of the increase in quota which the member’s monetary reserves on the date of consent bear to the quota to which the member has consented and the balance of the increase in quota shall be paid in currency.” Twenty-two members made reduced gold payments in accordance with that provision. The total amount of gold that these members would have paid if there had been no reduction in gold payments would have amounted to the equivalent of $64 million. Instead, their increased gold subscriptions amounted to the equivalent of about $32 million. These members undertook to repurchase in five equal annual installments, unless the Fund’s holdings of their currency are otherwise reduced, that portion of their local currency subscription which represents the difference between the actual amount of gold paid and 25 per cent of the increase in their quotas.
The Fund decided, in accordance with the Resolution and Article VII, Section 2(ii), that it would sell gold in replenishment of its currency holdings up to the equivalent of $700 million to mitigate the gold losses of those members that had sold gold to other members to enable the latter to pay their increased gold subscriptions.13 By April 30, 1971, 75 members had bought gold from other members for the purpose of paying all or part of their increased gold subscriptions to the Fund. The equivalent of $548 million was bought by members from the United States, and the equivalent of $16 million from Austria; the Fund replenished its holdings of U.S. dollars and Austrian schillings by equivalent sales of gold. Very small amounts of gold, totaling the equivalent of $95,000, were bought from Italy and South Africa, for which no mitigation was sought by these members.
After taking into account these mitigation operations, the rise in the Fund’s gold holdings resulting from the increased gold subscriptions under the Fifth General Review amounted to the equivalent of $1,180 million, an increase of 38 per cent above the Fund’s gold holdings on October 29, 1970, the day before the first increases in quotas became effective. The rise in the Fund’s currency holdings resulting from the increase in quotas and the associated replenishment operations amounted to the equivalent of $5,926 million, about 83 per cent of the overall increase in quotas.
During the fiscal year 1970/71, 44 members purchased currencies from the Fund, amounting to $1,167 million, compared with $2,996 million in 1969/70, the largest amount in any fiscal year. The figure of $1,167 million includes gold tranche purchases of $810 million, or 69 per cent of the total, made by 24 members. Purchases by 4 members were in the super gold tranche and included two transactions by the United States totaling the equivalent of $400 million, the largest amount purchased by any member during the fiscal year. Purchases under stand-by arrangements were made by 18 members and amounted to $305 million, substantially less than the $2,261 million purchased by 22 members under such arrangements in the previous year. One purchase of $2.5 million was made under the facility for the compensatory financing of export fluctuations. Other purchase transactions by 4 members amounted to $49 million. Three of these members made purchases within their first credit tranches, and the other within the second credit tranche. Details on purchases in the year ended April 30, 1971 are given in Table 45. In June 1971 the United States made a gold tranche purchase of the equivalent of $250 million.
As noted in last year’s Annual Report, the service charge of Vi of 1 per cent on gold tranche purchases made after July 27, 1969 was abolished.14 As stated above, 69 per cent of total purchases in 1970/71 was within gold tranches. Thus, the abolition of the service charge on gold tranche purchases, as well as the reduced volume of other purchases and the reduction in the amount outstanding, has had an impact on Fund income.
Buffer Stock Financing Facility
In November 1970 the Fund examined the first proposed use, of its buffer stock financing facility, established in June 1969.15 Having considered the text of the Fourth International Tin Agreement, the Executive Directors decided that member countries could use the facility in connection with the financing of contributions that they were required to make to the international tin buffer stock to be established under the new Agreement.16
On the basis of their examination, the Directors concluded that the terms of the Agreement, as negotiated in May 1970, were consistent with the requirements considered appropriate to international commodity agreements for which Fund assistance may be given. In particular, schemes suitable for Fund assistance are expected to take account of the effects of price stabilization on the stabilization of earnings and should aim at price stabilization around a medium-term trend, so that buffer stock transactions could be expected roughly to balance out in the medium term. The Fund considers that, when its financial assistance is sought in connection with buffer stock schemes, an appropriate part of the total resources required should be met from sources other than international financial institutions.
The special facility being made available, which is subject to the conditions set forth in the 1969 Annual Report, is in addition to the normal access by members to the Fund’s resources under ordinary tranche policies in dealing with balance of payments difficulties. In July 1971 the first purchases under the facility were made in connection with initial buffer stock contributions under the International Tin Agreement.
During the year ended April 30, 1971, the Fund approved 18 stand-by arrangements, all for primary producing countries, authorizing purchases up to $502 million. This was $1,880 million less than the total amount approved in the previous year. However, purchases authorized under standby arrangements for primary producing countries only amounted to $396 million in 1969/70, when $2,381 million in arrangements approved included $985 million for France and $1,000 million for the United Kingdom. A summary of the stand-by arrangements in effect during 1970/71 is shown in Table 48. Purchases under the arrangements amounted to $305 million during the fiscal year. This was 26 per cent of total purchases; in 1969/70 the comparable figure was 75 per cent.
During the past fiscal year, repurchases amounted to $1,657 million, compared with $1,671 million repurchased in 1969/70. Of the total amount repurchased during 1970/71, the equivalent of $685 million, or 41 per cent, was repurchased by the United Kingdom.
During the year several members repurchased amounts drawn under the Compensatory Financing Decision. Uruguay repurchased $33 million, of which $5 million was in this category. Iceland’s repurchases, totaling $15 million, included $7.5 million in this respect. Of India’s repurchases amounting to $135 million, the equivalent of $10 million completed repurchase of the compensatory financing drawing made in December 1967. Guatemala, whose purchases under a stand-by arrangement were partially reclassified as having been effected under the Compensatory Financing Decision, completed repurchase of the amount that had been reclassified.
Of total repurchases during the fiscal year, 59 per cent was under schedules approved by the Fund; repurchases in accordance with Article V, Section 7(b), of the Fund Agreement accounted for 29 per cent; repurchases in respect of purchases under stand-by arrangements amounted to 8 per cent; and voluntary and other repurchases accounted for 3 per cent of the total. (See Table 50.)
Transactions and Operations in Gold
The Fund’s transactions and operations in gold during the fiscal year 1970/71 were the largest in its history. During the year the Fund received gold in a gross amount equivalent to $2,684 million and disbursed gold to members in an amount equivalent to $1,109 million, of which a total amount equivalent to $1,086 million was sold in replenishment of its currency holdings. On April 30, 1971 the Fund’s gold holdings were equivalent to $4,338 million, compared with $2,763 million at the end of the previous fiscal year. The details of the transactions and operations are presented in Supplementary Note A.
The relatively large-scale transactions in gold undertaken by the Fund during the year were, in large part, a consequence of the increased gold subscriptions paid by members in connection with their increases in quotas and of the associated mitigation operation in which the Fund sold gold in replenishment. The Fund received the equivalent of $1,808 million in new and increased subscriptions from members, of which, as noted above, $1,744 million was the result of increases in quotas under the Fifth General Review. The Fund sold the equivalent of $564 million in replenishment operations to mitigate the effects of these gold payments to the Fund.
Also important in contributing to the volume of transactions and operations were those under decisions adopted on December 30, 1969 relating to the purchase of gold from members.17 During the fiscal year 1970/71, the Fund purchased the equivalent of $390 million of gold from South Africa, following the purchase of $283 million during the first four months of 1970. The details of the amounts purchased in accordance with various parts of the Fund decision to the end of April 1971 are given in Supplementary Note A. By early July 1971 further purchases had been made, totaling the equivalent of $105 million.
Partly as a consequence of these purchases of gold from South Africa, the Fund decided in September 1970 to sell $325 million of gold to 12 members in replenishment of its holdings of their currencies. The Fund, however, provided that each of these members, all of whom were participants in the Special Drawing Account, could elect to receive an equivalent amount in special drawing rights in place of gold to be sold. Three members exercised their options and SDR 67.5 million was transferred. In April 1971 the Fund decided to sell a further $320 million of gold to 14 members in replenishment, and again offered the option of special drawing rights in place of gold; SDR 56 million was transferred to 3 members. With these two operations the Fund sold in replenishment gold and special drawing rights equivalent to virtually all the gold it had acquired from members under Article V, Section 6(a), during 1970. The Fund purchased the equivalent of $138 million between January 1 and July 2, 1971 and on July 23 agreed to sell in replenishment gold equivalent to $135 million; members were again given the option to receive special drawing rights.
In September 1970 the Fund reacquired from the United States an amount of gold equivalent to $400 million after reducing its investments in short-term U.S. Treasury securities by a like amount. These investments, which had totaled $800 million, were made in 1956, 1959, and 1960 from the proceeds of sales of gold by the Fund to the United States in order to meet the past administrative deficits of the Fund and to provide a reserve toward meeting possible deficits in the future. The effect of this operation was to reduce the amount of investments under the general heading of Gold Account in the balance sheet of the Fund and to increase bar gold held with depositories.
In connection with its sales of gold in replenishment of its currency holdings during 1970 and in April 1971, the Fund transferred to its bar gold holdings gold from its general deposits with the Federal Reserve Bank of New York and the Bank of England. These general deposits had been established in 1965 in connection with the Fourth Quinquennial Review of Quotas as a means of alleviating gold losses of the United States and the United Kingdom arising from their sales of gold to other members to permit the latter to pay their increased gold subscriptions at that time. On the occasion of any use of gold, the Fund normally transfers gold from the general deposits to its bar gold holdings on a pari passu basis; that is, the amount of gold that would be transferred from the two general deposits would be based on the proportion that those deposits bear to the Fund’s total gold holdings at the time of the sale of gold by the Fund. During 1970/71 these transfers amounted to the equivalent of $74 million, of which $63 million was transferred from the general deposits of gold with the Federal Reserve Bank of New York and $11 million from those with the Bank of England. At the end of April 1971, the equivalent of $175 million of gold was held on general deposit. A further reduction of $5 million was associated with the replenishment agreed on July 23.
In the past year the Executive Directors held extensive discussions on policies with respect to the replenishment of the Fund’s currency holdings by sales of gold. In a decision adopted on March 22, 1971, the Directors agreed on guidelines for future gold sales, other than those sales designed to mitigate the effects of quota increases.18 With respect to the gold acquired by the Fund under Article V, Section 6(a), the guidelines provided that, unless there was no case for replenishment, it should be presumed that sales of gold would be justified in amounts roughly corresponding to the amounts acquired under that section since the last preceding sale. Such sales should be considered at six-month intervals. The guidelines further provided that other sales of gold would be made at times and in amounts determined by the Fund’s need for replenishment. In seeking to establish this need, account should be taken, inter alia, of the Fund’s stock of currencies currently considered suitable for drawings, relative to the amount of potential drawings on the Fund’s resources. Where appropriate and feasible, the Fund should combine with sales of gold replenishment through borrowing.
The Executive Directors agreed that, in accordance with the guidelines, sales of gold should be distributed among net creditor countries whose currencies were considered suitable for drawings at the time, in proportion to their average net creditor positions, provided that the Fund would not purchase any currency beyond the point where its holdings of that currency equaled 75 per cent of quota. The average net creditor position would be calculated on a period ending with the month preceding the proposed gold sale and beginning either six months before that date or at the end of the period on which the last preceding gold sale was based, whichever began earlier. Further, pending the elaboration of a general policy on replenishment with special drawing rights, the Fund should normally on the occasion of sales of gold give members the option of receiving special drawing rights in place of gold, provided that the holdings of special drawing rights in the General Account were considered adequate.
The General Arrangements to Borrow (GAB), which enable the Fund to supplement its General Account resources by borrowing up to $5.9 billion, were not activated in the period under review. Instead, the Fund, in accordance with the provisions of the Arrangements, reduced its GAB indebtedness during the period May 1, 1970 to May 31, 1971 by a total amount equivalent to $663 million. This reduction resulted from a repayment in July 1970 to Italy for balance of payments reasons and from repayments related to repurchases by France in February and May 1971 and by the United Kingdom in March 1971, which were in respect of previous purchases by these members that were partly financed through borrowings under the GAB. By May 31, 1971 the Fund’s outstanding indebtedness under the GAB had been reduced to $152 million and the balance available for future calls amounted to about $5.75 billion.
In April 1971 the Fund repaid to Japan the equivalent of $125 million of the $250 million claim on the Fund under the bilateral arrangement that Japan had acquired from Italy in 1970. This repayment was possible since the Fund’s holdings of yen had risen as a result of repurchases in this currency by other members and as a result of the increase in Japan’s quota. This repayment, together with those mentioned above, decreased the Fund’s total indebtedness from borrowing to $277 million.
Payment of Remuneration and Net Income
The provisions of Article V, Section 9, of the Fund Agreement specify that the Fund pay a return to members on the amount by which 75 per cent of a member’s quota exceeds the average of the Fund’s holdings of its currency (any holdings in excess of 75 per cent of quota being excluded from the calculation). Remuneration is paid as of the end of the Fund’s fiscal year in gold and the member’s currency. However, participants in the Special Drawing Account have the option of receiving special drawing rights in place of gold or their own currencies, provided that the General Account’s holdings of special drawing rights at the end of a fiscal year exceed the total amount of remuneration payable for that year.
For the past fiscal year, remuneration at 1½ per cent amounted to $37.4 million and was paid to 39 members in May 1971. Of this amount $14.7 million was paid in special drawing rights, $22.7 million in gold, and a very small amount in members’ own currencies.
After payment of remuneration, the Fund’s net income for the fiscal year amounted to $46.4 million.
Consultations, Technical Assistance, and Training
During 1970/71 the Fund completed 86 regular Article VIII and Article XIV consultations with member countries, a larger number than in any previous fiscal year. Through the consultation procedure the Fund has been able to develop close working relationships with its members, enabling it to be informed of current developments and to reach a decision promptly if a member proposes a change in the par value of its currency or in its exchange practices, or requests the use of Fund resources through a drawing or stand-by arrangement. Although the consultation procedure is basically concerned with the problems and policies of the consulting member country, the authorities of the member can raise with the Fund any special difficulties stemming from the actions or policies of other members, and the discussion of the Executive Directors that concludes each consultation places increasing emphasis on the international repercussions of domestic economic and financial policies. As an outgrowth of its consultation experience, the Fund is now devoting attention to a number of problems affecting different groups of member countries, such as aid and credit practices, debt problems, and commodity policies.
Among the important services that the Fund provides, particularly to developing countries, are its technical assistance and training. The Fund continues to be involved in filling requests for advice from members on various aspects of their fiscal, monetary, exchange, and general stabilization policies. As in the past, the more specialized technical assistance is provided through the Central Banking Service, the Fiscal Affairs Department, and the Bureau of Statistics. During the fiscal year 1970/71, technical assistance was provided to 40 countries through the Central Banking Service and to 22 countries (as well as a regional organization) through the Fiscal Affairs Department; the Bureau of Statistics assisted 15 members to establish or to improve central bank bulletins. The IMF Institute completed 2 training courses that had begun in the previous fiscal year and offered 5 new courses, which were attended by 125 officials from 75 member countries. Details on these activities are given in Supplementary Note A.
Payments Arrears and External Debt Management
In the fiscal year ended April 30, 1971, the Executive Directors reviewed the Fund’s policy with respect to undue delays in making exchange available for the settlement of current international transactions that result from governmental limitations and give rise to payments arrears. The Executive Directors concluded that such undue delays are payments restrictions under Article VIII, Section 2(a), and Article XIV, Section 2, of the Fund Agreement, whether the limitation is formalized as with the imposition of compulsory waiting periods for exchange, or is informal, or ad hoc. They drew attention to the harm that these restrictions cause to a country’s international financial relationships and provided general guidelines for their treatment by the Fund. These guidelines make provision for the possibility of Fund approval of the restriction involved, provided that the member presents a satisfactory program for its elimination. Similarly, when a member having payments arrears requests Fund financial assistance, such assistance may be granted if the member’s financial program, inter alia, envisages a phasing out of the arrears.19
The Executive Directors also reviewed the Fund’s experience in assisting member countries in the management of their external debts and in the avoidance of debt service problems. In view of the growing importance of debt service payments in the balance of payments of many developing countries, regular Article VIII and Article XIV consultations have included, where appropriate, a review of the external debt management policies of the members. In consultations with countries having potentially serious debt problems, the Fund has urged the authorities to exercise caution in incurring further net foreign indebtedness before the situation becomes critical. In this activity, the Fund has benefited from close contact with other international organizations concerned with problems of foreign indebtedness and with the flow of development aid.
In formulating policies to correct balance of payments difficulties, member countries have frequently found it useful to establish quantitative limits on foreign indebtedness. In this connection they have often requested the use of Fund resources in the form of stand-by arrangements, and limits on external indebtedness have been included as performance criteria. These limits have not only reduced strains on the external payments position deriving from debt servicing but have also supported measures to restrain domestic credit expansion and to improve public expenditure control. By contributing to the maintenance of confidence between creditor and debtor countries, they have supported the flows of capital from more developed to less developed members and thereby assisted in the latter’s development efforts. Experience with debt regulations in stand-by arrangements now extends over a decade and practices have evolved as a growing number of members have adopted them. While these practices must take fully into consideration the situation of individual countries and be reviewed from time to time in order to avoid any untoward effects, the Executive Directors concluded that they should continue to be applied where appropriate.
|Net Cumulative |
|Holdings April 30, 1971|
|Col. 3 as Per Cent of Col. 2|
|Net Use (-) |
Net Receipt (+)
|Net receivers||10||1,877||2,454||130.74||+ 576|
|Primary producing countries|
|Less developed areas|
|Total, all countries||110||6,363||5,873||92.30||-4903|
Nonusers are defined as participants that have neither received nor used special drawing rights except in payment of their shares in the annual assessments.
Includes one participant that elected not to receive allocations.
Holdings of the General Account on April 30, 1971.
Nonusers are defined as participants that have neither received nor used special drawing rights except in payment of their shares in the annual assessments.
Includes one participant that elected not to receive allocations.
Holdings of the General Account on April 30, 1971.
See See Annual Report, 1970, page 117.
A11 operations and transactions involving special drawing rights are conducted through the Special Drawing Account. All other operations and transactions of the Fund are conducted through the General Account. Certain operations and transactions are conducted through both Accounts. (See Article XXII, Section 1, of the Fund Agreement.)
Ethiopia, Kuwait, Lebanon, the Libyan Arab Republic, Portugal, Saudi Arabia, and Singapore.
Excluding China, which had elected not to receive allocations.
See Article XXV, Section 3, of the Fund Agreement and Annual Report, 1970, page 29.
The United States used SDR 305 million in the same way in May and July 1971. The recipients were Belgium and the Netherlands.
See above, footnote 2.
In this Report, data on transactions are generally expressed in terms of U.S. dollars, regardless of the currencies in which they took place.
Resolution No. 25-3, adopted February 9, 1970, and a report of the Executive Directors to the Board of Governors on the increase in quotas were reproduced in the Annual Report, 1970, pages 177-84. This Resolution was amended by Resolution No. 25-4 which added Cambodia (now the Khmer Republic) and by Resolution No. 26-1 which added the Yemen Arab Republic to the list of members shown in the Annex to the Resolution.
One member, Nepal, had paid one installment, so that its quota had increased by one fifth of the increase to which it had consented. All other increases were for the full amount.
South Africa consented to the increase in its quota, from $200 million to $320 million, effective July 15, 1971. Portugal had consented to the increase in its quota, from $75 million to $117 million, but the increase had not become effective at the time of the completion of this Report.
Annual Report, 1965, pages 124-32.
Executive Board Decision No. 3150-(70/93), adopted October 23, 1970 and reproduced in Appendix I.
Annual Report, 1970, pages 35 and 175-76.
Annual Report, 1969, pages 38-40, and 1970, page 175.
Executive Board Decision No. 3179-(70/102), adopted November 25, 1970 and reproduced in Appendix I. The Agreement entered into force provisionally on July 1, 1971.
See Annual Report, 1970, page 34-35 and 184-89.
Executive Board Decision No. 3294-(71/22), adopted March 22, 1971 and reproduced in Appendix I.
See Executive Board Decision No. 3153-(70/95), adopted October 26, 1970 and reproduced in Appendix I.