Chapter

Chapter 2 Developments in International Liquidity

Author(s):
International Monetary Fund
Published Date:
September 1972
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Reserve Changes in 1971

Reserve Growth and Composition

International reserves increased in the course of 1971 by an even larger amount than in the previous year, when the increase was already exceptional by any previous standard (Table 6). During these two years, countries’ aggregate official holdings went up from the equivalent of SDR 75 billion to SDR 121 billion, a gain of 61 per cent.1 The accrual of the equivalent of over SDR 29 billion in 1971 greatly exceeded the increase of almost SDR 17 billion in 1970. Despite several months of relative stability, the strong upward trend in reserves continued in the first half of 1972 as a whole. Apart from the allocation of SDR 2.9 billion in January, reserves rose by the equivalent of SDR 4.3 billion in the first quarter and by some SDR 3-4 billion in the second quarter.

Table 6.Reserves, Credit Tranche Positions, and Other Unused Credit Facilities, End of Years, 1952-71(In billions of SDRs)
End of

Year
GoldSDRsReserve

Positions

in Fund
Foreign

Exchange

Adjusted 1
Total

Reserves

Adjusted 1
Credit

Tranche

Positions

in Fund
Other

Unused

Credit

Facilities 2
195233.91.915.751.57.0
195334.31.917.053.27.1
195434.91.818.154.98.6
195535.41.918.555.87.9
195636.12.319.557.97.7
195737.32.318.858.47.1
195838.02.618.859.47.2
195937.93.317.859.012.8
196038.03.620.261.813.6
196138.94.220.763.812.81.7
196239.33.821.364.413.31.4
196340.23.923.667.813.52.0
196440.84.225.070.013.95.8
196541.85.424.471.612.43.8
196640.96.324.671.817.04.5
196739.55.726.771.918.15.3
196838.96.528.473.817.013.1
196939.16.729.675.416.814.3
197037.23.17.743.991.925.014.2
197136.15.96.372.9121.327.211.1
Annual percentage changes
19531.10.88.83.40.7
19541.9-2.46.53.221.0
19551.42.12.21.7-8.5
19561.822.85.13.6-2.6
19573.5-0.3-3.41.0-6.7
19581.910.6-0.21.61.4
1959-0.327.1-5.0-0.676.5
19600.39.813.14.76.7
19612.216.42.93.2-6.43
19621.1-8.72.81.04.2-16.2
19632.43.810.85.31.639.2
19641.55.55.83.32.6193.4
19652.529.4-2.42.3-10.6-35.3
1966-2.317.70.80.337.418.4
1967-3.4-9.210.80.96.217.7
1968-1.412.96.42.6-5.8149.3
19690.53.74.22.2-1.49.3
1970-5.0314.448.521.948.8-1.0
1971-2.888.1-17.566.132.09.0-21.8
Annual compoundrate, 1952-710.336.58.44.67.43
Source: International Financial Statistics and, for “other unused credit facilities,” Fund staff estimates.

Excluding U. S. holdings of foreign exchange and including throughout the period amounts incorporated in published U. K. reserves in 1966 and 1967 from proceeds of liquidation of U. K. official portfolio of dollar securities. The figures for 1971 include the U. K. official assets “swapped forward” with overseas monetary authorities, as reported in U. K. Central Statistical Office, Economic Trends.

Unutilized drawing facilities under swap arrangements and related credit arrangements between central banks and treasuries.

A percentage change cannot be calculated, the base number being zero.

Source: International Financial Statistics and, for “other unused credit facilities,” Fund staff estimates.

Excluding U. S. holdings of foreign exchange and including throughout the period amounts incorporated in published U. K. reserves in 1966 and 1967 from proceeds of liquidation of U. K. official portfolio of dollar securities. The figures for 1971 include the U. K. official assets “swapped forward” with overseas monetary authorities, as reported in U. K. Central Statistical Office, Economic Trends.

Unutilized drawing facilities under swap arrangements and related credit arrangements between central banks and treasuries.

A percentage change cannot be calculated, the base number being zero.

The measurement of reserve growth in 1971 is affected by the widespread realignment of currencies in December of that year, relative to gold and other assets with a fixed gold value held as reserves—special drawing rights (SDRs) and reserve positions in the Fund. In this chapter, the SDR is adopted as the unit of account for valuing both holdings and changes in holdings. Therefore, other components whose value remained fixed in terms of the SDR—gold, reserve positions in the Fund, and claims in currencies whose gold value was not changed or that had an exchange rate guarantee in terms of such currencies—were not affected by the realignment. Certain currencies held in reserves (mainly U. S. dollars) are deemed to have declined in value against SDRs as a result of the realignment by an amount estimated by the Fund staff at the equivalent of SDR 4.7 billion. Other currencies held in reserves are estimated to have risen in value against SDRs as a result of the realignment by the amount of SDR 0.4 billion.2 Thus, the level of the foreign exchange component and hence of total reserves would have been higher by some SDR 4.3 billion, had it not been for the impact of the realignment.

The overall growth in international reserves during 1971 was confined almost entirely to the foreign exchange component, changes in assets in other forms being relatively small and largely offsetting (Table 7 and Chart 4).

Chart 4.Level and Composition of Reserves, End of Period, 1961-First Quarter 1972

(In billions of SDRs)

1 Adjusted reserves; see Table 6.

The world’s official gold holdings remained at SDR 41 billion, a level from which they have not greatly deviated since the end of 1968. The share of the international monetary institutions in this total, however, increased by SDR 1 billion in 1971, reducing the amount held by national authorities to SDR 36 billion. Gold transactions with member countries added a net amount of SDR 0.4 billion to the Fund’s holdings. The Fund’s acquisitions comprised SDR 0.5 billion obtained through members’ repurchases of their currencies, SDR 0.1 billion in Fund purchases of gold with currency from South Africa, and a further SDR 0.1 billion received from gold subscriptions. Sales of gold by the Fund for replenishment (SDR 0.4 billion), together with minor transactions, partly offset these acquisitions.3 Countries’ transactions with the Bank for International Settlements reduced country holdings by a net amount of SDR 0.6 billion, a considerably larger sum than in any other recent year.

The second allocation of special drawing rights at the beginning of 1971 added SDR 2.9 billion to countries’ holdings. Net transfers of some SDR 0.2 billion to the General Account of the Fund during the year raised holdings in the General Account to about SDR 0.5 billion, leaving SDR 5.9 billion of the total allocated up to the end of 1971 in the hands of national authorities.

Reserve positions in the Fund fell by SDR 1.3 billion in 1971, canceling out the rise that had occurred over the previous two years. The decline resulted from a reduction of SDR 1.9 billion in the outstanding use of the Fund’s resources in the credit tranches. This reduction predominantly reflected large repurchases of their own currencies by France and the United Kingdom. However, other transactions through the General Account, on balance, tended to limit the decline in members’ reserve positions in the Fund.

Although gold, SDRs, and reserve positions in the Fund comprised slightly over one half of the world’s stock of international reserves at the end of 1970 (Table 8), those elements made very little net contribution to the striking increase in the total stock that took place during 1971. The expansion was thus concentrated in the remaining component, foreign exchange holdings, which rose by SDR 29 billion. The magnitude of this increase was unprecedented, being double the previous record accrual of SDR 14 billion in 1970. It marked a rise of 66 per cent in currency claims and brought the proportion of such claims in total reserves up to 60 per cent.

Table 8.Percentage Composition Of Adjusted Global Reserves End of 1951, 1961, 1969, 1970, 1971 and First Quarter 19721
First

Quarter
195119611969197019711972
Gold66.861.051.940.529.827.7
SDRs3.44.86.9
Reserve positions
in the Fund3.46.58.98.45.24.9
Foreign exchange29.832.539.247.860.160.5
Total100.0100.0100.0100.0100.0100.0
Source: International Financial Statistics.

For the nature of the adjustments, see Table 6, footnote 1.

Source: International Financial Statistics.

For the nature of the adjustments, see Table 6, footnote 1.

The financing of the U. S. deficit on an official settlements basis (Table 9) played an even more dominant role in generating the expansion in 1971 than it had in 1970. This deficit, excluding the allocation of SDR 0.7 billion to the United States in special drawing rights, totaled SDR 30.5 billion in 1971 at the prerealignment equivalent. In financing the deficit, the U. S. authorities made net use of their holdings of reserve assets to the extent of SDR 3.1 billion, with virtually all the rundown occurring before August 15. The remainder of the deficit, equivalent to SDR 27.4 billion, had its counterpart in an increase in U. S. liabilities to foreign official holders and thus in an increase in world reserves, after allowing for the impact of the realignment.

Table 9.U.S Balance OF Payments And Its Financing(In billions of SDRs)
19671968196919701971 1
Balance on goods and services3.91.30.72.2-0.8
Transfers and long-term capital-7.1-2.7-3.6-5.2-8.5
Basic balance-3.2-1.3-2.9-3.0-9.3
Short-term capital (including banking liabilities) 2-0.23.05.6-7.6-21.2
Official settlements balance-3.41.62.7-10.7-30.5
Financed by
Reserve liabilities (decrease —)3.4-0.8-1.57.327.4
Reserve assets (increase —)
Gold1.21.2-1.00.80.9
SDRs0.5
IMF gold tranche-0.1-0.9-1.00.41.3
Foreign exchange-1.0-1.20.82.20.4
Total reserve asset transactions0.1-0.9-1.23.43.1
Memorandum item: SDR allocation (—)-0.9-0.7
Reserve chanee including SDR allocation
(increase —)0.1-0.9-1.22.52.3
Source: U. S. Department of Commerce, Survey of Current Business.

The U. S. dollar value of these transactions over 1971 has been used as an approximation of their value in terms of SDRs.

Official settlements balance less basic balance.

Source: U. S. Department of Commerce, Survey of Current Business.

The U. S. dollar value of these transactions over 1971 has been used as an approximation of their value in terms of SDRs.

Official settlements balance less basic balance.

The huge increment in official claims on the United States tends to overshadow developments in other kinds of foreign exchange holdings, which, by the standards of comparison prevailing before 1970, could otherwise be considered quite significant. Official holdings of the other principal reserve currency, sterling, continued the strong upward trend that they had shown in the previous two years, after the network of sterling agreements arrested their decline in 1968. Not only did the overseas sterling area countries, whose aggregate reserves continued to show strong growth, add SDR 1.1 billion to their sterling holdings but other countries also increased their holdings by more than SDR 0.4 billion. Official deutsche mark claims held in Germany, which had undergone a substantial expansion in 1970, were actually reduced in 1971 by almost SDR 0.4 billion, excluding the revaluation gain that accrued on them. Aggregate reserves denominated in deutsche mark, however, including those held in the Euro-currency market, increased over the year.

Available evidence suggests a substantial proliferation of holdings in forms that have not been usual in the past. The difference between official foreign exchange assets, as reported by the holders of these assets, and the identified liabilities that are their counterpart rose by some SDR 5.2 billion in 1971 after allowing for the impact of the realignment (see line 4.g of Table 7). Since this amount is derivable only as a residual, it is affected by any errors or asymmetries in the reported and estimated figures for other reserve assets and liabilities. Nevertheless, direct information, although incomplete, makes it apparent that the bulk of this increase took the form of claims on countries whose currencies were not widely held as reserves in previous years and Euro-market claims denominated in currencies other than the U. S. dollar, notably the deutsche mark.

In line with the greater emphasis given to holdings of currencies other than the U. S. dollar, virtually no further net placement of official funds in the Euro-dollar market took place in 1971 (Table 10). The expansion of holdings in that market, amounting to an estimated SDR 5 billion, had been one of the most notable developments affecting international reserves in 1970. In the second quarter of 1971, the central banks of the major industrial countries decided, for the time being, not to place additional funds in Euro-currency markets and to withdraw such funds when prudent in the light of market conditions. Over the year, these countries appear to have shifted into other assets some SDR 1.5 billion of Euro-dollar deposits, well over half of the amount of the placements they had made during 1970. Other countries, however, did not follow the same practice; their Euro-dollar holdings in fact increased by another SDR 1.6 billion.

Country Distribution

As might be expected when a single country had as large a payments deficit as that of the United States in 1971, countries recording reserve gains far outnumbered those experiencing losses. In fact, three fourths of the some 120 countries that report data to the Fund had gains in gross reserves (measured in terms of SDRs) over the course of the year. Nevertheless, the bulk of the increase was heavily concentrated in a few countries, namely, those countries with relatively large reserve holdings whose balance of payments experience was unusually favorable during 1971. (See Chapter 1.)

While reserve gains in particular countries tend to be related to balance of payments surpluses, the correspondence—even outside the United States where surpluses are more likely to result in a decline in liabilities to official holders—is not necessarily very precise. Surpluses may be financed, for example, by a reduction in the use made of Fund credit or swap arrangements, rather than by an accrual of reserve assets. During 1971, French and U. K. repayments to the Fund and the U. K. settlement of its remaining indebtedness (equivalent to SDR 1 billion) under inter-central-bank arrangements were important instances of this kind of financing by major surplus countries.

Further, changes in a country’s own liabilities, when held as reserve assets by other countries, may affect the relationship between reserve changes and the balance of payments. The large increase during 1971 in such liabilities of the United Kingdom, which has already been noted, augmented the increase in reserve assets that came about in the course of financing the surplus of that country. The allocation of SDRs is also a source of reserve growth that is not related to surpluses earned on current and nonreserve capital account. Finally, in 1971 the currency realignment had the effect of reducing, by the equivalent of SDR 4.3 billion, the level of reserves that would otherwise have been attained through balance of payments transactions.

The degree of concentration of gross reserve gains in a few countries is suggested in Table 11. An attempt is also made in that table to indicate the relative importance of current account transactions and nonreserve capital flows as sources of reserve growth during 1971. The increase in the combined reserve assets of the 11 countries listed amounted to over SDR 27 billion, equal to about 93 per cent of the global increase. While capital inflows, mainly in liquid forms, were the preponderant factor producing the surpluses in these countries as a group, several countries also recorded very large surpluses on current transactions. The experience of individual countries did not follow any single pattern. In some, notably Japan and the United Kingdom, large surpluses in both current and capital transactions combined to bring about very large reserve gains. However, instances in which the behavior of either the current or the capital account was the decisive element were perhaps even more common.

Table 11.Major Reserve Increases by Principal Source, 1971(In billions of SDRs)
Increase

in Ad-justed

Reserve

Assets1
Current

Account

Surplus

(Deficit -)2
Net

Capital

Inflow

(Outflow -)3
Reconciliation

Items 4
Japan9.35.94.3-0.9
United
Kingdom5.32.33.8-0.9
Germany3.30.24.1-1.0
France2.60.82.4-0.6
Australia1.4-0.92.2
Switzerland1.30.10.60.5
Spain1.20.80.6-0.2
Italy0.91.8-0.8-0.1
Libyan Arab
Republic0.80.80.1
Saudi Arabia0.70.10.7-0.1
Canada0.60.20.5-0.2
Total 11
countries27.312.118.6-3.5
All countries29.4
Source: International Financial Statistics, and Fund staff information and estimates.

The concept of “adjusted reserve assets” is the oneused in Table 6; see especially footnote 1 to that table.

Balance on goods, services, and official and private transfers.

Recorded movements of capital (excluding official reserves and related assets and liabilities) and net errors and omissions.

Difference between the increase in adjusted reserve assets and the balance on current and capital account. The difference arises from the allocation of SDRs, the appreciation or depreciation of reserve asset stocks in terms of SDRs, the use (or repayment) of Fund credit and other conditional liquidity, changes in official monetary assets not included in the reserves, and changes in liabilities to foreign official holders.

Source: International Financial Statistics, and Fund staff information and estimates.

The concept of “adjusted reserve assets” is the oneused in Table 6; see especially footnote 1 to that table.

Balance on goods, services, and official and private transfers.

Recorded movements of capital (excluding official reserves and related assets and liabilities) and net errors and omissions.

Difference between the increase in adjusted reserve assets and the balance on current and capital account. The difference arises from the allocation of SDRs, the appreciation or depreciation of reserve asset stocks in terms of SDRs, the use (or repayment) of Fund credit and other conditional liquidity, changes in official monetary assets not included in the reserves, and changes in liabilities to foreign official holders.

The emphasis given to the role of a few countries, and the fact that the reserve gains recorded by these countries virtually matched the total for the world as a whole, does not mean that these were the only countries that had balance of payments surpluses. For the more than 100 countries reporting balance of payments data to the Fund for 1971, the aggregate amount of overall surpluses (measured by changes in reserves and related assets inclusive of SDRs received through allocation, changes in the use of Fund credit, and changes in other official monetary liabilities) for those countries that showed a surplus was almost SDR 40 billion. On the other hand, apart from the U. S. deficit of SDR 30 billion, other countries reported overall deficits amounting to almost SDR 2.0 billion, with 6 countries contributing SDR 1.4 billion to this total. The net excess of recorded surpluses over recorded deficits, amounting to some SDR 8 billion, was mainly attributable to the allocation of SDRs (SDR 2.9 billion) and, as was indicated in Chapter 1, to the placement of official reserves in Euro-currency markets (SDR 5.4 billion).

Reserve growth during 1971 was concentrated, by and large, on the same few countries that had added large amounts to their reserves in 1970. The pattern of distribution among world areas was thus strongly affected by developments in these two years (Table 12). The proportion of world reserves held by industrial countries, other than the United States, grew from 50 per cent of the total at the end of 1969 to 63 per cent at the end of 1971. The proportion held by the United States, on the other hand, went down from nearly 19 per cent to 10 per cent. The reserves of the more developed primary producing countries as a group just about kept pace with the global trend, thus maintaining a constant share of 10 per cent. The less developed primary producing countries did not fare as well; their ratio declined, over this period, from nearly 21 per cent to just over 17 per cent. If the oil producing countries in this category are excluded, the decline was more marked—i.e., from over 15 per cent to 11 per cent.

Table 12.Countries’ Official Reserves, Adjusted, 1960, 1964, and 1969-First Quarter 19721(In millions of SDRs)
Total at End of PeriodComposition of Reserves at End of March 1972
Reserve
MarchpositionsForeign
196019641969197019711972GoldSDRsin the FundExchange
Industrial Countries
United States19,35916,24014,18313,85811,89112,0589,6621,810586
United Kingdom5,0943,6902,5272,8278,1368,5407529216,867
Total24,45319,93016,71016,68520,02620,59810,4142,7315866,867
France2,2725,7243,8334,9607,6027,8003,5235274493,302
Germany7,0337,8827,12913,61016,94018,1864,0776351,09112,384
Italy3,2513,8245,0455,3526,2516,1292,8843403562,549
Belgium and Netherlands3,3674,5714,9176,0816,6957,4003,4521,1181,2391,590
Switzerland2,3243,3214,4255,1326,4166,2122,9093,303
Other industrial Europe 21,8433,3183,3933,8204,9305,3401,0323533613,594
Total, industrial Europe20,09028,64028,74238,95548,83451,06917,8762,9733,49826,722
Canada1,9982,8903,1064,6795,2515,4257944883453,797
Japan1,9492,0193,6544,84014,14815,34973542452013,669
Total, industrial countries48,49053,47952,21265,15988,25992,44129,8196,6174,94951,057
Primary Producing Countries
More developed areas
Other European countries 32,3483,9074,8695,6928,1129,0421,8803282766,558
Australia, New Zealand, and South Africa1,3132,6862,7722,8313,9984,7536653222983,466
Total, more developed areas3,6616,5937,6418,52312,11013,7942,54565057510,024
Less developed areas
Western Hemisphere 42,9622,8434,4705,6425,8956,2961,0136543694,260
Middle East 51,4142,3213,0373,1184,7155,2971,008134894,066
Asia 63,0713,0984,8185,1535,1405,4646725101924,089
Africa 72,0581,5833,0954,1744,7155,0564012851614,209
Total, less developed areas 89,6019,91515,56918,21120,93022,2253,2051,58381216,625
Memorandum item:
of whichselected oil exporting countries92,4632,6444,0234,7607,5357,7071,1802992385,992
Grand Total61,75269,98975,42291,893121,299128,46035,5708,8486,33677,706
Source: International Financial Statistics.

For the nature of the adjustments, see footnote 1 to Table 6. Totals may not add because of rounding and because some area totals include unpublished data.

Austria, Denmark, Luxembourg, Norway, and Sweden.

Finland, Greece, Iceland, Ireland, Malta, Portugal, Spain, Turkey, and Yugoslavia.

Argentina, Bolivia, Brazil, Central America, Chile, Colombia, the Dominican Republic, Ecuador, Guyana, Haiti, Jamaica, Mexico, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela.

Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Saudi Arabia, the Syrian Arab Republic, and, since 1970, the People’s Democratic Republic of Yemen.

Afghanistan, Burma, Ceylon, China, India, Indonesia, Korea, Malaysia, Nepal, Pakistan, the Philippines, Singapore, Thailand, and Viet-Nam and, for the Khmer Republic and Laos, only SDRs and reserve positions in the Fund.

Excluding Egypt and South Africa.

Includes residual.

Algeria, Indonesia, Iran, Iraq, Kuwait, the Libyan Arab Republic, Nigeria, Saudi Arabia, Trinidad and Tobago, and Venezuela.

Source: International Financial Statistics.

For the nature of the adjustments, see footnote 1 to Table 6. Totals may not add because of rounding and because some area totals include unpublished data.

Austria, Denmark, Luxembourg, Norway, and Sweden.

Finland, Greece, Iceland, Ireland, Malta, Portugal, Spain, Turkey, and Yugoslavia.

Argentina, Bolivia, Brazil, Central America, Chile, Colombia, the Dominican Republic, Ecuador, Guyana, Haiti, Jamaica, Mexico, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, and Venezuela.

Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Saudi Arabia, the Syrian Arab Republic, and, since 1970, the People’s Democratic Republic of Yemen.

Afghanistan, Burma, Ceylon, China, India, Indonesia, Korea, Malaysia, Nepal, Pakistan, the Philippines, Singapore, Thailand, and Viet-Nam and, for the Khmer Republic and Laos, only SDRs and reserve positions in the Fund.

Excluding Egypt and South Africa.

Includes residual.

Algeria, Indonesia, Iran, Iraq, Kuwait, the Libyan Arab Republic, Nigeria, Saudi Arabia, Trinidad and Tobago, and Venezuela.

Within these broad economic groups, the experience of geographic subgroups and of individual countries showed much diversity. The reduction in the proportion of world reserves held by the less developed primary producing countries was most marked in the Asian and Western Hemisphere areas. The Asian area, in fact, showed only a negligible increase from 1969 to 1971 in the absolute size of its holdings, an experience that was also rather widely prevalent among individual countries in the area. In the Middle East and Africa, strong reserve gains by the oil producing members, which as a group virtually doubled their reserves in the span of only two years, served to maintain the share of the world total held by these two areas.

Factors Affecting the Adequacy of Reserves

The rapid growth of international reserves since 1969 has altered the tendency toward the increasing scarcity of reserves that had characterized the period from 1964 to 1969. However, it is difficult to make any precise appraisal of the degree of reserve ease achieved in 1971, a time when international payments were in major disequilibrium, in which shifts of mobile capital played an important role, and the international monetary system was in a state of flux. Two methods of assessing changes in reserve adequacy may be considered: the first examines the supply of official reserves in relation to the need for them as evaluated by statistical procedures; the second points to certain symptoms and effects, chiefly effects on policies, from which changes in global reserve ease may be inferred.

Recent Development of the Supply of Official Reserves Compared with the Need

The development of the need for official reserves over time can be illustrated by the variation in ratios of reserves to various economic aggregates that are customarily thought to provide an indication of changes in the need for reserves. The ratio most commonly used for this purpose is that of reserves to imports. Chart 5 shows the development over the period 1954-71 of the ratio of reserves to imports for 60 countries combined. Following an almost continuous decline, there was a substantial increase from 1970 to 1971, bringing the ratio in 1971 to a level slightly higher than that of 1968, a year in which, as analyzed on page 27 of the 1969 Annual Report, global reserve ease was judged to have become less than adequate. At the end of 1971, reserves were some SDR 17 billion in excess of the amount that would be obtained by applying the 1968 ratio to the trend level of imports for the end of 1971.

Chart 5.Ratio of Aggregate Reserves to Aggregate Imports of 60 Countries, 1954-71 1

(In per cent)

1 Reserves are annual averages of monthly data.

The behavior of the ratio of reserves to imports suggests that the degree of reserve ease has recently stopped its decline and has thereafter increased considerably. However, these statistical comparisons leave out of account some important factors affecting the adequacy of global reserves in present circumstances. Four of these factors deserve special attention.

1. The degree of reserve ease experienced over the last two years was attributable not only to the level of reserves but also to the high rate of increase in reserves during these years.

2. As already indicated, the major part of the reserve increases of 1970 and 1971 accrued to a small number of industrial countries, particularly Japan and Germany, that already had relatively large reserves. This concentration somewhat reduces the significance for global reserve ease of the expansion in world reserves for two reasons. First, the resulting unevenness in the distribution of world reserves itself tends to reduce the global reserve ease attributable to a given total. Second, the massive accumulation of reserves in the countries in question was to a large extent associated with an inflow of short-term funds, including a transfer of private balances previously held in the United States, which were at least partly of a speculative and hence reversible nature. The possibility of such a reflux must be regarded as a contingent charge on the reserves of those countries.

3. The international mobility of capital, particularly in the form of private short-term balances, has increased since the end of the 1950s—an increase that appears to have accelerated in recent years, partly as a result of the growth of Euro-currency markets. The growing mobility of capital may have somewhat improved countries’ ability to finance balance of payments deficits by borrowing. However, this effect of capital mobility is likely to have been outweighed so far as global reserve ease is concerned by its effect in increasing potential payments deficits, and therefore the need for reserves (or for special credit facilities).

4. As at least a partial offset to this, enhanced flexibility of exchange rates may permit a certain economy in the use of reserves through inducing equilibrating and impeding disequilibrating movements of short-term funds. Apart from a possible increase in the tendency to allow exchange rates to float or to adjust exchange rates more promptly in response to market pressures, many countries utilize margins that are considerably wider than those that were customarily maintained before the exchange rate realignment of December 1971. At present, experience with the system of wider margins is not yet sufficient to make an adequate assessment of its effects on the need for reserves. The same conclusion holds for the effect on global reserve ease of the tightening of capital controls observed in some industrial countries over the last two years.

Manifestations of Changes in Reserve Ease

The approach to the assessment of the adequacy of reserves pursued in the preceding sub-section can be supplemented by one based on the observation of the manifestations of changes in reserve adequacy. As discussed in the 1971 Annual Report, an increase in global reserve ease would tend, over time, to bring about: (1) reduced reliance on restrictions on imports and payments, (2) an increase in the volume or a reduction in the tying of aid, (3) a reduced propensity for countries to devalue their currencies and an increased willingness to undertake revaluations, and (4) a reduced reliance on balance of payments credits. In the light of more recent circumstances, it would be appropriate to add, as one of the symptoms of an increase in reserve ease, the imposition of restrictions on capital inflows. Moreover, an increase in reserve ease may cause countries to pursue somewhat more expansionary demand policies than would be appropriate in the light of the domestic economic situation alone and a reduction in reserve ease would tend to induce somewhat more contractionary policies than would otherwise be called for.

In 1971 and the early part of 1972 there was only limited resort to increased use of restrictions on outward payments, although resort to multiple currency practices may have increased somewhat. In many instances where new restrictions were introduced or tightened, this was primarily related to a slowing of the growth of exports or to depressed or declining prices of primary products.4 In several countries “reverse” restrictions, designed to reduce the inflow of capital, were introduced or strengthened during 1971 and the first half of 1972. Moreover, separate exchange rates for capital transactions were applied by Belgium and France during this period for the purpose of limiting capital inflows.

Official development aid from countries of the Development Assistance Committee has been declining as a percentage of GNP since the mid-1960s. This decline appears to have been arrested in 1971. While a number of aid donors have in the last three years introduced measures to mitigate the adverse effects on recipients of their tying practices, most official development assistance remains subject to tying restrictions. Negotiations aiming at a general untying of development loans were no longer pursued after mid-August 1971.

As regards the balance between devaluations and revaluations, the exchange rate appreciations or upward floats of Canada in 1970 and Austria, Germany, the Netherlands, and Switzerland in May 1971 followed by those of most other industrial countries after August 1971 provide evidence of an increase in reserve ease for these countries, while the suspension of convertibility by the United States, which may be regarded as analogous to downward floating, and a number of devaluations by developing countries, provide evidence in the opposite sense. In June 1972 the United Kingdom and a number of other countries in the sterling area had resort to a floating rate which resulted in a depreciation of their currencies.

Reliance on balance of payments credits was reduced in the course of 1970 and 1971. As was indicated in Table 7, net use of IMF credit (i.e., outstanding drawings in the credit tranches) declined in 1970 and even more in 1971. Partly responsible for this development were large repayments of outstanding drawings by France and the United Kingdom. However, new credit tranche drawings by all groups of countries also were unusually low, reflecting, at least in part, uncertainty about exchange rate developments in general and about the dollar price of gold in particular. Amounts outstanding under swap facilities or related credit facilities of central banks and treasuries declined substantially in 1970 and continued to decline in 1971.

The divergence of countries’ demand management policies from what might be regarded as optimal in the light of domestic developments alone is another possible symptom of reserve shortage or excess, but one that is extremely difficult to assess. As described in Chapter 1, prices, particularly in industrial countries, started to rise at an undesirably high rate in 1969. This increase accelerated in 1970 and at the beginning of 1971, but lessened somewhat toward the end of 1971 and in the first few months of 1972, partly as a result of measures of price and incomes policy. In view of this sequence of events, compared with the timing of reserve increases, it is difficult to attribute primary responsibility for recent price movements to recent reserve developments, since the upward thrust of prices started at the end of a period of extremely slow reserve growth and preceded, rather than followed, the sharp rise in reserves in 1971. This does not preclude the possibility that conditions of reserve ease, where they existed, may have affected the strength of resistance against price changes. Policies tending to reduce inflationary pressures were acknowledged to be desirable for domestic reasons in most countries during this period. However, since unemployment tended to remain high or even to increase in many major countries, the design of policies had in some instances to achieve a compromise between the goals of price stability and full employment. Failure to counteract recent inflationary developments more effectively must be ascribed more to the conflict of the targets of price stability and full employment, as well as to the inadequacy of the available policy instruments, than to any lack of concern, caused by a high degree of reserve ease, over the goal of price stability.

As in previous Annual Reports, this chapter is directed to official reserve holdings and not to private holdings (the effect of which on international liquidity may need further study). The concept of reserves used covers SDRs, reserve positions in the Fund, and official holdings of gold and foreign exchange, except for the foreign exchange holdings of the United States. These are mainly the counterpart of the use of swaps by other countries and could not generally be drawn upon to finance U. S. deficits. Such holdings had in any event been reduced to a very low level by the end of 1971, so that adjusted world reserves on that date did not differ significantly from the un adjusted figure.

The impact of the realignment on the SDR value of currency holdings has been calculated by applying to the amount of such holdings at the time of there alignment the difference between the post realignment and the prerealignment SDR equivalents of the cur-rencies concerned. The post realignment SDR equivalent was based, for the U. S. dollar, on the rate of $38 perfine ounce of gold and, for other currencies, on the postrealignment par values and central rates. The pre-realignment SDR equivalents were based generally on prerealignment par values.

These Fund transactions are described, on a fiscal-year basis, in Chapter 3 and Appendix Table I.16.

See Twenty-ThirdAnnualReportonExchange Restrictions (Washington, 1972), page 2.

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