Chapter

Chapter 2 Developments in International Liquidity

Author(s):
International Monetary Fund
Published Date:
September 1974
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Reserve Changes in 1973

Reserve Growth and Composition

THE stock of international reserves increased during 1973 by the equivalent of SDR 6.9 billion, after growing by more than SDR 70 billion during the previous three-year period (Table 10). Aggregate holdings of all countries reached the equivalent of SDR 153 billion at the end of 1973, which was slightly more than twice their level at the beginning of 1970.1 The rise of 4.7 per cent in this latest year was quite small in the context of recent experience; viewed in longer perspective, it was comparable with the growth rates of 3 to 6 per cent reached during 5 of the 10 years before 1964. For the first half of 1974, preliminary indications are that official holdings increased by some SDR 12 billion or more. The reserves of the major oil exporting countries as a group appear to have more than doubled, while the net change for all other countries combined is likely to have been quite small. In particular, complete reports for the industrial countries show that this group’s reserves, which account for a substantial share of the world total, were much the same at the end of June 1974 as they had been six months earlier. Partial data for the developing countries other than the oil exporters suggest some increase in the holdings of that group during the period.

Table 10.Reserves, Credit Tranche Positions, and Other Unused Credit Facilities, End of Years, 1954-73
GoldSDRsReserve Positions in FundForeign Exchange Adjusted1Total Reserves Adjusted1Credit Tranche Positions in FundOther Unused Credit Facilities2
In billions of SDRs
195434.91.918.154.97.8
195535.41.918.555.97.8
195636.12.319.557.87.5
195737.32.318.858.57.1
195838.02.618.859.47.2
195937.93.317.859.012.9
196038.03.620.261.813.6
196138.94.220.863.812.81.7
196238.93.821.364.013.31.4
196340.23.923.767.813.42.0
196440.84.225.070.013.85.8
196541.85.424.471.612.33.8
196640.96.324.671.817.04.5
196739.55.726.771.918.15.3
196838.96.528.573.917.013.1
196939.16.729.675.516.814.3
197037.23.17.744.192.125.014.2
197136.15.96.473.8122.127.211.1
197235.78.76.395.2145.927.712.3
197335.88.86.2102.1152.827.919.6
Annual percentage changes
19551.41.92.31.70.5
19561.821.25.13.6−4.3
19573.51.5−3.51.1−4.7
19581.910.6−0.31.61.4
1959−0.327.0−5.0−0.677.6
19600.39.913.14.76.1
19612.216.52.93.2−6.43
1962−8.72.90.44.3−16.2
19633.53.811.06.00.839.2
19641.55.45.63.22.8193.4
19652.529.4−2.32.4−10.7−35.3
1966−2.317.80.70.338.318.4
1967−3.4−9.28.60.26.117.7
1968−1.412.96.72.7−5.8149.3
19690.53.74.02.1−1.39.3
1970−5.0314.448.922.048.8−1.0
1971−3.088.1−17.567.332.59.0−21.8
1972−0.947.8−0.528.919.51.910.5
19731.4−2.57.34.70.659.9
Annual compound
rate, 1954-730.136.59.55.56.83
Sources: 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. The figures for 1973 include official French claims on the European Monetary Cooperation Fund.

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.

Sources: 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. The figures for 1973 include official French claims on the European Monetary Cooperation Fund.

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 net expansion in official reserves in 1973 came about in spite of a devaluation of the U. S. dollar that considerably reduced the value of the reserve stock in terms of special drawing rights (SDRs), the unit in which the reserve statistics have been expressed.2 In February, the value of the U. S. dollar was reduced de facto by 10 per cent in terms of gold and of other assets held as reserves that had a fixed gold value, notably special drawing rights and reserve positions in the Fund. As a result, official U. S. dollar holdings—including both dollars held in the United States and Euro-dollar holdings—have declined in value against SDRs. The reduction in the SDR value of such assets—and hence the reduction in the total reserve stock—has been estimated by the Fund staff at the equivalent of some SDR 8.6 billion.

Countries’ net use or acquisition of reserve components other than foreign exchange, which from 1970 onward had tended to become only a minor factor in explaining overall reserve developments, played an even less important role in 1973 (Table 11 and Chart 6). Central banks engaged in few gold transactions, either between themselves or with the Fund, because of the wide disparity between the official gold price and the price on the private market.3 No further allocation and no cancellation of SDRs took place after the first basic period ended in 1972, although participants’ holdings of SDRs increased by SDR 121 million as the result of transfers from the Fund’s General Account, mostly because of purchases for purposes of reconstitution. The resulting increase in the General Account’s holdings of currencies, together with a small net reduction in the use of Fund credit and some other minor transactions, reduced members’ reserve positions in the Fund by SDR 157 million. Virtually the whole rise in countries’ reserves was thus directly attributable to the foreign exchange element, which by the end of 1973 accounted for as much as two thirds of the total stock (Table 12).

Table 11.Sources of Reserve Change, 1964-731(In billions of SDRs)
Outstanding
Totals at the
Annual Changes in1964196519661967196819691970197119721973End of 1973
1.Gold Reserves
Monetary gold0.70.2−1.6−0.70.10.3−0.10.2
Gold transactions (acquisitions—)
by IMF, BIS, and European Fund−0.10.8−0.90.20.10.1−2.2−1.0−0.5
Countries’ gold reserves0.61.0−0.9−1.4−0.60.2−2.0−1.1−0.335.8
2.Special Drawing Rights
Allocation of SDRs3.43.03.0
IMF holdings of SDRs (increase—)−0.3−0.2−0.10.1
Countries’ SDR holdings3.12.82.80.18.8
3.Reserve Positions in the Fund
Use of IMF credit0.41.6−0.51.20.3−0.8−1.9−0.3−0.1
IMF gold transactions (inflow +)2−0.1−0.31.00.1−0.41.60.40.1
IMF transactions in SDRs (inflow +)0.30.20.1−0.1
IMF surplus (increase—)−0.1−0.1−0.1−0.1−0.1−0.1
Reserve positions in the Fund0.21.21.0−0.60.70.21.0−1.3−0.2‘ 6.2
4.Foreign Exchange Holdings
a. Official claims on United States3
U. S. deficit on official settlements41.51.3−0.23.4−1.6−2.710.730.510.24.9
U. S. reserve assets (including
foreign exchange) used in
transactions with countries−0.2−1.2−0.7−0.10.91.3−2.9−3.05−0.2−0.2
Official claims on United States31.4−1.03.3−0.8−1.57.827.4510.04.7655.4
b. Official sterling claims on United
Kingdom−0.1−0.4−0.1−0.57−0.50.80.51.70.60.26.5
c. Official deutsche mark claims on
Germany0.10.10.10.10.8−0.450.1−0.70.6
d. Official French franc claims on
France−0.10.10.1−0.280.20.20.30.21.3
e. Foreign exchange claims arising
from swap credits and related
assistance0.4−0.30.70.91.2−0.1−2.2−0.70.590.59
f. Correction for effect of valuation
changes on stock of reserves10−0.8−0.1−4.4−8.6
g. Identified official holdings
of Euro-dollars11−0.10.50.21.61.05.61.156.82.0617.8
h. Identified official holdings)
of other Euro-currencies1.91.75.3
i. Residual sources of reserves12)−0.40.2−0.2−1.070.11.181.84.751.67.0614.9
Countries’ holdings of foreign
exchange1.3−0.60.22.11.81.214.529.721.37.0102.1
Total reserve change2.21.70.20.12.01.616.630.023.86.9152.8
Sources: International Financial Statistics and Fund staff information and estimates.

Adjusted reserves. See footnote 1, Table 10.

Variations in IMF gold investments and gold deposits are excluded because they do not give rise to net creditor positions in the Fund.

Covers only claims of countries, including those denominated in the claimants’ own currency.

Unlike the other components of reserve growth, the deficit is already a flow concept and therefore is not expressed as a change from the previous year. The U. S. deficit is shown before allocations of SDR 0.9 billion in 1970 and SDR 0.7 billion in both 1971 and 1972.

Excluding the estimated impact of the December realignment on the value of amounts outstanding at that time.

Excluding the estimated impact of the February devaluation of the U. S. dollar on the amounts outstanding at that time.

Excluding the estimated impact of the November devaluation of the pound sterling on the amounts outstanding at that time.

Excluding the estimated impact of the August devaluation of the French franc on the amounts outstanding at that time.

Comprises official claims on the European Monetary Cooperation Fund.

For explanation, see page 30 above and page 25, footnote 2, of the Annual Report, 1972.

See Table 15 for more details concerning these Fund staff estimates.

Includes asymmetries arising from the fact that data on U. S. and U. K. currency liabilities are more comprehensive than data on official foreign exchange holdings shown in International Financial Statistics. Table 15 provides more details.

Sources: International Financial Statistics and Fund staff information and estimates.

Adjusted reserves. See footnote 1, Table 10.

Variations in IMF gold investments and gold deposits are excluded because they do not give rise to net creditor positions in the Fund.

Covers only claims of countries, including those denominated in the claimants’ own currency.

Unlike the other components of reserve growth, the deficit is already a flow concept and therefore is not expressed as a change from the previous year. The U. S. deficit is shown before allocations of SDR 0.9 billion in 1970 and SDR 0.7 billion in both 1971 and 1972.

Excluding the estimated impact of the December realignment on the value of amounts outstanding at that time.

Excluding the estimated impact of the February devaluation of the U. S. dollar on the amounts outstanding at that time.

Excluding the estimated impact of the November devaluation of the pound sterling on the amounts outstanding at that time.

Excluding the estimated impact of the August devaluation of the French franc on the amounts outstanding at that time.

Comprises official claims on the European Monetary Cooperation Fund.

For explanation, see page 30 above and page 25, footnote 2, of the Annual Report, 1972.

See Table 15 for more details concerning these Fund staff estimates.

Includes asymmetries arising from the fact that data on U. S. and U. K. currency liabilities are more comprehensive than data on official foreign exchange holdings shown in International Financial Statistics. Table 15 provides more details.

Chart 6.Level and Composition of Reserves, End of Period, 1963-First Quarter 1974

(In billions of SDRs)

1 Adjusted reserves; see Table 10.

Table 12.Composition of Adjusted Global Reserves, End of 1950, 1960, and 1970-First Quarter 19741(In per cent)
First Quarter
1950196019701971197219731974
Gold68.961.640.429.524.523.423.1
SDRs3.44.86.05.85.7
Reserve positions in the Fund3.55.88.45.24.34.04.0
Foreign exchange27.632.647.960.565.266.867.2
Total100.0100.0100.0100.0100.0100.0100.0
Source: International Financial Statistics.

For the nature of the adjustments, see footnote 1, Table 10.

Source: International Financial Statistics.

For the nature of the adjustments, see footnote 1, Table 10.

The net accrual of foreign exchange reserves during 1973 was very unevenly spread over the course of the year. Changes in holdings from month to month or even from quarter to quarter are not necessarily indicative of significant trends because movements over these short periods are often greatly distorted by factors that prove to be temporary or reversible. These factors include seasonal strength or weakness in the balance of payments, especially in the trade and services items; swaps between the monetary authorities and the commercial banks at certain accounting dates, undertaken for such purposes as window dressing or adjustment to domestic liquidity requirements; sporadic official borrowings; and exchange market intervention to counter speculative capital flows, together with arrangements made between monetary authorities for financing such intervention. Nevertheless, the pattern for 1973 clearly suggests a definite slackening in the rate of reserve growth and, indeed, a reversal during the year from a very high rate in the first months to a negative rate toward the end. An accumulation of over SDR 11 billion in foreign exchange holdings occurred in the first quarter, the greater part being offset by the reduction in value of the dollar-denominated portion of those holdings that resulted from the devaluation of that currency in February. The second and third quarters saw a further increase in foreign exchange reserves totaling just over SDR 7 billion. In the final quarter, however, a decline set in that reduced the aggregate by more than SDR 3 billion.

This sequence of events was to some extent paralleled by developments in the “official settlements” balance of the United States and its financing (Table 13). Of those sources that can be identified, the financing of the imbalance between the United States and other countries made the largest contribution to reserve change during 1973, but its influence diminished greatly compared with previous years. During the three-year period 1970-72, the global financing of all countries’ overall payments imbalances (that is, all sources other than valuation changes) had added an average of SDR 23.3 billion annually to countries’ foreign exchange stock, of which 65 per cent was in the form of U. S. dollar and other claims on the United States. Yet in 1973, when the aggregate addition from the financing of imbalances had fallen to SDR 15.6 billion, less than one third of that amount had a counterpart in the corresponding U. S. liabilities. Moreover, the net increase in world reserves during the year from the financing of imbalances with the United States was due entirely to developments in the first quarter, when the increase approached the equivalent of SDR 9 billion. Beginning in the second quarter, reductions in official claims on the United States began to take place at an accelerating rate; these reductions accumulated to a total of SDR 4 billion for the remainder of the year. The value of these claims that are officially held, expressed in terms of SDRs, was slightly lower at the end of 1973 than it had been at the beginning of the year, because the impact of the devaluation of the dollar on existing holdings outweighed the moderate net new accumulation that took place over the year.

Table 13.U. S. Balance of Payments and Its Financing, 1968-73(In billions of SDRs)
1968196919701971119721973
Balance on goods and services2.01.32.9−0.2−6.03.8
Transfers and long-term capital−3.4−4.9−6.7−10.4−4.3−4.5
Balance on goods, services, transfers, and
long-term capital−1.4−3.6−3.8−10.6−10.3−0.7
Short-term capital, and errors and omissions, net3.06.3−6.9−19.90.1−4.2
Official settlements balance1.62.7−10.7−30.5−10.2−4.9
Financed by
Reserve liabilities (decrease—)−0.8−1.57.327.49.44.6
Reserve assets (increase—)
Gold1.2−1.00.80.90.5
SDRs0.5
IMF gold tranche−0.9−1.00.41.40.2
Foreign exchange−1.20.82.20.40.2
Total reserve asset transactions−0.9−1.23.43.10.70.2
Memorandum item: SDR allocation (—)−0.9−0.7−0.7
Reserve asset change including SDR allocation
(increase—)−0.9−1.22.52.30.2
Source: U. S. Department of Commerce, Survey of Current Business.

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

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

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

Claims on the United States continued both to constitute the bulk of foreign exchange holdings and to form the largest single type of official reserves. Other kinds of foreign exchange claims in aggregate, however, are not notably smaller (Table 14). Despite the considerable dampening of reserve expansion that characterized global reserve developments in 1973, the increase in officially held claims other than those on the United States nearly matched the exceptionally large increase that had occurred in the previous year. During 1973, they rose by almost SDR 11 billion through transactions to settle payments imbalances and, even after making allowance for the reduction in the SDR value of the dollar-denominated portion because of the devaluation, reached a stock total that is estimated at about SDR 47 billion at the end of the year. At that level, they were considerably larger than the world’s holdings of gold valued at the official price.

Table 14.Official Holdings of Claims on the United States and Other Foreign Exchange, End of Years 1969-73 1
Other ForeignTotal Foreign
Claims on theExchangeExchange
United StatesAdjusted2Adjusted1
In billions of SDRs
196916.013.629.6
197023.820.344.1
197146.727.173.8
197256.738.595.2
197355.446.7102.1
In per cent
196954.145.9100.0
197054.046.0100.0
197163.336.7100.0
197259.640.4100.0
197354.345.7100.0
Source: International Financial Statistics.

Adjusted holdings. See footnote 1, Table 10.

Comprises the types of claims shown in Table 11, lines 4.b-e and 4.g-i; it should be noted that 4.i is the residual item.

Source: International Financial Statistics.

Adjusted holdings. See footnote 1, Table 10.

Comprises the types of claims shown in Table 11, lines 4.b-e and 4.g-i; it should be noted that 4.i is the residual item.

The growth of foreign exchange other than dollar claims in the United States was widely dispersed over a variety of forms, some of them traditional but most of rather recent origin (Table 15). A detailed review of developments in this area must be approached cautiously, since the data that the Fund staff has been able to compile are not as complete or as reliable as could be desired. Thus, the composition of only just over two thirds of the stock of these other claims at the end of 1973 has been identified from the side of either the claimants or the debtors, and the remainder, which is derived as a residual, also contains all the errors, omissions, and asymmetries in the recorded reserve statistics, partially on an offsetting basis. Furthermore, not much more than half of the aggregate growth in claims in this group through transactions during 1973 can as yet be attributed to a specific category of claims.

Table 15.Identified Official Holdings of Euro-Currencies and Residual Sources of Foreign Exchange Reserves, End of Years, 1969-73(In billions of SDRs)
196919701971 119721973 2
1.Identified official Euro-currency holdings
Euro-dollars
Industrial countries2.25.13.45.75.1
Primary producing countries
More developed areas0.51.41.92.93.0
Less developed areas2.03.85.38.79.6
Western Hemisphere0.61.21.53.43.7
Middle East0.40.61.11.92.4
Asia0.51.01.01.82.5
Africa0.51.11.61.71.0
Total, primary producing countries2.55.21.211.612.6
of which, major oil producers0.81.52.83.94.0
Grand Total4.710.310.617.417.8
Other Euro-currencies1.73.65.3
2.Residual sources of reserves
Identified direct claims on IBRD and IDA0.50.70.60.60.6
Identified direct claims on other central monetary
institutions 30.80.71.1
Unidentified residual4−0.51.14.46.013.3
Sources: Fund staff information and estimates. For area and group coverage, see notes to Table 17.

Includes the change in the level of holdings owing to the effect of the realignment in December.

Includes the change in the level of holdings owing to the effect of the U. S. dollar devaluation in February.

That is, on central monetary institutions other than those in the United States, the United Kingdom, France, or Germany.

See footnote 12, Table 11. Before 1971, this line includes holdings of non-dollar Euro-currencies and claims on other central monetary institutions, which were not then separately identified.

Sources: Fund staff information and estimates. For area and group coverage, see notes to Table 17.

Includes the change in the level of holdings owing to the effect of the realignment in December.

Includes the change in the level of holdings owing to the effect of the U. S. dollar devaluation in February.

That is, on central monetary institutions other than those in the United States, the United Kingdom, France, or Germany.

See footnote 12, Table 11. Before 1971, this line includes holdings of non-dollar Euro-currencies and claims on other central monetary institutions, which were not then separately identified.

In spite of these reservations about the estimates, Euro-dollar claims are clearly the most prevalent form, next to direct dollar claims, in which foreign exchange is now held. Identified Euro-dollar holdings at the end of 1973 accounted for almost two fifths of foreign exchange other than claims on the United States, and this proportion could actually be much higher, depending on what part of the unidentified residual as well may consist of Euro-dollar holdings. Euro-dollars were also the largest identifiable component (besides U. S. dollars) contributing to reserve expansion in 1973, when the devaluation loss in the stock is excluded from consideration. Although the indicated increase in such holdings was much below that of the previous year, this finding must be appraised in the light both of the slower rise in reserves in general and of the large increase in the residual for 1973 that is as yet unidentified. The increment in Euro-dollar assets appears to have been quite widely distributed over the primary producing countries, although here again the defects in the data make such a conclusion rather tenuous.

Identified Euro-currencies other than the Eurodollar have been emerging as significant media in which reserves are held. Such holdings more than trebled over the past two years, reaching an aggregate amount in excess of SDR 5 billion at the end of 1973. The favored currency of denomination was overwhelmingly the deutsche mark, although occasional use was made of other major European currencies.

Claims on countries other than the United States in their own currencies have for some time been declining in importance relative to dollars and Euro-currencies as instruments for holding reserves. Nevertheless, the known stock of such claims has continued to show a steady enlargement and is estimated at the equivalent of SDR 9.5 billion at the end of 1973. Over two thirds of this total comprises sterling, followed by much smaller amounts for the French franc, the deutsche mark, and a few other European currencies.

Country Distribution

As was to be expected in a year when global reserve growth was tapering off sharply, large changes in the reserves of some countries in 1973 represented not only overall payments surpluses but also deficits (Table 16). However, all five of the countries showing major declines in their reserves had experienced major increases in at least two of the three preceding years. This drawing down of recent accumulations was not general, since the five countries with the largest increases in 1973, namely, Germany, Brazil, the Netherlands, Spain, and Saudi Arabia, had made major gains in reserves in at least two of the previous three years. Six other countries recorded major increases during 1973 for the first time in the 1970-73 period, with the exception of Turkey, which had an increase of comparable size in 1972.

Table 16.Selected Countries with Major Reserve Changes, 19731(In billions of SDRs)
CurrentNet
Change inAccountCapital
AdjustedSurplusInflow
Reserves2(Deficit -)3(Outflow -)4
Major increases
Germany, Fed.
Rep. of5.65.62.1
Brazil1.5−1.13.1
Netherlands1.01.4−0.8
Spain1.00.40.4
Saudi Arabia0.92.6−1.1
Argentina0.70.60.1
Belgium0.71.4−0.8
Sweden0.61.1−0.4
Yugoslavia0.60.30.2
Algeria0.5−0.51.0
Turkey0.50.50.1
Total of 11
countries
with major
reserve
increases13.412.23.9
Major declines
Japan−6.80.2−5.4
France−1.90.5−2.1
Libyan Arab
Republic−0.90.1−1.0
Canada−0.8−0.4
Australia−0.60.7−1.2
Total of 5
countries
with major
reserve
declines−11.01.0−9.6
Sources: International Financial Statistics and Fund staff information and estimates.

The difference between current and capital transactions and the increase in adjusted reserves results from the use (or repayment) of Fund credit and other conditional liquidity, changes in official monetary assets not included in the reserves, changes in liabilities to foreign official holders, and changes in the valuation of reserves, most of which arose from the devaluation of the U. S. dollar in February 1973.

For the nature of the adjustments, see footnote 1, Table 10.

Balance on goods, services, and private transfers.

Government transfers and recorded movements of capital (excluding official reserves and related assets and liabilities) plus net errors and omissions.

Sources: International Financial Statistics and Fund staff information and estimates.

The difference between current and capital transactions and the increase in adjusted reserves results from the use (or repayment) of Fund credit and other conditional liquidity, changes in official monetary assets not included in the reserves, changes in liabilities to foreign official holders, and changes in the valuation of reserves, most of which arose from the devaluation of the U. S. dollar in February 1973.

For the nature of the adjustments, see footnote 1, Table 10.

Balance on goods, services, and private transfers.

Government transfers and recorded movements of capital (excluding official reserves and related assets and liabilities) plus net errors and omissions.

Changes in the gross reserve assets of individual countries or groups, however, are not necessarily indicative of the overall strength or weakness of their balance of payments positions. In particular, reserve holdings may be increased or their decline limited through borrowing abroad, which is sometimes undertaken specifically for those purposes; similarly, the repayment of previous borrowing will tend to hold down reserve increases or to reduce asset holdings. The listing of countries with major declines in gross reserve assets, for example, includes some countries whose overall payments position was actually quite strong. Conversely, some countries whose position was comparatively weak are not included in the table. These balance of payments developments are discussed in Chapter 1.

The less developed of the primary producing countries as a group continued to add to their reserves at a rapid rate, as had also been the case in the previous year (Table 17). The addition to gross reserves in 1973 amounted to the equivalent of SDR 7.0 billion, compared with SDR 8.0 billion in 1972, the main factor underlying this apparent slowdown being the reduction in value of the stock caused by the devaluation of the U. S. dollar. This latest increase brought the share of this group in total world reserves to 23.9 per cent, a proportion well above the previous high of 20.7 per cent that had been attained at the end of 1969. Nearly three fourths of the overall improvement for the group in 1973 was accounted for by the growth in the reserves of the major oil exporters other than the Libyan Arab Republic, together with Argentina and Brazil. The pattern for individual geographic areas showed increases of 18 per cent for Asia, 29 per cent for the Western Hemisphere, and 34 per cent for the Middle East. In Africa, however, an aggregate decrease of 2 per cent was recorded, reflecting the substantial decline in the holdings of the Libyan Arab Republic; the increase for all other African countries taken together came to 30 per cent.

Table 17.Countries’ Official Reserves, Adjusted, 1950, 1960, and 1970-March 19741(In billions of SDRs)
Composition of Reserves
Total at End of Periodat End of March 1974
Reserve
positions
Marchin theForeign
1950196019701971197219731974GoldSDRsFundexchange
Industrial countries
United States24.319.413.911.911.911.912.19.71.80.6
United Kingdom3.45.12.88.15.25.45.30.70.60.13.9
Total27.724.516.720.017.117.317.410.42.40.73.9
Belgium0.81.52.83.23.64.24.01.50.60.51.4
France0.82.35.07.69.27.46.73.50.10.32.7
Germany, Federal Republic of0.27.013.617.221.927.527.34.11.41.220.6
Italy0.73.35.46.35.65.35.52.90.30.32.0
Netherlands0.51.93.23.54.45.45.01.90.40.22.4
Switzerland1.62.35.16.46.97.16.62.93.7
Other industrial Europe 20.51.83.84.96.06.96.51.00.40.44.6
Total, continental industrial Europe5.220.139.049.157.663.861.617.93.33.037.5
Canada1.82.04.75.35.64.85.10.80.50.33.5
Japan0.61.94.814.116.910.210.30.70.40.58.6
Total, industrial countries35.448.565.288.597.296.094.429.86.64.553.5
Primary producing countries
More developed areas
Other European countries 31.62.35.78.111.813.613.31.90.30.310.7
Australia, New Zealand, and South Africa2.11.32.84.07.46.76.60.90.30.35.1
Total, more developed areas3.73.78.512.119.220.319.92.80.60.615.8
Less developed areas
Western Hemisphere 42.82.85.66.19.713.013.71.00.60.411.6
Middle East51.51.43.34.97.19.711.71.00.20.210.3
Asia 64.13.15.25.47.28.49.10.60.50.27.7
Africa 70.82.14.25.15.55.46.40.40.30.25.5
Total, less developed areas89.89.618.421.529.536.540.83.21.61.135.0
of which, major oil exporting countries91.32.44.97.69.911.815.51.20.30.313.7
Grand Total48.961.892.1122.1145.9152.8155.135.78.86.2104.3
Source: International Financial Statistics.

For the nature of the adjustments, see footnote 1, Table 10. Totals may not add because of rounding and because some totals include unpublished data for component areas.

Austria, Denmark, Luxembourg, Norway, and Sweden.

Finland, Greece, Iceland, Ireland, Malta, Portugal, Spain, Turkey, Yugoslavia, and, beginning in 1972, Romania’s reserve position in the Fund.

Argentina, Bolivia, Brazil, Central America, Chile, Colombia, the Dominican Republic, Ecuador, Guyana, Haiti, Jamaica, Mexico, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, Venezuela, and, beginning in 1970, SDRs and reserve position in the fund for Barbados.

Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Saudi Arabia, the Syrian Arab Republic, and, beginning in 1965, the People’s Democratic Republic of Yemen, and in 1970, Oman.

Afghanistan, Burma, the Republic of China, India, Indonesia, Korea, Malaysia, Nepal, Pakistan, the Philippines, Singapore, Sri Lanka, Thailand, and Viet-Nam and, for the Khmer Republic and Laos, 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, and Venezuela.

Source: International Financial Statistics.

For the nature of the adjustments, see footnote 1, Table 10. Totals may not add because of rounding and because some totals include unpublished data for component areas.

Austria, Denmark, Luxembourg, Norway, and Sweden.

Finland, Greece, Iceland, Ireland, Malta, Portugal, Spain, Turkey, Yugoslavia, and, beginning in 1972, Romania’s reserve position in the Fund.

Argentina, Bolivia, Brazil, Central America, Chile, Colombia, the Dominican Republic, Ecuador, Guyana, Haiti, Jamaica, Mexico, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, Venezuela, and, beginning in 1970, SDRs and reserve position in the fund for Barbados.

Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Saudi Arabia, the Syrian Arab Republic, and, beginning in 1965, the People’s Democratic Republic of Yemen, and in 1970, Oman.

Afghanistan, Burma, the Republic of China, India, Indonesia, Korea, Malaysia, Nepal, Pakistan, the Philippines, Singapore, Sri Lanka, Thailand, and Viet-Nam and, for the Khmer Republic and Laos, 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, and Venezuela.

The more developed of the primary producing countries as a group had shared to an extraordinary degree in the global reserve accumulation that occurred in 1971 and 1972, much more than doubling their official holdings in this short span of only two years. This experience was not repeated for a third consecutive year. These countries in the aggregate, however, did not undergo any attrition of their total stock during 1973, despite the devaluation of the dollar, and in fact increased their holdings by almost 6 per cent.

The industrial countries were the only group to experience an actual decline in their reserves during 1973. Although the reduction was little more than 1 per cent, it was noteworthy because it succeeded three annual increases on a hitherto unprecedented scale. This lack of notable change in the aggregate was the net outcome of very large movements in one direction or the other recorded for a number of the individual countries in the group. Japan’s official reserve holdings declined by SDR 6.8 billion while Germany’s holdings rose by SDR 5.6 billion, both changes being of a magnitude that has rarely been encountered in preceding years. In fact, individual instances of large change during 1973 were considerably more prevalent than those of comparative stability; the latter include Italy, Switzerland, the United Kingdom, and the United States.

Factors Affecting the Adequacy of Reserves

This section contains the review of the adequacy of global reserve holdings that the Executive Directors are required to make under Section 10 of the By-Laws of the International Monetary Fund. The review this year is being made against the background of a number of exceptional developments : (1) the realignment of parities and widespread adoption of floating exchange rates; (2) developments relating to gold; and (3) the changes in balance of payments prospects as a result of developments in the markets for essential commodities, particularly oil. All of these developments may well have had a major impact on reserve ease, but to an extent that is still highly uncertain. The section therefore starts by analyzing the individual impact on reserve ease that might be expected from each of these developments.

This is followed by the presentation of two tentative approaches to assessment of the degree of global reserve ease, on the lines that have been developed in previous annual reviews. The first compares actual reserve holdings with the volume of reserves that might be judged appropriate on the basis of statistical extrapolation procedures. The extrapolation is based on the estimation of relationships between reserve holdings and other economic variables to which reserve needs are thought to be related, taking as the base a period in which reserve ease is judged to have been satisfactory. The results of these extrapolations require modification to allow for the effects of changes in the underlying structure that have occurred since the period of observation. Because there have recently been many important structural changes, and the adjustments required by these are so uncertain, it is considered that, at least in present circumstances, this approach should be regarded as supplementary to the second approach.

The second approach seeks to draw conclusions regarding the degree of reserve ease from countries’ use of such policy instruments as exchange rates, aid, trade and exchange controls, demand management, and international borrowing. This approach has the advantage, in principle, which is particularly important in the present context, of permitting inferences to be drawn about the net impact of several conflicting factors. Its difficulties are that it is often questionable as to whether policy measures can legitimately be interpreted as reflections of reserve ease or stringency; that it cannot yield any quantitative estimate of reserve excess or inadequacy; and that contradictory manifestations of reserve ease or stringency in different countries require weighting before conclusions as to global reserve ease can be reached.

The Impact on Reserve Ease of Certain Recent Developments

(1) The move to widespread floating.

It has generally been taken for granted that greater flexibility in adjusting exchange rates would reduce the extent to which countries use reserves in intervention. This would suggest that one of the major motives for holding reserves would have been weakened so far as an important group of countries are concerned, and therefore that the global need for reserves would have declined.

There appear, however, to be several reasons for questioning whether the need for reserves has declined as much as is sometimes assumed. First, even where currencies are floating independently their exchange rates are being managed rather than being allowed to float without intervention. Second, there are other motives for holding reserves in addition to their use in financing payments imbalances, such as the need to preserve confidence and to serve as a basis for foreign borrowing. Third, countries whose currencies are presently floating may be anxious to preserve the option of returning to a par value system when circumstances permit, and this would require the maintenance of a level of reserves appropriate to such a system. Fourth, the present system is one of limited floating in that the majority of countries still peg their currencies, either to a single intervention currency, to a composite of currencies, or to a number of other currencies in the context of joint intervention arrangements. It seems likely that most countries which peg their currency to a floating currency will increase their use of reserves above the level experienced under a par value system, because the fluctuation of the exchange rates of third currencies in terms of their intervention currency will tend to add to the variability of their payments balance.

There is not as yet any statistical evidence of a reduction in the utilization of reserves by countries that have allowed their currencies to float. However, experience of the operation of a system of widespread floating is still too limited to permit assessment of the existence or magnitude of economies in reserve use as a result of floating, especially in view of the many other disturbing factors that have been present since March 1973. Without the absorption of market pressures through exchange rate changes, the strains on individual countries’ reserves in 1973 and early 1974 might have been much greater.

(2) Gold.

There have been several important developments relating to gold in the past year. The price on the private market, which has remained extremely volatile, rose substantially over the period, from an average of about $100 per ounce in the second quarter of 1973 to over $160 per ounce in the corresponding quarter of 1974. (The price was $154 at the end of July 1974.) The Washington arrangements of March 1968, whereby the Governors of the central banks of the United States and six European countries agreed not to sell gold on the private market, were terminated in -November 1973. This was followed in December 1973 by termination of the December 1969 Fund decision regarding purchases of South African gold by the Fund. Since December 1973 there have been a number of informal discussions on the future pricing and use of officially held gold, including the conclusion of the Ministers of the Group of Ten in June 1974 that gold could be used as collateral at a price different from the official gold price.

As long as the Washington arrangements were in force, any significant premium of the price on the private market over the official gold price reinforced the reluctance of many countries to use their gold holdings, which tended to reduce the level of effective liquidity. If termination of the Washington arrangements had led central banks to be willing to sell their gold holdings on the private market, the central banks that hold substantial quantities of gold would have experienced a major increase in their effective liquidity, which would have been further reinforced by the strong rise in the price of gold on the private market. But it is not clear just how large the increase in effective liquidity—i.e., the expectation of the authorities involved regarding the sum that could be realized in the event of need—would have been.

It appears, however, that termination of the Washington arrangements did not result in central banks being any more willing to sell gold on the private market, perhaps because of the expectation that such action would precipitate a price decline, or that prices were likely to rise further. It remains to be seen whether the opportunity of using gold as collateral at a price different from the official gold price will provide a channel by means of which countries will once again become willing to use their gold holdings. In any event, it would clearly be inappropriate to ignore the implications of developments in the private market for an assessment of the effective liquidity of gold holding countries, and it is probable that the combined effect of the developments of the past year has been to increase this effective liquidity, possibly by a substantial sum.

(3) Developments in the oil market.

The third set of recent developments with major potential implications for reserve ease are those relating to the market for oil. From the standpoint of importers the increase in the price of oil has been paralleled by increases in the prices of some other essential commodities. The distinctive problem stemming from the oil price increase is that—because of the limited absorptive capacity of a number of oil exporting countries in the medium run—there is virtually no prospect of current account adjustment leading to an end to large reserve accumulation by the oil exporters in aggregate. This raises a number of complex issues, which require discussion at some length, particularly concerning the probable capital account effects of the prospective imbalances.

Although greater supply stringency in the early 1970s led to a decline in the extension of credit on favorable terms to oil importers by the oil companies, and the production cuts by some countries late in 1973 resulted in important temporary disturbances, the major development in the oil market has been the large price increases of late 1973. This led to a dramatic shift in the balance of payments outlook, with many oil importing countries faced with the prospect of substantial current account deficits in place of traditional outcomes of near balance or of surplus. It is not of course true that these current account deficits will lead to a pari passu reduction in the collective reserves of the oil importing countries, because, either directly or through the Euro-currency markets, much of the volume of funds acquired by the oil exporters will tend to return to some of the oil importers on capital account. However, even if the current account deficits of the oil importers led to no reduction in their collective reserves, it might be expected that their reserve ease would decline as a result of an increased demand for reserves, occasioned by uncertainty as to their future success in securing capital inflows for financing their current deficits, and by an increased need to hold reserves as security for borrowing.

Since the oil exporters in aggregate are receiving reserves in excess of their medium-run needs, and in a number of cases reserve holdings are intended to generate a permanent flow of interest earnings, reserve increases accruing to them are likely to have a minimal impact on global reserve ease. Consequently an examination of the impact of changes in the supply of reserves on the degree of reserve ease should concentrate on the impact on the collective reserves of the oil importers, rather than on the global supply of reserves (including the reserves of net exporters).

If the oil exporters were to hold their reserves in the same market and with the same composition as the countries that were losing reserves, whether this be in the form of primary reserve assets, foreign exchange held in the country of issue, or foreign exchange held in an offshore (i.e., Euro-currency) market, and if the oil importers were not induced to undertake additional borrowing, the transfer of reserves would leave the world total of reserves unchanged and therefore would reduce the collective reserves of the oil importers by an amount equal to the surplus of the oil exporters. In other cases, however, the world total of reserves will tend to change. The size of this change, and therefore the impact on the collective reserves of the oil importers, will depend on the extent to which the initial transfer enables the oil importers to recoup their reserve losses through increased borrowing, whether directly from oil exporters, through the medium of the offshore markets, or via the financial markets of a reserve center.

In the case (which appears to be important in practice) where the oil importers transfer foreign exchange that they have held in the issuing country and the oil exporters place these funds in the offshore markets, the transfer could be expected to increase world liquidity, since the funds placed in the offshore markets by the oil exporters would provide a source from which the oil importers could replenish their reserves by borrowing, either directly on government account or indirectly on private account. Provided there were such replenishment the increase in world reserves would approximate the surplus of the oil exporters, and so leave the collective reserves of the oil importers largely unchanged. In the converse case, if the oil importers used reserves previously held in offshore markets and the oil exporters placed these in the country of issue, there would be a decline in world reserves and a magnified decline in the reserves of the oil importers, except to the extent that the latter were prompted to borrow in the reserve center. In aggregate both oil exporters and oil importers spread their reserve holdings between the issuing country and the offshore market, but the oil exporters tend to hold a higher proportion of their reserves in the latter,4 so the probable outcome is that world reserves will tend to increase while the reserve holdings of the oil importers will tend to decline.5

The impact on reserves of the investment policies of the countries gaining and losing reserves will be reduced to the extent that capital is mobile. For example, a decision by the oil exporters to deposit additional reserves in the U. S. market rather than the Euro-dollar market would not reduce the reserves of the oil importers to the extent that the latter were to borrow more in the United States. The chance of this occurring was increased by the abolition of controls on capital outflows by the United States in January 1974. However, imperfections in capital mobility, coupled with a U. S. policy of at least partially sterilizing capital inflows with a view to domestic monetary management, imply that the extent of borrowing by oil importers will be smaller the greater the proportion of their funds that the oil exporters place in the United States. In any event, this analysis would seem to reinforce the previous conclusion that the oil developments are likely to cause a decline in the collective reserves of the oil importers but by less than the size of their oil deficit. Taking account of the facts that the demand for reserves by the oil importers is likely to rise and that the bulk of the oil exporters’ reserve increases are in excess of their short-run needs, there is therefore a presumption that—despite the expected increase in total reserves—the oil developments will tend to reduce reserve ease, even without allowing for any effect of the increasing indebtedness of the oil importers.

Quantitative Assessment of Reserve Ease

As already pointed out, recent developments in the international monetary system make it difficult to rely to any great extent on measures of reserve ease based on data predating these developments. Such measures nevertheless remain worth examining as very rough indicators, even though their interpretation must be based on particular assumptions.

The projections of the need for reserves developed in connection with the SDR facility were based on extrapolation of relationships observed in the past between reserve holdings and other aggregates to which reserve needs are thought to be related. Chart 7 shows the development of one such indicator, the ratio of reserves to imports, for a sample of 60 countries taken over the period 1954-73. Apart from the years 1958 and 1961, this ratio declined continuously until 1970. In the following two years it rose substantially, reaching a level of 38 per cent in 1972 compared with 28 per cent in 1970. In 1973, however, it declined to about 34 per cent, thus indicating a reduction in reserve ease.

Chart 7.Ratio of Aggregate Reserves to Aggregate Imports of 60 Countries, 1954-731

(In per cent)

1 Reserves are annual averages of monthly data. Reserves are measured gross, and the sample of 60 countries includes the United States.

The statistical estimates of reserve needs reported in last year’s review suggested that during the period 1971-72 there was a build-up of excess reserves, and that at the beginning of January 1973 this excess, which was heavily concentrated in a limited number of countries, was in the vicinity of SDR 20-30 billion. The realignment of exchange rates in early 1973 had the immediate result of decreasing the real value of the reserve stock. The strong inflationary trends that continued throughout 1973 and the abatement of reserve growth tended to reduce excess reserves through the remainder of 1973. Estimates for the end of 1973, constructed on lines similar to those made last year, range from an excess of reserves of SDR 5 billion to a deficiency of SDR 5 billion.

The unqualified application of quantitative analysis previously developed therefore suggests that by early 1974 the increasing need for reserves was overtaking the stagnating supply. This conclusion is, however, dependent on the legitimacy of extrapolating previous relationships despite the major developments discussed in the preceding section. Any effect that the widespread adoption of floating exchange rates may have had in reducing the global need for reserves means that the use of previous relationships tends to overestimate reserve stringency. Second, to the extent that the effective liquidity provided by gold exceeds its balance sheet value at the official price, reserve stringency is again less than suggested by the quantitative estimates. This factor would become even more important if further actions intended to mobilize gold were adopted. Third, the oil developments work in the opposite direction and suggest that reserve stringency is greater than would be indicated by the comparison of global reserves (including the reserves of the oil exporters) with estimates of reserve needs. This factor was still small in the early part of 1974, although it can be expected to grow rapidly as oil exporters accumulate larger reserves.

Reserve ease is influenced by the distribution, as well as the level, of reserve holdings. During the early 1970s reserves became increasingly concentrated, and this concentration reduced global reserve ease for a given level of global reserves. The concentration of reserve holdings in relation to a measure of reserve need is depicted for the years 1968 and 1973 by the two curves shown in Chart 8. A measure of reserve need was constructed by taking into account, with approximately equal weights (whose exact values were determined by a regression equation), the two variables that have been found empirically to be important determinants of the demand for reserves: imports, and export variability. The diagonal 45-degree line in this diagram indicates reserve “needs,” based on these two factors (but without taking account of other factors that may be relevant), and the curved line indicates the actual distribution of reserves. Hence the bulge between the curve and diagonal indicates the difference between the actual distribution of reserves and a distribution in proportion to “need,” and the area between the curve and the diagonal measures the extent of inequality (relative to “need”) in reserve distribution. It will be observed that the chart shows a substantial increase in inequality in reserve distribution between 1968 and 1973; the area between the curve and the diagonal in fact increased by 32 per cent over this period.6 This increase was concentrated in the period 1970-72; in the last year there was a marginal reduction in inequality. It also appears that the increased inequality is to a significant extent associated with the decrease in reserves, relative to “need,” of the United States.

Chart 8.Comparative Distribution of Actual Reserves and Reserve “Needs,” 1968 and 1973

Note. The curved lines in the chart were constructed by ranking countries in order of their ratios of actual reserves to the measure of reserve need. The country with the lowest ratio was plotted from the origin; the country with the next lowest ratio, and therefore contributing the next flattest segment to the curve, was cumulated at the upper right-hand end of the first country’s segment; and so on, until the country with the highest ratio of holdings to need was plotted at the upper right-hand corner of the diagram.

It has been traditional to assess reserve adequacy solely with reference to official reserve holdings, but substantial private holdings of internationally liquid assets also exist. The concept of private international liquidity refers to holdings of assets by the private sector which can be realized readily to settle international debts, analogously to the concept of domestic liquidity as embracing assets which can be realized readily to settle domestic debts. To qualify as a part of private international liquidity, an asset should be convertible, liquid (i.e., short term or readily marketable), and denominated in a unit which does not fluctuate too much in value in terms of the unit in which the debts to be settled are denominated. There are serious problems in giving operational content to such a concept. It seems clear that foreign holdings of short-term claims in convertible currencies, whether held in the country of issue or in the Euro-markets, are a part of private international liquidity. Table 18 shows an attempt to estimate such claims for the years 1964-73, although it is incomplete in that claims held in the country of issue are included only for what are thought to be the two principal issuing countries for direct claims, the United States and the United Kingdom. It might also be argued that private holdings of gold should be included, but this has not been done in view of the difficulty of determining the extent to which private gold holdings are held with a view to liquidity considerations. In addition, there is a difficulty arising from the fact that holdings of a currency with resident convertibility also provide a domestic holder with international liquidity: it is impractical to allow for this factor. Finally, it should be noted that an attempt has been made to net interbank deposits in Table 18.

Table 18.Estimated Private International Liquidity and Official Reserve Holdings, 1964-73(In billions of SDRs)
Estimated Private Liquidity Holdings
Other estimated Euro-currency
liabilities4Estimated
U. S. externalU. K. externalEstimatedPrivateOfficial
dollarsterlingEuro-dollarDeutscheSwissInternationalReserve
Yearliabilities 1liabilities 2liabilities 3markfrancOtherLiquidity 5Holdings 6
(1)(2)(3)(4)(5)(6)(7)(8)
196411.14.76.80.50.60.724.470.0
196511.54.98.80.60.70.827.371.6
196614.24.711.40.70.91.032.971.8
196715.83.814.21.21.00.936.971.9
196819.43.521.52.21.71.249.573.9
196928.23.433.62.82.51.171.675.5
197021.84.037.85.23.81.874.492.1
197113.95.737.17.34.22.470.6122.1
197218.25.546.69.74.93.688.5145.9
197319.74.455.512.67.54.8104.5152.8
Sources: International Financial Statistics (IFS); Bank for International Settlements (BIS), Annual Reports; and Fund staff estimates.

Taken from IFS, U. S. country pages, line 4b. It includes short-term liabilities to nonresidents other than central banks, governments, and international agencies.

Taken from IFS, U. K. country pages, line 4c. It includes assets not held for central monetary purposes, or by international agencies, and excludes British Government bonds.

This series is based on Euro-dollar liabilities to nonresidents, as reported by the BIS, but adjusted for identified official Eurodollar holdings (and the “unidentified residual item” since 1971), and interbank deposits as estimated by the BIS.

These series are based on liabilities presented in the BIS Annual Reports, adjusted for identified official Euro-currency holdings, and interbank deposits, as estimated by the BIS. The same adjustment factor was used for interbank deposits for each of the three components for any given year, although the adjustment factor varied from year to year.

This column is the sum of columns 1-6. To the extent that Euro-banks hold dollars with U. S. banks, and these deposits are already counted in the U. S. liabilities column, this figure includes some double counting. To the extent that external liabilities of countries other than the United States and the United Kingdom are not covered, and the Euro-currency liabilities exclude liabilities in foreign currencies to residents, this figure will underestimate private international liquidity holdings.

See Table 10, page 31.

Sources: International Financial Statistics (IFS); Bank for International Settlements (BIS), Annual Reports; and Fund staff estimates.

Taken from IFS, U. S. country pages, line 4b. It includes short-term liabilities to nonresidents other than central banks, governments, and international agencies.

Taken from IFS, U. K. country pages, line 4c. It includes assets not held for central monetary purposes, or by international agencies, and excludes British Government bonds.

This series is based on Euro-dollar liabilities to nonresidents, as reported by the BIS, but adjusted for identified official Eurodollar holdings (and the “unidentified residual item” since 1971), and interbank deposits as estimated by the BIS.

These series are based on liabilities presented in the BIS Annual Reports, adjusted for identified official Euro-currency holdings, and interbank deposits, as estimated by the BIS. The same adjustment factor was used for interbank deposits for each of the three components for any given year, although the adjustment factor varied from year to year.

This column is the sum of columns 1-6. To the extent that Euro-banks hold dollars with U. S. banks, and these deposits are already counted in the U. S. liabilities column, this figure includes some double counting. To the extent that external liabilities of countries other than the United States and the United Kingdom are not covered, and the Euro-currency liabilities exclude liabilities in foreign currencies to residents, this figure will underestimate private international liquidity holdings.

See Table 10, page 31.

There are two reasons for believing that private international liquidity may influence reserve ease. The first is that official and private holdings of internationally liquid assets are to some extent substitutes from the standpoint of the authorities, since there are often possibilities of mobilizing private assets to help finance a payments deficit. The second is that there is some tendency for private holders to switch between domestic and foreign currency assets, and when this occurs under a system of fixed exchange rates it results in offsetting variations in official reserve holdings that do not reflect underlying imbalances.

The figures shown in Table 18 indicate that the growth in private liquidity was strong in a period when official liquidity stagnated (1964-69). In 1970 and 1971, the stock of official liquidity grew substantially, but growth in private liquidity abated. In 1972 both private and official international liquidity grew strongly, at rates of 25 per cent and 19 per cent, respectively. The deceleration of the growth in official liquidity in 1973 was accompanied by continued strong growth in private international liquidity, measured in SDRs, which increased by 18 per cent. These figures provide an additional possible reason for believing that the quantitative estimates of reserve ease presented above may overstate the extent to which reserve stringency has recently been increasing, although they make no allowance for distributional effects.

All of the assets shown in Table 18 are matched by corresponding debts. Presumably increased liabilities by a debtor country have some effect in reducing its reserve ease, in which case increased holdings of private liquidity make a net addition to reserve ease only to the extent that there is an asymmetry between the impacts on the creditor and debtor countries. It is not altogether clear that such an asymmetry is likely to persist in the changed circumstances following the oil developments. Borrowing which is undertaken in order to finance oil deficits, especially—though not exclusively—when it is done by public sector borrowers, seems likely to reduce the effective liquidity of the borrowing countries in a way that was not true of borrowing for productive investment. Such borrowing has been extensive in recent months, and further accumulation of liabilities must be expected to reduce reserve ease even if the official reserves of the borrowing countries remain constant.

Manifestations of Reserve Ease

The extent to which exchange rate changes consist predominantly of either revaluations or devaluations can provide a useful indication of excess reserves or reserve stringency, respectively, although experience in this respect has to be interpreted in the light of current attitudes toward exchange rate adjustment. Resort to floating is less clear, since it is necessary to infer from other evidence whether the intention of the float is to prevent further gains or losses of reserves. There were a series of exchange rate actions in mid-1973, whose avowed objective was in most cases that of combating inflation, which were consistent with the view that liquidity was ample. The main events in the first half of 1974 were the floating of the French franc and the Spanish peseta in January; the de facto revaluation of the Austrian schilling in May; and the floating of the South African rand in June. These moves do not reflect a consistent pattern such as was present in mid-1973.

There are a number of policy instruments other than the exchange rate mechanism that are used to affect countries’ balance of payments, and although the connection between these instruments and the desired payments position is more tenuous, examination of their use may also assist in making a judgment of the degree of reserve ease. These additional policy instruments can be divided into two main groups: the first group covers a wide variety of measures directly affecting international transactions, while the second group influences balance of payments outturns by affecting domestic economic developments.

As was true in 1972, developments with respect to the volume of foreign aid flows and the tying of these flows offer little evidence of changes in reserve ease during 1973. The flow of aid under bilateral arrangements was somewhat reduced in value, at least partly on account of inflation. The share of total gross disbursements of official development assistance from members of the Development Assistance Committee that is free of procurement restrictions has remained at a level of roughly one third.

There were a considerable number of examples of limitations, prohibitions, or taxes on exports during 1973. In a number of cases these policies were adopted as anti-inflationary measures, or to protect domestic supplies of scarce commodities. Such instances suggest that the countries imposing the restrictions felt sufficiently liquid to be able to place the interests of domestic consumers ahead of those of foreign consumers despite the resulting reduction in foreign exchange earnings. Although a number of measures to promote exports were adopted by both developed and developing countries, the restrictions imposed on exports would seem more significant in the context of assessing reserve ease.

As regards import restrictions, a number of industrialized countries and more developed primary producing countries continued to relax their restrictions in 1973. Many developing countries also relaxed restrictions, but a large number maintained restrictions and the overall picture for this group is less clear cut. After the oil developments in October, however, there was a reversal in developed countries of the earlier trend toward a liberalization of import restrictions. The most conspicuous examples of this came in May 1974 with the actions of Italy in imposing a 50 per cent import deposit requirement, and of Denmark in imposing surtaxes on a range of consumer goods with a high import content. Up to the present time, however, restrictive actions have been confined to countries with severe payments problems, and there is no evidence of countries whose external position is close to balance participating in a trend in this direction.

The general pattern found in policies affecting capital flows is consistent with the pattern found in measures affecting imports, suggesting reserve ease during most of 1973, but with a sharp decline at the end of the year. Measures to curb inflows and liberalize outflows were widely introduced in developed countries in the early part of 1973, but they were modified or even reversed in the latter part of 1973 and early in 1974. In fact, early in 1974, measures were increasingly taken in developed countries, excluding the United States, to stimulate inflows and curb outflows, including large-scale foreign borrowing by public sector institutions in a substantial number of countries. Developing countries generally maintained efforts to attract capital inflows during 1973, and some of them intensified these efforts in early 1974.

The linkage between reserve ease and demand management policies is particularly controversial. Following a slowdown in economic activity in 1970 and 1971, strong economic expansion took place in the following two years in the main industrial countries. This expansion appeared to be cresting during 1973, but this was at least partially because of the emergence of supply constraints. During this boom, inflation has emerged as an increasingly important world-wide problem, with annual rates of overall price increases ranging between 7 per cent and 16 per cent in the industrial countries even before the impact of the oil price increases was felt. Although inflation has many and complex causes, the lack of success in curbing global inflation may in part reflect the effect of reserve ease in relaxing the pressure on countries to pursue anti-inflationary policies, and in intensifying expansionary influences from trading partners.

The use of conditional liquidity and reserve borrowing might provide additional evidence on developments in reserve ease. Use of Fund credit remained minimal during 1973, but started to rise during the first half of 1974. Swap arrangements with the Federal Reserve System were increased by almost 50 per cent in mid-1973, in response to speculative movements in the foreign exchange markets and the use of swap drawings was greater in 1973 than in 1972, although still modest by previous standards. Early in 1974, swap arrangements were increased further, although outstanding drawings actually fell. In contrast, the credit facilities available within the Fund remained unchanged from 1970 until the introduction of the oil facility in August 1974. The desirable level of conditional liquidity through the Fund is currently under review in connection with the general review of quotas. Since the last review was undertaken, both the level of reserves and the nominal value of trade have come close to doubling.

Concluding Remarks

The factors discussed above suggest that a situation of global reserve ease prevailed during most of 1973. However, there are a number of indications that the degree of reserve ease, which was already declining as a result of the reduction in the real value of reserves through the depreciation of reserve currencies and inflation during the course of 1973, was further reduced by the oil developments that occurred toward the end of the year. The symptoms of greater reserve stringency in 1974 include an increased tendency for deficit countries to resort to import restrictions; a sharp increase in official encouragement to foreign borrowing designed to curtail reserve decreases; a widespread wish to maximize access to the oil facility; and an evident desire by some gold holding countries to mobilize their gold reserves at the highest possible price. On the other hand, there is as yet no evidence of inappropriate deflationary policies being dictated by reserve stringency (except in a few small developing countries); inflation continues to be the most serious global problem, and has led a number of countries to use reserves on a large scale to prevent the depreciation of their currencies; import restrictions have not spread to countries that are not suffering from unusually large non-oil deficits in the balance of payments; and the exchange rate realignment of recent years may have reduced the size of future payments disequilibria and therefore the need for reserves of a number of countries.

It is, however, a widely held view that the situation has been changing in the direction of reserve stringency. It is, of course, possible that reserve stringency may not emerge because of a renewed growth of foreign exchange holdings, which are not under international management. A second possible source of increased reserve ease would be a development which increased the effective liquidity of gold holdings. Neither of these developments, however, would promote the agreed aim of increasing the role of the SDR as the main international reserve asset.

The third possible source of supply of reserves is the Fund. It is a matter for consideration as to the role which the Fund could play in meeting any emerging reserve stringency, including the increasing difficulty which countries might find in financing their oil deficits through private borrowing. In addition to the possibility of a new allocation of SDRs, the Fund could play an important role through increased use of conditional liquidity, which has as a by-product the creation of additional reserves. The use of conditional liquidity may be expanded by the utilization of facilities such as the oil facility and the Extended Fund Facility; there is also the possibility of a large expansion in the size of the Fund on the occasion of the impending general review of quotas. In view of the evidence that reserve distribution has worsened in recent years, and the facts that conditional liquidity can be directed to those countries which have a particular need for additional liquidity and be used to support programs of adjustment to changed circumstances, there might be a case for substantial emphasis at the present time on this aspect of the Fund’s potential contribution to the provision of liquidity.

As in previous Annual Reports, a gross concept of official reserve holdings is used in this chapter; no account is taken of reserve liabilities, which for some countries constitute an offset to reserve assets, although the question of the best measure of reserves for various purposes in the light of recent developments is under study. Reserve assets in this chapter cover SDRs, reserve positions in the Fund, and official holdings of gold and foreign exchange except for the foreign exchange holdings of the United States. In the years when U. S. holdings were substantial, they were mainly the counterpart of the use of swaps by other countries and could not be used to finance U. S. deficits. Such holdings had in any event been reduced to very low levels by the end of 1971, so that adjusted world reserves on and after that date did not differ significantly from the unadjusted figures.

The impact of the devaluation of the U. S. dollar on the SDR value of the portion of foreign exchange holdings denominated in U. S. dollars has been calculated as affecting such holdings in mid-February 1973, when the U. S. Government announced that it was seeking congressional approval for a devaluation of the U. S. dollar by 10 per cent. Any impact of fluctuations in exchange market rates for the U. S. dollar relative to other currencies is not reflected in the statistics on reserve holdings.

The gold component of reserves is expressed at its official equivalence in terms of SDRs, which remained unchanged throughout the period.

One reason for this is that the Group of Ten and Switzerland have agreed to refrain from adding to their reserves held in the Euro-currency markets.

There is also the possibility of oil importers with reserve currency status paying the oil exporters by an increased issue of liabilities rather than by a transfer of reserve assets, which would tend to increase the world supply of reserves. As long as the reserve currency so acquired was held by the oil exporter in the country of issue, world gross reserves would expand in line with the oil exporters’ surplus, and oil importers’ reserves would remain constant. However, placement of the reserve currency in the offshore market could actually result in an increase in the gross reserves of the oil importers.

An alternative possible measure of inequality in distribution is the sum of the absolute deviations of actual reserve shares from the shares in global reserve “need.” This measure increased by 46 per cent between 1968 and 1973.

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