Chapter

Chapter 3 Activities of the Fund

Author(s):
International Monetary Fund
Published Date:
September 1974
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TOWARD the end of 1972 and early in 1973 the foreign exchange markets were again subject to growing speculative pressures and to an intensification of large-scale short-term capital flows. This situation led to further changes in the structure of exchange rate relationships among currencies and in the nature of the exchange rate system. Major developments in this period were the announcement by the U. S. Government in February 1973 that it was seeking congressional approval for a 10 per cent devaluation of the U. S. dollar and a move to a more general floating of currencies. The intensification of inflationary pressures during the year, especially in the industrial world, and the substantial increases in the price of petroleum and petroleum-related products toward the end of 1973, brought about a dramatic change in the prospects for the balance of payments and reserves positions of members and in the prospects for the working of the international money and capital markets.

These developments led, in turn, to a change in emphasis in the work of the Committee of the Board of Governors on Reform of the International Monetary System and Related Issues (the Committee of Twenty). In mid-June 1974 the Committee presented its final report, together with an Outline of Reform, indicating the general direction in which the international monetary system could evolve and proposing that a number of steps be taken immediately. At the same time, working in cooperation with the Committee, the Executive Directors adopted on June 13, 1974 a set of important decisions that constituted a significant change in the bases on which Fund operations and practices are carried out. These decisions are described in detail later in this chapter.

As noted in last year’s report, the U. S. authorities announced in February 1973 that legislative action was being sought for a devaluation of the U. S. dollar by 10 per cent. Market rates promptly reflected the prospective change in the par value of the U. S. dollar, although the new par value was not established with the Fund until passage of the relevant U. S. legislation had been completed later in the year. Consequently, the Executive Directors took a decision on February 16 applying Rule 0-3 so that calculations, other than those for the U. S. dollar, would be made on the basis of a value for the U. S. dollar that reflected its prospective par value (US$1 = SDR 0.828948), instead of its par value (US$1 = SDR 0.921053). As a result of the decision, the valuation and adjustment of the Fund’s holdings of a currency were made on the basis of the new “effective parity relationship” between the currency involved and the U. S. dollar. Calculations for transactions in the Special Drawing Account, again except those for the U. S. dollar, were made on the same basis. The decision remained in effect until the new par value for the U. S. dollar was established with the Fund in October 1973.

Although the prospective value of the U. S. dollar had immediately been reflected in the exchange markets, strong pressures re-emerged in mid-May 1973 which led to a further appreciation of continental European currencies, in terms of U. S. dollars, and those countries adhering to the European narrow margins arrangement became reluctant to use SDRs in intra-EEC settlements on the basis of Rule 0-3. In November 1973 the Executive Directors decided to permit participants in the Special Drawing Account that engage in transactions by agreement, in which the user of SDRs purchases balances of its own currency held by another participant, to employ the par value or central rate of the currency involved as an alternative to the valuation method of Rule 0-3. The decision of the Executive Directors involved the suspension, for these transactions, of the equal value provision of the Articles of Agreement for a period of 120 days. All transfers of SDRs, other than those in the one category covered, continued to take place at exchange rates based on market rates in accordance with Rule 0-3. The suspension was subsequently extended by a Board of Governors Resolution for an additional period of 240 days.

In view of the evident need to preserve international monetary cooperation in a period marked by rapid economic developments and frequent changes in currency relationships, the Executive Directors gave renewed attention to the role of the Fund’s consultations with members and initiated toward the end of 1973 a new procedure for special consultations with countries whose external policies are of major international importance. A second round of these special consultations in the first half of 1974 included several of the larger developing countries.

In November 1973 the Executive Board decision “Central Rates and Wider Margins: A Temporary Regime” was revised to permit a member that maintains a stable rate for its currency in terms of an intervention currency, which is itself floating, to declare that rate to the Fund as a central rate (see Appendix II).

At a meeting in Rome in January 1974, the Committee of Twenty issued a communiqué stressing the importance, inter alia, of members avoiding competitive exchange depreciation and the escalation of restrictions on trade and payments. Subsequently, the Executive Directors took a decision that called on all members to collaborate with the Fund in accordance with Article IV, Section 4(a), with a view to attaining the objectives outlined by the Committee. The Executive Directors also stated in their decision that the consultations of the Fund on the policies that members were following in present circumstances would be conducted in the light of these objectives.

In a decision taken on June 13, 1974, the Executive Directors reached agreement on a memorandum recommending that members use their best endeavors to observe certain guidelines for the management of floating rates. The guidelines, and the accompanying commentary, are described in greater detail later in this chapter and are reproduced in full in Appendix II.

The agreement with regard to official gold transactions reached in Washington on March 17, 1968 between the Governors of seven central banks was abolished in November 1973. This was followed by a request from South Africa to terminate the Fund decision “South Africa: Policy on Sales of Gold to the Fund,” which had been adopted toward the end of 1969. The Executive Directors terminated the decision on December 7, 1973. In other developments related to gold, the Fund approved requests for the postponement of repurchase obligations under Article V, Section 7(b), incurred in gold, in view of the uncertainty about the future international role of gold; the Bahamas was permitted to become a member of the Fund without paying a portion of its subscription in gold;1 and, upon the request of Nepal, the Executive Directors recommended and the Board of Governors agreed that the fourth and fifth installments of the increase in Nepal’s quota be postponed until April 30, 1976—each of those installments included the equivalent of SDR 200,000 in gold.

A major consideration of the Executive Directors in the first half of 1974 was to establish a new facility in the Fund to assist members in financing the initial impact of the increase in the cost of their oil imports. This facility, which was established in June, was first discussed with the Executive Directors on the initiative of the Managing Director, who recommended it to the Committee of Twenty at its meeting in Rome in January. The establishment of the facility was accompanied by, and was in large part dependent upon, the settlement of other related issues, including new borrowing arrangements.

In July 1974 the Executive Directors continued with their consideration of another special facility, the Extended Fund Facility, designed to provide longer-term financial assistance for countries with structural balance of payments problems. At the same time, they were also working on the preparation of draft amendments to the Articles of Agreement for later consideration by the Interim Committee and for submission to the Board of Governors.

Reform of the International Monetary System

The Committee of the Board of Governors on Reform of the International Monetary System and Related Issues (the Committee of Twenty) presented its final report, together with an Outline of Reform, on June 14, 1974. On the previous day, consistent with a number of the Committee’s recommendations for immediate action, the Executive Directors adopted a series of interrelated decisions. The outcome of the Committee’s work and the decisions adopted by the Executive Directors are summarized below.

The Committee of Twenty

After its establishment by a Resolution adopted by the Board of Governors on July 26, 1972, the Committee of Twenty held 6 meetings and its Deputies met 12 times. In addition, seven technical groups were established to deal with particular aspects of reform. Following its inaugural meeting in September 1972, the Committee met in Washington in March and July 1973 and in Nairobi late in September at the time of the Annual Meeting. At that meeting the Chairman of the Committee submitted to the Board of Governors an interim report on the work of the Committee, together with a First Outline of Reform that had been prepared by the Chairman and the Vice Chairmen of the Deputies.

Subsequently, at a meeting of the Committee and the Deputies in Rome in January 1974, the Committee expressed serious concern at the abrupt and significant changes that were in prospect for the world balance of payments structure and agreed that, in the light of developments that had taken place in the world economy, certain important aspects of reform affecting the interests of both developed and developing countries should be given priority, with a view to their early implementation. Other aspects of the reform could be agreed and implemented at a later date. The Committee established a timetable for completing its work on the reform at a meeting to be held in Washington in June 1974.

Accordingly, following further meetings of the Deputies in Washington in March and in Paris in May, both the Committee and the Deputies met in Washington in June 1974 to make a number of recommendations for immediate action, as set out in a final report and an accompanying Outline of Reform.2 In its final report, the Committee noted that the Outline was in two parts. Part I, “The Reformed System,” recorded the outcome of the Committee’s discussion of international monetary reform and indicated the general direction in which the Committee believed that the system could evolve in the future. It is envisaged that there should be more effective and symmetrical adjustment procedures, which, while leaving the choice of particular policies as far as possible to the country concerned, would nevertheless ensure, through a process of assessment supported by reserve indicators and by graduated pressures, that appropriate action would be taken where necessary; that the system of convertibility should promote the better management of global liquidity and the avoidance of uncontrolled growth of reserve currency balances, and that the SDR should become the principal reserve asset, with the role of gold and of reserve currencies being reduced; and that there should be arrangements to give positive encouragement to economic development and to promote an increasing net flow of real resources to developing countries. The arrangements envisaged in Part I of the Outline involve an enlargement of the scope of international surveillance and management in a number of important areas, and consequently a larger role for the Fund.

The Committee recognized in its report that, in view of present uncertainties, it would not be appropriate to attempt at that time to determine the full details of all aspects of the system, and noted that a number of areas in which agreement has not been reached were considered in Annexes prepared by the Chairman and Vice Chairmen of the Deputies that accompanied the Outline. It was envisaged that arrangements in these areas, as they were agreed, should be implemented as and when the Fund judged it feasible to do so, and that the Fund might in some cases introduce such arrangements initially on an experimental basis with a view to subsequent agreement on full implementation.

The immediate steps on which the Committee agreed were set out in Part II of the Outline and in a detailed statement by the Committee attached to the communiqué. These included the following recommendations: the establishment of an Interim Committee of the Board of Governors and subsequently of a Council; the strengthening of Fund procedures for close international consultation and surveillance of the adjustment process; the adoption of appropriate guidelines for the management of floating rates during the present period of widespread floating; the establishment of a facility in the Fund to assist members in meeting the initial impact of increased oil import costs; provision for countries to pledge themselves on a voluntary basis not to introduce or intensify trade or other current account measures for balance of payments purposes without a finding by the Fund that there is a balance of payments justification for such measures; improvement of procedures in the Fund for management of global liquidity; further international study in the Fund of arrangements for gold in the light of agreed objectives of reform; the adoption of an interim method of valuing the SDR in transactions against currencies; measures of special interest to developing countries, including the Extended Fund Facility, as well as reconsideration of the possibility and modalities of establishing a link between development assistance and SDR allocation, and arrangements for carrying forward the study of the broad question of the transfer of real resources to developing countries; and the preparation of draft amendments of the Articles of Agreement, for further examination by the Interim Committee and for possible recommendation at an appropriate time to the Board of Governors.

Related Decisions of the Executive Directors

After its meeting in Rome in January 1974, the Committee of Twenty issued a communiqué, inter alia, inviting the Executive Directors to prepare for the Board of Governors a draft Resolution to create an Interim Committee, to cooperate with the Deputies on the formulation of rules for floating, to work out for an interim period the details of a method for basing the value of the SDR on a basket of currencies, and to explore with urgency the feasibility of establishing a new facility in the Fund to help members to finance the initial impact of the increase in oil import costs. Decisions on these matters, as well as the interest rate on SDRs and new rates of remuneration and charges in the General Account, were adopted on June 13, 1974. On June 26, 1974 the Executive Directors also took a decision inviting members of the Fund to subscribe to a Declaration on trade and other current account measures for balance of payments purposes. The full text of these decisions, which are summarized below, are reproduced in Appendix II.

Interim committee of the Board of Governors

The Executive Directors adopted a decision 3 approving for submission to the Board of Governors at the 1974 Annual Meeting a draft Resolution recommending the establishment of an Interim Committee of the Board of Governors on the International Monetary System. The Committee would advise the Board of Governors in supervising the management and adaptation of the international monetary system, including the continuing operation of the adjustment process, and in this connection, reviewing developments in global liquidity and the transfer of real resources to developing countries; considering proposals by the Executive Directors to amend the Articles of Agreement; and dealing with sudden disturbances that might threaten the system.

The members of the Committee would be Governors of the Fund, ministers, or others of comparable rank. Each member country of the Fund that appointed an Executive Director and each group of member countries that elected an Executive Director on or after the date on which the last regular election took place would appoint one member of the Committee and not more than seven associates. In addition, Executive Directors, or in their absence their Alternates, would be entitled to attend meetings of the Committee. The Managing Director would be entitled to participate in all the Committee’s meetings.

The Interim Committee would serve until a Council of Governors with decision-making powers could be established through amendment of the Articles of Agreement.

Guidelines for the Management of Floating Rates

After discussion of a memorandum4 entitled “Guidelines for the Management of Floating Rates,” the Executive Directors decided to recommend, pursuant to Article IV, Section 4(a), of the Articles of Agreement, that in present circumstances members of the Fund should use their best endeavors to observe the guidelines set forth and explained in the memorandum. The guidelines were intended to provide criteria that members would observe in performing their undertakings and that the Fund would observe in exercising surveillance in present circumstances.

The guidelines were based on the assumption that in any situation of floating it may be desirable (a) to smooth out very short-run fluctuations in market rates, (b) to offer a measure of resistance to market tendencies in the slightly longer run, particularly when they are leading to unduly rapid movements in the rate, (c) to the extent that it is possible to form a reasonable estimate of the medium-term norm for a country’s exchange rate, to resist movements in market rates that appear to be deviating substantially from the norm, and (d) to take account of members’ reserve positions in the operation of the guidelines covered by (b) and (c). The guidelines also recognize the interest countries have in intervention conducted in their currencies by other countries.

The guidelines also take into account (a) that national policies, including those relating to domestic stabilization, should not be subjected to greater constraints than are necessary in the international interest; (b) that a degree of uncertainty attaches to any estimate of a medium-term normal exchange rate and that on occasion the market view may be more realistic than any official view; and (c) that in view of the strength of short-term market forces it may at times be unavoidable to forego or curtail official intervention that would be desirable from the standpoint of exchange stability.

The guidelines were intended to provide the basis for a meaningful dialogue between the Fund and member countries with a view to promoting international consistency during a period of widespread floating. They were termed guidelines rather than rules to indicate their tentative and experimental character. They should be adaptable to changing circumstances, and they would be reviewed from time to time in order to make any adjustments that might be appropriate.

THE VALUATION AND INTEREST RATE OF THE SDR, REMUNERATION, AND CHARGES

On June 13, 1974 the Executive Directors adopted a decision 5 amending Rule 0-3 and giving effect, as from July 1, 1974, to the standard basket system of valuation for an interim period. The decision will be reviewed two years from the date of its adoption. For the purpose of determining the exchange rates of currencies in terms of special drawing rights, one SDR will be deemed to be equal to the sum of the following amounts of currencies:

The currencies included in the SDR basket are those of the 16 countries that had a share in world exports of goods and services in excess of 1 per cent of average over the five-year period 1968-72. The amounts were determined in such a way that the relative weights for these currencies were broadly proportionate to the share of these countries in international transactions, using as proxy for this purpose average exports of goods and services in the period 1968-72 but modified, particularly with respect to the United States, in recognition that the proxy does not necessarily provide an adequate measure of a currency’s real weight in the world economy in all cases. Accordingly, the U. S. dollar was assigned a weight of 33 per cent. The Fund will collect exchange rates of the basket currencies daily in order to calculate a daily rate of the SDR in terms of each currency for which a representative rate has been established.

U. S. dollar0.40
Deutsche mark0.38
Pound sterling0.045
French franc0.44
Japanese yen26
Canadian dollar0.071
Italian lira47
Netherlands guilder0.14
Belgian franc1.6
Swedish krona0.13
Australian dollar0.012
Danish krone0.11
Norwegian krone0.099
Spanish peseta1.1
Austrian schilling0.22
South African rand0.0082

The Executive Directors also adopted a decision 6 establishing the rate of interest on the SDR at 5 per cent per annum. The interest rate on the SDR will be the same as the basic rate of remuneration on super gold tranche positions. After an initial period of six months, unless the Executive Directors decide otherwise, both rates will be subject to adjustment in relation to a weighted average of short-term market interest rates in the United States, Germany, the United Kingdom, France, and Japan. If the weighted average market rate is below 9 per cent, the rates will be reduced below 5 per cent by three fifths of the difference between the weighted average market rate and 9 per cent. If the weighted average market rate is above 11 per cent, the rates will be increased above 5 per cent by three fifths of the difference between the combined market rate and 11 per cent.

However, in order to bring the Fund’s income and expenses into balance without raising the Fund’s charges to undesirably high levels, it has been agreed that, for the next two years, a lower rate of remuneration will be paid on the segment of the super gold tranche corresponding to the Fund’s holdings of currency between 75 and 50 per cent of quotas, during any periods when the basic rate of remuneration is above 3¼ per cent; the lower rate will then be 2½ per cent or half the basic rate of remuneration, whichever is the higher. Moreover, the lower rate will be increased to the extent that the Fund’s net income permits. These provisions for a split rate of remuneration will be reviewed after two years and will lapse in the absence of a further decision.

Prior to July 1, 1974 the rate of interest on the SDR and the rate of remuneration had been 1 ½ per cent. These two rates are closely linked under Article XXVI, Section 3, of the Fund Agreement, which provides that the SDR interest rate shall not be greater than two per cent or the rate of remuneration, whichever is higher, or smaller than one per cent or the rate of remuneration, whichever is lower.

The Executive Directors also adopted a decision 7 establishing a revised schedule of charges on use of the Fund’s resources. The revised charges, except those resulting from purchases under the oil facility, range from 4 per cent on amounts outstanding up to one year, to 6 per cent for amounts outstanding from four to five years (see Appendix Table I.20).

THE OIL FACILITY

The Fund established a special facility to assist members in meeting the initial impact of the increase in oil costs. Resources made available under this decision will be supplementary to any assistance that members may obtain under other policies on the use of the Fund’s resources.

Requests for purchases under the Fund decision will be met by the Fund, subject to certain limits,8 if the Fund is satisfied that the member needs assistance because of the increases in the cost of its imports of petroleum and petroleum products and because it has a balance of payments need. The Fund will assess each request in order to determine whether, and the extent to which, the member has such a balance of payments need. A member that has made a purchase under this decision will be expected to cooperate with the Fund to find appropriate solutions for its balance of payments problems.

A further condition for access to the facility is that the member represents that it is following policies not inconsistent with the undertakings set forth in paragraph 2 of the Rome Communiqué of the ad hoc Committee of Twenty 9 and in Executive Board Decision No. 4134-(74/4), adopted January 23, 1974 (see Appendix II).

Use of the Fund’s resources under this facility would be repurchased as soon as the balance of payments problem for which the purchase had been made was overcome, and in any event in 16 equal quarterly installments to be completed not later than seven years after the purchase. Charges on transactions effected under the oil facility are set out in Appendix Table I.21.

The facility will be financed, at least initially, from borrowing by the Fund from oil producing countries. Calls under these borrowing arrangements can be made up to December 31, 1975. Lenders will make available either their own currencies, which they will convert into U. S. dollars on request, or U. S. dollars and a loan to the Fund will be evidenced by a nonnegotiable instrument expressed in terms of SDRs. Interest will be paid quarterly by the Fund at an annual rate of 7 per cent and repayment will be completed within an outside period of 3 to 7 years from the date of borrowing; provision is also made for early repayment under certain circumstances.

Various major oil exporters, including Abu Dhabi, Iran, Kuwait, the Libyan Arab Republic, Oman, Saudi Arabia, and Venezuela, have provisionally agreed to make resources available to the Fund in connection with the facility. Canada has also agreed to participate in this financing. The resources being made available to the Fund from these countries total initially the equivalent of about SDR 3 billion. Discussions are being held with other members, both oil and non-oil producers, with a view to increasing the reserves available under the facility.

Not later than September 15, 1974, the Executive Directors of the Fund will review developments since the adoption of this decision in the light of the Fund’s existing and prospective liquidity. A further review will be conducted not later than December 31, 1974.

VOLUNTARY DECLARATION ON TRADE MEASURES

In a communiqué issued at the end of its final meeting on June 13, 1974, the Committee of Twenty stressed the importance of avoiding the escalation of current account restrictions for balance of payments purposes and invited members of the Fund “to subscribe on a voluntary basis to the Declaration concerning trade and other current account measures for balance of payments purposes.” The Declaration was annexed to the Committee’s statement. On June 26, 1974 the Executive Directors took a decision 10 associating themselves with the invitation and concurring in the transmission to members of a letter from the Managing Director requesting that members inform the Fund whether they subscribe to the Declaration.

In subscribing to the Declaration, a member would represent that, in addition to observing its obligations with respect to payments restrictions under the Articles of Agreement, it would not on its own discretionary authority introduce or intensify trade or other current account measures for balance of payments purposes that are subject to the jurisdiction of the GATT, or recommend them to its legislature, without a prior finding by the Fund that there was balance of payments justification for such measures. In arriving at its findings, the Executive Directors would take into account the special circumstances of developing countries.

The Declaration will become effective among subscribing members when members having 65 per cent of the total voting power of members of the Fund have accepted it, and shall expire two years from the date on which it becomes effective unless it is renewed.

Sixth General Review of Quotas

The Fund’s Articles of Agreement require a general review of members’ quotas at intervals of not more than five years. The Executive Directors meeting as a Committee of the Whole held their first meeting on April 15, 1974 relating to the Sixth General Review of Quotas. Any Resolution of the Board of Governors relating to the Sixth General Review of Quotas has to be adopted by February 8, 1975.

Exchange Rates

After the announcement by the U. S. Government in February 1973 that it was seeking congressional authority for a reduction of 10 per cent in the par value of the U. S. dollar, a large number of member countries notified the Fund of new arrangements for their currencies. Two countries (Italy and Japan) decided that for the time being they would not ensure the maintenance of specified margins for their currencies in exchange transactions, thus joining three other countries (Canada, the United Kingdom, and Switzerland) that had earlier permitted their currencies to float. In March six members (Belgium, Denmark, France, Germany, Luxembourg, and the Netherlands) of the European Economic Community, joined later by two countries (Norway and Sweden) that were not members of the EEC, decided to maintain fluctuations between their currencies within margins of 2¼ per cent, but no longer to ensure that quotations for the U. S. dollar in their markets remained within specified limits (referred to as the European narrow margins arrangement); at the same time, the deutsche mark was revalued by 3 per cent in terms of SDRs. From late March 1973 to mid-May 1974 Austria maintained a maximum margin of 2¼ per cent between the schilling and the currencies of the countries participating in the European narrow margins arrangement, although not formally participating in that arrangement.11 After May 17, 1974 this margin was increased to 4½ per cent. Thirty-five members notified the Fund that they had decided to maintain the exchange rates of their currencies in terms of the U. S. dollar; most of the other Fund members maintained unchanged their par values, central rates, or market rates in terms of currencies other than the U. S. dollar.

After a period of comparatively quiet trading in foreign exchange markets, strong pressures re-emerged in mid-May 1973 leading to a sharp appreciation of continental European currencies in terms of U. S. dollars and to marked tension among the currencies participating in the European narrow margins arrangement. On June 29, 1973 the German authorities communicated to the Fund a new central rate that revalued the deutsche mark by a further 5.5 per cent. Later in the year, the Netherlands and Norway also revalued their currencies by 5 per cent to facilitate the operation of the European narrow margins arrangement; new central rates were communicated to the Fund by the Netherlands, effective September 17, and by Norway, effective November 16.

In view of the effects on their balance of payments of the sharp movements in exchange rates of the currencies of major industrialized countries, a number of other member countries found it necessary during the fiscal year to adjust their par values or central rates or to adopt more flexible exchange market arrangements.12 In the third quarter of 1973, the Fund concurred in par value changes proposed by Thailand (July), Saudi Arabia (August), and Australia (September); all these changes revalued the currencies of these countries in terms of SDRs. After approval by the U. S. Congress, the United States proposed and the Fund concurred in a change of the par value of the U.S. dollar effective October 18, 1973, thereby formalizing the devaluation proposed in February. The par values of nine other member countries—the Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Liberia, Mexico, Nicaragua, and Panama—were changed similarly in the following weeks. In addition, initial par values were established by Algeria, the Bahamas, Qatar, and the United Arab Emirates.

Kenya, Tanzania, and Uganda notified the Fund of the adoption of central rates in June 1973 that appreciated their currencies from the par value; in January 1974 their central rates were again changed, reversing the earlier appreciation. Another member—Rwanda—notified the Fund of a new central rate that involved a depreciation of its currency. Fiji replaced the exchange rate maintained under its membership resolution by a central rate involving an appreciation of the currency. Western Samoa adopted a central rate unchanged from the exchange rate it maintained under its membership resolution.

A number of countries discontinued the fixed relationship that they had been maintaining between their currency and a reserve currency because these relationships were causing excessive movements in their effective exchange rates. Members indicating that they would no longer maintain exchange rates within previously applicable margins included Cyprus (July), Finland (June), Greece (October), Iceland (June), Malawi (November), Malaysia (June), Morocco (May), New Zealand (July), Singapore (June), and Yugoslavia (July).

Exchange rate trends and relationships began to shift fairly markedly as early as the third quarter of 1973 and particularly toward the end of the year, reflecting the sharp turnaround in the current account balance of the United States in 1973 and market expectations of relative changes in the balance of payments positions of the major industrial countries as a result of world oil developments. By mid-January 1974 the currencies of the countries participating in the European narrow margins arrangement had fallen to a discount of 6 to 8 per cent of parity or central rates expressed in terms of the U. S. dollar, in comparison with a premium as high as 18 to 20 per cent in July 1973. France notified the Fund that owing to the balance of payments uncertainties that would be affecting the international monetary system, it had decided that from January 21, for a period of six months and on a provisional basis, the exchange rate between the French franc and certain other currencies in the official market would not necessarily be confined within predetermined margins, but that during this period orderly conditions would be maintained in the exchange market. Spain similarly discontinued from January 22 observance of specified margins in exchange transactions between the peseta and the U.S. dollar. On March 21, 1974 France abolished the separate market for financial transactions that had been established in August 1971; the changes in the structure of the balance of payments and the floating of the franc in the exchange market had rendered unnecessary the complex administrative procedures required by the dual market system. Similarly, Italy unified the exchange markets for the commercial and financial lira, effective March 22, 1974. In the context of a reform of its exchange system, Costa Rica adopted a new par value, effective April 25, 1974.

In June 1974 the situation was that most major industrial countries (e.g., Canada, France, Italy, Japan, the United Kingdom, and the United States) were not maintaining exchange rates within specified margins, while other industrial countries within the European narrow margins arrangement were maintaining a maximum margin in the rates for exchange transactions between their currencies only among themselves. A large number of other countries, developed and less developed, were endeavoring to maintain the exchange rates for their currencies roughly unchanged in terms of the currencies of their major trading partners taken as a group; most remaining Fund members were maintaining stable exchange rates for their currencies in terms of a single intervention currency—usually the U. S. dollar, the pound sterling, or the French franc.

Special Drawing Account

During the fiscal year 1973/74 the total use of SDRs by participants was SDR 1,123 million. The major part of this total—SDR 996 million—was used in transactions by agreement (that is to say, without designation by the Fund) involving only five participants. The amounts of SDRs transferred in this way were substantially in excess of the totals of SDR 303 million and SDR 380 million transferred in similar transactions in the two previous fiscal years. However, transactions with designation (SDR 60 million) and the use of SDRs to make repurchases in the General Account (SDR 29 million) were at low levels compared with previous years. The General Account transferred a total of SDR 185 million to participants, of which SDR 157 million was acquired by participants needing to reconstitute their SDR holdings. The totals of the different categories of SDR transfers are shown in Appendix Table 1.4.

The large increase in transactions by agreement between participants resulted from the use of SDRs by EEC members in settlement of obligations arising from intervention in foreign exchange markets under the European narrow margins arrangement. The reduction in other forms of SDR use cannot be attributed to any single cause; the increasing need for some participants to retain SDRs in order to meet the reconstitution requirements probably acted as a brake on SDR use, and the continued uncertainty as to the future value of SDRs in terms of currency during the period under review may also have encouraged participants to retain their SDRs.

No proposal was made on future allocations of SDRs during the fiscal year. The Managing Director continues to be obliged to make a proposal whenever he is satisfied that it could be made consistently with the Articles.

Exchange Rates for SDRs in Transactions by Agreement

From the outset of operations in the Special Drawing Account, the valuation of currencies in terms of SDRs has been determined by Rule 0-3 of the Fund’s Rules and Regulations. Prior to the amendment of Rule 0-3 on July 1, 1974,13 the exchange rate of the U. S. dollar in terms of SDRs was its par value or prospective par value; the exchange rate of other currencies in terms of SDRs continued to be determined by the market exchange rate of these currencies against the U. S. dollar. The methods of valuation, which applied to all transactions in SDRs between participants as well as to conversions associated with such transactions, gave effect to the “equal value” principle set out in Article XXV, Section 8(a). This principle requires that “the exchange rates for operations or transactions between participants shall be such that a participant using special drawing rights shall receive the same value whatever currencies might be provided and whichever participants provide those currencies.”

In March 1973 the EEC members of the European narrow margins arrangement agreed that SDRs would be used as one of the media for settlement of obligations resulting from intervention to maintain the agreed margins. Toward the middle of 1973, the market rates of the currencies of several EEC members appreciated strongly against the U. S. dollar. As a result, although these members wished to transfer SDRs among themselves to settle obligations arising from intervention in the foreign exchange markets, they felt seriously inhibited from doing so under the method for the valuation of currencies in terms of SDRs set out in Rule 0-3, since the use of this method had the effect of diminishing the value of their SDR holdings in terms of their own currencies. As mentioned earlier, the “equal value” principle was suspended for certain transactions on November 5, 1973.

All transactions by agreement between participants that took place in the period under review were in settlement of obligations incurred under the European narrow margins arrangement. The users of SDRs in these transactions were Belgium (SDR 37 million), Denmark (SDR 5 million), France (SDR 588.5 million), Germany (SDR 100.5 million), and the Netherlands (SDR 264.9 million); and the recipients of SDRs were Belgium (SDR 103.2 million), Denmark (SDR 72.3 million), France (SDR 108.4 million), and Germany (SDR 712 million). These transfers of SDRs resulted in a significant redistribution of SDR holdings among these countries; on April 30, 1974 the SDR holdings of Belgium and Germany were 289 and 268 per cent of their respective allocations, whereas the SDR holdings of France were reduced to about 21 per cent of its allocation.

Of the total of SDR 996 million transferred in this way, SDR 131 million was transferred in May 1973. Thereafter, as a consequence of the valuation difficulties mentioned earlier, there were no further transactions by agreement until the Executive Directors took the decision that enable the amounts of currencies transferred against SDRs in these transactions to be based on their par values or central rates. Following this decision in November 1973, par values or central rates were used in all transactions by agreement that took place during the remainder of the fiscal year.

Transactions with Designation

During the fiscal year there were only six transactions with designation, in which a total of SDR 60 million was used to obtain currency from participants designated by the Fund (see Table 19). As a result of this low level of transactions and the procedures followed in designation, only nine participants were actually designated, although many more were included in the quarterly designation plans. The plans agreed by the Executive Directors for the third and fourth calendar quarters of 1973 and the first quarter of 1974 each made provision for possible designation of SDR 100 million; this limitation of amount resulted in the inclusion in the plans only of those participants considered sufficiently strong to be designated whose holdings of SDRs were below their allocations. In order to spread designation over a broader list of participants at a time when widespread reserve losses were expected to give rise to greater use of SDRs, the designation plan agreed for the second quarter of 1974 provided for possible designation of SDR 300 million covering 26 participants, including the United States whose balance of payments and reserve position was considered sufficiently strong to justify it being subject to designation for the first time since mid-1970. As mentioned later, it was not necessary for any participant to be designated to receive SDRs under the rules for reconstitution.

Table 19.Use and Receipt of SDRs in Transactions with Designation, Fiscal Year Ended April 30, 1974(In thousands of SDRs)
UseReceipt
Argentina21,400
Colombia7,500
Greece2,213
Haiti900
Indonesia10,500
Iran3,000
Khmer Republic3,500
Malagasy Republic8,500
Philippines6,000
Sierra Leone1,213
South Africa37,0001,000
Turkey1,000
Uganda9,000
Yugoslavia7,500
Total60,11360,113

Transactions and Operations Between Participants and the General Account

Transfers of SDRs to the General Account in settlement of repurchases totaled SDR 29 million, which was less than half the amount of SDRs used in this way during the previous fiscal year and represented less than 5 per cent of total repurchases during the fiscal year. Participants also used a total of SDR 29 million in settlement of charges in the General Account; this high level, amounting to over 94 per cent of total charges, presumably reflected the fact that the principal alternative medium of payment was gold.

The General Account transferred a total of SDR 185 million to participants. Of this total, SDR 20 million was transferred in payments to 26 participants that exercised their option to accept SDRs rather than currency in part settlement of remuneration on their net creditor positions in the General Account and SDR 157 million was transferred to participants that needed to reconstitute their SDR holdings.14 As a result of these receipts and transfers, the General Account’s holdings of SDRs declined from SDR 617 million to SDR 499 million during the fiscal year.

Reconstitution

The rules for reconstitution require participants, over successive five-year periods, to maintain their average holdings of SDRs at not less than 30 per cent of the average of their net cumulative allocations. The first five-year period ends on December 31, 1974. In accordance with the provisions of the Articles of Agreement, since the end of 1971, the Fund has been making monthly calculations to determine whether and to what extent each participant has a need to obtain SDRs to achieve the required average holding of 30 per cent. Participants are permitted to obtain the amounts of SDRs shown by these calculations to be necessary to meet the reconstitution requirement. The SDRs may be obtained either from another participant with a balance of payments need to use SDRs or from the Fund’s General Account against gold or currencies acceptable to the Fund or as part of a purchase from the General Account in accordance with the Fund’s policy on the use of its resources. All acquisitions of SDRs for purposes of reconstitution that have taken place in the past fiscal year have involved transfers by the General Account. The total of SDRs acquired for reconstitution since January 1, 1972 was SDR 310.8 million, as shown in Table 20.

Table 20.Acquisition of SDRs for Reconstitution from the Fund’s General Account, January 1, 1972-April 30, 1974(In millions of SDRs)
197219731974 Jan. 1-Apr. 30Total
AmountNumber of TransactionsAmountNumber of TransactionsAmountNumber of TransactionsAmountNumber of Transactions
Against currency
acceptable to Fund39.327140.06018.715198.0102
In purchases64.2838.0910.64112.821
Total103.535178.06929.319310.8123

At the start of the fiscal year 23 participants needed to reconstitute their SDR holdings in amounts totaling SDR 147 million. During the fiscal year, as participants obtained and used SDRs, the composition of the list of participants with a need to reconstitute, and the amounts they needed to acquire, varied from month to month. On October 31, 1973, after a period in which SDR 124 million had been obtained from the General Account, the list had been reduced to 19 participants, needing to obtain a total of only SDR 57 million. However, by the end of the fiscal year, the list had expanded to include 24 participants and the needed amounts totaled SDR 143 million. By making acquisitions of SDRs during the year, 8 participants eliminated their need to reconstitute and 17 others substantially reduced the amounts they needed to acquire. During the year the General Account transferred a total of SDR 157 million to 24 participants needing to reconstitute their holdings. Details of the participants and the amounts they acquired are given in Appendix Table I.7. In all cases, participants acquiring SDRs took the initiative to do so, although for a few participants the need to reconstitute had reached the level at which they were subject to designation to promote the reconstitution of their holdings; in these latter cases, voluntary acquisitions made actual designation unnecessary.15

It is difficult to form a judgment as to how far the rules for reconstitution have affected the use of SDRs. With few exceptions, however, participants for which the calculations have shown a need to reconstitute have rarely made further use of SDRs except in the payment of charges in the General Account. Other participants have also appeared to limit their use of SDRs in such a way that their holdings have remained above 30 per cent of their allocation; at the end of April 1974, of the 89 participants with holdings below their allocations, only 13 had holdings below 30 per cent of allocation, while 39 participants had holdings in the range from 30 to 60 per cent of allocation.

Changes in the Distribution of SDR Holdings

The main changes in the distribution of SDR holdings during 1973/74 were the movements of SDRs among the five EEC countries participating in the European narrow margins arrangement described earlier; the decline in the General Account holdings by SDR 118 million; and the net increase of SDR 90 million in the holdings of less developed countries, which was mainly the result of the acquisition of SDRs to promote reconstitution but also partly reflected net receipts through designation. Among the industrial countries, the holdings of the United States, the United Kingdom, Canada, and Japan were little changed. The principal changes in SDR holdings are summarized in Table 21.

Table 21.Changes in the Distribution of SDR Holdings, Fiscal Year Ended April 30, 1974(In millions of SDRs)
HoldingsApril 30, 1973-April 30, 1974
Net Cumulative AllocationsApril 30, 1973April 30, 1974UseReceiptNet Change
Industrial countries6,1786,5816,6071,0111,03726
United States2,2941,7961,7888−8
United Kingdom1,0066005946−6
Belgium2095286043711376
Denmark837214057368
France485582100590108−482
Germany, Fed. Rep. of5428261,454100728628
Netherlands2366564002659−256
Other continental Europe58663063222
Canada35946746922
Japan37742542611
Primary producing countries3,1372,1172,20913522691
More developed areas78964164251521
Less developed areas2,3481,4761,5678417490
Western Hemisphere879593623215130
Middle East23911915163832
Asia765485505274720
Africa46528028830388
Total participants9,3158,6988,816118
General Account617499−118

BIS Prescribed as Holder of SDRs

By a Resolution of the Board of Governors, adopted on January 21, 1974, by a majority in excess of the required 85 per cent of the total voting power of participants, the Fund prescribed the Bank for International Settlements (BIS) as a holder of SDRs. The text of the Resolution is reproduced in Appendix II. Under the Resolution, a participant in the Special Drawing Account may use SDRs to obtain currency from the BIS with the assurance that the BIS would use the same amount of SDRs to obtain currency from the participant within a period not exceeding six months. The Resolution requires that the Executive Directors discuss the operation of this Resolution in their Annual Report as part of their review of the operation of the Special Drawing Account. During the fiscal year no transactions in SDRs took place between the BIS and participants.

General Account

As in 1972/73 purchases exceeded total repurchases during the fiscal year ended April 30, 1974. Total purchases were equivalent to SDR 1,058 million, the smallest amount in any year since 1963/64. Nearly 60 per cent of all purchases were made within the gold tranche,16 including purchases by France, Germany, and the Netherlands totaling SDR 438 million related to settlement of liabilities under the European narrow margins arrangement. The larger part of these settlements, equivalent to SDR 349 million, took place after the suspension for certain transactions of the equal value principle under Article XXV, Section 8(a), in November 1973. Purchases under the compensatory financing facility amounted to the equivalent of SDR 212 million, or 20 per cent of total purchases, little changed from the previous year.

On April 10, 1974 the Executive Board approved a stand-by arrangement for Italy, the first one for this member, which authorized purchases equivalent to SDR 1 billion over a 12-month period.

Repurchases amounted to the equivalent of SDR 672 million during 1973/74, an increase of 24 per cent over the previous year; more than one half was made in discharge of obligations incurred under Article V, Section 7(b). Voluntary repurchases accounted for SDR 138 million (21 per cent of the total), compared with SDR 11 million (2 per cent) the previous year. The increase reflected mainly the repurchase by the United States, equivalent to SDR 110 million, made in accordance with a decision of the Executive Board, accepting repurchases up to the equivalent of SDR 400 million.

Although purchases exceeded repurchases during the fiscal year by SDR 385 million, members’ creditor positions were reduced by SDR 283 million because of compensating or offsetting use of creditor positions by EEC members of the European narrow margins arrangement, sales of U. S. dollars rather than use of the currency of a creditor member, purchases of SDRs from the General Account by members using their own currencies, and members’ acquisitions of SDRs with currencies acceptable to the Fund.

Currencies of members not maintaining rates for their currencies within the margins prescribed by the Articles of Agreement or by Executive Board Decision No. 904-(59/32) continued to be valued on the basis of representative rates established under Rule 0-3 17 when used in Fund transactions. Following the establishment of the new par value for the U. S. dollar with the Fund, on October 18, 1973, Executive Board Decision No. 3865-(73/12) G/S lapsed and the provisions of Rule 0-3 applied in the usual way. This decision was adopted on February 16, 1973, after the U. S. authorities announced the proposed reduction in the par value of the U. S. dollar, and amended Rule 0-3(i) so that all calculations involving currencies other than the U. S. dollar would be made on the basis of the prospective par value for the U. S. dollar.

At the beginning of 1973 the procedures for the selection of currencies for use in Fund transactions was modified to take account of the reluctance of some members to permit reductions in their creditor positions in the Fund in exchange for increases in their holdings of foreign exchange. It was in recognition of this situation that the Fund’s selection of currencies during 1972 had aimed at an equitable distribution of changes in net creditor positions; this entailed limiting the selection of currencies usable in purchases to those that were acceptable by the Fund in repurchases, and advising members that currencies used in Fund transactions should normally be converted into or out of U. S. dollars. This procedure meant that less emphasis had been placed on equalizing the reserve positions in the Fund of creditor members in relation to their holdings of gold and foreign exchange.

During 1973, however, when it became apparent that purchases were exceeding repurchases, the procedure was resumed of determining the amounts of currencies to be used in purchases in accordance with the member’s holdings of gold and foreign exchange, and the amounts of currencies for use in repurchases (except for Belgian francs, Mexican pesos, and Netherlands guilders) in accordance with the member’s reserve position in the Fund. This procedure tended to equalize, for the currencies to which it was applied, the cumulative use of members’ currencies relative to their holdings of gold and foreign exchange.

In January 1974 the United States offered and the Fund agreed that over a period of three months (subsequently extended) the United States could repurchase up to the equivalent of SDR 400 million. It was expected that the United States would acquire currencies for the major part of such repurchases in the course of market operations. Actual repurchases from the Fund during the remainder of the fiscal year amounted to only SDR 110 million.

In accordance with Article XXV, Section 7(f), the Executive Board permitted two members, Bangladesh and Romania, to purchase SDRs from the General Account for purposes other than reconstitution; Bangladesh purchased SDRs in four gold tranche transactions in order to pay charges on balances in excess of quota arising from use of the compensatory financing facility. In connection with a transaction in the first credit tranche, Romania purchased an amount of SDRs to be held and used solely for the payment of charges in connection with that transaction.

On January 30, 1974 the Executive Board adopted a decision amending Rules E-2 and E-3 of the Fund’s Rules and Regulations permitting a reduction in the minimum balance of a member’s currency held by the Fund in its No. 1 Accounts from 1 per cent to ¼ of 1 per cent of quota.

Use of Fund’s Resources

During the year purchases of currencies and special drawing rights by 24 members amounted to the equivalent of SDR 1,058 million (Appendix I, Table I.9), a decline of SDR 118 million from the previous year. The equivalent of SDR 280 million was purchased by the Netherlands in five separate gold tranche transactions. France and India each made purchases of SDR 138 million; France made two gold tranche purchases and India a gold tranche purchase and another purchase under the compensatory financing facility.

Romania made its first use of the Fund’s resources with a purchase in the gold tranche in May 1973; it made its first credit tranche purchase in November.

Use of their gold tranche positions by 13 members, for a total amount of SDR 607 million, accounted for more than half the total purchases in 1973/74. Purchases in the gold tranche included SDR 438 million by France, Germany, and the Netherlands, in connection with the settlement of liabilities under the European narrow margins arrangement. Developing countries accounted for 28 per cent of total gold tranche transactions in 1973/74, compared with 9 per cent in 1972/73.

Purchases under stand-by arrangements during the year declined from SDR 213 million in 1972/73 to SDR 179 million, the smallest amount purchased under such arrangements in 13 years. The total amount of stand-by arrangements approved in 1973/74, equivalent to SDR 1,394 million, was SDR 1,072 million above last year’s figure (see Appendix Tables I.10 and I.12). The increase was accounted for largely by the standby arrangement approved for Italy. With this exception, all other stand-by arrangements in effect in 1973/74 were with primary producing countries.

Use of the compensatory financing facility was made by 8 members for a total of SDR 212 million. This amount, which was slightly higher than the previous year, represented the second largest amount purchased under the facility in any one year. The largest amount, SDR 220 million, was purchased in 1967/68, when 12 members used the facility. The largest single purchase under the facility during 1973/74 was made by India for SDR 62 million.

Credit tranche purchases other than under stand-by arrangements or special facilities totaled SDR 60 million, of which Nicaragua and Romania purchased SDR 12 million and SDR 48 million, respectively.

The currency most used in purchases was the deutsche mark for the equivalent of SDR 415 million, followed by French francs for SDR 126 million. Those two currencies together constituted over half of total purchases, reflecting the use made of them in settlements under the European narrow margins arrangement.

Repurchases

Repurchases amounted to SDR 672 million, compared with SDR 540 million in 1972/73. The largest repurchase during 1973/74, equivalent to SDR 110 million (16 per cent of the total), was made by the United States.

Repurchases equivalent to SDR 381 million, or 57 per cent of the total, were in discharge of obligations incurred under Article V, Section 7(b), of the Fund Agreement, rather more than twice as much as in 1972/73; SDR 8 million and SDR 30 million related to obligations incurred as of April 30, 1971 and 1972, respectively; and the remainder, amounting to SDR 343 million, was in discharge of obligations incurred as of April 30, 1973 18 (see Appendix Table I.15).

Voluntary repurchases amounted to SDR 138 million, or 21 per cent of the total. In addition to the repurchase of SDR 110 million relating to the U. S. gold tranche purchase, they included SDR 14 million in respect of a purchase under the Compensatory Financing Decision and SDR 7 million each relating to a credit tranche purchase and to a gold tranche purchase that was regarded as having been made under the Buffer Stock Financing Decision.

The sum of SDR 102 million, or 15 per cent of the total, was repurchased in accordance with schedules of amounts, approved by the Fund, for repurchase within five years from the date of purchase. Repurchases in respect of purchases under stand-by arrangements amounted to SDR 34 million, or 5 per cent of the total.

Other repurchases totaled SDR 17 million, including SDR 6 million by 21 members in respect of currency payments in excess of 75 per cent of the increase in quotas in accordance with paragraph 5 of Board of Governors Resolution No. 25-3 on “Increases in Quotas of Members—Fifth General Review”;19 SDR 5 million by the Bahamas under paragraph 4 of Board of Governors Resolution No. 28-3 on Membership;20 and SDR 4 million by Bolivia in accordance with paragraph 5(ii) of the Decision on the Problem of Stabilization of Prices of Primary Products, which states that a member shall repurchase to the extent that the international buffer stock makes a distribution in currency.

The Executive Board approved scheduling of repurchases over periods up to five years from the date of purchase for 14 members. The Board also agreed that 4 members postpone the discharge of repurchase obligations under Article V, Section 7(b), incurred in gold, subject to a review by October 31, 1974.

Three member countries used SDR 3 million of gold in the discharge of obligations incurred under Article V, Section 7(b), and Schedule B, payable as of April 30, 1973. Use of SDRs totaled SDR 29 million, of which SDR 4 million was in discharge of repurchase obligations incurred as of April 30, 1973.

In addition to being the currency most used in purchases, the deutsche mark was the currency most used in repurchases for SDR 248 million, or 37 per cent of the total (see Appendix Table I.16). Net use of deutsche mark amounted to some SDR 168 million.

Income, Expenses, and Reserves

The largest part of the Fund’s income is derived from charges on Fund holdings of currencies in excess of quota, from service payments on purchases of currency and SDRs from the General Account other than those in the gold tranches, and from charges on stand-by arrangements. The Fund’s income is also augmented by interest payments on SDRs held by the General Account and from assessments to defray the cost of conducting the business of the Special Drawing Account that is levied, under Article XXVI, Section 4, on all participants in proportion to their net cumulative allocations (this item is treated as a deduction from expenses).

All charges are payable in gold or at the member’s option in SDRs, but charges on stand-by arrangements may be paid in U. S. dollars. In accordance with the provisions of Article V, Section 8(f), however, a member may settle its charges partially in its own currency if its monetary reserves are equivalent to less than one half of its quota.

The schedule of charges on balances in excess of quota that was in effect during 1973/74 (see Appendix Table I.19) produced earnings of SDR 28.2 million during the fiscal year. The highest earnings, SDR 128.1 million, were in 1970/71.

The schedule of charges is reviewed annually by Executive Directors and, as described earlier, a new schedule was introduced effective July 1, 1974. This was the first change in the schedule of charges since May 1, 1963.

The remainder of the Fund’s income, equivalent to SDR 10.3 million during 1973/74, came mainly from interest payments received on holdings of SDRs by the General Account and, to a lesser extent, from charges in connection with purchases from the Fund and stand-by arrangements. Interest payments on holdings of SDRs were equivalent to SDR 7.8 million, which showed a decrease for the first time since the allocation of special drawing rights in 1969/70 because of lower average amounts held by the Fund; charges amounted to SDR 2.5 million, a decrease of 22 per cent compared with the previous year. Assessments to cover the expenses of operating the Special Drawing Account amounted to SDR 1.0 million.

Operational expenses, amounting to SDR 27.2 million, again consisted entirely of payment of remuneration to creditor members as specified in Article V, Section 9, of the Fund Agreement. In 1972/73 these payments totaled SDR 29.3 million.

The Fund’s net operational income was SDR 11.2 million, a decrease of SDR 1.0 million from the previous year. Compared with SDR 34 million,21 in 1972/73, budgetary and fixed property expenses increased by SDR 14.4 million in 1973/74. Net expenses of SDR 37.2 million were charged to the Special Reserve, reducing that balance to SDR 351.7 million on April 30, 1974.

A summary of income and expenses over the past ten fiscal years is given in Appendix Table I.18.

Transactions and Operations in Gold

During the past fiscal year, the Fund received gold equivalent to SDR 3.4 million and disbursed gold equivalent to SDR 3.6 million (see Appendix Table I.17). These transactions and operations were connected primarily with repurchase obligations incurred by members under Article V, Section 7(b), and payment of remuneration to creditor members as specified in Article V, Section 9, of the Fund Agreement.22 On April 30, 1974 the Fund’s gold with depositories was equivalent to SDR 5,369.9 million, only fractionally changed from last year.

At the request of South Africa, the Fund terminated its decision entitled “South Africa: Policy on Sales of Gold to the Fund” 23 on December 7, 1973. Under this decision, which had been adopted at the end of 1969, South Africa had been entitled to sell gold to the Fund, inter alia, to meet current foreign exchange needs when the price of gold in the markets fell to or below the equivalent of the parity price and, regardless of the market price, when South Africa had a need for foreign exchange over a semiannual period beyond that which could be satisfied by the sale of all current production of newly mined gold on the private markets or by sales to the Fund when the market price fell to or below the parity price.

South Africa’s gold sales to the Fund in the framework of the decision had amounted to the equivalent of SDR 639.75 million in 1970 and SDR 137.55 million in 1971; no sales had taken place after 1971.

The decision permitted a review when requested because of a major change in circumstances, and in any event after a period of five years. In the request for termination of the decision, South Africa indicated its view that the termination in November 1973 of the agreement reached in Washington in March 1968, which had brought into existence the two-tier gold marketing arrangements, constituted a major change in circumstances.

During the year the Executive Directors permitted four members—Colombia, Iraq, the Philippines, and Turkey—to postpone the discharge of portions of repurchase obligations, under Article V, Section 7(b), of the Fund Agreement, that were payable in gold.24 The total amount involved was equivalent to SDR 13.2 million. In permitting these postponements, the Executive Directors took note of the statements by the members that gold payments under present circumstances presented difficult problems and acted pending clarification of the future role of gold in connection with the reform of the international monetary system. The respective decisions are subject to review not later than October 31, 1974.

In November 1973 the Executive Directors took note of the difficulties faced by members in settling gold with the Fund in amounts of less than one standard bar, also in connection with repurchases incurred under Article V, Section 7(b). The Executive Directors decided that such small amounts shall not be collected.25

Consultations with Member Countries

In 1973/74 the Fund completed 89 regular consultations with member countries, of which 61 were under Article XIV and 28 with Article VIII countries. Member countries maintaining restrictions on current international payments and transfers under Article XIV are required to consult annually with the Fund. For members that have accepted the obligations of Article VIII, Sections 2, 3, and 4, the consultations are held regularly on a voluntary basis.

Consultations are a continuing and an important element in the work of the Fund. They not only provide the opportunity for reviewing in detail the economic and financial situation and policies of member countries but also establish a singularly effective setting for furthering international monetary cooperation. Over the years, consultations have placed increasing emphasis on the implications of members’ domestic economic and financial policies in the context of international monetary stability. They help the Fund to deal quickly with members’ requests for the use of Fund resources and proposals for changes in exchange rates and exchange practices. Also, for the individual member country, the consultations provide an independent appraisal of policy and enable the member to discuss with the Fund any special difficulties arising from the actions or policies of other countries.

In recent years the regular consultations have at times been supplemented by special consultations, and toward the end of 1973 the Fund initiated a new procedure for special consultations with members whose external policies were of major importance to the world economy. The first round of these consultations was held in November 1973 with nine member countries whose balance of payments developments and policies have had a major impact on international currency relationships. A second round of discussions, with ten members, including several of the larger developing countries, took place in April and May 1974.

During the fiscal year Qatar, South Africa, the Bahamas, and the United Arab Emirates accepted the obligations of Article VIII, Sections 2, 3, and 4, bringing to 41 the number of member countries with Article VIII status. These members are listed in Appendix Table I.22.

Training and Technical Assistance

The Fund has continued to provide member countries with a wide range of technical services in the fields of fiscal, monetary, and payments policy, banking, government finance, and statistics. The assistance has been made available in a variety of forms—through Fund representatives and advisors, training at headquarters, staff missions, and the assignment of outside experts—and has again covered about two thirds of the Fund’s membership. In 1973/74, 35 Fund representatives or advisors were on assignment of six months or more in 23 countries; 240 government officials from 101 countries attended the IMF Institute; 72 staff members visited 29 countries on technical assistance missions; and 119 outside experts were on assignments of six months or more in 51 countries. This assistance was in addition to the general advisory services and technical assistance made available through the Fund’s regular procedures under Article VIII and Article XIV consultations.

The IMF Institute’s training facilities were increased in 1973/74 when, for the first time, the Institute was able to conduct three courses simultaneously. During the year the Institute offered ten courses to 240 officials of member governments and their financial institutions, an expansion of 25 per cent over the previous year. The course on Financial Analysis and Policy continues to be the principal course provided by the Institute, offered for 20 weeks in English, and for 24 weeks each in French and Spanish. This course, which places special emphasis on the problems of less developed countries, surveys the instruments of monetary, fiscal, and payments policy and examines their effectiveness in achieving policy objectives. It also includes a discussion of the purposes and operations of the Fund directed toward promoting a continued improvement in monetary cooperation among members and in their relations with the Fund. The Institute offers two shorter courses, also in English, French, and Spanish, as required. One is an 8-week course in Balance of Payments Methodology, held in conjunction with the Balance of Payments Division of the Research Department; the other is a 10-week course in Public Finance, conducted jointly with the Fiscal Affairs Department.

The Central Banking Service provided technical assistance to 51 member countries during the year. As in the past, this assistance took two forms: the provision of advisory services to deal with specific problems, usually undertaken by staff members but in some cases also by outside consultants; and the assignment of resident experts in countries, usually for one year or more, to serve in central banks or similar monetary institutions. The services provided included assistance in the setting up of new central monetary institutions; the drafting of central banking, general banking, and deposit insurance legislation; reviews of the financial and banking systems of members; and a computer feasibility study for a central bank. During the year the Central Banking Service and the Legal Department, in cooperation with the area departments concerned, prepared draft banking legislation in 6 countries and helped in the revision of draft legislation in 5 other countries. The Central Banking Service manned technical assistance missions to 15 countries and sent consultants to 8 countries in 1973/74. In the course of 1973/74, 78 outside experts and 14 consultants provided technical assistance to 45 countries. At the end of the year 61 outside experts and 1 consultant were on assignment from the Central Banking Service in 38 countries.

The Fiscal Affairs Department maintained its assistance to member countries at the substantially higher level to which it had increased in the previous year. A total of 31 countries received fiscal technical assistance during the year in the form of staff missions, staff assignments in the field, use of the services of members of the panel of fiscal experts, and work on fiscal projects undertaken at headquarters. The principal fields in which assistance was given were tax policy, tax and customs administration, budgetary systems and procedures, government accounting and auditing, and general financial management. In cooperation with the Legal Department, advice on drafting fiscal legislation was given in five countries. At the end of 1973/74, 24 members on the panel of fiscal experts were on long-term assignments in 15 member countries, and groups of long-term advisors were continuing to operate in 2 countries.

The Bureau of Statistics has continued to provide technical assistance in statistics to member countries, principally for establishing or improving central bank bulletins. This assistance has emphasized the development and inclusion in bulletins of financial and general statistics prepared in accordance with classifications and definitions that help to make such data useful for monetary authorities and others concerned with monetary and payments problems. During the past year, the Bureau’s technical assistance on central bank bulletins covered 10 countries and also included brief review visits to assess progress made in central bank bulletins of 25 countries that had been assisted by the Bureau in previous years. The Bureau helped to inaugurate new central bank bulletins in 5 countries in 1973/74, and at the end of the period work was well advanced on the establishment of statistical bulletins in 7 other countries. Since technical assistance began in this field five years ago, the Bureau has helped to establish 18 central bank bulletins and to bring about substantial improvements in 16 existing bulletins.

In separate short-term staff missions during the year, the Bureau assisted 2 countries in the area of financial statistics and conducted a statistical seminar for Central African officials and technicians. The Bureau also continued to work with member governments on the compilation of disaggregated data on government finance according to the conceptual framework and classification standards developed in the Fund.

Relations with Other International Organizations

The Fund’s cooperation with other international organizations particularly those in the economic and financial area, was brought into sharp focus during 1973/74 as world events emphasized the need for coordination in dealing with common interests. In addition to its special relationship with the International Bank for Reconstruction and Development (IBRD), the Fund continued to have frequent contacts with the United Nations (UN) and its relevant organs, the Organization for Economic Cooperation and Development (OECD), the General Agreement on Tariffs and Trade (GATT), the European Economic Community (EEC), and the Bank for International Settlements (BIS). This liaison is maintained by the Fund’s offices in Paris and Geneva and the office of its Special Representative to the United Nations, by exchange of pertinent data, and by attendance of headquarters staff at meetings at both the plenary and working levels. Representatives of these organizations attended the Annual Meeting of the Board of Governors of the Fund, held jointly with those of the IBRD and its affiliates in Nairobi, Kenya in September 1973, along with representatives of other organizations with which the Fund has related interests. Furthermore, officers of the IBRD, the United Nations Conference on Trade and Development (UNCTAD), the OECD, the GATT, the EEC, and the BIS attended meetings of the Committee of Twenty and its Deputies.

The Managing Director, Mr. Pierre-Paul Schweitzer, addressed the 55th Session of the UN Economic and Social Council (ECOSOC) in Geneva on July 5, 1973, while the new Managing Director, Mr. H. Johannes Witteveen, addressed the 55th Session, Resumed, in New York on October 16, 1973, when he presented the Fund’s Annual Report. The Managing Director or his Deputy attended meetings of the Administrative Committee on Coordination (ACC), while other staff attended preparatory and related interagency meetings. The Managing Director also attended the meeting of the OECD Ministerial Council and a monthly meeting of the BIS during the year under review. Coinciding with meetings of the Committee of Twenty, the Managing Director also attended meetings of the Ministers of the Intergovernmental Group of Twenty-Four on International Monetary Affairs and a meeting of ministers and governors of central banks of the Group of Ten; staff representatives also attended meetings of these groups at the Deputies’ level.

The Fund was also represented at other meetings of UN bodies, including sessions of the General Assembly in New York and of the ECOSOC, as well as its regional commissions and other specialized bodies. Fund staff also cooperated with various bodies of the OECD, and attended relevant meetings in the EEC, monthly meetings and the Annual Meeting of the BIS, as well as a meeting of the Economic and Consultative Committee of the International Chamber of Commerce, the UN, and the GATT.

The Fund’s long-standing cooperation with the GATT with regard to import restrictions imposed for balance of payments reasons involved staff participation and the provision of pertinent documentation for GATT consultations with certain members common to both organizations. During the fiscal year Fund staff attended the 29th Session of the Contracting Parties, meetings of the Council of Representatives, and both the preparatory meeting in Geneva and the Ministerial Meeting in Tokyo relating to the forthcoming multilateral trade negotiations.

Cooperation with members with respect to debt renegotiation and aid coordination involved staff participation and provision of relevant documentation to multinational meetings of creditors on Chile, Ghana, and the Khmer Republic, as well as a meeting of the Pakistan Consortium. Fund representatives continued their participation in the periodic meetings of the Inter-Governmental Group on Aid to Indonesia, and in meetings held jointly by the IBRD and the Asian Development Bank on the reconstruction and development of Indochina. Fund staff attended a multilateral conference to consider economic aid for the Khmer Republic in 1974, an exploratory meeting of potential donor countries for Ghana, and meetings of the IBRD Consultative Groups on aid coordination for Colombia, Ethiopia, East Africa (Kenya), Korea, Morocco, Peru, the Philippines, the Sudan, Thailand, and Zaire, as well as meetings of the IBRD-sponsored Consortium for India and the OECD-sponsored Consortium on Turkey. Fund staff also attended the Annual Meetings of the Boards of Governors of the African Development Bank, the Asian Development Bank, and the Inter-American Development Bank, and participated in a conference held by the Arab Fund for Economic and Social Development on the expansion and flow of investment funds in the region and in the Annual Meeting of that Fund. In Latin America, Fund staff attended the Annual Meeting of the Inter-American Economic and Social Council of the Organization of American States (OAS) and continued to cooperate and to provide documentation in connection with the OAS Committee on the Alliance for Progress’ annual country reviews and other matters of mutual interest. In Africa, the Fund was represented at the 3rd meeting of the Association of African Central Banks in Lagos, Nigeria, and a fact-finding team from the Association later visited the Fund.

The experience of Fund staff in economic and financial matters occasioned participation in, and in some instances the provision of organizational assistance to, a number of seminars, including a Seminar on the Problems, Ways, and Means of Promoting West African Entrepreneurship, organized by the Bank of Sierra Leone in Freetown, for the West African Sub-Regional Committee of the Association of African Central Banks; a statistical seminar in Yaoundé, Cameroon, held for the five members of the Bank of Central African States (Banque des Etats de l’Afrique Centrale (BEAC)); a Seminar on Investment Policies for Surplus Funds for Arab Oil Producing Countries in Kuwait; a Seminar on Monetary Policy and Public Debt Administration, held by the Brazilian Capital Market Institute and the National Association of Open Market Institutions, in Rio de Janeiro; a Seminar on Capital Markets, under the joint auspices of the Central Bank of Uruguay and the OAS Capital Markets Program in Montevideo; a Seminar on Capital Markets, sponsored by the Government of Bolivia and the OAS in La Paz; a Seminar on Employment, convened by the Government of Mexico and the International Labor Office, in Mexico City; a special technical meeting on inflation held by the Monetary Policy Committee of the Central American Monetary Council in San José, Costa Rica, which was followed a month later by a Seminar on Inflation in San Salvador, El Salvador. A Fund staff member also delivered a technical paper and chaired a round-table discussion at the 7th Annual General Assembly of the Inter-American Center of Tax Administrators (CIAT) in Guatemala City and another staff member participated in a meeting for international coordination for the development of financial markets held in Geneva under the auspices of the International Finance Corporation and the International Savings Banks Institute.

In the area of commodities, staff attended meetings of the International Cocoa Organization’s Council and the International Tin Council, with which the Fund has special relationships in connection with its buffer stock facility; the World Grain Seminar, held by the Canadian Grains Council in Winnipeg; an International Seminar on Commodity Forecasting Techniques, held by the IBRD in Oxford, United Kingdom; the 16th Session of the Food and Agriculture Organization Committee on Commodity Problems’ Intergovernmental Group on Grains, in Rome; and various meetings of the UNCTAD Committee on Commodities in Geneva.

Reflecting the Fund’s interest in export credits, staff representatives attended the 30th annual general meeting of the Union d’Assureurs des Credits Internationaux (Berne Union) and its extraordinary general meeting in South Africa, and an ad hoc Group for Fund/Bank cooperation from the Berne Union visited Fund headquarters for an informal exchange of views on statistics and matters relating to external debt.

Membership, Quotas, and Participation in the Special Drawing Account

The Bahamas became a member of the Fund on August 21, 1973 with a quota of SDR 20 million, bringing total membership on April 30, 1974 to 126 members and aggregate quotas to SDR 29,189 million. The Bahamas also became a participant in the Special Drawing Account, bringing the number of participants to 117, with quotas equivalent to 98.5 per cent of the Fund total.26 An application from Papua New Guinea for membership in the Fund, after it has attained independence, was before the Executive Directors at the end of the fiscal year.

In early April 1974, Nepal requested postponement to not later than April 30, 1976 of payments relating to the fourth and fifth installments of the increase in its quota to which it had consented in accordance with paragraph 6 of the Board of Governors Resolution No. 25-3 on “Increases in Quotas of Members—Fifth General Review.” 27 The fourth and fifth installments, each equivalent to SDR 800,000, are due not later than April 27, 1974 and April 27, 1975, respectively. For each installment, an amount equivalent to SDR 200,000 is payable in gold. In requesting postponement, the Nepalese authorities stated that payment of gold in present circumstances presented serious problems, especially in view of the uncertainty as to the future role of gold in connection with the reform of the international monetary system. The Executive Board accepted Nepal’s proposal and recommended that Board of Governors Resolution No. 25-3, “Increases in Quotas of Members—Fifth General Review,” adopted February 9, 1970 be amended to permit Nepal to pay the fourth and fifth installments of its quota increase not later than April 30, 1976. The amendment was adopted by the Board of Governors on June 24, 1974.

Executive Directors, Management, and Staff

A list of Executive Directors and their voting power on April 30, 1974 is given in Appendix III. The changes in membership of the Executive Board during 1973/74 are shown in Appendix IV.

Mr. H. Johannes Witteveen, a former Minister of Finance and Deputy Prime Minister of the Netherlands, was appointed Managing Director and Chairman of the Board of Executive Directors and assumed office on September 1, 1973. He succeeded Mr. Pierre-Paul Schweitzer, of France, whose second term of office expired on August 31, 1973.

Mr. William B. Dale, formerly Executive Director of the Fund for the United States, was appointed Deputy Managing Director and assumed his duties on March 1, 1974. He succeeded Mr. Frank A. Southard, Jr., who had served as Deputy Managing Director from November 1, 1962.

In the year ended April 30, 1974, there were 153 appointments to the Fund’s regular staff and 110 separations. At the end of the fiscal year, the staff numbered 1,296 and were drawn from 88 countries. These figures do not include Advisors (4) and Assistants (74) to Executive Directors.

Board of Governors Resolution No. 28-3, adopted on July 3, 1973 on Membership for the Bahamas, provided for the subscription to be paid wholly in Bahamian dollars, and for the Bahamas to repurchase, within 60 days of having paid the subscription, an amount equivalent to 25 per cent of its quota in gold, SDRs, or convertible currencies acceptable to the Fund.

See International Monetary Reform: Documents of the Committee of Twenty (Washington, 1974).

Executive Board Decision No. 4231-(74/67), adopted on June 13, 1974 and reproduced in Appendix II.

Attached to Executive Board Decision No. 4232-(74/67), adopted on June 13, 1974 and reproduced in Appendix II.

Executive Board Decision No. 4233-(74/67) S, adopted on June 13, 1974 and reproduced in Appendix II.

Executive Board Decision No. 4235-(74/67), adopted on June 13, 1974 and reproduced in Appendix II.

Executive Board Decision No. 4238-(74/67), adopted on June 13, 1974 and reproduced in Appendix II.

See Executive Board Decision No. 4241-(74/67), adopted June 13, 1974, pages 122-23.

See International Monetary Reform: Documents of the Committee of Twenty (Washington, 1974).

Executive Board Decision No. 4254-(74/75), adopted June 26, 1974 and reproduced in Appendix II, together with the Managing Director’s letter to members and the text of the Declaration.

The Austrian schilling was revalued by 2.25 per cent in terms of SDRs in March 1973 and by 4.8 per cent in July 1973.

These changes are summarized in Appendix I.

See page 51, above.

The balance of SDR 7 million was transferred in purchases of SDRs from the General Account to Romania (SDR 6 million) and Bangladesh (SDR 1 million).

The Fund calculates participants’ needs to reconstitute in two ways: (i) in terms of a single amount that may be obtained in the month following the date of the calculation, and (ii) as a series of quarterly amounts to be obtained in each full calendar quarter remaining in a five-year period. When the quarterly amount reaches 10 per cent of a participant’s net cumulative allocation, that participant is subject to designation to promote reconstitution.

The Articles of Agreement define a gold tranche purchase as “a purchase by a member of the currency of another member in exchange for its own currency which does not cause the Fund’s holdings of the member’s currency to exceed one hundred percent of its quota, provided that for the purposes of this definition the Fund may exclude purchases and holdings under policies on the use of its resources for compensatory financing of export fluctuations.”

Executive Board Decision No. 3637-(72/41) G/S, adopted May 8, 1972.

Article V, Section 7(b), provides that, subject to certain limitations, a member shall repurchase an amount of the Fund’s holdings of its currency equivalent to one half of any increase in the Fund’s holdings of its currency that has occurred during the Fund’s financial year, plus one half of any increase, or minus one half of any decrease, in the member’s monetary reserves during the same period, or, if the Fund’s holdings of the member’s currency have decreased, one half of any increase in the member’s monetary reserves minus one half of the decrease in the Fund’s holdings of the member’s currency. While 19 members had incurred obligations as of April 30, 1973 totaling the equivalent of SDR 482 million, Article V, Section 7(c)(iv), limited the amount to be discharged forthwith to SDR 271 million (see Appendix Table I.14).

See Annual Report, 1970, pages 177-84.

The Membership Resolution for the Bahamas provided for a quota of SDR 20 million to be paid in currency, with the provision that SDR 5 million would be repurchased within 60 days after the currency subscription had been paid.

This figure would have been SDR 55.2 million had it not been reduced by SDR 21.2 million, the SDR equivalent of the proceeds of sale of the Fund’s former headquarters building.

In accordance with Rule 1-9 of the Fund’s Rules and Regulations, remuneration is payable “in gold to the extent that receipts of gold, during the financial year, in payment of charges under Article V, Section 8(f), exceed payments during that year of gold as transfer charges and interest on borrowings.” Rule 1-9 provides that “any remuneration due to each member and not payable in gold shall be paid in that member’s currency.” However, in accordance with Executive Board Decision No. 3033-(70/38), the Fund shall offer to pay participants, at their option, in special drawing rights for any amount of gold or currency payable as remuneration, provided that the General Account’s holdings of SDRs at the end of the financial year exceed the amount of remuneration payable for that year.

See Annual Report, 1970, pages 34-35 and 184-89.

These members repurchased an equivalent amount of the Fund’s holdings of their currencies with SDRs.

Executive Board Decision No. 4087-(73/105), adopted on November 9, 1973 and reproduced in Appendix II.

The 9 members of the Fund that have not deposited instruments of participation in the Special Drawing Account are Ethiopia, Kuwait, Lebanon, the Libyan Arab Republic, Portugal, Qatar, Saudi Arabia, Singapore, and the United Arab Emirates.

See Annual Report, 1970, pages 177-84.

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