Chapter

Appendix II Principal Policy Decisions of the Executive Board and Report by the Managing Director

Author(s):
International Monetary Fund
Published Date:
September 1977
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A. Buffer Stock Financing Facility: Fifth International Tin Agreement

1. The Fund, having considered the text of the Fifth International Tin Agreement, as adopted by the United Nations Tin Conference on June 21, 1975, finds that the terms of this Agreement relating to the international tin buffer stock to be established under the Agreement are consistent with the principles referred to in Executive Board Decision No. 2772-(69/47) of June 25, 1969.

2. In view of (1) above, the Fund will meet, subject to the provisions of Executive Board Decision No. 2772-(69/47) as amended by Executive Board Decision No. 4913-C75/207),1 a member’s requests for purchases in connection with the financing by the member of its compulsory contributions to the buffer stock established under the Fifth International Tin Agreement.

3. The Fund decides that any contribution made in the form of tin metal under Article 21 of the Agreement shall be regarded as equivalent to a contribution in cash, valued at the floor price prevailing when the contribution is called up. Any transfer of metal from the buffer stock to a member will be treated as a distribution in currency, valued at the floor price prevailing when the transfer is made.

4. The staff will keep the Executive Directors informed on the operation of the buffer stock and other developments in connection with the Fifth International Tin Agreement by reports that will be made at least once a year, and the Fund may make such review of this decision as is appropriate in the light of these reports.

Decision No. 5127-(76/91)

June 23, 1976

B. Subsidy Account: Review of Decision

(a) Annual Review and Payment of Subsidy for Fiscal Year 1976

1. For the fiscal year ended April 30, 1976, a subsidy shall be paid to each member listed in Table 1 of EBS/76/271 at the rate of 5 per cent per annum of the average daily balances of the currency of the member held by the Fund in excess of quota outstanding under Executive Board Decision No. 4634-(75/47) 2 during the year.

2. The payments shall be made in U.S. dollars based on the U.S. dollar/SDR exchange rate on July 19, 1976.

3. The payments shall be deemed to be made first from income earned from the investment of the contributions to the Subsidy Account and thereafter from the contributions.

4. No charge shall be levied for the services rendered by the Fund in the operation of the Subsidy Account for the fiscal year ended April 30, 1976.

5. The next review of Executive Board Decision No. 4773-(75/136)3 shall be conducted in May 1977.

Decision No. 5144-(76/102) SA

July 12, 1976

(b) Annual Review and Payment of Subsidy for Fiscal Year 1977

In concluding their second review of Executive Board Decision No. 4773-(75/136)4 August 1, 1975, the Executive Directors adopt the following decision:

1. For the fiscal year ended April 30, 1977, a subsidy shall be paid to each member listed in Table 1 of EBS/77/164 at the rate of 5 per cent per annum on the average daily balances of the currency of the member held by the Fund in excess of quota outstanding under Executive Board Decision No. 4634-(75/47)5during the year.

2. The payment shall be made in U.S. dollars on June 16, 1977 based on the U.S. dollar/SDR exchange rate determined three working days prior to payment.

3. No charge shall be levied for the services rendered by the Fund in the administration and operation of the Subsidy Account for the fiscal year ended April 30, 1977.

4. The next review of Executive Board Decision No. 4773-(75/136) shall be conducted in May 1978.

Decision No. 5425-(77/79) SA

May 27, 1977

C. SDR Reconstitution: Redefinition of Maximum Acquisition

1. Paragraph 2 of the Executive Board Decision No. 3457-(71/121) G/S, as amended,6 is hereby further amended to read as follows:

Pursuant to Article XXV, Section 2(b)(ii), the Fund prescribes that a participant may obtain special drawing rights from another participant in a transaction with that other participant that would promote reconstitution under Article XXV, Section 6(a), and Schedule G, paragraph 1(a). The maximum amount that may be obtained in that way shall be the sum of (i) the single amount most recently notified to the participant under Rule P-3 or calculated for acquisition in the final month of a reconstitution period, taking into account the proposed date of acquisition, and (ii) the total amount of any charges to be paid to the General Account and repurchase obligations in special drawing rights to be discharged by the participant prior to the next calculation under Rule P-2. These maximum amounts will be reduced by any net acquisition of special drawing rights other than by way of allocation subsequent to the date the calculation is made.

2. Rule P-6 of the Fund’s Rules and Regulations is modified to read as follows:

A participant may receive special drawing rights in a transaction prescribed by the Fund to promote reconstitution by the participant in a total amount equal to the amount it would need to obtain in accordance with the calculations under Rule P-2, increased by the amount of any charges to be paid, or repurchase obligations in special drawing rights to be discharged, by the participant to the General Account during the month following the calculation under Rule P-2. To the extent that a participant may receive special drawing rights in a transaction under any prescription, in accordance with this Rule, the Fund shall provide special drawing rights held in the General Account to the participant at its request for gold or currency acceptable to the Fund. A participant shall consult the Managing Director before making a request under this Rule.

Decision No. 5167-(76/120) G/S

August 2, 1976

D. Special Drawing Rights: Transactions by Agreement Between Participants

1. Pursuant to Article XXV, Section 2(b)(ii), the Fund prescribes that participants may engage in transactions by agreement that bring the holdings of both participants closer to their net cumulative allocations and under Article XXV, Section 3(c), prescribes that the users of SDRs in these transactions shall be exempt from the requirement of need set out in Article XXV, Section 3(a).

2. Under Article XXV, Section 3(c), the Fund prescribes that the user of SDRs in a transaction by agreement between participants to promote reconstitution pursuant to Executive Board Decision No. 3457-(71/121) G/S, adopted December 3, 1971, as amended,7 shall be exempt from the requirement of need set out in Article XXV, Section 3(a).

Decision No. 5185-(76/128) S

August 25, 1976

E. Quarterly Review of Rate of Remuneration Under Rule I-10

In accordance with the formula in Rule I-10, the rate of remuneration for the calendar quarter beginning on October 1, 1976 shall be 4 per cent per annum.

Decision No. 5208-(76/141)

September 17, 1976

In accordance with the formula in Rule I-10, the rate of remuneration for the calendar quarter beginning on January 1, 1977 shall be 4 per cent per annum.

Decision No. 5294-(76/168)

December 22, 1976

In accordance with the formula in Rule I-10, the rate of remuneration for the calendar quarter beginning on April 1, 1977 shall be 3.75 per cent per annum.

Decision No. 5358-(77/40)

March 22, 1977

In accordance with the formula in Rule I-10, the rate of remuneration for the calendar quarter beginning July 1, 1977 shall be 3.50 per cent per annum.

Decision No. 5455-(77/92)

June 29, 1977

F. General Arrangements to Borrow: Increase in Amount of Credit Arrangement for Japan

1. Japan has indicated its willingness to increase from 90 billion yen to 340 billion yen the amount of its credit arrangement under the General Arrangements to Borrow (Executive Board Decision No. 1289-(62/l) of January 5, 1962, as amended).8 The Fund agrees to this increase in the amount of Japan’s credit arrangement under Paragraph 5 of the General Arrangements.

2. The increase will become effective when the Fund has received the agreement of the participants in the General Arrangements to the proposed increase.9

Decision No. 5249-(76/154)

November 5, 1976

G. Sales of Gold

(a) Timing of Gold Auctions

The Executive Directors agree to proceed with the gold auctions on the basis of the arrangements described under Option 2 in the Managing Director’s statement, with attachment [below].

Decision No. 5273-(76/163) TR

December 7, 1976

(b) Timing of Sales of Gold for the Purpose of Distribution

The Executive Directors agree to undertake the first restitution operation on the basis of the arrangements described under Option 2 in the Managing Director’s statement, with attachment [below].

Decision No. 5274-(76/163)

December 7, 1976

Option 2 in the Managing Director’s Statement with Attachment

(2) A second possibility would be to hold the sixth auction on January 26, 1977 for another 780,000 ounces. This would represent the last auction under the present schedule. Beginning early in March, auctions would then be held on the first Wednesday of each month and 525,000 ounces (rounded up from 521,333) would be offered in each of 15 monthly auctions. This schedule would facilitate the completion of the first restitution operations, and the amount to be offered in each of the first two years of the sales program would be approximately equal as shown in column 2 of the annexed table. If the sixth auction were not to be the last under the present schedule so that 780,000 ounces would not be offered, but would be the first of monthly auctions, the amounts to be offered would be the same as under the first possibility. In addition, a monthly auction on the fourth Wednesday of each month would later require an adjustment in the dates in order to avoid an auction during the 1977 Christmas holiday season.

Attachment

Timing and Amounts of Auctions and Timing of Restitution(Amounts in fine ounces)
(1)(2)(3)
Sixth auctionJanuary 12January 26February 2
Amount to be offered510,000780,000540,000
Seventh auctionFebruary 9March 2March 2
Monthly amount510,000525,000540,000
Gold offered in year
ending May 31, 19776,450,0006,255,0006,060,000
Gold offered in
second year6,120,0006,300,0006,480,000
Gold offered in
first two years12,570,00012,555,00012,540,000
Restitution
Notification to Fund
by membersDecember 27, 76December 27, 76January 3, 77
Delivery of restituted
goldJan. 10–14, 77Jan. 10–14, 77Jan. 17–21, 77
Delivery of gold from
sixth auction
(approximate dates)January 24,77February 9, 77February 16, 77
onwardsonwardsonwards

(c) Gold Distribution: Postponement10

1. The Fund notes the requests from Barbados, Burundi, Grenada, Liberia, Panama, Philippines, Sierra Leone, Zaïre, and Zambia to allow these members to postpone their participation in the first gold restitution operation on the ground of balance of payments need.

2. Lebanon, Lesotho, Malawi, Sudan, and Uganda have requested the Fund to allow them to postpone their participation in the first gold restitution operation on the ground of balance of payments need. The Fund agrees to these requests.

3. Postponement, in accordance with paragraphs 1 and 2 above, shall continue until not later than 30 days after the date of the second amendment of the Articles of Agreement.

Decision No. 5314-(77/6)

January 10, 1977

H. Transfer of Special Drawing Rights Held in the General Account to Participants Making Purchases from the Fund

Executive Board Decision No. 3414-(71/98) G/S 11 adopted September 10, 1971 is amended to read as follows:

When a member which is a participant in the Special Drawing Account consults in accordance with the Executive Board Decision No. 1371-(62/36),12 adopted July 20, 1962, on Currencies to Be Drawn and to Be Used in Repurchases, the Managing Director may propose that the participant request the purchase of special drawing rights not in excess of the amount which he shall indicate.

Decision No. 5355-(77/36) G/S

March 15, 1977

I. Financial Position of the Fund and Increases in the Fund’s Charges

I. Application of Rule I–4(c)(ii): Decreases in Fund’s Holdings of a Currency

For the purpose of applying Rule I-4(c)(ii), decreases in the Fund’s holdings of a currency that do not reduce balances subject to Rule I-4(f) (3) (ii), (iii), or (iv) shall reduce balances subject to Rule I-4(f) (3) (i) after balances subject to Rule I-4(f) (2) have been eliminated.

Decision No. 5368-(77/51)

April 8, 1977, deemed effective April 1, 1977

II. Amendment of Rule I-4(a): Time for Payment

The second sentence of Rule I-4(a) shall be made to read as follows:

These charges shall be payable promptly after the end of the quarter to which they relate.

Decision No. 5369-(77/51)

April 8, 1977, deemed effective April 1, 1977

III. Amendment of Rule I-4(f)(3)(i) and Rule I-4(g)(4): Change in Rates of Charge

1. Rule I-4(f) (3) (i) shall be amended as follows:

  • The charge to be levied on each segment that is in excess of 100 per cent of quota and is not subject to (ii) below shall be 4⅜ per cent per annum for the first 12 months; if the margin of the initial rate of charge above the rate of remuneration is reduced to less than ¼ of 1 per cent or increased to more than 1 per cent because of changes in the rate of remuneration pursuant to Rule I-9, the Executive Board will promptly review the Fund’s financial position, the rate of remuneration and the initial rate of charge and take such action as it considers necessary to safeguard the financial position of the Fund. If a new decision is not taken as a result of this review on the rates of charge or on the rate of remuneration, the initial rate of charge shall be ¼ of 1 per cent or 1 per cent above the rate of remuneration, as the case may be. The initial rate of charge shall rise by an additional ½ per cent per annum for each additional twelve months. This decision shall be reviewed if the Fund’s total annual income substantially exceeded its total annual expenses.

2. In Rule I-4(g)(4) the words “6.5 per cent” shall be replaced by the words “the initial rate of charge under (f) (3) (i) above plus 2.5 per cent” and the words “7 per cent” shall be replaced by “the initial rate of charge under (f) (3) (i) above plus 3 per cent.”

Decision No. 5370-(77/51)

April 8, 1977, deemed effective April 1, 1977

IV. Second Amendment, Article XXX(c)(iii): Exclusion of Purchases Under Oil Facility for Purposes of Definition of “Reserve Tranche Purchase”

With effect on the date of the second amendment of the Articles of Agreement, the Fund’s holdings of currencies acquired in purchases under Executive Board Decision No. 4241-(74/67),13 June 13, 1974, and Executive Board Decision No. 4634-(75/47),14 April 4, 1975, shall be excluded pursuant to Article XXX(c) (iii) for the purpose of the definition of “reserve tranche purchase.”

Decision No. 5371(77/51)

April 8, 1977, deemed effective April 1, 1977

J. Surveillance over Exchange Rate Policies

1. The Executive Board has discussed the implementation of Article IV of the proposed second amendment of the Articles of Agreement and has approved the document entitled “Surveillance over Exchange Rate Policies” [below]. The Fund shall act in accordance with this document when the second amendment becomes effective. In the period before that date the Fund shall continue to conduct consultations in accordance with present procedures and decisions.

2. The Fund shall review the document entitled “Surveillance over Exchange Rate Policies” at intervals of two years and at such other times as consideration of it is placed on the agenda of the Executive Board.

Decision No. 5392-(77/63)

April 29, 1977

Surveillance over Exchange Rate Policies

General Principles

Article IV, Section 3 (a), provides that “The Fund shall oversee the international monetary system in order to ensure its effective operation, and shall oversee the compliance of each member with its obligations under Section 1 of this Article.” Article IV, Section 3(b), provides that in order to fulfill its functions under 3(a), “the Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies.” Article IV, Section 3(b), also provides that “The principles adopted by the Fund shall be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice consistent with the purposes of the Fund and Section 1 of this Article. These principles shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members.” In addition, Article IV, Section 3(b), requires that “Each member shall provide the Fund with the information necessary for such surveillance, and, when requested by the Fund, shall consult with it on the member’s exchange rate policies.”

The principles and procedures set out below, which apply to all members whatever their exchange arrangements and whatever their balance of payments position, are adopted by the Fund in order to perform its functions under Section 3(b). They are not necessarily comprehensive and are subject to reconsideration in the light of experience. They do not deal directly with the Fund’s responsibilities referred to in Section 3(a), although it is recognized that there is a close relationship between domestic and international economic policies. This relationship is emphasized in Article IV which includes the following provision: “Recognizing … that a principal objective [of the international monetary system] is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.”

Principles for the Guidance of Members’ Exchange Rate Policies

A. A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.

B. A member should intervene in the exchange market if necessary to counter disorderly conditions which may be characterized inter alia by disruptive short-term movements in the exchange value of its currency.

C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.

Principles of Fund Surveillance over Exchange Rate Policies

1. The surveillance of exchange rate policies shall be adapted to the needs of international adjustment as they develop. The functioning of the international adjustment process shall be kept under review by the Executive Board and Interim Committee and the assessment of its operation shall be taken into account in the implementation of the principles set forth below.

2. In its surveillance of the observance by members of the principles set forth above, the Fund shall consider the following developments as among those which might indicate the need for discussion with a member:

  • (i) protracted large-scale intervention in one direction in the exchange market;

  • (ii) an unsustainable level of official or quasi-official borrowing, or excessive and prolonged short-term official or quasi-official lending, for balance of payments purposes;

  • (iii) (a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or

    • (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital;

  • (iv) the pursuit, for balance of payments purposes, of monetary and other domestic financial policies that provide abnormal encouragement or discouragement to capital flows; and

  • (v) behavior of the exchange rate that appears to be unrelated to underlying economic and financial conditions including factors affecting competitiveness and long-term capital movements.

3. The Fund’s appraisal of a member’s exchange rate policies shall be based on an evaluation of the developments in the member’s balance of payments against the background of its reserve position and its external indebtedness. This appraisal shall be made within the framework of a comprehensive analysis of the general economic situation and economic policy strategy of the member, and shall recognize that domestic as well as external policies can contribute to timely adjustment of the balance of payments. The appraisal shall take into account the extent to which the policies of the member, including its exchange rate policies, serve the objectives of the continuing development of the orderly underlying conditions that are necessary for financial stability, the promotion of sustained sound economic growth, and reasonable levels of employment.

Procedures for Surveillance

I. Each member shall notify the Fund in appropriate detail within thirty days after the Second Amendment becomes effective of the exchange arrangements it intends to apply in fulfillment of its obligations under Article IV, Section 1. Each member shall also notify the Fund promptly of any changes in its exchange arrangements.

II. Members shall consult with the Fund regularly under Article IV. The consultations under Article IV shall comprehend the regular consultations under Articles VIII and XIV. In principle such consultations shall take place annually, and shall include consideration of the observance by members of the principles set forth above as well as of a member’s obligations under Article IV, Section 1. Not later than three months after the termination of discussions between the member and the staff, the Executive Board shall reach conclusions and thereby complete the consultation under Article IV.

III. Broad developments in exchange rates will be reviewed periodically by the Executive Board, inter alia in discussions of the international adjustment process within the framework of the World Economic Outlook. The Fund will continue to conduct special consultations in preparing for these discussions.

IV. The Managing Director shall maintain close contact with members in connection with their exchange arrangements and exchange policies, and will be prepared to discuss on the initiative of a member important changes that it contemplates in its exchange arrangements or its exchange rate policies.

V. If, in the interval between Article IV consultations, the Managing Director, taking into account any views that may have been expressed by other members, considers that a member’s exchange rate policies may not be in accord with the exchange rate principles, he shall raise the matter informally and confidentially with the member, and shall conclude promptly whether there is a question of the observance of the principles. If he concludes that there is such a question, he shall initiate and conduct on a confidential basis a discussion with the member under Article IV, Section 3(b). As soon as possible after the completion of such a discussion, and in any event not later than four months after its initiation, the Managing Director shall report to the Executive Board on the results of the discussion. If, however, the Managing Director is satisfied that the principles are being observed, he shall informally advise all Executive Directors, and the staff shall report on the discussion in the context of the next Article IV consultation; but the Managing Director shall not place the matter on the agenda of the Executive Board unless the member requests that this procedure be followed.

VI. The Executive Directors shall review annually the general implementation of the Fund’s surveillance over members’ exchange rate policies.

K. Attribution of Repurchases Under Article V, Section 7(b)

The Executive Directors endorsed the following conclusions, effective March 23, 1977:

  • (i) the [present] practice … should be modified to allow a member incurring a repurchase obligation under Article V, Section 7(b). and a member with outstanding purchases whose currency is sold to another member making use of the Fund’s resources, to specify the undertaking it wishes considered discharged; and

  • (ii) if such a specification is made and the specified purchase has been financed by borrowed funds, the Fund would propose to the lender or lenders that they accept repayment in accordance with the specification instead of the original practices of attribution. No repayment that departed from application of the original practices of attribution would be made if the lender objected to it.

L. Allocation of Special Drawing Rights (Article XXIV, Section 4(c))

Report by the Managing Director to the Board of Governors and to the Executive Directors

Article XXIV, Section 1(a), of the present Articles15 provides that “In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.” Decisions to allocate or to cancel SDRs are made by the Board of Governors on the basis of proposals of the Managing Director, concurred in by the Executive Directors. Before making any proposal, “the Managing Director, after having satisfied himself that it will be consistent with the provisions of Section 1(a) of this Article, shall conduct such consultations as will enable him to ascertain that there is broad support among participants for the proposal.” 16 Article XXIV, Section 4(c), of the present Articles provides that not later than six months before the end of each basic period the Managing Director shall either make such a proposal or report to the Board of Governors and to the Executive Board that “there is no proposal which he considers to be consistent with the provisions of Section 1 of this Article that has broad support among participants.”

The present basic period, which is the second one, began as an “empty” period on January 1, 1973 in the absence of a proposal by the Managing Director and will terminate at the end of this calendar year. I now wish to report that at the present time I am not in a position to make a proposal with respect to the next (third) basic period, which starts on January 1, 1978.

The possibility of an SDR allocation was not discussed by the Executive Board between 1973 and 1977, and major changes occurred in the international monetary system during that period. Indeed, such changes began to take place immediately following the first allocation. A figure of approximately SDR 9.5 billion had been agreed for the basic period of three years, 1970–72. This amount was expected to be approximately equal to the gap between the anticipated growth of reserve needs (of perhaps SDR 4–5 billion a year) and the predicted increase in the supply of reserves other than SDRs (some SDR 1–1.5 billion a year). During the period, however, there was a dramatic shift in the trend of reserve increases. In the three years 1967–69, members’ reserves had risen by about SDR 6 billion.

But in 1970–72 they rose by about SDR 68 billion (about SDR 15 billion in 1970, SDR 30 billion in 1971, and SDR 23 billion in 1972) with less than SDR 9 billion of this total coming from the SDR allocation.

When it came time to consider an allocation for the second basic period, there was considerable support for a further allocation over a short basic period of two years. Some members favored an annual figure roughly the same as in the first basic period, others were prepared to accept an amount approximately half this size, and some did not see the need for any allocation. On June 26, 1972, just over six months before the beginning of the second basic period, the Managing Director reported that he was unable to find sufficient support for an allocation proposal but indicated that he would continue his consultations. These consultations, in the second half of 1972, led to the conclusion that there was not broad support for any proposal, and the Managing Director ceased his consultations after the very large increase in foreign exchange reserves (about US$20 billion) that took place in the first quarter of 1973.

Major changes have occurred and are occurring in the international monetary system, and the question of an SDR allocation should be considered in relation to these continuing developments. In my view, some important issues still remain open, and the request of the Interim Committee that the Executive Directors give the subject further study provides an opportunity to see whether these questions can be resolved within the near future. From the consideration that has been given to the question of an SDR allocation in recent weeks, I would judge it unlikely that I shall be able to make a proposal before January 1, 1978. Thus, it may be expected that the third basic period will start as an empty period.

Active consideration of the issues involved is being planned for the months ahead. In their communiqué of April 29 the Interim Committee reached the following conclusions:

  • The Committee also considered the question whether a further allocation of SDRs would be advisable at the present time. The Committee noted that the Executive Directors have been discussing this question and agreed to request them to give further consideration to all aspects of this matter and to report to the Committee at its first meeting in 1978.

  • The Committee also agreed to request the Executive Directors to review the characteristics and uses of the SDR so as to promote the purposes of the Fund, including the objective of making the SDR the principal reserve asset in the international monetary system.

I should note that I can make a proposal at any time during the third basic period when I am satisfied that the requisite conditions of Article XXIV, Section 4(b), are fulfilled, and indeed am obliged to do so by Article XXIV, Section 4(c). If the outstanding questions can be resolved, I will submit a proposal for an SDR allocation as soon as I am satisfied that one can be made that will be consistent with the requirements of the Articles, or, if such a proposal cannot be made, I will report to the Board of Governors and the Executive Board at an appropriate time.

June 29, 1977

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