Chapter

Chapter 2 Developments in the International Monetary System

Author(s):
International Monetary Fund
Published Date:
September 1977
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This chapter reviews a number of significant developments in the international monetary system since the adoption of more flexible exchange rate arrangements by most industrial countries. The first part of the chapter concentrates on exchange rate arrangements, beginning with a review of the variety of exchange rate practices adopted by members in recent years. A number of issues relevant to the behavior of exchange rates under the present, more flexible, arrangements are then discussed, and an assessment is made of the role of exchange rate changes in the international adjustment process. This leads on to a review of developments in the demand for and supply of international liquidity, with particular reference to the role of the Fund in providing conditional and unconditional liquidity.

Exchange Rate Arrangements

The new Article IV concerning exchange rate arrangements will take effect when the Proposed Second Amendment enters into force, that is, after the amended Articles have been accepted by the requisite majorities of Fund membership and voting power. Meanwhile, considerable progress has been made in putting into place arrangements for surveillance under the new provisions. Following the meeting of the Interim Committee in April 1977, the Executive Board approved principles for the guidance of members’ exchange rate policies, and principles and procedures for Fund surveillance, to be applied when the Second Amendment takes effect. (For the decision on Surveillance over Exchange Rate Policies, see Appendix II.) The provisions of Article IV, and the principles adopted by the Fund for the guidance of members’ exchange rate policies, allow members to adopt a wide variety of regimes, thereby recognizing the growing heterogeneity of exchange rate practices that has characterized the international monetary system since the adoption of floating exchange rates by major industrial countries early in 1973.

The exchange rate practices adopted by members over the past four years cover a broad spectrum, ranging from independent floating with relatively little attempt to influence market forces, to the maintenance of a fixed peg against a single intervention currency. The fact that most major currencies float independently implies, of course, that even countries that peg their currencies in some manner face variability in their bilateral exchange rates against currencies outside their group.

Within the group of countries that permit continuous flexibility in their exchange rates, the extent to which rates are managed varies quite widely. Some countries have generally refrained from efforts to influence the course of their exchange rates, other than smoothing short-term disturbances or countering disorderly market conditions. These include Canada, the United States, and the members of the European common margins arrangement (the snake) taken as a group—though individual participants in the snake undertake the necessary measures to keep their exchange rates vis-à-vis other snake currencies within the agreed margins, and some participants have engaged in heavy borrowing to finance current account deficits. Among other countries that consider their exchange rates to be floating, and particularly for those that have faced difficult balance of payments adjustment problems, there has generally been a somewhat greater disposition to use intervention and other policies to influence developments in their rate.

A variety of policies, which may of course also be employed with other objectives in view, have been used to influence exchange rate developments. Such policies include reserve changes, official and quasi-official borrowing and lending, domestic monetary policy, and changes in exchange controls. On occasion these policies have been employed in the context of a fairly clear objective for the exchange rate; but more usually, the policy has been one of resisting rapid movements in the rate.

Among those countries that formally pursue a policy of fixing their exchange rates—the majority of Fund members—a number of different pegging techniques are presently employed. The choice of technique depends in part on historical and institutional factors and partly on the view of the authorities concerned of what would be most consistent with their overall economic objectives. The most commonly used technique is still that of pegging to a single currency (a unitary peg). On June 30, 1977, a total of 44 countries (with about 10 per cent of members’ exports in 1975) still retained a peg to the U.S. dollar; 14 (accounting for ½ per cent) were pegged to the French franc; and 9 (with ½ per cent) were pegged on other currencies. In addition, 7 countries (with roughly 2 per cent) having relatively high inflation rates had an exchange rate that was fixed by the authorities, but adjusted frequently on the basis of indicators of relative costs and prices.

A growing group of countries (29 in number on June 30, 1977, with about 9 per cent of members’ exports) have chosen to link their currencies in some manner to a basket of other currencies (a composite peg) or to the special drawing right (SDR). Finally, 7 countries (with 24 per cent of members’ exports) are participating in the European common margins arrangement, whereby these countries undertake to use mutual intervention to maintain the exchange rate for their currencies within a narrow band of fluctuation against each other, although not against the currencies of other countries.

There has also been a growing preparedness to reappraise exchange rate policies more frequently than in the past. Such reappraisal has resulted in changes in policy or in exchange rate practices. Some countries have changed the intervention points against their peg currency without, however, changing the form of the peg. Others have changed their peg either to another currency or to a currency basket, and still others have made use of formulas or indicators as a guide to peg changes. Relatively few countries outside the industrial world have chosen to move to independent floating as a permanent arrangement, although some have used exchange rate flexibility as an interim measure pending re-establishment of a fixed peg.

This change in attitude to exchange rate arrangements and exchange rate policies can be illustrated by comparing the actions of members in the later years of the par value system with experience in the floating period. In the last three complete years of the operation of the par value system, 1968 to 1970, only one country, Canada, changed from a fixed peg to a floating arrangement (although the deutsche mark was allowed to float briefly in 1969 prior to returning to a par value).

Since 1973, on the other hand, there have been a considerable number of changes in exchange rate arrangements and much more frequent changes in peg by countries adhering to pegging arrangements. In February-March 1973, when the Smithsonian pattern of exchange rates broke down, the European countries participating in the common margins arrangement allowed the snake as a whole to float against other currencies, and a number of other European countries and Japan also adopted floating arrangements. Later in 1973, 10 other countries moved away from a unitary peg, with 3 of these—Greece, Iceland, and Yugoslavia—electing to float independently and 7—including Finland, Malaysia, New Zealand, and Singapore—adopting composite pegging arrangements. In 1974, there were 10 changes in members’ exchange arrangements, of which one was re-pegging by a country with a floating currency (Greece), 6 were changes in pegging arrangements, including the adoption by Spain and Australia of composite pegs, and 3 were the adoption of independent floating (France, Nigeria, and South Africa). In 1975, out of the 22 changes in exchange arrangements, the great majority were movements from a unitary peg to pegging to a composite of currencies, though South Africa switched from independent floating to a unitary peg and France returned to membership in the European common margins arrangement. A noteworthy feature of developments in exchange rate arrangements during 1975 was the adoption of a peg to the SDR by 10 countries that had previously been pegged either to a single intervention currency or to a composite of currencies. Among countries adopting an SDR peg during 1975 were Iran and the 3 countries of the East African Community; Saudi Arabia also shifted to an SDR peg early in the year, but later widened its intervention points to allow a greater measure of stability in its rate against the U.S. dollar.

In 1976 there were rather fewer changes in exchange practices, partly perhaps because many Fund members were by that time already operating under arrangements they considered appropriate to the new circumstances. During the year, four more countries ceased to peg to sterling, with two of them electing to peg to the dollar, one to the SDR, and one to a composite peg. France again left the European common margins arrangement, and Mexico stopped pegging to the U. S. dollar to float independently. In addition, four other countries, including Australia, adopted arrangements permitting greater flexibility in their exchange rates. In the first half of 1977, the only country to change its exchange arrangements was Portugal, which shifted from floating to a composite peg.

An increasing tendency to reconsider exchange rate policies is also reflected in the greater frequency with which countries using pegging arrangements have been prepared to change their intervention points as a means of responding to balance of payments disequilibria. In the three years 1968 to 1970, of the 99 countries that were continuously operating under par values or unitary pegs, and were members of the Fund during the entire period, only 6 proposed changes in par value to the Fund or adjusted their pegged rates. In the three years 1974 to 1976, by contrast, of the 73 countries that continuously maintained a unitary peg (or a peg to the SDR), a total of 19 countries made one or more changes in their intervention points.

In summary, the four years that have elapsed since the move to greater exchange rate flexibility by a number of industrial countries have seen a perceptible increase in flexibility in the exchange arrangements of Fund members as a whole. There has been a growing diversity of exchange practices among countries, and members have been prepared to change their exchange arrangements to meet new circumstances. In addition, there has been an increasing disposition to regard the exchange rate as an instrument of policy that may need to be changed from time to time to respond to disequilibria that have emerged. Countries that are prepared to conduct their domestic policies so as to maintain a rigidly fixed peg for any appreciable period of time now represent only a small proportion of world trade.

A number of factors have combined to induce countries to give greater attention to their exchange rate policies as part of their overall economic strategy. Perhaps the most important has been the unstable economic conditions and high level of worldwide inflation in recent years. This has resulted in fixed exchange rates becoming inappropriate more rapidly than was the case when underlying economic conditions were more settled and rates of price increase were lower and more uniform among countries. Second, uncertainty about the implications for exchange rates of changes in the structure of world trade has required greater attention to exchange rates in the context of achieving effective adjustment. Third, for smaller countries adopting a unitary peg, changes in exchange rates between the currency to which they peg and other major currencies have sometimes resulted in unwelcome shifts in the local currency price of exports and imports. Lastly, and more generally, the breakdown of the par value system has encouraged countries to give more active consideration to the role of the exchange rate in formulating their overall economic policies.

At the same time, many smaller countries have felt that there were advantages for them in maintaining a point of reference for their exchange rate through a policy of pegging. Among the industrial countries that have a pegging policy, and particularly for the smaller members of the snake, the advantages of exchange rate stability have been perceived mainly in relation to the fight against inflation. For developing countries, the main fear has been that independent floating might result in exchange rate instability that would hamper their planning efforts and be harmful to their growth prospects and the confidence on which both capital inflows and local investment depend. Among the reasons why these countries felt unwilling to allow their exchange rates to be continuously determined by market forces alone are the inability of these countries to affect their export or import prices in foreign currencies through changes in their own exchange rates; the inelastic nature of their demand for imports and, in the short run, of their supply of exports; the lack of well-developed financial markets, including forward exchange markets; the unresponsiveness of capital flows to conventional yield considerations; and the desire to maintain a given external objective as a fulcrum for domestic economic policies.

While recognizing that these factors are often put forward as arguments for pegging in the case of primary producing countries, it must also be noted that pegging to a single intervention currency has rather different implications when the major currencies are floating against each other than it does when the world as a whole is operating under fixed rates. In particular, when the major currencies are floating against one another, movements in the pegged rate of a smaller country will reflect developments in the balance of payments of the major country to whose currency it is pegging, and may not necessarily be consistent with the requirements of its own balance of payments position. Since fluctuations in the country’s effective exchange rate are to this extent not dependent on the country’s own policy, they may interfere with the pursuit of internal policy objectives. To help moderate these unwelcome influences, while still retaining some of the perceived advantages of pegging, a number of countries, most of which are primary producers, have chosen to peg the value of their currencies to some composite of currencies of their important trading partners.

Exchange Rate Changes and Uncertainty

Since the early months of 1973, when a number of major currencies started to float, members’ effective exchange rates have fluctuated much more than they had done during the preceding years, except perhaps during the months immediately following the discontinuation of the convertibility into gold of foreign official U. S. dollar holdings in August 1971.

After the par value system broke down, concern was often expressed that exchange rate uncertainty accompanying greater rate flexibility could adversely affect international trade and capital transactions. There is no satisfactory measure of this uncertainty, but one possible indication of developments in exchange rate uncertainty is provided by the information available in spot and forward markets.

In their decisions on the use of the forward market for covering exchange risks, market participants compare the present spot and forward rates with their expectation of the future spot rate at the time when the forward contract matures and the interest rate differential prevailing in the relevant markets. The actions of market participants taken together result in a tendency for the forward rate to be drawn toward the future spot rate collectively expected by the market, with both of these rates tending to differ from the present spot rate by the difference in short-term interest rates in the two money markets in question. These tendencies may, of course, be prevented from fully manifesting themselves by the thinness of the forward market for many currencies and in some instances also by official intervention in this market.

To the extent that the forward rate reflects the market’s expectation of the future spot rate on the date on which the forward contract matures, the gap, observed ex post, between the forward rate as quoted three months earlier and the actual spot rate on this date can serve as an indicator of market participants’ errors in forecasting exchange rate developments.

This indicator is shown in Chart 7 for eight major currencies for which forward exchange rates are readily available. The indicator is calculated as the nine-month moving average of the absolute deviations, whether positive or negative, of the three-month forward rate at the end of each month and the actual spot rate observed three months later. It is noteworthy that the indicator for the Canadian dollar is considerably lower than those for the other currencies during the early part of the period under investigation. This is largely explained by the much narrower range of fluctuations between the Canadian and U. S. dollars than between the currencies of other countries and that of the United States. The increase in the Canadian indicator in the middle of 1975 resulted from an appreciation of the spot rate during a period when there were discounts on the forward Canadian dollar established three months earlier, paralleling the unprecedented disparity in short-term interest rates between Canada and the United States. For many of the European currencies, the largest deviation occurred in 1973 with the onset of floating by many of the major currencies. A smaller peak occurred for countries adhering to the European common margins arrangement in the second quarter of 1975, when there was doubt concerning the effect of the recession on the balance of payments of these countries. For Japan, the peak occurred in the middle of 1974, reflecting the impact of the oil price increase and the subsequent recession.

Chart 7.Indicator of Uncertainty of Future Exchange Rates Against the U.S. Dollar, January 1973–December 1976 1

(In per cent)

1 End-of-month data; nine-month moving averages of the absolute difference between the spot rate on a given date and the three-month forward rate for currency to be delivered on the same date.

In contrast, during 1976 the deviations remained relatively small for most of the currencies shown. Only the pound sterling and the Dutch guilder did not follow this general trend. For the pound, the measured deviations reached a peak during 1976. The rise in the indicator for the Dutch guilder above those of most of the other countries in the second half of 1976 may have been caused by unfulfilled expectations that the guilder would be realigned within the European common margins arrangement. The chart shows that, on the whole, the deviations between forward exchange rates and actual spot rates at the time the forward contracts mature were smaller during 1976 than in previous years for many of the major currencies. While, in part, it may indicate that market participants are learning how better to anticipate exchange rate movements, it may also be that the underlying determinants of exchange rates have become less variable and, therefore, more predictable.

The Role of the Exchange Rate in the Adjustment Process

Four years after the breakdown of the fixed rate system and the move toward greater exchange rate flexibility, a number of industrial countries are continuing to experience serious external imbalances. While it is recognized that too rapid an adjustment to the 1973 oil price increase by the industrial countries as a whole was not desirable, concern has been expressed recently about the apparent slowness of the adjustment process. This section focuses on the role of the exchange rate in the adjustment process for industrial countries that are floating. Evidence from the past four years is reviewed to see whether exchange rate movements have fostered an improvement in the international price competitiveness of industrial countries in a weak position on current account vis-à-vis those in a strong position, and whether exchange rate movements have significantly influenced current account outturns. The contribution of exchange rate movements to the reduction of existing imbalances is found to have been limited, and two main explanations are advanced: (1) until recently the need for external adjustment has not been given high priority and the flexibility of exchange rates has been reduced by the use of intervention and other policy measures, such as official and quasi-official borrowing; and (2) the effectiveness of exchange rate changes has often been impaired by the absence of appropriate accompanying domestic policies. The greater exchange rate flexibility of the past four years has, nevertheless, been helpful in offsetting the effects of divergent inflation rates on countries’ external positions.

Since early 1973 changes in exchange rates have tended to offset differences in the rates of inflation among the major industrial countries. This point is evident from Chart 8, which shows the effective exchange rate and the relative wholesale price of manufactured goods before and after adjustment for exchange rate changes. The base period for the chart is the first half of 1973, which corresponds to the beginning of the floating rate period. As a consequence of these offsetting price and exchange rate developments, the pattern of competitiveness among most of the major industrial countries is now very similar to what it was in early 1973. Only two countries, Switzerland and Italy, have exhibited a clear change in their competitive positions as measured by wholesale prices adjusted for exchange rate changes between the first half of 1973 and the first quarter of 1977.

Chart 8.Effective Exchange Rates and Relative Prices, 1969–76

(Quarterly indices, first half 1973 = 100)1

1 These indices, including those used in the calculation of the effective exchange rates, are based on data for the 14 industrial countries

2 First quarter partially estimated by the Fund staff.

The type of comparison made above obscures short-term changes in relative prices. For example, the Federal Republic of Germany sustained a sharp rise in relative prices as a result of the large appreciation of the deutsche mark in early 1973, but its competitive position gradually improved to the third quarter of 1975 as a result of better domestic price performance and no clear trend in its effective exchange rate. Since the third quarter of 1975 there has been some loss in price competitiveness by the Federal Republic of Germany as a result of a further appreciation of the effective exchange rate for the deutsche mark. Japan’s price performance exhibits a similar pattern; after a loss in competitiveness of about 10 per cent from 1973 to mid-1974, which reflected high domestic rates of inflation, its relative price position improved through 1975 as a result of relatively low rates of domestic price increases. However, the appreciation of the yen from the early part of 1976 has contributed again to some loss in competitiveness.

Although the relative price position of French manufactured goods has not changed over the period taken as a whole, its development has been discontinuous, reflecting alternating periods of appreciation and depreciation. The United Kingdom experienced a continuing loss in competitiveness from the second half of 1973 to mid-1975, but an improvement accompanied the rapid depreciation of the pound exchange rate to the end of 1976. During the first quarter of 1977 rapid rates of domestic inflation accompanied by an exchange rate appreciation have resulted in a level of competitiveness equal to that experienced in early 1973. The United States and Canada have experienced lesser movements in their relative price positions during the four-year period.

A comparison of prices for manufactured goods may, however, be a misleading indicator of the competitive position of a country, since the producers of manufactured goods may be obliged to some extent to price their products at world price levels despite changes in domestic costs. Under these circumstances, a loss of competitiveness will not be indicated by the relative price of manufactures adjusted for exchange rate changes. Indicators of relative unit labor costs are less subject to this weakness. They have other well-known drawbacks, however, such as their sensitivity to relative cyclical factors. In the present case, the evidence on relative unit labor costs in manufacturing does not diverge significantly from earlier results. According to these indices, the comparative advantage gained by Italy is somewhat larger, while the United Kingdom and the United States also moved into positions of increased competitiveness between the first half of 1973 and the first quarter of 1977. During the same four-year period there was some deterioration in Canada’s relative cost position.

Apart from longer-run changes in international competitiveness, the recent period has also been characterized by short-term fluctuations in exchange rates that have led to sharp temporary movements in the relative price of manufactured goods adjusted for exchange rate changes. The French experience provides an extreme example of the impact of short-run fluctuations in the exchange rate on the competitive position of a country. It is clear from Chart 8 that the short-term fluctuations in the French exchange rate have had a large and immediate impact on the competitive position of French manufactured goods. To the extent that lagged adjustment in domestic prices has occurred, it has tended to amplify the impact of the exchange rate. In 1974 and 1975, domestic prices appear to have been adjusting in part to the prior depreciation of the franc while the exchange rate was appreciating. As a consequence, both factors contributed to the sharp deterioration in the competitive position of French manufactured goods during this period. As discussed below, such short-term fluctuations in relative prices do not, however, have much impact on patterns of production and demand.

The greater exchange rate flexibility of the past four years has been helpful to the adjustment process insofar as exchange rate movements have prevented certain current account imbalances from developing or widening owing to divergent inflation rates. Rate flexibility has also facilitated the financing of current account imbalances by encouraging equilibrating capital movements. Exchange rate changes do not seem, however, to have played much of a role in recent years in reducing existing external imbalances among industrial countries. Current account developments since 1973 seem to have been dominated by other factors.

First, the volume of oil imports is not the same for all industrial countries, and, therefore, the relative current account positions of the various countries were changed by the 1973 oil price increase. Those countries already facing payments deficits in 1973, for example, France, Italy, and the United Kingdom, felt the further weakening in their external position particularly strongly.

Second, the current account developments in individual industrial countries have also been influenced by their demand management policies. Of the eight industrial countries considered in Chart 8, Japan, the Federal Republic of Germany, the United States, and Switzerland adopted restrictive domestic policies during 1973–74 and were successful in reducing inflation, although not in eliminating it. These four countries retained or gradually moved back into current account surplus during 1974–76. Italy and the United Kingdom, which were less prompt in restraining domestic demand and less successful in controlling inflation, experienced large current account deficits in 1974 and, except for Italy in 1975, remained in deficit through 1976. Canada and France followed demand management policies and experienced current account developments during the two years that fell somewhere between those of the other two groups of countries. By 1976, however, Japan, the Federal Republic of Germany, and, especially, the United States had adopted more expansionary policies, while France, Italy, and the United Kingdom continued to experience high inflation rates and introduced or intensified restrictive domestic policies. These policy changes have already contributed to major cyclical shifts in current balance positions in late 1976 and early 1977 as discussed in Chapter 1.

These price and current account developments should not be construed as evidence that exchange rate movements have tended to exacerbate the current account problems of certain industrial countries. It is shown in Chart 9 that the countries with depreciating exchange rates have also had weak current account performances, while the countries with the most rapidly appreciating currencies—the Federal Republic of Germany and Switzerland—have registered persistent surpluses. The most plausible explanation for this pattern is that both the depreciation and the deficit are the result of unstable underlying domestic economic conditions, and that exchange rate developments have prevented these conditions from having a more severe impact on the current balance of the countries concerned. There is still a need, nevertheless, for an exploration of the factors that have inhibited the adjustment process.

Chart 9.Relative Prices, the Current Account Balance, and the Effective Exchange Rate, 1972–76

One reason why exchange rate movements have not played a greater role in changing relative prices and reducing external imbalances is that exchange rate flexibility has, at times, been reduced because countries decided to sustain large-scale intervention in the foreign exchange market, to encourage foreign borrowing of public and semipublic corporations, and to impose exchange restrictions and capital controls. In many cases, such intervention was justified on the basis of domestic conditions, or because of the need to avoid too rapid an adjustment to the 1973 oil price increase. Denmark, France, Norway, Sweden, and the United Kingdom are among the European countries that have tended to finance current account deficits through international borrowing. Total official financing and net foreign reserve loss by the United Kingdom, for example, amounted to about $13½ billion over the period from 1974 to 1976. The Italian authorities also influenced the exchange rate through the imposition of import surcharges, import deposit requirements, and restrictions on purchases of foreign currency.

Exchange rates, however, do not always move in the short run in the direction required for current account adjustment because of short-term financial factors. For example, during 1974 the inflow of short-term capital into the United Kingdom from the oil exporting countries may have prevented a depreciation that was needed to improve the current account position.

As to the effect of an exchange rate change on the trade balance of a country, there is considerable empirical evidence that relative price changes eventually have a strong impact on foreign trade performance. Successful trade performance, however, is also strongly influenced by nonprice factors, such as a reputation for quality, reliable delivery schedules, good after-sales service, and the development of new products. It is consequently unrealistic to expect that an unanticipated change in relative prices, induced by an exchange rate change, will rapidly affect patterns of production and demand that reflect such “structural” factors. At a minimum, economic agents will have to be sure that the relative price change is going to last before they undertake the large adjustment costs involved in any change in the pattern of demand or supply. In recent years, the slowness of adjustment may have been increased by the depth of the recession and the continued strength of inflationary expectations.

A major consequence of the slow speed of adjustment in the goods market is that the trade balance may initially move in a perverse direction following an exchange rate change because the terms of trade effect may more than offset the slowly developing volume effect on the balance of trade. This is often referred to as the J-curve effect. The deterioration in the terms of trade as a result of a depreciation will be particularly marked if the country’s export prices in terms of foreign exchange fall because in the short run the world demand for its products is relatively inelastic—for example, because it exports specialized goods that account for a large share of the corresponding market—while its short-run export supply is relatively price elastic.

Chart 10 presents some empirical evidence on the terms of trade effect for particular periods when the exchange rate exhibited sharp short-term fluctuations. In each of these cases, the terms of trade of the country under consideration relative to those of other industrial countries were positively related to the movement in the exchange rate, and during the periods considered the changes in the terms of trade appear to have persisted. Since the volume of trade does not seem to have responded rapidly to the exchange rate in these cases, this suggests that a change in the exchange rate may have had a perverse effect on the current account for a period of time.

Chart 10.Effective Exchange Rate and the Terms of Trade1

1 This chart considers four particular cases in which a sharp change in the effective exchange rate has occurred.

2 Export price index divided by import price index, scaled by a trade-weighted average of the terms of trade for the United Kingdom, France, the Federal Republic of Germany, Italy, and Japan.

For the exchange rate to have the desired impact on the current account, it must be able, inter alia, to exert a sustained impact on relative costs. The high rates of inflation that have characterized the 1970s, however, have caused economic agents to focus on wages and prices in real rather than in nominal terms, and have contributed to the rapid spread of wage indexation. By 1976 wage contracts in more than half of the industrial countries in Europe were indexed to a considerable degree, while a significant number of contracts in Canada and the United States included cost of living clauses. In some countries where there was no formal indexation, wages nevertheless responded rapidly to price rises. These factors help to explain why many countries, and particularly those with small open economies, now accept the vicious circle hypothesis, that exchange rate changes lead to offsetting price and cost movements and further exchange rate adjustments, and why they believe that the benefits from exchange rate adjustments are limited. The factors considered above cannot be ignored, but their importance should not be exaggerated either. The evidence presented in Chart 8 and Chart 10, for example, indicates that at least for a period of time, and for the major countries considered here, exchange rate changes have had some impact on relative prices.

In practice, the issue behind the vicious circle argument turns on the effectiveness of different policy instruments in bringing about changes in real wages that are essential for effective adjustment, while minimizing the harmful consequences for other objectives, such as reasonable price stability and full employment. A needed exchange rate adjustment will become associated with a vicious circle only if demand management policy is sufficiently expansionary to permit it. The first step in preventing the vicious circle is to institute adequate restraint on the increase in nominal demand; such restraint should be coupled with efforts to minimize the feedback from the exchange rate to wages and other domestic costs so as to hold down unemployment. This may be helped, for example, by an incomes policy, negotiated among the government, labor unions, and industry, governing price and wage developments. The effectiveness of exchange rate adjustments in the deficit countries will also depend on the adoption of cooperative policies in the surplus countries. The latter must be willing to maintain an adequate level of domestic demand and to accept the appreciation of their effective exchange rates that results from the play of market forces.

In short, both demand management and exchange rate policies have essential roles—distinct but interrelated—to play in the successful functioning of the international adjustment process. As experience clearly shows, use of one without the other is apt to prove ineffective.

Reserve Developments

The previous section has shown that, despite the greater flexibility of exchange rates in recent years, there are still substantial payments imbalances, and the manner in which liquidity is provided to finance these imbalances therefore remains a matter of central concern. Even among countries whose currencies are floating, management of rates in varying degrees is quite widespread. In addition, many currencies are pegged to other individual currencies, to various baskets of currencies, or to the SDR. As a result, countries have been making considerable use of both credit and reserves to deal with payments imbalances.

To a considerable extent, the expansion of reserves and of balance of payments credit has been in the form of assets and liabilities in international capital markets, rather than being provided through the Fund or other intergovernmental agencies. An important issue confronting the international community is the extent to which an expansion of official sources of liquidity could improve the adjustment process, and, by strengthening the international monetary system, support a continuation of private lending. In this connection, a number of issues concerning the volume and nature of the liquidity provided by the Fund are currently under consideration by the Executive Board, including the Seventh Quota Review, whether there should be an allocation of SDRs, the characteristics and uses of the SDR, and the plan put forward by the Managing Director for a temporary supplementary credit facility. These questions will be discussed below in the section on the adequacy of reserves, but first a brief review will be given of recent reserve developments.

Two changes have occurred in recent years that raise questions with respect to the meaning of comparisons over time of the total value of international reserves. First, relative prices of the major reserve assets have been continuously changing by substantial margins over the last few years. For example, from the end of 1970 to the end of 1976, sterling depreciated against the U. S. dollar by almost 30 per cent, the U. S. dollar depreciated against the SDR (and against reserve positions in the Fund whose value is maintained in terms of SDRs) by 14 per cent, and the market price of gold in terms of U. S. dollars rose approximately fourfold. The purchasing power of a given collection of reserve assets therefore depends on its composition. Second, there has been a sharp reduction in the use of gold. Under the present Articles of Agreement gold transactions between members have to take place at the official price of SDR 35 per ounce. Although some gold has been used as a pledge for borrowing abroad, very few transactions have occurred since 1971. Furthermore, uncertainty about the future course of the free market price, and also about the effect on this price of the disposal of significant amounts of officially held gold over a short period, has inhibited governments from undertaking substantial sales in the private market. Thus, most countries’ holdings of gold have remained approximately constant since 1971.

For purposes of the compilation of reserve data in the Statistical Annex to this chapter, assets are valued at current prices in terms of SDRs, except for gold, which is valued at SDR 35 per fine ounce. The same convention underlies Charts 11 and 12 and Table 10.

Chart 11.Level and Composition of Reserves, End of Period, 1951–March 1977

(In billions of SDRs)

Chart 12.Level and Distribution of Reserves, End of Period, 1951–March 1977

(In billions of SDRs)
Table 10.Official Reserves, End of Years 1969–76 and End of May 1977(In billions of SDRs)
19691970197119721973197419751976May

1977
Fund-related assets
Reserve positions in the Fund6.77.76.46.36.28.812.617.719.2
Special drawing rights3.15.98.78.88.98.88.78.5
Subtotal, Fund-related assets6.710.812.215.015.017.721.426.427.7
Foreign exchange 133.045.475.196.2102.0126.9137.4160.4172.3
Total liquid reserves 139.856.387.3111.2116.9144.6158.8186.7200.1
Gold38.937.035.935.635.635.635.535.435.5
Total reserves 178.793.2123.2146.8152.6180.2194.3222.1235.6
Source: International Financial Statistics.

Official reserves of Fund members except Romania, plus the Netherlands Antilles, Surinam, and Switzerland. Foreign exchange holdings for 1973 include official French claims on the European Monetary Cooperation Fund.

Source: International Financial Statistics.

Official reserves of Fund members except Romania, plus the Netherlands Antilles, Surinam, and Switzerland. Foreign exchange holdings for 1973 include official French claims on the European Monetary Cooperation Fund.

During the 1950s and 1960s, the main reserve assets held by countries grew at moderate rates (Chart 11). Gold holdings rose from the early 1950s to 1965 by just over 1 per cent per annum; but they subsequently declined until the volume in the mid-1970s was about equal to that observed in the mid-1950s. Foreign exchange holdings increased during the 1950s and 1960s by about 4 per cent per annum, with substantial variations from year to year. These variations depended chiefly on the state of the balance of payments between the United States and the rest of the world, and the willingness or desire of monetary authorities outside the United States to hold dollars. Reserve positions in the Fund grew somewhat more rapidly during this period, on average by about 9 per cent per annum; variations in this rate of change were caused by the uneven incidence over time in the demand for Fund credit.

Beginning in 1970, reserve assets other than gold increased at a much faster pace. Foreign exchange reserves rose fivefold from the end of 1969 to the end of 1976 and “Fund-based reserve assets”—including in this concept SDRs as well as reserve positions in the Fund—increased fourfold. As already mentioned, the volume of gold holdings declined slightly.

The rise in official holdings of foreign exchange and Fund-related reserve assets in the 1970s occurred in two distinct waves, separated by a pause in 1973. During the three years 1970–72, foreign exchange reserves nearly tripled. Two thirds of the total increment of SDR 63 billion took the form of an increase in official claims on the United States, while the larger part of the remainder was accounted for by the growth in identified official holdings of Eurodollars. Following a year of slower growth in 1973, foreign exchange reserves expanded by some 50 per cent in 1974–75, chiefly as a result of the accumulation of foreign exchange assets by major oil exporting countries. Reserves of non-oil exporting countries rose very little during these two years. Reserve positions in the Fund expanded rapidly, doubling from the end of 1973 to the end of 1975. This was a reflection of the same forces that were responsible for the rapid increase in foreign exchange reserves, namely, the impact of the increase in the price of oil on countries’ payments balances. The increase in reserve positions in the Fund resulted from the rising need for Fund credit by oil importing countries encountering payments difficulties.

In 1976, the rapid rise in liquid reserves continued, with increases in both foreign exchange holdings and reserve positions in the Fund. The latter increased by SDR 5 billion, to reach a level of SDR 17.7 billion, bringing the total of Fund-related assets to SDR 26.4 billion. Foreign exchange holdings increased by SDR 23 billion (17 per cent), partly as a result of the same influences that caused a rise of foreign exchange holdings during the two preceding years but also partly because of a broadly based upward movement in the foreign exchange reserves of non-oil countries, both industrial and developing. This development was facilitated by the recovery in import demand in major industrial countries, and the decisions taken by many countries to use a substantial part of the proceeds of their borrowing to add to their reserves.

During the first five months of 1977, countries’ reserves expanded by SDR 13.4 billion and thus continued to rise at about the same pace as in 1976. The bulk of the increase took the form of foreign exchange holdings, but there was also a further expansion, by SDR 1.5 billion, of reserve positions in the Fund. A small rise in gold holdings, resulting chiefly from the sale of Fund gold to members at the official price, was offset by a decline in countries’ holdings of SDRs. (See Chapter 3.) All major country groups except the more developed primary producing countries shared in the increase in global reserve holdings; about one half of it accrued to the industrial countries, and the larger part of the remainder to the major oil exporting countries.

Factors Affecting the Adequacy of Reserves

This section contains the review of the adequacy of global reserve holdings that the Executive Directors are required to make as part of the Annual Report under Section 10 of the By-Laws of the International Monetary Fund. This provision was introduced as an amendment to the By-Laws in October 1969 at the time of the approval of the first SDR allocation. Since then there have been a number of major changes in the international monetary system that have affected the supply of and demand for reserves. The two most important are the more active use of exchange rates for balance of payments adjustment, including the floating of most major currencies, and the rapid expansion of international capital markets.

As a result of these changes, previous Annual Reports have broadened the discussion of reserve adequacy. Thus, last year’s Annual Report went beyond a comparison of the existing global volume of reserves with the global need, and included “the effects on reserve adequacy of the distribution of reserves among countries, the asset composition of a given reserve volume, the availability of public and private liquid resources other than reserves, and the adaptability of the supply of reserve assets to the existing demand.” 1 A broad approach will also be followed here with consideration being given to both of the main components of international liquidity, reserve assets and credit available for temporary balance of payments financing.2

A demarcation line between the two forms of international liquidity is not absolutely watertight, but the distinction is, nevertheless, clear in principle as well as in practice. Reserve assets, or “reserves,” are at the disposal of the country owning them without any need for negotiation, without any conditionality as to the countries’ policies, and without any significant limitation as to the circumstances in which they can be used. Access to credit is always subject to the first of these restrictions and may be subject to the other restrictions mentioned. Thus, the availability of credit, before a credit line has been negotiated, provides less assurance to a country than the ownership of an equal amount of reserves that it will be able to meet possible balance of payments deficits. While, therefore, the demand for reserves is not independent of the availability of credit, the fact that the two forms of liquidity perform somewhat different functions means that the composition of liquidity is not a matter of indifference to individual countries or to the international community as a whole.

Ownership of reserves provides more freedom of maneuver to countries than reliance on access to balance of payments credit, but the certainty of having financial resources available when needed that owned reserves can confer usually entails a cost. For resources already in hand, this cost can be measured by the difference between the return that could be obtained by their long-term investment—for example, in plant and equipment—and the yield achieved by keeping them in the form of liquid reserve assets; for resources that are obtained by borrowing, the cost is similar, reflecting the spread between the rate of interest that countries must pay for loans and the yield on reserve assets. By contrast, access to credit is typically costless, or virtually costless, if not used.

For the reasons just mentioned, the ownership of reserves and access to international credit are not perfect substitutes, and countries tend to aim at some balance in the composition of these liquid resources. Developments in reserve holdings and in the availability and use of international credit facilities should, therefore, be assessed jointly. This is done in the concluding section of this chapter, but first a brief review is necessary of some of the unexpected changes in reserve holdings in the last decade.

At one time, it was easy to think of the Fund as the principal source of supply of balance of payments credit for most member countries. Similarly, when the first allocation of SDRs was being considered, it seemed evident that if the desire of members to increase their reserves were to be met this would have to be done largely by the Fund. Gold was not expected to be a major source of new reserves, and it was widely felt that the U.S. balance of payments deficit, which had been a major source of past increases in the official reserves of other members, would and should be reduced or eliminated. Only two possible sources for reserve increases thus remained—reserve positions in the Fund and special drawing rights. The first was dependent on an increase in quotas and use of the Fund’s resources, the second on decisions affecting the timing and size of SDR allocations.

The first decision to allocate SDRs was therefore taken in the expectation of a rising demand for reserves with a supply of reserve assets, other than the SDR, that was both inelastic and expected to increase at a low annual rate. By tailoring the allocation of SDRs to its best estimate of this excess of demand over supply of reserves from other sources, the Fund was, to paraphrase Article XXIV, seeking to meet the long-term global need as it arose to supplement existing reserve assets.

Things did not turn out as expected either in the short run or longer run. 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 the SDR (some SDR 1–1.5 billion) was to be filled by an SDR allocation of about SDR 3 billion a year for the basic period of three years, 1970–72. 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, with less than SDR 9 billion of this total coming from the SDR allocation. The rapid increase in reserves was followed by other fundamental changes in the system as a whole, and this raised the question of the extent to which the earlier analysis of these issues still applied.

When looked at today, the changes on the side of the demand for reserves have perhaps been less than might have been expected from the major modifications that have taken place in the international monetary system. Although, as noted earlier in this chapter, greater use has been made of the exchange rate for adjustment purposes than in the past, there are still substantial payments imbalances, and most countries, including both those that peg and those that do not, show a desire to hold a growing stock of reserves to meet unexpected changes in their external position. For example, in 1976 when the opportunity for reserve increases occurred, approximately two thirds of the developed countries and two thirds of the non-oil developing countries increased their reserves.

The changes on the supply side of the market for international reserves have been much more striking. Particularly in the few years before 1971, the major part of the increase in international reserves took the form of official claims on the United States. Since the United States could potentially be called on to convert these official dollar holdings into gold, their continued rapid growth became a cause of some concern, because of the possibility that it would jeopardize confidence in the ability and willingness of the United States to undertake such conversion. After convertibility of the U. S. dollar into gold was discontinued in August 1971 and the U. S. dollar allowed to float, this was no longer a consideration. Further, financial intermediation (with deposits and loans denominated in U. S. dollars and other currencies) was expanding in the Eurocurrency markets during the 1960s, and in recent years has become very substantial in a number of financial centers around the world. Many countries have now become accustomed to borrow foreign currencies from commercial banks and other private sources, and their governments can choose to employ some of these funds to increase gross official reserves. The change in the elasticity of supply of international liquidity over the course of the last decade represents a difference in degree that almost amounts to a difference in kind.

In most years, the aggregate addition to reserves that countries make is small in comparison with capital market transactions in countries whose currencies are widely used in international trade and finance. Thus, countries that have access to international capital markets now face within their borrowing capabilities a highly elastic supply of reserves, both individually and in the aggregate. Individually, they can, if they wish, use external borrowing to move toward a particular reserve position. Collectively, the system can generate reserves through the intermediation provided by banks and other private financial institutions.

Partly as a result of these changes, the composition of reserve increases has turned out to be very different from that anticipated at the time of the first allocation of SDRs. The projections made in 1969 implied that at the end of the first allocation period, that is, at the beginning of 1972, SDRs would account for 10 per cent of total reserves and 16 per cent of liquid reserves (reserves excluding gold). It was widely expected that SDR creation would continue thereafter to account for the bulk of reserve increases. In the event, holdings of reserve currencies increased very much faster than had been anticipated, and the actual share of SDR holdings at the beginning of 1972 was about 10 per cent of liquid reserves. Since then, the share of SDRs in liquid reserves has declined further, to less than 5 per cent at the end of 1976.

What in effect has happened as a result of the changes in the last decade is that private capital markets have greatly expanded their activities compared with international financial institutions and central banks. By making medium-term loans and by accepting placement of some of the counterpart funds at shorter term, capital markets have in effect become major suppliers of reserves. Their intermediation between surplus and deficit countries has enabled the latter to settle balance of payments deficits through the use of credit rather than by reducing their gross reserves, while the official holdings of surplus countries, and thus global reserves, have increased. Very substantial payments imbalances have developed in recent years, and there was a time when official agencies would have been expected to be the principal intermediaries between surplus and deficit countries. When the need arose, however, private international markets had already developed to the point at which they were able to perform this function effectively for a number of countries and have continued to do so. During the same period, the ratio of Fund quotas to total imports fell substantially, from over 10 per cent in 1966 and 1967 to under 4 per cent in 1976. The ratio of quotas to imports immediately after general quota increases was 10.7 per cent in 1966 and 9.6 per cent in 1970. In 1977, after the implementation of the Sixth General Review of Quotas, it is estimated that it will be only 4.3 per cent.

Over a number of years the Fund credit available to a member has increased by successive steps in relation to quotas. As early as 1963, the compensatory financing facility was introduced, mainly for the use of countries exporting primary products, adding a potential 50 per cent of quota to the access of members in a position to use that facility, and in 1964 a further 25 per cent was added through the buffer stock facility. Then came the extended Fund facility, adding an additional 65 per cent of quota (1973); the oil facility (1974 and 1975); the expansion of the compensatory financing facility to 75 per cent of quota and the removal of its joint limit with the buffer stock facility (1975); and the temporary widening of the credit tranches by 45 per cent (1976). Not all these facilities have been drawn on to the same extent, but there has nevertheless been a significant increase in the Fund’s lending activity. From the end of 1973 to March 31, 1977, all drawings from the Fund totaled about SDR 17 billion, with about 16 per cent of this coming from drawings under the compensatory financing facility, about 40 per cent from the oil facility, and just over 1 per cent from the extended Fund facility. During the same period, reserve positions in the Fund rose by just under SDR 12.5 billion.

While the Fund has been an active lender, the development of private international capital markets has led in recent years to a rapid expansion of private institutions into fields where borrowers were formerly dependent on official organizations or the use of their own official reserves. Thus, commercial banks lend to countries encountering balance of payments difficulties, and governments wishing to add to official reserves can do so by holding the equivalent of part of their countries’ borrowing in the form of short-term assets abroad. This, of course, is true only for countries that can borrow in international capital markets. A number of Fund members are not in this position, and for these countries the availability of conditional and unconditional liquidity is largely dependent on the capacity of the Fund to provide credit or to allocate SDRs. For many Fund members, however, the dependence on official financing has been greatly reduced in recent years, and when considering quota increases, supplementary credit, and SDR allocations they can look at these as little more than alternative sources of reserves or balance of payments credit. No country can, of course, be sure that it will not at some stage have need of official assistance, but when this need lies in the uncertain future, more weight can be given to such considerations as the contribution official sources of liquidity can make to the orderly evolution of the international monetary system.

There are varying views on the way in which the expansion of private relative to official sources of finance has affected the international monetary system. Heavy reliance on international capital markets leads to differences in the availability of credit and reserves to countries, depending upon their ability to borrow in such markets. This effect, which is the inevitable result of reliance on the market, is regarded as inequitable by countries whose capacity to borrow is very limited. There are differences, moreover, among increases in reserves obtained through borrowing, current account surpluses, and SDR allocations. For borrowing to lead to a lasting increase in reserves it has to be periodically renegotiated, and circumstances may not necessarily be such that it is easy or convenient for countries to do this.

As far as balance of payments finance is concerned, institutions in the private sector do not normally make a practice of applying comprehensive policy conditions when making balance of payments loans to governments. Access to private sources of balance of payments finance may, therefore, in some cases permit countries to postpone the adoption of adequate domestic stabilization measures. This can exacerbate the problem of correcting payments imbalances, and can lead to adjustments that are politically and socially disruptive when the introduction of stabilization measures becomes unavoidable. The assurance that sufficient official lending capacity with adequate conditionality was available would reduce this risk. In these circumstances, an increase in the capacity of the Fund would complement the resources available through markets and increase confidence in the smooth functioning of the international monetary system.

In recent months, consideration has been given to these issues by the Executive Directors and by the Interim Committee. Since large payments imbalances are likely to persist in the foreseeable future, demands for access to international liquidity must be expected to remain high.

There is thus need for the Fund to be able to give balance of payments assistance to its members on an adequate scale. It is generally agreed that the increased quotas under the Sixth General Review, which are expected to become effective after the Proposed Second Amendment enters into force, will need to be increased again under the Seventh General Review of Quotas. The Seventh Review, which is already under way, is to be completed in February 1978, but, as with earlier quota increases, will not be implemented for some time thereafter.

Some Fund members, however, are expected over the coming period to experience payments imbalances that are large in relation to their economies and, consequently, large also in relation to their quotas. In these circumstances, there is a need for a supplementary facility that would enable the Fund to expand its financial assistance to these members. This assistance, which would be financed through lines of credit from countries in a position to provide them, should be available to all members and subject to adequate conditionality. At its meeting in April, the Interim Committee recognized the urgent need for such a facility and agreed on some of its main features.

In order for the Fund to fulfill its responsibilities in the provision of unconditional liquidity, the issue of whether the conditions exist for an allocation of SDRs must be kept under consideration. Moreover, the characteristics and uses of the SDR must be reviewed from time to time to ensure their continued adaptation to changing circumstances. The Executive Directors have been requested by the Interim Committee to examine all these matters and to report back to the Committee. On the question of the need for an SDR allocation, this report is to be made at the Committee’s first meeting in 1978.

Statistical Annex
Table 11.Distribution of Reserves, End of Years 1950, 1960, and 1970–76 1(In billions of SDRs)
195019601970197119721973197419751976
Industrial countries
United States24.319.414.512.112.111.913.113.615.8
United Kingdom4.85.12.88.15.25.45.74.73.6
Subtotal29.124.517.320.317.317.318.818.219.4
Austria0.71.82.22.52.42.83.83.8
Belgium-Luxembourg0.81.52.83.23.64.24.45.04.5
Denmark0.10.30.50.70.81.10.80.70.8
France0.82.35.07.69.27.47.210.828.42
Germany, Federal Republic of0.27.013.617.221.927.526.526.530.0
Italy0.73.35.46.35.65.35.74.15.7
Netherlands0.51.93.23.54.45.45.76.16.4
Norway0.10.30.81.11.21.31.61.91.9
Sweden0.30.50.81.01.52.11.42.62.1
Switzerland1.62.35.16.47.07.17.48.911.2
Subtotal, continental industrial Europe5.220.139.049.157.763.863.470.474.8
Canada1.82.04.75.35.64.84.84.55.0
Japan0.61.94.814.116.910.211.010.914.3
Total, industrial countries36.848.565.888.897.596.097.9104.1113.5
Primary producing countries
More developed countries
Other European countries 31.52.35.68.011.713.412.411.211.8
Australia, New Zealand, South Africa2.01.33.04.27.66.55.04.24.0
Subtotal, more developed primary
producing countries3.53.68.512.119.419.917.315.415.8
Less developed countries
Major oil exporting countries 41.32.35.07.810.012.138.448.356.1
Other less developed countries
Other Western Hemisphere 52.42.24.54.57.510.09.78.613.1
Other Middle East 61.10.71.72.02.73.63.94.45.0
Other Asia 73.72.75.86.37.88.810.511.216.1
Other Africa 80.50.92.01.71.92.22.42.42.6
Subtotal, other less developed countries7.76.613.914.519.924.526.526.636.7
Subtotal, less developed countries 99.59.018.922.329.936.664.974.992.9
Total, primary producing countries13.012.627.434.449.356.582.290.2108.7
Total49.761.293.2123.2146.8152.6180.2194.3222.1
Source: International Financial Statistics.

Official reserves of Fund members except Romania, plus the Netherlands Antilles, Surinam, and Switzerland. In addition to the holdings covered in IFS, the figures for 1973 include official French claims on the European Monetary Cooperation Fund; those for 1950 and 1960 include amounts incorporated in published U.K. reserves in 1966 and 1967 from proceeds of liquidation of the U.K. official portfolio of dollar securities. Totals may not add to figures shown because of rounding and because some totals include unpublished data for component areas.

The value of the official French and Italian reserve stocks, as shown in this table, differs from that published in official national statistics because, since January 1975 and December 1976, respectively, France and Italy have adopted systems of valuing gold based on market prices.

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

Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, Venezuela, and, beginning in 1966, Qatar, in 1970, Oman, and in 1973, the United Arab Emirates.

Argentina, Bolivia, Brazil, Central America, Chile, Colombia, the Dominican Republic, Ecuador, Guyana, Haiti, Jamaica, Mexico, Panama, Paraguay, Peru, Surinam, Trinidad and Tobago, Uruguay, and, beginning in 1966, Barbados, and in 1968, the Bahamas and the Netherlands Antilles.

Cyprus, Egypt, Israel, Jordan, Lebanon, the Syrian Arab Republic, and, beginning in 1965, the People’s Democratic Republic of Yemen and Bahrain, and in 1973, the Yemen Arab Republic.

Afghanistan, Burma, the Republic of China, Fiji, India, Korea, Lao People’s Democratic Republic, Malaysia, Nepal, Pakistan, the Philippines, Singapore, Sri Lanka, Thailand, Viet Nam, Western Samoa, and, beginning in 1972, Bangladesh.

African Fund members other than Algeria, Libya, Nigeria, and South Africa.

Includes’ residual.

Source: International Financial Statistics.

Official reserves of Fund members except Romania, plus the Netherlands Antilles, Surinam, and Switzerland. In addition to the holdings covered in IFS, the figures for 1973 include official French claims on the European Monetary Cooperation Fund; those for 1950 and 1960 include amounts incorporated in published U.K. reserves in 1966 and 1967 from proceeds of liquidation of the U.K. official portfolio of dollar securities. Totals may not add to figures shown because of rounding and because some totals include unpublished data for component areas.

The value of the official French and Italian reserve stocks, as shown in this table, differs from that published in official national statistics because, since January 1975 and December 1976, respectively, France and Italy have adopted systems of valuing gold based on market prices.

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

Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, Venezuela, and, beginning in 1966, Qatar, in 1970, Oman, and in 1973, the United Arab Emirates.

Argentina, Bolivia, Brazil, Central America, Chile, Colombia, the Dominican Republic, Ecuador, Guyana, Haiti, Jamaica, Mexico, Panama, Paraguay, Peru, Surinam, Trinidad and Tobago, Uruguay, and, beginning in 1966, Barbados, and in 1968, the Bahamas and the Netherlands Antilles.

Cyprus, Egypt, Israel, Jordan, Lebanon, the Syrian Arab Republic, and, beginning in 1965, the People’s Democratic Republic of Yemen and Bahrain, and in 1973, the Yemen Arab Republic.

Afghanistan, Burma, the Republic of China, Fiji, India, Korea, Lao People’s Democratic Republic, Malaysia, Nepal, Pakistan, the Philippines, Singapore, Sri Lanka, Thailand, Viet Nam, Western Samoa, and, beginning in 1972, Bangladesh.

African Fund members other than Algeria, Libya, Nigeria, and South Africa.

Includes’ residual.

Table 12.Composition of Reserve Change, 1970–76 1(In billions of SDRs)
1970197119721973197419751976
Net annual transactions in reserves
Gold
Monetary gold0.3–0.10.2–0.3
Gold transactions (acquisitions—) by IMF, BIS,
and European Fund–2.2–1.0–0.50.2
Countries’ gold reserves–1.9–1.1–0.3–0.1–0.1
Special drawing rights
Allocation of SDRs3.43.03.0
IMF holdings of SDRs (increase—)–0.3–0.2–0.10.10.1–0.1–0.1
Countries’ SDR holdings3.12.82.80.10.1–0.1–0.1
Reserve position in the Fund
Use of IMF credit–0.8–1.9–0.3–0.12.73.75.2
IMF gold transactions (inflow +)21.60.40.1–0.1
IMF transactions in SDRs (inflow +)0.30.20.1–0.1–0.10.10.1
IMF surplus (increase—)–0.1
Reserve position in the Fund1.0–1.3–0.22.73.85.1
Official foreign exchange holdings
Official claims on the United States 37.827.310.04.78.54.211.3
Other official claims4.66.811.09.717.02.610.7
Official sterling claims on United Kingdom0.51.70.70.32.7–1.1–2.2
Official deutsche mark claims on Federal Republic
of Germany0.8–0.40.1–0.60.10.10.1
Official French franc claims on France0.20.20.30.2–0.2–0.1
Other official claims on other countries denominated
in the debtor’s own currency4–0.10.6–0.41.40.7
Foreign exchange claims arising from swap credits
and related assistance–2.2–0.70.41.2–0.40.2
Identified official holdings of Eurodollars55.50.97.55.011.74.87.0
Identified official holdings of other Eurocurrencies40.72.11.80.11.4–0.2
Identified official claims on IBRD and IDA0.10.10.40.50.5
Residual6–0.34.30.51.91.4–4.14.6
Total official foreign exchange holdings12.434.121.114.325.56.822.0
Effect of valuation changes on stock of reserves 7–4.4–8.5–0.63.70.9
Total reserve change14.630.023.55.827.614.227.8
Sources: International Financial Statistics and Fund staff information and estimates.

A difference for 1973 between these data and those published in IFS is noted in Table 11, footnote 1. Table 14 provides comparable stock data concerning official holdings of foreign exchange. Note, however, that in some years changes in outstanding stocks do not coincide with the estimated transactions values recorded here because of changes in the relationship between the currency of denomination and the SDR. Footnote 1 to Table 14 notes these cases.

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

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

The underlying stock data were not available prior to 1970; therefore, the value of transactions in these assets is included with the residuals until 1971.

See Table 14 for more details concerning these Fund staff estimates.

Table 14, footnote 4, provides details.

Countries’ official holdings of foreign exchange are denominated in U.S. dollars or other national currencies. The value of most currencies has changed from time to time in relation to the SDR, the unit in which the figures in these annex tables are expressed. That appreciation or depreciation affects the amount of the reserve stocks, which is calculated by converting the original currency figures into SDRs at the rates prevailing on each day in question. Such valuation changes are given separately in this item; the other changes shown in the table (except the grand total below) are thus solely those resulting from international transactions.

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

A difference for 1973 between these data and those published in IFS is noted in Table 11, footnote 1. Table 14 provides comparable stock data concerning official holdings of foreign exchange. Note, however, that in some years changes in outstanding stocks do not coincide with the estimated transactions values recorded here because of changes in the relationship between the currency of denomination and the SDR. Footnote 1 to Table 14 notes these cases.

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

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

The underlying stock data were not available prior to 1970; therefore, the value of transactions in these assets is included with the residuals until 1971.

See Table 14 for more details concerning these Fund staff estimates.

Table 14, footnote 4, provides details.

Countries’ official holdings of foreign exchange are denominated in U.S. dollars or other national currencies. The value of most currencies has changed from time to time in relation to the SDR, the unit in which the figures in these annex tables are expressed. That appreciation or depreciation affects the amount of the reserve stocks, which is calculated by converting the original currency figures into SDRs at the rates prevailing on each day in question. Such valuation changes are given separately in this item; the other changes shown in the table (except the grand total below) are thus solely those resulting from international transactions.

Table 13.Composition of Reserve Change by Area, 1976 1(In billions of SDRs)
Industrial CountriesPrimary Producing CountriesTotal
More

developed

countries
Major oil

exporting

countries
Other less

developed

countries 2
United

States
Other

countries
Net transactions in reserves
Gold–0.20.1–0.1
SDR holdings0.1–0.1–0.1–0.1
Reserve positions in Fund1.92.21.1–0.15.1
Official foreign exchange holdings 30.24.40.56.610.322.0
Official claims on United States43.10.31.46.511.3
Official sterling claims on United Kingdom–0.2–0.5–1.5–2.2
Identified official holdings of Eurodollars0.8–0.13.03.37.0
Residual holdings of foreign exchange50.20.40.52.72.05.9
Effect of valuation changes on stock of reserves 60.60.20.10.10.9
Total reserve change2.27.20.47.810.227.8
Sources: International Financial Statistics and Fund staff information and estimates.

Table 12 provides more detailed information on the composition of changes in official reserves of all countries, including comparable data for earlier years.

The transactions values of the components of foreign exchange shown for this group were derived as residuals and therefore include any omissions, errors, and asymmetries included in the transactions values estimated for the other groups.

Area details are based on data provided by those holders of these claims that report this information to the Fund.

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

More details of this residual are provided in Table 12.

For explanation, see Table 12, footnote 7.

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

Table 12 provides more detailed information on the composition of changes in official reserves of all countries, including comparable data for earlier years.

The transactions values of the components of foreign exchange shown for this group were derived as residuals and therefore include any omissions, errors, and asymmetries included in the transactions values estimated for the other groups.

Area details are based on data provided by those holders of these claims that report this information to the Fund.

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

More details of this residual are provided in Table 12.

For explanation, see Table 12, footnote 7.

Table 14.Official Holdings of Foreign Exchange, by Type of Claim, End of Years, 1970–76 1(In billions of SDRs)
1970197119721973197419751976
Official claims on United States 223.846.656.755.462.668.979.0
Official sterling claims on United Kingdom5.77.38.16.58.36.43.2
Official deutsche mark claims on Fed. Rep. of Germany1.31.01.10.60.80.91.1
Official French franc claims on France0.60.81.01.21.11.10.9
Other official claims on countries denominated in the
debtor’s own currency0.80.90.71.41.22.63.4
Official foreign exchange claims arising from swap credits
and related assistance0.70.41.631.331.53
Identified official holdings of Eurocurrencies
Eurodollars
Industrial countries5.13.45.67.36.57.07.8
Primary producing countries
More developed countries1.61.73.23.43.03.83.7
Less developed countries3.85.49.210.422.828.034.4
Western Hemisphere1.01.63.64.05.05.65.9
Middle East0.61.11.92.312.016.919.6
Asia1.11.12.02.73.03.56.0
Africa1.11.61.71.32.82.03.1
Memorandum item: Major oil exporting countries1.62.83.94.015.621.024.1
Total identified Eurodollars10.510.418.021.132.338.746.0
Other Eurocurrencies0.41.13.25.05.66.87.0
Total identified holdings of Eurocurrencies10.911.621.226.137.845.552.9
Identified claims on IBRD and IDA0.70.60.60.60.91.62.1
Residual 41.16.46.89.712.59.216.1
Total official holdings of foreign exchange45.475.196.2102.0126.9137.4160.4
Sources: International Financial Statistics and Fund staff information and estimates.

Includes the estimated change in the level of holdings owing to the general realignment of currencies in 1971, the U.S. dollar devaluation in 1973, and the widespread floating of currencies since 1974.

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

Comprises the double deposit arrangement between the Deutsche Bundesbank and the Bank of Italy.

Part of this residual occurs because some member countries do not classify all the foreign exchange claims that they report to the Fund. It also includes asymmetries arising because data on U.S. and U.K. currency liabilities are more comprehensive than data on official foreign exchange as shown in International Financial Statistics.

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

Includes the estimated change in the level of holdings owing to the general realignment of currencies in 1971, the U.S. dollar devaluation in 1973, and the widespread floating of currencies since 1974.

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

Comprises the double deposit arrangement between the Deutsche Bundesbank and the Bank of Italy.

Part of this residual occurs because some member countries do not classify all the foreign exchange claims that they report to the Fund. It also includes asymmetries arising because data on U.S. and U.K. currency liabilities are more comprehensive than data on official foreign exchange as shown in International Financial Statistics.

See Annual Report, 1976, page 39.

As in earlier years, the analysis of this section does not deal with the provision of long-term development finance.

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