Chapter

Chapter 3: Activities of the Fund

Author(s):
International Monetary Fund
Published Date:
September 1979
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The principal developments during the year were as follows:

  • Almost all the quota increases proposed under the Sixth General Review of Quotas had come into effect by September 13, 1978, on which date the Fund had 134 members with total quotas of SDR 39 billion. The Seventh General Review of Quotas was completed in December 1978 when the Board of Governors adopted a Resolution on increases in members’ quotas that will, if all members accept the proposed increases, raise total quotas in the Fund to SDR 58.6 billion.

  • The supplementary financing facility, which is designed to assist those members that would require balance of payments financing in larger amounts and for a longer period than could be available under the regular credit tranches, became operational on February 23, 1979. The amount available for the facility under the borrowing agreements with lenders at the end of June 1979 is SDR 7,784 million.

  • The Interim Committee of the Board of Governors on the International Monetary System expressed “broad support” for active consideration by the Executive Board of an account, to be administered by the Fund, that would accept deposits of foreign exchange from members on a voluntary basis in exchange for an equivalent amount of SDR-denominated claims. The Executive Board has continued to work on such an account with the objective of presenting its conclusions to the next meeting of the Committee to be held in Belgrade, October 1, 1979, on the occasion of the next Annual Meeting of the Board of Governors.

  • The Executive Board adopted, in March 1979, a new set of guidelines on conditionality on the use of the Fund’s general resources in the upper credit tranches. The new guidelines replace an earlier set of guidelines formulated in 1968, with more detailed specifications.

  • In accordance with one of the major objectives of the Second Amendment, the Fund took several decisions toward enhancing the role of the SDR as the principal international reserve asset, through resumption of allocations and improvements in its yield, provision for a wider range of uses, and a reduction in the reconstitution requirement.

  • With the participation in late 1978 of five members (Lebanon, Libyan Arab Jamahiriya, Saudi Arabia, Singapore, and the United Arab Emirates), all but one of the Fund’s 138 members are now participants in the Special Drawing Rights Department.

  • The Fund resumed the allocation of SDRs, last made in the period 1970–72, with an allocation of SDR 4 billion as of January 1, 1979 to the 137 members that were participants in the Fund’s Special Drawing Rights Department on December 31, 1978. This allocation, which brought the total of SDRs in existence to SDR 13.3 billion, was made in accordance with a Resolution of the Board of Governors providing for further allocations of about SDR 4 billion as of January 1 in each of the years 1980 and 1981.

  • The Fund completed the third of four annual distributions of gold to members and sold, for the benefit of developing member countries, 7.2 million ounces to the market through public auctions. The Executive Board agreed on the terms and conditions of gold sales through public auctions for the last year, ending in May 1980, under the four-year gold sales program.

  • The Trust Fund loans in the first period ended June 1978 aggregated SDR 840.9 million, representing over 40 per cent of the qualified members’ quotas; for about three fourths of the qualified members these loans represented one half or more of the assessed need. For the Trust Fund’s second period, which will end on June 30, 1980, 59 members (against 61 in the first period) will be eligible to receive low-interest loans in support of 12-month balance of payments programs that are to begin no later than May 1, 1980.

  • For the second consecutive year, there was a reduction in the net amount of balance of payments assistance provided by the Fund through the General Resources Account. Total purchases amounted to SDR 3,720 million. Reserve tranche purchases rose to an all-time peak of SDR 2,480 million, accounted for largely by the purchases made by the U.S. Government as part of a package of measures to strengthen the position of the U.S. dollar. Total repurchases were also the largest amount in any financial year in the Fund’s history, so that there was a net contraction of Fund credit equivalent to about SDR 3.6 billion. For its part, the Fund reduced its net outstanding borrowing from governments and central banks.

  • For the first time the Fund extended financial assistance under its buffer stock facility to member countries to meet their obligations under the 1977 International Sugar Agreement.

  • For the second time since its financial year 1971/72, the Fund recorded an overall surplus (SDR 46 million, compared with SDR 27 million in 1977/78) in its operations (after taking account of administrative expenses), which was added to reserves.

During the year discussion by the Executive Board of a number of major policy issues was guided by the deliberations of the Interim Committee of the Board of Governors on the International Monetary System (the Interim Committee) and the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (the Development Committee). Both committees met in Washington, D.C. at the time of the 1978 Annual Meetings, and the Interim Committee subsequently met, again in Washington, D.C, during March 1979. The press communiqués by the Interim Committee are reproduced in Appendix III.

Sixth General Review of Quotas

On April 1, 1978, at the time of the entry into force of the Second Amendment of the Fund’s Articles of Agreement, 86 members having 78.65 per cent of total quotas had consented to and paid in full increases in their quotas, thus satisfying the conditions in the Board of Governors Resolution of March 22, 1976, that no increase in quotas in the Sixth Review would be effective before the latter of two dates: (1) the effective date of the Second Amendment; or (2) the date of the Fund’s determination that members having 75 per cent of the total of Fund quotas as of February 19, 1976 had consented to their increases. Under the Resolution, members that had not consented to their increases at the time the Second Amendment came into effect had up to one month after the effective date of the Amendment to consent, that is, up to May 1, 1978. The Executive Board, acting under a provision of the Resolution, extended the period of consent, first to June 12, 1978, then to August 7, 1978, and finally to October 31, 1978. By that date all eligible members except Democratic Kampuchea had consented to increases in their quotas; Singapore consented to an increase in its quota from SDR 37 million to SDR 49 million, against the proposed maximum quota of SDR 110 million. The Resolution required that payments for quota increases be made within 60 days of the effective date of the Second Amendment, or of the date of consent if the member consented after April 1, 1978; the last payment for a quota increase was made on September 13, 1978, on which date the Fund had 134 members with total quotas of SDR 39,001.4 million.

As mentioned in the 1978 Annual Report, a member increasing its quota under the Sixth General Review had the option to pay the entire increase in its own currency, or 25 per cent of the increase in SDRs, or in currencies of other members specified—with their concurrence—by the Fund, and the balance of the increase in the member’s own currency. Eleven members paid 25 per cent of the increase in quotas in media other than their own currencies.

Seventh General Review of Quotas

The Executive Board submitted to the Board of Governors on November 1, 1978 a report containing proposals for increases in members’ quotas under the Seventh General Review of Quotas. The Report contained a draft Resolution, which was approved by the Board of Governors effective December 11, 1978.1 The proposals for quota increases were based on the view that, in general, increased access to the Fund’s resources should, over the longer run, normally result from an increase in Fund quotas, which give the Fund a more assured access to resources than does borrowing. However, the possibility of large payments imbalances over the next few years and their distribution are likely to affect the Fund’s liquidity position. For these reasons, and in accordance with the understandings reached by the Interim Committee at its meeting on September 24, 1978, the Board of Governors proposed a general increase in the overall size of quotas of 50 per cent for all members except China and Democratic Kampuchea; in addition, selective quota increases totaling SDR 388 million were proposed for 11 member countries. The proposed increases will become effective for an individual member on the latest of the following three dates: (a) the date of the member’s consent to the increase, (b) the date of payment of its increased subscription, and (c) the date on which the Fund determines that members having not less than three fourths of the total of quotas on November 1, 1978 have consented to increases in their quotas. However, if the Fund’s determination is in the period between July 1, 1980, and October 5, 1980, no increase in quota will become effective until after October 5, 1980. This provision was designed to ensure that there would be no changes in quotas during, or shortly before, the 1980 Annual Meeting, when the next election of Executive Directors will take place. Since total quotas on November 1, 1978 were equivalent to SDR 39 billion, the minimum participation requirement will be met when members accounting for at least SDR 29.3 billion of total quotas have consented to a full or partial increase in their quotas.

A member may consent to an increase in its quota any time on or before November 1, 1980. The Executive Board may extend this period as it may determine. A member can consent to an increase smaller than the amount proposed for it in the Annex to the Resolution, and later could consent to an additional amount, up to the proposed maximum, at any time prior to the expiration of the period for consent. As of July 30, 1979, 15 countries—Bolivia, Botswana, Chile, Denmark, Ecuador, El Salvador, Guatemala, Iceland, Indonesia, Malawi, Malaysia, Nepal, Paraguay, the Philippines, and Sweden—had consented to their maximum increases under the Seventh General Review. The quotas of these countries accounted for about 6 per cent of total quotas in the Fund as of November 1, 1978.

Members that are participants in the Special Drawing Rights Department must pay 25 per cent of the increase in their quota under this review in special drawing rights; a nonparticipant must pay 25 per cent in the currencies of other members specified by the Fund, subject to their concurrence. The balance of the increase shall be paid in a member’s own currency. Members must pay the increase in quota—both the SDR portion and the local currency portion—within 30 days after the later of (a) the date on which the member notifies the Fund of its consent, or (b) the date determined by the Fund on which the participation requirement is met, unless this determination is made between July 1 and October 5, 1980, in which case the determination will be deemed to have been made on October 5, 1980. If all members accept increases in their quotas to the maximum amounts proposed, total quotas in the Fund would rise as a result of the Seventh General Review from the current level of SDR 39,011.2 million to SDR 58,616.3 million.

The Executive Board does not intend to propose a general adjustment of quotas for five years after the adoption—on December 11, 1978—of Board of Governors Resolution No. 34-2, unless there is a major change in the world economy and its financing needs. The Executive Board will review the customary method of calculating quotas after completion of the Seventh General Review of Quotas. Such a review will examine the quota shares of members in relation to their positions in the world economy with a view to adjusting their shares better to reflect members’ relative economic positions while having regard to the desirability of an appropriate balance in the composition of the Executive Board.

Conditionality Attached to the Use of Fund Resources

At its April 1978 meeting in Mexico, the Interim Committee asked the Executive Directors of the Fund to review the conditionality attached to the use of Fund resources in the credit tranches. The review began in June 1978 and was completed on March 2, 1979 with the adoption by the Executive Board of a decision containing a new set of guidelines for the use of Fund resources.2 Executive Directors discussed the Fund’s experience in the application of conditionality, the policies and objectives of adjustment programs supported by the Fund’s resources in the upper credit tranches, and the criteria that govern the use of these resources. The discussions took into account comments that had been made at the Annual Meetings of the Fund and in other forums on the Fund’s approach to conditionality.

The new guidelines include many of the conclusions that the Executive Board had reached in 1968 following a similar review of this subject.3 These are (a) the avoidance of contractual language in stand-by documents; (b) the inclusion of appropriate consultation clauses in all stand-by arrangements; (c) the limitation of performance criteria to those that are necessary to assess the implementation of the program so as to ensure the attainment of its objectives; and (d) the limitation on the use of phasing of purchases under stand-by arrangements to those arrangements that go beyond the first credit tranche and to purchases beyond this tranche.

The new guidelines, however, include a number of considerations that go further than the 1968 conclusions. It is recognized that countries often tend to hesitate to adopt corrective measures at an early stage in their balance of payments difficulties. In recent years, many countries approached the Fund for support only after their financial situation had already undergone an extreme degree of deterioration. In these cases, the financial programs have had to be more stringent than they would have been if adjustment measures had been taken earlier. The new guidelines therefore emphasize that the Fund, in its regular consultations with members under Article IV and on other occasions, will intensify its efforts to encourage countries to adopt necessary corrective measures that could be supported by the use of the Fund’s general resources at an early stage of their balance of payments difficulties. They also recognize—and indeed this has been the practice in recent years—that for countries facing severe balance of payments problems, often of a structural nature, the period of adjustment should extend beyond one year. Therefore, in appropriate cases, stand-by arrangements may be concluded for a period of up to three years in order to alleviate the effect of corrective measures on real incomes and to contribute to a distribution of the burden of adjustment within the economy that is socially and politically more acceptable. Long periods of adjustment have been specifically provided for in the extended Fund facility, introduced in 1974, which supports programs that cover periods of up to three years, and also in the supplementary financing facility.

Adjustment measures typically relate to sensitive areas of fiscal, credit, incomes, and exchange rate policies as well as to policies on trade and payments restrictions, and governments are rightly concerned about the compatibility of these policies with their economic priorities and their domestic social and political objectives. The new guidelines have made it clear that, in assisting countries in the design of adjustment programs, the Fund will pay due regard to these concerns and to the particular circumstances of members, including the causes of their balance of payments difficulties. Furthermore, performance criteria will normally be confined to (1) macroeconomic variables and (2) those criteria necessary to implement specific provisions of the Articles of Agreement or policies adopted under them. Performance criteria may relate to other variables only in exceptional cases when they are essential for the effectiveness of the member’s program, because of their macroeconomic impact.

As in the past, the Managing Director will continue to recommend to the Executive Board the approval of a member’s request for a stand-by arrangement when he judges that the request is consistent with the Fund’s provisions and policies and that the program presented by the member will be carried out. In certain circumstances, the new guidelines recognize that this may require the member to adopt certain measures before the stand-by arrangement is approved. In such cases, the Managing Director will keep Executive Directors informed in an appropriate manner of the progress of discussions with the members.

The new guidelines provide for flexibility in those cases, including in particular programs extending beyond one year, where a member is not able to establish in advance one or more performance criteria for the duration of the stand-by arrangement. In these instances, provision is made for a review in order to establish the performance criteria for the remaining period. In addition, in exceptional cases where an essential feature of the program cannot be formulated as a performance criterion at the beginning of the program year because of uncertainties concerning major economic trends, the guidelines make provision for a review in order to reach any necessary understandings.

Other important issues are stressed in the guidelines, such as the need for the Managing Director to ensure adequate coordination in the application of policies relating to the use of the Fund’s resources in order to maintain the nondiscriminatory treatment of members. It is also recognized that the policies of the Fund in this area, as well as in others within its competence, will have to evolve in the light of changing circumstances in the world economy. The concluding two guidelines require the Fund staff to prepare studies of the appropriateness of and performance under programs. Individual country programs will be analyzed and evaluated in reports on consultations under Article IV or when a further request for use of Fund resources is made by the country concerned. Studies evaluating and comparing the features of different programs as well as their appropriateness and the performance under them will be prepared periodically. These studies will assist the Executive Board in deciding on the timing and modalities of the next comprehensive review of conditionality.

Consultations with Member Countries

Regular consultations with member countries are a central part of the Fund’s work, providing an occasion for review and appraisal of the country’s economic and financial situation in an international context as well as a background of up-to-date information, which enables the Fund to deal promptly with requests for use of Fund resources and with proposed changes in practices subject to Fund approval. Under the Second Amendment of the Articles of Agreement, which became effective on April 1, 1978, consultations under Article IV are required for all members and, in principle, take place annually. These new consultations include the regular consultations previously held under Article XIV and Article VIII. Consultations are required annually for countries availing themselves of the transitional arrangements under Article XIV; they were held annually on a voluntary basis for Article VIII countries.

While Article IV gives member countries substantial freedom in the selection of their exchange arrangements, it establishes general obligations and specific undertakings that each member must meet in pursuit of its exchange policies. In addition to the commitment to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates, each member is to endeavor to direct economic and financial policies toward fostering orderly growth and to seek to promote stability by fostering orderly underlying economic and financial conditions. The member is to refrain from manipulating exchange rates to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members. Under the Fund’s principles for the guidance of members’ exchange rate policies, each member is enjoined to intervene in the exchange market if necessary to counter disorderly conditions, and to take into account in its intervention policies the interests of other members. The Article IV consultation is intended to help the Fund in ensuring observance of these obligations and in exercising firm surveillance over exchange rate policies. Thus, in formal terms the scope and role of regular consultations have been enlarged to include consideration of the observance by members of the principles for the guidance of members’ exchange rate policies as well as of a member’s obligations under Article IV, Section 1. In other respects there has been no major substantive change in the approach to consultations, since comprehensive analysis of economic and financial developments and policies has always been an objective of these discussions.

As before, regular consultation discussions normally take place in member countries between their representatives and Fund staff teams. On the basis of these discussions the Fund staff prepares reports for consideration and discussion by the Executive Board. Not later than three months after the termination of discussions between the member and the staff, the Executive Board is to reach conclusions and thereby complete the consultation under Article IV. In addition to any formal decision rendered by the Board on any matters subject to Fund jurisdiction, the Article IV consultation concludes with an informal summation by the Managing Director expressing the sense of the meeting and indicating the conclusions reached. These views are transmitted promptly to the authorities of the member country by the Fund.

Regular consultations as described are supplemented by special consultations held in connection with the periodic review of the world economic outlook by the Executive Board. These special consultations are intended to provide up-to-date information on the economic situation of countries whose external policies are regarded as being of major importance to the world economy. In this context, a special surveillance of the exchange rate and of the underlying policies of a major member country (the United States) was undertaken for the first time by the Executive Board in December 1978.

Following a review of procedures for surveillance under Article IV in late 1978, the Executive Board decided4 that there should be provision for reviews of developments involving the exchange rate policies of individual member countries between annual consultations. Accordingly, a supplemental surveillance procedure was established under which the Managing Director must initiate an informal and confidential discussion with a member whenever he considers that a modification in the member’s exchange arrangements or exchange rate policies or the behavior of the exchange rate of its currency may be important or may have important effects on other members. This supplementary procedure can justify discussion not only when an important movement of the exchange rate has occurred but also when lack of movement might be considered important because a change in underlying conditions is giving rise to a serious imbalance. It permits the Fund to look into exchange rate developments or situations of importance between regular Article IV consultations without any presumption that the member in question has not complied with its obligations. If, after a prior discussion, the Managing Director considers the matter to be of importance, he must either conduct an ad hoc consultation with the member and report to the Executive Board, or informally advise the Executive Directors on the consultation as promptly as circumstances permit.

In 1978/79, the first full year of experience under the Second Amendment, the Fund completed 70 regular Article IV consultations, of which 40 were with countries availing themselves of the transitional arrangements of Article XIV and 30 with countries that had formally accepted the obligations of Article VIII. In addition, 20 consultations were completed that had been initiated before Article IV came into effect; of these, 16 were under Article XIV and 4 under Article VIII. Another 31 consultations were initiated in 1978/79 but not completed before the end of the financial year; of these, 23 were with Article XIV countries and 8 with Article VIII countries. During the financial year, one member country, Suriname, formally accepted the obligations of Article VIII, Sections 2, 3, and 4. On April 30, 1979, the Fund had a total membership of 138 countries, of which 47 had Article VIII status, as listed in Appendix I, Table I.17.

Major Developments Relating to Special Drawing Rights

Several major decisions were taken in 1978/79 to enhance the yield and characteristics of the SDR and thereby to promote the SDR as the principal reserve asset in the international monetary system, which is one of the objectives of the Second Amendment to the Articles of Agreement. These decisions were part of a package of measures adopted in the light of the consensus reached at the meeting of the Interim Committee in September 1978, including an increase of 50 per cent in the quotas of most Fund members. The decisions concerning the SDR were as follows:

  • (i) to increase the volume of SDRs in existence by resuming allocations of SDRs;

  • (ii) to improve the return on SDR holdings by raising the rate of interest on the SDR;

  • (iii) to liberalize the conditions under which SDRs may be used by reducing the “reconstitution” requirement for average holdings of SDRs; and

  • (iv) to widen the usability of SDRs by permitting the use of SDRs in certain “operations” by agreement between participants.

With a view to broadening the use of SDRs even further, the staff of the Fund has begun to explore with a number of official institutions the possibility of their becoming “other holders” of SDRs so as to be able to acquire, hold, and use SDRs in certain transactions and operations.

Another important development during the financial year was that five Fund members that were not participants (Lebanon, Libyan Arab Jamahiriya, Saudi Arabia, Singapore, and the United Arab Emirates) decided to participate in the Special Drawing Rights Department. Thus, all but one of the 138 Fund members are now participants.

An increasingly large number of transactions and operations in the Fund are now being conducted in SDRs, including purchases and repurchases in the General Resources Account, the payment of charges and quota payments by members, and interest payments and loan repayments by the Fund. Outside the Fund, there has been increasing use of the SDR as a unit of account in private contracts and international treaties, and by the end of June 1979, 13 Fund members had pegged the rate of their currency to the SDR.

Allocations

On December 11, 1978, the Board of Governors adopted a Resolution approving the proposal of the Managing Director, concurred in by the Executive Board, that allocations of SDRs should be resumed and that SDR 4 billion should be allocated as of January 1 each year in 1979, 1980, and 1981.5 The proposal was made in accordance with the Managing Director’s conclusion that, as required by Article XVIII, Section 1 (a) of the Articles of Agreement, the Fund should seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such a manner as to promote the attainment of its purposes. The basis for this finding was, inter alia, that, notwithstanding greater exchange rate flexibility, countries wanted to increase their reserves in keeping with the rise in the level of their international transactions. While most countries could satisfy their need for reserves by recourse to international capital markets, this entailed difficulties of periodic refinancing that did not arise when additions to net reserves were made through allocations of SDRs. Another consideration was that exclusive reliance on the accumulation of reserve currencies to provide the needed increases in reserves would not be compatible with the objective of making the SDR the principal reserve asset of the international monetary system. The share of holdings of SDRs in reserves excluding gold had declined from about 10 per cent at the beginning of 1972 to about 4 per cent at the end of 1978 and, in the absence of allocations in the third basic period, the SDR would have continued its decline as a proportion of reserves.

The amount of SDR allocations and the period over which they are to be made were determined by a combination of several considerations. First, it was estimated that members’ holdings of official reserves might increase by SDR 20 billion a year or more over the next five years, taking into account expected growth in the value of world trade over this period. Second, with a highly elastic supply of reserves through international capital markets, a substantial part of any allocation of SDRs could be expected to be substituted for increases in official holdings of foreign exchange that would otherwise have taken place, so that the expansionary effects of allocation would be limited. However, in view of the possible effects on expectations with respect to inflation, SDR allocations should be modest in terms of both annual size and the length of the period of allocation. Yet another consideration was that SDRs would be used in partial payment for quota increases under the Seventh General Review of Quotas.

The main provisions of Board of Governors Resolution No. 34-3, adopted December 11, 1978, are as follows:

  • (i) The third basic period for allocations that began on January 1, 1978 would end on December 31, 1981.

  • (ii) Allocations during the basic period would be made as of the first day of the month following the effective date of the Resolution and as of the same date in each of the subsequent two years (i.e., the basic period would have a duration of four years, with allocations as of January 1 in each of the last three of those years).

  • (iii) The amount to be allocated to each eligible participant would be determined by the percentage, rounded to the nearest 1/10 of 1 per cent, resulting from dividing SDR 4 billion by the total of quotas on the day before allocation of those participants that were eligible to receive allocations on the effective date of the Resolution.

In accordance with the Resolution, the total amount allocated as of January 1, 1979 was SDR 4,033 million, bringing the cumulative total of SDR allocations to SDR 13.3 billion, about 5 per cent of world official reserves excluding gold. The allocation was made to the 137 Fund members that were participants in the Special Drawing Rights Department, including 25 participants that were receiving an allocation for the first time. To allow allocations to members that became participants after the beginning of the third basic period, the Executive Board decided to permit such allocations provided that the members concerned became participants by December 31, 1978 and indicated their wish to receive the allocations during the third basic period.6 It is expected that the Executive Board will give sympathetic consideration to a desire by any new participant to receive allocations during the remainder of the third basic period after it becomes a participant.

The amount of SDRs allocated to each participant was equal to 10.4 per cent of its quota, and thus ranged widely from SDR 874 million for the United States to SDR 93,600 for the Maldives, the Fund member with the smallest quota.7 It is expected that the allocation as of January 1, 1980 will be based on present quotas, since these are likely to be still in effect at that time. However, the allocation as of January 1, 1981 for most members will probably be calculated on the basis of higher quotas in accordance with the Resolution on the Seventh General Review of Quotas.

Interest Rate

On January 1, 1979 the interest rate on the SDR was increased from 60 per cent to 80 per cent of the combined market interest rate that is calculated each calendar quarter on the basis of short-term money market rates in the five countries with the largest Fund quotas (France, the Federal Republic of Germany, Japan, the United Kingdom, and the United States) and rounded to the nearest ¼ of 1 per cent.8 As a result of the new decision and the general rise in money market rates, the interest rate on the SDR rose from 4 per cent in the fourth quarter of 1978 to 6 per cent in the first quarter and 6.5 per cent in the second quarter of 1979. Taking into account the basket method for valuation of the SDR, which was reviewed and updated a year ago,9 and the decision to increase the interest rate, the yield on the SDR is now more competitive with yields on other international reserve assets.

Reconstitution

Also effective January 1, 1979, the Executive Board decided to reduce from 30 per cent to 15 per cent the minimum level of average SDR holdings that participants must maintain in relation to their net cumulative allocations to meet the reconstitution obligation.10 This requirement must be met for successive five-year periods ending each calendar quarter. The change in the requirement helps to emphasize the reserve asset character of the SDR and enables participants to maintain lower levels of SDR holdings from day to day, thus increasing their ability to use SDRs without having to reacquire them to meet the reconstitution requirement. The decision giving effect to the reduced requirement also provides that the reconstitution provisions should be considered further in the light of experience.

Consideration was also given to the way in which the reconstitution requirement should be applied to participants that received allocations for the first time as of January 1, 1979. It was noted that participants that received allocations in 1970 were first subject to the reconstitution requirement for the five-year period ended December 31, 1974 and were not obliged to reacquire SDRs earlier than 1972, even if they had used their allocations in full. Thus, to provide uniform treatment among participants, it was decided that participants that received their first allocations in 1979 should not be required to meet the reconstitution requirement for five-year periods that end before December 31, 1983. This was put into effect by a decision of the Executive Board providing that participants must meet the 15 per cent requirement for the reconstitution period ending five years after the date of the first allocation to them and for each five-year reconstitution period ending thereafter.11

Wider Uses of SDRs

One change of major importance in widening the use of SDRs under the amended Articles is the freedom of participants to use their SDRs to obtain currency in transactions by agreement with other participants, without regard to the requirement of need and without the necessity for specific authorization by the Fund. A further provision of the amended Articles enables the Fund to “prescribe” (permit) operations in which participants may use SDRs by agreement without exchanging them directly for currency. During the financial year 1978/79, the Executive Board took a number of decisions that permitted the use of SDRs in such operations, as follows: 12

  • (i) To settle financial obligations, other than to make donations.

  • (ii) To make loans of SDRs at interest rates and maturities agreed between the parties. Repayment of loans and payment of interest may be made with SDRs.

  • (iii) As security for the discharge of financial obligations, other than to make donations. The security may be provided in either of two ways: (a) participants may pledge SDRs, which can be earmarked for the duration of the pledge by being recorded in a special register kept by the Fund; (b) participants may agree that SDRs would be transferred as security for the performance of an obligation and that the SDRs would be returned to the transferor when its obligation under the agreement had been fulfilled.

The amounts used in these operations are left for the parties to agree in the light of the user’s SDR holdings. The denomination of the financial obligation concerned may be in SDRs, or the currency of a Fund member, or the currency of a nonmember, or a unit of account that is composed of currencies and is applied under an intergovernmental agreement. The exchange rates to be used for any loans or settlements of financial obligations must be at equal value and would be the same as the exchange rates that would be used for transactions in SDRs.

The decisions prescribing the operations provide for reviews by June 30 of each year. However, as by the end of June 1979, there had been no operations in SDRs under these decisions, it was not necessary for the Executive Board to hold the reviews during the past year. The Interim Committee at its meeting in March 1979 endorsed the intention of the Executive Board to pursue and complete, as soon as possible, its work on other types of SDR use, in particular the use of SDRs in swaps, forward transactions, and donations.

Other Holders of SDRs

The Interim Committee also endorsed the intention of the Executive Board to consider increasing the number of official institutions that might, as “other holders” of SDRs, be authorized to acquire, hold, and use SDRs on terms and conditions agreed by the Fund. Following the Second Amendment, a wide range of international organizations, national institutions, and nonmembers of the Fund would be eligible to become other holders. At present, only the Bank for International Settlements (BIS) is an other holder. As in preceding years, there were no transactions in SDRs involving the BIS during 1978/79.

The SDR as Unit of Account and Currency Peg

There have been several important developments in the use of the SDR as a unit of account and as a currency peg. The SDR is the unit of account for the Fund’s General Resources Account and the Trust Fund, but it has now also been adopted widely outside the Fund as a unit of account (or as the basis for a unit of account) for private contracts and international treaties, and by other international and regional organizations, such as the African Development Bank, the Arab Monetary Fund, the Asian Clearing Union, the Economic Community of West African States, the Islamic Development Bank, and the Nordic Investment Bank. SDR-denominated currency deposits are now accepted by the BIS and several of the major commercial banks, and bonds denominated in SDRs have been issued in the international capital market.

Some Fund member countries have pegged their currency to the SDR. This is done by fixing the value of the member’s currency in terms of the SDR and then setting the value in terms of other currencies by reference to the SDR value of the other currencies as calculated and published by the Fund.

Transactions and Operations in the Special Drawing Rights Department

The volume of transactions and operations in SDRs reached a new record of SDR 5,283 million in 1978/79, following the high level of activity in the previous year, when a total of SDR 4,499 million was transferred.

A summary of the transactions and operations during the financial year is presented in Table 21. Further details are given in the sections that follow, but the main features are as follows:

  • (i) The new freedom under the amended Articles for transactions by agreement between participants enabled the United States to use SDRs to acquire the equivalent of SDR 600 million in deutsche mark from the Federal Republic of Germany and SDR 500 million in Japanese yen from Japan. These transactions were part of the package of measures announced by the United States on November 1, 1978 to strengthen the U.S. dollar.

  • (ii) There was a record volume of SDR 1,080 million in transactions with designation. This occurred as a result of the policy of providing mainly SDRs instead of currencies from the General Resources Account to members using the Fund’s resources. Members receiving SDRs in this way may either retain the SDRs or use them immediately in a transaction with designation to obtain foreign exchange.

  • (iii) Acquisitions of SDRs to promote reconstitution fell sharply from the high levels of recent years, mainly because of the reduced reconstitution requirement and the effect of resumed allocations of SDRs on members’ current and projected average holdings of SDRs.

  • (iv) The allocation of SDRs as of January 1, 1979 might have been expected to be followed by a substantial volume of use of SDRs by participants with balance of payments financing needs, especially because of the simultaneous reduction in the reconstitution requirement. However, during the four months to the end of the financial year, the use of SDRs by participants from their holdings was rather modest. Thus, transactions with designation (excluding those that resulted from purchases of SDRs from the Fund’s General Resources Account) amounted to SDR 74 million and repurchases to SDR 201 million, a total of SDR 275 million—less than 7 per cent of the allocation as of January 1, 1979 to all participants.

Table 21.Summary of Transfers of SDRs, May 1, 1976–April 30, 1979(In millions of SDRs)
Financial Years Ended April 30
197719781979
Transfers by participants
To other participants
In designation1193981,080
By agreement3179271,533
4361,3252,613
To the Fund
Repurchases73844502
Charges709801715
Quota payments20119
Other244159
8051,8871,295
Transfers by the Fund
To participants
Purchases256621,106
Reconstitution44547475
Remuneration24122136
Other2958
4951,2871,375
Total transfers1,7364,4995,283
Fund holdings of SDRs at
end of period7711,3711,290

Transactions by Agreement

The use of SDRs by participants in transactions by agreement with other participants amounted to SDR 1,533 million in 1978/79, compared with SDR 927 million in the previous year. The United States transferred SDR 1,100 million to the Federal Republic of Germany and Japan, as mentioned earlier, and the Netherlands transferred SDR 100 million to the Federal Republic of Germany in two transactions to settle obligations arising under the former European common margins arrangement. The remaining transactions involved use by Canada, the Federal Republic of Germany, and the Netherlands, which countries had high holdings of SDRs and maintained arrangements with the Treasurer’s Department of the Fund for transfers of SDRs to other participants that wished to acquire them for any reason. In these cases, therefore, transactions were arranged at the initiative of the recipient, usually because SDRs were needed to promote reconstitution or to make payments to the Fund, for example, for repurchases or charges. Details of transactions by agreement in 1978/79 are shown in Table 22.

Table 22.Use and Receipt of SDRs in Transactions by Agreement, Financial Year Ended April 30, 1979(In millions of SDRs)
ParticipantUseReceipt
Argentina41.2
Bangladesh7.6
Canada47.9
Chile0.2
Fiji0.3
Finland30.0
Germany, Fed. Rep. of192.9702.2
Ghana1.2
Grenada0.02
Haiti1.5
Israel62.0
Jamaica1.1
Japan500.0
Kenya2.4
Korea4.9
Madagascar4.0
Mexico50.0
Morocco4.3
Netherlands190.0
New Zealand13.0
Pakistan30.1
Panama1.0
Papua New Guinea5.5
Peru6.3
South Africa20.0
Sudan1.2
Tanzania3.9
Turkey2.316.0
Uganda3.3
United States1,100.0
Uruguay1.6
Yemen, People’s Dem. Rep. of0.8
Yugoslavia17.5
Total1,533.01,533.0

Transactions with Designation

During the year, the Executive Board reviewed the principles and procedures for selecting participants for inclusion in the designation plan, but no changes were made.

The amounts of SDRs transferred in transactions with designation in 1978/79 totaled SDR 1,080 million, much higher than in any previous financial year. (See Appendix I, Table I.3.) An amount of SDR 1,006 million was used in transactions resulting from purchases in the Fund’s General Resources Account, and the remaining amount (SDR 74 million) was used by 12 participants from their own holdings, following the allocation as of January 1, 1979. From September 1978 it became the practice in executing the quarterly operational budgets to sell SDRs in preference to currencies because the Fund’s holdings of SDRs were at a high level. Including 17 non-oil exporting developing countries, 37 participants were designated to provide currency in transactions with designation. The largest amounts were provided by the United Kingdom (equivalent to SDR 335 million), Italy (SDR 122 million), France (SDR 113 million), and India (SDR 88.6 million). Details of transactions with designation in 1978/79 are shown in Table 23.

Table 23.Use and Receipt of SDRs in Transactions with Designation, Financial Year Ended April 30, 1979(In thousands of SDRs)
ParticipantUseReceipt
Afghanistan1,000
Argentina23,500
Austria6,500
Brazil25,300
Burma11,500
Burundi687
Canada2,000
Chile6,500
Colombia14,000
Denmark3,000
Dominican Republic17,510
Ecuador500
Egypt60,000
El Salvador1,000
Ethiopia7,335
Finland8,303
France113,181
Gabon10,028
Gambia, The4,750
Germany, Federal Republic of39,550
Ghana44,631
Guinea-Bissau2,176
Guyana8,875
Honduras975
India88,575
Indonesia32,585
Iran22,635
Iraq17,957
Ireland4,000
Israel53,000
Italy122,276
Jamaica70,150
Japan29,800
Kenya23,905
Korea20,560
Lao People’s Dem. Rep.4,000
Liberia9,250
Malaysia17,278
Mali3,200
Mauritius10,470
Mexico9,152
Morocco34,400
Nepal4,500
Netherlands11,510
Nicaragua5,757
Norway2,000
Peru110,550
Philippines84,076
Romania71,310
Senegal14,850
Solomon Islands981
Spain22,499
Sri Lanka53,000
Sudan24,352
Sweden10,000
Tanzania8,8241,000
Thailand107,749
Trinidad and Tobago7,925
Turkey60,589
United Kingdom334,650
United States45,750
Uruguay5,750
Venezuela7,300
Western Samoa2,537
Yemen Arab Republic1,000
Yugoslavia19,750
Zaïre11,944
Zambia143,750
Total1,079,9491,079,949

Following the Second Amendment, designated participants may provide any currency that the Fund has determined is a freely usable currency as defined in the Articles of Agreement.13 The Executive Board has decided that, until further notice, five currencies are freely usable currencies, namely, the deutsche mark, French franc, Japanese yen, pound sterling, and U.S. dollar.14 Arrangements have been made with the issuers of these currencies for the prompt exchange of balances of these currencies for balances of any other freely usable currency that may be requested by participants using SDRs in transactions with designation.

The arrangements for the provision and exchange of currencies in transactions with designation worked smoothly during the financial year. In most transactions U.S. dollars were provided directly to the participants using SDRs (SDR 882 million); however, pounds sterling and French francs were also provided directly (SDR 67 million), French francs were provided and exchanged for deutsche mark and U.S. dollars (SDR 88 million), and U.S. dollars were provided and exchanged for deutsche mark and Japanese yen (SDR 44 million). Further details of currencies transferred against SDRs are presented in Table I.4 in Appendix I.

Transactions and Operations Between Participants and the General Resources Account

The SDR holdings of the Fund’s General Resources Account fell slightly during 1978/79 after increasing sharply over the preceding two financial years. Inflows from participants using SDRs to pay charges or to make repurchases declined, while total outflows rose reflecting a large increase in purchases of SDRs by participants partially offset by a fall in transfers to participants to promote reconstitution. The Fund’s SDR holdings totaled SDR 1,290 million as of April 30, 1979, about 10 per cent of the total allocations to all participants.

Inflows

Transfers to the General Resources Account totaled SDR 1,295 million in 1978/79, which was considerably lower than the record level of SDR 1,887 million in the previous year. Repurchases with SDRs instead of currencies totaled SDR 502 million, compared with SDR 844 million in 1977/78, when Italy used SDR 575 million for this purpose. The largest amounts used for repurchases were by the United Kingdom (SDR 210 million), Israel (SDR 80 million), Chile (SDR 51 million), and South Africa (SDR 40 million). Apart from repurchases by the United Kingdom, more than 60 per cent of the repurchases with SDRs were made during the last four months of the financial year after the allocation of SDRs and the reduction in the reconstitution requirement as of January 1, 1979.

The payment of charges in SDRs amounted to SDR 715 million in 1978/79, somewhat lower than in the previous year because of lower average balances of members’ currencies that were subject to charges. The largest amounts of charges were paid by the United Kingdom (SDR 152 million), Italy (SDR 92 million), and Spain (SDR 44 million).

In other payments to the Fund, Rwanda and Yugoslavia elected to use SDRs instead of their own currencies to pay part of their quota increases under the Sixth General Review of Quotas, and the Solomon Islands used SDRs it received in the allocation as of January 1, 1979 to pay part of its initial subscription as a new member of the Fund. These quota payments totaled SDR 19 million. Interest received on the Fund’s holdings of SDRs in the General Resources Account totaled SDR 57 million.

Outflows

The main avenue for outflows of SDRs from the General Resources Account in 1978/79 was in transfers to members making purchases. As explained above, transfers of SDRs in this way reached a record SDR 1,106 million, compared with SDR 662 million in the previous year. These transfers of SDRs accounted for 82 per cent of total purchases during the year that were financed through the Fund’s operational budgets.

In May 1978, the Fund paid remuneration on members’ net creditor positions for the year 1977/78, including amounts in SDRs totaling SDR 136 million to 36 members. Following the Second Amendment, remuneration is to be paid in SDRs, unless the member or the Fund decides that the payment should be made in the member’s own currency. The largest payments in SDRs were to the United States (SDR 67 million) and Japan (SDR 25 million).

Transfers to participants to promote reconstitution were only SDR 75 million, a sharp decline from SDR 474 million in 1977/78. This can be partly attributed to the fact that participants received SDRs in other ways, including purchases, transactions by agreement, and transactions with designation. The main factors, however, were the reduced reconstitution requirement and the allocation of SDRs, as mentioned above.

In other transfers, the Fund used SDR 12 million to pay interest and transfer charges on borrowings under the General Arrangements to Borrow and SDR 38 million to repay lenders under the oil facility. These payments were made to lenders that agreed to receive payment in SDRs rather than in currencies.

Reconstitution

All participants, except Democratic Kampuchea,15 fulfilled the reconstitution requirement during 1978/79. The change in the requirement for participants’ average holdings of SDRs from 30 per cent to 15 per cent of average net cumulative allocations took effect for all five-year reconstitution periods ending after January 1, 1979. The monthly calculations, which are made to determine which participants need to acquire SDRs to meet the reconstitution requirement, were adapted so as to reflect the allocation as of January 1, 1979 and the projected allocations as of January 1, 1980 and 1981. As a consequence, the number of participants needing to acquire SDRs for reconstitution fell from 39 participants at the end of September 1978 to only 3 participants at the end of April 1979, and there were no acquisitions to promote reconstitution in the four months January-April 1979.

Transactions and Operations in the General Resources Account

There was a net reduction in members’ use of the Fund’s resources for the second consecutive year, which can be partly attributed to the continued improvement in external financial positions of several members making large use of the Fund’s resources and to the availability of funds from the international money and capital markets. (See Chart 18.) In addition, the repurchase commitments under the oil facility had begun to fall due during the year. Although total purchases increased to SDR 3.7 billion, about one half more than the aggregate in 1977/78, repurchases reached a total of SDR 4.9 billion, exceeding last year’s record of SDR 4.5 billion. (See Table 24.) As a result, the amount of members’ purchases to which repurchase provisions apply decreased further, from SDR 14 billion at the end of the previous financial year to about SDR 10 billion on April 30, 1979, representing the equivalent of about 26 per cent of total quotas.

Chart 18.Use of Fund’s Resources as at April 30, 1970–79

(In billions of SDRs)
Table 24.Flow of Transactions in the General Resources Account and Resulting Stocks, Financial Years Ended April 30, 1974–79(In millions of SDRs)
Financial Year Ended April 30
Type of Transaction197419751976197719781979
Total purchases1,0585,1026,5914,9102,5033,720
Reserve tranche6079811,3241611362,480
Credit tranche2391,6044612,3701,937485
Buffer stock548
Compensatory financing212188281,753 1322465
Extended facility8190109242
Oil facility2,4993,966437
Total repurchases6725189608684,4854,859
Gold sales411452453
In connection with auctions201239181
(i) Replenishment up to May 31, 19782(—)(—)(—)(201)(239)(—)
(ii) Competitive bids(—)(—)(—)(—)(—)(181)
Noncompetitive bids51
In distributions210213220
Outstanding borrowings
In connection with oil facility2,4996,4656,7026,3294,257
Under the General Arrangements to Borrow9111,576777
From Swiss National Bank89154
Holdings of the General Resources Account
Usable currencies36,50010,1007,8005,30011,2008,800
SDRs4995104617711,3711,290
Gold25,3705,3705,3704,9594,5074,055

In addition, credit tranche purchases equivalent to SDR 39.56 million in the fiscal year ended April 30, 1976 were reclassified as having been made under the compensatory financing decision.

Valued at SDR 35 per fine ounce.

“Usable currencies” are those that are available to the Fund for net sales through the operational budget, except for those currencies held by the Fund in excess of quota. Since the Second Amendment became effective on April 1, 1978, the criterion for including currencies for net sales is that the members concerned have a balance of payments and reserve position that is considered “sufficiently strong” for that purpose.

In addition, credit tranche purchases equivalent to SDR 39.56 million in the fiscal year ended April 30, 1976 were reclassified as having been made under the compensatory financing decision.

Valued at SDR 35 per fine ounce.

“Usable currencies” are those that are available to the Fund for net sales through the operational budget, except for those currencies held by the Fund in excess of quota. Since the Second Amendment became effective on April 1, 1978, the criterion for including currencies for net sales is that the members concerned have a balance of payments and reserve position that is considered “sufficiently strong” for that purpose.

As in the previous year, aggregate purchases and repurchases were influenced by relatively large transactions between the Fund and the industrial countries. Total purchases by industrial countries (SDR 2,375 million) included the reserve tranche purchases by the Netherlands (SDR 100 million) and the United States (SDR 2,275 million); repurchases totaling SDR 2,467 million included those by the United Kingdom (SDR 1,621 million) and Italy (SDR 846 million). Industrial countries received the equivalent of SDR 137.5 million in the third distribution of gold.

During the year nonindustrial countries purchased the equivalent of SDR 1,345 million (SDR 1,122 million in the previous year) and reduced their indebtedness in the General Resources Account by SDR 1,047 million, compared with SDR 744 million during the previous financial year. Their share in the gold distribution was SDR 76.9 million. The payments from the Trust Fund in connection with the distribution of profits and in loan disbursements amounted to about SDR 730 million.

All 14 stand-by arrangements that were approved in the year were, as in the previous year, with developing countries, for a total of SDR 507.9 million, which was less than one half the amount (SDR 1,285 million) approved in the previous year for 18 arrangements. At the end of the financial year, 15 members had outstanding stand-by arrangements that would permit, subject to observance of performance criteria, purchases of SDR 633.9 million. This total represented a sharp decline from the amount available a year earlier (SDR 3,130 million), which had included SDR 2,080 million under stand-by arrangements for Italy and the United Kingdom that had been approved in 1976/77 for periods longer than one year. At the end of the financial year, outstanding purchases in the upper credit tranches amounted to about 4 per cent of the total use being made of the Fund’s resources, which was considerably below the level of about 10 per cent a year earlier.

Four extended arrangements were approved during the year, for a total of SDR 1,093 million, in support of three-year programs; three of these arrangements were for amounts in excess of 140 per cent of the members’ quotas because of their exceptional circumstances, particularly the balance of payments need relative to their quotas.

Purchases under the compensatory financing facility were made by 19 members, for a total of SDR 464.8 million, an increase of about 44 per cent over the total of SDR 321.8 million purchased by 9 members in the previous year. The sharp decline in the amount of use of the facility during the two years, following the record high of SDR 1,752.8 million purchased in 1976/77, reflected in part the increases in the prices of some raw materials.

The purchases by 2 members under the buffer stock financing facility amounted to SDR 47.6 million and represented the first use of the Fund’s resources under this facility in connection with the financing of special stocks of sugar that were established under the 1977 International Sugar Agreement.

The Fund completed its third distribution of about 6.1 million fine ounces of gold, amounting to the equivalent of about SDR 214.5 million, to most of those countries that were members of the Fund on August 31, 1975. Under the provisions of the Second Amendment, all purchases of gold were at SDR 35 per fine ounce with the members’ own currencies.

Reserve Tranche Purchases

Purchases in the reserve tranche (formerly the gold tranche) recorded a sharp rise during the financial year 1978/79 to SDR 2,480 million (67 per cent of all the purchases during the period), compared with SDR 135.7 million in 1977/78 and SDR 160.6 million in 1976/77. The rise during 1978/79 was due almost wholly to two purchases totaling SDR 2,275 million made by the United States as part of a package of measures undertaken by the U.S. Government to strengthen the position of the U.S. dollar. The second largest purchase (SDR 100 million) was by the Netherlands in connection with the settlement of liabilities it incurred as a result of operations in support of its currency in the context of the European arrangements for maintaining margins of 2.25 per cent. The remaining purchases, totaling SDR 105.4 million, were made by 11 developing countries in amounts ranging from SDR 0.15 million (Swaziland) to SDR 32.5 million (Thailand); 5 of these members drew on their reserve tranche prior to subsequent purchases under stand-by arrangements in accordance with required procedures.

Credit Tranche Purchases and Stand-By Arrangements

As in the previous year, most credit tranche purchases during the financial year were made under standby arrangements, but the total purchases were smaller, SDR 484.9 million, compared with SDR 1,936.8 million in 1977/78. The purchases in the previous year, however, were largely accounted for by the purchases by Italy (SDR 90 million) and the United Kingdom (SDR 1,250 million), which represented about 69.2 per cent of the total.

All the credit tranche purchases in 1978/79 were by nonindustrial countries, with Zambia purchasing the largest amount (SDR 125 million) in four transactions made under a two-year stand-by arrangement approved in April 1978 for SDR 250 million (177 per cent of quota). This arrangement reflected the member’s exceptional economic circumstances and the size of its balance of payments deficit in relation to its quota. The other amounts purchased in the credit tranches were all for less than SDR 50 million.

During the year, 14 stand-by arrangements were approved for 13 members in amounts totaling SDR 507.9 million, of which the largest amount was for Peru (SDR 184 million), approved in September 1978 for a period of 27½ months. The previous arrangement for SDR 90 million approved for the period November 18, 1977-December 31, 1979, of which SDR 10 million had been drawn, was canceled.

The stand-by arrangement for Peru was the second stand-by arrangement approved by the Fund for use of the Fund’s resources by a member above 200 per cent of its quota. The arrangement was in support of the Government’s stabilization program in response to the balance of payments difficulties and inflation that had been building up over approximately the past four years and that had resulted in an acute foreign exchange crisis by the second quarter of 1978. Of the other 13 arrangements, all for one-year periods, those for Kenya (SDR 17.25 million), Liberia (SDR 9.25 million), Senegal (SDR 10.50 million), Thailand (SDR 45.25 million), and Uruguay (SDR 21 million) permitted drawings in the first credit tranche; those for Gabon (SDR 15 million), Ghana (SDR 53 million), and Portugal (SDR 57.35 million) were in the first and second tranches; those for Burma (SDR 30 million), Congo (SDR 4 million), and Guyana (SDR 6.25 million) were in the second and higher credit tranches. Panama canceled an arrangement before expiration, and a new one for a slightly larger amount (SDR 30 million) was approved; both arrangements provided for purchases in the first and upper credit tranches.

Extended Fund Facility

Four three-year arrangements (for Egypt, Haiti, Jamaica, and Sri Lanka) were approved during the year for a total of SDR 1,092.5 million under the extended facility, which was established in September 1974 to provide medium-term assistance to members to meet balance of payments deficits for longer periods and in amounts larger in relation to quotas than under existing tranche policies. Of the three other arrangements concluded in previous financial years, those for Kenya (SDR 67.2 million) and the Philippines (SDR 217 million) expired during the year, whereas Mexico’s arrangement was still in effect, with the original amount of SDR 518 million.

The amounts under the arrangements with Egypt, Jamaica, and Sri Lanka, which were in excess of the 140 per cent of quota limit, were approved in the light of their exceptional circumstances, particularly the balance of payments need relative to the member’s quota. The arrangement for Jamaica, approved in June 1978, was for SDR 200 million (270.3 per cent of quota), of which SDR 70 million had been purchased as of April 30, 1979. The arrangement of SDR 600 million for Egypt (July 1978) represented 263.2 per cent of quota, the largest absolute amount approved so far under the facility; as of April 30, 1979, Egypt had purchased SDR 75 million under the arrangement. Sri Lanka’s arrangement (January 1979) was for SDR 260.3 million (218.7 per cent of quota), of which SDR 40 million had been purchased as of April 30, 1979. Haiti’s arrangement (October 1978) was the only one that was subjected to the normal limit of 140 per cent of quota (SDR 32.2 million). No purchases were made by Haiti during the year.

It may be noted that the total amount of SDR 1,894.7 million committed under the decision on the extended Fund facility up to April 30, 1979 is near the SDR 2 billion mark at which the Executive Directors decided to review the adequacy of the provisions of the decision relating to the extended Fund facility.16 The Executive Board reviewed the decision in June 1979 and decided that no modification should be made to the decision for the time being, but that the functioning of the extended Fund facility should be reviewed again when the possibility of access to the supplementary financing facility came to an end.

Compensatory Financing Facility

In 1978/79, 19 members purchased a total of SDR 465 million under the compensatory financing facility, bringing the total amount purchased in the last three financial years to SDR 2,539 million. During this three-year period, purchases under the compensatory financing facility accounted for 23 per cent of total purchases from the Fund, and 32 per cent of purchases other than those made in the reserve tranche or under the oil facility.

Purchases outstanding under the compensatory financing facility increased from SDR 2,668 million at the end of April 1978 to SDR 2,945 million at the end of April 1979. Repurchases are expected to be large in 1979/80, because the very large purchases made in 1976/77 (SDR 1,753 million) will enter into the normal three-year to five-year repurchase period. For that reason, outstanding purchases under the facility in 1979/80 are unlikely to exceed SDR 4 billion, which would trigger an automatic review of the facility.

During the financial year, the Executive Board devoted considerable attention to possible ways of improving the facility. In June 1978, the Board reviewed a joint Fund/ Bank staff report on the stabilization of export earnings and transmitted that report to the Development Committee, together with the preliminary views expressed by Executive Directors. The Development Committee, at its meeting in September 1978, requested a further report, which will also be reviewed by the Board before being transmitted to the Committee for consideration in September 1979. The Board began its own review of the facility, giving particular attention to various proposals made either for improving the existing Fund facility or for establishing additional compensatory financing facilities. This review is expected to be completed in 1979/80.

Buffer Stock Facility

A total amount of SDR 48 million was purchased by two members under the buffer stock facility in 1978/79. The two purchases (by the Philippines and the Dominican Republic) were made in connection with special stocks of sugar constituted under the terms of the 1977 International Sugar Agreement. This agreement entered into force provisionally in January 1978.

Financial assistance under the buffer stock facility can also be provided in connection with members’ contributions to the buffer stock facility established under the Fifth International Tin Agreement and loans to the International Cocoa Council, but no requests were made in this connection during 1978/79, since no stock was bought. Throughout the period, the market prices of both tin and cocoa remained above the level at which stocks could be purchased under the terms of the agreements.

Supplementary Financing Facility

This facility was established on August 29, 1977 to enable the Fund to provide supplementary financing in conjunction with the use of the Fund’s ordinary resources to members facing serious payments imbalances that are large in relation to their economies and their Fund quotas. It became operational on February 23, 1979 when the Austrian National Bank joined 12 other members or institutions in making resources available for the facility. The agreement with the Austrian National Bank raised the total amount available for the facility to SDR 7,754 million. (The minimum required for the facility to become operational was SDR 7.75 billion, including at least six agreements for amounts not less than SDR 500 million each.) A fourteenth Agreement was concluded on April 16, 1979 with the Banco de Guatemala (central bank of Guatemala) for SDR 30 million. This raised the total amount available for the facility to SDR 7,784 million.17

The main features of the facility are as follows:

  • (1) Members can use the facility only under a standby arrangement (normally of more than one year and might be up to three years) reaching into the upper credit tranches or under an extended arrangement (usually up to three years), subject to the usual policy conditions, phasing, and performance criteria.

  • (2) The amounts available to a member will be apportioned between ordinary resources and supplementary financing in prescribed proportions as follows:

    • (a) The equivalent of 12.5 per cent of its quota along with its first credit tranche, and 30 per cent of its quota along with each of the upper credit tranches.

    • (b) Purchases may be made beyond the upper credit tranches wholly with supplementary financing in special circumstances.

    • (c) Under an extended arrangement, which permits drawings up to 140 per cent of quota, an equivalent amount of supplementary finance will be available.

  • (3) Holdings resulting from these purchases will be subject to repurchase in equal semiannual installments that begin not later than three and one-half years, and are to be completed not later than seven years, after the purchase. The supplementary financing facility will be reviewed by the Executive Board not later than two years after its effective date, or earlier if the Seventh General Review of Quotas becomes effective before the end of the two-year period.

The supplementary financing facility was used for the first time in May 1979 when the Fund approved a request from Sudan to make purchases equivalent to SDR 200 million (227.3 per cent of Sudan’s quota) over the next three years under the Fund’s extended facility in support of a medium-term adjustment program. Purchases under the extended arrangement with Sudan will be financed in equal parts from the Fund’s ordinary resources and from resources available under the Fund’s supplementary financing facility.

On June 30, 1979, total purchases by three members financed with resources available under the supplementary financing facility amounted to SDR 47.1 million.

Repurchases

The total repurchases made in the financial year amounted to the equivalent of SDR 4,859 million, which was about 8.3 per cent higher than the previous peak of SDR 4,485 million reached in 1977/78. Slightly over half the total (SDR 2,467 million) reflected repurchases by Italy (SDR 846 million) and the United Kingdom (SDR 1,621 million); over 27 per cent of the total (SDR 1,340 million) represented repurchases by 8 members with repurchases greater than SDR 100 million (Argentina, Finland, India, Korea, Mexico, South Africa, Spain, and Uruguay). The balance of SDR 1,052 million, or 22 per cent of the total, represented repurchases by the remaining 60 members that made repurchases during the financial year.

The largest amount, 53 per cent of the total, was repurchased with respect to purchases made under stand-by and extended arrangements. About 43 per cent of total repurchases related to purchases made under the oil facility for 1974 and 1975. The remaining SDR 196 million represented mainly repurchases in respect of purchases made under the compensatory financing facility but also included SDR 22 million repurchased in connection with the third distribution of gold. Almost one half (SDR 2,391 million) of the total repurchases was discharged by seven members in advance of the due dates for repurchases, the largest part of which represented repurchases by two members, Italy (SDR 544.7 million) and the United Kingdom (SDR 1,538 million).

The Executive Board reviewed the experience with the guidelines for early repurchases adopted in March 1978.18 Under these guidelines, members that have made purchases subject to the early repurchase provision of the amended Articles and whose balance of payments and reserve position is judged sufficiently strong in the context of the operational budget and designation plan are expected to make early repurchases in amounts that are based on the level of a member’s gross reserves and on changes in these reserves. Specifically, members would be expected to repurchase holdings of their currency equivalent to 1.5 per cent of their latest gross reserves plus (minus) 5 per cent of the increase (decrease) in gross reserves over the latest six-month period for which data are available. Expected repurchases are limited to 4 per cent of a member’s latest gross reserves and to an amount that would not reduce these reserves below 250 per cent of the member’s quota. During the review of the guidelines, the Executive Board decided that cumulative expected repurchases during any period of four quarters should not exceed 10 per cent of a member’s latest gross reserves. The amended guidelines also specify that a member’s repurchases made in advance of maturity, or sales of its currency, that exceed the minimum reduction expected during a quarter would be taken into account when determining expected repurchases during the following five quarters.19

The total amount of early repurchases that were calculated for the quarterly periods June 1, 1978-May 31, 1979 was equivalent to SDR 2,498.5 million, and the period for repurchase of amounts calculated for the last quarter ended on May 31, 1979.

By April 30, 1979 early repurchases totaling SDR 1,885.5 million were met in part by maturing obligations (SDR 308.2 million), by advance repurchases and sales of currencies made before the calculations (SDR 985.2 million), and by repurchases made under the guidelines (SDR 592.1 million).

The equivalent of SDR 564.4 million was repurchased in partial and full discharge of obligations incurred under the former Article V, Section 7(b) as of April 30, 1977 and 1976. About one half of this amount accounts for repurchases by India (SDR 188.8 million) and Mexico (SDR 92.5 million).

Operational Budget

Article V, Section 3(d) prescribes that the Fund shall establish policies and procedures for selection of currencies to be sold that take into account, in consultation with members, their balance of payments and reserve positions, and developments in the exchange markets, as well as the desirability of promoting over time balanced positions in the Fund.

During the year, the Executive Board reviewed the policies and procedures relating to the criteria for judging members’ economic positions for the purpose of their inclusion in the quarterly operational budgets, and the role that the SDR should assume in the financing of transactions and operations of the General Resources Account. Pending the conclusion of these reviews, the operational budgets continued to be prepared and executed in a flexible manner, with the aim of using currencies in broad proportion to the individual amounts included in each budget. The proposed use of currencies and SDRs in Fund transactions and operations is subject to approval by the Executive Board, and is no longer agreed on the basis of consultations with member countries through their Executive Directors.

In view of the continued high level of the holdings of SDRs in the Fund’s General Resources Account, and the emphasis on the role of the SDR as a means of payment, as well as to conserve its holdings of usable currencies, the Fund has included, in the operational budgets since March 1977, substantial proportions of SDRs in projected purchases, and has generally sold SDRs on a priority basis, i.e., before sales of currencies. Members were able to use SDRs immediately to receive currency through a transaction with designation, if they so desired. Of total sales to members through the operational budget amounting to SDR 1,345 million, about SDR 1,106 million (82 per cent) was made in SDRs. At the request of members, SDR 997.4 million was exchanged for currencies, mainly U.S. dollars.

During the first few months of the financial year, currencies of certain debtor members whose economic situation had sufficiently improved were included for sales in the operational budgets, as these members wanted to reduce their indebtedness by sales of their currencies in addition to making repurchases. Throughout the year currencies of members with remunerated reserve positions have been included in amounts proportionate to their gold and foreign exchange holdings. (For all operational purposes, such as the designation plan, the operational budget, and early repurchases, the Fund continues to value gold held in members’ reserves at SDR 35 per fine ounce.) In the latter part of the financial year, however, priority was given to sales of SDRs, and currencies were used only for payments of interest on the Fund’s outstanding borrowings and for repayments of loans under the oil facility when these could not be executed simultaneously, with related repurchases by members. In view of the weakness of the U.S. balance of payments, U.S. dollars were not included for sales to other members. Nevertheless, at the option of lenders, the largest portion of the Fund’s interest payments continued to be made with U.S. dollars. Furthermore, a large number of repayments to lenders under the oil facility and associated repurchases by members were also settled in U.S. dollars. However, most of these transactions were executed simultaneously so that the U.S. position in the Fund was not affected.

In accordance with established practice, large individual transactions were not included in the operational budgets. The use of currencies in repurchases totaling SDR 1.3 billion by the United Kingdom, related repayments to lenders under the General Arrangements to Borrow and the Swiss National Bank, and the reserve tranche purchases by the United States equivalent to SDR 2,275 million was authorized by the Executive Board on the basis of special budgets. These purchases were made in deutsche mark and Japanese yen and were financed from the Fund’s own resources in the equivalent of SDR 1,498 million, and Fund’s borrowings under the General Arrangements to Borrow equivalent to SDR 777.3 million. As a result, the holdings of deutsche mark and Japanese yen in the General Resources Account were significantly reduced. In order to restore these holdings to a level that would enable the Fund to respond to members’ requests for purchases of these currencies in the future, operational budgets provided for the use of deutsche mark and Japanese yen in repurchases. Amounts for these currencies in the budgets were calculated in proportion to these members’ reserve positions in the Fund, excluding their loan claims on the Fund.

The Fund’s holdings of usable currencies, which had doubled during 1977/78, continued to increase during the first six months of the past financial year. They reached a peak of SDR 17 billion at the end of October 1978, when the holdings of four usable currencies (deutsche mark, French franc, Japanese yen, and U.S. dollar) totaled about 55 per cent of aggregate holdings of usable currencies (SDR 17 billion), with the U.S. dollar representing 32 per cent of the total. However, largely as a result of the U.S. drawing in the reserve tranche during 1978/79, the holdings of usable currencies declined to SDR 8.8 billion on April 30, 1979, which was about 21 per cent below the level at the end of April 1978.

The large inflow of currencies during the first half of the year was mainly the result of members’ subscription payments of about SDR 9.8 billion under the Sixth General Review of Quotas. But the marked decline in the volume of usable currencies during the remainder of the year was attributable mainly to the reserve tranche purchases by the United States, in November 1978, of deutsche mark and Japanese yen totaling SDR 2.3 billion. While the smaller purchase equivalent to SDR 777 million was financed by borrowings under the General Arrangements to Borrow, and had no impact on the volume of the Fund’s usable resources, the larger purchase in the equivalent of SDR 1.5 billion, which was financed with the Fund’s own resources, reduced the Fund’s holdings of deutsche mark and Japanese yen to a level that no longer permitted the use of these currencies in payments by the Fund.

The total amount of the Fund’s usable assets (usable currencies, SDRs, and gold) decreased during the year by about SDR 2.9 billion, to about SDR 14.1 billion on April 30, 1979. The holdings of SDRs decreased by about SDR 81 million, to SDR 1.29 billion. There was also a contraction of about SDR 6 billion in the volume of the Fund’s immediate liquid liabilities (outstanding reserve positions, including loan claims on the Fund, and undrawn balances under current stand-by and other arrangements) to SDR 15.4 billion at the end of the financial year 1978/79, or about two thirds of the amount outstanding on April 30, 1978. This contraction was due largely to the repayments totaling about SDR 3.8 billion of loans made under the GAB and borrowing agreements for the financing of transactions under the oil facility. The Fund repaid in full the outstanding balance equivalent to SDR 1.7 billion of borrowings under the GAB and from the Swiss National Bank made for financing purchases by the United Kingdom and Italy. Furthermore, the balance of outstanding loans under the oil facility was reduced by the equivalent of about SDR 2.1 billion in connection with members’ repurchases made under the facility.

During the financial year the Fund’s outstanding indebtedness was reduced to about SDR 5 billion at the end of April 1979, compared with SDR 8.1 billion a year earlier. The claims on the Fund’s assets were also reduced with the expiration of the stand-by arrangements for the United Kingdom and Italy, which provided for the use of Fund resources up to a total of SDR 2.1 billion at April 30, 1978. Thus, the amount of liquid liabilities exceeded the Fund’s usable assets by about SDR 1.3 billion at the end of the financial year 1978/79.

Borrowing by the Fund

The Fund is authorized under its Articles of Agreement to supplement its resources by borrowing. Since 1973/74 the Fund has supplemented its resources by substantial borrowing from some of its members and Switzerland. But during 1978/79 there was a net reduction of about SDR 3 billion in the Fund’s total outstanding borrowing, from about SDR 8 billion to about SDR 5 billion (13 per cent of total quotas at the end of April 1979). The Fund repaid all outstanding borrowings under the GAB, and from the Swiss National Bank, amounting to SDR 1.7 billion as of April 30, 1978, of which SDR 1.4 billion was repaid in connection with repurchases by the United Kingdom and Italy in respect of purchases under their respective stand-by arrangements. The remainder (SDR 297.8 million), which represented a claim by the United States under the GAB, also related to purchases by the United Kingdom, was repaid with the Fund’s own resources. As a result of the reserve tranche purchases by the United States, the Fund’s holdings of U.S. dollars had increased to a level sufficiently above working requirements to enable the Fund to make the repayment. In total, since April 1974 the Fund has borrowed or made arrangements to borrow up to the equivalent of about SDR 20 billion, about 50 per cent of the sum of members’ quotas.

General Arrangements to Borrow

The General Arrangements to Borrow (GAB), which enable the Fund to supplement its resources by borrowing, were originally concluded in 1962 between the Fund and ten industrial member countries. Subsequently, Switzerland became associated with the GAB under an agreement of June 11, 1964 with the Fund, which has been extended until October 23, 1980. The amendments to the provisions of the GAB to make them conform to the Second Amendment of the Articles of Agreement came into effect on August 11, 1978 when they were concurred in by all ten of the participants in the GAB. The GAB have been extended a number of times, and were last renewed for a period of five years from October 24, 1975. The Fund has to decide on their renewal and modification, if any, not later than 12 months before that period, namely, by October 23, 1979. The maximum credit available to the Fund through the GAB (excluding the Swiss National Bank) is the equivalent of about SDR 6.5 billion in lenders’ currencies. The balance available as of April 30, 1979 was SDR 5.8 billion.

During the year 1978/79, the only borrowings by the Fund under the GAB were for an amount equivalent to SDR 777.3 million to finance the reserve tranche purchase made by the United States, which comprised the equivalent of SDR 583 million from the Deutsche Bundesbank and SDR 194 million from Japan. The GAB have been used on prior occasions to help to finance transactions with the United Kingdom, France, and Italy. The borrowings from the Swiss National Bank on the occasion of the purchases by the United Kingdom and Italy in the previous year, which amounted to SDR 57.1 million and SDR 7.5 million, respectively, were subsequently repaid.

The Ministers and Governors of the Group of Ten endorsed the report of their Deputies on the adequacy and role of the GAB, which also noted that the amount of the GAB and the relative contributions by participants could be considered at the time of renewal. They also accepted the recommendation of the Deputies that the liquidity of the GAB claims should be enhanced to a similar degree as for the claims under the supplementary financing facility. In March 1979 the Executive Board decided to allow the transfer, under certain terms and conditions, of all or part of claims for repayment to certain GAB participants and the Swiss National Bank.

Oil Facility

In the course of the year, the Fund repaid the equivalent of about SDR 2 billion to 17 lenders that had made loans to the Fund in connection with the oil facility. Several of the repayments were in advance of the original repayment schedules, as members made “early” repurchases under the guidelines that they attributed to the oil facility purchases. By April 30, 1979, the Fund had repaid the equivalent of SDR 2.6 billion of indebtedness incurred in connection with the oil facility; the balance of indebtedness on that date amounted to the equivalent of SDR 4.3 billion. (See Appendix I, Table I.12.)

Supplementary Financing Facility

As noted in the 1978 Annual Report, the Fund decided to establish lines of credit from a group of lenders with strong external positions in order to be able to finance transactions under the supplementary financing facility on the scale envisaged and without endangering the Fund’s liquidity. By April 30, 1979, a total of 13 Fund members and the Swiss National Bank had concluded agreements to lend the Fund a total of SDR 7,784 million to finance transactions under the facility.20 The individual lenders, amounts, and currencies to be made available under the agreements are as follows: Participation in the financing of the facility remains open to other lenders whose external positions are strong.

LenderAmount

(millions

of SDRs)
Currency
Abu Dhabi150U.S. dollars
Austrian National Bank50U.S. dollars
National Bank of Belgium150Belgian francs
Canada200U.S. dollars
Deutsche Bundesbank1,050U.S. dollars
Banco de Guatemala30U.S. dollars
Japan900Japanese yen
Central Bank of Kuwait400Kuwaiti dinars
The Netherlands Bank100U.S. dollars
Central Bank of Nigeria220U.S. dollars
Saudi Arabian Monetary
Agency1,934Saudi Arabian riyals
Swiss National Bank650U.S. dollars
United States1,450U.S. dollars
Central Bank of Venezuela500Venezuelan bolívares
Total7,784

The rate of interest payable by the Fund on the amounts made available to it will be at a rate equal to the average yield for each six-month period starting July 1, 1978 for U.S. Government securities with a maturity of five years, rounded upward to the nearest ⅛ of 1 per cent. For the six-month period ended June 30, 1979, this rate was 9.25 per cent a year. The first borrowing by the Fund on the resources available under the supplementary financing facility was made in May 1979, and at the end of June the Fund had borrowed a total of SDR 47.1 million from four lenders.

The creditor’s loan claims on the Fund will be encashable on demand by the Fund if the creditor represents that it has a balance of payments need, and lenders will be able, without prior reference to the Fund, to transfer their claims to any other lender, any Fund member, or certain other official entities at prices agreed between the transferor and transferee. Thus, the creditor’s loan claims on the Fund are highly liquid.

Gold Sales

The Fund continued its gold sales program under which 50 million ounces (1,555 tons) of gold are to be sold over a four-year period. One half of this amount is to be sold at the former official price of SDR 35 an ounce to countries that were members of the Fund on August 31, 1975, and the profits from the sale of the other half are to be used for the benefit of developing countries. During the financial year, the Fund sold a total of 13.5 million fine ounces (416.9 tons) of gold. Eligible member countries acquired 6.3 million ounces (196 tons); and 7.16 million ounces (222.7 tons) were sold to both competitive and noncompetitive bidders in the auctions.

Gold Auctions

There were few changes in the Fund’s gold auction procedures during the year. Auctions continued to be held once every month, as they had been since March 1977, but in view of gold sales to noncompetitive bidders—discussed below—the amount of gold auctioned each month was reduced from 525,000 ounces (16.3 tons) to 470,000 ounces (14.6 tons) beginning with the June 1978 auction and to 444,000 ounces (13.8 tons) from June 1979. In addition, the Executive Board reviewed and adjusted the terms and conditions for the auctions following the entry into force of the Second Amendment of the Fund’s Articles. Since the Amendment, member countries have been free to buy gold at any price, and thus official agencies of members are no longer restricted from participation in the auctions. However, no such participation has been recorded, apart from the noncompetitive bids received from developing countries described below. It also became possible for the Fund to sell gold directly on the market, rather than replenishing against gold its holdings of the currencies of some member countries, which in turn sold the gold to the Trust Fund at the official price.

The auctions, which since March 1978 have been held on the bid price method under which bidders pay the price they actually bid, continued to attract substantial participation. Bidding during the year ranged from 690,000 ounces (21.5 tons) in the November 1978 auction to about 1.5 million ounces (46.7 tons) in most of the auctions in 1979; bids in all auctions except one exceeded the amount on sale by more than 50 per cent, and frequently by more than 100 per cent. (See Table 25.) As in previous years, the major international gold dealers usually participated in the auctions; during the year, the number of bidders ranged from 14 to 24, and that of successful bidders from 5 to 20. The sales price in the auctions remained close to, and over the year rose sharply parallel to, the price in the international gold market. The Fund’s average sales prices generally were within a range of US$1 above or below the average London fixing price on the day of the auction: a spread considerably lower than the average day-to-day fluctuation in market prices. Somewhat larger differences—once below and once above—occurred on two occasions when conditions in the market on the day of the auction were particularly volatile.

Table 25.Fund Gold Auctions: Summary Statistics, June 2, 1976–July 3, 1979
DatePricing

Method
Place of

Delivery
Ounces Bid

(Thou-

sands)
Sub-

scription

Ratio1
Ounces

Awarded

to Noncom-

petitive

Bidders
Competitive BidsNo. of Non-

competitive

Bids
Price Range of

Successful Bids

(US$ per

fine ounce)
Average

Award

Price
Profits

(In

millions

of U.S.

dollars)
Number of

bidders
Number of

bids
TotalSuccessfulTotalSuccessful
(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)
1976
June2CommonNew York2,320.02.97302022059126.00-134.00126.0067.10
July14CommonNew York2,114.02.71231719656122.05-126.50122.0564.00
Sept.15BidNew York3,662.44.70231438041108.76-114.00109.4053.82
Oct.27BidNew York4,214.45.40241638337116.77-119.05117.7160.25
Dec.8CommonLondon4,307.25.52251326533137.00-150.00137.0075.35
1977
Jan.26CommonNew York2,003.22.57211519249133.26-142.00133.2672.50
Mar.2BidNew York1,632.83.1121718714145.55-148.00146.5155.60
Apr.6BidNew York1,278.02.43181113622148.55-151.00149.1857.02
May4BidNew York1,316.42.51171410738147.33-150.26148.0256.37
June1CommonNew York1,014.01.9314137535143.32-150.00143.3253.87
July6CommonParis1,358.42.5915158335140.26-145.00140.2652.16
Aug.3CommonLondon1,439.22.74181613644146.26-150.00146.2655.31
Sept.7BidNew York1,084.42.07151111521147.61-149.65147.7856.24
Oct.5BidNew York971.21.85171210332154.99-157.05155.1459.97
Nov.2BidLondon1,356.42.581879021161.76-163.27161.8663.29
Dec.7CommonNew York1,133.62.16191910858160.03-165.00160.0362.13
1978
Jan.4CommonNew York984.81.88191910364171.26-180.00171.2667.68
Feb.1CommonParis598.41.1417177662175.00-181.25175.0069.65
Mar.1BidNew York1,418.02.70191612776181.13-185.76181.9572.92
Apr.5BidNew York1,367.62.60211512230177.61-180.26177.9270.78
May3BidLondon3,104.05.91241719236170.11-171.50170.4066.83
June7BidNew York1,072.42.28925.22115137285182.86-183.92183.09195.64
July5BidNew York797.21.7020.82219101442183.97-185.01184.1468.96
Aug.2BidNew York1,467.63.1270.02120117422203.03-205.11203.2885.84
Sept.6BidNew York773.21.65133.6201089252212.39-213.51212.50101.42
Oct.4BidLondon805.61.71134.4181276251223.57-224.62223.68107.74
Nov.1BidNew York689.61.4780.014750241223.03-230.00224.0298.37
Dec.6BidParis1,965.24.1820.01613102311195.51-196.75196.0674.23
1979
Jan.3BidNew York1,479.63.1516.4179159231219.13-221.00219.3483.93
Feb.7BidNew York1,489.63.1759.2195123111252.47-252.77252.53109.60
Mar.7BidLondon1,534.43.26181712750241.28-243.26241.6892.62
Apr.4BidNew York1,186.82.53171410744238.71-240.27239.2191.37
May2BidNew York1,514.83.2220.02017155561245.86-247.01246.1898.79
June6BidNew York1,452.43.2719510919280.22-281.37280.39104.73
July3BidNew York1,518.83.42201311323281.06-281.87281.52104.84

The ratio of total bids to the amount on auction, i.e., 780,000 ounces in the auctions from June 1976 through January 1977, 525,000 ounces in auctions from March 1977 to May 1978, 470,000 ounces in auctions from June 1978 to May 1979, and 444,000 ounces since that time.

The ratio of total bids to the amount on auction, i.e., 780,000 ounces in the auctions from June 1976 through January 1977, 525,000 ounces in auctions from March 1977 to May 1978, 470,000 ounces in auctions from June 1978 to May 1979, and 444,000 ounces since that time.

Noncompetitive Bidding

Developing countries that can participate in the direct distribution of profits from gold sales had the option after the Second Amendment to purchase gold in the auctions through noncompetitive bids.21 Members that retained this option were entitled to submit noncompetitive bids for that part of 25 million ounces of gold that corresponded to their share in Fund quotas on August 31, 1975 in one or more of the auctions that were held before the end of May 1979. Of the 104 member countries that were eligible to do so, 40 members, with a share in Fund quotas on August 31, 1975 of 14.6 per cent, retained the option and were thus entitled to submit noncompetitive bids up to a total of 3.7 million ounces (115.1 tons). Of these 40 members, 13 exercised the option and acquired 1.48 million ounces (46.0 tons) of gold; 9 countries bought the total amount they were entitled to purchase, while 4 members submitted noncompetitive bids for only a part of their entitlement. (See Table 26.)

Table 26.Countries Submitting Noncompetitive Bids, June 1978–April 1979(In thousands of fine ounces)
CountryEntitlementAward
Colombia134.4134.4
Cyprus22.44.0
India804.8804.8
Kenya41.041.0
Korea68.868.8
Malaysia159.2159.2
Mauritius18.818.8
Mexico316.860.0
Nepal10.810.8
Paraguay16.416.4
Philippines132.8132.8
Tanzania36.09.2
Uruguay59.020.0
Subtotal1,821.21,480.2
Other countries entitled to
submit noncompetitive bids1,844.6
Total3,665.8

The total proceeds of sales of gold during the financial year amounted to the equivalent of SDR 1,179.2 million, of which SDR 250.5 million represented the capital value of the gold sold and was added to the currency holdings of the General Resources Account, while the remainder (SDR 928.7 million) represented profits that accrued to the Trust Fund.

After completion of the third year of the gold sales program and the end of the period during which noncompetitive bids could be submitted, the Executive Board in May 1979 reviewed the gold sales policies and procedures, and decided upon the terms and conditions for the fourth and last year of the sales period. The only important change in the terms was a reduction in the amount of gold to be auctioned every month from 470,000 ounces (14.6 tons) to 444,000 ounces (13.8 tons). This adjustment was made in the light of the amount of gold sold to member countries in noncompetitive bidding, and permits an equal amount of gold to be sold in the 12 auctions in the last year of the sales program.

Gold Distribution

The gold sales program pursuant to the arrangements agreed by the Interim Committee in August 1975 and January 1976 provided for sale of 25 million ounces of gold at the former official price of SDR 35 per fine ounce in four annual installments to all countries that were members of the Fund as of August 31, 1975 and to Papua New Guinea; each member’s share was calculated in proportion to its quota as of that date. As part of the program, the Fund sold during the financial year a total of 6,297,320.573 fine ounces (195.9 tons) of gold (SDR 220.4 million) to 126 members. Virtually all of these sales represented the third distribution of gold to members, which amounted to 6,127,427.940 fine ounces—190.6 tons—(SDR 214.5 million). The remainder, 169,893.633 fine ounces—5.3 tons—(SDR 5.9 million), was sold at the beginning of the financial year to 5 of 11 members that for balance of payments reasons had postponed their participation in the previous distributions until after the Second Amendment came into effect, when they were able to make the purchase with their own currency. The 5 members were Madagascar, the Philippines, Sudan, Uganda, and Zaïre. Madagascar had requested postponement only in the second distribution, while the four others had postponed participation in both previous distributions. Sales to the other 6 members that had requested postponement in the first two distributions had been completed in the previous financial year. Three of these—Barbados, Lesotho, and Zambia—had requested postponement of participation in both the first and second distributions; Bolivia, Morocco, and Peru had postponed participation only in the second distribution. The total gold sold includes 1,713.233 fine ounces (0.05 ton), amounting to SDR 59,963, that were purchased in July 1978 by Equatorial Guinea in respect of the second distribution, after a delay for technical reasons.

The bulk of the third gold distribution took place in December 1978, with sales of 5,741,543 fine ounces—178.6 tons—(SDR 201 million) to 90 members, while another 334,528 fine ounces—10.4 tons—(SDR 11.7 million) were sold in January 1979 to 33 members, and the remaining amount of 51,356 fine ounces—1.6 tons—(SDR 1.8 million) was sold to three members in February and March 1979.22 With the completion of the third distribution, the Fund had sold a total of 18,384,401 fine ounces (571.8 tons) of gold (SDR 643.5 million) out of the 25 million ounces (777.6 tons) to be distributed.

The amended Articles provide for the sale of gold to all participating members in exchange for their own currency, with no handling charge being levied. The Fund’s holdings of a member’s currency in excess of quota acquired as a result of payments for gold are subject to charges at the rate that applies to holdings from a purchase in the credit tranches, and must be repurchased not later than two years after the sale of gold to the member. In March 1979 the Executive Board adopted a decision that requires a member whose balance of payments and reserve position is considered sufficiently strong in the context of operational budgets to repurchase within 30 days from the decision adopting the budget, or 30 days from the date of distribution, whichever is later.

Charges and Remuneration

The rates of charges levied by the Fund remained unchanged during the financial year, although two amendments were made to the Rules that govern the charges levied by the Fund.

First, Rule I-7(5) (b) (i) governing the rate of charge levied by the Fund for the first 12 months that a purchase is outstanding was amended with effect from the date of the first allocation of SDRs in the third basic period (January 1, 1979). This amendment did not alter the rate of charge for the first 12 months, which remained at 4.375 per cent per annum. Rather, the amendment has to do with the procedures for adjusting the rate of charge as it relates to the rate of remuneration. Prior to the amendment of the Rule, whenever the margin between the rate of charge for the first 12 months was reduced to less than ¼ of 1 per cent above the rate of remuneration, the Executive Board was to promptly review the Fund’s financial position, the rate of remuneration, and the rate of charge for the first 12 months and to take such action as it considered necessary to safeguard the financial position of the Fund. If a new decision on the rate of charge or on the rate of remuneration was not taken, then the rate of charge for the first 12 months would increase to ½ of 1 per cent above the rate of remuneration.

The amendment provides that the review of all aspects of the Fund’s financial position by the Executive Board now shall take place whenever in any period of 6 successive months the Fund’s total expenses exceed its income and further that the rate of charge for the first 12 months shall be ¼ of 1 per cent above the rate of remuneration unless, as a result of the review of the Fund’s financial position, the Executive Board decides within one month after the end of any 6-month period in which the Fund’s expenses exceed its income that a different rate shall apply.

Second, in December 1978 the Fund reviewed the schedule of charges, adopted in April 1978, applicable to balances acquired by the Fund under the regular credit tranches (i.e., excluding those under a special policy) that would raise the Fund’s holdings of a member’s currency above 200 per cent of quota, or to balances that would raise the Fund’s holdings of a member’s currency acquired in purchases under the extended Fund facility to more than 140 per cent of quota. As a result of the review, it was decided that the schedule would apply to holdings acquired by the Fund as a result of stand-by or extended arrangements taking effect before the earlier of two dates—July 1, 1979, or the date on which the supplementary financing facility came into effect. This schedule ceased to apply after the supplementary financing facility became operational on February 23, 1979, except for outstanding arrangements that would permit drawings above the specified levels. At June 30, 1979 the Fund held the currency of one member in excess of 200 per cent of quota as the result of a purchase made under a stand-by arrangement taking effect prior to February 23, 1979. The rate of charge applicable to the amount in excess of 200 per cent of quota for the six months ended June 30, 1979 was 9.50 per cent per annum.

In May and June 1979 the first purchases were made under the supplementary financing facility. The rate of charges applicable to holdings resulting from such purchases for the six months ended June 30, 1979 was 9.45 per cent per annum (0.20 per cent above the rate of interest paid by the Fund on amounts borrowed from lenders under the supplementary financing facility).

The seven schedules of charges currently in effect are reproduced in Appendix I, Table I.14.

There was an important change during the year in the level of the interest rate on the SDR and the rate of remuneration on the creditor positions in the Fund. Following a review by the Executive Board, Rule T-1(b) was amended to set the rate of interest on the SDR at four fifths of an interest rate basket of the short-term market interest rates in the United States, the Federal Republic of Germany, the United Kingdom, France, and Japan, rounded to the nearest ¼ of 1 per cent.23 Concurrently, Rule I-10, which governs the rate of remuneration, was amended to make it equal to 90 per cent of the rate of interest on the SDR.24 Prior to the amendment of these Rules, the rate of interest on the SDR and the rate of remuneration were the same and were equal to three fifths of the combined market rates, i.e., the weighted average of daily interest rates of specified market obligations in the financial markets of the United States, the Federal Republic of Germany, the United Kingdom, France, and Japan, rounded to the nearest ¼ of 1 per cent. (The combined calculated market interest rate is based on short-term rates for the six-week period ending on the fifteenth day of the last month before the calendar quarter for which the rate is determined.) The amended Rules came into effect on January 1, 1979, the date of the first allocation of SDRs in the third basic period.

The interest rate on the SDR and the rate of remuneration, which were fixed at 3.75 per cent per annum at the beginning of the financial year, remained at that level for the calendar quarter beginning July 1, 1978, but were increased to 4 per cent per annum on October 1, 1978. In accordance with the amended Rule T-1(b) and, as a result of the increase in the combined calculated market rate, the rate of interest on the SDR was set at 6 per cent and the rate of remuneration at 5.4 per cent, i.e., at 90 per cent of the interest rate on the SDR, for the calendar quarter beginning January 1, 1979. The rates were increased further in the quarter beginning April 1, 1979, following an increase in the combined calculated market rate, when the rate of interest on the SDR was set at 6.5 per cent and the rate of remuneration at 5.85 per cent. (See Chart 19.) As a result of the increase in the rate of interest on the SDR and in the rate of remuneration, the rates at which the Fund’s holdings of currencies attract charges for the first two years have been below the rate of remuneration paid by the Fund since January 1, 1979.

Chart 19.Rate of Remuneration, SDR Interest Rate, and Short-Term Interest Rates, July 1974–June 19791

1 For the United Kingdom and the United States, the yield on three-month treasury bills; for France and the Federal Republic of Germany, the rate for three-month interbank deposits; and for Japan, the call money market rate (unconditional).

The decisions taken with respect to the relationship of the rate of interest on the SDR to combined calculated market interest rates and of the rate of remuneration to the rate of interest on the SDR provide further that, shortly before the end of each financial year, the Fund shall consider whether the net income of the Fund for a financial year is adequate to permit the rate of remuneration to be raised to a level above 90 per cent but not above 100 per cent of the average annual rate of interest on the SDR. The review was made for the financial year ended April 30, 1979, and in the light of the changes that had taken place in the Fund’s financial position it was decided not to raise the rate of remuneration for the period January 1–April 30, 1979 above 90 per cent of the rate of interest on the SDR, nor to reduce charges with effect from May 1, 1979.

Income, Expenses, and Reserves

During the financial year ended April 30, 1979, the Fund’s operational income from periodic charges, service charges, and interest on holdings of SDRs in the General Resources Account amounted to SDR 753 million, which represents a decrease of SDR 86 million (10 per cent) from that of the previous year. Operational expenses—the payment of remuneration on creditor positions and interest and transfer charges on Fund borrowing—decreased by a greater amount, by SDR 108 million (15 per cent), from SDR 742 million in 1978 to SDR 634 million in 1979. As a result, net operational income increased from SDR 98 million in 1978 to SDR 120 million in 1979. Administrative and other expenses increased by SDR 3 million, to SDR 73 million. For the financial year as a whole, the Fund had a surplus of income over expenses of SDR 46 million, compared with SDR 27 million in 1978. The surplus of income over expenses for the financial year ended April 30, 1979, which was the second surplus since 1970/71, was placed to the Special Reserve. The total reserves at April 30, 1979 amounted to SDR 760 million.

Income from periodic charges levied by the Fund on its average holdings of members’ currencies amounted to SDR 678 million, which represents a decrease of 14 per cent from that of the previous year. (See Table 27.) The most significant factor contributing to this decrease was the substantial repurchases (SDR 2,073 million) of balances outstanding under the oil facility. For the year as a whole excluding balances under the oil facility, there was a decline of SDR 1,156 million in the average daily balances on which the Fund levies charges. This decline in the average daily balances reflects the effects of the large volume of repurchases that took place at the end of 1977/78 and the excess of repurchases over purchases that occurred during 1978/79. Total outstanding purchases on which charges are levied declined from SDR 12.1 billion at April 30, 1978 to SDR 8.9 billion at April 30, 1979. Over the year, the average rate of charge, other than that applicable to the oil facility, increased from 4.77 per cent per annum to 5.04 per cent per annum, reflecting the progression in the rates of charges over the time that the balances remain outstanding.

Table 27.Summary of Average Rates of Periodic Charges, Interest on SDR Holdings, Remuneration, and Interest on Borrowing, Financial Years Ended April 30, 1978 and 1979(Balances and charges in millions of SDRs)
1979197819791978
Including the

oil facility
Excluding the

oil facility
Income from periodic charges
Average daily balances10,86813,0075,4746,630
Total charges for the period678.1786.6275.9316.0
Average annual rate6.246.055.044.77
Interest on SDR holdings
Average daily balances1,2931,1181,2931,118
Total interest for the period57.139.857.139.8
Average annual rate4.423.564.423.56
Combined income
Average daily balances12,16114,1256,7677,748
Total income for the period735.2826.4333.0355.8
Average annual rate6.055.854.924.59
Remuneration expense
Average daily balances3,9035,6363,9035,636
Total remuneration for the period171.7200.9171.7200.9
Average annual rate4.403.564.403.56
Interest on borrowing
Average daily balances6,9538,1161,5391,600
Total interest for the period458.1537.170.771.5
Average annual rate6.596.624.604.47
Combined expense
Average daily balances10,85613,7525,4427,236
Total expense for the period629.8738.0242.4272.4
Average annual rate5.805.374.453.76
Excess of average daily income-earning balances over
average daily interest-costing balances+1,305+373+1,325+512
Margin between the combined average annual rate of
income and the combined average rate of expense+0.25+0.48+0.47+0.83
Excess of periodic charges and interest on SDR holdings
over remuneration and interest+105.4+88.4+90.6+83.4

Income from service charges decreased from SDR 11.8 million in 1977/78 to SDR 6.2 million in 1978/79, reflecting a lower volume of purchases in the credit tranches and under special policies of the Fund. Standby charges accruing to the Fund on undrawn amounts of stand-by arrangements amounted to SDR 11.9 million in 1978/79, against SDR 1.1 million in 1977/78.

Interest received on holdings of SDRs in the General Resources Account amounted to SDR 57.1 million, an increase of 43 per cent over the SDR 39.8 million received in 1977/78. This increase is attributable to an increase in the average daily balance of SDR holdings by the Fund and the increase in the average rate of interest on the SDR from 3.56 per cent per annum in 1977/78 to 4.42 per cent per annum in 1978/79. (See Table 27.)

In the financial year 1978/79, remuneration paid by the Fund on creditor positions decreased by 14 per cent from that of the previous year, to SDR 172 million. The decrease is attributable to a reduction in the average daily balances on which remuneration is paid, from SDR 5,636 million in 1977/78 to SDR 3,903 million in 1978/79, reflecting the effects in 1978/79 of the large volume of repurchases that occurred at the end of 1977/78 and during 1978/79 and the effects of the monthly gold sales on remunerated positions. While the average of the remunerated positions was reduced, the rate of remuneration increased considerably, rising on average from 3.56 per cent per annum in 1977/78 to 4.40 per cent in 1978/79. (See Table 27.)

The net decrease of SDR 3,025 million in the outstanding borrowing by the Fund, from SDR 8,059 million on April 30, 1978 to SDR 5,034 million on April 30, 1979, reflected repayments of SDR 2,072 million by the Fund of amounts borrowed under the oil facility in connection with members’ repurchases. In addition, during the year net repayments by the Fund to lenders under the GAB and under the agreement with the Swiss National Bank amounted to SDR 953 million. Interest paid on all outstanding borrowing decreased from SDR 537 million in 1978 to SDR 458 million in 1979. Of these amounts, SDR 387 million was paid under the oil facility borrowing agreements (SDR 465 million in 1978), and SDR 71 million was paid under the GAB and other borrowing (SDR 72 million in 1978).

The combined average cost of all capital resources provided to the Fund increased to 5.80 per cent in 1978/79, from 5.37 per cent in 1977/78. This increase was attributable mainly to the increase in the rate of remuneration paid by the Fund on members’ creditor positions. There was also an increase in the average annual rate of income earned by the Fund, from 5.85 per cent in 1978 to 6.05 per cent in 1979.

Although for the financial year as a whole there was a positive spread between the average annual rate of income and the average annual rate of expense, the spread became negative during April 1979. This is the result of the considerable rise in the rate of remuneration, which since January 1, 1979 has exceeded the rate of charge for the first two years that balances are outstanding. Consequently, the Fund’s income dropped significantly in the latter part of the financial year and was prevented from developing into a deficit position by the fact that balances on which the Fund earns income at April 30, 1979 exceeded balances on which the Fund incurs costs by SDR 1,356 million. For the year as a whole, this excess averaged SDR 1,305 million (SDR 1,325 million, exclusive of the oil facility).

The Subsidy Account

The Subsidy Account, which is administered by the Fund, was established by the Executive Board on August 1, 1975 to assist the Fund’s most seriously affected (MSA) members to meet the cost of using the 1975 oil facility; 18 such members received payments from the Account for a total of SDR 551.03 million (Table 28). The Subsidy Account, like the Trust Fund, constitutes an arrangement that is separate from the Fund’s own accounts and resources. The Subsidy Account was established to reduce the effective rate of annual charge payable on drawings under the 1975 oil facility by about 5 percentage points per annum. The actual amounts of annual subsidy payments to eligible members are calculated as a percentage per annum of the average daily balances, subject to charges, of the Fund’s holdings of each eligible member’s currency outstanding under the 1975 oil facility.

Table 28.Subsidy Account: Total Use of 1975 Oil Facility by Most Seriously Affected (MSA) Members and Subsidy Paid for the Years Ended April 30, 1978 and 19791(In millions of SDRs)
CountryTotal Use

of 1975

Oil Facility
Subsidy at 5 Per Cent

for Year Ended
April 30,

1978
April 30,

1979
Bangladesh40.472.022.00
Cameroon11.790.590.58
Central African Empire2.660.130.13
Egypt31.681.581.58
Haiti4.140.210.20
India201.347.462.17
Ivory Coast10.350.520.23
Kenya27.931.401.37
Mali3.990.200.20
Mauritania5.320.270.26
Pakistan111.015.555.41
Senegal9.910.500.48
Sierra Leone4.970.250.24
Sri Lanka34.131.711.69
Sudan18.300.920.90
Tanzania20.611.030.99
Western Samoa0.420.020.02
Yemen, People’s
Democratic Republic12.020.600.58
Total551.0324.9519.10

Purchases began in July 1975 and continued until May 1976. The subsidy amounts shown are calculated as a percentage per annum of the average daily balances, subject to charges, of the Fund’s holdings of each eligible member’s currency outstanding under the 1975 oil facility during the year. Since the average cost of using the facility is about 7.7 per cent per annum, a rate of subsidy of 5 per cent would reduce the effective cost of using the facility by MSA countries to 2.7 per cent.

Purchases began in July 1975 and continued until May 1976. The subsidy amounts shown are calculated as a percentage per annum of the average daily balances, subject to charges, of the Fund’s holdings of each eligible member’s currency outstanding under the 1975 oil facility during the year. Since the average cost of using the facility is about 7.7 per cent per annum, a rate of subsidy of 5 per cent would reduce the effective cost of using the facility by MSA countries to 2.7 per cent.

The Subsidy Account is funded by contributions from 24 members of the Fund and Switzerland (Table 29). These contributions are received either in U.S. dollars or in the member’s own currency with immediate conversion into U.S. dollars. The funds have been invested in U.S. Treasury bills or notes, as far as possible, on dates appropriate to the disbursement requirements of the Subsidy Account. Contributions totaling SDR 160.5 million are anticipated over the life of the Account, and contributions, either in whole or in part, from all members and Switzerland, amounted to some SDR 120.9 million as of April 30, 1979. Among the contributing countries, Austria, Canada, Italy, Luxembourg, the Netherlands, Norway, South Africa, and Switzerland have paid their contributions in full. During 1978/79, Brazil, the Federal Republic of Germany, Sweden, Venezuela, and Yugoslavia completed payment of their full contributions; and further installments were received from Australia, Belgium, Finland, France, Japan, New Zealand, Spain, and the United Kingdom.

Table 29.Subsidy Account: Contributions(In millions of SDRs)
ContributorAnticipated

Total

Contributions1
Contributions

Received as of

April 30, 1979
Australia5.7004.570
Austria2.3002.300
Belgium5.6003.360
Brazil1.8501.850
Canada9.5009.500
Denmark2.2000.960
Finland1.6001.200
France12.9009.773
Germany, Fed. Rep. of13.70013.719
Greece0.6000.150
Iran6.0004.500
Italy8.6008.600
Japan10.3006.348
Luxembourg0.1100.108
Netherlands6.0006.000
New Zealand1.7000.918
Norway2.1002.100
Saudi Arabia40.00019.810
South Africa1.3501.350
Spain3.4001.960
Sweden2.8002.800
Switzerland3.2853.285
United Kingdom12.0508.876
Venezuela6.0006.000
Yugoslavia6.9000.900
Total160.545120.938

In some cases, subject to final agreement on amount and timing, parliamentary approval, and/or certain conditions. In some cases where contributions are being made in installments, budgetary approval will be required in each year that a contribution is to be made. SDR amounts may be subject to small adjustments owing to exchange rate changes.

In some cases, subject to final agreement on amount and timing, parliamentary approval, and/or certain conditions. In some cases where contributions are being made in installments, budgetary approval will be required in each year that a contribution is to be made. SDR amounts may be subject to small adjustments owing to exchange rate changes.

For the financial year ended April 30, 1979, the Executive Board decided that the rate of subsidy would continue to be 5 per cent as in the previous three years, thus reducing the effective interest cost to recipients from about 7.7 per cent to 2.7 per cent per annum. This rate involved payments by the Subsidy Account totaling SDR 13.8 million in 1975/76, SDR 27.5 million in 1976/77, SDR 24.9 million in 1977/78, and SDR 19.1 million for the year ended April 30, 1979. (See Table 28.) The reduction in the amount of subsidy reflected repurchases made with respect to drawings under the oil facility.

The 1975 decision establishing a Subsidy Account was amended in November 1978 in order to permit any surplus, after provision has been made to pay the original beneficiaries at the rate of 5 per cent, to be used to make payments at a rate not exceeding 5 per cent to seven additional beneficiaries, namely, Grenada, Malawi, Morocco, Papua New Guinea, the Philippines, Zaïre, and Zambia. With the additional of these members, the list of beneficiaries includes all members eligible to receive assistance from the Trust Fund that have used the 1975 oil facility. The Subsidy Account, however, does not as yet hold a surplus of assets that could be used to make payments to these additional beneficiaries. Moreover, the exact timing of remaining contributions is not known, and a reasonable estimate of investment income on these amounts cannot yet be made.

The Trust Fund

The Trust Fund, established by the Executive Board in May 1976 and administered by the Fund, provides additional balance of payments assistance on concessionary terms to eligible developing member countries that qualify for assistance by carrying out programs of balance of payments adjustment.25 The resources of the Trust Fund comprise profits realized from the sale of 25 million ounces of the Fund’s gold for the benefit of developing countries in accordance with the views expressed at the Interim Committee meeting in September 1975, income from investments, income from loans already made to members, and other transfers to the Trust.

As mentioned in the 1978 Annual Report, the Executive Board decided that the operations of the Trust Fund would be divided into two periods, each of two years’ duration. The first of the two-year periods ended on June 30, 1978, and the second period covers the two years July 1, 1978-June 30, 1980. Profits from the sale of 12.5 million ounces of gold are available for disbursements in each of the two periods of the Trust Fund. The disbursements are made on the basis of quotas in the Fund in 1975.

For the Trust Fund’s first two-year period, total profits from the sale of gold were about US$1,305 million, of which US$363 million was paid directly—as agreed in principle by the Interim Committee—to 104 developing members with 27.77 per cent of Fund quotas as of August 31, 1975. The amount of profit paid to each member was calculated on the basis of its share of Fund quotas at August 31, 1975. The remainder of the profits from gold sales was thus available to the Trust Fund to provide loan assistance. Of the eight members of the Organization of Petroleum Exporting Countries (OPEC), six have made irrevocable transfers of their shares of profits to the Trust Fund in order to increase the Trust’s resources for loan assistance. Yugoslavia made a similar transfer of one third of its share of profits, and Romania has decided to lend 10 per cent of its share. As mentioned in the 1978 Annual Report, balance of payments assistance of over US$1 billion (SDR 841 million) was provided to 43 of the 61 eligible members that had qualified for the first period.26

The total amount of loans made to qualified members in the Trust’s first period (SDR 841 million) represented over 40 per cent of these members’ quotas (the equivalent of more than one and a half tranches), or one half or more of the assessed need for almost three fourths of the qualified members. Moreover, for almost all the 23 members that used the Fund’s resources and received Trust loans, the total of Fund-related financing covered the assessed needs in the program periods. During the first period of the Trust Fund the total amount of Trust assistance, including the distribution of profits, amounted to SDR 1,133 million, which exceeded the amount of balance of payments financing received by these members from the Fund itself.

For the Trust Fund’s second period, 59 members are eligible for assistance; compared with the list for the first period, Guatemala, Mauritius, and Paraguay are excluded and Zambia has been added. Loans are to be made on the basis of 12-month balance of payments programs, of at least first credit tranche conditionality, that are separate from the ones used as the basis of loans for the first period. Moreover, in considering a program for the second period, the Fund as Trustee must take into account the progress made by the member toward strengthening its balance of payments position under the program in the first period. The Trust Instrument provides that these programs are to begin no later than May 1, 1980. The terms and conditions of the loans are otherwise the same as those in the first period. The Trust loans must be the same percentage of members’ quotas on December 31, 1975, subject to any limitation of need as decided by the Trustee after a re-examination if necessary. The loans are being made in U.S. dollars, but the amounts of the loans are denominated in SDRs. They bear interest at a rate of ½ of 1 per cent per annum, which is payable half-yearly in currency specified by the Fund (U.S. dollars, so far), and, unless otherwise decided, are to be repaid in ten semiannual installments between six and ten years from the dates of the loan disbursements. With these provisions and at the current levels of market interest rates, the loans have a grant content of about 50 per cent. Moreover, there is the provision that toward the end of five years after the first interim disbursement, namely, about January 1982, the Trustee shall review the terms of repayment on the basis of uniform criteria. It has also been decided that, to the extent practicable, the Trust shall make loans at quarterly intervals during the remainder of the second period.

The profits from sales of gold in the Trust’s second period to July 1979 totaled US$1,426 million. Of this amount, US$396 million was to be paid directly to the 104 members in July 1979 in the third of the annual distributions of profits. The remainder of the profits, together with irrevocable transfers by certain OPEC members and Yugoslavia and investment income less valuation adjustments and expenses, totaled SDR 890 million (about US$1,160 million). This amount, which is available for loans, was used to make interim loan disbursements in January and July 1979 to the members that had qualified for the July 1979 disbursements. (See Appendix I, Table I.15.) The interim disbursements are made on the assumption that all 59 eligible members will qualify for loans in the second period.

As mentioned in the 1978 Annual Report, the assets held in the Trust pending disbursement were held throughout the first period in U.S. Government obligations, with the concurrence of the United States. It was also mentioned that, in the light of the international character of the Trust and in order to maintain the assets for loans in terms of the SDR, the Executive Board as Trustee had decided in June 1978 that, in principle, the investments of the Trust should be held in SDR-denominated assets or in a combination of currencies that would, to the maximum extent practicable, correspond to the composition of the SDR basket. It was also decided that the Trustee could consider placing SDR-denominated deposits with the BIS. SDR deposits were made with the BIS in the period July-November 1978 with the profits from the monthly auctions that were to be held for subsequent loan assistance.

The decision on investment diversification was reviewed in December 1978, at which time the Executive Board reaffirmed the earlier principle and decided to broaden considerably the decision to invest in SDR-denominated deposits. The decision on Trust Fund diversification now provides that if the Managing Director considers an offer by the BIS as not sufficiently attractive, he must inform the Executive Board and make other proposals for investment in SDR-denominated obligations, which may include obligations of international financial organizations or members or national official financial institutions of members or commercial banks.27 On each occasion since December 1978, the Managing Director has found the offers by the BIS to be satisfactory in the light of comparable market rates and prevailing conditions, and all the SDR deposits so far have been made with the BIS. The deposits with the BIS in the year to July 1979 totaled SDR 825 million at an average interest rate of 8.6 per cent per annum. The maturities of these deposits were up to one year; thus, some have already matured and have been used for loan payments or reinvested in deposits with the BIS.

The remainder of the Trust’s assets held for the distribution of profits continued to be invested in U.S. Government obligations. In all its investments, the Trustee continued the practice, as far as possible, of investing funds as soon as they were available for investment with maturities matching the expected timing and amounts of Trust disbursements.

Training and Technical Assistance

Training and technical assistance continued to be made available to member countries in the fields of fiscal, monetary, and balance of payments policies, banking, mobilization of domestic savings, exchange and trade systems, government finance, and statistics. This assistance included training at headquarters, staff missions, and the stationing of staff members and outside experts in member countries and was in addition to the assistance that was made available to members through the Fund’s regular consultation procedures under Article IV. During the year the Executive Board carried out a thorough review of the policies and practices of the Fund’s specialized technical assistance services and decided that, in future, such reviews would take place not less frequently than every five years.

During the financial year, the IMF Institute conducted nine training courses, which were attended by 253 officials of governments and central banks of member countries. Since its inception in 1964, Institute courses have been attended by 2,380 officials from 132 member countries.

The Institute’s main course, on Financial Analysis and Policy, was conducted twice in English and once each in French and Spanish. The course, which runs for 19 weeks in English and 21 weeks in French and Spanish, presents an exposition of the Fund’s procedures and policies, examines the modern tools of economic analysis and forecasting, and provides a thorough study of the instruments of monetary, fiscal, and balance of payments policies that are used to achieve economic objectives under changing national and international conditions.

The 8-week course on Balance of Payments Methodology was presented twice (in English) this year in collaboration with the Bureau of Statistics. It concentrates on the balance of payments concepts and definitions used in the Fund and serves as a medium for assisting member countries in their efforts to improve their balance of payments statistics. The 10-week course on Public Finance, offered twice (in French and Spanish) in cooperation with the Fiscal Affairs Department, deals with the objectives, instruments, and procedures of public finance, emphasizing the fiscal problems of developing countries. In addition, a 5-week course on Government Finance Statistics was conducted for the first time in Spanish in cooperation with the Bureau of Statistics. It presents the concepts, definitions, and procedures set out in the Draft Manual on Government Finance Statistics for compiling statistics from accounts of the government and other parts of the public sector.

The Central Banking Service has continued to provide technical assistance on all aspects of the establishment, organization, and operation of central banks or similar monetary institutions. During the past financial year, 56 member countries, 2 territories of present members, and 5 multinational institutions received technical assistance, either in the form of outside experts recruited by the Fund or through the provision of advisory services by regular staff members.

Experts on long-term assignments (six months or more) served in advisory or executive capacities in 46 countries and 5 multinational institutions and short-term consultants visited 3 additional countries. The assignment of these experts provided technical assistance primarily in research and statistics, organization and management, and bank supervision. However, the assistance also covered foreign exchange operations or exchange control, general banking operations, accounting, and the establishment of training programs. All experts are required to train local staff. Experts are, for the most part, drawn from present or past staff of established central banks, but while in the field receive support and specialized assistance from staff at headquarters.

The technical assistance provided through advisory services is normally carried out by staff members of the Central Banking Service in cooperation, as needed, with staff from other departments within the Fund and other institutions, including the World Bank. These services cover a wide range of central banking and related activities, such as drafting or amending central and general banking legislation (in cooperation with the Fund’s Legal Department), administration and organization of central monetary authorities, and development of local financial markets and institutions. Much of this work is carried out by staff at headquarters, but the advice is supplemented by visits in the field when a review of specific recommendations becomes desirable. During the financial year ended April 30, 1979, advisory services requiring staff missions were provided to 15 countries.

The Fiscal Affairs Department has again provided technical assistance through staff missions, staff assignments in the field, and use of the services of members of the panel of fiscal experts. The principal fields in which assistance was given were tax policy, tax and customs administration, budget systems and procedures, accounting, auditing and financial reporting, and general financial management. The number of countries utilizing all forms of technical assistance was 35, compared with 41 in the previous financial year. Five countries received assistance for the first time. Of the 59 individual field assignments carried out in the financial year, 38 were long-term assignments and 21 short-term assignments, while 359 man-months were spent in the field. Technical assistance work for the year was divided among 37 panel members and 24 staff members. As part of the continuing review, members of the staff visited a number of countries to inspect progress and to advise on requests for further assistance. Another important element of technical assistance provided by the Fiscal Affairs Department is the work of staff members at headquarters in supporting and controlling the work of field experts.

Technical assistance in the statistical field has continued to be provided by the Bureau of Statistics. Such assistance has included the improvement of existing central bank bulletins and the establishment of new bulletins, as well as assistance to members in the compilation of balance of payments and government finance statistics. The assistance took the form of lectures, discussions, and work on data with national officials and technicians, using concepts and classification standards for the assembly of data relevant to the analysis of monetary and payments problems. In improving the statistical control of central bank bulletins, the emphasis has been on the presentation of financial and general statistics. In its assistance in the fields of balance of payments and government finance statistics, the Bureau has focused on applying to national source materials the conceptual framework and classification standards given in the Fund’s Balance of Payments Manual and the Draft Manual on Government Finance Statistics. This assistance has been supported by courses in these areas of statistics given by the IMF Institute in Washington.

During the financial year, the Bureau’s overall technical assistance activities resulted in 53 visits to 43 countries and in a substantial improvement of the statistics assembled in central banks, ministries of finance, and other data-compiling agencies.

Relations with Other International Organizations

The Fund’s enhanced role under the Second Amendment emphasized the importance of its relationships with other international and regional organizations in the economic and financial area. Close collaboration on matters of common concern was maintained with the World Bank; the United Nations (UN) and its relevant organs; the Organization for Economic Cooperation and Development (OECD); the General Agreement on Tariffs and Trade (GATT); the Commission of the European Communities (CEC); the Bank for International Settlements (BIS); the Organization of American States (OAS), particularly its Inter-American Economic and Social Council and its Permanent Executive Committee (CEPCIES); and regional financing and development institutions in Africa, Asia, Latin America and the Caribbean, and the Middle East. Representatives of those organizations were present as observers at the Annual Meeting of the Board of Governors of the Fund, held jointly with that of the World Bank and its affiliates, in Washington in September 1978. Several of them also attended the two meetings of the Interim Committee held in Washington, one just before the Annual Meeting and the other on March 7, 1979, as well as meetings of the Development Committee held just prior to and during the Annual Meeting.

Full-scale liaison activities are carried out by the Special Representative to the United Nations; the European Office in Paris, particularly with regard to the OECD, CEC, and the BIS; and the Geneva Office, especially with the UN Conference on Trade and Development (UNCTAD), the GATT, and other relevant agencies. This is supplemented by specific assignments of senior officials and technical specialists from headquarters, as well as resident representatives in the field, as required. These contacts involve attendance at meetings at ministerial, plenary, and subsidiary levels, participation in seminars and expert groups, informal exchange of views, and exchange of pertinent documents and information, often on a year-round basis.

The Managing Director participated in the meeting of the OECD Ministerial Council on June 15, 1978, at which he spoke on the problem of balance of payments adjustment and the importance of flexible demand management policies and appropriate differentiation of growth rates. The annual address to the UN Economic and Social Council (ECOSOC) was delivered on behalf of the Managing Director by the Economic Counsellor of the Fund on July 10, 1978. During the year under review, the Managing Director continued to monitor the arrangements on sterling balances administered by the BIS, with the support of the central banks of the Group of Ten countries and Switzerland, until the termination of those arrangements, along with the BIS facility, on February 7, 1979. The Managing Director also attended the monthly meeting of the BIS in Basle in September 1978, when the sterling arrangements were reviewed. He also attended the first 1979 regular session of the UN Administrative Committee on Coordination (ACC) in Geneva, and other staff participated in preparatory and subsidiary interagency meetings. Concurrently with meetings of the Interim Committee, the Managing Director also attended meetings of the Ministers of the UNCTAD Intergovernmental Group of Twenty-Four on International Monetary Affairs and meetings of the Group of Ten ministers and governors of central banks, while staff members attended meetings at the Deputies’ level, as well as other Group of Ten Deputies’ meetings.

Standing arrangements with the GATT for collaboration with respect to consultations with common members on trade restrictions imposed for balance of payments reasons entailed staff participation in those consultations and the provision of pertinent documents. Staff representatives also attended the 34th session of the Contracting Parties and meetings of the Council of Representatives and Working Party on Specific Duties, and kept close watch on developments in the Multilateral Trade Negotiations that were concluded in April 1979.

Aid coordination and debt renegotiation efforts involving developing countries are among the particular concerns of the Fund. The Fund took part in meetings of the World Bank’s Consultative Groups on Aid Coordination for Egypt, the Philippines, Thailand, and Zambia; the India and Pakistan consortia; and the Aid Groups for Bangladesh, Burma, Nepal, and Sri Lanka, also held under the auspices of the World Bank. In addition, the Fund provided technical assistance and participated in meetings relating to the Caribbean Group for Cooperation in Economic Development, an aid group organized by the World Bank. As in previous years, Fund representatives participated in meetings and provided pertinent documents to the Inter-Governmental Group on Indonesia (IGGI), convened by the Government of the Netherlands, and attended meetings of the OECD-sponsored Turkish Consortium. Fund staff also took part in international coordination meetings on a financial and economic recovery plan for Zaïre, convened by the Belgian Government in Brussels; meetings on debt rescheduling for Peru, convened by the Government of France under the framework of the Paris Club; an informal meeting of creditors of Gabon, held in Paris under the auspices of the French Government; and meetings of the OAS Joint Commission for the Implementation of External Cooperation with Haiti, held in Port-au-Prince.

Reflecting its experience in economic and financial matters, the Fund was called upon to provide technical assistance to a number of international and regional organizations. At the request of the Center for Latin American Monetary Studies (CEMLA), an expert was assigned to develop a training program in bank examination and supervision, and, as before, staff lecturers contributed to CEMLA’s training program on monetary policy and programming in Mexico City and Washington. In response to a request from the South-East Asian Central Bank’s (SEACEN) Research and Training Centre, a study was prepared on the monetary policy experience of SEACEN countries, which also involved staff participation in a seminar held in Kuala Lumpur and presentation of an overview of the study at the Annual Governors Conference of SEACEN at Baguio, Philippines. Technical specialists from the Fund gave lectures at the East African Management Institute’s Workshop in Public Finance and Taxation held in Arusha, Tanzania, and at the 12th South-East Asia, New Zealand and Australia (SEANZA) Central Banking Course held in Seoul, Korea. In cooperation with the BIS, the OECD, and the World Bank, and at the request of the Group of Ten and Switzerland, the Fund assisted in preparation of a brochure setting out the kinds of information about countries’ external indebtedness that are presently made publicly available by international organizations.

Commodity matters, on which the Fund focuses particular attention in connection with its compensatory financing and buffer stock facilities, occasioned staff attendance at the UN Cocoa Conference, 1979; the UN Conference on Olive Oil, 1979; the UN Conference on Natural Rubber, as well as Preparatory Group meetings; the resumed UN Conference to Negotiate an International Arrangement to Replace the International Wheat Agreement, 1971, as extended, and meetings of the Conference’s Interim Committee; meetings of the UNCTAD’s Integrated Program for Commodities, including its Negotiating Conference on a Common Fund, the 5th and 6th Preparatory Meetings on Copper and the Working Group on Copper, the 3rd Preparatory Meeting on Cotton and Cotton Yarns, and the 6th Preparatory Meeting on Jute. Fund representatives also attended the 32nd Session of the International Coffee Council and the 25th Assembly of the International Rubber Study Group.

As follow-up to a conference of experts on the methodology of balance of payments analysis held in 1976, the Fund conducted a Conference on Methods of Assessing Countries’ External Positions, at the Paris Office in October 1978, which was attended by official experts from 13 industrialized member countries of the Fund and Switzerland, plus representatives of the OECD, the BIS, and the European Communities.

Membership, Quotas, and Participation in the Special Drawing Rights Department

Membership in the Fund rose from 134 to 138, and participation in the Special Drawing Rights Department from 128 to 137 during 1978/79. The four new members, which also became participants in the Special Drawing Rights Department, were the Solomon Islands, which joined the Fund on September 22, 1978, with a quota of SDR 2.1 million; Cape Verde, on November 20, 1978, with a quota of SDR 2 million; Dominica, on December 12, 1978, with a quota of SDR 1.9 million; and Djibouti, on December 29, 1978, with a quota of SDR 3.8 million. Five members—Lebanon, Libyan Arab Jamahiriya, Saudi Arabia, Singapore, and the United Arab Emirates—that had not previously been participants in the Special Drawing Rights Department deposited their instruments of participation with the Fund before December 31, 1978. Accordingly, they were able to take part in the allocation of special drawing rights for the third basic period, for which the first allocation was made as of January 1, 1979. At the end of the financial year, applications for membership by St. Lucia and St. Vincent were under consideration by the Executive Board.

The Executive Directors extended the period for consent to increases in quotas under the Board of Governors Resolution on Increases in Quotas of Members—Sixth General Review until October 31, 1978. However, by September 13, 1978, all eligible members except one had consented to increases under the Resolution, and had completed payment for their increases, which brought them into effect. Democratic Kampuchea did not consent to its increase in quota within the period provided. Singapore consented to an increase that was less than the full amount specified by the Board of Governors Resolution.

Provisions for a further increase in quotas under the Seventh General Review of Quotas are discussed on pages 61–62.

With the increases in quotas under the Sixth General Review and the quotas of new members, the aggregate of quotas of Fund members on April 30, 1979 was SDR 39,011.2 million, compared with SDR 32,346.4 million a year earlier.

Executive Directors and Staff

A list of Executive Directors and their voting power on April 30, 1979 is given in Appendix IV. The changes in membership of the Executive Board during 1978/79 are shown in Appendix V.

In the year ended April 30, 1979, there were 80 appointments to the Fund’s regular staff and 87 separations. At the end of the financial year, the staff numbered 1,379 and was drawn from 87 countries. These figures do not include Advisors and Assistants to Executive Directors.

Publications

The list of publications issued by the Fund during 1978/79 is shown in Appendix I, Table I.19.

Board of Governors Resolution No. 34-2, adopted December 11, 1978 and reproduced in Appendix II.

Executive Board Decision No. 6065-(79/38), adopted March 2, 1979 and reproduced in Appendix II.

See Annual Report, 1969, pages 37–38.

Executive Board Decision No. 6026-(79/13), adopted January 22, 1979 and reproduced in Appendix II, supplementing Executive Board Decision No. 5392-(77/63), adopted April 29, 1977. See Annual Report, 1977, pages 107–109.

The Managing Director’s Proposal and Board of Governors Resolution No. 34-3, adopted December 11, 1978, are reproduced in Appendix II.

Executive Board Decision No. 5956-(78/180) S, adopted November 17, 1978 and reproduced in Appendix II.

The amounts allocated to all participants are shown in Table I.2 in Appendix I.

The financial instruments and the weights used in calculating the combined market interest rate are as follows:

Per cent
Market yields for three-month U.S. Treasury bills49
Three-month interbank deposits rate in Germany18
Market yields for three-month U.K. Treasury bills11
Three-month interbank money rate against private
paper in France11
Call money market rate (unconditional) in Japan11
100

See Annual Report, 1978, pages 56–57.

Executive Board Decision No. 5936-(78/168) S, adopted October 25, 1978 and reproduced in Appendix II.

Executive Board Decision No. 6063-(79/43), adopted March 14, 1979 and reproduced in Appendix II.

Executive Board Decisions No. 6000-(79/1) S and No. 6001-(79/1) S, adopted December 28, 1978, and No. 6053-(79/34) S and No. 6054-(79/34) S, adopted February 26, 1979.

A freely usable currency is a member’s currency that the Fund determines (i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets.

Executive Board Decision No. 5719-(78/46), adopted March 31, 1978. See Annual Report, 1978, page 127.

In view of the repeated failure of Democratic Kampuchea to meet the reconstitution requirement and its failure to pay charges due on its SDR allocations, the Executive Board decided on December 19, 1978 to suspend the right of Democratic Kampuchea to use SDRs acquired after that date.

Executive Board Decision No. 5220-(76/144), adopted September 20, 1976 and reproduced in Selected Decisions of the International Monetary Fund and Selected Documents (Supplement to Eighth Issue, Washington, 1978), page 19.

The individual lenders, amounts, and currencies to be made available under the agreements are given on page 78.

See Executive Board Decision No. 5704-(78/39), adopted March 22, 1978. (See Annual Report, 1978, pages 125–26.)

See Executive Board Decision No. 6172-(79/101), adopted June 28, 1979 and reproduced in Appendix II.

The lending of U.S. dollars by sources other than the United States is subject to the concurrence of the United States, which has been given.

See Annual Report, 1978, page 71.

Arrangements have not been completed with regard to the distribution to Democratic Kampuchea and the Republic of China.

Executive Board Decision No. 5933-(78/168) S, adopted October 25, 1978 and reproduced in Appendix II.

Executive Board Decision No. 5934-(78/168), adopted October 25, 1978 and reproduced in Appendix II.

The establishment and operation of the Trust Fund were discussed in Annual Report, 1978, pages 76–78, Annual Report, 1977, pages 66–67, and Annual Report, 1976, pages 60 and 111–17. The report of the Audit Committee for the year ended April 30, 1979 is reproduced in Appendix VIII.

See Annual Report, 1978, pages 77 and 108.

Executive Board Decision No. 5973-(78/189) TR, adopted December 4, 1978 and reproduced in Appendix II.

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