STAND-BY ARRANGEMENTS are not expressly provided for in the Fund’s Articles of Agreement. They represent a development in Fund practice in response to a general feeling among members, and in the Fund itself, that some technique should be devised by which members that do not have an immediate need of the Fund’s financial resources, but feel that they may possibly need them in the near future, could be assured of prompt financial assistance from the Fund if and when the need arose. Under a stand-by arrangement a member of the Fund is assured that, following upon a review of its policies and position, and subject to such conditions as are included in the arrangement, it can purchase from the Fund the currencies of other Fund members up to an agreed amount during a stated period without further consideration of its position by the Fund.
Mr. Nicoletopoulos studied law and economics at the University of Athens and at Columbia University. After serving briefly with the United Nations Legal Department, he joined the staff of the Fund, where he is now a Deputy General Counsel.
As is well known, members of the Fund may use its resources if they need foreign exchange in order to cope with balance of payments problems. Under the Fund’s Articles of Agreement, use of these resources by a member takes the form of a purchase by the member, at its request, of the currency of one or more of. the other members against the payment to the Fund of an equivalent amount of its own currency.
When a member’s request to purchase foreign exchange is received, the Fund examines the request in order to determine the consistency of the proposed transaction with the Articles of Agreement. Where, after reviewing a request, the Fund finds that the proposed transaction would not be consistent with the Articles—that it would not involve a proper use of the Fund’s resources—the Fund may reject the request or accept it subject to conditions if the examination justifies such action.
In view of this, and the fact that in the earlier years of the Fund’s operations the criteria to be applied for determining that a transaction would constitute a proper use of the Fund’s resources had not been fully developed, members could not always count with confidence on prompt financial assistance from the Fund at the time of need. Often, members did not need additional resources at once or in the immediate future, but felt that they might possibly require them at a somewhat later date. Therefore, it became clear that it would be very useful to a member working out a plan for coping with its balance of payments problems to know what would be the amount of the Fund’s resources that would be available to it, if needed, in the future. It was found desirable, therefore, that there should be some procedure by which members could make purchases of exchange during an agreed period, if the need to do so actually arose, without submitting each purchase to the kind of review which the Fund makes in the case of a request for a purchase that is not under a stand-by arrangement.
Stand-By Arrangements Established, 1952-53
Since no such procedure existed, it had to be devised; the Fund Agreement is sufficiently flexible to permit such developments. In a major decision on the use of its resources, adopted on February 13, 1952, the Fund formally recognized that “discussions between the member and the Fund may cover its general position, not with a view to any immediate drawing, but in order to ensure that it would be able to draw if, within a period of say 6 to 12 months, the need presented itself.” As a result of this pronouncement, and in order to contribute to the solution of a special problem at the time, the Fund entered into a stand-by arrangement with Belgium in June 1952. In the light of this arrangement, a general policy decision was adopted on October 1, 1952, establishing stand-by arrangements as standard practice. This decision was substantially revised and replaced by a decision adopted on December 23, 1953, which, with certain amendments, is still in effect.
The General Framework
These policy decisions established the framework for stand-by arrangements—a framework of general rules intended to ensure the consistency of purchases under stand-by arrangements with the provisions and purposes of the Fund Agreement. The most important of these rules was that in considering a request for a stand-by arrangement, the Fund would apply the same procedure that is applied to requests for immediate drawings, including a review of the member’s position, policies, and prospects in the context of the Fund’s objectives and purposes, and would agree to the stand-by arrangements only if, and to the extent that, it would be willing to sell foreign exchange to the member immediately. It was also made clear that the right of a member under a stand-by arrangement to make purchases of exchange without further review by the Fund could be suspended if the request for the purchase was received after a general suspension of financial operations had been decided by the Fund, or if the member had become ineligible, under the Articles of Agreement, to use the Fund’s resources, or a decision had been taken to initiate proceedings for declaring the member ineligible. Further, the general rules provided that standby arrangements would normally be for a period not in excess of 6 months, although they could be for longer periods in certain circumstances and subject to appropriate understandings between the Fund and the member. The decision of December 1953 also fixed the charge payable for stand-by arrangements. It is ¼ per cent per annum of that portion of the amount of the arrangement which, if utilized, would increase the Fund’s holdings of the member’s currency above the member’s quota. If the member makes purchases under the arrangement and pays the charge for transactions, the corresponding proportion of the stand-by charge is refunded.
Within the framework established by the general policy decisions, individual stand-by arrangements have been adapted so as to deal as effectively as possible with the diverse problems of Fund members. Stand-by arrangements have been granted by the Fund in order to sustain confidence in currencies under pressure because of international emergencies, to provide additional resources to members during seasonal difficulties, to support programs intended to stabilize economies, to provide backing for currency or exchange reforms, and for certain other purposes.
The Machinery of Stand-By Arrangements
Stand-by arrangements normally take the form of two documents. The first contains standard clauses indicating the purpose of the arrangement, the period of its duration, the amount available under it, the terms of the undertaking by the member to repurchase its currency if it makes a drawing, the charges to be paid by it, and the circumstances in which the right of the member to make purchases under the arrangement may be suspended. The second document is a memorandum or letter signed by appropriate officials of the member country concerned and setting forth, at times in some detail, the financial, monetary, and exchange policies that the member’s government intends to pursue. The first document also frequently restricts the right of the member to make purchases under the stand-by arrangement by making it conditional on the continued implementation by the member of certain of the policies set forth in the second document.
In accordance with the requirements of the general policy decisions, the period of the stand-by arrangement is fixed by the Fund in the light of the member’s problem. Occasionally, where the problem is of a seasonal or other short-term character, the period has been the 6 months that was envisaged in 1963 as being the normal maximum, but in practice 12 months has become more usual. In no instance has the Fund granted an arrangement for an original period of more than 12 months, although occasionally the original period has been extended for a brief interval. Of course, renewals, as distinct from these brief extensions, are possible and are fairly common, but each request for a renewal is supported by the member with an amended or revised statement of its policies and is treated by the Fund as a new application.
The currencies that a member may purchase under a stand-by arrangement are not specified in it. They are left to the member’s determination, although it has become the practice in the recent past for the member to consult with the Managing Director of the Fund on its choice of currencies before making purchases. It goes without saying that a member does not have to make any purchases under a stand-by arrangement; it may exercise the right if it so wishes, but in practice the amount frequently remains unutilized or is utilized only in part. Either the need that was contemplated did not arise or the assurance of the availability of resources in case of need has helped the member to cope with its problems.
Unlike the currencies that may be purchased, the total amount available is always stated in the stand-by arrangement, expressed as a U.S. dollar equivalent. It is normally stipulated that this amount will be augmented, unless the member indicates otherwise, by the amounts of repurchases in respect of purchases under the stand-by arrangement, and of purchases made at the time the arrangement was granted. This clause permits members to “revolve” the amounts available to them under the arrangement, although to a limited extent only. Until about five years ago, it was normal practice to permit a member to add to the amount of the stand-by arrangement the equivalent of all amounts repurchased by it during the life of the stand-by arrangement, whether the repurchases related to purchases under it, to purchases effected at the time the arrangement was made, or to earlier purchases. The effect of this was to put at a member’s disposal a revolving amount of foreign exchange, since any repurchases by the member increased correspondingly the amounts it could purchase under the arrangement. In April 1959 the Fund decided to discontinue this type of revolving feature in favor of a more limited one which is now standard practice. The reason was that, by permitting members to add to stand-by arrangements the equivalent of repurchases in respect of earlier purchases, the pre-1959 formulation made it possible for members to make a more protracted use of the Fund’s resources than was consistent with the short-term character of Fund financial assistance. In accordance with established Fund policy, foreign exchange purchased from the Fund should not normally remain outstanding for more than a maximum period of three to five years.
The terms of the stand-by arrangement often provide for the amount to be made available in stated installments, which may be accumulated to the extent that they have not been used. An important purpose of this provision is to ensure that the resources provided for under the arrangement will in fact be available when the need for them arises in the course of the year. Every effort is thus made to adjust the installments to the requirements of the member’s plan for solving its problems.
Observance of Policies
The right of a member under a stand-by arrangement to make drawings without further review of its position by the Fund is often made subject to its continued observance of policies that are considered to be of fundamental importance for the success of its economic program. When this is so, it is usually stipulated that if the member fails to observe during the period of the stand-by arrangement any one of certain specified policies, it can make further purchases under the arrangement only after consultation and agreement with the Fund on the terms for such purchases. This stipulation is formulated in a way which permits the member to know at all times whether it can exercise its right to make purchases under the stand-by arrangement, without the necessity of a determination by the Fund. The observance or non-observance by the member of these policies is ascertained by reference to certain objective tests or criteria, a process which does not involve the exercise of a subjective judgment by the Fund. For instance, such a test or criterion might be the total amount of credit extended by the member’s central bank, the avoidance of multiple currency practices, or the maintenance of specified levels of reserve requirements for commercial banks.
This practice is intended to ensure that the resources provided under the stand-by arrangement are in fact used for the purposes for which they were made available. When granting the stand-by arrangement, the Fund agrees to forgo its right to review the member’s position when a request to purchase is made, and hence its right to reject the request, on the understanding that the member will make purchases under the stand-by arrangement only as long as it is observing the policies in consideration of which the arrangement was granted. This practice has been adopted mainly in stand-by arrangements granted in support of comprehensive stabilization programs where it is possible to put some of the elements in the program into quantitative or objective form. Where this is not feasible, an understanding is usually reached, although not as a legal condition, by means of a declaration by the member that, if there is any major change in its policies as stated to the Fund, the member will be prepared, at the invitation of the Managing Director of the Fund, to consult with the Fund before requesting further purchases.
Limitation of Members’ Stand-By Rights
As already indicated, the assurance given to a member under a stand-by arrangement covers only purchase requests received by the Fund before (a) a decision to suspend financial operations has been taken, or (b) the member requesting the purchase has become ineligible to use the Fund’s resources, or (c) the Fund has decided to consider the initiation of ineligibility proceedings against the member. The purpose of the first of these three limitations is obvious: since stand-by arrangements provide for the use of the Fund’s resources, they must be automatically suspended when the Fund decrees a general suspension of financial operations. Under the Articles of Agreement, the Fund may decree such a suspension “in the event of an emergency or the development of unforeseen circumstances threatening the operations of the Fund.” The second limitation is intended to ensure that the member may not continue to use the Fund’s resources when its eligibility to use these resources has ceased, either automatically by operation of the provisions of the Articles of Agreement, or as a result of a Fund decision declaring the member ineligible. It relates not to some general disturbance but to the special circumstances of the member itself which result in its ineligibility to use the Fund’s resources. The circumstances in which ineligibility is brought about automatically are specifically set out in the Fund Agreement and include, for instance, the adoption by a member of a new par value for its currency despite the objection of the Fund. Ineligibility may be declared by the Fund if the Fund establishes that a member is using its resources in a manner contrary to the purposes of the Fund. If a member becomes ineligible to use the Fund’s resources, its normal ability to make purchases from the Fund is in abeyance until the ineligibility is terminated, and the fact that the member has been granted a stand-by arrangement does not change this rule. The purpose of the third limitation is to protect the resources of the Fund against the possibility of substantial purchases by a member after the procedure to declare the member ineligible has been initiated.
Importance of Stand-By Arrangements
Stand-by arrangements are a major feature of the Fund’s operations. In the 12 years since the technique was developed, the total number of stand-by arrangements has exceeded 100, and they have been granted to 44 of the Fund’s 102 members, including many of the main industrial countries. The total amounts that could be purchased under these arrangements have exceeded the equivalent of $7.9 billion. The amounts of the individual arrangements have varied widely: the largest ever granted was for the equivalent of $1 billion, and the smallest for $1.5 million. At present, there are in operation 19 arrangements, including one with the United Kingdom and one with the United States. The purposes of these arrangements vary. Most of them are designed to support the introduction or continuation of stabilization programs by members. A few have been granted in order to provide support to members in their efforts to simplify or unify their exchange systems. Others are designed to provide support to the members’ reserve positions in the face of seasonal variations in exports, or an assured secondary line of reserves against short-term balance of payments contingencies. The arrangement with the United Kingdom is intended to reinforce that member’s reserves in the event of any temporary balance of payments difficulties and to contribute thereby to sustained confidence in the pound sterling. The arrangement with the United States is intended to enable that member to facilitate repurchases by other Fund members; this would be accomplished through U.S. purchases of other convertible currencies, which could then be sold to these other members for dollars to be used by them to make repayments to the Fund.
However, the true significance of stand-by arrangements cannot be comprehended unless it is borne in mind that frequently other institutions—international, governmental, and private—enter into financial arrangements of their own with members only after these members have entered into stand-by arrangements with the Fund. Frequently, recourse to these other rights is made contingent on the continued ability of the member to exercise its rights under the stand-by arrangement with the Fund. Sometimes the pace at which these other rights may be enjoyed, or the dates for repayment, are tied in some way to purchases from and repayments to the Fund. Thus the granting of a stand-by arrangement by the Fund acts as a kind of assurance, acceptable to the world financial community, that a country is meeting its difficulties responsibly and with a measure of success.