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The Financial Structure of the Fund: Part II - How the Fund’s Resources Revolve

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1965
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Rudolf Kroc

WHEN A MEMBER has drawn upon the Fund’s resources it will, whenever the conditions specified by the Articles are present, incur a repurchase obligation under the Articles of Agreement. Broadly speaking, repurchase obligations require a member to repurchase specified amounts of its currency from the Fund, in exchange for gold and convertible currency of other members. These obligations are designed to ensure the revolving character of the Fund’s resources.

The revolving character of the Fund’s resources is also maintained when a drawing by any member of another member’s currency is offset by the drawing of its currency from the Fund by another member: for example, member A, whose currency is the peso, may draw the currency of member B, while A’s own pesos are drawn by member C. For most currencies this possibility is limited in view of the long-established commercial practice of making nearly all international payments in a very small number of currencies. At best, such offsets will restore a few members’ positions in the Fund, but for the great majority of countries the repurchase provisions will be the more important.

The repurchase provisions aim at protecting the liquidity of the Fund by restoring, in due course, its holdings of each member’s currency as close as possible to 75 per cent of each member’s quota, the level prescribed in the Fund Agreement. The fundamental idea on which the repurchase provisions in the Fund Agreement are based is that an increase in a member’s monetary reserves indicates an improvement in its balance of payments position.

When a member’s reserves have improved—provided that its reserves are not less than its quota—the repurchase provisions of the Fund Agreement provide, in substance, that it must reacquire from the Fund its own currency and transfer to the Fund gold and convertible currencies in exchange. Specifically, when such a member’s monetary reserves increase between April 30, the end of one financial year of the Fund, and the next April 30, repurchase becomes mandatory until the Fund’s holdings of the member’s currency are reduced to 75 per cent of the member’s quota. Repurchase is not carried beyond that point. In the Fund Agreement a special significance is attached to the level of 75 per cent of quota. It constitutes what may be called the neutral or ideal position, where the member is neither debtor nor creditor in the Fund. The Fund Agreement prohibits a member from reducing the Fund’s holdings of its currency through repurchase to less than 75 per cent of that member’s quota and it also prohibits the use of any currency in making a repurchase which would increase the Fund’s holdings of that currency beyond 75 per cent of the member’s quota.

The repurchase provisions are expressed in a formula which ensures that no member will finance more than one half of any balance of payments deficit by drawing on the Fund, or increase its monetary reserves by adding drawings from the Fund to its foreign exchange holdings. This is intended to ensure that the Fund’s resources are maintained as a second line of reserves for all members.

This formula requires that one half of any increase in the Fund’s holdings of a member’s currency during the Fund’s financial year, at the end of which the computation of the repurchase obligation is made, shall be the starting point for computing this obligation. The member can offset against this only one half of any decrease in its monetary reserves. Thus, in considering whether it should avail itself of the Fund’s resources, the member should consider whether by the end of the financial year it will have made net use of its own monetary reserves. In other words, the member must consider whether at the end of the year its monetary reserves are likely to have decreased since the beginning of the Fund’s financial year to the same extent as the member will have drawn on the Fund. If not, the member will have to use its monetary reserves to make a repurchase equal to one half of the increase during the year in the Fund’s holdings of its currency plus one half of the increase, or minus one half of the decrease, during the year, in the member’s monetary reserves. Assuming that a member whose quota is 100, and whose monetary reserves at the beginning of the Fund’s financial year are 150, has a balance of payments deficit of 20 in the course of that year, it should finance this deficit by using at least 10 of its own reserves and confine its purchase from the Fund to 10. Should it cover the deficit by drawing 16 from the Fund and use 4 of its independent reserves, the calculation made at the end of the year would show an increase in the Fund’s holdings of 16 and a decrease in monetary reserves of 4. The formula, 8—2 = 6, would impose a repurchase obligation of that amount on the member.

Member Countries’ Reserves

The Fund computes each member’s monetary reserves every year, basing the calculations on data supplied by the member. For the purposes of the Fund Agreement monetary reserves are defined in the Articles. This definition establishes a concept which is narrower than that generally used in economic analysis and central banking practice, and the Executive Board has had to take a number of decisions in order to clarify it. Assets are limited to the central holdings of gold and convertible currencies of members; and liabilities to those short-term obligations represented by the holdings of the currency of the member whose reserves are being computed by specified institutions of other members. The term “holding” has been interpreted to mean ownership. Under this concept, pledged gold will appear among the assets of the pledger; and if, at the time of the Fund’s calculation, the member still retains the foreign exchange proceeds of the short-term loan for which gold was pledged or a part thereof, these will also appear among the assets.

The term “convertible” is defined in a special way for Fund purposes. It is applied only to the currencies of “Article VIII countries,” that is to say, countries which do not avail themselves of those provisions of the Fund Agreement which permit the maintenance during the postwar transitional period of restrictions on payments and transfers for current international transactions.1 These are the provisions of Article XIV; some member countries have never been “Article XIV countries”; others have abandoned that status and accepted the obligations of Article VIII. At some time after a member had notified the Fund that it was prepared to accept the obligations of Article VIII it might find itself in economic difficulties which compelled it to request Fund approval for the imposition of certain restrictions. But once a member has ceased to rely on Article XIV it cannot revert to this Article; for purposes of computing monetary re-reserves, its currency would still be considered convertible.

The definition of monetary reserves includes only the convertible currencies of Fund member countries, unless the Fund specifies a non-member currency for inclusion, which so far it has not done. Should a member find it convenient to hold foreign reserves in Swiss francs, for instance, these holdings would not be included in the Fund’s computations of that member’s assets, as Switzerland is not a member of the Fund.

The concept of monetary reserves as defined in the Articles of Agreement emphasizes their liquidity and provides for the inclusion of gold and short-term assets only. Government obligations with a maturity at issue exceeding 12 months are excluded. If a member invests its convertible currency holdings, or some part thereof, in such obligations or in other issues, for instance World Bank bonds, these would not appear among the assets in the Fund’s calculation.

Liabilities deductible from the foregoing assets are confined by the Fund Agreement to “currency liabilities.” These are liabilities represented by the holdings of the currency of the member whose reserves are being computed by specified institutions of other members.

The repurchase provisions of the Fund Agreement cannot be waived; once a repurchase obligation has been established as to amount and types of reserves payable, it must be discharged. However, the obligation cannot be established without the member’s agreement, or failing that, by a decision by the Executive Board, so that the member’s rights are safeguarded. On the other hand, the Executive Board has the power to defer a repurchase, and this has been done when a member country has made out a case for it. But deferment has never been permitted beyond five years from the date of the purchase to which the repurchase referred.

In addition to the repurchase provisions of the Articles, there are other provisions, as well as Fund policies and decisions, to ensure the revolving character of the Fund’s resources. These play a significant role in the Fund’s operations, but are not discussed in this article.

Amounts Involved

Repurchases of all types have amounted to the equivalent of $5.6 billion since the inception of the Fund. The bulk was made in U.S. dollars ($3.6 billion) and in gold ($0.8 billion), the remainder being distributed among ten other convertible currencies. An increase in the Fund’s holdings of U.S. dollars to 75 per cent of the U.S. quota in 1963 made it impossible for the Fund to accept further U.S. dollars in repurchase, pursuant to the repurchase provisions of the Articles of Agreement or in repurchases not pursuant to these provisions. Repurchases in the latter category thus have to be effected in other convertible currencies which are held by the Fund in amounts below 75 per cent of the quota of the members whose currency is considered. However, many members maintain their exchange reserves in U.S. dollars and the necessity to acquire these other currencies to make payment to the Fund in repurchase of their currency would have meant a hardship for these members. In many instances they do not maintain accounts abroad in currencies other than U.S. dollars, and often the currencies acceptable to the Fund were at a premium against the dollar at the time of payment. This difficulty led to recent drawings by the United States: the United States has drawn acceptable currencies from the Fund and made them available for dollars at par to members having repurchases to make, and these members were then able to use these acceptable currencies to repurchase their own from the Fund.

The Fund’s Liquidity

The Fund at present holds gold and currencies to a total value of some $15 billion. Inconvertible currencies as defined by the Fund amount to about 36 per cent of the currency holdings. Inconvertible currencies have not been in demand, although some of them have at times been quite “hard” even without the formal acceptance by the member of the convertibility obligations of the Fund Agreement. In addition to the economic reasons resulting in a weak demand for inconvertible currencies, there is the further impediment to their use that the Fund requires repurchases with gold and convertible currencies in respect of any drawing.

Of the Fund’s convertible currency holdings on March 31, 1965, somewhat less than 45 per cent were in U.S. dollars and over 30 per cent in sterling. The Fund’s gold assets may be used for the replenishment of its holdings of currencies. Since the Fund would be unlikely to sell all its gold, its holdings of currencies of members in a strong balance of payments position—in other words, of currencies that other members might wish to purchase from the Fund—may seem rather limited. However, under the provisions of the Fund Agreement the Fund may also replenish its holdings of a member’s currency by borrowing either from the member issuing the currency or from some other source.

When attempting to assess the contribution the Fund might make toward meeting balance of payments deficits that might be incurred by members, it is obviously necessary to estimate these deficits. This is naturally a very difficult task, and it is complicated further by the need to forecast the effect of measures being taken by members to correct deficits, to forecast other members’ simultaneous surpluses, and to make assumptions of what other means of finance would be available.

The Fund’s total sales of currency over a period of almost 18 years have been $9 billion. The currency most used was the U.S. dollar ($4.6 billion), followed by deutsche mark ($1.5 billion), French francs ($836 million), and pounds sterling ($622 million). The balance was made up of ten other currencies. It is perhaps best not to take into account the initial years before the Fund had worked out its present policies. However, if only the years since 1956 are taken into consideration, the Fund’s average sales each year amount to some $850 million, or little more than 5 per cent of its present assets. If purchases by the United Kingdom are excluded, the average annual figure is reduced to $500 million, or about 3 per cent of present assets. On the other hand, stand-by arrangements have been entered into with members for a total amounting to somewhat over $9.5 billion, of which about $3.5 billion has been drawn. One member, the United Kingdom, accounts for more than one third of the total purchases and an even higher proportion of the stand-by arrangements. The Fund’s commitments to make currencies available under stand-by arrangements were continuously in excess of $1 billion—most of the time over $1.5 billion and at times reaching $2 billion—from late in 1961 until December 1964, when they fell below $1 billion following the drawing by the United Kingdom.

With the acceptance of formal convertibility by the major European countries, the possibility of heavy outflows from these countries had also to be taken into consideration. For the purpose of supplementing its resources, the Fund entered into the General Arrangements to Borrow (GAB), under which the parties, eight industrial member countries and the central banks of two others, undertook to lend to the Fund their currencies up to specified amounts totaling $6 billion if needed to forestall or cope with an impairment of the international monetary system. The loans would have a gold guarantee and would earn interest at the rate of 1½ per cent per annum. If a lender later found itself in balance of payments difficulties it could demand repayment in foreign exchange or gold. Switzerland, not a Fund member, has agreed to participate up to a maximum of $200 million under the terms of bilateral agreements with each participant. Up to the present, the GAB have been used once, in connection with the purchase of currencies equivalent to $1 billion by the United Kingdom. A total of $405 million has been made available to the Fund by eight countries.

The Fund’s Balance Sheet

The Fund’s balance sheet, like many others, reveals comparatively little, and does not reflect the aforementioned aspects of liquidity. The amounts made available by the Fund under the stand-by arrangements and those available to the Fund under the GAB are not incorporated in the balance sheet. They are appended to the balance sheet in a separate statement. Nor are convertible and inconvertible currencies divided, either in the balance sheet or in the appended statement covering currencies and securities held by the Fund.

With the Fund’s financial statement, which is published quarterly, a summary of transactions sets forth the purchases, repurchases, movements of gold, and utilization of the GAB during the period. Outstanding drawings are not recorded specifically in the Fund’s accounting records, but statistical information is provided on a monthly basis in the Exchange Transactions tables in the Fund’s publication International Financial Statistics, under the heading Net Drawings.

Some member countries show their Fund position in one way, and others in different ways, as they are entitled to do. The precise counterpart of the Fund’s accounting may be found in the balance sheet of a central bank where the member’s quota is included among the assets and the Fund’s accounts maintained in the member’s currency appear among the liabilities.

Balance Sheet

as at December 31, 1964

Values expressed in U.S. dollars on the basis of established parities (See Note 1)

Assets
Gold Account
Gold with depositories$ 2,179,348,202
(62,267,091.487 fine ounces at $35 per ounce)
Investments (See Note 2)
$822,651,000 U.S. Government securities maturing within 12 months, at cost$ 799,989,004
Funds awaiting investment2,507799,991,511$ 2,979,339,713
Currencies and Securities
With depositories
Currencies$2,732,361,794
Securities9,863,282,468$12,595,644,262
(Nonnegotiable, noninterest-bearing demand obligations payable at face value by members in their currencies)
Add: Currency adjustment receivable2,357,84312,598,002,105
(In accordance with Article IV, Section 8)
Subscription to Capital—Receivable
Balance not due926,833,224
(members whose par values have not yet been established)
Withdrawing Member’s Currency9,999,861
(redeemable by Cuba in gold, or convertible currencies acceptable to the Fund, in five equal annual installments commencing July 1, 1964)
Other Assets (See Note 3)16,454,955
Total Assets$16,530,629,858
Notes:

With the exception of the following currencies which, for bookkeeping purposes, are computed provisionally at the following rates per U.S. dollar:

Argentine peso83.0000Colombian peso9.00000Paraguayan guaraní122.000
Bolivian peso11.8750Indonesian rupiah315.000Peruvian sol26.8150
Brazilian cruzeiro470.000Korean won255.000Vietnamese piastre35.0000
Chilean escudo2.70000Mali franc246.853Yugoslav dinar750.000

Made with the proceeds of the sale of 22,856,900.312 fine ounces of gold. Upon termination of the investment, the same quantity of gold can be reacquired.

The assets and liabilities of the Staff Retirement Fund are not included, but are reflected in a separate Balance Sheet for that fund.

A stand-by charge has, under certain circumstances, to be credited against the service charge for a drawing under the stand-by arrangement: the maximum amount on December 31, 1964 was $650,243. A portion of the stand-by charge is refundable to a member if the arrangement is canceled: the maximum amount on December 31, 1964 was $191,339.

Capital, Reserves, and Liabilities
Capital
Authorized subscriptions of members$15,849,500,000
Reserves
Special reserve$137,795,895
General reserve136,633,575274,429,470
Indebtedness to Participants Under General Arrangements to Borrow405,000,000
Provision for Potential Refunds of Stand-by Charges (See Note 4)650,243
Other Liabilities (See Note 3)1,050,145
Total Capital, Reserves, and Liabilities$16,530,629,858
Notes:

With the exception of the following currencies which, for bookkeeping purposes, are computed provisionally at the following rates per U.S. dollar:

Argentine peso83.0000Colombian peso9.00000Paraguayan guaraní122.000
Bolivian peso11.8750Indonesian rupiah315.000Peruvian sol26.8150
Brazilian cruzeiro470.000Korean won255.000Vietnamese piastre35.0000
Chilean escudo2.70000Mali franc246.853Yugoslav dinar750.000

Made with the proceeds of the sale of 22,856,900.312 fine ounces of gold. Upon termination of the investment, the same quantity of gold can be reacquired.

The assets and liabilities of the Staff Retirement Fund are not included, but are reflected in a separate Balance Sheet for that fund.

A stand-by charge has, under certain circumstances, to be credited against the service charge for a drawing under the stand-by arrangement: the maximum amount on December 31, 1964 was $650,243. A portion of the stand-by charge is refundable to a member if the arrangement is canceled: the maximum amount on December 31, 1964 was $191,339.

Notes:

With the exception of the following currencies which, for bookkeeping purposes, are computed provisionally at the following rates per U.S. dollar:

Argentine peso83.0000Colombian peso9.00000Paraguayan guaraní122.000
Bolivian peso11.8750Indonesian rupiah315.000Peruvian sol26.8150
Brazilian cruzeiro470.000Korean won255.000Vietnamese piastre35.0000
Chilean escudo2.70000Mali franc246.853Yugoslav dinar750.000

Made with the proceeds of the sale of 22,856,900.312 fine ounces of gold. Upon termination of the investment, the same quantity of gold can be reacquired.

The assets and liabilities of the Staff Retirement Fund are not included, but are reflected in a separate Balance Sheet for that fund.

A stand-by charge has, under certain circumstances, to be credited against the service charge for a drawing under the stand-by arrangement: the maximum amount on December 31, 1964 was $650,243. A portion of the stand-by charge is refundable to a member if the arrangement is canceled: the maximum amount on December 31, 1964 was $191,339.

Consolidation of Statements Accompanying Balance Sheet1(In millions of units)
Payments on SubscriptionsCurrencies and Securities with Depositories
MemberQuotaGoldCurrencyTotal (In member’s currency)Exchange rate 2US dollar equivalentPercentage of quota
(US dollar equivalent)
Afghanistan22.55.616.91,265.545.000028.1125.0
Algeria6015.0
Argentina28070.0210.033,199.883.0000*400.0142.9
Australia40058.4341.6133.9224.000†300.075.0
Austria7511.263.868.026.00002.63.5
Belgium337.584.4253.18,328.650.0000166.549.4
Bolivia22.55.616.9264.411.8750*22.299.0
Brazil28070.0210.0164,008.0470.000*348.9124.6
Burma304.325.7107.121.0000†22.575.0
Burundi11.250.1
Uganda252.3
United Arab Republic12024.595.579.6287.156†228.7190.6
United Kingdom1,950398.81,551.2880.7280.000†2,465.9126.5
United States4,1251,031.23,093.83,355.53,355.581.3
Upper Volta7.50.8
Uruguay307.522.5277.57.400037.5125.0
Venezuela15037.5112.5376.83.3500112.575.0
Viet-Nam22.55.67.5262.535.0000*7.5
Yugoslavia12022.997.1129,158.2750.000*172.2143.5

In this table, the first ten and the last nine member countries, in alphabetical order, are given as a sample.

Parity rates, except for those marked *, which are provisional rates for bookkeeping purposes. Rates marked † represent U.S. cents per currency unit; all other rates represent currency units per U.S. dollar.

In this table, the first ten and the last nine member countries, in alphabetical order, are given as a sample.

Parity rates, except for those marked *, which are provisional rates for bookkeeping purposes. Rates marked † represent U.S. cents per currency unit; all other rates represent currency units per U.S. dollar.

See “Consultations with the Fund” above, p. 90.

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