First Annual Meeting in Africa
The crucial issue of the reform of the world monetary system continued to dominate the activities of the International Monetary Fund during the months leading up to the 1973 Annual Meeting in Nairobi, Kenya. The meeting, the first to convene in Africa, is to be held at the Kenyatta Conference Centre from September 24 to 28.
The Committee of 20, as the Committee responsible for the consideration of the reform of the international monetary system is usually known, met at ministerial level at the end of July. The Deputies of the Committee of 20 met in Washington from July 11 to 13. The deliberations of both the Committee of 20 and its Deputies took place against the background of renewed activity and concern in the foreign exchange markets, following a revaluation of the deutsche mark at the end of June and a continued decline in the value of the U.S. dollar in the weeks that followed.
C-20 press conference
Following the C-20 Deputies meeting, Mr. C. Jeremy Morse, Chairman of the Deputies, told a press conference that the negotiations on the shape of a reformed international monetary system had now reached a crucial point. For this reason it was timely, he said, that there would be a meeting of the C-20 at the ministerial level at the end of July, so that the progress which had been made toward international monetary reform might be pressed as far as possible before the Annual Meeting.
He said that in their deliberations the Deputies had reached an understanding on some major points of principle. They had agreed that countries with surpluses in their balance of payments had as much obligation to make adjustments as countries in deficit. There was also a general consensus that the new system would probably use multi-currency intervention so as to have a more symmetrical form than the former dollar intervention system, and there was a desire to pursue studies toward establishing such a system. Mr. Morse said the Deputies envisaged that the new system would permit Central Banks to sell gold from their reserves on the open market, although there was less agreement whether they should also have the right to buy gold on the open market. There had been a further review of the possible link between special drawing rights and economic aid as a means of promoting development, he said.
The main differences among the Deputies, Mr. Morse reported, continued to center on the adjustment process and the shape of the future system of currency convertibility.
Looking to the future, Mr. Morse announced that the last meeting of the Deputies before the Annual Meeting would be in Paris from September 5 to 7. Even if all major issues were settled before Nairobi, he forecasts that it would be up to a year before all details of the new system were settled and a further year before amendments to the Fund’s Articles of Agreement were ratified.
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Prior to the meeting of the C-20 Deputies a special technical group reviewed the important questions of the possible link between special drawing rights (SDRs) and aid, including such topics as establishing new facilities that would especially benefit developing countries and ways of improving the access of developing countries to capital markets. This aspect of the reform was emphasized by the statement submitted to the Deputies at their previous meeting in May by the Chairman of the Deputies of the Group of 24, representing developing countries. It stated that “the developing countries consider that any acceptable outline of the reform of the international monetary system must include, as an indispensable element, specific measures to promote the transfer of real resources to the developing countries as an integral part of the reform.” The statement added: “They accordingly reaffirm their commitment to the principle of establishing a ‘link’ between the allocation of SDRs and additional development finance, it being understood that the total amount of SDR creation will be determined solely by the liquidity requirement of the world economy.” In addition, the interests of the developing countries would be best served by “an increase in their share of SDRs by means of direct country allocation by the Fund to be used for development purposes.” This and other aspects of the future development of the SDR in the monetary system were studied by the special technical group. (The value of one special drawing right is equal to US$1.20635 following the proposal of the United States in February 1973 to devalue the dollar in terms of gold and SDRs.)
During the May meeting of the C-20 Deputies there was an intensive review of ways in which consultation on the adjustment process might be made more effective and also of the role objective indicators should play. Similar consideration was given to the subject of convertibility and to means of reducing the role of reserve currencies in the international monetary system.
The urgency of the need to press forward with the reform of the international monetary system was expressed by Mr. Pierre-Paul Schweitzer in his final address as Fund Managing Director to the United Nations Economic and Social Council on July 5. “The central point I want to stress is the importance of the return to an internationally agreed system, and to the observance of international decisions with respect to such matters as exchange rates, the use of trade and exchange controls, and convertibility,” he told the Council. “Delay in restoring an agreed system could erode the legal and moral power of the international community, as it operates through the Fund, and thereby through the U.N. family of nations….
If the SDR is to become the main international asset of the future, it must be backed by a strong Fund, whose members share a common view of the basic features of the international monetary system.”
Code of conduct
Mr. Schweitzer continued: “It will be important that the new monetary system should meet the needs of all member countries, large and small, rich and poor. The code of conduct required of smaller and poorer countries should not be more onerous than that accepted by rich and powerful members. And we must remember that the interest of industrialized nations in an effective functioning of the international monetary system is matched by an equally strong interest among developing countries.” Turning to the problem of expanding the growth rate of the developing countries, he said: “The responsibility for tackling this problem falls on both the industrialized countries and on the developing nations themselves. The richer countries must put into effect their expressed intention to liberalize their trading arrangements and increase the flow of development capital. The developing world must recognize the importance of sound financial planning and strategic infrastructure investment…. In particular, I hope the occasion of the monetary reform will permit measures to increase the flow of real resources from developed to developing countries.”
Mr. Schweitzer flew to Paris in early June to attend the ministerial level session of the Council of the Organization for Economic Cooperation and Development (OECD). Following the meeting the ministers expressed in a joint communique their concern at the persistence and accentuation of inflationary pressures among the industrialized countries, and agreed on the need to prevent the emergence of excessive demand pressures and to take vigorous anti-inflationary measures.
Par value changes
During the second quarter of 1973 a change in par value was carried out, with the concurrence of the Fund, for the currency of Thailand—the baht. Also, the initial par value for the Qatar riyal was established by agreement between the Government of Qatar and the Fund. Qatar notified the Fund that it accepted the obligations of Article VIII of the Fund’s Articles of Agreement. Members accepting these obligations undertake to avoid imposing restrictions on payments for current international transactions, or engaging in multiple exchange practices or discriminatory currency arrangements. Qatar became the thirty-eighth member of the Fund to assume this status.
Drawings on the Fund’s General Account during the second quarter totalled SDR 241.9 million and consisted of a purchase of the equivalent of SDR 12 million by Nicaragua and compensatory financing purchases by the Khmer Republic, The Philippines, and Sri Lanka to meet temporary shortfalls in their export earnings largely attributable to circumstances beyond their control.
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The purchase by the Government of Nicaragua was in support of the Government’s reconstruction program following the disastrous earthquate which struck the capital city, Managua, last December. The replacement cost of the structures destroyed by the earthquate was estimated by the Fund to be over 3 billion cordobas, which is equivalent to some 40 per cent of the country’s gross national product in 1972. The demands of reconstruction will inevitably cause the country’s external debt to rise and strain the balance of payments, and the Government plans to use the purchased currencies to strengthen the country’s reserves and maintain confidence in its own currency.
Total gross purchases under the General Account since the beginning of Fund operations reached SDR 25,798.5 million by the end of June. Net drawings as of the same date were equivalent to SDR 3,651.1 million. Fund holdings of selected currencies as of the end of June are shown in Table 1.
Special drawing account
In transactions between participants during the second quarter of 1973, Egypt, Germany, and the Netherlands used a total of SDR 136.4 million. The recipients of SDRs in these transactions were Belgium (59.4 million), France (61.0 million), Denmark (13.6 million), and the United Kingdom (2.4 million).
During the quarter, the Fund’s General Account received SDR 20.3 million from 7 participants which used SDRs in repurchases in the General Account, and SDR 7.2 million from several participants in payment of charges relating to their use of the Fund’s resources. In addition, the General Account received SDR 10.2 million as interest on its SDR holdings for the year ended April 30, 1973, and SDR 0.7 million as reimbursement for the expenses of conducting the business of the Special Drawing Account.
The General Account transferred SDR 98.5 million to participants during the quarter. A total of SDR 77.9 million was acquired by 16 participants in order to promote reconstitution of their SDR holdings, and SDR 20.4 million was transferred to 26 participants which elected to receive SDRs in payment of remuneration on their net creditor positions in the General Account for the fiscal year ended April 30, 1973.
The General Account’s holdings of SDRs at the end of June 1973 were SDR 529.9 million.
As of June 30, 1973, Fund stand-by arrangements were in effect for 14 countries—7 in the Western Hemisphere, 5 in Asia, and 2 in Africa. Stand-by arrangements, which have been available since 1952, assure the participating member country that drawings may be made up to specified limits and within an agreed period of time so long as the member observes the conditions of the arrangement regarding specific policies it is required to pursue in the fields of exchange, monetary, and fiscal matters.
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During the second quarter of 1973, the number of stand-bys approved by the Fund increased considerably over the first quarter. Nine stand-by arrangements were approved in the second quarter, compared with three in the first. The total amount extended under the stand-bys was equivalent to SDR 182.50 million (see Table 2).
Two of the stand-by arrangements are with African countries. The arrangement with Zambia is to help that country sustain its balance of payments position in the face of the recent decline in world market prices for copper, a commodity which accounts for no less than 95 per cent of the country’s export earnings. In addition, the closing of the Rhodesian border at the beginning of the year had a severe adverse impact on Zambia’s balance of payments and budget, since about half of its foreign trade was formerly through Rhodesia. The stand-by will support the Government’s efforts to limit the decline in the country’s gross external reserves and the deterioration in the balance of payments situation as a result of these external factors.
Liberia’s stand-by was also arranged to enable the country to tackle adverse external economic developments: a decline in the world market price for rubber and a hesitant recovery in demand for iron ore. The indications are that there will be a recovery in economic activities later in the year, stemming largely from a marked improvement in external demand. The Liberian authorities have consequently adopted policies which are designed to stimulate and diversify the economy. The arrangement with the Fund will provide them with the assurance that they will be able to carry out these policies without interruption, even if external conditions prove less favorable than anticipated.
Buffer stock financing
In a further measure of importance to African economic development, as well as that of cocoa producing countries elsewhere in the world, the Fund announced at the end of April that its buffer stock financing facility would be available for use by Fund members to finance loans to enable the International Cocoa Council to acquire stocks of cocoa beans to be used in market stabilization operations. The Council is to manage the International Cocoa Agreement, which was negotiated under United Nations auspices to promote price stability in the cocoa trade through the operation of export quotas and a buffer stock scheme. The Agreement, which has been signed by 41 governments as well as the European Economic Community, came into force at the end of June and will expire in September 1976, unless it is either renewed or extended for a year to allow renewal negotiations to be completed.
Ian S. McDonald