Funding the Oil Facility for 1975
Terms and conditions for financial assistance by the Fund under its oil facility for 1975 to members experiencing difficulties in their balance of payments due to the increased cost of oil imports were announced by the Fund in April. Mr. H. Johannes Witteveen, the Fund’s Managing Director, held discussions in February and March with a number of oil exporting countries and countries in strong balance of payments positions in the Middle East, Europe, and Latin America on possible lending to the facility. A target figure for such lending of the equivalent of SDR 5 billion was set by the Interim Committee of the Board of Governors at its January meeting in Washington. As of March 31, 1975, purchases amounting to the equivalent of SDR 2.5 billion had been made by 38 member countries of the Fund under the oil facility for 1974.
In the light of the Interim Committee’s discussions and other developments, the terms and conditions of the oil facility for 1975 have a number of modifications compared with the one for 1974. Subject to the assessment by the Fund of the member country’s balance of payments needs, total access to the facility for 1975 is determined more by a formula related to the member’s quota in the Fund and less by one related to the calculated increase in the member’s oil import cost than it was under the facility for 1974. However, in no instance will the member’s access be less than one third of the increase in its oil import costs nor less than its maximum calculated access under the 1974 oil facility. A review of the oil facility for 1975 will be conducted by the Executive Board of the Fund in July and, until then, the initial access by a member may not exceed 30 per cent of its total access.
Access to the oil facility for 1975 will also be subject to stricter policy conditionality than in 1974. Each member country that wishes to make a drawing under the facility will describe its policies to achieve medium-term solutions to its balance of payments problems, and access to the facility will be subject to an assessment by the Fund of the adequacy of these policies. In addition, each drawing member will describe any measures to conserve oil or develop alternative sources of energy it has taken or proposes to take in the light of its economic situation. As in 1974, access to the facility will depend on an undertaking by the member to avoid the introduction or intensification of restrictions on external payments as well as on international transactions unless it has consulted the Fund in advance.
The period for which drawings under the oil facility may be outstanding will be seven years, the same as in 1974. Charges on a member’s outstanding drawings will be at an average rate of 7 3/4 per cent, compared with an average of 7 per cent in 1974. An interest rate of 7 1/4 per cent has been arranged for borrowings from those countries providing loans to the oil facility for 1975.
The cut-off date for requests for purchases under the oil facility for 1974 was February 27, 1975. An amount equivalent to SDR 3,038.745 million has been made available to the 1974 oil facility through borrowing agreements with nine lenders. As of March 31, 1975, 38 member countries had made purchases amounting to the equivalent of SDR 2.5 billion. Although the size of the oil facility was small compared with the estimated increase in the current account surpluses of the major oil exporting countries, it was important in relation to the increase in the current account oil deficits of the 31 non-oil exporting developing countries that made use of the oil facility. For these countries, the use of the 1974 oil facility was an important factor in avoiding an escalation of restrictions on trade and payments and the implementation of an unduly abrupt adjustment. For the aggregate of developing countries that have used the facility, purchases have totaled over 40 per cent of the calculated cost increase in their oil imports from 1973 to 1974. This percentage was still higher for developing countries in the Western Hemisphere (63 per cent) and in Africa (72 per cent).
On a regional basis, of the SDR 2.5 billion purchased under the oil facility for 1974 by March 31, 1975, the largest share (SDR 675 million) constituted a purchase by one industrial European country (Italy). Other developed countries drew the equivalent of SDR 794.6 million. Developing countries in Asia drew the equivalent of SDR 520.34 million, in Latin America the equivalent of SDR 234.067 million, and in Africa the equivalent of SDR 181.154 million, while three countries in the Middle East region drew the equivalent of SDR 79.06 million.
Meeting of Interim Committee
At the end of March the Fund announced that the next meeting of the Interim Committee of the Board of Governors on the International Monetary System would be held in Paris on June 10 and 11 at the Hotel Majestic, the international conference center of the French Government. The meeting, it was announced, would be preceded by meetings of the Group of 24, representing developing countries, and the Group of 10, representing industrialized countries. The agenda for the Interim Committee meeting would include a review of possible amendments to the Fund’s Articles of Agreement, the proposed increase in quotas in the Fund, and the operation of the oil facility for 1975.
Stand-by arrangements—how they function
The stand-by arrangements for Israel and Chile, which were approved by the Fund’s Executive Board on February 14 and March 19, respectively, bring the total of stand-by arrangements approved for member countries of the Fund since the instrument was first established in 1952 and until the end of March 1975 to 361, the equivalent of SDR 21,137 million. Peru with 16 stand-by arrangements; Colombia with 15; Haiti with 14; Chile with 13; and Bolivia, Honduras, and the Philippines with 12 each have been the most frequent recipients of stand-by arrangements from the Fund.
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The first stand-by arrangement amounting to $50 million was extended to Belgium in June 1952, prior to the approval of the first general policy decision on the new instrument on October 1, 1952. The stand-by arrangement rapidly emerged as the main instrument by which the Fund makes its resources available to members and has been employed to deal with a wide range of different problems. Stand-by arrangements have been approved in order to (1) sustain confidence in currencies under pressure because of a variety of international difficulties or emergencies, (2) provide additional resources during seasonal difficulties, (3) support economic stabilization programs, and (4) provide backing for exchange reform and other purposes.
Stand-by arrangements have often been used, not to deal with immediate problems but to avert problems by encouraging member countries to continue sound monetary and fiscal policies. For this reason there have been many stand-by arrangements under which members have made no purchases. Stand-by arrangements also serve as an endorsement of a member country’s economic program by demonstrating that the Fund’s resources are available to it.
When considering a request for a stand-by arrangement, the Fund applies the same policies it applies to requests for direct purchases, which include review of the member country’s position, policies, and prospects in relation to the objectives of the Fund. Stand-by arrangements are designed to correct medium-term balance of payments problems of a member country. The stand-by period was originally fixed at six months, but from the beginning of its operation, periods of one year were agreed, and since 1956 the one-year period has become normal. Repayment of the amounts purchased is required to be made not later than three to five years from the date of purchase.
For stand-by arrangements beyond the first credit tranche (which bring the Fund’s holdings of the member country’s currency to more than 125 per cent of quota), the resources committed by the Fund are phased through the stand-by period. The member country’s right to purchase depends on its observance of performance criteria, and provision is made for consultation concerning its position and performance. Gradually, as expereince with stand-by arrangements has grown, the Fund has been able to rely on fewer and less complex performance criteria.
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To March 31 only.
To March 31 only.
Certain objective tests or performance criteria are employed to determine the observance by the member country of the policies outlined in the stand-by arrangement. These criteria may include the total amount of credit extended by the member country’s central bank, the avoidance of restrictions on external payments and, in some instances, external debt limits and fiscal ceilings. In various exchange system situations, including a currency float, a balance of payments test has been used as an objective criterion in stand-by arrangements. This test takes two forms: a limitation on total net sales of exchange by the monetary authorities in the foreign exchange market or the maintenance of a minimum level of net foreign reserves.
The Fund opens negotiations for a stand-by arrangement with a member country on receipt of a request for such an arrangement. These negotiations are normally conducted between the member country’s authorities and a staff mission sent from Fund headquarters. They are designed to review the nature and difficulty of the problem for which the arrangement is intended to provide assistance and to formulate the policies which the member will pursue in dealing with this problem. When the discussions are completed, the member country’s representatives sign a letter of intent, which is transmitted to the Fund’s Managing Director. The proposed stand-by arrangement and the letter of intent are annexed to a memorandum prepared by the staff and submitted to the Executive Board of the Fund for its consideration.
The number of stand-by arrangements approved by the Fund was comparatively limited during the early years. Only 2 were approved each year during the fiscal years 1952/53 to 1955/56. From 1956/57 the number began to increase, rising to 24 in 1961/62, 1964/65, and 1965/66, 25 in 1966/67, and 32 in 1967/68. Thirteen stand-by arrangements were approved in 1971/72 and 1972/73, 15 in 1973/74, and 14 in the period May 1, 1974 to March 31, 1975. (See Table 2.) A reason for the decline in the number in 1971/72 and 1972/73 was the considerable increase in those years in the world market prices of many of the primary commodities that developing countries export.
Some of the largest stand-by arrangements approved by the Fund have been those for the United Kingdom, which received stand-by arrangements equivalent to SDR 738.5 million in 1956, SDR 1,000 million in 1962, and SDR 1,400 million in 1967; Italy, which received a stand-by arrangement equivalent to SDR 1,000 million in April 1974; France, with a stand-by arrangement equivalent to SDR 985 million in 1969; Japan, with one equivalent to SDR 305 million in 1962; Brazil, with one equivalent to SDR 125 million in 1965; and Argentina, with stand-by arrangements equivalent to SDR 100 million in 1960 and SDR 125 million in 1967.
The basic source of information on the history and development of the stand-by arrangement is The Stand-by Arrangements of the International Monetary Fund by Joseph Gold, the Fund’s General Counsel. Mr. Gold’s book (295 pp.) is available for $4.00, or the equivalent in most other currencies, from The Secretary, International Monetary Fund, Washington D.C. 20431.
In the first quarter of 1975 member countries purchased the equivalent of SDR 588.85 million under the regular facilities of the General Account, with repurchases amounting to the equivalent of SDR 96.06 million. Total gross purchases under the General Account since the beginning of Fund operations reached SDR 31,663.2 million by the end of March. Fund holdings of selected currencies as of March 31, 1975 are shown in Table 1.
Special Drawing Account
In the first quarter of 1975, one participant in the Special Drawing Account used a total of SDR 3.0 million to obtain currencies from one other participant designated by the Fund.
During the quarter the Fund’s General Account received a total of SDR 6.5 million from five participants that used SDRs in repurchases in the General Account and SDR 46.3 million from 50 participants that paid charges relating to their use of the Fund’s resources. The Fund transferred a total of SDR 19.5 million to 14 participants in transactions to promote the reconstitution of their SDR holdings and SDR 0.1 million to one other participant in payment of interest for the borrowings made to finance transactions under the oil facility.
Holdings of SDRs in the General Account at March 31, 1975 were SDR 490.3 million
Ian S. McDonald