Journal Issue
Finance & Development, March 1979

Fund activity: Review of 1978; de Larosière on the adjustment process; special drawing rights allocation and changes in interest rate and reconstitution requirements; gold sales exceed $2 billion; new members of the Fund; Fund transactions

International Monetary Fund. External Relations Dept.
Published Date:
March 1979
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1978 was year of major chanqes in Fund

Important changes took place in the structure and financial activities of the Fund in 1978. Foremost among these were the Second Amendment to the Fund’s Articles of Agreement and its entry into effect on April 1, the completion of the Seventh General Review of Quotas, the decision to allocate 4 billion special drawing rights (SDRs) annually to Fund participants in 1979–81, and the completion of the first two years of a projected four-year period of Fund gold sales. In addition, the Fund’s Executive Board made further changes in the basket of currencies that determines the value of the SDR and established a method for its adjustment; moreover virtually all of the quota increases that were proposed in February 1976 under the Sixth General Review of Quotas came into effect in 1978. There was, moreover, a net contraction of Fund credit in 1978, compared with 1977.

This net contraction of Fund credit reflected an unprecedented volume of repurchases, which exceeded members’ purchases from the Fund by the equivalent of SDR 1,101 million. In 1977 and 1976 purchases had exceeded repurchases by SDR 488 million and SDR 5,738 million, respectively. Total purchases during 1978 amounted to SDR 3,744 million, including SDR 2,375 million by industrial countries. Twenty-eight developing countries purchased SDR 1,029 million from the Fund in 1978, compared with SDR 725 million in 1977 and SDR 2,749 million in 1976. Of the 1978 total, SDR 178 million was purchased by developing countries of the Western Hemisphere, SDR 395 million by Asian developing countries, and SDR 309 million by African developing countries.

A total of 14 stand-by arrangements were in effect on December 31, 1978 for a total amount of SDR 4,441.98 million, compared with SDR 4,677.45 million at the end of 1977 and SDR 610.94 million at the end of 1976. The amount purchased under these arrangements by December 31, 1978 was equivalent to SDR 2,490.63 million, and the undrawn balance was SDR 2,561.36 million.

When the Second Amendment to the Fund’s Articles of Agreement came into effect on April 1, 1978, it generated important changes in the Fund’s activities, including surveillance over members’ exchange arrangements, changes in the role of gold and wider uses of the SDR, as well as important innovations in the Fund’s operations and transactions. In addition, the Fund’s resources were enhanced in 1978, when its Board of Governors adopted two major resolutions, one of which enables members to raise their quotas in the Fund from the present equivalent of SDR 39 billion to SDR 58.6 billion, as a result of the completion of the Seventh General Review of Quotas; the other provides for the allocation of SDR 4 billion annually to Fund member countries that participate in the SDR Department in the three years 1979–81.

The first two years of a projected four-year period of gold sales ended in 1978, and the Fund also completed the second of four annual distributions of gold to members. The Trust Fund made its first payments to members from the profits from its gold auctions, following the decision of the Executive Board that 104 developing countries were eligible to receive such profits.

In 1978 the Fund’s Executive Board made certain changes in the basket of currencies that determines the value of the SDR and established a method for its further adjustment at five-year intervals. The changes involved including two new currencies—the Iranian rial and the Saudi Arabian riyal—while deleting the Danish krone and the South African rand; they also involved updating the number of units of each currency in the basket on the basis of average exports of goods and services over 1972–76. The Executive Board also decided that the interest rate on the SDR would be increased from 60 per cent to 80 per cent of a combined market rate that is the weighted average of short-term interest rates in France, the Federal Republic of Germany, Japan, the United Kingdom, and the United States. The rate of remuneration that the Fund pays on the reserve positions of its creditor members, which had been the same as the interest rate on the SDR, would be 90 per cent of the SDR interest rate, effective January 1, 1979.

Aldo W. Zanzi

New members

In 1978 six new members joined the Fund. The new members were Cape Verde, Dominica, Djibouti, Maldives, the Solomon Islands, and Suriname.

Fund transactions, 1977–78(In millions of SDRs)
Calendar yearended December 31
Total purchases3,4253,744
Reserve tranche802,536
Credit tranche2,895421
Buffer stock36
Compensatory financing241578
Extended facility209174
Oil facility
Total repurchases2,9374,845
Gold sales628469
In connection with auctions211207
Replenishments up to May 31, 1978(211)(92)
Competitive bids(—)(115)
Noncompetitive bids49
In distributions417213
Outstanding borrowings
In connection with oil facility6,4405,018
Under the General Arrangements to
From Swiss National Bank15479
Source: IMF Treasurer’s Department.
Source: IMF Treasurer’s Department.

Adjustment process is working though dangers remain – de Larosière

Despite the recent disturbances in the exchange markets and the underlying imbalance in external current accounts of the major industrial countries, the adjustment process is clearly working, and this should in time lead to more stable conditions in the world economy, said Mr. Jacques de Larosière in a speech delivered at the Overseas Bankers’ Club in London on February 5. The Managing Director of the Fund also outlined the major steps that still need to be taken to ensure that the progress made so far is not frustrated.

Mr. de Larosière pointed to the significant adjustment of exchange rates among major industrial countries during 1978 and to the U.S. policy adjustments of last November in coordination with actions taken elsewhere as evidence of the working of the adjustment process.

This coming year, he said, “should also see a further acceleration of domestic demand in Europe coupled with a slowing down in the United States.” This would lead to a reasonable expectation of a reduction in the current deficit of the United States and in the surpluses of European countries and Japan.

Despite the encouraging progress toward domestic expansion and reduced current account imbalances in the world economy, Mr. de Larosière identified a number of problems that still remain to be tackled. He viewed the persistence of inflation as the major obstacle to more satisfactory performance in the world economy. Prevailing rates in most countries were still too high to be considered acceptable, he said. He listed other dangers as slow growth of total output and the concomitant underutilization of economic resources leading to high unemployment in most of the industrial countries. This situation, he felt, had led to the spread of protectionist trade practices, which pose “a very difficult and potentially dangerous problem.”

Mr. de Larosière called for an improvement in the economic performance of the industrial countries and a coordinated approach to noninflationary growth. “There still seems to be room for countries with low inflation rates and a strong balance of payments to give higher priority to faster growth of domestic demand, without incurring the danger of overheating their economies.”

It is also necessary for countries with high inflation rates and weaker balances of payments to intensify their efforts to control inflation if sustained economic expansion is to be restored, said Larosière.

For the complete text of the Managing Director’s speech see IMF Survey February 5, 1979.

Over 4 billion SDRs allocated to 137 countries

The Fund allocated 4,032.7 million special drawing rights (SDRs) on January 1, 1979 to the 137 members that were participants in the Fund’s SDR Department on December 31, 1978. The last allocation of SDRs was made in 1972. The latest allocation brings the total of SDRs in existence to more than SDR 13,347.5 million, equivalent to $17 billion.

In the latter part of 1978, several new countries joined the Fund and became participants in the SDR Department and a number of existing Fund members also decided to become participants, including Lebanon, Libya, Saudi Arabia, Singapore, and the United Arab Emirates. Thus, the allocation was made to 137 of the 138 member countries of the Fund.

The allocations were made in accordance with a Board of Governors’ resolution which became effective on December 11, 1978. The resolution approved a proposal of the Managing Director, in which the Executive Board concurred, to allocate about SDR 4 billion in each of the three years 1979,1980, and 1981. This allocation will be followed by annual allocations on January 1, 1980 and January 1, 1981.

Allocations were made on the basis of existing Fund quotas of those participants that were eligible to receive allocations on the effective date of the resolution at the rate of 10.4 per cent of each participant’s quota. (For the actual SDR amounts allocated to participants, see IMF Survey January 8, 1979, page 5.)

In accordance with conclusions reached by the Interim Committee at its September 1978 meeting, the Executive Board has taken several decisions which became effective January 1, 1979 with regard to other aspects of the SDR and the rate of remuneration. The interest rate on the SDR has been increased from 60 per cent to 80 per cent, on the basis of a combined market rate that is the weighted average of short-term interest rates in the United States, the Federal Republic of Germany, the United Kingdom, France, and Japan. The rate of remuneration that the Fund pays on reserve positions of its creditor members, which was the same as the interest rate on the SDR, is now 90 per cent of the SDR interest rate. The Executive Board also decided that the requirement for reconstitution of SDR holdings, that is, the obligation for members to maintain a minimum average balance of SDRs over successive five-year periods, should be reduced from 30 per cent to 15 per cent of average net cumulative allocations.

Gold sales profits exceed $2 billion now

In May 1978 the Fund completed the second year of its four-year gold sales program, under which 50 million fine ounces of gold, or one third of the Fund’s holdings at the beginning of the period, are to be sold. The total gold sales profits accrued from all auctions held before December 31, 1978 were about $2.04 billion.

Profits from the gold auctions were paid to members for the first time in 1978 by the Trust Fund—of which the IMF is trustee—following the decision of the Fund’s Executive Board that 104 developing countries were eligible to receive such profits. Total disbursements in 1978 by the Trust Fund, including SDR 688 million in loans to 43 members, amount to SDR 1.1 billion.

In November 1978 the Executive Directors of the Fund reviewed the amount of gold to be sold monthly and decided to continue with monthly sales of 470,000 fine ounces through May 1979, when another review of the gold sales program will take place. About 15,840,800 fine ounces of gold were awarded to competitive bidders from the inception of the gold auctions in June 1976 through December 31,1978. The Fund also awarded 1,384 million fine ounces of gold to noncompetitive bidders between June 1978 and the end of 1978. Among the countries submitting noncompetitive bids were Colombia, Cyprus, India, Kenya, Korea, Malaysia, Mauritius, Mexico, Nepal, the Philippines, and Tanzania.

Ten of the monthly gold auctions held in 1978 used the bid price method, under which all successful competitive bidders are awarded gold at the actual price they bid; the other two auctions in 1978 used the common price method, in which all successful bidders pay the same price. Average award prices at the 1978 Fund auctions ranged from a low of $170.40 per fine ounce to a high of $224.02 per fine ounce.

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