David S. Cutler
The liquidity of the International Monetary Fund is not a simple concept. While the liquidity of a commercial bank can be readily assessed by relationships such as liquid assets to total liabilities, it is not easy to define or quantify these elements in the case of the Fund. This is because the Fund is a financial institution suigeneris, and its liabilities and assets are unlike those of more conventional financial institutions. The relationship between them reflects the rather complex nature of the Fund’s role, through its General Resources Account, in providing balance of payments (BOP) financing to its members, and—as an important byproduct of this role—in issuing international reserve assets that can be encashed by their holders in response to BOP needs.
The extent of the Fund’s financial operations is, of course, related to its overall size—that is, the total of the quotas of its 138 members. At present, this is about SDR 39 billion—some US$50 billion—and it has recently been agreed that quotas will be increased to close to SDR 59 billion. Members’ quotas determine the resources that they can be called on to make available to the Fund, and also serve as a basis for their access to BOP financing from the Fund. Nevertheless, with any given total of quotas, actual demands on the Fund’s resources are determined mainly by the size and distribution of BOP deficits among Fund members and the extent to which they finance these deficits by drawing down their so-called reserve positions in the Fund or by making use of the Fund’s credit facilities.
The largest of the Fund’s immediate liabilities are reserve positions in the Fund. These positions are international reserve assets and are held almost exclusively by Fund members. They consist of two elements—loan claims on the Fund and members’ “reserve tranche positions.” Loan claims arise as a result of borrowing by the Fund, and at the end of December 1978 they totaled SDR 6.4 billion, consisting of SDR 5 billion of outstanding borrowing under the Fund’s oil facility and SDR 1.4 billion under the General Arrangements to Borrow (GAB). (See Table 1.)
|In billions of SDRs|
|Charges receivable from|
|Borrowing: oil facility||5.0|
|Interest payable to members||.2|
A member’s reserve tranche position is measured by the extent to which the Fund’s holdings of its currency are less than the member’s quota; in economic terms, this represents the amount of resources the member has made available (other than by loans) to finance the Fund’s lending operations.
Although there are some legal distinctions between loan claims and reserve tranche positions, in practice both can be encashed with the Fund on demand in response to a BOP need on the part of their holders. In other words, lenders to the Fund can obtain the immediate repayment of their loans, and members with reserve tranche positions can obtain currency from the Fund by drawing on these positions. The total of these readily encashable claims was close to SDR 15 billion at the end of December 1978, consisting of reserve tranche positions of SDR 8.5 billion and the loan claims of SDR 6.4 billion mentioned above. During the past two years the total has been much higher, reaching a peak of almost SDR 19 billion in June 1977.
In addition, the Fund must be prepared to meet the demands that arise from members making drawings on the Fund in accordance with the various Fund policies on the use of its resources. These policies include the ability of a member to draw in the “credit tranches”; an amount equivalent to 25 per cent of a member’s quota can be drawn if a member is making a “reasonable effort” to overcome its problems, and additional amounts—generally not in excess of a further 75 per cent of quota—may be drawn subject to the establishment of a stand-by arrangement with the Fund on the basis of the adoption by the member of economic policies designed to overcome its balance of payments difficulties. Members can also draw under the extended Fund facility, the buffer stock financing facility, and the compensatory financing facility. The maximum credit that a member can obtain from the Fund by a combination of purchases under these various forms of access to the Fund’s resources is equivalent to nearly four times the amount of the member’s quota.
All demands on the Fund’s resources, whether arising from the encashment of reserve positions in the Fund or from the use of Fund credit, are subject to a BOP need on the part of the drawing member. Of course, these demands will be influenced by many factors, including the attractiveness to the Fund’s creditors of holding reserve assets in the form of reserve positions in the Fund, the willingness of members to agree to adopt policies appropriate for establishing stand-by arrangements, the extent to which there are shortfalls in the exports of primary producing countries that would qualify them for drawings under the compensatory financing facility, and the availability and cost of BOP financing in the international capital markets. The variety of factors that influence the demands that are made on the Fund’s resources makes it very difficult to forecast how these demands will develop.
Chart 1Liquid claims on the Fund
Note: Components may not add to totals because of rounding.
1 Includes borrowing from the Swiss National Bank in association with activations of the GAS.
What resources does the Fund have to meet these demands? At the end of 1978, the assets side of the Fund’s balance sheet consisted mainly of the Fund’s holdings of members’ currencies of about SDR 40.8 billion, gold valued at SDR 4.1 billion on the basis of SDR 35 per fine ounce, and SDRs in the amount of SDR 1.2 billion.
The Fund’s large gold holdings—the equivalent of about SDR 22 billion at the market price at the end of 1978—are a very important part of the Fund’s assets. However, while they provide considerable confidence to the Fund’s creditors, they cannot be considered as immediately usable. Legally, the Fund’s gold can be sold to members or to private buyers at market prices, but such sales require decisions of the Fund taken by an 85 per cent majority of the voting power.
The Fund’s holdings of SDRs—which are derived from members’ settlements of obligations to the Fund in SDRs—are readily available to finance the Fund’s operations. They can be sold directly to members making drawings on the Fund, and the recipients can—if they wish—use them immediately to acquire foreign exchange. Since March 1977, the Fund has transferred SDRs to members making drawings in amounts totaling SDR 1.1 billion. Alternatively, the Fund itself can sell SDRs to acquire currency that can be provided to a member making a drawing. So far, the Fund’s SDR holdings have not been an important element in financing the Fund’s operations, mainly because the amounts held by the Fund have been relatively small, only exceeding SDR 1 billion in July 1977. When Fund quotas are increased over the next two years members will be required to pay to the Fund 25 per cent of their quota increases in SDRs (with the balance in their own currencies). The Fund’s SDR holdings will increase by over SDR 4 billion, thus providing the possibility of a greater use of SDRs in the operations and transactions of the Fund, and a more important role for the Fund’s SDR holdings as a source of immediate liquidity. This will reflect the growth in the amounts of SDRs allocated by the Fund. From 1972 to the end of 1978, the total of SDRs in existence was SDR 9.3 billion; on January 1, 1979, a further SDR 4 billion was created, and two further allocations, each of SDR 4 billion, will be made at the beginning of 1980 and 1981.
But it is the Fund’s holdings of currency that have generally provided the bulk of the Fund’s readily available resources, and the balance sheet does not show the extent to which the Fund can use these very large holdings of currencies. Legally, it owns them; but its ability to use them is a complex matter, involving both the provisions of the Fund’s Articles of Agreement on the use of its holdings of currencies and the economic and financial effects on members of such use.
The standard mechanism by which members “borrow” from and “repay” the Fund is the purchase of one currency against another. When a member makes a drawing, it purchases the currency of another member in exchange for its own currency. When a member repays its indebtedness, it repurchases its own currency by paying the Fund an amount of the currency of another member. Thus, these transactions leave the total of the Fund’s currency holdings unchanged, and this total will always include the Fund’s holdings of the currencies of those members indebted to the Fund. These latter holdings are not normally available to finance drawings because their sale by the Fund would be the equivalent of requiring the members concerned to repay their indebtedness. At the end of 1978, the total of the Fund’s holdings of the currencies of members indebted to the Fund was about SDR 22 billion, or just over half the total of the Fund’s currency holdings at that time.
Chart 2Use of Fund credit
Note: Components may not add to totals because of rounding.
1 Including the extended Fund facility.
2 Compensatory financing and buffer stock facilities.
How far the remaining SDR 19 billion in currencies is “usable” depends on the legal and economic considerations that guide the Fund in its use of currencies. The principal criterion for the Fund to sell a currency is that the BOP and reserve position of the issuer of that currency is considered “sufficiently strong.” The general rationale of this criterion is that members with relatively strong external positions should make resources available, through the mechanism of the Fund, to those members whose external positions are relatively weak. In exchange for the resources made available through the Fund, as a result of the use of its currency, the member normally diversifies its international reserves by giving up foreign exchange and receiving a claim on the Fund (a reserve position) that can be drawn in the event of a BOP need. Clearly, as the Fund directs these claims to members with relatively strong BOP and reserve positions, there is some assurance against the possibility that the recipients will need to encash them in the near future.
At the end of October 1978, there were about 50 Fund members whose BOP and reserve positions were considered sufficiently strong for the Fund, at least in principle, to be able to use its holdings of their currencies to finance drawings. A number of these members were indebted to the Fund. Such members are expected to make repayments in the light of the improvements in their BOP and reserve positions that have occurred since they drew on the Fund, and this flow of repayments, together with repayments being made on fixed schedules, is an important source of liquidity for the Fund.
The Fund’s holdings of the currencies of about 40 members were available to finance drawings, and its total holdings of these currencies were about SDR 17 billion. This was a fairly high total in relation to the immediate demands that, at least theoretically, could be made on the Fund by the encashment of reserve positions totaling, at that time, some SDR 15.5 billion. This coverage of immediate liabilities by usable currencies represented a considerable improvement over the tight liquidity situation of recent years, during which the Fund’s holdings of such currencies was reduced to close to one third of its immediate liabilities. Part of the improvement stemmed from some large repurchases of earlier drawings. But the main cause of the improvement was that quotas were increased under the sixth review of quotas, and the Fund received amounts of members’ currencies in subscriptions totaling about SDR 10 billion. Some SDR 6 billion of this amount was in the currencies of members in relatively strong BOP and reserve positions. Of course, the enlarged quotas also enlarged members’ access to Fund credit; in time, as members make use of this enlarged access, the Fund’s holdings of usable currencies can be expected to fall.
The rapidity with which the Fund’s liquidity situation can change was illustrated in November 1978, when the United States drew on its reserve tranche position in the Fund the equivalent of SDR 2.3 billion in deutsche mark and Japanese yen, about one third of which was financed by the Fund borrowing these currencies under the GAB. The effects of this drawing on the Fund’s liquidity were twofold. First, its holdings of deutsche mark and yen were substantially reduced; and second, as the drawing by the United States reflected the weakness in its BOP, this suggested that—at least for the time being—the Fund’s holdings of U.S. dollars should not be used to finance drawings. Thus, the relationship between usable currencies and readily en-cashable claims changed rather dramatically; at the end of November, the total of currencies considered usable was reduced to about SDR 10 billion, while reserve positions in the Fund were still close to SDR 15.5 billion, with the reduction in the reserve tranche position of the United States being matched by increases in the positions of the Federal Republic of Germany and Japan as a consequence of the sale of their currencies by the Fund to the United States.
This broad outline of the determinants of the Fund’s liquidity is subject to several qualifications. On the demand side, while some members holding claims that can be readily encashed with the Fund are facing deteriorating BOP situations, a substantial proportion of these claims are firmly held by members in strong BOP positions. On the supply side, if holdings of usable currencies are low, the Fund can supplement its liquid assets by borrowing. Although as a legal matter members cannot be required to make loans to the Fund, there has been a readiness to do so at times when the Fund’s liquidity has been under strain. In the past, the principal source of borrowing has been the GAB under which the Group of Ten industrial countries undertook to lend amounts totaling about SDR 6.6 billion to the Fund when one of them draws on the Fund; for example, during 1977, the Fund arranged to borrow about SDR 2.9 billion in connection with stand-by arrangements for the United Kingdom and Italy. (See “Increasing the resources of the Fund: borrowing” by David Williams, Finance & Development, September 1976.) In the case of the oil facility, the Fund borrowed SDR 6.9 billion for the specific purpose of making BOP financing available to members whose external positions had deteriorated as a result of the increase in oil prices in late 1973. The last disbursements under the oil facility were made in 1976. The financing of this special facility from the Fund’s own resources would have posed some difficulties; at that time BOP deficits were widespread, and relatively few members were in positions that were sufficiently strong to justify the Fund using their currencies to finance drawings. Early in 1979 the Fund completed arrangements to borrow up to SDR 7.8 billion to finance a new facility—the supplementary financing facility—that is intended to provide supplementary financing in conjunction with the use of the Fund’s ordinary resources to members facing payments imbalances that are large in relation to their Fund quotas.