N. John Brady*
GOLD AND FOREIGN EXCHANGE statistics serve three purposes. The total of a country’s gold and foreign exchange holdings represents the major element in its international liquidity. The change in a country’s gold and foreign exchange holdings during a period reflects its balance of payments surplus or deficit in a broad sense. Finally, the change in the national currency value of a country’s gold and foreign exchange holdings during a period is an element of monetary analysis. The object of this paper is to look into the problems which arise in the compilation and use of gold and foreign exchange statistics, and to consider the extent to which the three purposes can be served by the same data.
Statistics for all three purposes have their beginning in the accounts of the money and banking system, because in most countries data on the foreign assets and liabilities of that system are readily available and because the holdings of the system approximate those that meet the criteria of each of the measurements. They tend to be the kinds of claims on foreigners which, by type of asset and by holding sector, are usable directly to finance balance of payments deficits. Their measurement tends to separate from the whole of an economy’s transactions with foreigners (which necessarily net to zero) those which represent international monetary settlements rather than the commercial, investment, speculative, or other autonomous transactions requiring such settlement. And, as assets of the money and banking system, their changes tend to produce equal changes in the economy’s money supply.
Problems in compiling gold and foreign exchange statistics arise from the fact that in many countries the institutional structure of the money and banking system is not clearly defined, owing to the extension of the monetary sector beyond the banking system proper: to the government at one end of the spectrum and to an array of other financial institutions at the other end. Problems also arise from the use that is made of the distinction between claims on foreigners and claims in foreign currency and between liquid and non-liquid claims in defining foreign assets. They arise further from the existence of foreign liabilities, which raises both the question of the extent to which liabilities are offsets to assets, and the question of the extent to which the ability to incur additional liabilities constitutes an element of international liquidity comparable to the holding of an asset. Finally, they arise from multiple currency practices, which raise questions concerning the measurement of profits and losses on exchange operations and whether these profits and losses reflect part of the monetary effects of transactions in foreign assets or part of the revenue or expenditure of government; and from changes in the valuation of foreign assets and liabilities, which provide discontinuous changes in the data. These problems affect the suitability of the original money and banking data to serve each of the three purposes for which gold and foreign exchange statistics are used, and they produce differences between the three sets of data because of the ways in which the problems are resolved.
The problems considered in this paper are under constant review at the International Monetary Fund (IMF). Changes in statistical procedures, are, of course, required from time to time as new forms of institutional arrangements develop; moreover, changes may also result from new thinking. The discussion in this paper is based mainly on the procedures currently used in the Fund’s publication, International Financial Statistics (IFS), which endeavors to present data for individual countries in an internationally comparable form. A recent review by the Fund of the reserve statistics published by individual countries shows that there is a wide variety of treatment of the problems in compiling gold and foreign exchange statistics. A summary of this review is given in the final section of this paper.
Problems Arising from Institutional Differences
In general, the money and banking system of a country may be defined as consisting of the central bank and commercial banks. In a number of countries, however, this definition is obscured by the fact that the government performs certain functions which are of a monetary nature. An example common to many countries is the issue of coin by the Treasury. The splitting of monetary functions among the banking system, the government, and other institutions raises problems for the compilation of monetary statistics in general and, of more specific interest to this paper, for the compilation of gold and foreign exchange statistics.
In the introduction to this paper, it was suggested that the net change in the money and banking system’s foreign assets broadly approximates the over-all surplus or deficit in the balance of payments. This is true only if the foreign assets of the money and banking system are held so as to provide a means of payment for foreign transactions rather than as investments in their own right. It assumes that the money and banking system does not make a conscious decision to purchase a foreign asset as an alternative to the purchase of a domestic asset. If such a decision were made, the purchase of the foreign asset would be classified more accurately as a transaction giving rise to the need for monetary settlement rather than a transaction representing such a settlement.
In those countries whose currencies are convertible, the commercial banks often acquire foreign assets as an alternative to investment in domestic assets, but, in general, it is not possible to distinguish such assets from those which serve only purposes of monetary settlements. In most other countries, particularly those practicing exchange control, the money and banking system does not engage in the purchase or sale of foreign assets for investment reasons, although this needs to be qualified to the extent that banks regard their discounts of foreign bills as investments. For these countries, the foreign assets of the commercial banks are likely to function as working balances only. In such countries, the monetary system is not likely to hold long-term foreign securities solely for their income or for the prospect of capital appreciation.
Foreign assets of government institutions
In order to present statistics which reflect the activities of the whole monetary system, it is necessary to consolidate those accounts of the government which are of a monetary nature with the accounts of the banking system.
The inclusion of these government accounts in the definition of the banking system usually raises no conceptual or statistical problems. For example, currency boards were widely developed among dependent territories and are still maintained in some independent countries. These boards are responsible for the management of the currency issue, through the issue of domestic currency against the receipt of foreign exchange. This is a function usually undertaken by a central bank, and the accounts of the board clearly need to be consolidated with those of the banking system. Since the assets of the board consist almost entirely of foreign exchange, the consolidation has direct relevance to the compilation of statistics of gold and foreign exchange for all three purposes.
Usually the banking system is the major holder of the foreign exchange reserves of a country. However, in some countries, the government establishes a separate agency, such as an exchange stabilization fund, to administer the purchase and sale of foreign exchange. If the accounts of the monetary system are to reflect the full extent of the country’s holdings of foreign exchange and to indicate the monetary effects on the economy of a balance of payments surplus or deficit, the accounts of the exchange fund need to be consolidated with those of the remainder of the money and banking system. The method of consolidation depends upon the way in which the fund’s purchases and sales of foreign exchange are financed. If the fund is financed directly by the central bank, the consolidation results in an addition to the foreign assets of the monetary system and the liquidation of the system’s claims on the fund. If it is financed by the government, the consolidation adds to the foreign asset holdings of the monetary system and, on the assumption that the system had purchased government debt issued to meet the exchange fund’s needs, an amount equal to the fund’s foreign assets is deducted from the monetary system’s claims on government. In both cases the result is the same: the accounts of the consolidated money and banking system will attribute changes in money supply to the balance of payments surplus or deficit rather than to changes in domestic credit.
There are also countries where the treasury holds gold on its own account. For reasons similar to those mentioned in the preceding paragraph, these gold holdings are consolidated with the accounts of the banking system. On the assumption that the acquisition of the gold was financed by borrowing from the central bank, the counterpart to the gold holdings is deducted from the monetary system’s claims on government.
Foreign assets of other official institutions
Apart from those government holdings already mentioned, there may be holdings of foreign exchange by certain other governmental or semigovernmental agencies, such as commodity marketing boards and local governments. Here the decision as to whether the accounts of these agencies should be included with those of the banking system is less clear. Generally, however, the extent of their nonmonetary activities is such that the inclusion of these entities in the money and banking system cannot be justified. On the other hand, the official nature of these entities suggests that, if necessary, their holdings of foreign exchange could be centralized so that they would be available for international monetary settlements. In IFS, the accounts of these entities are excluded from the monetary surveys; however, their holdings of foreign exchange are included in statistics of gold and foreign exchange for reserve purposes.
IMF position of a country1
The function of holding a country’s reserves of gold and foreign exchange is usually attributed to the monetary authorities. Since transactions between a member country and the IMF are intended to finance the balance of payments, it follows that the country’s accounts with the IMF should be consolidated with the accounts of the money and banking system. However, a problem arises from the fact that legal and institutional arrangements for the payment of subscriptions to, and the making of drawings on, the IMF differ widely between countries. In some countries, the assets and liabilities arising from transactions with the IMF are recorded entirely in the accounts of the central bank; in other countries, these assets and liabilities appear in the books of both the central bank and the treasury.
For the former group of countries, there are no problems of consolidation since the IMF accounts are already part of the accounts of the money and banking system. For the second group of countries, the location of the IMF accounts within different institutions raises a problem. In these instances, the accounts of the treasury with the IMF need to be consolidated with those of the banking system. The consolidation may be carried out by adding the net treasury-IMF accounts to the net central bank-IMF accounts and adjusting the central bank’s claims on government by an amount equal and opposite to the net treasury-IMF accounts. This is done on the assumption that the government’s financing requirements from the banking system were marginally affected by its transactions with the Fund.
The accounts of the money and banking system may thus be widened to include a country’s net asset or liability position with the Fund, whether the accounts are held by the central bank, the government, or both. The change in this net IMF position has a counterpart in those changes in other foreign assets and liabilities that arise from a member’s payments to and receipts from the Fund in gold or the currencies of other countries and from the Fund’s transactions with other countries in the member’s currency. In other words, these transactions involve a redistribution of foreign assets and liabilities which leaves their net balance unaffected. They do not have an impact on money supply; nor do they affect the over-all balance of payments surplus or deficit. To eliminate their effect on the movement in other net foreign assets, IFS includes the net IMF position in its statistics of gold and foreign exchange for balance of payments and monetary purposes; however, statistics of international liquidity require a different measurement of IMF accounts. This difference is considered later in the paper.
Foreign assets of the nonbank financial institutions
The definition of the money and banking system has thus been widened to include certain monetary functions of the government. At the other end of the spectrum, there are various kinds of financial institutions which may have claims for inclusion in the money and banking system. Such institutions on the fringes of the banking system include savings banks, development banks, discount houses, building societies, and other specialized credit institutions. Their claims for inclusion in the banking system may be judged by the extent to which their liabilities approximate to money in the eyes of the community or by the existence of special circumstances in an individual country.
Where such institutions are included in the money and banking system, however, the premise that the balance of the system’s transactions in foreign assets is a measurement of the balance of payments surplus or deficit is weakened. This is because these financial institutions are more likely to undertake transactions which give rise to the need for foreign payments. For example, the purchase of a foreign government security by a development bank would most likely represent an investment of surplus funds and thus would be regarded as a transaction which reduces the balance of payments surplus or increases the deficit, rather than as a transaction financing the surplus or deficit. If the development bank were included in the money and banking system, the transaction would imply no change in the system’s holdings of foreign assets although, in fact, the real balance of payments position had changed. In these circumstances, the holdings of the money and banking system (as defined) no longer provide a satisfactory measurement of the balance of payments surplus or deficit or of the monetary effects of international transactions. Hence, if the institutional structure of a country does not provide a clear separation between the money and banking system and other financial institutions, or if the compilation of money and banking statistics is widened to include the creators of a greater range of liquidities, it becomes more difficult to compile statistics of gold and foreign exchange which meet the purposes outlined in the introduction above.
Presentation of gold and foreign exchange statistics
The preceding sections have discussed the general problems in compiling gold and foreign exchange statistics which arise when the institutional structure of the country’s money and banking system is not clearly defined. These problems do not equally concern all three purposes which gold and foreign exchange statistics serve because, in the actual presentation of the data, differing interpretations of the extent of the money and banking system may be used.
(1) It is widely held that statistics on international liquidity should include only the holdings of the monetary authorities, i.e., the central bank and the government. The reason usually given is that the choice of monetary policy or exchange restrictions as an alternative to the use of reserves lies with the monetary authorities and it is their holdings which are most readily available for policy use. On the other hand, this restriction of reserves data tends to limit their usefulness since, if the need arose, the monetary authorities could probably exert pressure on the commercial banks to make their holdings available to settle temporary imbalances. In fact, as the IMF pointed out in its Annual Report for 1963,2 commercial banks in some European countries have in recent years been freely permitted, and even encouraged, to add to their holdings of foreign exchange, in contrast to earlier years when they were usually not allowed to hold more than working balances in foreign exchange.
(2) In regard to statistics on the balance of payments position, there are differences of opinion as to whether the over-all surplus or deficit of the balance of payments is best measured by changes in the foreign assets and liabilities of the monetary authorities or by changes in the foreign assets and liabilities of the whole of the money and banking system. The extent to which changes in the foreign assets and liabilities of the commercial banks should be included in the measurement of surplus or deficit depends on the autonomy of the banks to undertake transactions for commercial, investment, and speculative purposes. The balance of payments statements published by the IMF do not show a specific surplus/deficit position, but show separately the changes in the foreign assets and liabilities of the monetary authorities and of the commercial banks.
(3) Gold and foreign exchange statistics in the monetary survey in IFS are meant to measure the extent to which transactions with the rest of the world have contributed to the expansion or contraction of money supply; these are, of course, compiled from the accounts of the whole of the money and banking system.
The Problems of Defining Foreign Assets
It is not possible to provide a single definition of foreign assets which would meet the criteria required for each of the purposes for which gold and foreign exchange statistics are compiled. Two main problems arise when an attempt is made to provide a common definition. They are the problems of distinguishing between claims on foreigners and claims in foreign currency and of distinguishing between liquid and nonliquid claims.
Distinction between claims on foreigners and claims in foreign currency
Claims on foreigners comprise both claims on foreigners in foreign currency and claims on foreigners in domestic currency. There can be little doubt that claims on foreigners in foreign currency should be included in the basic data from which all three sets of statistics are compiled. It can also be argued that, in certain circumstances, the monetary system’s transactions in claims on foreigners in domestic currency represent settlements (as distinct from transactions which give rise to the need for settlements) and therefore tend to reflect the net balance of payments position and the domestic monetary effects of its financing. On the other hand, statistics of reserves should include only those claims which are readily available as a means of international monetary settlement; therefore, claims on foreigners in domestic currency generally would not qualify for inclusion. In some cases, however, certain foreign assets of a central bank or commercial banks may be denominated in domestic currency to provide an exchange rate guarantee, on the understanding that they are convertible into foreign exchange. Such assets may qualify for inclusion in statistics on liquidity. An example of this kind of asset is provided by the issue of bonds by the United States to certain European central banks in exchange for holdings of their currencies. These bonds are denominated in the domestic currencies of the holding countries and are mostly convertible into U.S. dollars.
Claims in foreign currency comprise both claims on foreigners in foreign currency and claims on residents in foreign currency. The latter group of claims do not ordinarily fit into the compilation of any of the three series of statistics because they do not represent claims which are available for international monetary settlements, and the monetary effect, if any, of changes in them does not arise from transactions with foreigners. As a result of recent changes in practice, however, it has become customary for certain countries to hold part of their official foreign exchange assets in the form of foreign currency deposits (say in Euro-dollars) with local commercial banks, which in turn keep a corresponding deposit abroad. Although the foreign assets are nominally held by the commercial banks, they appear to be as effectively controlled by the monetary authorities as the authorities’ direct foreign exchange holdings, and it is a question whether they should be classified as official reserves, disregarding the commercial banks as intermediaries, or as commercial bank holdings, in statistics on reserves and balance of payments. From the standpoint of monetary analysis, it does not matter whether they are classified as one or the other.
Generally, it seems that claims on foreigners would be a satisfactory definition of foreign assets for balance of payments and monetary statistics, but that the criteria for international reserves statistics may be better satisfied by a definition which includes only claims on foreigners in foreign currency (with some exceptions as noted above). In practice, however, banks are more concerned with the currency classification of their assets than a classification according to residence. The result is that, in many cases, the only available data on foreign assets relate to claims in foreign currency.
Distinction between liquid and nonliquid claims
The figures for foreign assets in the monetary survey are intended to show the net amount of national currency paid out (or received) by the monetary system in acquiring (or disposing of) its foreign assets. The question whether these foreign assets are liquid or nonliquid is not an important consideration. Thus, foreign assets in monetary statistics may be defined as including all claims on foreigners appearing in the balance sheets of the institutions included in the monetary survey.
The compilation of statistics of foreign assets for liquidity purposes involves more considerations than the compilation for monetary purposes. Statistics of a country’s international liquidity position are intended to measure the ability of the country to finance temporary deficits in its balance of payments. For this purpose, foreign exchange assets should include only those claims which are readily available as a means of international monetary settlement, i.e., only those claims on foreigners which are expressed in foreign currency (with some exceptions as already noted) and which are readily convertible into currency or deposits without risk of capital loss. Under this definition, liquidity statistics include not only short-term claims on foreign banks, but also foreign government obligations, such as treasury bills, short-dated bonds, and the readily marketable longer-term government securities of countries such as the United States or the United Kingdom, which are held by some countries as part of their reserves.
On the other hand, government or central bank obligations which have been funded and are repayable over a period of years, and long-term loans extended by central banks, are not readily convertible into liquid foreign exchange assets and should not be included in statistics of a country’s international liquidity.
Fairly clear-cut decisions can be made about whether or not the kinds of assets already mentioned represent readily available means of international settlement. The decisions are more difficult for certain other kinds of foreign assets, such as holdings of inconvertible currencies and balances under bilateral payments agreements. A few years ago, only the U.S. and Canadian dollars, among the major currencies of the world, were convertible currencies. Nevertheless, the major European currencies, notably sterling, were widely accepted in international monetary settlements. At this same time, a significant proportion of international settlements was carried out under payments agreements, particularly in the European Payments Union (EPU). Since 1958, most of the major currencies of the world have become convertible, with the result that the difference between a country’s holdings of convertible currencies and its holdings of inconvertible currencies has widened greatly. During these years, the EPU has been terminated and the volume of international trade conducted under payments agreements has declined substantially. In present conditions, therefore, the question arises as to whether holdings of inconvertible currencies and balances under payments agreements still represent an acceptable form of international monetary settlement, or whether they represent the outstanding position on transactions between two countries, a position which will give rise to a need for international settlement. Until recently, the IFS definition of reserves included holdings of inconvertible currencies and assets held in the form of balances under active payments agreements (but not the funded balances of old accounts, such as those which arose from the termination of the EPU). However, in the July 1964 issue of IFS, data on international liquidity, beginning with 1959, were revised to exclude known holdings of inconvertible currencies and balances under payments agreements.
The omission of balances under payments agreements from statistics of international liquidity also eliminates a number of problems relating to the treatment of these balances, namely, whether only the sum of creditor balances should be included; or the net balance of all accounts, if positive; or the net balance of all accounts, whether positive or negative.
In general, balance of payments statistics would include in a measurement of surplus or deficit only changes in those assets which qualify for inclusion in reserves statistics. Exceptions may be made for holdings of inconvertible currencies and balances under payments agreements. Movements in these items can perhaps be best regarded as part of the financing of the over-all surplus or deficit.
The Statistical Problems Raised by Foreign Liabilities
Foreign liabilities as offsets to foreign assets
A major problem in statistics of gold and foreign exchange revolves around the question of whether the data should be shown on a gross or a net basis and the extent to which foreign liabilities are offsets to foreign assets.
The foreign liabilities of the money and banking system are clearly offsets to assets in data which are compiled to show the domestic monetary effects of international transactions. Accordingly, net data are shown in IFS monetary surveys, although gross data are shown in the institutional sections, for which the information may be useful.
For the purpose of measuring the surplus or deficit in the balance of payments, the treatment of liabilities varies according to their nature. If they represent reserves of foreign official institutions, movements in them can clearly be offset against those in assets. If, on the other hand, the liabilities are due to nonfinancial corporations or individuals, it is likely that movements in them represent autonomous transactions requiring monetary settlements. If so, they should not be offset against the change in reserves in the measure of balance of payments surplus or deficit. Liabilities to foreign commercial banks may represent an intermediate case, depending on whether the banks concerned have placed the funds for commercial or similar reasons or whether the funds are held for purposes of monetary settlement only.
The treatment of foreign liabilities in reserves statistics, however, is an even more difficult problem, particularly in statistics compiled for international comparison. The problem of liabilities is inherent in such statistics, since one country’s foreign exchange assets are usually the foreign liabilities of another country. It might seem, therefore, that data on foreign exchange should be reported net, with each country’s foreign liabilities being deducted from its foreign exchange assets and the world total approximating zero.
However, statistics of foreign assets and liabilities for all countries are not usually presented in this way. For some years, IFS included a table showing the extent to which the reported foreign exchange assets of all countries could be reconciled with liabilities reported by the principal debtors, namely, the United States, the United Kingdom, France, the Bank for International Settlements, and the EPU. The reconciliation showed that reported assets tended to exceed reported liabilities partly because the former included claims on countries for which no liabilities data were shown. In addition, the development of the Euro-dollar market in recent years had the effect of inflating the figures of gross assets. This was brought about by the fact that Euro-dollar transactions involve a number of intermediaries, each of which might report its dollar deposits in its figures of gross assets. Factors working in the opposite direction in this reconciliation were the impossibility of separating out from U.K. liabilities the amounts due to foreign businesses and individuals, for which no assets data were shown, and, until recently, the inclusion in the liabilities of both the United Kingdom and the United States of amounts due to the Soviet bloc countries and Mainland China, for which no assets data were available.
Similar problems occur when considering the question of whether liabilities should be offset against assets when presenting reserves data for individual countries. For example, it was suggested earlier that reserves statistics should include only the foreign exchange holdings of the monetary authorities. If reserves statistics are to take account of foreign liabilities, the problem arises whether the foreign liabilities of the monetary authorities only should be offset, or whether the definition should be broadened to include the liabilities of the rest of the banking system or even of the economy as a whole. In addition, there are further problems of accurately defining and measuring foreign liabilities. These take two main forms.
The first is a definitional problem, i.e., whether foreign liabilities should include only liabilities to foreign official institutions or should also include liabilities to foreign banks and private individuals and institutions. There is also the practical difficulty of separating the foreign liabilities of the monetary system from its liabilities to the domestic private sector. In some countries, banks can separate liabilities to foreign governments and banks but not those to other foreign holders.
The second problem is that of interpreting certain transactions which, although related to the foreign sector, result in liabilities of the monetary system which are quite different in character from other foreign liabilities. An example of such transactions is provided by the operation of U.S. aid programs under which the country receiving aid is required to deposit in accounts owned by the United States local currency funds in payment for surplus agricultural produce sold to the country.
These local currency deposits owned by the U.S. Government should, by definition, be regarded as foreign liabilities of the country receiving aid. In this case, however, it is not so much the ownership of the deposits as their expected use which is of importance in determining the nature of the liability. The purposes for which the local currency will be used in a particular country are determined at the time the agreement for the sale of the surplus produce is signed. Part of the deposits is generally used for the benefit of the government receiving aid, through grants for economic aid and for the support of defense programs. However, some of the uses to which the deposits are put are strictly U.S. uses, e.g., for the payment of U.S. Government expenses in the recipient country, for loans to private U.S. enterprises and, in some instances, for financing triangular trade operations in which the deposits are used to purchase goods for export as grants to a third country.
The fact that most of the deposits are used within the aid-receiving country and thus do not constitute a future claim against that country’s holdings of foreign exchange suggests that at least that portion of the deposits should not be regarded as a possible offset to foreign assets, despite their ownership by the United States. In practice, also, the amounts reserved for U.S. operations are small in relation to the total balance of the deposits and are difficult to report separately. For these reasons, it is perhaps best not to offset them against foreign assets in any of the three measurements of gold and foreign exchange statistics. In its monetary surveys, for instance, IFS records them outside other foreign liabilities under the heading, “Counterpart Funds.”
Another example of the problems in interpreting foreign liabilities is provided by the treatment of prepayments for exchange in respect of import transactions. These prepayments may arise from a requirement of a government or central bank that private importers must lodge advance payments in local currency with domestic banks when applying for foreign exchange. Although the amount of these prepayments may give some indication of the future foreign exchange commitments in respect of imports, they do not represent liabilities to foreigners. At this stage, such a transaction does not involve a foreigner; it is between two residents, the importer and his bank (or the central bank), and the prepayment is a domestic liability of the banking system.
Many countries have relatively small foreign liabilities and, for them, the problem of whether reserves statistics should be shown gross or net is a relatively minor one. However, for the two major reserve currency countries, the United States and the United Kingdom, the question is more important. A consideration of their holdings of gross assets will not necessarily provide a proper measure of their reserves positions. For these countries, a balance of payments surplus may be reflected both in an increase in foreign assets and in a reduction in foreign liabilities; a deficit may be reflected both in a decrease in foreign assets and an increase in foreign liabilities. Thus it is necessary that both their assets and liabilities positions be considered. In IFS, data on the net sterling liabilities of the United Kingdom, by class of holder and by area, are shown in the international liquidity section on the pages of U.K. data. Similar information on U.S. dollar liabilities is also shown.
Until recently it was generally agreed that, because of the difficulties of defining and measuring foreign liabilities, the reserves of countries other than the United Kingdom and the United States were best measured by gross holdings of foreign assets. However, the development in recent years of various arrangements for the creation of reserves through the incurring of liabilities and for the exchange of assets and liabilities has tended to make the figure of gross assets a less useful measure of reserves.
Facilities for increasing gross reserves by incurring foreign liabilities
One way in which a country can increase its gross reserves by incurring additional liabilities is through its membership in the IMF. In discussing this possibility, it is necessary to consider the measure of liquidity arising from a country’s membership in the Fund.
The amount of resources which the IMF can make available to a member country is subject to conditions set out in the Articles of Agreement. One of the provisions that governs the use of the Fund’s resources is the limitation that, unless there is a waiver by the Fund, drawings by any one member in any one year may not exceed the equivalent of 25 per cent of its quota. As trade has grown and balance of payments fluctuations have widened, the Fund has increased the use of waivers in order to meet the needs of members. At the same time, it has formulated a set of principles relating to drawings in different tranches. A member’s gold tranche position represents the difference (when positive) between its quota in the Fund and the Fund’s holdings of its currency; for countries in a creditor position in the Fund, the gold tranche position equals, therefore, the sum of the country’s contribution in gold plus the net disbursement of its currency by the Fund. In 1952, the Fund adopted its gold tranche policy, which gives members the overwhelming benefit of the doubt in relation to requests for drawings that do not raise the Fund’s holdings of the member’s currency beyond an amount equal to the member’s quota. During the 12 years that this policy has been in operation, it has been made quite clear to member countries that these gold tranche positions are readily available whenever needed and that they are comparable to countries’ holdings of gold and foreign exchange in that they represent liquid official resources available to the monetary authorities. In its Annual Report for 1963, the Fund stated its view that “members’ reserves and their changes can usefully be measured as including gold tranche positions in the Fund.”3 The reserves statistics of all countries as published by the Fund in its Annual Report and in IFS accordingly include members’ gold tranche positions.
As mentioned above (p. 267), this measurement of the liquidity arising from a country’s membership in the Fund is different in concept from the country’s net IMF position, which is included in statistics measuring the domestic monetary effects and balance of payments effects of international transactions. Apart from some minor technicalities, the major difference is that the net IMF position can be positive or negative, but the gold tranche position can be only positive. This arises from the fact that the net IMF position represents the net asset or liability position of a country with the Fund. If a member makes a drawing on the Fund which takes it into the credit tranches, the net IMF position becomes negative. The gold tranche position represents the amount which is readily available to a member from the Fund; but as soon as a country makes a drawing which takes it beyond the gold tranche, no further automatic liquidity is available to it.
This leads back to a consideration of the way in which a country can increase its reserves by incurring liabilities to the IMF. This potential liquidity can be activated by a member country through the use of drawing facilities beyond the gold tranche. These credit tranche drawing facilities are available to a member up to the point where the Fund’s holdings of its currency reaches 200 per cent of quota, although drawings beyond this point are possible through a waiver. However, the member is required to satisfy increasingly strict criteria as the higher tranches are used. Thus, membership in the Fund enables a country to add to its gross assets by incurring an additional liability to the Fund, provided that it can satisfy the necessary criteria. A country’s unused credit tranches with the Fund are also shown in IFS in the sections on international liquidity, to provide a measurement of the potential liquidity which may be available to member countries.
The IFS presentation of Fund accounts in statistics on international liquidity is followed by only a few countries. A recent review by the Fund of country practices in the compilation and presentation of gold and foreign exchange statistics showed that they include a wide variety of measures of their position in the Fund. A summary of this review is given in a later section of this paper.
The recent development of “swap” arrangements between groups of countries for the exchange of assets and liabilities raises further doubts about using gross assets to measure reserves positions. Drawings under these arrangements provide possibilities for creating reserves at the cost of incurring additional liabilities. If the drawing country reports its reserves on a gross basis, the drawing results in an increase in reserves. If it reports its reserves on a net basis, reserves would show no change as a result of the drawing. Apart from affecting the statistical measurement of the reserves of an individual country, these drawings under swap arrangements have implications for the measurement of gross world reserves. A drawing can result in an addition to gross reserves of even more than the amount of the drawing. This happens when the drawing country adds part or all of the amount drawn to its gross reserves and the country drawn upon considers the asset acquired as part of its gross reserves. Drawings from the IMF may have similar results because the gold tranche position of the country whose currency is drawn is ordinarily increased by the amount of the drawing.
Thus it can be seen that developments in recent years have made it necessary to use greater caution when interpreting the significance of measurements in gross reserves, both for individual countries and for the world.
Although gold and foreign exchange statistics are derived from the accounts of the money and banking system, different methods of valuation are sometimes necessary in order to meet the specific purposes for which the data are required.
Methods of valuation
Statistics of gold and foreign exchange for reserves purposes are a measure of a country’s international liquidity. For purposes of international comparison, it is most convenient to express the assets in terms of some international unit of measurement. The most commonly adopted unit of measurement is the U.S. dollar, and it is in this currency that statistics of international liquidity are expressed in IFS. However, individual countries may prefer to present their reserves statistics in their own currencies, in order to compare them with other domestic statistics. This is a satisfactory procedure, although it is desirable that the data also show the rate of exchange that has to be applied in order to obtain a valuation in an international standard.
Since balance of payments statements cover transactions only, it is necessary to omit those changes in a country’s foreign assets and liabilities which arise from valuation changes. Accordingly, gold and foreign exchange statistics for balance of payments purposes are measured by converting the assets and liabilities denominated in foreign currency to domestic currency at a fixed rate appropriate to the given period rather than at the actual rates at which the individual transactions were carried out.
In order to measure the monetary impact within a country of international settlements through the monetary system, it is necessary to show the net amounts of domestic currency issued by (or withdrawn by) the monetary system in acquiring (or disposing of) foreign balances. In countries where the rate of exchange is fixed, the basis of valuation in the measurement of the domestic monetary effect of foreign transactions will differ little from that used in measurements for other purposes.
Problems arising from multiple currency practices
However, in those countries where multiple exchange rate systems or fluctuating rates of exchange are in use, the measurement of the monetary effect of transactions in foreign assets may require a basis of valuation which is different from that used in measurements for other purposes. In such countries, the amount of national currency paid out or withdrawn as a result of transactions with foreigners will not be the same as that obtained by converting the foreign asset holdings of the monetary system at a fixed exchange rate. In order to measure the extent to which transactions with the rest of the world have contributed to the expansion or contraction of money supply, it is necessary to record the transactions in foreign exchange at their actual transaction rates, and not at an arbitrary fixed rate.
This can be done in two ways in the books of account of the banking system. One method is to record the purchases and sales of foreign exchange at a nominal rate and to carry the difference between this nominal rate and the actual rate in respect of each transaction to a separate exchange profit and loss account. In this case, the domestic monetary effect of transactions with foreigners is measured by the figure for net foreign assets at the nominal valuation, plus the loss or minus the profit on the transactions. The alternative method is to record all receipts and payments of foreign exchange at the rates at which the transactions take place.
Although these accounting methods are relatively simple, the accounts of some multiple currency countries in past years were so complicated that they failed to provide data which met the requirements of any of the three purposes which gold and foreign exchange statistics serve. However, the gradual elimination of multiple currency practices in recent years has reduced the seriousness of this problem.
The fundamental problem caused by the use of multiple or fluctuating exchange rates is, of course, the question whether the profits or losses on the exchange transactions should be regarded as part of the monetary effects of transactions in foreign assets or as part of the revenues or expenditures of the government. The answer to this question depends upon whether the responsibility for making a decision about the exchange rate is considered to be a function of the government or of the central bank. The use of multiple exchange rates could be regarded as a substitute for import duties, export subsidies, or taxes, and to this extent the exchange rate decision may be regarded as a government function. However, both the central bank and the government usually participate in such decisions, and the division of the function between these authorities is necessarily arbitrary when statistics are being compiled for purposes of international comparison.
IFS has taken the view in its monetary surveys that the profits or losses on exchange transactions should be regarded as part of the monetary effects of transactions in foreign assets. For those countries in which the profits and losses on exchange transactions are actually transferred to the government from time to time, it may not be possible to show a figure for foreign assets which fully reflects the monetary effect of foreign transactions; when this is true, IFS notes that fact.
The problem of different bases of valuation is not limited to multiple and fluctuating currency situations. It also arises whenever there is a revaluation of a country’s foreign assets and liabilities. Revaluation does not greatly affect the presentation of foreign exchange statistics for reserve purposes. If the series is expressed in terms of an international unit of currency, the revaluation makes no difference; if the series is expressed in domestic currency, attention needs to be drawn to the changed rate of conversion of the foreign currency.
Since changes in foreign exchange statistics arising from a revaluation merely reflect the assignment of a different valuation rate to foreign assets and liabilities, and are not the result of transactions, their influence needs to be excluded from statistics of gold and foreign exchange which purport to measure the balance of payments position or the monetary effects of its financing. This can be done in the balance of payments statement by expressing the statement in an international unit of currency or by footnoting. The problem is a little more complicated when compiling statistics which show the monetary effect of transactions with foreigners. In this case, the statistics can be expressed only in domestic currency. Furthermore, since the profit or loss on revaluation is often transferred to the government, there may also be changes in the figures for claims on government which do not reflect monetary changes. The most appropriate solution is to draw attention to the breaks in homogeneity of both series and to the need to exclude from the data the influence of the revaluation of foreign assets and liabilities.
Country Practices in the Presentation of Reserves Statistics
Earlier in this paper, references were made to an IMF review of the practices of individual countries in the compilation and presentation of their reserves statistics. This review showed that there was a wide diversity of treatment of the problems which have been raised in this paper. Of approximately 70 countries which were reviewed, 11 do not publish a table showing reserves or international liquidity. The review of the remaining countries was divided into two parts. The first part dealt with the treatment of IMF accounts in country statistics, and the second part dealt with other differences between IFS data on international liquidity and national data.
Treatment of Fund accounts
Of the 58 countries which publish data on reserves, 30 do not include any element of their IMF position in the calculation. The remaining 28 countries publish reserves statistics which include some part of their accounts with the Fund, but the statistics are presented in a wide variety of forms. Twenty countries include some element of their Fund accounts in reserves proper; 7 countries include them in “second-line reserves”; and 1 country includes portions of its Fund accounts under both headings.
Belgium and Italy are the only countries which include the gold tranche position in their reserves statistics. Belgium includes this measure of its Fund position in its reserves statistics proper, and Italy includes the measurement in second-line reserves. The United States records its gold tranche position in a footnote to its reserves statistics; and the United States, the United Kingdom, and Australia show their total tranche positions in the form of addenda to their statements on reserves. France includes in its second-line reserves its gold subscription to the Fund and the Fund’s net sales of francs; its outstanding drawings on the Fund are shown as liabilities. Hence, net second-line reserves include the net IMF position and when France has no outstanding drawings, as has been the case in recent years, second-line assets include the gold tranche position. The Netherlands includes in its first-line reserves the Fund’s net sales of guilders or, as a minus entry, the Netherlands’ outstanding drawings on the Fund.
A number of countries enter their gold subscriptions to the Fund in their reserves assets, drawings outstanding in reserves liabilities, and the net IMF position in net reserves. Other countries follow variations of this procedure. Some report only the gold subscription in assets, and some report only outstanding drawings in liabilities.
Such a wide variety of treatment of Fund accounts in country statistics requires an equally wide variety of adjustments in order to present internationally comparable data in IFS. The problems of users and compilers of the world’s statistics would be eased if there were a greater degree of comparability in the treatment of Fund accounts in national data.
Other differences betweenIFSdata and national data
IFS presently defines reserves as the gross gold and foreign exchange holdings of a country’s monetary authorities. The definition of foreign exchange includes short-term claims on foreign banks, short-term foreign government obligations, such as treasury bills and short-dated bonds, and also the readily marketable long-term securities of such countries as the United States and the United Kingdom. Until recently, the definition also included holdings of inconvertible currencies and assets held in the form of balances under active payments agreements but, as mentioned earlier, these types of assets were omitted from data on international liquidity in the April 1964 issue of IFS.
For some countries, the IFS data do not agree with the general definition because data are not available in the form required or for other reasons. For example, both Australian data and IFS data on Australia include holdings of commercial banks; and both Italian data and IFS data on Italy exclude foreign exchange holdings of the Bank of Italy but include a number of items which the IFS general definition would exclude.
Differences between IFS and national data on reserves, other than in the treatment of Fund accounts, appear in more than 30 of the 58 countries which publish tables of reserves statistics. Differences occur for 7 countries because they include commercial bank holdings (either net or gross) within the total of reserves. Seven countries include the net, rather than gross, foreign exchange holdings of the monetary authorities, and 4 others compile data which are partly net. Two countries exclude the accounts of their central banks with correspondents, presumably on the grounds that they are working balances; 2 exclude their official gold holdings, presumably because they are constant and outside of the area of reserve policy; 1 excludes its holdings of sterling, presumably because they are working balances; and 1 includes its holdings of silver. Three countries which record subscriptions to the Fund as reserves assets extend this treatment to their subscription accounts with other international agencies. In 6 countries, there were differences between the entries for payments agreements balances which IFS used to include and those included in national data.
Les problèmes que présente la préparation des statistiques de l舗r et des devises
Les statistiques de l’or et des devises servent à trois fins differéntes. D’abord, l’ensemble des avoirs d’un pays en or et en devises représente l’élément le plus important de la liquidité internationale de ce pays. Ensuite, la variation des avoirs d’un pays au cours d’une période déterminée traduit en gros l’excédent ou le déficit de la balance des paiements de ce pays. Enfin, la variation de la valeur en monnaie nationale des avoirs d’un pays en or et en devises au cours d’une période donnée constitue un élément d’analyse monétaire.
Les statistiques préparées à ces diverses fins ont pour origine la comptabilité du système monétaire et bancaire, parce que des chiffres précis concernant les avoirs et engagements extérieurs de ce système s’obtiennent facilement dans la plupart des pays et que les avoirs du système en question sont très proches de ceux qui répondent aux exigences de chaque calcul.
Certains problèmes de statistique se présentent du fait que, dans bien des pays, la structure institutionnelle du système monétaire et bancaire n’est pas clairement définie, le secteur monétaire dépassant le cadre du système bancaire proprement dit. Des difficultés proviennent également de la distinction entre les créances sur les étrangers et les créances en monnaie étrangère, et entre les créances liquides et non liquides, considérées comme mesures des avoirs extérieurs. D’autres difficultés résultent de l’existence d’engagements extérieurs, ce qui soulève la question de savoir dans quelle mesure les engagements constituent la contrepartie des avoirs et dans quelle mesure la possibilité de contracter de nouveaux engagements constitue un élément de liquidité internationale comparable au fait de détenir un avoir. Enfin, des difficultés naissent des pratiques de monnaies multiples, qui soulèvent des questions concernant la base d’évaluation des avoirs et engagements extérieurs.
Ces problèmes influent sur l’aptitude des données monétaires et bancaires originales à servir à chacune des trois fins auxquelles on utilise les statistiques de l’or et des devises, et produisent des différences entre les trois séries de données, du fait des méthodes de résolution des problèmes.
Problemas al compilar las estadísticas sobre el oro y las divisas extranjeras
Las estadísticas sobre el oro y las divisas extranjeras sirven para tres objetos. El total de las tenencias en oro y en divisas extranjeras que posea un país representa el principal elemento en su liquidez internacional. La variación en las tenencias de un país en un periodo dado refleja, en sentido amplio, el superávit o el déficit de su balanza de pagos. Finalmente, la variación en el valor, en términos de la moneda nacional, que se produzca en las tenencias en oro y divisas extranjeras de un país durante un periodo, es un elemento de análisis monetario.
Las estadísticas para estos tres propósitos se originan en las cuentas del sistema monetario y bancario, porque los datos del sistema, en cuanto a los activos y pasivos extranjeros, se adquieren fácilmente en la mayoría de los países, y porque las tenencias del sistema se aproximan a aquellas que llenan los requisitos de cada medida.
Surgen dificultades en las estadísticas porque en muchos países la estructura institucional del sistema monetario y bancario no está claramente definida, debido a la extensión del sector monetario más allá del propio sistema bancario. Surgen problemas a causa de la diferenciación entre créditos contra extranjeros y créditos en moneda extranjera, y entre activos realizables y no realizables como definición de los activos sobre el extranjero. Surgen, además, de la existencia de obligaciones sobre el exterior, lo que origina tanto la cuestión del punto hasta el cual las obligaciones compensan los activos, como la del grado hasta el cual la facultad de incurrir en obligaciones adicionales constituye un elemento de liquidez internacional comparable a la tenencia de un activo. Por último, emanan de prácticas de tipos de cambio múltiples, las que dan lugar a problemas relacionados con la base para valuar los activos y pasivos sobre el extranjero.
Estos problemas afectan a la adaptabilidad de los datos derivados de los balances del sistema monetario para servir a cada uno de los tres objetos para los cuales se usan las estadisticas sobre el oro y las divisas extranjeras, y ocasionan diferencias entre las tres series de datos debido a las maneras como los problemas son resueltos.
Mr. Brady, economist in the Bureau of Statistics, is a graduate of the University of Melbourne, Australia. He is presently on leave from the service of the Reserve Bank of Australia.
For a definition of the IMF position, see J. Marcus Fleming, “The Fund and International Liquidity,” Staff Papers, Vol. XI (1964), p. 180.