Chapter

SDRs

Author(s):
Joseph Gold
Published Date:
September 1983
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Prescribed Holders

In Pamphlet No. 36 (1981), there was a discussion of the provisions of the Articles of Agreement of the International Monetary Fund and the decisions of the Fund that deal with the Fund’s prescription of the entities that may hold and deal in special drawing rights (SDRs).1 These “other holders” (i.e., other than members of the Fund and the Fund itself) may hold and deal in SDRs proper, which means SDRs that came into existence when allocated by the Fund to participants in the Special Drawing Rights Department. All members of the Fund have decided to be participants. Any entity, official or private, may enter into contracts under which the SDR is the unit of account. The SDR in this sense is not the SDR proper but is, as a minimum, the means of expressing a value by reference to the value of the SDR in terms of currency. Prescription by the Fund is not necessary for the use of the SDR as a unit of account. A decision by the Fund is necessary if the Fund itself agrees to undertake the burden or accept the benefit of an obligation denominated in SDRs, but a decision of this kind has nothing to do with prescriptions of other holders of SDRs.

Rights originating in contract and denominated in SDRs may be means of payment also. The Fund’s authorization is not required for this function of the SDR.

Pamphlet No. 36 (1981) recorded that the Fund had prescribed nine holders of SDRs proper. The list has now grown to thirteen, but the list is not closed. The entities can be grouped into three classes:

  • (i) four central banks and currency authorities

    • Swiss National Bank, Zurich

    • Bank of Central African States, Yaoundé

    • Central Bank of West African States, Dakar

    • East Caribbean Currency Authority, St. Kitts

  • (ii) three intergovernmental monetary institutions

    • Bank for International Settlements, Basle

    • Andean Reserve Fund. Bogotá

    • Arab Monetary Fund, Abu Dhabi

  • (iii) six intergovernmental development institutions

    • Asian Development Bank, Manila

    • International Bank for Reconstruction and Development, Washington, D.C.

    • International Development Association, Washington, D.C.

    • Islamic Development Bank, Jeddah

    • Nordic Investment Bank, Helsinki

    • International Fund for Agricultural Development, Rome

For the entities in the last two of these three classes, SDRs are assets held as part of the portfolios of the holders. The SDRs do not function as reserve assets as they do when monetary authorities use holdings of SDRs in support of their currency.

The list includes both multilateral and regional organizations. It includes organizations that, like the Fund, are Specialized Agencies of the United Naitons, as well as organizations that do not have this status.

Prescribed holders may enter into all the categories of operations and transactions involving SDRs that are available to members of the Fund. The terms and conditions on which prescribed holders may accept, hold, and use SDRs are the same for all these holders. The Fund’s Annual Report for 1982 announced that prescribed holders have begun to engage in transactions and operations in SDRs.2

SDR as Unit of Account

Fund’s Financial Activities

A member’s currency held by the Fund in accounts other than the General Resources Account is not subject under the Fund’s Articles of Agreement to the principle of maintenance of value in terms of the SDR that applies to currency held in the Fund’s General Resources Account.3 The Fund has express or implied powers to invest holdings in accounts to which no obligation to maintain value is attached. The law or policy of the Fund is to invest these holdings in instruments or deposits denominated in SDRs so that in effect value will be maintained, although not by the automatic obligation of the issuer of the currency that is invested. Sometimes, the concurrence of that member must be sought, but the agreement of the obligor with which the Fund invests is always necessary. Since 1978, the Fund has placed currency accruing to its Trust Fund in deposits denominated in SDRs with the Bank for International Settlements.4 A similar form of investment was authorized in 1981 for the Subsidy Account associated with the Fund’s Supplementary Financing Facility.5

Investment in this form is particularly important when the Fund borrows resources under a contractual obligation of the lender to lend amounts determined by reference to the SDR, undertakes an obligation to repay that is denominated in SDRs, and cannot use the borrowed resources immediately to finance transactions with members. If the resources are not used immediately in this way, their value in terms of the SDR may be less when the Fund does use them. The obligation in terms of the SDR of the member entering into a transaction with the Fund that is financed with the resources may not be equal to the repayment obligation undertaken by the Fund in borrowing. The Fund has negotiated borrowing to finance transactions under its Policy on Enlarged Access, and borrows resources under these agreements that are not immediately sold to members through the General Resources Account.6 The Fund has established Borrowed Resources Suspense Accounts within the General Department but not within the General Resources Account in that Department. Resources borrowed to finance transactions under the Policy on Enlarged Access are transferred to these Suspense Accounts before they can be used for financing transactions.7 Similarly, resources received in repurchases are transferred to the Suspense Accounts before the resources can be used in the repayment by the Fund of loans to it.8 The Managing Director is authorized to invest currencies held in the Suspense Accounts in specified deposits or marketable obligations that must be denominated in SDRs.9 Investment enables the Fund to match obligations in its roles as obligor under loans to the Fund and obligee as the result of transactions with members financed with borrowed resources.

International Conventions

The SDR has been adopted as the unit of account in numerous international conventions or amendments of existing conventions that have been negotiated, as discussed in earlier surveys. Further treaties or amendments have been negotiated. The Protocol (of September 23, 1978) To Amend the Convention on Damage Caused by Foreign Aircraft to Third Parties on the Surface signed at Rome on October 7, 1952 is one such convention.10 Under the Protocol, the limits on liability for damage for each aircraft and incident are expressed in SDRs.11 In judicial proceedings, the translation of amounts in SDRs into a member’s currency is to be made according to the Fund’s valuation for its own operations and transactions at the date of judgment. A nonmember determines the manner in which the calculation is made in its currency. If a nonmember’s law does not permit application of the SDR, the nonmember may express the limits on liability in the amounts of “monetary units” specified by the Protocol. The “monetary unit” is defined in a way that corresponds to the definition of the Poincaré franc. The translation of amounts expressed in “monetary units” into the nonmember’s currency is made according to the nonmember’s law.12 These provisions follow the precedent of the Montreal Protocols to the Warsaw Convention and Protocols to it13 and not the later Convention on the Carriage of Goods by Sea, 1978 (the Hamburg Rules),14 because there is no express requirement that the recoveries in the nonmember’s currency must approximate as closely as possible the real value of recoveries in members’ currencies. The Protocol of September 23, 1978, like the Montreal Protocols, was negotiated under the auspices of the International Civil Aviation Organization (ICAO).

The present Central Office for International Railway Transport (OCTI), which does not have legal personality as an international organization, performs many functions connected with international rail services, including the facilitation of financial relations among the railways of contracting parties, most, but not all, of which are in Europe. The basic conventions that the Central Office administers are the International Convention Concerning the Carriage of Goods by Rail (CIM) and the International Convention Concerning the Carriage of Passengers and Luggage by Rail (CIV). The conventions apply to the transportation of goods, passengers, and luggage over the territories of at least two contracting parties. The Germinal franc is the unit of account in these conventions.

The earlier reluctance of some contracting parties to replace the Germinal franc with the SDR15 was followed by an administrative decision of OCTI to apply the SDR, without the benefit of amendment of the CIM and the CIV.16 On May 9, 1980, agreement was reached on a new treaty, the Convention concerning International Transport by Rail (COTIF), under which the SDR will be substituted for the Germinal franc.17 The proposed treaty has novel features in dealing with limits of liability. An intergovernmental Organization for International Transportation by Rail (OTIF) will be established for the first time, with its seat at Berne, and with five organs, among which the OCTI will act as executive and secretariat.18 A Revision Commission is another organ, with powers that include authority to increase the limits of liability expressed in SDRs.19 The procedural requirements for considering and for taking a decision to increase the limits on liability are not severe, although the effective date of a decision can be delayed by an objector. The consequence of delay is that when it comes to an end, the Convention will apply only among the members that do not object to the decision. It will be seen that the problem of the procedure for amending the limits of liability in a convention has not been confined to COTIF.

The Revision Commission can be convened by the OCT1 on the initiative of OCTI or at the request of five members of the OTIF. The agenda for a meeting must be addressed to members not later than two months before the meeting. The quorum for a meeting is attained if a majority of all members is represented at the meeting. A member may represent other members, but not in excess of two. A proposed decision is adopted if supported by at least one third of the number of members present and voting, provided that the positive votes outnumber the negative votes.20 A decision of the Revision Commission takes effect for all members of the OTIF on the first day of the twelfth month following the date on which the OCTI gives notice of the decision to all members, unless a third of the members object within four months of the date of notice. If a member objects within this period of four months and denounces the Convention (i.e., renounces its adherence) not later than two months before the date on which the decision is to take effect, the decision does not come into force until the denunciation by the objector becomes effective.21

The unit of account in the CIM22 and the CIV,23 which are now appended to the COTIF, is the SDR as defined by the Fund. The value of the currency of a member of the OTIF that is a member of the Fund is calculated according to the method of valuation applied by the Fund in its own operations and transactions. The value in terms of the SDR of the currency of a nonmember of the Fund is calculated according to the method determined by that country, but the calculation must arrive at a value approaching as closely as possible the real value as calculated in the currencies of members of the Fund. If the law of a nonmember of the Fund does not permit application of the SDR, the unit of account for that member is defined in gold in an amount equivalent to the Germinal franc. The criterion of equal real value applies to calculations in the currency of this country also.24

The efforts of the International Telecommunication Union (ITU) to adopt a unit of account that is appropriate to current conditions was discussed in Pamphlet No. 22 (1977).25 The unit of account according to Article 30 of the ITU Convention was the Germinal franc. The Plenipotentiary Conference held in Nairobi in the fall of 1982 decided to modify Article 30. Under the amended provision, in the absence of special arrangements concluded between members, the monetary unit to be used in the composition of accounting rates for international telecommunication services and in the establishment of international accounts is either “the monetary unit of the International Monetary Fund” or “the gold franc,” both as defined in the Administrative Regulations. A resolution of the Conference26 recited that the Conference competent to revise these regulations could not be held until 1988, and that in the meantime transitional provisions were necessary for the application of Article 30. The resolution noted that the SDR was currently the monetary unit of the Fund. The Conference resolved, therefore, in effect, that the “parity” between the gold franc and the SDR shall be 3.061 Germinal francs = 1 SDR. This relationship is based on the definition of the Germinal franc and the former definition of the SDR in terms of gold.

The language referring in abstract terms to the monetary unit of the Fund and the decision to continue the use of the Germinal franc as an alternative unit of account were the result of positions taken by the U.S.S.R. and other nonmembers of the Fund.

Other Organizations

In early 1981, the Vice President (Finance) of the African Development Bank, when asked whether borrowing in SDRs would lower the cost of funds, replied:

To borrow in SDRs would certainly be the best for us since we lend in SDRs. But the market is very narrow. Very few issues have been made. The SDR concept is still at an early state.27

On February 5, 1982, the African Development Bank signed an agreement for an eight-year credit facility with a number of international banks in the amount of SDR 200 million.28 The President of the Bank, a former Executive Director of the Fund, noted that this was the first agreement denominated in SDRs that had been entered into with an African financial institution.29

The Treaty and Charter of the East African Development Bank were amended and re-enacted by agreement among Kenya, Tanzania, and Uganda, with effect on July 23, 1980.30 The main purposes of the amendment and re-enactment were to provide for a broader regional membership in the Bank and for more extensive powers and activities. No change was made in the unit of account, which therefore remained equivalent to 0.124414 gram of fine gold (Article 3, paragraph 1), and no change was made in references to par values (Article 25). Practical problems were managed by a decision that the Uganda shilling, in which accounts were kept, was equal to 0.711239 of the unit of account. The Uganda shilling was pegged to the SDR. The Treaty and Charter were amended again on August 7, 1981 to substitute the SDR as the unit of account after the Uganda shilling ceased to be pegged.31

Commercial Transactions

The use of the SDR as a unit of account in commercial transactions can promote the use of the SDR in financial transactions, and the reverse is also true. There is a growing amount of published information about the use of the SDR in financial transactions,32 but little information is available so far about the use of the SDR in commerce. The Statement of Financial Accounting Standards No. 52 of the Financial Accounting Standards Board in the United States, issued in December 1981, on the subject of Foreign Currency Translation, suggests that the use of the SDR as a unit of account is of sufficient importance, or potential importance, to warrant mention. The following definition of “Foreign Currency’ appears in the Glossary:

A currency other than the functional currency of the entity being referred to (for example, the dollar could be a foreign currency for a foreign entity). Composites of currencies, such as the Special Drawing Rights on the International Monetary Fund (SDRs), used to set prices or denominate amounts of loans, etc., have the characteristics of foreign currency for purposes of applying this Statement.33

Another development of interest is the revision of 1980 in “Lloyd’s Standard Form of Salvage Agreement—No Cure-No Pay,” which is referred to as “LOF 1980.” This form of contract has been developed over considerable time, and the present version is intended to respond to current technical, economic, and legal conditions. Clause 21 of the form provides that

The Contractor shall be entitled to limit any liability to the Owners of the subject vessel and/or her cargo bunkers and stores which he and/or his Servants and/or Agents may incur in and about the services in the manner and to the extent provided by English law and as if the provisions of the Convention on Limitation of Liability for Maritime Claims 1976 were part of the law of England.34

The Convention35 has not yet become effective, but the provisions of the Convention under which liability is limited to amounts of SDRs are incorporated in LOF 1980.

The amendment of the Convention of the International Telecommunication Union noted above means that the SDR is a unit of account not only for the official administrations to which the Convention applies but also for recognized private operating agencies.

SDR and Nonmembers of Fund

In the negotiation of new treaties or amendments of existing treaties in which the SDR is to be the unit of account, nonmembers of the Fund have often insisted on the inclusion of a second monetary unit, which has been defined in relation to gold. Some nonmembers have alleged that there were difficulties under their domestic law in applying the SDR, but the problems may have been more political than legal. These nonmembers may have thought that there was an incongruity in giving effect under their domestic law to the unit of account of an international organization to which they do not belong and which establishes the method of valuation of the unit of account by a process of decision in which they have no voice.36

A Working Group of the United Nations Commission on International Trade Law (UNCITRAL), which met in Vienna in January 1982, recommended to the Commission that, in the preparation of future international conventions and of revisions of existing conventions in which there are provisions on the limitation of liability, the unit of account should be the SDR and an alternative monetary unit should not be available. At this meeting, the delegate of the U.S.S.R. announced that his country was prepared to accept the SDR in future conventions without supporting the inclusion of another monetary unit defined in terms of gold. This new attitude enabled the Working Group to recommend that the SDR should be the sole unit of account.37

The acceptance of the SDR by the U.S.S.R. would raise the problem of valuing the ruble in terms of the SDR. In addition, the question might arise of including a qualification that was included in the Convention on the Carriage of Goods by Sea as adopted at Hamburg in March 1978,38 Under that qualification, if a nonmember calculates the limits of liability in its currency on the basis of the SDR or if a nonmember makes the calculation on the basis of the alternative monetary unit because the nonmember’s law does not permit application of the SDR, the nonmember must ensure that, as far as possible, the calculation of the limits in its own currency yields “the same real value.” as calculations by members in their currencies on the basis of the SDR. Provisions of this kind have become common, and the COTIF, discussed above, is only one of many conventions in which they appear.

The position taken by the delegate of the U.S.S.R. in the Working Group was modified somewhat in the plenary meeting of the Commission held in New York in July 1982. Representatives of the U.S.S.R. declared that units of account other than the SDR might be acceptable for the purpose of a particular convention. The representative of another nonmember of the Fund was uncertain whether his authorities could agree to the use of the SDR as a unit of account under their law. In view of these statements, the Commission adopted a decision in which the SDR is endorsed as “a preferred unit of account for many conventions, particularly for those of global application,” but is not the only possible unit of account.39 The decision and the form of the provision on a universal unit of account recommended for inclusion in future conventions or revisions of conventions is reproduced in Appendix A of this pamphlet.

The model provision entitled Universal Unit of Account and annexed to the UNCITRAL decision is one that is intended for conventions in which only the SDR is to be the unit of account. The position of a nonmember of the Fund is recognized by providing that the nonmember may determine how the equivalence between its currency and the SDR is to be calculated, but that determination must ensure, as far as possible, recovery by a claimant of the same real value as is expressed in SDRs, In its report, however, UNCITRAL explains that its preference for the SDR does not preclude the possibility that a diplomatic conference drafting a convention might prefer the solution incorporated in the Convention on the Carriage of Goods by Sea, 1978 (the Hamburg Rules). Under that Convention, a nonmember of the Fund whose law does not permit application of the SDR may declare that the limits on liability in its territory will be expressed in a “monetary unit,” which is defined in an amount of gold that corresponds to the definition of the Poincaré franc. The amounts of monetary units are determined by the ratio between the “monetary unit” and the gold value of the SDR as defined by the First Amendment of the Fund’s Articles (i.e., 1 monetary unit = SDR 1/15).40

The position of the U.S.S.R. on the amendment of Article 30 of the ITU Convention, as discussed above, departed from the view expressed by the U.S.S.R. at the meeting of the Working Group of UNCITRAL in January 1982, although the position can be reconciled with the acceptable but not preferred solution endorsed at the meeting of the Commission in July 1982. It appears that the various ministries of a country do not always give uniform instructions to representatives of the country at all international conferences.

Units of Account and Constant Purchasing Power

Pamphlet No. 36 discussed the work conducted under the auspices of UNCITRAL, with the assistance of observers from the staff of the Fund, on a unit of account that would have constant purchasing power and could be incorporated in conventions containing provisions on the limitation of liability.41 The Working Group studying the problem had recommended that adjustments for inflation could be made either in accordance with a price index suitable for the convention in which it would be included or through a revision committee that would follow an accelerated procedure for considering amendments to increase the limits of liability under the convention.

The plenary session of UNCITRAL in July 1982 decided to adopt, with some modifications, the recommendations of the Working Group.42 The Commission decided to request the General Assembly of the United Nations to recommend the use of provisions in future conventions or revised conventions that would give effect to one of the alternative techniques advanced by the Working Group. The alternatives are reproduced in Appendix A under the headings of Sample Price Index and Sample Amendment Procedure for Limit of Liability.

The provision on a “sample price index” takes no position on what would be a suitable index. The decision of the Commission suggests that the negotiators of a future convention or amendment should consider “the nature of the intended price index and the institution to be charged with its preparation, revision and calculation.” It is proposed also that there should be a margin of tolerance within which adjustments should not be made because of changes in the index. The emergence in treaty practice of provisions for special meetings to consider the adaptation of treaties in present conditions has been noted elsewhere.43

The report of UNCITRAL recognizes that some states will not ratify a convention that contains a provision on indexing. The recommendation of a price index is without precedent so far in treaty practice.44 The greater likelihood is that provisions will be adopted along the lines of those in the COTIF for the revision of limits expressed in SDRs.

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