VI. A Look Ahead
- Michael Ainley
- Published Date:
- September 1984
The reforms of the GAB were long overdue. They do much to restore the General Arrangements to their original relative importance as a valuable line of defense for the Fund. It is, however, not easy to assess how this line of defense will operate or how readily it will be available to the Fund in a crisis.
On the one hand, the reforms strengthen the Fund in several important ways. First, the tripling of the GAB, together with the quota increase that emerged from the Eighth General Review of Quotas and the further SDR 6 billion loan from the BIS, the National Bank of Belgium, Japan, and Saudi Arabia108 represent major additions to the Fund’s resource base. The Fund is now in a much more secure financial position. Taken together, the enlarged General Arrangements and the quota increase should give the Fund access to new usable resources of about SDR 23 billion109 until the next quota review is completed, probably in 1988. These are substantial amounts. The fact that such amounts are there should give the private banks and official creditors confidence in the Fund’s ability to deal with future problems in the international monetary system. Even if the enlarged General Arrangements are not used, they should serve to enhance the Fund’s authority and standing in the period ahead.
Second, and more directly, the Fund is in a position to continue assisting its members on an adequate scale. The enlarged access policy has been continued in 1984, and will be continued in 1985, albeit with maximum access limits which are progressively lower, in terms of quota, than the limits that applied in 1981-83.110 The Fund should, therefore, remain an effective agent for adjustment and an important catalyst for other financial flows. Without the quota increase, the SDR 6 billion loan, and the backing of the enlarged GAB, the enlarged access policy would have had to be abruptly curtailed.
Third, the enlargement of the GAB means that the Fund is now in a better position to meet potential borrowing needs of the main industrial countries. Although none of these countries has come to the Fund since 1978, such an approach cannot be ruled out, particularly if the economic recovery falters in Europe. Without the enlarged GAB, drawings by industrial countries might have put considerable strain on Fund resources. The risk of the Fund becoming simply a bank for developing countries, contrary to the purposes of the Articles of Agreement, is now much less.
Fourth, the General Arrangements have now become more open and less exclusive. The fact that the Fund will be able to tap the GAB for on-lending to nonparticipants is potentially very significant. Virtually all of the Fund’s conditional lending in recent years has been to the developing countries. It is also likely that this group of countries will rely heavily on the Fund’s financial support in the period ahead.
The Fund’s access to the GAB to meet developing countries’ borrowing needs is, of course, highly conditional. The Fund must be short of liquidity, and the stability of the system must be threatened, not simply impaired.111 But the conditions for activating the GAB have been interpreted flexibly in the past. A threat to the system could, for example, cover a number of possibilities, ranging from serious problems in one large country, such as Brazil, to actual or potential problems in a group of small countries or in a specific region. It is also important that no fixed amount has been set aside for use by participants. It is, therefore, possible that access to the GAB for the benefit of nonparticipants could be sizable.
Fifth, the Fund’s liquidity could be considerably strengthened in the future if the Group of Ten is now prepared to admit outsiders into their club. The participation of Switzerland sets an important precedent, as does the association of Saudi Arabia, which could eventually become a participant. There is also provision for further associated arrangements with other strong countries. Such arrangements could, similarly, be stepping-stones to participation. There could, perhaps, be candidates among the members of the OECD, particularly since there is now the attraction of a market-related interest rate on GAB claims.
On the other hand, the revised General Arrangements leave a number of questions unanswered. First, it could be argued that their overall size may be insufficient to cover potential demands on the Fund by participants as well as nonparticipants. This would, of course, be particularly true if the participants were to rule out further increases in their credit arrangements for another 20 years.
More specifically, the new total of SDR 18.5 billion (including Saudi Arabia) is equivalent to only 35 percent of participants’ Fund quotas,112 compared with 60 percent in 1962, and to only 8 percent of their reserves at the end of 1983,113 compared with 15 percent in 1962. It is no longer true, as it was in 1963-73, that the current account balances of the original ten participants are invariably positive in aggregate. All ten of the original participants recorded current account deficits in at least two of the six years 1977-82. Some of the participants continue to have sizable current account deficits.
It is, therefore, possible that, say, two major participants could come to the Fund to borrow very large amounts when the external positions of several other participants were not very strong. In such a case, the credit lines of the prospective GAB beneficiaries would not be available for on-lending, and the Fund might be able to call only limited amounts from the credit lines of some of the other participants. Bearing in mind that the Fund now has to pay due regard to potential, as well as actual, calls for the benefit of participants, this could leave very little available in the enlarged GAB for nonparticipants.
Second, it could be argued that the conditions for activating the GAB for nonparticipants are overly restrictive. If the 1961-62 discussions are any guide, the system may have to be in danger of collapse before such activations take place.114 The developing countries are also very concerned that the definition of a threat to the system will be made by the GAB participants and not by the Fund alone. They fear that the General Arrangements may not be activated at all for nonparticipants or, if they are, only for a large country, like Mexico or Brazil, in which the GAB creditors have important interests.
Third, the possible use of the GAB for the benefit of nonparticipants may be only temporary. The new provisions will be the subject of particular scrutiny by the participants before the General Arrangements are next renewed. If the crisis atmosphere of 1982 has given way to a more settled international outlook, the participants could decide to restore the General Arrangements to their original role as a source of finance available exclusively for drawings by the Group of Ten on the Fund.
Fourth, and more generally, the enlargement of the General Arrangements, in preference to a much larger quota increase, could be interpreted as a shift to a more conservative role for the Fund in the mid-1980s. The quota increase that emerged from the Eighth General Review was below what could have been justified by members’ potential needs for Fund financing. The GAB participants, and not the Fund, have control over the new GAB resources. In recent months, the major industrial countries have been pressing the Fund to recognize the constraints on its resources and to live within these constraints. They have successfully urged the Fund to provide less finance over shorter periods and subject to stricter conditions. They believe that the Fund is overextended and should return to its more traditional monetary role as a temporary lender of last resort.