International Monetary Fund
Published Date:
January 1971
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Under Article VII, Section 2,32 the Fund can borrow the currencies of members in order to replenish its holdings of them. The Fund has entered into General Arrangements to Borrow with eight of its members and the central banks of two other members. Each of these ten “participants” has assumed a stand-by commitment to lend up to a stated maximum amount in its own currency in certain circumstances and on certain terms and conditions.33

The commitment of each participant is expressed as an amount of units of its currency. There is no obligation on the part of participants to maintain the gold value of these commitments. Therefore, if a participant’s currency were devalued, its commitment would remain the same nominal amount in its currency, but the gold value of the commitment would be reduced. It is true that before Canada adhered to the General Arrangements, it agreed to an increase in its commitment on the establishment of a par value that represented a devaluation compared with the rate of exchange for the Canadian dollar on the basis of which the commitment had been calculated. However, this was a voluntary action on the part of Canada and in no way implied a duty to do this as a term of the General Arrangements. The fact that under the General Arrangements the commitments are determined once and for all in the participant’s currency 34 is in striking contrast to the obligations undertaken by members in connection with the Fund’s holdings of their currencies.

The obligation of the Fund to a participant under the General Arrangements resulting from an actual advance of its currency to the Fund has been settled in another way. The question arose whether, in the event of a change in the par value of the participant’s currency before the date of repayment by the Fund, repayment in the participant’s currency would be based on the par value at the date of the advance or at the date of repayment. Article IV, Section 8(a), provides expressly for the maintenance of the gold value of the Fund’s assets and not its obligations. It was not necessary, however, to decide whether the Articles implicitly provide that the Fund’s repayment obligations under a loan agreement shall be maintained at a constant value in terms of gold. There was no difficulty in concluding that the Fund could agree as a term of the General Arrangements that:

The value of any transfer [to the Fund as a loan] shall be calculated as of the date of the transfer in terms of a stated number of fine ounces of gold or of the United States dollar of the weight and fineness in effect on July 1,1944, and the Fund shall be obliged to repay an equivalent value.35

This feature of the right to repayment helps to give it a character comparable to that of the gold tranche as a reserve asset.36

One reason why there was no difficulty in agreeing to this term was that it cannot subject the Fund to loss, although it is also true that the Fund cannot garner a profit.37 If the Fund borrows a member’s currency under the General Arrangements, it does so in order to sell that currency to another member. That other member will transfer to the Fund an amount of its own currency equal in gold value to the currency sold to it by the Fund, and the purchasing member will maintain the gold value of the Fund’s holdings of its currency notwithstanding changes in the par or foreign exchange value of its currency. Moreover, it will be required to repurchase its currency from the Fund, and the gold value of its repurchase commitment will also be maintained. Accordingly, the Fund, having borrowed currency for the benefit of a purchaser, will always receive from the purchaser the equivalent in gold value of what the Fund borrowed, and it is this amount that the Fund will be bound to repay to the lender.

Although the commitments of participants to lend to the Fund and the Fund’s obligations to repay loans made under those commitments can be operated on the different principles that have been explained, it might be necessary on occasion to reconcile them. For example, assume that a participant is committed to lend 200 million units of its currency, lends that full amount, and devalues its currency from parity with the U. S. dollar of the weight and fineness in effect on July 1, 1944 to two units to that dollar. The Fund will be bound to repay the equivalent of $200 million to the lender, and the purchaser from the Fund will be bound to make a repurchase equivalent to this same amount. When the purchaser repurchases and the Fund repays its debt, the Fund will repay 400 million units of the lender’s currency. The purpose of the General Arrangements is that there shall be revolving stand-by commitments to lend, and that on repayment the lender shall be bound to lend again should the need arise. However, the commitment is not increased beyond the original amount expressed in units of currency. In the example, the lender receives 400 million units in repayment, but its commitment thereafter will be no more than the original 200 million. This is the intent of Paragraph ll(i) of the General Arrangements:

When any repayment is made to a participant, the amount that can be called for under its credit arrangement … shall be restored pro tanto but not beyond the amount of the credit arrangement.38

More difficult questions may arise under this provision when a participant revalues its currency while a loan that it has made is still outstanding.

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