Opting Out of a Uniform Proportionate Devaluation

International Monetary Fund
Published Date:
January 1971
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Whatever may be the practical difficulties of deciding that there shall be a uniform proportionate change, whether with or without a waiver under Article IV, Section 8(d), it will be assumed that there is such a change and a waiver in order to consider a further question. Under Article IV, Section 7, a member can inform the Fund within 72 hours of the Fund’s decision to make a uniform proportionate change that it does not wish the par value of its currency to be changed, and in that event its par value remains unchanged. If the member’s sole interest is to protect the gold value of its gold tranche, opting out of a uniform proportionate change will have that effect. Both the par value of the member’s currency and its quota would then probably be out of alignment with the par values and quotas of the members that had permitted the uniform proportionate change to affect the par values of their currencies. Nothing would prevent the member from proposing a change in the par value of its currency under Article IV, Section 5. Under that Article, the Fund would have to be satisfied that the member was in fundamental disequilibrium and that after giving the member the benefit of any reasonable doubt, the change was neither too large nor too small to correct the disequilibrium. A member that opted out of a uniform proportionate devaluation would not be likely to have any difficulty in showing that it was now in fundamental disequilibrium even though it might not have been before the uniform proportionate change. Furthermore, there would probably be no difficulty about the amount of the devaluation if the member proposed a change of the same proportion as the uniform proportionate devaluation. If the change in par value were made in this way, this would again preserve the former gold value of the member’s gold tranche.

If the member wished also to bring its quota into alignment with those of other members, it would have to apply for a reduction in quota under Article III, Section 2, and obtain the approval of the Fund.56 Again, it is not likely that the request for approval would encounter any great difficulty if the reduction was in the same proportion as the effective reduction in the quotas of the members participating in the uniform proportionate devaluation. If the Fund did not agree to the reduction, it would be perpetuating a change, and perhaps a striking change, in the hierarchy of quotas. It should be noted that although the Executive Directors could concur in the change of par value, a resolution of the Board of Governors would be required for the reduction of quota.57 This requirement would probably cause no inconvenience, because any urgency that might exist would be likely to relate more to the change of the par value than to the change of quota, and on the change of par value the Executive Directors themselves could act and act promptly.

If the change in par value and the reduction in quota were carried out, a “creditor” member would be in the same position as if it had not opted out of the uniform proportionate devaluation, with the important exception that it would suffer no reduction in the value of its gold tranche. The member’s gold tranche after these changes and the gold returned to it under Article III, Section 4(b),58 would equal in gold value its gold tranche before the changes. For example, suppose the member’s quota is $100 million and the Fund’s holdings of the member’s currency are $50 million before the devaluation. After the devaluation and a later reduction in quota of 50 per cent, the calculation in old dollars would be as follows: An amount equivalent to $50 million must be returned to the member, but only $12.5 million could be returned in currency so as to avoid reducing the Fund’s holdings below 75 per cent of the new quota. Therefore, $37.5 million would be returned in gold. This amount of gold plus the new gold tranche of $12.5 million would equal the former gold tranche of $50 million.

Although it is true that a member could prevent a reduction in the value of its gold tranche by opting out of a uniform proportionate devaluation accompanied by a waiver, if enough members with large gold tranches did this and then reduced their quotas, the result could be a reduction of the Fund’s resources below the total of quotas because of the payments of gold and currency that the Fund would have to make under Article III, Section 4(b), and the consequent decline on the asset side of the balance sheet. Even if these members did not reduce their quotas, the effect of opting out could still lead to a reduction in the liquidity of the Fund because of the relative increase on the liability side of the balance sheet. This increase in liabilities could occur whether or not their currencies were devalued. The implication of this analysis is that if the Fund were disposed to decide that there should be a uniform proportionate devaluation and a waiver of adjustment, it would be most unlikely to take such a decision without being confident that all, or perhaps most, of the members with large gold tranches would not opt out. This might well be the Fund’s attitude even apart from the financial considerations that have been discussed.

Finally, the point should be made that opting out has been discussed in terms of the dissatisfaction of a member with the reduction in the gold value of its gold tranche because of a waiver under Article IV, Section 8(d). It must be recognized, however, that a member might feel impelled to opt out of a uniform proportionate devaluation for other reasons. It might feel that it did not need to devalue its currency, and this might be more likely if the proportion of the uniform proportionate devaluation were much smaller than the one used for illustrative purposes in this pamphlet. Again, a member might consider that the proportion of the uniform devaluation was not appropriate for its currency and that a larger or smaller change should be made for its currency. All that need be said of these possibilities is that although the motive for opting out would be different, the effects on the liquidity of the Fund would be similar to those already described.

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