Current Legal Issues Affecting Central Banks, Volume V

Chapter 1 Developments at the International Monetary Fund

Robert Effros
Published Date:
May 1998
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1A. Special Drawing Rights


Special drawing rights (SDRs) were created by the First Amendment of the International Monetary Fund’s Articles of Agreement,1 which entered into force on July 28, 1969. Although they were created to supplement existing reserve assets, they were not explicitly recognized themselves as reserve assets by the Fund’s Articles. Their main use was to be exchanged for currencies among Fund members. Some of those initial features were amended at the time of the Second Amendment (effective April 1, 1978) essentially to broaden the use of SDRs, make them the unit of account of the Fund’s General Resources Account (GRA) instead of gold, and not only recognize their nature as reserve assets but expressly state that they were intended to become the principal reserve asset of the international monetary system.

Thus, with the Second Amendment, SDRs were officially recognized as a reserve asset, a characteristic that was only implicit until then. Therefore, a country’s reserve assets now include four categories of assets: gold, foreign currencies, reserve position in the Fund, and SDRs. A brief comparison of these four categories of assets may be useful.

1. Gold is a traditional reserve asset and, although gold is no longer the monetary standard, many central banks hold part of their reserves in gold. Since there is no longer any official price of gold, gold reserves may be valued differently by central banks. Some use the old historic price of SDR 35 per ounce; others use the market price, which means that adjustments are made when the market price changes. Gold has two disadvantages: it is not a liquid asset, and it does not earn remuneration. For instance, a payment in gold may require a shipment from the seller to the purchaser. Alternatively, a central bank’s gold deposited with another central bank may be transferred without shipment by relabeling the holdings from the seller’s name to the purchaser’s.

2. Foreign currencies, in contrast, are liquid assets: they may be transferred from one account to another by instructions to the depository, which may be a foreign central bank or commercial bank. Foreign currencies may be invested to earn remuneration. They are valued at current exchange rates.

Both gold and foreign currencies share a common feature: they have to be purchased for value or borrowed. There is no such thing as a free distribution of gold or foreign currencies to central banks. For instance, a central bank may swap its currency for another central bank’s currency, but the transaction has to be reversed within the agreed period of time.

3. A reserve position in the Fund is really a credit line with the Fund’s GRA, but it is regarded as a reserve asset because its use is unconditional. It also happens to be cost free, although this is not a condition to being a reserve asset. A country that is a member of the Fund has a reserve position in the organization, to the extent that the Fund’s holdings of its currencies in the GRA are below its quota. For instance, if a country’s quota is SDR 100 million and the Fund’s holdings of the country’s currency in the GRA are SDR 75 million, the country has an SDR 25 million reserve tranche. The reason is that, because the quota must be fully subscribed in the member’s currency and other reserve assets (initially gold, now SDRs or other members’ currencies), whenever the Fund’s holdings are below the member’s quota, the member has made a net transfer of reserve assets to the Fund. This position may be the result of the way the subscription was paid or of subsequent sales of the member’s currency by the Fund to other members.

Any member that has a reserve position in the Fund has the right to draw all or part of its “reserve tranche” by obtaining SDRs or other member’s currencies from the Fund and replacing them with an equivalent amount of its own currency (or a security or book entry of the same amount). This right to draw the reserve tranche is said to be unconditional in the sense that the Fund cannot refuse the transaction, unless the member has been declared ineligible to use the Fund’s general resources (probably as a result of an earlier breach of its obligations under the Articles). The transaction is cost free: there is no service charge or periodic charge (interest) to be paid to the Fund.

Another feature of reserve positions in the Fund is that they are remunerated, but only in part. At the time of the Second Amendment, it was agreed that reserve positions should be remunerated because they corresponded to interest-earning assets provided by each member to the Fund. However, gold that had been used previously to finance part of quota subscriptions did not earn interest and could not be remunerated. Therefore, it was agreed that for countries that were members of the Fund at the time of the Second Amendment an amount corresponding to 25 percent of their quota at that time would not be remunerated. In relative terms, this amount is now less than 25 percent of current quotas, as quotas have been increased since 1976. Moreover, quota increases have not been uniform, which means that the unremunerated position in terms of quotas varies from country to country. This unremunerated percentage of quota is called the norm. For some countries, it is as low as 91 percent of quota; for others, more. Countries that joined the Fund after the Second Amendment were given a norm based on the average norm for other members at the time each new member joined the Fund (for example, 95 percent), and this percentage was later modified with subsequent quota increases.

4. SDRs are a relatively recent addition to reserve assets, and their creation was the result of protracted discussions. In the mid- and late 1960s, there was a growing concern that gold was no longer sufficient to finance the additional liquidity required by the growth of the world’s international financial relations. Moreover, the fact that gold was essentially produced in two countries (South Africa and the Soviet Union) created uncertainties on its future production, availability, and price. The central banks were trying to maintain the official price of gold of $35 per ounce, but market prices were already higher, which could have resulted in a general devaluation of all currencies if gold remained the monetary standard. The main source of liquidity was the U.S. dollar, essentially as a result of the U.S. balance of payments deficit, but many economists believed that this deficit would not last. They thought that the end of the Vietnam War, in which the United States was heavily engaged, would restore a surplus in the U.S. balance of payments, thus generating a shortage of U.S. dollars (the “dollar gap” so dreaded at the time).

Therefore, first within the Group of Ten, later within the Fund, various proposals were put forward to create a new source of liquidity, additional to existing reserve assets, which could be created by a deliberate action of the world community and injected into the world economy in order to avoid a general deflation, but subject to some strict conditions to avoid a general inflation. Finding a name was difficult, and the most lackluster and unimaginative denomination prevailed. By analogy with drawing rights on the Fund and because the new instrument was designed essentially as a credit line among participants, the new instrument was called the special drawing right. The Fund’s Articles of Agreement were amended to authorize the Fund to allocate SDRs to member countries that were willing to participate in the new scheme (“participants”).

At first, the creation of the SDR appeared to be a complete success: SDR 9.5 billion was allocated by the Fund in 1970-72. The SDR was still pegged to gold at SDR 35 per ounce, because gold was the unit of account of the Fund (in the form of the gold value of the 1944 U.S. dollar). However, the evolution of the world economy was not what had been expected. The U.S. balance of payments remained in deficit, and there was a surge of liquidity in the world, with inflation, as capital markets grew considerably and prices of commodities rose. Oil prices in particular increased considerably, and oil-exporting countries acquired large amounts of dollars (petrodollars), which were recycled outside the United States as eurodollars. This unexpected development cast a doubt on the continued need for SDR allocations. Nevertheless, further allocations of SDR 12 billion took place in the 1979-81 period.

Since then, there has been no SDR allocation. Consequently, countries that joined the Fund after that period have not received any SDR allocations, and some of them complain that this is inequitable. Other countries, however, feel that there is really no need at present for SDR allocations, because capital markets have ample liquidity. The debate is whether the conditions required for an SDR allocation are met, and the opinions are divided. Proposals for allocations have been made, sometimes for all Fund members—as all of them now participate in the SDR Department—and sometimes for those members that joined the Fund since the last allocation. The Managing Director has suggested to combine a general allocation to all members with a special allocation to new members. For an allocation to new members, an amendment of the Articles would be required. On March 18-19, 1996, a seminar on the future of the SDR was organized by the Fund, and the Interim Committee, at its spring session in 1996, asked that work on SDR allocations continue in order to reach a consensus. Therefore, SDRs are again very much in the forefront of the Fund’s agenda.

The rules governing the creation, valuation, and use of SDRs are extremely complex, and it is not possible or even necessary to present here an exhaustive description of these rules. Only the main features will be highlighted, but before describing these main features an example of how the system operates may be useful.

Theoretical Example of How the SDR System Operates

1. Assume that agreement among Fund members is reached on an SDR allocation of 20 billion to be phased over four years. The Managing Director makes a proposal, with the concurrence of the Executive Board, to the Board of Governors of the Fund. The proposal is approved by the required majority, that is, 85 percent of the total voting power in the Board of Governors.

The allocation is then made, at no cost to them, to all members of the Fund that are participants in the SDR Department, on the basis of their quotas at the time of their allocation. As previously noted, now all members of the Fund participate in the SDR Department.

All participants are entitled to receive an allocation. The Fund cannot discriminate among them by denying an allocation to a participant or by making allocations on any basis other than quotas. In particular, developing countries and countries in transition do not receive more or less than their quota-based share. SDR allocations are neither a form of development assistance nor limited to industrialized countries.

All participants must participate in the allocation. A participant cannot opt out unless its governor has voted against the allocation and the country notifies the Fund in writing that it does not wish to receive its share of the allocation. The reason for opting out is that participation in the SDR scheme creates some obligations, and there has been one case of opting out in the past at a time when these obligations were more likely to be effective than now.

2. Once a participant has received its share of SDRs, the participant has both an asset and a liability of equal amounts: its asset is the amount of its SDR holdings and its liability is the amount of its allocation. In the SDR Department, a mirror image will appear: by way of example, the SDR Department has a credit of 50 on the member for the allocation and a debit of 50 for the holdings. At that point the net balance is zero. The participant earns interest on its holdings and pays charges on its allocation. Since the rate of interest and the rate of charges are equal, there is no net cost again for the member as long as its holdings are equal to its allocation.

Suppose now that the participant uses some of its SDRs to pay a debt to another participant or to the GRA, or exchanges some of its SDRs for a foreign currency. Its holdings are reduced but its allocation is unchanged. The participant now has a negative balance vis-à-vis the SDR Department. Therefore, it will still pay the same charges (based on the allocation) but it will receive less interest (based on its holdings). This is true in all cases even if, for instance, the SDRs are used to make a donation: the donor will pay charges on the amount of the donation, while the recipient will earn interest on its additional holdings of SDRs.

Assume the opposite situation. A participant receives SDRs in payment: its charges will not increase because this is not an allocation, but its positive balance will entitle the participant to additional interest because its holdings have increased.

These basic rules of SDR accounting are unfortunately not always known, which may explain why some generous proposals for SDR donations to indebted countries have eventually failed when the potential donors realized that they would bear not only the voluntary loss of reserve assets but also the cost of additional charges on the amount donated.

3. The last step in this theoretical example is cancellation. Pursuant to the same procedure used for allocations, the Fund can cancel all or part of existing SDRs. The cancellation will be made in proportion to existing net cumulative allocations, without any discrimination among members. There is no opting out for cancellations.

Once a decision to cancel has been taken, the cancellation is automatic for participants whose holdings exceed or are equal to their share of canceled SDRs. Other participants must eliminate their negative balance as promptly as their gross reserve position permits. Therefore, there is at least a possibility of delay in the cancellation of those SDRs, since they have to be acquired by the participant that has a negative balance. There is even a risk that the participant will eventually fail to fulfill that obligation and will never return the value of the SDRs received in allocations.

A similar situation may arise if a member withdraws from the Fund: its participation in the SDR Department is terminated, and its SDR allocation is canceled.

Finally, the SDR Department may be liquidated, and all SDR allocations would then be canceled: some participants will have a positive balance while others will have a negative balance.

In all of these situations, there is a risk of loss if a participant does not return an amount of SDRs equal to its SDR allocation. The risk of loss is not borne by the Fund. When the SDR Department is liquidated, the loss will be shared among all participants with a creditor position, that is, those whose holdings of SDRs exceed their respective allocations. This consequence derives from the total separation of assets and liabilities between the General Department, where the Fund holds assets and incurs liabilities, and the SDR Department, which is only administered by the Fund and where the assets and liabilities are those of the participants.

This example will help to understand the nature of the SDR as an original type of reserve asset.

Functions of the SDR

The SDR has two functions. It is a unit of account and a reserve asset.

Unit of Account

The SDR is the unit of account of the Fund’s GRA. All Fund holdings of currencies in the GRA are expressed in SDRs, and their value must be maintained in terms of SDRs. If a currency depreciates, an additional amount must be credited to the Fund by the member, usually in the books of the central bank or in the form of security or book entry. If a currency appreciates, the Fund must return part of its holdings to the member. In both cases, the SDR value of the currency holdings will remain unchanged in terms of SDRs.

The SDR is also the unit of account for certain other purposes. For instance, it is the unit of account of the Structural Adjustment Facility (SAF), within the Special Disbursement Account of the General Department. It is the unit of account of the Enhanced Structural Adjustment Facility (ESAF) Trust, which is an administered account of the Fund outside of the General Department.

As a unit of account, the SDR is also used by various international organizations (the African and Asian Development Banks and the International Development Association), in bond issues and loan agreements, and for purposes of certain international treaties.

The value of the SDR is determined by the Fund on the basis of a basket of the five freely usable currencies.2 It is the sum of the following amounts:

U.S. dollar0.582
Deutsche mark0.446
Japanese yen27.200
French franc0.813
Pound sterling0.105

On May 7, 1996, the U.S. dollar value of the SDR was about $1.45 (exactly $1.4497).

Reserve Asset

At the time of the Second Amendment, two provisions were added to the Fund’s Articles that both state the objective of making the SDR the principal reserve asset in the international monetary system.3 The meaning of this objective is not altogether clear, but it can be explained by the travaux préparatoires of these provisions. The intention was that the SDR would replace gold in the monetary system. In other words, it would be the anchor of the system, not in terms of quantity but in terms of quality. It would be a desirable asset, valued and held by central banks. There was no intention, however, of preventing countries from holding other reserve assets or of making massive allocations of SDRs to replace other assets. Rather, it was expected that central banks would be less willing to part with SDRs—ideally more valuable than gold—than with other reserve assets. This explains why the Articles of Agreement imposed an obligation on participants to reconstitute, at least in part, their holdings of SDRs, an obligation that has since disappeared. This also explains why consideration was given, after the Second Amendment, to the establishment of a substitution account, which would have allowed countries holding dollars and other currencies to replace them with SDRs, but this proposal failed.

In any case, it is clear from the record that the objective of making the SDR the principal reserve asset was not regarded as a basis for SDR allocations, since these allocations are governed by specific conditions stated in other provisions of the Articles of Agreement. It may be noted, however, that shortly after the Second Amendment, when a second SDR allocation was under discussion, the point was made that, if the total amount of allocated SDRs fell to a negligible level in total reserve assets, the objective of making the SDR the principal reserve asset could not be met. Therefore, although the objective was of a qualitative nature, it would have quantitative implications.

As a reserve asset, the SDR offers a number of original features.

First, unlike gold and coins or banknotes, it is not a physical asset. It is not legal tender in any country. SDRs are book entries in the SDR Department of the Fund. SDRs can only be used among participants in the SDR Department, the Fund itself, and other holders prescribed by the Fund (for example, the World Bank, the Bank for International Settlements, and the like). Their use even among participants, the Fund, and prescribed holders is somewhat limited by the Articles of Agreement: they can be used for payments or exchanged for currencies of equivalent amount, and they can also be used for various operations, such as donations or swaps, prescribed by the Fund. The Fund itself can only hold SDRs in the GRA, not, for instance, in its administered accounts, even those where SDRs are used as a unit of account (the ESAF Trust).

Second, SDRs are created by the Fund, but they are not issued by the Fund. Unlike currencies, which are issued by central banks for value received and constitute liabilities in their balance sheets, SDRs are allocated by the Fund without any value received, and they are not liabilities of the Fund. As previously explained, the risk of ultimate loss is not borne by the Fund but by participants with creditor positions. Therefore, SDRs are really what their name says: they are credit lines among participants. This explains the contrast between a payment in foreign currencies and a payment in SDRs. A central bank making a payment in a foreign currency parts with an asset and will lose the interest on the asset if it was invested, but will not have to pay interest unless the foreign currency was borrowed. In contrast, a central bank making a payment with SDRs will have to pay charges if its holdings are reduced below its allocation: it has a debtor position vis-à-vis the SDR Department, as in the case of a payment in borrowed currency.

Third, operations and transactions in SDRs take place normally by agreement among participants and with the Fund or other holders. However, the Articles also contemplate the case where a participant could not find a counterpart willing to exchange its SDRs for currency. In that case, the Fund can designate a participant to provide currency for those SDRs. These transactions by designation are no longer necessary in practice, but this feature of the SDR system shows that basically SDRs are credit lines among all participants, on a multilateral basis, in order to ensure the full liquidity of the SDR as an asset.

Finally, SDRs can be canceled, just like credit lines can be terminated. The difference is that the decision to cancel is not made by individual creditors but by the Fund and in proportion to net cumulative allocations.

Without being facetious, the closest analogy to SDRs is Monopoly money. It is distributed at the beginning of the game to all players, because without money there is no game, and it is returned at the end. The difference is that in the SDR Department the “play money” can be used to buy real assets and discharge real liabilities and, at the end, real value must be returned if the allocated SDRs have been spent.

Allocations of SDRs

The general features of SDR allocations have been described in the theoretical example above, except one that is essential: the substantive conditions for an SDR allocation. Article XVIII, Section 1(a) of the Fund’s Articles of Agreement sets forth these conditions:

In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.

The major difficulty and the most controversial element in this provision is the meaning of “long-term global need.” Many attempts have been made to define this concept, but, even if a definition were adopted, there would still be a question of judgment as to whether at a particular moment it can be concluded that there will be such an actual long-term global need.

On the meaning of what constitutes a long-term global need, there have been innumerable discussions, but no definitive agreement has been reached. The only certainty is that there is no mathematical formula to answer the question. Some even doubt that, in a world of rapidly growing capital markets, there could ever be a long-term global need justifying SDR allocations, because reserves can always be borrowed from the markets. In response, others argue that some developing countries have no access to those markets or can only borrow under expensive conditions and for short periods, while an SDR allocation would provide them with the reserves they need. The response to the response is that the need of some developing countries is not a global need and that the cause of their problem is not the lack of available liquidity but their own lack of creditworthiness.

Without trying to resolve these fundamental problems, a few points can be made.

First, a distinction must be made between the finding of long-term global need and the decision to allocate SDRs. There may be a finding of need without a decision to allocate, for instance, because an increase in reserves other than SDRs is expected. Here, the objective of making the SDR the principal reserve asset will be taken into account, not as a substitute for need, but to decide, once a need has been found, whether an SDR allocation is the proper answer.

Second, the concept of need must be understood in light of the objectives of the provision: attainment of the Fund’s purposes and avoidance of economic stagnation and deflation, as well as excess demand and inflation in the world.

Third, at the time of the second SDR allocation, the report to the Board of Governors proposing the allocation stated the preference for owned reserves resulting from SDR allocations over borrowed reserves obtained from capital markets, as borrowed reserves are subject to refinancing. This consideration was included in support of the finding of long-term global need, but it would have more appropriately been made in support of a preference for SDR allocations over certain other forms of reserves. Regrettably, the distinction between the finding of need and the choice for an SDR allocation, initially made in the report, disappeared at the final stage and created some confusion.

Fourth, when assessing the need to supplement reserves, the concept of gross reserves has been used, although some support for using the concept of net reserves has been expressed.

Fifth, the term “global” means that an overall assessment must be made in terms of world reserves and need. The particular need for reserves of a group of countries is not relevant. In particular, the point was made at the time of the second SDR allocation that an inequitable distribution of reserves among countries, some of which had no access to capital markets, should not be taken into account.

Sixth, access to Fund credit is not a substitute for reserves, because reserves are unconditional while Fund credit is conditional. This point was also made at the time of the second SDR allocation, but again it is not relevant to the finding of need but rather to the discussion on how to meet the need, that is, whether or not an allocation of SDRs is the appropriate measure.

The ongoing and inconclusive discussions since 1981 on what constitutes a long-term global need and whether at any given moment the finding can be made has led to some proposals for amendments of the Articles.

Proposals for Amendments

Various types of amendments have been proposed to ameliorate the SDR in order to make it a hard asset. This would require a new definition, probably based on the price of the stronger currencies, at any given time, in a specified basket. The consequence could be a lower interest rate on SDR-denominated obligations, since the principal would be better protected against inflation.

Most proposals, however, have focused on the conditions required by the Articles for SDR allocations. A few may be mentioned. First, the concept of long-term global need could be defined on the basis of a mathematical formula; for example, as a percentage of world trade. A 10 percent increase in world trade would justify an additional 10 percent allocation to maintain the relative importance of the stock in SDRs in the world economy.

Second, SDR allocations could be linked to changes in quotas; any quota increase would trigger an SDR allocation in the same proportion. In that case, SDR allocations to each participant would be based on increases in the participant’s individual quota.

Third, in the 1970s consideration was given to special allocations to developing countries (“the link”). More recently, there was widespread support for an “equity allocation” to new members of the Fund that had not participated in previous SDR allocations. However, any allocation to a specific country or group of countries would require an amendment of the Articles, since the rule is that all allocations are made on the basis of quotas among all participants in the SDR Department.

In order to achieve some kind of equity allocation without an amendment, it was suggested to use the Fund’s power to cancel existing SDRs: all existing SDRs would be canceled, and they would be immediately reallocated among all participants, including new members, on the basis of current quotas. This proposal had one major disadvantage: some early participants would not receive the same amount of SDRs that they had before the cancellation, because the existing SDRs would be reallocated among a greater number of participants. Even if the cancellation were combined with an additional allocation, those participants would be deprived of their right to participate in the new allocation without losing their existing allocations. On legal grounds, the proposal was not acceptable, because, in order to cancel SDRs, the Fund had to find that there was no longer a need for them and the Fund could not, in good faith, make such a finding and at the same time find that there was a need for a new allocation. The proposal was a clear case of détournement de pouvoir where the Fund would use its powers to cancel and allocate in order to circumvent the rule that SDR allocations cannot be redistributed by the Fund among participants. The proposal was abandoned.

Fourth, as a substitute for the cancellation-reallocation technique, it has been proposed to amend the Articles in order to provide for a special allocation to new members. This “equity allocation” has found widespread support, but countries that support a general allocation on the basis of the present Articles of Agreement have taken the view that there is also a long-term global need justifying such a general allocation and have made the general allocation a condition for their approval of the amendment and the “equity allocation” to new members.

All of these proposals have one element in common: they preserve the unconditional nature of SDR allocations in the sense that either all participants or a designated group will receive the allocations. Other, more radical proposals have been put forward. For instance, SDRs could replace currencies in the GRA: the Fund would hold SDRs instead of the currencies paid by members for their quota subscription, and SDRs held by the Fund would be either borrowed or bought for their own currencies by member countries. A less radical system would be for the Fund to retain its holdings of currencies, but the Fund would also make temporary allocations of SDRs in order to supplement its holdings of currencies. In both systems, the sale or allocations of SDRs would be subject to the conditions governing the use of Fund resources. The objection to these schemes is that they would change the nature of SDRs and SDR allocations. They would either replace or compete with the current use of Fund resources, and they would negate the traditional distinction between unconditional assets such as SDRs and conditional assets such as credit tranche purchases from the Fund or loans from the ESAF Trust.

Most probably, the time has not come for such radical changes and the current discussions will focus on a possible compromise combining an equity allocation to new participants with a general allocation to all participants.


On September 23, 1997, the Board of Governors of the Fund adopted a resolution approving a proposal of the Executive Board for amending the Fund’s Articles to allow for a special onetime allocation of SDRs so as to equalize members’ ratios of cumulative allocations to their Ninth Review quotas at approximately 29.32 percent.4 In order to enter into force, the amendment will require acceptance by three-fifths of the members of the Fund, having 85 percent of the total voting power.5

1B. On Being a Lawyer in the International Monetary Fund



Societies, as well as organizations, ascribe different roles to lawyers. As international organizations have grown in number, diversified in function, and matured in form, interest in the actual situation of the lawyers in such organizations has increased. The International Monetary Fund is both active (in the pursuit of its objectives and functions) and mature (at 50). As the primary global organization responsible for the international monetary system, it is staffed mainly by economists. In this milieu, therefore, it is of interest to inquire: What does a lawyer do? When, how, and with what effect?

In order to answer these questions, first it is useful to spell out the objectives, structure, and functions of the Fund. Legal activities will necessarily reflect these features. Second, it might be informative to sketch the spread of legal tasks that are carried out by the Legal Department at this time. Third, and to flesh out the inquiry, some features of the legal function will be identified: Who are the clients? What form does legal advice take? Where is the law found? Finally, some issues of a broader nature will be raised for purposes of appraisal and reflection.

The Fund and Its Functions

The Fund

The following is an overview of what the Fund does and how it does it.

The Fund is an intergovernmental, international organization, whose authority and power derive from its constitutional document, the Articles of Agreement.1 These Articles were drafted by the World War II allies in 1944 at the same time as, but not as a component of, the negotiations leading to the United Nations (UN). The final negotiations, held at Bretton Woods, New Hampshire, produced both the Fund and the World Bank—thus, the “Bretton Woods Institutions.”

Under the Articles of Agreement, membership in the Fund is open to all countries, subject to the decision of the Fund on terms and conditions.2 Today, membership is essentially global (182 members). The Soviet Union, despite its participation at Bretton Woods, decided at that time not to become a member; but Russia and the other 14 components of the former Soviet Union have now joined.

As a worldwide organization with global responsibilities, the Fund is a distinctive actor in the international system—apart from its members—and, as such, exercises international legal personality. In addition, the Fund is also a specialized agency of the United Nations, having entered into the requisite agreement with the United Nations.3

The Articles of Agreement determine the decision-making structure of the Fund: A Board of Governors, composed of a Governor appointed by each member (and an Alternate Governor), concerned with basic policies and constitutional decisions, meeting annually; an Executive Board, consisting of 24 Executive Directors, some appointed by the largest members and some elected by their constituent countries, meeting constantly in Washington, thus constituting an active arena of intergovernmental consultation; and the Managing Director and staff. The Managing Director serves both as Chairman of the Board of Directors and as chief of the staff.


The functions of the Fund are set forth in the Articles of Agreement.

Article 1 of the Articles of Agreement sets out the purposes of the Fund in generic but incisive terms:

  • to promote international monetary cooperation;

  • to facilitate the expansion and balanced growth of world trade;

  • to promote exchange stability, including the avoidance of competitive exchange depreciation;

  • to assist in the establishment and maintenance of a multilateral system of payments;

  • to make financial assistance available to members, thus assisting members to overcome their balance of payments difficulties; and, thereby,

  • to help shorten both the duration and magnitude of payments imbalances between countries.

The Articles then deal with the functions designed to achieve those ends. A primary function is to administer a code of conduct with respect to exchange arrangements of members in order to establish and maintain fair exchange arrangements and stable exchange rates. This function was specifically delineated in the Second Amendment (in 1978) in order to replace the par value structure of the original Articles. Article IV imposes certain obligations on members; in turn, the Fund assumes the responsibilities of “oversee[ing] the international monetary system” and “the compliance of each member with its obligations” and is called on to “exercise firm surveillance over the exchange rate policies of members.”

Performance of this function of “surveillance” calls for the continuous collection of information by the Fund, regular contact between the Fund and its members, analysis of the underlying national financial and economic policies, the production of papers by the staff and discussions by the Executive Board, and dialogue between the national authorities and the Managing Director and staff. The surveillance function involves a constant interchange between the Fund and each member, and review of national action in the context of interactions with others and the broader international interests.

In order to foster a multilateral system of payments for current international transactions between members and the elimination of foreign exchange restrictions, members are obliged not to impose exchange restrictions on current international transactions, and to avoid multiple currency practices and discriminatory currency arrangements without the approval of the Fund,4 although restrictions maintained at the time of membership may be continued (and, by definition, those on capital transfers),5 Accordingly, this function calls for constant identification by the Fund of each member’s exchange laws and practices, and the resulting exercise of the Fund’s regulatory jurisdiction in this respect.

To assist members to respond to their balance of payments problems, and to enable them to fulfill their obligations under the Articles, the Fund provides foreign exchange, primarily from the currencies provided by members in the form of subscriptions, in order to help members overcome their external difficulties.

In this respect, the Fund has developed extensive policies and practices (“facilities”) for rendering this financial assistance, with a corresponding range of entitlement (“access”) and conditions governing that entitlement (“conditionality”).

In recent years, financial assistance has been granted primarily within two major avenues. First, for utilization of the general resources of the Fund, the traditional framework is the stand-by or extended arrangement. Under this technique, financial assistance is available to a member, pursuant to a credit line, over a period of 1-4 years, in support of the member’s stated financial and economic policies, and in accordance with a member’s progress (and to be reversed over 4–10 years). Second, for the 70 poorest countries, loans are available at concessional terms for similar stabilization purposes, under the Enhanced Structural Adjustment Facility (ESAF) Trust.

An additional area of activity of the Fund today concerns the operation of the regime of special drawing rights (SDRs), a scheme introduced by the First Amendment of the Articles in 1969, by which the Fund may supplement members’ reserves by allocating, on a deliberate and periodic basis, the reserve asset called the SDR.6

The latest allocation of SDRs was decided on in 1979 and completed in 1981. Allocation requires a threshold judgment that there is a global need to supplement existing reserve assets and be approved by 85 percent of total voting power. Since 1979, the required consensus of members for a further allocation has been absent, but the issue remains on the active agenda of the Fund.7

In recent years, the Fund has increased its efforts to provide technical assistance to its members for areas within its competence (primarily, fiscal, monetary and balance of payments policies, banking, exchange and trade systems, government finance, and statistics).8 This assistance—provided to members requesting it—is provided by staff members an outside experts, and usually involves visits to the country for discussions with national officials, followed by the preparation of studies, recommendations, and the identification of a timetable for implementation.

Finally, the Fund—like many international institutions—publishes extensively concerning its activities: an Annual Report, an Annual Report on Exchange Arrangements and Exchange Restrictions, the World Economic Outlook, several statistical publications, and a steady stream of books, articles, and pamphlets.

Legal Activities

Most, if not all, international organizations have a legal department, usually headed by a General Counsel. In the Fund, the Legal Department is made up of 25 lawyers—ranging in seniority and experience, and, reflecting the multinational character of the institution, drawn from different national legal backgrounds. In fact, the Legal Department is the smallest of the Fund’s 22 departments: to perform its functions, the Fund employs about 2,700 people, many of whom are economists.

The Legal Department was one of the first departments established at the beginning of the Fund in 1946, although lawyers had played only a supporting role during the negotiation of the Articles of Agreement in 1944. From those early days, therefore, it was accepted that the “legal perspective” was a necessary part of decision making. Since then, the Department has contributed to practically all of the Fund’s activities.

For organizational and presentational purposes, the legal work in the Fund can be described as falling within four functional categories: general legal issues, country-specific issues, administrative affairs, and technical assistance.

General Legal Issues

The broader legal issues faced by the institution comprise a class that may be categorized as “general legal issues.” Such issues include the most basic constitutional questions, involving matters of scope of power and permissibility of decision and action, the formulation of general decisions to project policy intentions, the drafting of basic instruments, the analysis of new legal issues and proposed initiatives, and relations with other organizations.

The Articles of Agreement are a constitutional document; under the Articles, the Fund is created as an entity of limited authority. Proposals for action, therefore, must be appraised for their legality. At the same time, a constructive approach requires a search for alternative strategies that may both satisfy legal standards as well as achieve the policy objective. However, in the event that constitutional difficulties cannot be overcome, an amendment to the Articles might be considered. At that point, examination of the scope and integration of the proposal with the existing Articles becomes paramount. Finally, once the draft amendment is settled, submission of an amendment will be accompanied by a detailed explanatory commentary to the Board of Governors. Amendments to constitutional charters, however, are not common; not only are amendments treated with solemnity, but for many countries parliamentary approval is required. Nonetheless, currently two amendments are under review by the Executive Board: one to allow for a special and additional allocation of SDRs, the other to increase the Fund’s regulatory authority over capital movements.

Allocations of competence between organs and procedures for decision making provoke a variety of legal issues. In December 1992, the Fund decided that the Socialist Federal Republic of Yugoslavia had ceased to exist, that it had been replaced by five new states, and that these five states should be offered membership in the Fund as successors to the original single member. That decision necessarily involved the issue of the appropriate level of authority. The Executive Board accepted that, the question not being a matter reserved to the Board of Governors, it was the authorized organ as a matter of general delegation. Issues of procedure are more pervasive. After the Second Amendment, there are numerous types of decisions calling for special majorities; the sale of gold by the Fund, for example, requires an 85 percent majority of the total voting power. In deciding upon the appropriate majority, the categorization of the actual decision then becomes crucial.

The formulation of new policy decisions can be particularly challenging. The Fund’s existing legal system must be reviewed and analyzed so that the proposal can be assessed for legality and consistency. Specifically, the new policy decision must be drafted so as to achieve the objectives of the proposal, and at the same time be sufficiently clear to members (in terms of their rights and obligations) and to Fund staff (in terms of application of the measure).

The Fund, of course, is only one among many actors in the international legal system. Another dimension is added by the Fund’s relations with other international organizations, such as the UN, the World Trade Organization (WTO), or the Organization for Economic Cooperation and Development (OECD). Traditionally, some organizations are close and open to cooperative (if at times competitive) behavior—as is, for example, the World Bank in its relations with the Fund. In other cases, organizations are entwined by their charters and other formal arrangements. With the WTO, for example, specific provisions build on the earlier General Agreement on Tariffs and Trade (GATT) experience of recognizing the Fund’s jurisdiction over exchange restrictions, on the one hand, and of the Fund’s contribution in the case of exchange restrictions for balance of payments purposes, on the other hand. At this time, to bolster the GATT experience, the Fund is negotiating a formal agreement with the WTO, which spells out the nature and scope of the cooperation of the two organizations through their organs and their staffs.

In these endeavors, the Legal Department at times prepares its own papers to serve as legal opinions. More frequently, lawyers work with other departments in order to produce joint papers, especially for the Executive Board. Finally, the Legal Department regularly reviews virtually all of the policy papers authored by other departments, for example, on surveillance, use of Fund resources, financial structure, and SDRs, in order to ensure respect for legal standards and the explanation of applicable principles, before the papers are issued to the Executive Board for discussion and decision.

Country-Specific Issues

The Legal Department is responsible for the drafting of all country-specific decisions. These include, in particular, Article IV consultation decisions and those on the use of Fund resources (including any associated arrangement).

As mentioned, the Fund’s regulatory jurisdiction focuses especially on each member’s exchange rate policies and exchange restrictions, usually in the context of the annual Article IV consultation report to the Executive Board. For each of the Fund’s 181 members, therefore, the exchange system of each member must be identified, understood, and explained; specifically, it is for the “country lawyer” to identify any restrictions, in order that they may be included in the relevant Article IV consultation report to be considered by the Board, as appropriate, for approval. In this regard, the Fund’s principles and jurisprudence have to be explained—and, at times, defended—both to the member countries and to the Executive Board. As part of its expertise, when a member is considering relinquishing its reliance on the transitional processes of Article XIV, thereby “accepting] the obligations of Article VIII,”9 the Legal Department undertakes a full and intensive review of the exchange system.

A major activity of the Fund is the provision of financial resources to its members to assist in their balance of payments stabilization. Approximately 90 members currently are pursuing adjustment programs in conjunction with the Fund.

The original expectation of the Articles was that the use of Fund resources was to be quite simple. That is no longer the case. First, different policies or windows (“facilities”) have been established to respond to different balance of payments problems. Second, there are two major means of assistance, the first drawing on the General Resources Account, the second drawing on the additional resources of the Structural Adjustment Facility or the ESAF. Third, as is well known, the Fund must be assured of the efficacy of the underlying economic and financial reform (“conditionality”), entailing the use of performance criteria, phasing, and regular reviews. In the case of Russia, for example, the new extended arrangement makes purchases subject to monthly reviews. All of these technical elements require understanding of policies and practices within a fabric of documentation that is unique to the Fund. It is for the lawyer to ensure that the Executive Board acts within the constraints of the Articles and the policies of the Fund, that the interests of both the Fund and the member are protected, and that the documentation, including the Board decisions, are in order.

In recent years, country-specific issues have also included the negotiation of an unprecedented growth of membership—35 new members since 1992. Membership is taken seriously by all concerned. On the side of the country, membership involves it in a new and intense relationship, calling for detailed scrutiny of its domestic affairs, disclosure of elements of its economic and financial system previously kept secret, and a variety of new obligations. On the side of the Fund, the membership seeks assurance that the country will behave in accordance with the applicable rules, and that, in the terms of the Articles, the applicant is legally in a position to accede to the treaty and to carry out its obligations. As a participant in this reorientation, the lawyer’s job is to explain the linkages of membership to the country and its new international obligations, as well as the policies and procedures of the Fund, and thereby to assist the country to draft the necessary membership legislation. Often, the exercise is straightforward, especially as credibility is established and issues explained. At times, however, more complex legal issues have to be resolved. For example, Bosnia and Herzegovina became a member of the Fund on December 20, 1995. Constitutionally, the governmental authorities were acting under the provisions of the Dayton Accord and, in particular, pursuant to the new constitution that entered into effect at the time of the Accord. Accordingly, the Fund had to rely on the transitional provisions of the Constitution in order to clarify, with the authorities, the appropriate procedures and, in particular, the officials authorized to act for the country.

Technical Assistance

The general growth of the Fund’s technical assistance program is reflected in the enlarged involvement of the Legal Department; today, more than one quarter of the Department’s resources are devoted to technical assistance.

Necessarily, the Fund’s legal technical assistance is associated with monetary, financial, and economic matters; traditionally, it is focused on three major areas: (i) the exchange system—especially related to exchange restrictions, exchange liberalization, and international payments; (ii) central and general banking; and (iii) taxation. In practice, this includes the review of proposals for new legislation, in the context of the political and legal aspects of the country, and the production, in close collaboration with a working group of the authorities, of comprehensive new laws. In this venture, the Fund’s lawyer is expected to contribute a perspective drawn from comparative experience, to clarify the proposed scheme, and adapt it to the changing demands and the prospect of enactment. In addition, the enactment of the legislative measure may be tied to the member’s program of financial and economic reform; when the measure is identified with a required prior action or a required performance under a Fund-supported program, its significance increases.

Administrative Legal Services

In Fund parlance, “administrative legal services” refers to the more practical aspects of the Fund’s legal relationships—both internal and external. Such functions are part and parcel of all international organizations.

Reflecting its legal personality and specified capacities, the Fund engages in a variety of activities in the “real” legal world; for example, it engages in contractual and other relations with private parties, pursues legal claims, and may be subjected to suit.

Second, under the Articles the Fund is immune from judicial process, and its staff and officials are protected in the performance of official functions.10 Within national courts, therefore, the Fund cannot be sued without its consent. That immunity, however, can be waived by the Fund. Similarly, officials and employees are entitled to the functional immunity referred to in the Articles and confirmed and expanded in the UN Convention on the Privileges and Immunities of the Specialized Agencies.11

Third, there is the matter of relations between the Fund and its staff. What law governs the employment relationship? If there is a dispute between the Fund and a staff member, how is it settled? Like other international organizations, the Fund has established different levels of decision for the resolution of such issues, in the form of a less formal and nonbinding Grievance Committee, and an adjudicatory, binding Administrative Tribunal, which allows the legality of regulatory and individual decisions to be tested.

Finally, the Fund as an employer conducts a pension scheme for its staff members, bringing different demands for rules, procedures, and judgments. On the one hand, the assets of the Plan are invested in accordance with the directions of an Investment Committee; the result is a mix of asset classes invested globally through more than 35 hired money managers. On the other hand, it is the Administration Committee’s job to apply the Plan across an assortment of individual situations.

All of these practical dimensions of the Fund take place in a legal context, with serious (and at times financial) consequences. Until now, they have been handled in-house by the Legal Department. In this way, the lawyer is expected, therefore, to protect the interests of the Fund, to assist other departments (particularly the Administration Department) in the pursuit of their functions, and to act as counsel for the Fund in arbitration and litigation proceedings.

The Context of Legal Advice

The Clients

The work of the Legal Department is demand driven from a variety of sources. Unlike in the case of a corporate lawyer, or even a governmental legal adviser, at the Fund requests for legal advice are relatively disparate and uncoordinated.

  • Members of the Fund, more formally at the level of Governors or Ministers, often acting through the respective Executive Directors, seek advice of the Legal Department on particular issues; for example, in the course of the Annual Meetings and other meetings, when issues assume a higher and more focused profile, and when a lawyer is asked to visit the country to explore a particular legal issue.

  • The Executive Board, as its name implies, is the organ of the Fund responsible for much of the Fund’s deliberation and decision making. It meets on a continuous basis in Washington, D.C. As part of the Executive Board’s deliberation of any matter, a legal question can arise. Often, the General Counsel or another senior lawyer responds immediately; at times, however, a more sustained written legal opinion is agreed on. For both more general policy decisions and the country-specific decisions, it is expected, therefore, that a lawyer will be available to explain the legal dimension to the Board and to guide its deliberations.

  • Executive Directors, who make up the Executive Board, consult the Legal Department as they consider it useful. This occurs so as to enable them to obtain or better understand a legal view, especially during the preparation of a presentation to the Board on an agenda item. It also occurs so as to explain matters to a concerned member.

  • The Managing Director, assisted by three Deputy Managing Directors, regularly calls for legal input. As chief of the staff of the Fund, the Managing Director is responsible for positions taken and advice given; as Chairman of the Executive Board, he is responsible for recommending proposals to the Board; as Managing Director, he is a participant in international discourse and initiatives at the highest political level. For these endeavors, the General Counsel is expected to contribute on an ongoing basis.

  • Other Departments and staff, either by tradition, direction, or in the search for assistance, turn to a lawyer. Thus, as mentioned above, virtually all papers written for submission to the Executive Board are passed to the Department for comment. Meanwhile, as part of this process a Department or a staff member can seek legal clarification at any time.

  • External inquiries are common. These range from friendly collaborators in other international organizations, to commercial agents and adversaries, to lawyers in practice facing international financial and Fund-related issues, and to lawyers and courts requesting a Fund view pursuant to Article VIII, Section 2(b) of the Articles of Agreement.

Forms of Legal Advice

Legal advice is given in different ways, ranging from the formal to the less formal.

The more formal legal opinions cover a spectrum. First, the Executive Board might ask for a full analysis of a legal position. In that case, the General Counsel directs the lawyers of the Department in the research, drafting, and production of an opinion under the rubric of an “Executive Board paper.” Normally, the Board will then discuss the issue. Similarly, a report to the Board of Governors on a matter for decision at that level, such as an amendment for the Articles, will be accompanied by a legal analysis (or “commentary”).

Second, the individual client may request or the issue may deserve a written formulation. That opinion, in turn, becomes part of the “law” of the Fund, to be identified, retrieved, and referred to in the future as a “precedent.”

Third, in the same way, the legal staff’s contributions at the Executive Board in the form of oral statements and replies to questions become part of the record. Extensive minutes of the Board meetings are kept to guide action in the future.

Less formal advice follows a similar diversity. First, as noted, almost all draft Executive Board papers emanating from other departments, both general policy papers and periodic reports on the one hand, and country-specific matters on the other hand, benefit from legal review and clearance. In addition, the Legal Department may be asked to review the more formal statements and speeches, as well as certain publications of the institution, and communiques and press releases.

The Fund, like other institutions, resorts to committees, working groups, task forces, and so on. In such situations, a legal perspective can guide the discussion on issues of substance and technique.

Finally, there is the ubiquitous telephone inquiry from new or established clients.

Corpus Juris of the Fund

To this interplay of legal activity, further questions might be asked: What law governs these questions? Does the Fund lawyer turn to some equivalent of American jurisprudence? The response is not quite so simple, but neither need it be elusive. There are, in the Fund’s practice, ample “sources” of law.

  • The Articles of Agreement are the constitutional charter of the Fund. The Articles lay down the Fund’s juridical personality, its purposes and functions, its institutional structure, its privileges and immunities, and, thereby, the rights and obligations of members.

  • The Board of Governors adopts decisions (“resolutions”) on important matters reserved to it, either in the form of general decisions, such as the Fund’s By-Laws and the rules for the election of Executive Directors, or in the form of individual decisions, such as the terms and conditions for the admission of new members.12

  • Executive Board decisions are numerous and diverse, being made up of general policies on the Fund’s activities, more detailed prescriptions (“Rules and Regulations”), and country-specific decisions (for example, approval of a Stand-By Arrangement or conclusion of an Article IV consultation).13

  • Within international organizations, practice can be prescriptive, especially when acted on by members and accepted by the Executive Board as authoritative. Past interpretations and legal opinions, meanwhile, are guarded carefully by the Department and can greatly influence legal positions and the course of decision making.

  • As a public international organization, the Fund relies also on principles of public international law and, more specifically, on principles governing international organizations, for example, with respect to treaty interpretation, the definition of what is a “country” eligible for membership and recognition of states and governments. Similarly, “the general principles of law” can play a role, involving, therefore, extensive comparative law investigation.

  • National law, especially through the form of comparative law, is also analyzed and respected, according to the context. By way of example, it could help to elucidate concepts of setoff and retroactivity.

  • International agreements may be particularly relevant, for example, the UN Convention on Privileges and Immunities of the Specialized Agencies.14


In light of this description of the Fund’s activities in general and the lawyer’s participation in these activities more specifically, some general observations about “being a lawyer in the Fund” might be made.

First, a lawyer in the Fund participates relatively fully in the Fund’s decision-making process: the formulation of policy proposals, the conversion of policy into authoritative rules, the interpretation and application of rules, and review and termination of rules.

Nonetheless, the lawyer’s involvement varies according to the situation. On major policy initiatives and matters in which legal complexity is apparent, the Department works in close association with others. In some activities, tradition sometimes governs the lawyer’s involvement or exclusion. There is no readily accepted definition of “legal issues”; sometimes, therefore, legal matters are necessarily (at least in terms of resources) handled by nonlawyers. Significantly, for example, the formulation of adjustment programs and the conduct of the staff’s Article IV discussions normally proceed without the presence of a lawyer. It follows that sometimes a lawyer’s engagement will be as a reaction to events rather than in terms of problem prevention.

A second comment relates to the loyalty of the lawyer; in other words, whose lawyer is he? In the domestic situation, the lawyer’s allegiance is more easily identified, such as an advocate for a party in the adversary process, as an adviser to a foreign office pursuing the identified national interest, or as a judge adjudicating a disputed claim.

Clearly, in the structure of the Fund there might at times be a certain tension. On the one hand, the Legal Department is just another of the Fund’s many segmentations (22 departments, bureaus, and offices) advising the Managing Director as he serves as chief of the operating staff. On the other hand, the General Counsel cannot reasonably be expected to change his legal advice upon command. In the Executive Board, similarly, Executive Directors look to the Legal Department as giving expert advice in an objective and essentially definitive fashion. Yet, at times, particular Executive Directors may contest the legal view; this is quite possible, for instance, when national interests are seen to be at stake or when national legal authorities have an established position despite the apparent correctness of a particular legal viewpoint.

At the same time, as guardian of the Fund’s legal system, however, the lawyer has a comparative advantage in several respects. First, it is acknowledged by all that the Fund is a “rule-based” organization and that it benefits from a substantial framework within which “discretionary” decisions are regularly required. In general, therefore, the search is for the governing rule and its proper application. To fortify this culture, the Managing Director and Executive Directors are often graduates from national bureaucracies and, therefore, well versed in rule-oriented systems. Second, the lawyer brings a strong portfolio of skills and knowledge—his whole training and experience are directed to the development of legal skills: the recourse to concepts (“uniformity of treatment,” “set off”); familiarization with legal doctrines, principles, and practices (for example, the Vienna Convention on the Law of Treaties15 and the meaning of immunity from judicial process); and intimate awareness of the Fund’s jurisprudence, with an acquaintance of past precedents and opinions. Finally, a legal contribution involves methodical preparation, structured presentation, and a recognition of systemic consequences.

A further important feature of the Fund’s decision making deserves mention, namely, the limited prospect for review of a legal opinion or an Executive Board decision. Under the Articles, a specified mechanism for review is in place, in particular, an interpretation of the Articles under Article XXIX. However, such recourse to a “formal” interpretation—with the prospect of appeal to the Board of Governors assisted by a Committee on Interpretation—has fallen from use. Meanwhile, the Agreement between the UN and the Fund provides for a request to the International Court of Justice for an advisory opinion.16 No such request has ever been made. In this situation, therefore, it is tempting to conclude that legal advice, to the extent at least that is accepted in practice and, as necessary, endorsed by the Executive Board, whether explicitly or in practice, assumes an adjudicatory function. This role is reinforced by the absence of any general dispute-settlement mechanism for disputes among members (in comparison to, for example, the WTO).

This, then, is the environment of a lawyer in the Fund. Perhaps it is not so far removed from a lawyer’s role in other institutions—for instance, as a government legal adviser or as a company lawyer. However, even though the methods and skills are similar, there are differences—not the least of which is that lawyers in an international organization are primarily dealing with its member states and are caught up in the historic shift of authority from exclusive national authority (“sovereignty”) to that of cooperative international authority.

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