(B) Creation of Additional Reserves Through the International Monetary Fund—Supplementary Notes (March 28, 1966)
- International Monetary Fund
- Published Date:
- February 1996
(a) Intended sequence of the arrangements described in Parts I and II respectively. The two schemes presented were intended to be considered as alternative approaches to the same objective of creating additional international reserves. The underlying idea was that, although the two schemes were similar in most of their effects, members might have a preference for one or the other on either institutional, technical, or psychological grounds. It was also suggested in the memorandum by the Managing Director that there might be some convenience in starting with the first scheme even if this might involve going over later, as more experience had been gained, to the second scheme if that scheme were considered to be technically preferable for the longer run. There is nothing of a legal or technical nature in the two schemes, however, that would prevent their being in operation at the same time, if that approach to the problem were felt to be the most desirable.
(b) Provision of conditional and unconditional liquidity. In the introduction to his proposal, the Managing Director pointed out that an expanding world economy would require increases in both conditional and unconditional liquidity “in an appropriate mixture.” The mixture between conditional and unconditional liquidity should be a reflection of the agreed views among countries as to the extent to which their ability to meet payments deficits should be subject to some measure of international control, i.e., be met by conditional liquidity, and in what degree countries should have resources freely at their disposal to meet such imbalances, even though their policies would still be the subject of international scrutiny or international rules of good behavior as established by the international organizations of which they were members. 1
If countries wanted to preserve approximately the present balance between conditional and unconditional liquidity, quotas in the Fund would have to increase over time in approximately the same proportion as countries’ own reserves. On the most recent occasion when countries decided to increase conditional liquidity, in connection with the increase in the Fund’s quotas, the increase agreed was not much larger proportionately than that shown by reserves in recent years. The latest Quinquennial Review provided for a basic increase of 25 per cent and a number of special increases, making for a total increase of approximately 30 per cent of quotas. This involves a rate of increase of Fund quotas of the order of some 5 per cent per year over the six-year period elapsed since the previous general quota increase. This rate compares to increases in countries’ reserves of 3½ per cent a year in recent years, and of about 8 per cent a year for all countries except the United States.
Part I: Special Reserve Facility in the IMF
A. Creation and distribution
The scheme provides for reserve creation in amounts broadly proportionate to Fund quotas. The purpose of this provision is to make this facility no more rigid than a unit scheme as to the amounts of additional reserves to be made available to individual countries. Since the amounts to be created for each country will be expressed in absolute amounts, any subsequent quota increases, whether special or general, will not automatically lead to increases in the special reserve facility. It will be up to the Fund at that time to decide whether or not, and in what amount, quota increases should be accompanied by increases in the special facility.
B. Access to facility by members making conditional use
Under the new facility members acquire conditional or unconditional liquidity in the Fund depending on their position in the Fund. This “self-qualifying” principle is a normal feature of the Fund which for instance also applies when countries make gold payments on quota increases: countries that are at that time using the Fund in the credit tranches do not receive an addition to their gold tranche facilities, but an increase of their conditional access to the Fund.
It would have been possible to avoid this “self-qualifying” feature and to give all members an additional drawing right in the Fund of an unconditional character by making the new facility fully “floating.” However, it was felt that the feature as proposed recommends itself in that it makes unconditional reserves in the first instance available only to countries that are not at that time meeting payments problems for which they have had recourse to the Fund’s conditional liquidity, and, more generally, only to those countries which, in the light of their actual use of the Fund, can with good probability be expected to add to the average level of their reserves over time.2
C. “Floating” character of facility
Apart from the qualification mentioned under B, the new facility will be fully floating in the sense that members receiving it will be free, after they have used the gold tranche, to use it, in whole or in part, before or after they use any part of their conditional facilities.
If a member was using the Fund’s resources in the credit tranches at the time of the first distribution of the special reserve facility, reductions in the Fund’s holdings of its currency below an amount equivalent to its quota plus its allocation of this facility would begin to give the member this facility pro tanto. The member would thus gradually come into the same position as countries that had received the facility at the time of distribution. In other words, the member will in due course have the full special facility in addition to all of its established conditional and unconditional drawing privileges in the Fund.
For example, a country with a quota of $100 million and Fund holdings of its currency of $150 million would not receive the special facility of, say, $5 million at the time of the initial distribution. However, this country’s established conditional drawing facilities would be increased so that the Fund’s holdings of its currency could also rise to $205 million. As the country repurchased the Fund’s holdings of its currency below $105 million, it would begin to acquire the special facility. For example, if it had repurchased the Fund’s holdings down to $102 million, the country would have acquired the special facility for an amount of $3 million. Assuming that the member met the applicable policy criteria, it could then draw so as to increase the Fund’s holdings to $202 million without using the facility or to $205 million with the use of the facility.
The process would work in a similar way on the occasion of subsequent distributions.
D. Provision of resources to Fund
Lines of credit equal for each member to its special reserve facility have been provided to safeguard the liquidity of the Fund. The equality of each member’s facility and commitment is similar to that provided in the Fund’s quota structure, where a member contributes an amount equal to its quota and can then draw, normally, an amount equal to 125 per cent of its quota. There are some differences from the quota structure:
(a) additional drawing rights under this scheme equal to 100 per cent of the line of credit and not 125 per cent as in the case of a quota increase;
(b) the additional drawing rights are (subject to B) unconditional, whereas under a quota increase they are at least four-fifths conditional; and
(c) the quota contribution includes 25 per cent in gold, whereas the line of credit is fully in currency.
The additional resources provided to the Fund through the lines of credit should be adequate to meet the additional drawing rights even without taking into account the Fund’s other resources.3
No suggestion is contained in the scheme as to the order in which the Fund would use currencies contributed under the quotas and those made available under the lines of credit. However, since the lines of credit provide loans under Article VII they could not be used unless the Fund needed to replenish holdings of a particular currency, and in practice this has not been done unless the Fund’s holdings were below 75 per cent of quota. Below the 75 per cent level it would make little difference in substance either to the Fund or to the member whose currency was used whether any amount was drawn from the Fund’s ordinary resources or under the lines of credit. The only difference of any substance would be the interest payable on lines of credit, and even this difference would disappear if the Fund decided as a matter of policy to distribute preferential dividends under Article XII, Section 6 at a rate equal to the rate of interest paid under the lines of credit.
This paragraph merely states that the existing mechanism of transferability applying to the gold tranche will also apply to the new special reserve facility.
The proposal on repurchase is intended to enhance the reserve-like quality of the gold tranche and the special reserve facility by dispensing with the representation that members make as to repurchase under the Decision of February 13, 1952. The representation is, in effect, that the member will repurchase as the problem for which it drew is overcome and within three to five years after the purchase at the latest. Although the representation on a gold tranche drawing is a representation of intention and not an obligation in the legal sense, and although it is in the form that if the member has not repurchased after three years it understands that it “will be requested” by the Fund to agree on repurchase within five years, some have thought that this detracts from the reserve quality of the gold tranche.
The proposal to remove this drawback cannot change the legal position that a member must make no more than a temporary use of the Fund’s resources. The Fund’s present policy understanding is that this is a period not exceeding five years. The Fund will continue to expect a member to make a temporary use even if repurchases do not accrue under Article V, Section 7 and even if the member no longer makes an express representation as to repurchase. There is a post hoc legal remedy for a protracted use in the ineligibility provisions, but the Fund had been reluctant to use this procedure. There is a further safeguard under Article V, Section 8 (d), and Rule 1-4 (g) in that the Fund’s charges continue to ascend beyond 5 per cent if a member fails to agree, in the consultation referred to in those provisions, on repurchase within five years.4
A member making a gold tranche drawing or using the special reserve facility would have to make the representation of Article V, Section 3 (a) (i), which encompasses both the need to draw and consistency with the provisions of the Articles. Legally, the Fund retains the capacity to challenge, but experience indicates that it can safely continue to give the overwhelming benefit of any doubt to gold tranche requests and extend this treatment to the proposed facility.
G. Decision making
The ideas set forth as examples of the way in which decisions of the Executive Directors can become operative are designed to ensure that the Fund will have adequate liquidity if it establishes the special reserve facility. The model on which the ideas are based is the general quota increase, which became operative when the Board of Governors, by 80 per cent of the total voting power, so decided and when consents were received from individual members totaling the specified minimum participation. The suggestions that have been advanced [on March 3, 1966] † would ensure adequate provision of resources without the need to wait for parliamentary action in countries representing 80 per cent of voting power. Care has been taken in all aspects of the plan, including the participation clause, to avoid the necessity of amending the Articles.
It should be noted that the ideas advanced [on March 3, 1966] † do not contemplate the establishment of a group of members to control liquidity creation. The members that have been mentioned as necessary participants are those that are indicated by the needs of the Fund’s own liquidity. The Executive Directors would adopt a participation clause at the time of a decision to create liquidity, and they would then determine what the clause should be in the light of contemporary circumstances and prospective developments. The decision would be operative only for the one distribution, i.e., for a five-year period, and it could be formulated in another way for any subsequent distribution in the light of new circumstances and developments.
Any member of the Fund will be able to participate in the facility if it wishes, provided that it grants a line of credit, and no vote will be necessary. The special voting provisions do not apply to any use of the facility.
The participation clause refers to members, and not voting by Executive Directors, if for no other reason than the fact that each member granting a line of credit would be entering into an agreement to lend pursuant to Article VII, Section 2.
H. Settlement and liquidation
These provisions will require to be spelled out in greater detail at a later stage.
Part II: Reserve Creation Through International Reserve Fund Units
The constitutional ideas touched on here and in section F can be clarified as follows. Three approaches can be contemplated. The first would apply to certain plans for integrating a unit scheme into the existing Articles with a merger of all assets for all of the resulting operations of the Fund; this would require extensive amendment of the Articles. A second approach would be to create a separate account for a unit scheme, with separate assets held by the Fund; this could be done with a simpler amendment of the Articles, which might be substantially or even exclusively the addition of a new article to the present charter. Neither of these approaches is proposed. The preferred solution is an affiliate with a separate charter and legal personality. This will not involve amendment of the Articles. The relationship between the Fund and the affiliate can be regulated in part by the charter of the affiliate and for the rest by an agreement under Article X. One feature of this approach would be that the participation for bringing the affiliate into being could be chosen at will and it need not be the same as is required for amendment under Article XVII (60 per cent of the membership having 80 per cent of total voting power).
C. Reserve creation and distribution
The currencies that members will pay to the Fund in exchange for units will be kept in the Fund in a dormant account as a guarantee fund to meet claims by members on liquidation, withdrawal of individual members, or reduction in the amount of units outstanding.
The second sentence of the second paragraph introduces the self-qualifying principle of Part I, paragraph B into the unit scheme. The third sentence envisages the fact that some kind of parallel action may be desirable in the irf if a country is ineligible in the imf or otherwise unable to draw. It is not suggested that ineligibility in the Fund would freeze the ability of a country to make use of the units it held at that time. The sentence referred to is intended to indicate that there might be circumstances in which a member, whether eligible or ineligible in the imf, should not, for good reasons, participate in a particular new distribution. What might be considered good reasons could be left to agreement between the imf and irf. If it should be agreed that there was good reason why a particular member should not participate in some distribution, its share could be canceled or simply withheld.
D. Value maintenance guarantee and interest
In essence this section attempts to establish rules for the transferability of units that reflect the experience of the Fund in its policies on drawings and on currencies to be drawn. There are some differences, however, which will be noted below. The suggested provisions also attempt to meet certain of the objectives which others have tried to achieve by suggesting that units could only be transferred in conjunction with an equal transfer of gold, i.e., to assure:
(a) that countries would not transfer units merely to change the composition of their reserves, and
(b) that countries would have to meet any payments deficit by a reasonable combination of traditional reserves and units. It is the staff’s view that the introduction of the link of units to gold in use would have undesirable side effects, and that, while units-cum-gold might require less reliance on rules for transferability than the circulation of units by themselves, such rules would still be necessary.
In accordance with these general objectives subsection (i) stipulates that members can dispose of units only in connection with a balance of payments need and, in the second sentence, makes the suggestion that members should meet only a certain proportion (say, half) of any total decline in their reserves by reducing their holdings of units. There is no suggestion that either of these two provisions be subject to a previous check or approval by the irf; if it were clearly established what were “the rules of the game” for the use of units, members would be expected to adhere to these rules but without prior approval procedures of the irf.
In subsection (ii)5 creditor limits of 3 times the amounts of units allocated to a member are suggested. This is higher than the implicit creditor limit in Section D of Part I, which comes to twice the amounts allocated. There are various reasons for this. The Fund by being able to use its resources, including resources borrowed under Article VII outside of the credit lines, could accept a somewhat narrower provision of liquidity for the new facility than would be applicable to the irf, which would have to rely fully on the acceptance rules of its own. It may also be a fact that countries might be more willing to undertake a commitment to purchase units for their reserves than to extend lines of credit to the Fund, although there is no inherent economic difference between the two commitments. In order to induce members to accept units beyond the limits specified in this subsection, the balance of payments need for the subsequent sale of units accepted beyond these limits is waived in the last sentence of this section.
The Fund’s experience with its policies on the currencies to be drawn suggests that members not only want to be assured of some equitable limits as to the amounts of reserves they are to be obliged to acquire in this form but are also anxious to have certain agreed rules on how transfers of units are to be made among holders within these limits. Subsection (iii) gives certain suggestions in this respect. The particular suggestion of broad proportionality to the total of other reserves (an arrangement which at present exists, subject to other criteria, with respect to reserve positions in the Fund) incidentally resembles in some respects the suggestion made in certain proposals that units be held in proportion to countries’ gold holdings, without the complications of the latter.
Since, as suggested in the last sentence of (iii), countries would have some discretion (and perhaps in the long run a large amount of discretion) in the choice of the transferee, it will be necessary to provide for a price at which units are transferred that will not in itself become an important determining factor as to the choice of transferee. It would not, therefore, seem possible to have all transfers at par against the currency of the transferee. The suggestion has, therefore, been made that the transfer be made at par against one currency, the U.S. dollar. Where the transfer is made against another convertible currency the exchange could be made against the currency of the transferee, but this would then have to be at an exchange rate reflecting the cross rate between that currency and the U.S. dollar.
F. Institutional aspects
G. Withdrawal and liquidation
This approach implies that reserves and credit facilities would both be available to meet fluctuations on current and long-term and short-term capital account. It is not believed that an “appropriate mixture” of conditional and unconditional liquidity could be determined on the basis of the nature of the imbalances to be financed or the relative rate of growth of such imbalances.
There is a strong correlation between countries’ ability to acquire and hold substantial owned reserves and their ability to avoid use of the Fund, or to repurchase after a short period of use. The following table compares reserves as a percentage of imports for all Fund members for which adequate data were available at each year end, 1959 through 1964, with data of the same countries’ simultaneous position in the Fund:
|Fund Holdings of Currency as Per Cent of Quota||Ratio of Reserves to Imports|
|Less than 30%||30–50%||More than 50%||Total|
|Over 100 per cent||74||19||7||100|
|100 per cent or less||26||37||37||100|
J. Marcus Fleming, “Effects of Various Types of Fund Reserve Creation on Fund Liquidity,” Staff Papers, International Monetary Fund (Washington), Vol. 12 (July, 1965), pp. 163–88.
This safeguard does not, however, apply to the gold tranche.
See above, pp. 3–7.
The words “from the irf or” in line 1 of this subsection [p. 7] are to be deleted.