IMF History (1966-1971) Volume 1

Chapter 16: Quotas Enlarged

International Monetary Fund
Published Date:
February 1996
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Quotas, a Basic Part of the Fund’s original financial structure, assumed increasing importance in the years 1966–71. As in the previous twenty years, so in the years 1966–71, each member, upon joining the Fund, was assigned a quota and was required to pay a subscription equal to that quota. All subscriptions were paid partly in gold and partly in the member’s own currency, the gold portion normally amounting to 25 per cent of the member’s quota. The aggregate of quotas was the principal determinant of the volume of currencies and of gold available to the Fund, although the Fund also had access to additional resources by borrowing. The quota determined the contribution of a member to the Fund’s resources, the amount that the member might draw from the Fund, the member’s basic voting rights, and—for a member that was a participant in the Special Drawing Account—its allocations of SDRs.

There were several reasons why quotas assumed a greater importance in the six years ended with 1971. Members were making heavy use of the Fund’s resources. The discussions on international liquidity put considerable emphasis on the distinction between conditional and unconditional liquidity, and the volume of conditional liquidity was related to quotas. Members became more concerned about their relative voting positions in the Fund. And quotas were to be used to determine amounts of SDR allocations. Close attention to quotas meant that, when overall quotas were reviewed, the calculation of individual members’ quotas and the relative share of different groups of countries in the total were carefully scrutinized. Moreover, because of emerging problems about gold, the payment of gold to the Fund in connection with increases in quota also received special study.

In the six years ended December 31, 1971, the aggregate of quotas in the Fund—often used as a measure of the size of the Fund—almost doubled, increasing from a little less than $16 billion to almost $29 billion. Important changes also took place in the relative position of members in the structure of quotas; accordingly, changes occurred both in the distribution of votes cast by the Executive Directors and in representation on the Executive Board.

Growth from 1966 to 1969

The aggregate of quotas in the Fund on December 31, 1965 was $15,976 million. The first big jump thereafter came in the first few months of 1966 as a result of the fourth quinquennial review of quotas.1 The general and selective increases in quotas that had been recommended by the Executive Board following that review, and which had been approved in two resolutions of the Board of Governors in March 1965, took effect in February 1966.2 Within two months, that is, by April 30, 1966 (the end of the Fund’s 1965/66 fiscal year), 78 members had consented to the authorized increases and 67 members had paid the required gold and currency subscriptions. Also by that date, Jamaica, Malaysia, Nicaragua, the Syrian Arab Republic, and Tunisia had taken up the increases in their quotas that had been approved under that part of the compensatory financing decision that provided for sympathetic consideration of requests for quota adjustments by certain primary producing countries, particularly those with relatively small quotas.3 Quotas totaled $19,411 million on April 30, 1966. Table 5 (at the end of this chapter) gives the quotas for each member on that date and on April 30, 1968 and December 31, 1971.

Table 5.Quotas of Members on Selected Dates1(In millions of U.S. dollars)
MemberApr. 30,

Apr. 30,

Dec. 31,

Central African Republic7.58.513.0
China, Republic of550.0550.0550.0
Congo, People’s Republic of the7.58.513.0
Costa Rica20.025.032.0
Dominican Republic26.429.243.0
El Salvador25.025.035.0
Equatorial Guinea8.0
Gambia, The5.07.0
Germany, Federal Republic of787.51,200.01,600.0
Ivory Coast15.817.452.0
Khmer Republic25.0
Libyan Arab Republic19.019.024.0
Malagasy Republic19.019.026.0
New Zealand157.0157.0202.0
Saudi Arabia90.090.0134.0
Sierra Leone15.015.025.0
South Africa200.0200.0320.0
Syrian Arab Republic38.038.050.0
Trinidad and Tobago25.025.063.0
United Kingdom2,440.02,440.02,800.0
United States5,160.05,160.06,700.0
Upper Volta7.58.513.0
Western Samoa2.0
Yemen Arab Republic10.0
Yemen, People’s Democratic Republic of29.0

A dot (•) indicates that the country was not a member on the particular date or dates.

By this date not all members had taken up the increases in quota authorized by the Board of Governors in March 1965.

By this date all members had taken up the selective increases in quota authorized by the Board of Governors in March 1965; the period of consent for the general increase of 25 per cent that was authorized at the same time lapsed on April 30, 1968.

A dot (•) indicates that the country was not a member on the particular date or dates.

By this date not all members had taken up the increases in quota authorized by the Board of Governors in March 1965.

By this date all members had taken up the selective increases in quota authorized by the Board of Governors in March 1965; the period of consent for the general increase of 25 per cent that was authorized at the same time lapsed on April 30, 1968.

During the next fiscal year, which ended on April 30, 1967, the total of quotas rose by $1.5 billion, to $20,921 million. Another 34 members had made effective the general and selective increases in their quotas that had been authorized in 1965; Malaysia had paid the last of three installments of a special increase in its quota that had been approved by the Board of Governors in September 1964; Singapore (on August 3, 1966) and Guyana (on September 26, 1966) had joined the Fund with quotas of $30 million and $15 million, respectively; and Indonesia, which had joined the Fund in April 1954 and withdrawn in August 1965, re-entered on February 21, 1967 with a quota of $207 million.

Late in 1967 the Executive Board extended to April 30, 1968 the period for consent under the first resolution of the Board of Governors, the 16 members that were entitled to special increases under the second resolution having already taken up their increases. Hence, quotas from this source rose again in the fiscal year 1967/68, by $65 million. Only 6 members (the Republic of China, Kuwait, Laos, Panama, Senegal, and Togo) had not consented to the changes in their quotas that had been authorized in 1965. The Republic of China had not taken up any increase in its quota since joining the Fund in 1945. Senegal and Togo had declined increases.

A more important source of the rise in aggregate quotas in the year ended April 30, 1968 was the enlargement of the quotas of several members under the compensatory financing decision. The quotas of Korea, Nigeria, Peru, Uruguay, and Viet-Nam were increased by an aggregate of $128 million. In addition, The Gambia joined the Fund on September 21, 1967 with a quota of $5 million. On April 30, 1968 total quotas came to $21,119 million.

By April 30, 1969, quotas had risen by another $112 million, to $21,231 million. Only $32 million was accounted for by the admission of new members: Botswana (on July 24, 1968), Lesotho (on July 25, 1968), Malta (on September 11, 1968), and Mauritius (on September 23, 1968). The balance resulted from adjustments in quotas of existing members, mostly for members that had opted to pay in installments the additional subscriptions occasioned by the enlargements of their quotas authorized by the general increase of 1965. In addition, Burma, Cyprus, Panama, and Trinidad and Tobago increased their quotas under the compensatory financing decision, bringing the total number of quota adjustments effected under that provision to 30, for an aggregate increase of about $430 million. Panama’s increase took into account the general increase authorized in 1965 that it had not taken up before the date of expiry.

Fifth General Review Begins

Under the Fund’s procedures, the fifth general review of quotas was due to be completed not later than December 27, 1970, and the Executive Board was required to appoint a review committee one year in advance, that is, by no later than the end of December 1969.4 The Executive Directors decided, however, to begin the quota review somewhat earlier with an informal exchange of views in mid-1969. The fourth quinquennial review of 1964–65 had taken the better part of two years, despite the discussions of quotas in connection with the 1963 decision on compensatory financing of export fluctuations and those that the Group of Ten had had in 1964. The fifth general review was likely to raise more intractable questions.

As has been seen in Chapter 10, one of the difficulties facing the fifth general review of quotas was that it began in 1969 when consideration was being given to the activation of the SDR facility. Some members had misgivings about agreeing to the allocation of SDRs, and some officials feared that if these members consented to a general enlargement of quotas it would be on the condition that there would be no early SDR allocations. At the very least, the magnitudes of the amounts involved in the two exercises would be interrelated.

Furthermore, because each participant’s allocation of SDRs was to be based on its quota in the Fund, the Executive Directors, especially those elected by developing members, were eager that an understanding should be reached on what the quota increases were to be before any SDRs were allocated. In any event, some ingenious technique would have to be found to relate the SDR allocations, the first of which were expected to be made on January 1, 1970, to the quota changes resulting from the fifth general review of quotas, which was not expected to be completed until later in 1970.

Interest in the fifth general review of quotas was intense also because some of the largest members, including France, Italy, and Japan, had made it clear that, in addition to any general quota increase, they wanted substantial special increases in order to bring their quotas more into line with their stronger economic positions in the world. To arrive at these special increases on a consistent basis, there would have to be sizable special increases in the quotas of some other industrial members, including Belgium, Canada, the Federal Republic of Germany, and the Nordic countries. Thus, the upcoming quota review would affect not only the total size of the Fund but also the relative positions of members within the Fund, with resulting consequences for voting power and for representation on the Executive Board.

Another question was what part the Group of Ten would have in the quota review. Mr. Lieftinck told the Executive Directors, many of whom had not been on the Executive Board at the time of the fourth quinquennial review of quotas, that in his view the decision on the fourth quinquennial review had been taken outside the Fund and that the report of the Executive Board, which contained little economic rationale for the quota adjustment agreed upon, had reflected that situation. These were circumstances that he hoped would be avoided this time. Yet, in the meantime, the Group of Ten had become more active in international financial decisions.

Contrasting Views

The informal sessions of the Executive Directors in mid-1969 quickly brought out the major question on which debate was to center for the next several months: Should more emphasis be given to the general increase in quotas or to the selective increases? Because of the considerations mentioned in the preceding paragraphs, positions on this question differed substantially.

Data prepared by the staff showed that, given the rapid growth of world trade and payments during the mid-1960s, a general increase of reasonable size in Fund quotas was warranted. Calculations for members’ quotas applying the Bretton Woods formula to national income, foreign exchange and gold reserves, average imports and exports, current services, and variations in trade and service accounts as of 1967 produced a total of quotas much higher than that based on data for 1962, the year used at the time of the previous review of quotas.5 Even reducing the calculated quotas by one half, as had been done at the time of the fourth quinquennial review, yielded a total of $29.4 billion.

The Executive Directors elected by developing members were in favor of a large general increase. Messrs. Kafka and Madan contended that the world’s need for much more conditional, as well as unconditional, liquidity was readily apparent. The shift in world finance to heavy reliance on bilateral swap transactions and temporary lines of credit had been unhealthy. The size of the Fund ought to keep pace with the rapidly expanding world economy. But the primary consideration influencing their position was that, with large selective quota increases in prospect for several industrial members, the relative position of developing members as a whole in the structure of Fund quotas was in danger of being reduced. Quotas calculated for individual members showed that the shares of the quotas of several Latin American members and of India in total Fund quotas were especially likely to become smaller. The shift in the structure of quotas toward industrial members would be diminished if the general increase in quotas was larger and the special increases not so large.

Messrs. Kafka and Madan favored a general increase of at least 25 per cent, and would have preferred an even larger increase. The total of quotas of the Fund, they thought, could easily be increased to $30 billion. Some other Executive Directors for developing members went even further. Mr. Phillips O. (Mexico) said that he had personally told the Governors for many Latin American members who would be attending the 1969 Annual Meeting that a general increase in quotas of less than 50 per cent would not meet their needs. Mr. Escobar (Chile) took issue with the staff’s calculations. The use of official exchange rates to convert into dollars national income data initially expressed in local currency, he argued, yielded national income figures that were unduly low for members such as those in Latin America whose exchange rates had been substantially depreciated.

Mr. Stone was one of the few Executive Directors for the nonindustrial developed members who favored a general quota increase of considerable size. Inflation, he stated, had effectively reduced the real resources available to members from the existing level of quotas. Moreover, the quotas then being discussed were actually relevant to transactions some years hence, when world prices would be even higher and the volume of financial transactions much greater. Therefore, he believed that the quantity of the Fund’s resources ought to be considerably enlarged. In addition, he wanted to strengthen the quality of the Fund’s resources, stressing that a large increase in quotas would augment the Fund’s holdings of gold.

The Executive Directors for the industrial countries were much less inclined to support a large general increase, although most of them favored some sort of balance between the general increase in quotas and the expected selective increases for individual members. Mr. Johnstone believed that the sum total of selective increases should be of roughly the same magnitude as that of the general increase. Mr. Lieftinck thought that it would be difficult, both psychologically and politically, to have a smaller increase in quotas overall than on the occasion of the fourth quinquennial review, so that a 25 per cent increase seemed logical. The question was whether that 25 per cent should be inclusive or exclusive of the selective increases. Mr. Suzuki (Japan) preferred a comparatively large SDR allocation rather than a substantial general increase in quotas and, regarding the quota review, thought that preference should go to the selective increases. Mr. Maude likewise considered that, because of the activation of the SDR facility, the case for a general quota increase was much less strong than otherwise. Indeed, he believed that any increase in quotas could be limited to the selective increases.

Limit Set by Group of Ten

The Executive Directors thus held contrasting views. Some Directors favored as a minimum a general increase of 25 per cent, which would amount to an expansion of the Fund’s resources by $5.2 billion, plus whatever selective increases were agreed; other Directors wanted the emphasis placed on selective increases, which could themselves be as large as $5 billion. Reconciliation of these opposing views became quite complicated. The Group of Ten took the position that an upper limit should be placed on the amount of the increase in total Fund quotas. During the third week of July, Mr. Ossola, Chairman of the Deputies of the Group of Ten, informed Mr. Schweitzer that in the forthcoming general review the countries of the Group of Ten would support an overall increase in Fund quotas of 30 per cent, plus or minus 3 percentage points. The Deputies believed that, within this total increase of between $6 billion and $7 billion, it would be possible to combine a general increase of “reasonable” size with whatever selective adjustments were necessary. This consensus by the Deputies was accepted shortly afterwards at the ministerial level of the Group of Ten.

That the contrasting views expressed in July were deeply held was evident when the Executive Directors resumed their informal sessions in mid-August. Mr. Palamenghi-Crispi, Mr. Jacques Roelandts (Belgium, Alternate to Mr. van Campenhout), and Miss Lore Fuenfgelt (Federal Republic of Germany, Alternate to Mr. Schleiminger) emphasized that the figure of 30 per cent arrived at by the Group of Ten had been a compromise: it represented a one-third expansion of the Fund, which ought to be sufficient. The upper limit of 33 per cent consequently had to be regarded as nonnegotiable, that is, no figure higher than 33 per cent could be considered. On the other side, Mr. Kafka and Mr. Phillips O. objected that the Executive Board ought not to be faced with nonnegotiable limits.

Attempts at Reconciliation

In order to explore the implications of several possible combinations of general and selective quota increases, the staff calculated individual members’ quotas on a number of different bases: a 25 per cent general increase and $2.8 billion in selective increases; a 25 per cent general increase and $3.5 billion in selective increases; and a 20 per cent general increase and $4.5 billion in selective increases. In line with expressions by the Executive Directors appointed or elected by the members concerned that their authorities would not take up their full potential quotas, considerable downward adjustments were then made in the calculated quotas for the United States and the Federal Republic of Germany, no selective quota increase was assigned to the United Kingdom, and no quota increase was calculated for the Republic of China. Still, the total increase exceeded the 33 per cent limit insisted upon by the Group of Ten.

The staff then made an informal suggestion that the size of the general quota increase might be differentiated by country groupings. For example, a general increase of 15 per cent might be applied to those members that belonged to the Group of Ten while a 25 per cent general increase would be applied to all other members. A general increase so differentiated would expand the Fund by $3.87 billion, and with selective quota increases of about $3.1 billion, a package could be reached just within the $7 billion upper limit set by the Group of Ten.

Some members of the Executive Board—Mr. de Maulde, Mr. Hattori (Japan), and Mr. Palamenghi-Crispi—favored such differentiation in the percentages used for a general quota increase. Mr. Palamenghi-Crispi suggested that the basis of the differentiation could be along lines other than membership in the Group of Ten. But most of the Executive Directors did not like differential percentages. Mr. Dale said that the U.S. authorities objected in principle to differentiation among the Fund’s members. Mr. de Vries characterized differentiated rates for a general quota increase as the appearance of discrimination among the Fund’s members and feared that such discrimination might then follow in other situations, such as in the allocation of SDRs or in the degree of conditionality applicable to drawings. Mr. Stone thought that, as a result of the differentiation suggested by the staff for the forthcoming quota increase, the Fund would be too small, and it would not acquire enough gold. Mr. Kafka reiterated his belief that the quotas of all members ought to be increased by at least 25 per cent if the general quota review was to be significant.

Hence, although many of the Executive Directors were anxious that their proposed resolution to the Board of Governors for the Twenty-Fourth Annual Meeting, to begin in Washington on September 29, 1969, should be as specific and quantitative as possible, it was clear that accord could be reached on a resolution couched in only the most general terms. The Board of Governors was invited to approve, in addition to the resolution on allocating SDRs, one asking the Executive Directors to proceed promptly with the consideration of the adjustment of the quotas of members and to submit an appropriate proposal not later than December 31, 1969. This resolution was adopted by the Board of Governors on October 3, 1969.6

A Solution Emerges

After the Annual Meeting the elements of a solution began to take shape. The Governors for a number of developing members had spoken both about the low share of the developing members in the existing structure of Fund quotas and the need for a large general increase. And the Governors for some of the industrial members, for example, Canada and Italy, had expressed their support for a general quota increase of meaningful size that would not reduce the relative position of the developing members as a whole.7

It appeared that most Executive Directors, including those for the industrial members, would accept a general increase of 25 per cent. However, a general increase of 25 per cent, plus $5 billion in selective increases, would lead to an overall increase in the size of the Fund of nearly 50 per cent and to a sharp reduction in the shares of members other than those belonging to the Group of Ten. In order to limit the total increase, it seemed likely that some of the countries in the Group of Ten would voluntarily agree not to take up the full quotas offered to them, provided a number of them agreed to do so. Belgium, the Federal Republic of Germany, the Netherlands, Sweden, the United Kingdom, and the United States would, it was believed, be willing to scale down considerably the quotas offered to them.

The problem that now emerged was, therefore, how to reconcile arithmetically a 25 per cent general increase and a number of sizable selective increases with the 33 per cent limit for the total increase. This problem was to be taken up by the Executive Board meeting as a Committee of the Whole on Review of Quotas. In accordance with the Fund’s procedures, the Board appointed such a Committee of the Whole on November 5, 1969. The Committee consisted of all the Executive Directors, with the Managing Director as Chairman.

The Economic Counsellor, reporting on the meeting of the Deputies of the Group of Ten that was held in Paris on October 31, 1969, said that he thought that the Deputies were prepared to go along with a somewhat higher upper limit—say 35 per cent—in order to accommodate their own requests for increases in their quotas that amounted to a 34.8 per cent increase. However, several Executive Directors, including Mr. Lieftinck and Mr. Schleiminger, favored the 33 per cent ceiling. Hence, another compromise was attempted. Among the members slated to get large selected increases in their quotas, in addition to countries in the Group of Ten, were 4 other industrial members (Austria, Denmark, Luxembourg, and Norway) and 11 nonindustrial developed members (Australia, Finland, Greece, Iceland, Ireland, New Zealand, Portugal, South Africa, Spain, Turkey, and Yugoslavia). Mr. Palamenghi-Crispi and Mr. Plescoff, therefore, urged these members to accept voluntarily quotas lower than those calculated, just as some of the countries in the Group of Ten were doing. And Mr. Lieftinck attempted to work out agreed reductions with Messrs. Eero Asp (Finland), Johnstone, Palamenghi-Crispi, Stone, and van Campenhout. But this attempt was unsuccessful. While the Nordic members were willing to scale down their increases, other members strongly resisted any reduction in their proposed quotas. Mr. Stone gave the Executive Directors a number of reasons why the industrial members other than those in the Group of Ten and the nonindustrial developed members should not necessarily volunteer to let their quotas be reduced below the calculated amounts. For several of these members the calculated increase from both the general quota increase and any special increase was less, or certainly not much more, than the 33 per cent average increase being considered for the Fund as a whole. Moreover, the proportion of Fund quotas represented by developing members could remain unchanged, a stated objective of the quota exercise, without reducing the quotas proposed for these middle countries, if sufficient adjustment was made in the quotas of the industrial countries.

Agreement Reached on Fifth General Review

In accordance with the Executive Directors’ request, the staff then compiled a list of potential quotas. Taking into account the smaller increases agreed by some of the countries in the Group of Ten and by the Nordic countries, and allowing for no increase in the quota of the Republic of China, in line with the report of Mr. Beue Tann (Republic of China) to the Committee of the Whole that that member did not intend to participate in the general increase in quotas, the total of quotas came to $28.9 billion, an increase of $7.6 billion, or 35.4 per cent, over the existing size of the Fund.

These potential quotas became the basis for the report of the Executive Directors to the Board of Governors. The United States, the member with the largest quota, accepted a quota of $6,700 million, which was just slightly above its previous quota enlarged by the 25 per cent general increase. The United Kingdom, which had the second largest quota, accepted a quota of $2,800 million, only 14.8 per cent above its previous quota. The United Kingdom thus did not receive even the full 25 per cent general increase. The Federal Republic of Germany, which had the third largest quota, agreed to $1,600 million, a 33 per cent enlargement. The largest quota increases in percentage terms were for Japan (65 per cent), Italy (60 per cent), Belgium (54 per cent), France (52 per cent), and Canada (49 per cent). France was to have a quota of $1,500 million, still the fourth largest in the Fund, followed by Japan ($1,200 million), Canada ($1,100 million), Italy ($1,000 million), and India ($940 million).

Many other members were offered quotas that were 40 per cent, or more, higher than their existing quotas. These members included not only Austria, Denmark, Finland, Iceland, Ireland, Norway, South Africa, and Spain among the industrial and the nonindustrial developed members mentioned earlier but also, among developing members, Algeria, Iran, Israel, Kenya, Korea, Malaysia, Peru, the Philippines, Saudi Arabia, Thailand, and Trinidad and Tobago. Several other members—including Australia, Greece, Iraq, Jamaica, Mexico, Nigeria, Tunisia, Turkey, and Yugoslavia—were offered quotas that were at least 30 per cent higher than their existing quotas.

Mr. Phillips O., supported by Mr. Kafka, suggested that the principles of rounding used in the staff’s calculations should be changed somewhat. As in the fourth quinquennial review, quotas of less than $500 million had been rounded to the next higher $1 million and quotas of more than $500 million had been rounded to the next higher $5 million. The suggestion of Mr. Phillips O. was that quotas of up to $300 million be rounded to the next higher $1 million, that quotas between $300 million and $1,000 million be rounded to the next higher $5 million, and that quotas of more than $1,000 million be rounded to the next higher $10 million. These changes in rounding enlarged the potential quotas of Argentina, Brazil, Mexico, South Africa, and Venezuela. Very little was added to the sum total of quotas, and so alterations in quotas for these members were accepted.

The authorized quotas of six members (Cameroon, Ivory Coast, Kuwait, Lebanon, the Libyan Arab Republic, and Sierra Leone) also took account of the special increases to which they were entitled under the compensatory financing decision and which they had not yet taken up. Some members that had the right under the compensatory financing decision to claim increases in quota had not yet done so. The report of the Executive Directors recommended that where such a right had not yet been approved by the Board of Governors it would be superseded by the provisions of the resolution.

Because of these several adjustments in the quotas of individual members, the resolution proposed to the Governors did not describe the quota increase in general terms; instead, an annex attached to the resolution listed the maximum quota to which each member could consent.

Gold Payments and Alleviation of Impact

Before an increase in a member’s quota could become effective, the member was required to pay a subscription equal to the increase in its quota, of which 25 per cent must be paid in gold and the remainder in its currency. In the past the Board of Governors had approved a number of different arrangements for mitigating the impact on members’ reserves of gold payments to the Fund, necessitated by increases in quotas. To alleviate the direct, or primary, impact on their reserves, members had been permitted to increase their quotas by installments or to pay their subscription by means of special, unconditional drawings repayable in three years. In order to alleviate the indirect, or secondary, impact on the reserves of those members that had sold gold to other members so that the latter could pay their gold subscriptions, the Fund had sold gold to the former and had also made provision for gold from the Fund’s resources to be placed on general deposit with the United States and the United Kingdom up to an amount not exceeding $350 million.

During the fifth general review the question again arose whether the burden of members’ gold payments to the Fund should be alleviated and by what techniques. As the reader may recall, the possibility of using SDRs for gold in connection with quota increases had been explicitly rejected by the Finance Ministers and Central Bank Governors of the Group of Ten at Stockholm in March 1968.8 The problem of mitigation of the impact of gold payments, therefore, continued to exist, although it seemed less severe than on previous occasions because members would simultaneously be receiving additional reserves in the form of SDRs.

Some new technique for mitigating the impact of gold payments was necessary, however, since two of the means used in connection with the fourth quinquennial review to mitigate the primary impact could not be used. Under the Articles, as amended, special drawings in the credit tranches could no longer be unconditional. Moreover, although it had been agreed that a member could take up only a part of its quota and then, so long as the period of consent remained in effect, could take up larger amounts at a later date, SDRs were to be allocated as a percentage of quota. Members’ allocations of SDRs would thus be smaller if they took up their quota increases in installments.

This time the Executive Directors decided to exercise the discretion given to the Fund by Article III, Section 4 (a), to reduce the proportion of the increase in quota that had to be paid in gold. In accordance with that Article, a member was permitted to pay in gold only that proportion of 25 per cent of the increase in quota that the member’s monetary reserves bear to the increased quota to which the member has consented, and to pay the balance of the increase in quota in the member’s currency. The possibility of reducing the portion of quota increase payable in gold had been considered in connection with the third and fourth quinquennial reviews of quotas, but both times the Executive Directors had decided against it.

Despite these earlier rejections, the Executive Directors decided to consider such action in connection with the fifth general quota review. When the Committee of the Whole was considering mitigation of the impact of gold payments in November 1969, the Executive Directors favored the invocation of Article III, Section 4 (a), on a proportional basis, that is, reducing the gold payment required to the extent that a member’s reserves fell below its new quota. Mr. Kharmawan and Mr. Rajaobelina preferred a total waiver of gold payments, but that would have meant much less gold being paid into the Fund. The Executive Directors decided further that any member paying less than 25 per cent of its quota increase in gold must undertake to repurchase the additional currency subscription beyond 75 per cent of the increase in quota, unless the Fund’s holdings of that currency had otherwise been reduced, in five equal annual installments commencing one year after the date on which the quota increase became effective. As an additional technique for mitigation of the primary impact of gold payments, it was decided that members could consent to increases in quotas by installments.

Mitigation of the secondary impact of gold payments was also provided for. The Fund would sell gold up to a maximum amount of $700 million when it needed to replenish its holdings of the currencies of members from which gold had been purchased by other members. While the Executive Directors recognized that these triangular or turntable operations were somewhat artificial, adding nothing to total world liquidity, they thought that their objective justified these arrangements. Mr. Stone objected to this sale of gold by the Fund on the ground that the Fund thereby relinquished its right to a certain amount of gold emanating from the larger quotas. Several Executive Directors regretted that the new SDRs had not been given some kind of a role in the payment of quota increases. It was expected that most members wishing to buy gold for the purpose of paying their increased subscriptions to the Fund were likely to buy it from the United States, as they had done in the past, and that to a very large extent the sale of gold by the Fund would be to replenish its holdings of U.S. dollars. To the extent that the Fund did not have a need to replenish its holdings of U.S. dollars, it would be suggested to members that they purchase the gold from other members whose currencies the Fund did have a need to replenish.

Delaying the Consequences for Composition of the Executive Board

It was intended that the increases in quotas under the fifth general review should become effective sometime in 1970. This timing presented certain novel problems because it coincided with the regular election of Executive Directors, scheduled to take place during the 1970 Annual Meeting in Copenhagen. In the past, a regular election had never intervened between the time of the adoption by the Board of Governors of a resolution on quota increases and the effective date of most of the increases under it. In previous quota exercises, a minimum participation clause had been prescribed: quota increases became effective after members whose quotas represented a specified proportion of the total had consented to them.

However, it could not be known in advance when a minimum participation clause would be fulfilled, and on the occasion of the fifth general review this uncertainty could create difficulties in connection with the composition of the Executive Board. The increases in quotas might become effective too close to the time of the 1970 regular election to permit country groupings to be formed for electing Executive Directors. A similar difficulty attended a solution of letting the increase in any member’s quota become effective when that member had consented to the increase and had paid the subscription. In the past, any change in the groupings of countries electing Executive Directors or in the number of votes that might be cast by members had been avoided during the period immediately preceding an election. Moreover, Japan, which would have the fifth largest quota, would have the right to appoint an Executive Director, while India would no longer have that right. It was desirable to give India time to become part of a country grouping that would elect an Executive Director.

The Executive Directors accordingly agreed that no quota increases under the fifth general review would become effective until after the 1970 regular election. They chose October 30, 1970 as the earliest date that quotas could become effective, a date after the regular election of Executive Directors but before December 31, 1970, which was the latest date on which increased quotas could serve as a basis for the allocation of SDRs on January 1, 1971.

Consequently, while members received their altered voting power on November 1, 1970, the full impact on the line-up of members appointing or electing Executive Directors did not occur until the 1972 regular election of Executive Directors. There was, however, an interim arrangement for part of the change that would eventually come about. On November 1, 1970 Japan appointed an Executive Director, but Burma, Ceylon, Laos, Malaysia, Nepal, Singapore, and Thailand did not cast votes for any of the Executive Directors elected in the 1970 regular election of Executive Directors and designated the Executive Director appointed by Japan to look after their interests in the Fund until the next regular election of Executive Directors. India continued to have an appointed Executive Director until the 1972 regular election of Executive Directors. (At that election, held in Washington in September 1972 during the Twenty-Seventh Annual Meeting, there were several shifts in the groupings of members electing Executive Directors. These shifts were especially marked for members in Asia. India, not having formerly been in a group electing an Executive Director, had to arrange such a group.)

Resolution Adopted

On December 24, 1969 the Executive Board considered a draft of the report it would make to the Board of Governors, to which was attached the proposed resolution, and adopted that report. The Board of Governors adopted the resolution (No. 25-3) effective February 9, 1970 by more than the newly required majority of 85 per cent of the total voting power. Members had until November 15, 1971 to consent to the increases in their quotas, unless the date was extended by the Executive Directors.9

New Quotas Become Effective

Of the 116 members listed in the annex to the resolution, as amended to include the Khmer Republic (Cambodia) and the Yemen Arab Republic, 107 consented to increases in their quotas between October 30, 1970 and April 30, 1971. All of these had paid their increased subscriptions in full, and their new quotas had become effective. One member, Nepal, had paid one installment, thereby raising its quota only by one fifth of the increase to which it had consented. The total of Fund quotas on April 30, 1971 was $28,478 million.

By October 28, 1971, two weeks before the period of consent was due to elapse if it was not extended, Korea, Lebanon, and Tunisia had not yet notified their consents, and Kuwait, the Libyan Arab Republic, Luxembourg, and Singapore had consented to amounts less than those authorized. (The Executive Board extended the period, first to June 30, 1972 and then to December 31, 1972.) By the end of 1971 Korea and Tunisia had notified the Fund of their consents and only Lebanon had not consented to all or part of its increase.

Following these increases in quota under the fifth general review, there was a sharp rise in the Fund’s holdings not only of members’ currencies but also of gold. In the fiscal year 1970/71 members paid to the Fund $1,744 million in gold as a result of the payment of their increased subscriptions following the fifth general review. This was slightly less than 25 per cent of the aggregate increase in quotas. More than 20 members made reduced gold payments because their monetary reserves were less than their new quotas on the dates that they consented to their increased quotas. They paid $32 million, about half of what they would have paid had there been no reduction. These members undertook to repurchase in five equal annual installments, unless the Fund’s holdings of their currency were otherwise reduced, that portion of their local currency subscription which represented the difference between the actual amount of gold paid and 25 per cent of the increase in their quotas.

Seventy-five members bought gold from other members to pay all or part of their increased gold subscriptions to the Fund in 1970/71. Most purchases ($548 million) were from the United States; $16 million was from Austria. The Fund replenished its holdings of U.S. dollars and Austrian schillings by equivalent sales of gold to the United States and Austria. Very small amounts of gold were bought by Somalia from Italy and by Swaziland from South Africa, for which no mitigation was sought by Italy or South Africa.

In the eight months between the end of the fiscal year 1970/71 and the end of the calendar year 1971, seven members (Austria, Korea, Luxembourg, Portugal, Singapore, South Africa, and Tunisia) made their quotas effective. One member bought $7.5 million in gold from the Federal Republic of Germany to pay its subscription, and the Fund replenished its holdings of deutsche mark by an equivalent sale of gold to Germany.

Other Increases in Quotas During 1969–71

From May 1, 1969 to the end of 1971, the total of Fund quotas also rose for reasons other than the fifth general review. In the fiscal year 1969/70 4 countries joined the Fund: Swaziland on September 22, 1969 with a quota of $6 million; the People’s Democratic Republic of Yemen (Southern Yemen) on September 29, 1969 with a quota of $22 million; Equatorial Guinea on December 22, 1969 with a quota of $6 million; and the Khmer Republic (Cambodia) on December 31, 1969 with a quota of $19 million. In the same fiscal year, Zaïre and Jamaica increased their quotas under the compensatory financing decision, to $90 million and $38 million, respectively. These were the last quota increases under this decision because its provisions relating to quotas were superseded by the Board of Governors’ resolution on the fifth general review of quotas.

In December 1969 the quota of Laos was increased from $7.5 million to $10 million, the amount that had previously been authorized in the course of the fourth quinquennial review, but that Laos had rejected. At the end of 1969, just before the first allocations of SDRs, Laos reversed itself for the second time and decided to take up the larger quota, and was permitted to do so. In addition, in fiscal 1969/70, quotas were increased for 14 other members that had elected to take up in five equal annual installments the quotas authorized for them under the fourth quinquennial review. In view of the forthcoming SDR allocations, 11 of these members (Algeria, Chad, the People’s Republic of the Congo, Dahomey, Ivory Coast, Luxembourg, Malaysia, Mauritania, Morocco, Niger, and Upper Volta) accelerated payment of the fifth installment, thereby completing the total increases in their quotas under the fourth quinquennial review. The remaining 3—Cameroon, the Central African Republic, and Gabon—completed their installment payments in the fiscal year 1970/71.

All of the increases in quotas in the fiscal year 1969/70 were small. The aggregate of Fund quotas on April 30, 1970 was $21,349 million, only $118 million larger than the year before.

Aggregate quotas in the Fund on April 30, 1971, $28,478 million, were 33 per cent higher than they had been on April 30, 1970. Besides the quota increases under the fifth general review, this expansion reflected several small increases: three members paid their final installments under the fourth quinquennial review; on May 22, 1970 the Yemen Arab Republic joined the Fund with a quota of $8 million; and on December 29, 1970 Barbados became a member with a quota of $13 million.

In the last eight months of 1971, Fund quotas continued to grow as a result both of the fifth general review and of additions to membership. On May 28, 1971 Fiji became a member with a quota of $13 million; on December 23, 1971 Oman became a member with a quota of $7 million; and on December 28, 1971 Western Samoa became a member with a quota of $2 million.

The total of the Fund’s quotas on December 31, 1971 stood at $28,808 million. (See Table 5 at the end of this chapter for the quota of each of the 120 members on that date.)

Policy on Small Quotas

The growth in membership after 1966 raised another question concerning quotas: Should the Fund’s policy regarding small quotas be changed? After 1958 small countries seeking membership in the Fund had been offered minimum quotas in the range of $7.5 million to $11.25 million. Following the 25 per cent general increase in quotas effective under the fourth quinquennial review early in 1966, the applicable minimum would have been in the range of $10 million to $15 million. Several members did, in fact, ask for and receive increases in their quotas to $10 million. But when Zambia became a member in 1965 it was decided that quotas to be set for new members would not be adjusted to take account of the general increase under the fourth quinquennial review and that the applicable minimum would remain at $7.5 million.

Nonetheless, the staff believed that even this amount might be too large for some very small states that had become independent or were likely to become so in the future and that might apply for membership in the Fund. The economies of several countries, such as Botswana, The Gambia, Lesotho, and Western Samoa, that were then contemplating membership were extremely small when measured in terms of national income, imports and exports, foreign exchange reserves, and similar indicators of economic size. Calculations for quotas for these countries based on these indicators would yield quotas much below the minimum of $7.5 million. For some of these countries, quota calculations based on the relevant indicators would yield figures as low as $1 million to $2.5 million. Offering these prospective members unduly large quotas, even the applicable minimum of $7.5 million, could impose insuperable repurchase commitments on them when they became members and would also discriminate against other members.

The staff consequently recommended early in 1967 that the Fund should be prepared to consider offering small states a range of quotas below $7.5 million, with the understanding that this range should be appropriately related to the economic circumstances of each individual prospective member. For The Gambia, then an applicant for membership, the staff suggested a range of $4 million to $5 million. The lower figure, $4 million, resulted from a figure calculated in accordance with the Bretton Woods formula, which was then reduced in the same way as previous quota calculations for other members. The higher figure, $5 million, came from applying the ratio between quota and foreign trade that existed for several other small countries that were already members of the Fund.

The consensus of the Executive Board’s committee on membership for The Gambia was to accept the staff’s proposals. A quota of $5 million was accepted by the Executive Board and was approved by the Board of Governors in the membership resolution. Later in 1967 a quota for Botswana in the range of $2 million to $5 million was suggested, with the proviso that the quota chosen should be a multiple of $1 million. Botswana accepted a quota of $3 million.

In line with these precedents, in November 1967 the staff suggested a quota range of $3 million to $5 million for Lesotho. Lesotho accepted the lower figure. It was further agreed for both Botswana and Lesotho that they should pay not less than 3 per cent of their subscriptions in gold (compared with the usual 25 per cent) and the balance in their local currencies.

In 1969 the quotas for Swaziland and Equatorial Guinea were set at $6 million each, and in 1970, when the Yemen Arab Republic became a member, its quota was set at $8 million. As the year 1971 ended, Oman joined with a quota of $7 million and Western Samoa with a quota of $2 million, the smallest quota of all.

Quota Formula to be Reviewed

During the 1969 Annual Meeting, some of the Governors for developing members had expressed dissatisfaction with the way in which quotas in the Fund were determined. Mr. Jha (India) contended that the formulas used subjected developing members to a “double disability” When their gross national product and foreign trade figures declined, they received relatively smaller increases in quotas. Their access to the Fund’s resources was accordingly increased to a much smaller extent than if they had not suffered such declines. Yet these were the very members that most needed to use the Fund’s resources. In addition, poor members could not afford to lock up real resources for acquiring gold or foreign exchange. Mr. Jha further pointed to the large increase in the Fund’s membership that had resulted from the accession of so many developing members during the twenty-five years since Bretton Woods. By 1969, developing members accounted for over four fifths of the total membership. It was important to ensure that the position in the Fund of these members, individually and collectively, improved substantially in consonance with their changed status and responsibilities.10

Mr. Massad (Chile) urged the Fund to institute an early study and review of the factors taken into account in the Bretton Woods formula for determining quotas. In part, he argued that developing members had more need than other countries for the Fund’s resources. But he also appealed to the countries of the Group of Ten not to deprive the Fund as a multilateral organization of its full authority, and he urged that participation of all members be an actual fact.11 Mr. Tiémoko Marc Garango (Upper Volta), on behalf of the West African Monetary Union (Ivory Coast, Dahomey, Upper Volta, Mauritania, Niger, Senegal, and Togo), suggested a review of voting power.12

When the Executive Directors resumed their deliberations on quotas after the 1969 Annual Meeting, Mr. Kafka underscored Mr. Massad’s urgent request for a review of the quota formula. Mr. Escobar circulated a lengthy, technical paper prepared by his Alternate, Mr. Ricardo H. Arriazu (Argentina), containing calculations for the quotas of all members on the basis of a new formula. The formula stressed the increments in the variables of the Bretton Woods formula, that is, the increases in exports, imports, and national income taking place over a fairly long period of time, rather than the absolute values for these variables for a relatively short and outdated period of time, as in the Bretton Woods formula. Mr. Arriazu’s formula, therefore, became known within the Fund as the “incremental approach” to quota calculations. In using that approach, Mr. Arriazu’s rationale was that special weight ought to be given to the unusually rapid increases in trade and national income that many members had experienced in the years since the Bretton Woods formula was devised. In addition, his proposed formula used hypothetical exchange rates based on purchasing power parity relationships (that is, relationships between exchange rates and prices) rather than actual exchange rates, to convert national income figures from local currencies into a common currency. Mr. Arriazu argued that the use of such hypothetical exchange rates would produce higher and more accurate figures for national income, especially for the developing countries, because these countries had depreciated their currencies relative to changes in their price levels to a far greater extent than had industrial countries.13

The case of Mexico was an example of the dissatisfaction of several developing members with the calculations produced by the Bretton Woods formula. Mr. Phillips O. had asked that Mexico’s quota as calculated during the fifth general review be enlarged beyond the amount produced by the formula, basing his argument on the need to take into account items not included in the Bretton Woods formula. Mexico needed a larger quota, he said, because it was subject to large and volatile movements in capital owing to its substantial commercial and financial interchange with the United States and an open border that made enforcement of exchange controls impossible. Moreover, Mexico was an original Article VIII member and a net creditor to the Fund, factors also relevant to the quota of a member.

Because of these arguments, the Executive Directors, toward the end of 1970, agreed to a program of work that included a full review of the economic and statistical criteria used in determining quotas and a careful consideration of formulas that were alternative to the Bretton Woods formula, including the one proposed by Mr. Arriazu. Although this review did not take place in 1971, the staff was preparing a number of technical papers on the subject. As 1971 ended, it was clear that the whole problem of quotas in the Fund, including the methodology used in their calculation, and the payment of gold to the Fund as a result of increases in quotas, was going to be under extensive review in the foreseeable future.

All figures in this chapter (as well as elsewhere in this history) pertaining to the Fund’s accounts are given in U.S. dollars; the Fund’s accounts were expressed in dollars until March 20, 1972. Moreover, for the most part, the figures in this chapter and in Chap. 19, both dealing with the Fund’s accounts, are based on the fiscal year of the Fund (May 1–April 30). The Fund regularly publishes its financial data on a fiscal year basis in the Annual Reports. The figures given here thus can be compared with other readily available data.

This quota exercise was summarized in Chap. 2, pp. 33–34.

See par. 3 of E.B. Decision No. 1477-(63/8), February 27, 1963, as amended by E.B. Decision No. 2192-(66/81), September 20, 1966; Vol. II below, pp. 198–99.

One of the amendments to the Articles in 1969 altered the provision for reviews of quotas every five years (quinquennial reviews) to general reviews to be conducted at intervals of not more than five years.

The so-called Bretton Woods formula was the one used at the Bretton Woods Conference to determine the quotas of the Fund’s original members. The formula was: 2 per cent of national income for 1940; plus 5 per cent of holdings of gold and U.S. dollars as of July 1, 1943; plus 10 per cent of average annual imports, 1934–38; plus 10 per cent of the maximum variation of annual exports, 1934–38; the sum was then increased by the ratio of average annual exports, 1934–38, to national income.—Oscar L. Altman, “Quotas in the International Monetary Fund” Staff Papers, Vol. 5 (1956–57), pp. 129–50; reference is to pp. 138–39.

Resolution No. 24-15; Vol. II below, p. 266.

See references listed in Summary Proceedings, 1969, pp. 361–63.

See Chap. 7 above, p. 173.

“Increases in Quotas of Members—Fifth General Review: Report of the Executive Directors to the Board of Governors, December 24, 1969” and Resolution No. 25-3; reproduced in Vol. II below, pp. 266–72.

Statement by the Governor of the Fund for India, Summary Proceedings, 1969, pp. 74–75.

Statement by the Governor of the Fund and the World Bank for Chile, Summary Proceedings, 1969, pp. 129–30.

Statement by the Governor of the Fund for Upper Volta, Summary Proceedings, 1969, pp. 141–42.

Estimates of the magnitudes of exchange rate changes in developing countries relative to those in other countries can be found in Margaret G. de Vries, “Exchange Depreciation in Developing Countries,” Staff Papers, Vol. 15 (1968), pp. 560–78.

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