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IMF History (1972-1978) Volume 3
Chapter

Communiqués of the Interim Committee

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International Monetary Fund
Published Date:
February 1996
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The communiqués of the Interim Committee of the Board of Governors on the International Monetary System (Interim Committee) that were issued from October 3, 1974 through September 24, 1978 are reproduced below.

October 3, 1974

The Interim Committee of the Board of Governors on the International Monetary System held its inaugural meeting in Washington on October 3, 1974. The meeting was convened by Mr. Henri Konan Bédié, Chairman of the Board of Governors. Mr. John N. Turner, Minister of Finance of Canada, was selected as Chairman of the Committee for a period of two years. Mr. H. Johannes Witteveen, the Managing Director of the International Monetary Fund, participated in the meeting.

The members of the Committee had an exchange of views on the current situation and the prospects for the year ahead as it related to the business of the Committee.

The Committee reviewed the problem of recycling, and agreed to ask the Executive Directors to consider in this context, as a matter of urgency, the adequacy of existing private and official financing arrangements, and to report on the possible need for additional arrangements, including enlarged financing arrangements through the Fund, and to make proposals for dealing with the problem. The Committee also intends to discuss as a matter of priority the adjustment process, quotas in the Fund, and amendments of its Articles, including amendments on gold and the link, among other subjects.

The members of the Committee decided that their next meeting should take place on January 15-16, 1975, in Washington.

The terms of reference of the Committee are as follows:

“The Committee shall advise and report to the Board of Governors with respect to the functions of the Board of Governors in:

  • (i) supervising the management and adaptation of the international monetary system, including the continuing operation of the adjustment process, and in this connection reviewing developments in global liquidity and the transfer of real resources to developing countries;

  • (ii) considering proposals by the Executive Directors to amend the Articles of Agreement; and

  • (iii) dealing with sudden disturbances that might threaten the system.

In addition, the Committee shall advise and report to the Board of Governors on any other matters on which the Board of Governors may seek the advice of the Committee.

In performing its duties, the Committee shall take account of the work of other bodies having specialized responsibilities in related fields.”

January 15-16, 1975

1. The Interim Committee of the International Monetary Fund held its second meeting in Washington, D.C., on January 15 and 16, 1975. Mr. John N. Turner, Minister of Finance of Canada, was in the chair. Mr. H. Johannes Witteveen, Managing Director of the International Monetary Fund, participated in the meeting. The following observers attended during the Committee’s discussions of the matters referred to in paragraphs 2, 3, and 4 below: Mr. Henri Konan Bédié, Chairman, Bank-Fund Development Committee; Mr. Gamani Corea, Secretary-General, Unctad; Mr. Wilhelm Haferkamp, Vice President, ec Commission; Mr. Mahjoob A. Hassanain, Chief, Economics Department, opec; Mr. René Larre, General Manager, bis; Mr. Emile van Lennep, Secretary-General, oecd; Mr. Olivier Long, Director-General, gatt; Mr. Robert S. McNamara, President, ibrd.

2. The Committee discussed the world economic outlook and against this background the international adjustment process. Great concern was expresed about the depth and duration of the present recessionary conditions. It was urged that antirecessionary policies should be pursued while continuing to combat inflation, particularly by countries in a relatively strong balance of payments position. It was observed that very large disequilibria persist not only between major oil exporting countries as a group and all other countries but also among countries in the latter group, particularly between industrial and primary producing countries. Anxiety was also voiced that adequate financing might not become available to cover the very large aggregate current account deficits, of the order of US$30 billion, in prospect for the developing countries other than major oil exporters in 1975.

3. The Committee agreed that the oil facility should be continued for 1975 on an enlarged basis. They urged the Managing Director to undertake as soon as possible discussions with major oil exporting members of the Fund, and with other members in strong reserve and payments positions, on loans by them for the purpose of financing the facility. The Committee agreed on a figure of SDR 5 billion as the total of loans to be sought for this purpose. It was also agreed that any unused portion of the loans negotiated in 1974 should be available in 1975. The Committee agreed that, in view of the uncertainties inherent in present world economic conditions, it was necessary to keep the operation of the oil facility under constant review so as to be able to take whatever further action might be necessary in the best interests of the international community. It was also understood that during the coming months it would be useful to review the policies, practices, and resources of the Fund, since it would be appropriate to make increased use of the Fund’s ordinary holdings of currency to meet the needs of members that were encountering difficulties.

4. The Committee emphasized the need for decisive action to help the most seriously affected developing countries. In connection with the oil facility, the Committee fully endorsed the recommendation of the Managing Director that a special account should be established with appropriate contributions by oil exporting and industrial countries, and possibly by other members capable of contributing, and that the Fund should administer this account in order to reduce for the most seriously affected members the burden of interest payable by them under the oil facility.

5. The Committee considered questions relating to the sixth general review of the quotas of members, which is now under way, and agreed, subject to satisfactory amendment of the Articles, that the total of present quotas should be increased by 32.5 per cent and rounded up to SDR 39 billion. It was understood that the period for the next general review of quotas would be reduced from five years to three years. The Committee also agreed that the quotas of the major oil exporters should be substantially increased by doubling their share as a group in the enlarged Fund, and that the collective share of all other developing countries should not be allowed to fall below its present level. There was a consensus that because an important purpose of increases in quotas was strengthening the Fund’s liquidity, arrangements should be made under which all the Fund’s holdings of currency would be usable in accordance with its policies. The Committee invited the Executive Directors to examine quotas on the basis of the foregoing understandings, and to make specific recommendations as promptly as possible on increases in the quotas of individual member countries.

6. I. The Committee considered the question of amendment of the Articles of Agreement of the Fund. It was agreed that the Executive Directors should be asked to continue their work on this subject and, as soon as possible, submit for consideration by the Committee draft amendments on the following subjects:

(a) The transformation of the Interim Committee into a permanent Council at an appropriate time, in which each member would be able to cast the votes of the countries in his constituency separately. The Council would have decision-making authority under powers delegated to it by the Board of Governors.

(b) Improvements in the General Account, which would include (i) elimination of the obligation of member countries to use gold to make such payments to the Fund as quota subscriptions and repurchases and the determination of the media of payment, which the Executive Directors would study, and (ii) arrangements to ensure that the Fund’s holdings of all currencies would be usable in its operations under satisfactory safeguards for all members.

(c) Improvements in the characteristics of the SDR designed to promote the objective of making it the principal reserve asset of the international monetary system.

(d) Provision for stable but adjustable par values and the floating of currencies in particular situations, subject to appropriate rules and surveillance of the Fund, in accordance with the Outline of Reform.

II. The Committee also discussed a possible amendment that would establish a link between allocations of SDRs and development finance, but there countinues to be a diversity of views on this matter. It was agreed to keep the matter under active study, but at the same time to consider other ways for increasing the transfer of real resources to developing countries.

7. The Committee also agreed that the Executive Directors should be asked to consider possible improvements in the Fund’s facilities on the compensatory financing of export fluctuations and the stabilization of prices of primary products and to study the possibility of an amendment of the Articles of Agreement that would permit the Fund to provide assistance directly to international buffer stocks of primary products.

8. There was an intensive discussion of future arrangements for gold. The Committee reaffirmed that steps should be taken as soon as possible to give the special drawing right the central place in the international monetary system. It was generally agreed that the official price for gold should be abolished and obligatory payments of gold by member countries to the Fund should be eliminated. Much progress was made in moving toward a complete set of agreed amendments on gold, including the abolition of the official price and freedom for national monetary authorities to enter into gold transactions under certain specific arrangements, outside the Articles of the Fund, entered into between national monetary authorities in order to ensure that the role of gold in the international monetary system would be gradually reduced. It is expected that after further study by the Executive Directors, in which the interests of all member countries would be taken into account, full agreement can be reached in the near future so that it would be possible to combine these amendments with the package of amendments as described in paragraphs 6 and 7 above.

9. The Committee agreed to meet again in the early part of June 1975 in Paris, France.

June 10-11, 1975

1. The Interim Committee of the Board of Governors of the International Monetary Fund held its third meeting in Paris on June 10 and 11, 1975 under the chairmanship of Mr. John N. Turner, Minister of Finance of Canada. Mr. H. Johannes Witteveen, Managing Director of the International Monetary Fund, participated in the meeting. The following observers attended during the Committee’s discussions: Mr. Henri Konan Bédié, Chairman, Bank-Fund Development Committee; Mr. Gamani Corea, Secretary General, Unctad; Mr. Wilhelm Haferkamp, Vice President, ec Commission; Mr. Bahman Karbassioun, Advisor to the Secretary-General of opec; Mr. René Larre, General Manager, bis; Mr. Emile van Lennep, Secretary-General, oecd; Mr. F. Leutwiler, President, National Bank of Switzerland; Mr. Olivier Long, Director-General, gatt; Mr. Robert S. McNamara, President, ibrd.

2. The Committee received opinions, including that of the Managing Director, on the world economic outlook and its implications for the management of domestic policies and international financial relationships. The Committee agreed that external financing would remain for some time a critical problem for a number of countries and that its solution would require both maximum efforts on the part of such countries to enhance their creditworthiness and cooperative efforts in capital exporting countries to encourage the needed flows of financial resources.

3. The Committee noted that, in accordance with the consensus reached in the Committee at its January meeting, the Executive Directors of the Fund have decided to continue in 1975 the Fund’s oil facility and that in order to finance purchases under that facility, loans for substantial amounts have already been arranged with several oil exporting members and a number of other members in strong external positions. The Committee noted that negotiations would be continued in order to complete arrangements for the financing of the oil facility. The Committee welcomed the progress that has been make toward the establishment of a subsidy account to assist the members of the Fund most seriously affected by current conditions to meet the cost of using resources made available to them through the oil facility. The Committee welcomes the support pledged so far and urges other members to take similar action so that the account can be established as soon as possible. The Committee endorsed the decision of the Executive Directors to review all aspects of the facility in July 1975.

4. The Committee held a detailed discussion of the role of gold and there was widespread agreement that a solution would have to be based on the following broad principles:

  • (i) The objective should be an enhancement in the role of the SDR as the central asset in the international monetary system and, consequently, a reduction of the role of gold.

  • (ii) The official price of gold should be abolished.

  • (iii) Obligations to use gold in payments between the Fund and members should be abrogated.

  • (iv) There should be the sale of a portion of the Fund’s gold at the approximate market price for the benefit of developing members in general, and particularly those with low income, and the sale of another portion to members at the present official price.

  • (v) With respect to the rest of the Fund’s gold, there should be a range of broad enabling powers, exercisable with a high majority.

  • (vi) A reasonable formula should be found for understandings on transactions by monetary authorities with each other and in the market, which would include understandings that would be designed to avoid the re-establishment of an official price and would deal with the volume of gold held by monetary authorities.

  • (vii) An appropriate formula should be found for collaboration with the Fund in connection with the understandings among monetary authorities. Some countries felt that this collaboration should relate also to the reduction of the role of reserve currencies in the international monetary system.

The Committee was of the view that the Executive Directors should be asked to study the question of gold further in order that a final agreement can be reached on the basis of these principles.

The Executive Directors should study the establishment of a gold substitution account through which members would be able to exchange a part or all of their gold holdings for SDRs issued by the Fund for this purpose.

5. The Committee also discussed the exchange arrangements that members of the Fund should observe. There was widespread agreement that members should have a basic obligation to collaborate with the Fund and with other members in order to promote exchange stability, to maintain orderly exchange arrangements, and to pursue exchange policies that contribrute to adjustment, and that the Fund should adopt policies that contribute to adjustment, and that the Fund should adopt policies in order to enable members to act consistently with their basic obligations whatever their exchange arrangements might be. The Committee reiterated its agreement that provision should be made for stable but adjustable par values and the floating of currencies in particular situations, subject to appropirate rules and surveillance of the Fund, in accordance with the Outline of Reform.

6. The Committee endorsed the principle of the improvement of the Special Drawing Account and the General Account and agreed that the Executive Directors should be asked to find agreed solutions on the few remaining issues. The Committee attached particular importance to the inclusion of effective provisions in the amended Articles under which the Fund’s holdings of the currencies of all members would be usable, in accordance with appropriate economic criteria, in its standard operations and transactions. It was agreed that the Executive Directors should study a power to invest a part of the Fund’s assets equal to its reserves for the purpose of raising income that would enable it to meet any administrative or operational deficits, and to report on this subject as soon as possible.

7. (a) It was agreed that a Council should come into being when a decision is taken by the Fund for that purpose under an appropriate amendment. The Council would strengthen the Fund by providing it with an organ composed in the same manner as the Committee of Twenty and the Interim Committee but with authority not only to exercise advisory functions but also to take decisions under specific powers. The Committee shares the view of the Executive Directors that, except for a few powers of a political or structural character that should be reserved to the Board of Governors, all powers of the Board of Governors should be delegable in principle to the Council, to the Executive Directors, or to both concurrently, by decisions of the Board of Governors.

(b) On the question of the majorities for the adoption of decisions of the Fund on important matters, it was agreed that an 85 per cent majority should be required under the amended Articles for those decisions that can be taken now by an 80 per cent majority.

(c) The Committee noted with approval the draft of an amendment by which amendments to the Articles would become effective when accepted by three fifths of the members having 85 per cent, instead of 80 per cent as at present, of the total voting power.

8. The Committee considered various proposals to assist members in dealing with problems arising from sharp fluctuations in the prices of primary products. In this connection, the Committee requested the Executive Directors to consider appropriate modifications of the Fund’s facilities on the compensatory financing of export fluctuations and on assistance to members in connection with their contributions to international buffer stocks. It was agreed that, after amendment, a member using the Fund’s buffer stock facility would be able to retain any portion of its reserves held in the form of a reserve position in the Fund; this provision now applies to drawings under the Fund’s compensatory financing facility.

9. The Committee considered the report of the Executive Directors on the progress made toward implementation of the understandings reached in the Committee last January with regard to increases in the quotas of members as a result of the Sixth General Review of Quotas. The Committee noted with satisfaction that progress had been made in reaching agreement on quota increases to be proposed for individual countries. The Committee agreed that for the quota increases proposed as a result of this review, and subject to the amendment of the Articles, members should be given an option to pay 25 per cent of the increase in quota (which in the past members have had to pay in gold) in special drawing rights (SDRs), the currencies of certain other members, subject to their concurrence, or in the paying member’s own currency. The question of payment in gold by agreement with the Fund would be settled as part of the provisions on gold. The balance of the increase in subscription would be paid, as in the past, in the paying member’s own currency. The Committee also recommended that there should be no obligation for a member to repurchase the amount of its own currency paid in excess of 75 per cent of the increase in its quota. The Executive Directors have been asked to prepare and submit as promptly as possible to the Board of Governors, for consideration at its annual meeting in September 1975, a resolution that will include proposed increases in the quotas of individual members and provisions on the payment of corresponding subscriptions on the basis of the undertandings reached by the Committee.

10. The Committee agreed to meet again in Washington, D.C., immediately before the Annual Meeting of the Board of Governors. The Committee agreed to meet in Jamaica in January and expressed its gratitude to the Jamaican authorities for the invitation.

August 31, 1975

1. The Interim Committee of the Board of Governors of the International Monetary Fund held its fourth meeting in Washington, D.C., on August 31, 1975 under the chairmanship of Mr. John N. Turner, Minister of Finance of Canada. Mr. H. Johannes Witteveen, Managing Director of the International Monetary Fund, participated in the meeting. The following observers attended during the Committee’s discussions: Mr. Henri Konan Bédié, Chairman, Bank-Fund Development Committee; Mr. Gamani Corea, Secretary-General, Unctad; Mr. Wilhelm Haferkamp, Vice-President, ec Commission; Mr. René Larre, General Manager, bis; Mr. Emile van Lennep, Secretary-General, oecd; Mr. F. Leutwiler, President, National Bank of Switzerland; Mr. Robert S. McNamara, President, ibrd; and Mr. Gardner Patterson, Deputy Director-General, gatt.

2. The Committee had a discussion of the world economic situation and outlook, and expressed its concern about the current severe problems of recesssion and unemployment, balance of payments disequilibria, and inflation. The Committee felt that industrial countries which have slack domestic demand conditions and relatively strong balance of payments positions, and which have made progress in reducing inflation, should lead in the promotion of a satisfactory rate of expansion in world trade and activity. The Committee believed that, on the basis of such a coordinated policy approach, a resumption of economic growth might be expected for the industrial world during the latter part of 1975 or the first half of 1976. Although rates of price increase in industrial countries have generally been subsiding, the Committee noted the disturbing fact that economic recovery in the industrial world will get under way with rates of inflation still unacceptably high.

Throughout the Committee’s discussion, particular concern was expressed for the many primary producing countries, and especially the developing countries, whose current account deficits have been greatly enlarged by the increase in import costs and the downturn in global demand. Resumption of growth in world trade is urgently needed to alleviate the plight of such countries. Moreover, the Committee feared that, unless they were able to obtain adequate financing, many primary producing countries might have difficulty in fending off pressures to restrain imports, either through deflationary demand measures that would undermine their development efforts or through resort to trade restrictions. In view of these dangers, the Committee expressed the hope that the Executive Board would consider various steps that might be taken by the Fund to meet the present urgent need for a greater volume of financing.

3. The Committee noted the improvements in the 1975 oil facility introduced as a result of the July review by the Executive Directors and endorsed the efforts now in progress to raise the amount of resources that the Fund would be able to borrow for the financing of purchases under that facility to the total of SDR 5 billion that was agreed at the meeting of the Committee in January 1975. The Committee also endorsed the intention of the Executive Directors to have another review of the 1975 oil facility at an early date, one purpose of which would be to determine what action needs to be taken in the best interests of the international community, and also to undertake at about the same time a broader examination of the Fund’s policies on the use of its resources.

4. The Committee welcomed the establishment of a Subsidy Account to assist those members that have been most seriously affected by the current situation to meet the cost of using the oil facility and commended those members that have already stated their willingness to make contributions to that account. At the same time, the Committee expressed concern at the fact that the total amount of the contributions by members that have already stated their willingness to contribute is substantially short of the total support that was contemplated and urged those members that have not yet pledged their support to make every effort to do so as soon as possible.

5. The Committee noted the progress made by the Executive Directors on the Sixth General Review of Quotas within the framework of the understandings reached at previous meetings of the Committee. The Committee noted the agreement on increases in the quotas of almost all members. In particular, the increases for the industrial countries and for the major oil exporting members have been agreed. The differences that remain among the other members are few and are expected to be resolved soon. The Committee asked the Executive Directors to prepare and submit to the Board of Governors a resolution on increases in the quotas of individual members. The Committee also asked the Executive Directors to complete their work on the mode of payment of the increases in quotas on the basis of the understandings already reached in the Committee so that appropriate recommendations can be submitted to the Board of Governors at the same time as the resolution on increases in quotas. The Committee reiterated its view that all of the Fund’s holdings of currency should be usable in its transactions. The Committee agreed that on the question of majorities for the adoption of decisions of the Fund on important matters, a majority of 85 per cent should be required under the amended Articles for those decisions that can now be taken by an 80 per cent majority. It also agreed that amendments of the Articles should become effective when accepted by three fifths of the members having 85 per cent of the total voting power.

6. The Committee discussed the problem of gold, including the disposition of the gold holdings of the Fund. The elements of the consensus reached are described in this paragraph.

At the meeting of the Interim Committee on January 16, 1975, it was decided to move “toward a complete set of agreed amendments on gold, including the abolition of the official price and freedom for national monetary authorities to enter into gold transactions under certain specific arrangements, outside the Articles of the Fund, entered into between national monetary authorities in order to ensure that the role of gold in the international monetary system would be gradually reduced.”

To implement this general undertaking, provision should be made for:

(a) Abolition of an official price for gold.

(b) Elimination of the obligation to use gold in transactions with the Fund, and elimination of the Fund’s authority to accept gold in transactions unless the Fund so decides by an 85 per cent majority. This understanding would be without prejudice to the study of a gold substitution account.

(c) Sale of one sixth of the Fund’s gold (25 million ounces) for the benefit of developing countries without resulting in a reduction of other resources for their benefit, and restitution of one sixth of the Fund’s gold to members. The proportion of any profits or surplus value of the gold sold for the benefit of developing countries that would correspond to the share of quotas of these countries would be transferred directly to each developing country in proportion to its quota. The rest of the Fund’s gold would be subject to provisions in an amendment of the Articles that would create enabling powers exercisable by an 85 per cent majority of the total voting power.

The Committee noted that, in order to give effect to the understandings arrived at in this Committee, the countries in the Group of Ten have agreed to observe during the period referred to below the following arrangements, which could be subscribed to by any other member country of the Fund that wishes to do so. Other members might adhere to these arrangements, and on such occasions the necessary modifications in them would be made:

(a) That there be no action to peg the price of gold.

(b) That the total stock of gold now in the hands of the Fund and the monetary authorities of the Group of Ten will not be increased.

(c) That the parties to these arrangements agree that they will respect any further condition governing gold trading that may be agreed to by their central bank representatives at regular meetings.

(d) That each party to these arrangements will report semiannually to the Fund and to the Bank for International Settlements the total amount of gold that has been bought or sold.

(e) That each party agree that these arrangements will be reviewed by the participants at the end of two years and then continued, modified, or terminated. Any party to these arrangements may terminate adherence to them after the initial two-year period.

Many members from developing countries expressed concern that the proposed arrangements for gold would give rise to a highly arbitrary distribution of new liquidity, with the bulk of gains accruing to developed countries. This would greatly reduce the chances of further allocations of SDRs, thereby detracting from the agreed objective of making the SDR the principal reserve asset and phasing out the monetary role of gold. This aspect should be studied, and measures explored to avoid these distortions.

7. The Committee noted the work done so far by the Executive Directors on the subject of the establishment of a trust fund and the possible sources of its financing in response to the request of the Development Committee. It was agreed to ask the Executive Directors to pursue their work with a view to completing it at an early date, taking into account the understandings reached in the Committee with regard to the use of profits from the sale of part of the Fund’s gold for the benefit of developing countries, without neglecting the consideration of other possible sources of financing.

8. It was agreed that acceptable solutions must be found on the subject of the exchange rate system under the amended Articles, so that these agreed solutions can be combined with those on quotas and gold. The Executive Directors were requested to continue their work in order to arrive at acceptable solutions and to prepare for submission to the Board of Governors, after examination by the Committee at its next meeting, appropriate proposals for amendment of the Fund’s Articles on all aspects that have been under consideration.

9. The Committee noted that the Executive Directors are in the process of conducting a review of the Fund’s facility on compensatory financing with a view to improving a number of its aspects. It was agreed to urge the Executive Directors to complete their work on this subject as soon as possible, taking into account the various proposals that have been made by members of the Committee.

January 7-8, 1976

1. The Interim Committee of the Board of Governors of the International Monetary Fund held its fifth meeting in Kingston, Jamaica, on January 7-8, 1976 under the chairmanship of Mr. Willy De Clercq, Minister of Finance of Belgium, who was selected by the Committee to succeed Mr. John Turner of Canada as Chairman. Mr. H. Johannes Witteveen, Managing Director of the Fund, participated in the meeting. The following observers attended during the Committee’s discussions: Mr. Henri Konan Bédié, Chairman, Bank-Fund Development Committee; Mr. G. D. Arsenis, representing the Secretary-General, Unctad; Mr. Wilhelm Haferkamp, Vice-President, ec Commission; Mr. Mahjoob A. Hassanain, Chief, Economics Department, opec; Mr. René Larre, General Manager, bis; Mr. Emile van Lennep, Secretary-General, oecd; Mr. F. Leutwiler, President, National Bank of Switzerland; Mr. Olivier Long, Director-General, gatt; and Mr. Robert S. McNamara, President, ibrd.

2. The Committee endorsed the recommendations contained in the report of the Executive Directors on the Sixth General Review of Quotas and the proposed resolution on increases in the quotas of individual members to be submitted to the Board of Governors for its approval. In this connection, the Committee reaffirmed its view that the Fund’s holdings of each currency should be usable in the Fund’s operations and transactions in accordance with its policies. Appropriate provisions for this purpose will be included in the draft amendments of the Fund’s Articles. To give effect to the Committee’s view in the period before the amendments become effective, it was agreed that, within six months after the date of the adoption of this resolution, each member shall make arrangements satisfactory to the Fund for the use of the member’s currency in the operations and transactions of the Fund in accordance with its policies, provided that the Executive Directors may extend the period within which such arrangements shall be made.

3. The Committee considered the question of the implementation of the agreement reached at its fourth meeting regarding the disposition of a part of the Fund’s holdings of gold. It was agreed that action should be taken to start without delay the simultaneous implementation of the arrangements referred to in paragraph 6 of the press communiqué issued by the Committee on August 31, 1975. The sales of gold by the Fund should be made in public auctions according to an appropriate timetable over a four-year period. It is understood that the Bank for International Settlements would be able to bid in these auctions.

4. In its discussion of the world economic situation and outlook, the Committee noted that recovery from the severe international recession of 1974-75 was now under way in much of the industrial world. Nevertheless, current rates of both unemployment and inflation were still unacceptably high. The Committee called on the industrial countries, especially those in relatively strong balance of payments positions, to conduct their policies so as to ensure a satisfactory and sustained rate of economic expansion in the period ahead while continuing to combat inflation.

A special source of concern to the Committee was the deterioration in the external position of the primary producing countries, especially the developing ones. The general picture for the developing countries in 1975 was again one of large balance of payments deficits on current account, financed through heavy external borrowing and through the use of reserves already eroded by the inflation in recent years. With large current account deficits still in prospect this year, the Committee felt that the ability of many developing countries to maintain an adequate flow of imports in 1976, and to follow appropriate adjustment policies, would also depend on the availablity of adequate credit from the Fund.

5. The Committee welcomed the recent decision of the Executive Directors liberalizing the compensatory financing facility. Under the new decision the Fund will be prepared to authorize drawings up to 75 per cent of a member’s quota, as against 50 per cent under the 1966 decision. Maximum drawings in any one year are raised from 25 per cent to 50 per cent of quota. Moreover, the decision enables the Fund to render assistance under the facility at an earlier stage of the development of a shortfall.

6. The Committee noted the report of the Executive Directors on their review of the Fund’s policies on the use of its resources, and also on the trust fund for the benefit of the low-income members. After consideration of the issues involved, the Committee reached the following conclusions:

(a) It was agreed that the necessary steps should be taken to establish the trust fund without delay. Its resources would be derived from the profits of the sales of the Fund’s gold, which should be augmented by voluntary national contributions. It was agreed that the amount of gold available for sale in accordance with the agreement reached by the Committee at its fourth meeting should be disposed of over a four-year period. The resources of the Trust Fund should be used to provide balance of payments assistance on concessionary terms to members with low per capita incomes. Initially, eligible members would be those with per capita incomes in 1973 not in excess of SDR 300.

(b) It was further agreed, that, until the effective date of the amendment of the Articles, the size of each credit tranche should be increased by 45 per cent, which would mean that total access under the credit tranches would be increased from 100 per cent to 145 per cent of quota, with the possibility of further assistance in exceptional circumstances. The present kinds of conditionality for the tranches would remain unchanged. The Fund will in due course consider again the question of access to the Fund’s resources if it becomes evident that the needs of members make it advisable to re-examine this question.

7. The Committee noted the report of the Executive Directors on amendment, welcomed the progress made toward the solution of the outstanding issues, and commended them for the voluminous and successful work that they had done in order to achieve a major revision of the Articles. In particular, it welcomed the agreement that has been reached on provisions concerning the important problem of exchange rates. In this respect, it has endorsed a new Article IV of the Articles of Agreement which establishes a system of exchange arrangements. The new system recognizes an objective of stability and relates it to achievement of greater underlying stability in economic and financial factors. The Committee considered the remaining issues on which its guidance has been requested by the Executive Directors and agreed as follows:

(a) The amended Articles of Agreement should include a provision by which the members of the Fund would undertake to collaborate with the Fund and with other members in order to ensure that their policies with respect to reserve assets would be consistent with the objectives of promoting better international surveillance of international liquidity and making the special drawing right the principal reserve asset in the international monetary system.

(b) The amended Articles would contain an enabling provision under which the Fund would be able to sell any part of the gold left after the distribution of 50 million ounces in accordance with the arrangements referred to in paragraph 3 above, and use the profits (1) to augment the general resources of the Fund for immediate use in its ordinary operations and transactions, or (2) to make balance of payments assistance available on special terms to developing members in difficult circumstances. On the occasion of such sales the Fund would have the power to distribute to developing members a portion of the profits on the basis of their quotas or to make a similar distribution by the direct sale of gold to them at the present official price. Any decision on such a distribution should be taken by an 85 per cent majority of the total voting power. These powers of the Fund would be in addition to the power that the Fund would have under another enabling provision to restitute to all members, on the basis of present quotas and at the present official price, any part of the gold left after the disposition of the 50 million ounces referred to above.

(c) Decisions of the Fund on the use of the profits from the sale of its gold in the regular operations and transactions of the Fund should be taken by a 70 per cent majority of the total voting power and on decisions on use of the profits in other operations and transactions by an 85 per cent majority of the total voting power.

(d) The Executive Directors are urged to review, during the final stage of their work on the draft amendments, the majorities for operational decisions that do not reflect compromises of a political character with a view to considering the reduction, if possible, of the number and size of the special majorities that would be required under the amended Articles for such operational decisions. Such a review should be completed within the coming weeks and should not delay the completion of the comprehensive draft amendment.

(e) The majority required for the adoption of decisions on the method of valuation of the SDR under the amended Articles should be 70 per cent of the total voting power, with the exception of decisions involving a change in the principle of valuation or a fundamental change in the application of the principle in effect, which should be taken by an 85 per cent majority of the total voting power.

(f) The Executive Directors should continue their consideration of the subject of a substitution account without delaying completion of the comprehensive draft amendment.

(g) With respect to the obligation of participants in the Special Drawing Account to reconsititute their holdings of special drawing rights, it was agreed that the amended Articles should authorize the Fund to review the rules for reconstitution at any time and to adopt, modify, or abrogate these rules by a 70 per cent majority of the total voting power.

8. The Committee requested the Executive Directors to complete their work on amendment in the light of the guidance given by the Committee, and expects that the Executive Directors will be able to submit a comprehensive draft amendment for the approval of the Board of Governors, together with a report, within the coming weeks.

October 2, 1976

1. The Interim Committee of the Board of Governors of the International Monetary Fund held its sixth meeting in Manila, the Philippines, on October 2, 1976 under the chairmanship of Mr. Willy De Clercq, Minister of Finance of Belgium. Mr. H. Johannes Witteveen, Managing Director of the Fund, participated in the meeting. The following observers attended during the Committee’s discussions: G. D. Arsenis, Director, New York Office, Unctad; Henri Konan Bédié, Chairman, Development Committee; Wilhem Haferkamp, Vice-President in Charge of Economic and Financial Affairs, cec; René Larre, General Manager, bis; E. van Lennep, Secretary-General, oecd; F. Leutwiler, President, National Bank of Switzerland; Olivier Long, Director-General, gatt; and Robert S. McNamara, President, ibrd.

2. The Committee discussed the world economic outlook and the functioning of the international adjustment process.

The Committee welcomed the economic recovery that has been under way for the last year; it expressed continued concern, however, about persistently high levels of unemployment and high rates of inflation in many countries. The Committee believes that in present circumstances the restoration of a reasonable degree of price stability will be necessary to establish the basis for sustained economic growth and the reduction of unemployment. Accordingly, the Committee is of the view that policies in the industrial countries at the present time should give priority to the reduction of price and cost inflation. This would require fiscal and monetary policies in these countries that would provide effective control over the expansion of aggregate demand in a manner compatible with this objective, even where price and incomes policies are in effect.

The Committee further agreed that, given the constraint under which demand management policies in the industrial countries must operate, special efforts, including the reduction in the barriers to trade in the negotiations now under way, to improve market access to the exports of developing countries and to increase the flow of development assistance would be indicated.

With respect to the international adjustment process, the Committee reached the following conclusions:

(a) As a result of the recovery in the world economy, exports are rising in many countries and the international environment has become much more favorable for the adjustment of external payments positions. The Committee believes that such adjustment, which should be symmetrical as between deficit and surplus countries, is now both urgent and opportune.

(b) To this end, deficit countries should arrange their domestic policies so as to restrain domestic demand and to permit the shift of resources to the external sector, to the extent necessary to bring the deficit on current account in line with a sustainable flow of capital imports and aid.

(c) Industrial countries in strong payments positions should ensure continued adequate expansion in domestic demand, within the limits set by effective anti-inflationary policies.

(d) Exchange rates should be allowed to play their proper role in the adjustment process.

(e) In the context of the use of the Fund’s resources, adjustment by deficit countries can be promoted by a larger use of the credit tranches and the extended Fund facility.

3. The Committee noted that, in accordance with the agreement incorporated in the provisions of the Proposed Second Amendment, the Fund will have the obligation to exercise firm surveillance over the exchange rate policies of members. The Executive Directors should consider how this function is to be exercised and should report to the Committee on this subject.

4. The Committee noted the section of the Annual Report of the Executive Directors dealing with developments in international liquidity. In accordance with its terms of reference the Committee requested the Executive Directors to keep all aspects of international liquidity under review and to report to it at a later meeting.

5. The Committee reviewed, on the basis of a report by the Executive Directors, the financial activities of the Fund, including developments in the Fund’s policies on the use of its resources and in the liquidity of the Fund. The Committee noted the unprecedented expansion in the use of the Fund’s resources by members in order to finance their balance of payments deficits and agreed that, even if all reasonable efforts toward adjustment were made, there might still be a need for a large use of the Fund’s resources in the near future. The Committee shared the view of the Executive Directors that greater emphasis should be placed on the adjustment by members of imbalances in their payments positions and that the use of the Fund’s resources should present the Fund with the opportunity to promote the use by members of the kind of adjustment measures that are most conducive to the interest of all. The Committee noted the actions taken by the Executive Directors with regard to the trust fund and welcomed their intention to keep the compensatory financing and buffer stock facilities under review.

6. The Committee endorsed the conclusions of the Executive Directors on the state of the Fund’s liquidity. The Committee urged that, pursuant to the Resolution on Quota Increases adopted by the Board of Governors last March, all members that have not yet done so should make the necessary arrangements for the use of their currencies in the operations and transactions of the Fund in accordance with its policies. It was agreed that the Fund’s liquidity should be kept under close review. The Committee stressed the fact that prompt adoption of the Proposed Second Amendment of the Articles and the subsequent completion of the steps necessary for quota increases under the Sixth General Review would provide the most effective way of improving the liquidity of the Fund.

7. The Committee noted that the Executive Directors will initiate in the near future the Seventh General Review of Quotas so that it can be concluded, as planned, in February 1978.

8. The Committee noted the report of the Executive Directors regarding the progress made by members in connection with their acceptance of the Proposed Second Amendment of the Fund’s Articles. In view of the importance that the entry into force of the amended Articles will have for the functioning of the international monetary system, the Committee urged all members that had not yet notified the Fund of their acceptance of the Second Amendment to complete as soon as possible the arrangements that would permit them to take this action.

9. The Committee agreed to hold its eighth meeting in Washington, D.C., on April 18 and 19, 1977.

October 6, 1976 (Announcement)

The Interim Committee at its seventh meeting today in Manila selected Mr. Willy De Clercq, Minister of Finance of Belguim, to continue as its Chairman for a new term, following upon the election of Executive Directors of the International Monetary Fund which took place on October 5, 1976.

The Committee also decided that its eighth meeting previously announced for April 18 and 19, 1977 is now to be held on April 28 and 29, 1977 in Washington, D.C.

April 29, 1977

1. The Interim Committee of the Board of Governors of the International Monetary Fund held its eighth meeting in Washington, D.C., on April 28-29, 1977 under the chairmanship of Mr. Willy De Clercq, Minister of Finance of Belgium. Mr. H. Johannes Witteveen, Managing Director of the Fund, participated in the meeting. The following observers attended during the Committee’s discussions: Mr. G. D. Arsenis, Director, New York Office, Unctad; Mr. Mahjoob A. Hassanain, Chief, Economics Department, opec; Mr. Pierre Languetin, General Manager, National Bank of Switzerland; Mr. René Larre, General Manager, bis; Mr. Emile van Lennep, Secretary-General, oecd; Mr. Olivier Long, Director-General, gatt; Mr. Robert S. McNamara, President, ibrd; Mr. François-Xavier Ortoli, Vice-President, cec; and Mr. Cesar E. A. Virata, Chairman, Development Committee.

2. The Committee discussed the world economic outlook and the functioning of the international adjustment process.

The Committee noted the expansion of activity that has taken place in the world economy over the past year and welcomed the improvement in economic outlook during recent months following cessation of the “pause” in the industrial countries. The Committee expressed concern, however, about the persistence of high levels of unemployment, especially among young people, and high levels of inflation in many countries.

I. On the broad question of the economic policy options and priorities of member countries, the Committee agreed on the following conclusions:

(a) Policies of demand management in most countries must emphasize the need to deal with problems of inflation and the balance of payments. These policies are being guided by the conviction that measures to combat inflation and, where necessary, to strengthen the external position are not only necessary in present circumstances but also will make for a better record over time in terms of economic growth and employment.

(b) At the same time, special efforts should be made to improve market access for the exports of the developing countries and to increase the flow of official development assistance. Any tendencies toward protectionist trade policies cannot be considered acceptable from an international point of view and should be strongly resisted; indeed, increased attention should be paid to the need to reduce the existing restrictions on trade. Success in the current negotiations in Geneva would make an important contribution to this end.

II. The Committee drew the following conclusions from its review of the international adjustment process:

(a) The needs for adjustment remain large and, as experience shows, delays in dealing with them can be very costly. It will take international cooperation, and determined action by surplus as well as deficit countries, to make continuing progress with respect to adjustment. An encouraging development is that a number of countries, both large and small, developed and developing, have adopted programs to strengthen their external positions, often in the context of stand-by arrangements approved by the Fund.

(b) Strategies of adjustment must include emphasis on conservation of energy, on elimination of domestic sources of inflation, particularly in the deficit countries, and on improvement in cost-price relationships among countries. It is important that industrial countries in relatively strong payments positions should ensure continued adequate expansion of domestic demand, within prudent limits. Moreover, these countries, as well as other countries in strong payments positions, should promote increased flows of long-term capital exports.

(c) Given the persistence of large payments imbalances, important demands for the Fund’s resources can be expected to materialize. The Committee found good grounds for believing that expansion of the Fund’s role as a financial intermediary could contribute significantly to promotion of international adjustment and to maintenance of confidence in the continued expansion of the world economy and in the effective functioning of the international financial system.

3. The Committee reviewed the developments in international liquidity and in the financial activities and resources of the Fund. In this connection, it had the benefit of a report of the Managing Director summarizing the discussions that the Executive Directors have had to date on these subjects. As a result of this review, the Committee reached the following conclusions:

The Committee recognized that there was an urgent need for a supplementary arrangement of a temporary nature that would enable the Fund to expand its financial assistance to those of its members that in the next several years will face payments imbalances that are large in relation to their economies.

The Committee agreed that some of the main features of this supplementary arrangement would be as follows:

  • (i) The Fund would establish substantial lines of credit in order to be able to assist members to meet their needs for supplementary assistance.

  • (ii) Access to assistance under the supplementary arrangement should be available to all members and should be subject to adequate conditionality, and such assistance should normally be provided on the basis of a stand-by arrangement covering a period longer than one year.

  • (iii) The Fund should pay interest on amounts borrowed under the lines of credit at market-related interest rates, and charges by the Fund for the use by members of resources borrowed by it under these lines of credit should be based on these rates. The possibility of a subsidy related to the rates of charge that would be payable by low-income countries should be explored.

  • (iv) The claims of lenders under the supplementary arrangement should be appropriately liquid.

The Committee welcomed the willingness of a number of countries in a position to lend to the Fund to collaborate with it on arrangements for supplementary credit and urged the Managing Director to complete, as soon as possible, his discussions with potential lenders on terms and conditions and amounts. It further requested the Executive Directors to take the necessary steps for making such an arrangement operative as soon as possible.

4. The Committee considered the main isssues relating to the Seventh General Review of Quotas. It was agreed that, in view of the expansion of members’ international transactions and the need for the Fund to be able to give balance of payments assistance to members on a larger scale than would be available on the basis of quotas under the Sixth General Review, there should be an adequate increase in the total of quotas pursuant to the Seventh General Review. On the question of distribution of quotas, one view was that in order to conclude the Seventh Review at an early date, increases should be equiproportional to the quotas that will result from the Sixth General Review. Another view, however, was that a few special adjustments should be made for those members whose quotas are seriously out of line with their relative positions in the world economy, and in this connection some emphasis should be placed on increases that would strengthen the Fund’s liquidity. The Committee urged the Executive Directors to pursue their work and to prepare a report, together with draft recommendations to the Board of Governors, on increases in the quotas of members under the Seventh General Review for consideration by the Committee at its next meeting.

5. The Committee also considered the question whether a further allocation of SDRs would be advisable at the present time. The Committee noted that the Executive Directors have been discussing this question and agreed to request them to give further consideration to all aspects of this matter and to report to the Committee at its first meeting in 1978.

The Committee also agreed to request the Executive Directors to review the characteristics and uses of the SDR so as to promote the purposes of the Fund, including the objective of making the SDR the principal reserve asset in the international monetary system.

6. Although the Committee discussed the proposals for supplementary credit, the Seventh Quota Review and any allocation of SDRs separately as indicated above, members of the Committee attached importance to the interrelationships among them and particularly to the overall effect of the decisions as a whole.

7. The Committee noted with satisfaction the work of the Executive Directors on the implementation of Article IV of the Proposed Amendment of the Articles of Agreement, and welcomed the consensus reached by them on the principles and procedures for the guidance of members and for the exercise of surveillance by the Fund over the exchange rate policies of members in the period after the Second Amendment has become effective. The Committee endorsed these principles and procedures, and agreed that they will make an important contribution to the effective functioning of the international monetary system in the future.

8. The Committee noted that so far no more than twenty-four members of the Fund having about 32 per cent of the total voting power have notified the Fund of their acceptances of the Proposed Second Amendment of the Fund’s Articles and that very few members have given their formal consents to increases in their quotas under the Sixth General Review of Quotas. The Committee expressed its concern at this delay and urged all members that have not yet accepted the Proposed Second Amendment to complete as soon as possible the arrangements that would enable them to take this action and to increase their quotas under the Sixth General Review.

9. The Committee agreed to hold its ninth meeting in Washington on September 24, 1977.

September 24, 1977

1. The Interim Committee of the Board of Governors of the International Monetary Fund held its ninth meeting in Washington, D.C., on September 24, 1977, under the chairmanship of Mr. Denis Healey, Chancellor of the Exchequer of the United Kingdom, who was selected by the Committee to succeed Mr. Willy De Clercq of Belgium as Chairman. Mr. H. Johannes Witteveen, Managing Director of the International Monetary Fund, participated in the meeting. The following observers attended during the Committee’s discussions: Mr. G. D. Arsenis, Director, Division for Money, Finance and Development, Unctad; Mr. René Larre, General Manager, bis; Mr. Emile van Lennep, Secretary-General, oecd; Mr. F. Leutwiler, President, National Bank of Switzerland; Mr. Olivier Long, Director-General, gatt; Mr. Robert S. McNamara, President, ibrd; Mr. François-Xavier Ortoli, Vice-President, cec; Mr. Cyrus Sassanpour, Market Research Analyst, opec; and Mr. Cesar E. A. Virata, Chairman, Development Committee.

2. The Committee discussed the world economic outlook and the policies appropriate in the current situation.

While welcoming progress made in many countries in achieving stabilization and growth objectives, the Committee expressed concern about the faltering of economic activity during recent months in a number of industrial countries. Sluggishness in private investment demand, the Committee stated, continued to be a major feature of the current economic situation.

The Committee noted that the slower expansion of the economic activity had been accompanied by a deceleration in the growth of world trade. The impact of this on the export earnings of developing countries was a matter of concern to the Committee, which noted that these earnings had also been adversely affected by the marked declines in primary commodity prices during recent months.

The Committee paid considerable attention to the special problems that affect the economies of the developing countries. It was particularly concerned to ensure that adjustment measures by developed countries should not reduce the transfer of real resources to the developing world.

The Committee expressed concern about the persistence of high unemployment, noting that the overall rate of unemployment for the industrial countries as a group remained close to the recession peak reached in the latter part of 1975.

Although progress has been made in many countries in countering inflation, the Committee remained concerned about current rates of inflation noting that in almost all countries these were still much too high to be considered acceptable.

The Committee reaffirmed its view that tendencies toward protectionist trade policies are unacceptable from an international point of view and should be strongly resisted. In this connection, it stressed the importance it attached to the successful outcome of the current Multilateral Trade Negotiations in Geneva, and to the early conclusion of agreements that would benefit all countries, in particular developing countries.

With respect to national economic policies, the Committee agreed on the following conclusions:

(a) All countries in relatively strong external positions should make every effort to ensure adequate growth of domestic demand compatible with containing inflation; this would not only be in the interest of those countries themselves, but also would help to ensure achievement of a satisfactory rate of growth in world trade, supporting and facilitating external adjustment efforts by deficit countries. The Committee expressed regret that growth of domestic demand in some of the larger industrial countries had lagged behind the targets and expectations of their authorities, and it welcomed the expansionary measures recently announced by several governments. Also, the Committee expressed the belief that, as the results of adjustment action become progressively more evident, an increasing number of countries will be able to bring their inflation and balance of payments problems under control and thus will be strong enough to make their contribution to growth of the world economy.

(b) Demand policies in countries with relatively high inflation or seriously weak external positions should place primary emphasis on combating inflation and improving the balance of payments. The Committee reaffirmed its belief that for these countries this was not only necessary in present circumstances but over time would yield the best results for growth and employment.

(c) The Committee noted the importance of structural problems in the economic situation of many countries and the need to develop appropriate energy policies.

(d) Policies in all countries should be directed as a minimum to avoiding a resurgence of inflation and in many countries to reducing inflation rates which are clearly excessive.

3. An important requirement of the international adjustment process relates to the provision of official financing to deficit countries. Such finance should be provided in sufficiently large amounts, and under appropriate conditions which take account of the specific problems of the borrowing countries, and permits adequate time for necessary adjustment.

The Committee welcomed the completion by the Executive Directors of their work on the establishment of a supplementary financing facility that will enable the Fund to expand substantially the resources it can make available to members facing payments difficulties that are large in relation to their quotas, and the adoption of the decisions of August 29, 1977 on the facility and related arrangements. The Committee noted that a number of members and official institutions have expressed their willingness to make available to the Fund resources for the financing of the facility of about SDR 8.6 billion, equivalent to approximately $10 billion, but that the facility will not become operative until agreements have been entered into for a total amount of financing of not less than SDR 7.75 billion, including at least six agreements each of which provides for an amount not less that SDR 500 million. The Committee welcomed the prospect that some of the initial amounts made available might be increased and noted that it would be possible for other members in strong positions to make resources available to the facility. In view of the need of some members for prompt financial assistance on the scale envisaged under the new facility, the Committee urged all potential participants in the financing of the facility to complete as soon as possible the necessary action that will bring the facility into operation at the earliest date possible. At the same time, the Committee agreed to request the Executive Directors to pursue their consideration of the possibility of a subsidy, perhaps through voluntary contributions, that would be related to the charges payable by members determined by the Fund to be in difficult circumstances.

4. The Committee noted the report of the Executive Directors on the Seventh General Review of Quotas and their intention to give priority to this matter in their work after the Annual Meeting. It asked the Executive Directors to submit appropriate proposals to the Committee for its consideration, at its next meeting, together with draft recommendations to the Board of Governors.

5. The Committee reaffirmed its request to the Executive Directors to report on the question whether a further allocation of SDRs would be advisable at the present time and to report to the Committee at its first meeting in 1978.

The Committee also reaffirmed its request to the Executive Directors to review the characteristics and uses of the SDR so as to promote the purposes of the Fund including the objective of making the SDR the principal reserve asset in the international monetary system.

6. The Committee expressed concern at the delay in the entry into force of the Proposed Second Amendment of the Fund’s Articles of Agreement and in the increases in quotas under the Sixth General Review of Quotas. In this connection the Committee noted that it has been eighteen months since the Board of Governors completed its action on both these matters and that, although progress had been made in recent months, acceptances and consents from many more members will be needed to attain the required majorities. In view of the importance for members and the international monetary system of the entry into force of the Amendment and the increases in quotas, the Committee once again urged all members that have not yet accepted the Amendment or consented to the increases in their quotas, to do so at the earliest possible date.

7. The Committee agreed to hold its next meeting in Mexico on March 21, 1978. [This date was subsequently changed.]

April 30, 1978

1. The Interim Committee of the Board of Governors of the International Monetary Fund held its tenth meeting in Mexico City on April 29-30, 1978, under the chairmanship of Mr. Denis Healey, Chancellor of the Exchequer of the United Kingdom. Mr. H. Johannes Witteveen, Managing Director of the International Monetary Fund, participated in the meeting. The following observers attended during the Committee’s discussions: Mr. G.D. Arsenis, Director of Money, Finance and Development, Unctad; Mr. René Larre, General Manager, bis; Mr. Emile van Lennep, Secretary-General, oecd; Mr. F. Leutwiler, President, National Bank of Switzerland; Mr. Francois-Xavier Ortoli, Vice President of the Commission, cec; Mr. Gardner Patterson, Deputy Director-General, Trade Policy, gatt; Mr. Cyrus Sassanpour, Market Research Analyst, opec; Mr. Ernest Stern, Vice President, Operational Staff, ibrd; Mr. Cesar E. A. Virata, Chairman, Development Committee.

2. The Committee noted with satisfaction the recent entry into force of the Second Amendment of the Fund’s Articles, which has brought about a modernization of the Articles and will improve the operation of the Fund in current conditions and permit its adjustment to future conditions as they develop. The Committee also welcomed the consents by the overwhelming majority of the Fund’s members to the increases in their quotas as proposed under the Sixth General Review of Quotas and expressed the hope that the rest of the members will consent in the near future.

3. The Committee discussed the world economic outlook and the working of the international adjustment process.

The Committee recognized certain favorable developments. Notable among these were the progress made by a number of countries in achieving stabilization and growth objectives, a marked reduction in the surplus of the oil exporting countries, and improved access, over the last few years, by the non-oil developing countries as a group to sources of finance for their current account deficits, even though the combined current account deficit of these countries is expected to show an increase from 1977 to 1978.

Nevertheless, the Committee noted, world economic developments over the past year or so were unsatisfactory in some important respects. In particular, the Committee expressed concern with the slow and uneven pace of recovery from the severe 1974-75 recession, the prevalence of historically high levels of unemployment, the slow growth of world trade, the continuation of high rates of inflation in many countries, the maldistribution of current account balances, and instability of exchange rates among the industrial countries. The Committee emphasized the need to assure better ecomomic performances, especially in the industrial countries, and an improved environment for the adjustment of external trade and payments positions.

The Committee noted with concern the risk of increasing resort to protectionist action of all kinds in the wake of slow growth, low capacity utilization, and high unemployment. It was agreed that determined and broadly conceived national and international efforts, directed at the underlying causes as well as at specific protectionist measures, were urgently needed to arrest this drift toward protectionism and to reduce trade barriers. The successful completion of the Multilateral Trade Negotiations that are now well under way would do much to stop this development.

Considerable attention was given by the Committee to the special problems of the developing countries, including the need to accelerate their rates of growth as a continuing objective and a common responsibility of the international community. The vulnerability of their economies to slow growth of markets in the industrial world or to reduced access to such markets was a source of widespread concern, and the Committee stressed the desirability of measures on the part of the developed countries to assure continued expansion on an adequate scale of the flow of real resources to developing countries, which would help to promote the adjustment process.

In the course of the Committee’s discussion, a consensus was reached on the general outlines of a coordinated strategy, containing mutually supportive and reinforcing elements, designed to promote noninflationary growth of the world economy, leading to higher employment, a reduction of imbalances in international payments, and the conservation of energy. The Committee emphasized that the implementation of this strategy—geared to the meduim-term, through 1980—should take due account of the wide differences in current positions of individual countries. It suggested that, among countries in the industrial world, growth policies should be related to the success achieved in reducing inflation, the strength of the external position, and the degree of current and prospective economic slack.

In view of the risk if reviving inflationary pressures, the Committee noted the utility of policies appropriate to counter the predominance of cost-push factors in the current inflation. The Committee also suggested that for those countries with strong cost-push factors fiscal stimulus provided through tax reductions might often be more appropriate than equivalent stimulus applied through increases in domestic government spending unless such spending is investment-oriented.

The Committee was convinced that the general strategy envisioned would yield a more satisfactory rate of economic expansion for the industrial and developing countries and the world economy generally, within a pattern of differentiated growth rates among countries, which would reduce external payments imbalances. The improvement in basic underlying condtions would in this way contribute to greater stability of exchange markets, which is extremely important for the health of the world economy. Greater stability in these circumstances would help to achieve the higher growth rates desired and to improve the prospects of the developing countries.

4. The Second Amendment has brought into effect the provisions of a new Article IV which stresses the objective of a “continuing development of the orderly underlying conditions that are necessary for financial and economic stability” and makes it an obligation of each member “to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.” In accordance with Article IV, the principles for surveillance shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members. The principles and procedures for surveillance over exchange rate policies endorsed by the Interim Committee and approved by the Executive Board in April 1977 have gone into operation under the Second Amendment. The Committee noted with approval that the Fund has recently adapted its consultation procedures and practices to take account of surveillance, and that particular attention will be focused on those cases in which there are questions as to whether the exchange rate policies of members are consistent with the agreed exchange rate principles. The Fund has always concerned itself with situations in which the value of a currency is not compatible with the smooth working of the adjustment process, or where disorderly conditions exist in exchange markets. The Committee noted that the Fund now has both the obligation and the means through surveillance to make a greater contribution than before to the effective working of the exchange rate system. In this context, some members asked that the Executive Board should consider whether the Council should be brought into being under the Second Amendment as a decision-making organ. Some members of the Committee do not favor bringing the Council into existence because it would not contribute to the working of the international monetary system under the Second Amendment. The Committee received suggestions for the strengthening of surveillance, including the provision of more information by both surplus and deficit countries to assure the efficient working of the surveillance process.

5. The Committee noted the report of the Executive Board on improving the characteristics and broadening the uses of the SDR under the powers of the Second Amendment and on the question of an allocation of SDRs.

The Committee agreed that in present circumstances the interest rate on the SDR should be increased from 60 per cent to no more than 80 per cent of the weighted average of short-term interest rates in the five member countries with the largest quotas, and asked the Executive Board to agree on a satisfactory formula for the rate of remuneration on this basis. Some members could support an increase in the interest rate only on the condition that an allocation of SDRs would be made.

The Committee requested the Executive Board to pursue its work with regard to additional types of uses of SDRs that might be permitted by the Fund in accordance with the provisions of the amended Articles, and to report to the Interim Committee on these matters at its next meeting. Some members favored the abolition of reconstitution and requested the Executive Board to review the rules for designation and reconstitution under the amended Articles.

A large number of members supported an allocation of SDRs; some of these believed that the present state of world liquidity was not such as to justify more than a modest allocation. Some members suggested that a proportion of quota increases should be paid by members in SDRs.

The Committee agreed to request the Executive Board to pursue its work on all these aspects of an allocation of SDRs and to submit appropriate proposals, together with draft recommendations, for consideration by the Committee at its next meeting.

The Committee also considered the suggestion of the Managing Director that an allocation of SDRs could be combined with a reduction in the amount of reserve currency outstanding through a substitution account administered by the Fund. Some members believe that agreement on a substitution account would facilitate an allocation of SDRs. The Committee agreed that this suggestion of the Managing Director should be considered further and that a report should be submitted by the Executive Board for consideration by the Committee at its next meeting.

6. The Committee noted the report of the Executive Board on the Seventh General Review of Quotas and considered the issues involved. Recalling that the Board of Governors in its Resolution No. 31-2 decided that the Seventh Review of Quotas should be completed by February 9, 1978, the Committee expressed concern at the delay in completing the Review. The Committee reaffirmed its view that there was a need for an increase in total quotas under the Seventh Review that would be adequate to meet the expected need for conditional liquidity over the next five years and that would strengthen the available sources of balance of payments financing by enhancing the ability of the Fund to provide such financing without heavy recourse to borrowing and by furthering the process of international adjustment. Most members of the Committee were of the view that an increase of the order of at least 50 per cent of the quotas approved under the Sixth General Review would be appropriate in view of the present and prospective circumstances of the international economy. Most members of the Committee agreed that the Seventh Review should be mainly equiproportional, with at most a very small number of selective quota increases, in which case most members felt that the quota share of no developing country should be decreased except for one or two members whose quotas would remain unchanged.

Some members suggested a limited increase in the first credit tranche if quota increases were more than a modest amount, but other members considered that the first credit tranche should be enlarged if the increases were not more than a modest amount.

The Committee asked the Executive Board to give priority to these matters in its work in the coming months and to submit to the Board of Governors appropriate proposals, together with draft recommendations, for consideration by the Interim Committee at the time of the next Annual Meeting of the Board of Governors.

Several members asked that the criteria for quota increases should be reconsidered after the Seventh General Review.

7. The Committee expressed its concern at the long delay in bringing into operation the supplementary financing facility, the establishment of which was decided upon more than six months ago. In view of the need of a number of members for prompt financial assistance on the scale envisaged by the supplementary financing facility, the Committee urged that all necessary steps be taken for bringing the facility into operation at the earliest possible date. In this connection, Committee members from developing countries asked the Executive Board to review the conditionality attaching to the facility and also to drawings under regular credit tranches, and called again for an examination, as early as possible, of the establishment of a subsidy related to the rates of charges that would be payable by low-income countries. The Committee welcomed the intention of Nigeria and Guatemala to contribute to the financing of the facility SDR 220 million and SDR 30 million, respectively, and the intention of Venezuela to increase its contribution from SDR 450 million to SDR 500 million. As a result, the total financing of the facility will be approximately SDR 8.75 billion (about US$11 billion), as follows (expressed in millions of SDRs):

Abu Dhabi150
Belgium150
Canada200
Federal Republic of Germany1,050
Guatemala30
Iran685
Japan900
Kuwait400
Netherlands100
Nigeria220
Qatar100
Saudi Arabia2,150
Swiss National Bank650
United States1,450
Venezuela500

8. The members of the Committee, noting that Mr. Witteveen is about to relinquish his position as Managing Director of the Fund, expressed on their own behalf and on behalf of their constituencies their deep appreciation and gratitude for the superb manner in which he has discharged the responsibilites of his office in difficult circumstances. The members of the Committee also took the opportunity to congratulate Mr. Jacques de Larosière on his designation as Mr. Witteveen’s successor and wished him success in his important and difficult task in the years ahead.

9. The members and associates of the Interim Committee expressed deep appreciation for the welcome and hospitality extended to them in Mexico and thanked the Government of Mexico for the outstanding facilities provided for the tenth meeting of the Committee.

10. The Committee agreed to hold its next meeting in Washington, D.C., on September 24, 1978.

September 24, 1978

1. The Interim Committee of the Board of Governors of the International Monetary Fund held its eleventh meeting in Washington, D. C., on September 24, 1978, under the chairmanship of Mr. Denis Healey, Chancellor of the Exchequer of the United Kingdom. Mr. J. de Larosière, Managing Director of the International Monetary Fund, participated in the meeting. The following observers attended during the Committee’s discussions: Mr. Gamani Corea, Secretary-General, Unctad; Mr. Ali M. Jaidah, Secretary-General, opec; Mr. René Larre, General Manager, bis; Mr. Emile van Lennep, Secretary-General, oecd; Mr. F. Leutwiler, President, Swiss National Bank; Mr. Olivier Long, Director-General, gatt; Mr. Robert S. McNamara, President ibrd, Mr. François-Xavier Ortoli, Vice-President, cec; Mr. Jean Ripert, Under Secretary-General for International Economic and Social Affairs, un; and Mr. Cesar E. A. Virata, Chairman, Development Committee.

2. The Committee discussed the world economic outlook and the working of the international adjustment process.

The Committee recognized that progress had been made on various fronts in overcoming the serious difficulties that had beset the world economy during the years 1973-75. In countries that had taken policy measures to adjust to the disturbances of those years, the favorable effects were clearly evident. Nevertheless, the Committee noted, the current situation remained unsatisfactory in several important respects.

The Committee expressed concern that in most member countries rates of price increase continued to be much too high and substantial underutilization of economic resources, including high levels of unemployment, continued to prevail. On the international adjustment process, the Committee noted that wide differences in rates of inflation and growth in domestic demand had contributed to the continuation of large deficits and surpluses on current account among the industrial countries. These imbalances had resulted in unstable foreign exchange markets during the past year, and that this instability, in turn—through its effects on prices, confidence, and investment—had made the formulation and implementation of policies more difficult. The Committee emphasized that a return to exhange market stability would require that adoption of national policies to reduce inflation and to achieve more convergent rates of growth in domestic demand. In a further observation on the adjustment process, the Committee noted that a number of nonindustrial countries were encountering difficult problems of adjustment and external financing, in part because of the slow pace of world trade.

The Committee noted that inflation has continued to subside in a number of industrial countries but that it has tended to accelerate in some others, including the United States, where inflation has become the top priority of economic policy.

With respect to growth and resource utilization in the industrial world, the Committee’s concern focused mainly on the abnormally high unemployment rates and substantial slack in industrial capacity prevailing outside the United States. Attention was drawn to the marked differences in growth rates in recent years between the United States, where a relatively full cyclical recovery has taken place, and most of the other industrial countries, where real economic activity has not generally expanded fast enough since 1975 to reduce unemployment.

The Committee noted that in the group of non-oil developing countries the average rate of growth in total output had been relatively well sustained, but at a level appreciably below that of the 1967-72 period, so that only little room was left for gains in real income.

The Committee reiterated its concern about the risk of increasing resort to protectionism, and stressed the importance of an early and successful completion of the Multilateral Trade Negotiation.

In its discussion of the current situation and outlook, the Committee concluded that a welcome change in international trade flows was emerging. This reflected the effects of changes in exchange rates for major currencies that had taken place over the past year and a half. The effects on exports and imports in volume terms, which take considerable time to come through, were beginning to produce favorable shifts in the current account balances of the United States, Japan, and certain other countries. These shifts, the Committee observed, may be expected to increase and, over time, could lead to substantial improvement in the current account balances of industrial countries, provided that the pattern of price increases and growth rates in domestic demand among countries was an appropriate one. Achievement of such a pattern, the Committee stressed, would require that countries adopt internal measures to offset the expansionary effects of exchange rate depreciation and the deflationary effects of exchange rate appreciation.

The Committee reaffirmed the conviction it expressed at the April 1978 meeting in Mexico City that a coordinated strategy of policy, including measures with respect to energy, was needed in present circumstances in order to encourage noninflationary growth of the world economy and to ensure a reduction in imbalances in international payments, thereby promoting underlying conditions conducive to economic and financial stability as well as to greater stability in exchange markets. The Committee emphasized that implementation of such a strategy for the medium term would require each country to contribute to growth of the world ecomomy in relation to the strength of its external position and the success of its anti-inflation policy.

Successful pursuit of a medium-term strategy in the industrial countries would lead, in the Committee’s view, to marked improvement of the global environment for trade and development, with substantial benefits for the developing countries and other primary producing countries. The Committee believed that an improved world trading environment would help to arrest the recent ominous tendency toward use of protectionist trade measures. In addition, the Committee emphasized the desirability of measures on the part of the developed countries to open their markets more widely to products of the developing countries, to provide those countries more generous access to their capital markets, and—more generally—to assure the developing countries an adequate inflow of real resources, including a more satisfactory level of official development assistance.

3. The Committee considered a number of questions concerning the SDR on the basis of a report of the Executive Board on the subject. The Committee reached the conclusions set forth in paragraphs 4 and 5 below with the understanding that these conclusions are interrelated and must be adopted in their entirety together with the understandings reached by the Committee on the Seventh General Review of Quotas. In the view of the Committee, therefore, decisions on all these issues relating to SDRs and on the Seventh General Review should be taken at the same time.

4. The Committee discussed the question of the resumption of allocations of SDRs and, in that connection, took into account the various views and considerations presented in the report of the Executive Board. The Committee agreed to recommend that a decision to allocate SDRs, on the basis of a proposal to be made by the Managing Director concurred in by the Executive Board by November 1, 1978, should be acted on by the Board of Governors before the end of the year in order to help meet the long-term global need to supplement existing reserve assets in a desirable manner. Such an allocation would also help to promote the objective of the amended Articles of making the SDR the principal reserve asset in the international monetary system. In the Committee’s view the Fund should make allocations of 4 billion SDRs in each of the next three years 1979 to 1981.

5. The Committee reached the following conclusions with regard to other aspects of the SDR.

(a) It was agreed that the interest rate on the SDR should be increased from 60 per cent of the weighted average of the short-term interest rates in the five member countries with the largest quotas to 80 per cent of that average and that the rate of remuneration should be set at 90 per cent of the interest rate on the SDR, that is, at 72 per cent of the combined market rate. This change would be subject to the following understandings: (i) Shortly before the end of each financial year, the Fund would consider whether the estimated net income of the Fund for that year was sufficiently large to permit the average annual rate of remuneration applicable for that year to be raised to a level above 90 but not above 100 per cent of the average annual rate of interest on the SDR and, in this connection, would also consider the possibility of lowering periodic charges on the Fund’s currency holdings in the future, (ii) At the time that the Executive Board decides to adopt the new formula for the rate of remuneration, it would take a decision to prevent an automatic increase in the initial rate of periodic charges on the Fund’s holdings that would otherwise occur under the Fund’s Rules and Regulations. The Executive Board would review the Fund’s financial position, and would take such action as might be necessary to protect that position, if the Fund’s total expenses exceeded its income in any period of six successive months.

(b) The Committee noted that the Executive Board had been pursuing its work with regard to additional types of uses of SDRs, namely, for loans, collateral security, and the direct settlement of obligations, that could be permitted by the Fund in accordance with the provisions of the amended Articles and expressed the hope that the Executive Board would complete this work, take the necessary decisions in the near future, and report on them to the Committee at its next meeting.

(c) The Committee endorsed the view of the Executive Board that the requirement of reconstitution of special drawing rights, namely, the obligation to maintain a minimum average balance of SDRs over specified periods, should be reduced from 30 to 15 per cent of net cumulative allocations and that this requirement should be considered further in the light of experience.

(d) The Committee noted that the Executive Board intends to keep under review the question of a substitution account.

6. The Committee resumed its discussion of the Seventh General Review of Quotas and considered three major issues relating to it: the size of the overall increase in quotas, selective quota adjustments, and the method of payment of the increases in quotas. These issues were considered by the Committee in conjunction with various issues relating to the SDR with which they are regarded as interrelated. The Committee recalled its view that there was a need for an increase in total quotas under the Seventh Review that would be adequate to meet the expected need for conditional liquidity over the next five years. The Committee also recalled its view that an adequate increase would strengthen the available sources of balance of payments financing by enhancing the ability of the Fund to provide such financing without heavy recourse to borrowing and by furthering the process of international adjustment.

The Committee’s view was that an increase in the overall size of quotas of 50 per cent would be appropriate to bring about a better balance between the size of the Fund’s resources and the need of members for balance of payments financing over the medium term. The Committee noted that the Executive Board does not intend to propose a general adjustment in quotas for five years after the Board of Governors approves the increase in quotas under the Seventh Review, unless there is a major change in the world economy and its financing needs.

The Committee noted with satisfaction that agreement had been reached on selective quota increases for 11 developing member countries: Iraq, Iran, Korea, Kuwait, Lebanon, Libya, Oman, Qatar, Saudi Arabia, Singapore, and the United Arab Emirates.

Taking into account the conclusions reached on the issues relating to SDRs, including allocations of SDRs, the Committee was of the view that, for the quota increases proposed as a result of this review, participants in the Special Drawing Rights Department should pay 25 per cent of the quota increase in SDRs and that nonparticipants should pay the equivalent of 25 per cent of the increase in foreign exchange.

The Committee agreed to request the Executive Board to prepare and complete by November 1, 1978, for final decision and vote by the Board of Governors before the end of the year, a proposed resolution on increases in the quotas of members, which would include necessary provisions dealing with participation, the effective date of quota increases, and the method of payment of the increases in accordance with the understandings reached in the Committee.

7. In view of the need of a number of members for prompt financial assistance on the scale envisaged by the supplementary financing facility, the Committee stressed again the importance it attached to the entry into operation of the facility at the earliest possible date and urged all members that are expected to contribute to the financing of the facility to take the necessary action so that it could be brought into operation at the earliest possible date.

8. The Committee noted that, in accordance with the Committee’s request, the Executive Board has begun a review of the conditionality attaching to the use of the Fund’s resources and that it intends to resume its consideration of the subject as soon as possible after the Annual Meeting of the Board of Governors.

9. The Committee agreed to hold its next meeting in Washington, D.C. in the spring of 1979.

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