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IMF History (1972-1978) Volume 3
Chapter

Special Drawing Account—Rules for Reconstitution of SDRs

Author(s):
International Monetary Fund
Published Date:
February 1996
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Under the procedures established by the Articles of Agreement as amended in 1969 by the First Amendment, the Board of Governors was to review the rules for reconstitution of SDRs by the end of the first basic period, that is, by December 1972. Late in 1972, the Executive Directors sent to the Board of Governors a report recommending that the existing rules for reconstitution remain unchanged, and the Board of Governors adopted a resolution agreeing to this recommendation. The report of the Executive Directors and the related resolution of the Board of Governors are reproduced as (A) below.

Just before the end of the second basic period, on December 31, 1977, the Executive Directors once more reviewed the rules for reconstitution of SDRs and again recommended to the Board of Governors that no change be made in the existing rules. The Executive Directors proposed to review these rules after the Second Amendment came into effect. Early in 1978, the Board of Governors adopted a resolution agreeing to the Executive Directors’ recommendation. The Executive Directors’ report of 1977 and the related resolution of the Board of Governors are reproduced as (B) below.

(A) Report of the Executive Directors to the Board of Governors

(November 15, 1972)

1. Under Article XXV, Section 6(b) of the Fund’s Articles of Agreement the rules for reconstitution set out in Schedule G must be reviewed before the end of the first and each subsequent basic period. In accordance with Article XXVII, Section (a)(i) these reviews are to be conducted by the Board of Governors. As a result of such a review the Fund may modify existing rules, or adopt new rules, or take a decision to abrogate all rules for reconstitution. The adoption of new or modified rules, or the abrogation of existing rules, requires a majority of 85 per cent of the total voting power of participants in the Special Drawing Account.

2. The review under Article XXV, Section 6(b) must be completed by December 31, 1972, when the first basic period ends. The Executive Directors have considered the rules for reconstitution set out in Schedule G and are submitting this report to the Board of Governors. The Executive Directors recommend the adoption of the resolution set forth in paragraph 7 below.

3. Under paragraph 1(a)(i) of Schedule G a participant’s net use of its special drawing rights must be such that the average of its daily holdings over a five-year period will not be less than 30 per cent of the average of its daily net cumulative allocation of special drawing rights over the same period. Under paragraph 1(b) of Schedule G participants are also required to pay due regard to the desirability of pursuing over time a balanced relationship between their holdings of special drawing rights and their holdings of other reserve assets.

4. In accordance with Schedule G, paragraph 1(a)(ii), the Fund has been making monthly calculations for each participant since December 31, 1971 so as to ascertain whether and to what extent it has a need to obtain special drawing rights in order to maintain the required average holding of 30 per cent. As a result of a decision by the Executive Directors taken on December 3, 1971, a participant with a need to reconstitute its holdings of special drawing rights pursuant to Schedule G, paragraph 1(a) has been permitted to obtain from another participant, or from the General Account against gold or currency acceptable to the Fund, the full amount of special drawing rights indicated by the calculations as necessary to achieve the required average. Moreover, the Executive Directors decided that any participant that needs to reconstitute its holdings under this provision may obtain special drawing rights from the Fund when making a purchase in the General Account in accordance with the Fund policies on the use of its resources. A number of participants have taken the initiative to obtain special drawing rights from the General Account, and by October 31, 1972 a total of SDR 96.7 million had been obtained by participants to promote reconstitution under these procedures, of which SDR 38.0 million was obtained against the currencies of other members and SDR 58.7 million against participants’ own currencies in connection with purchases in the General Account. It has not proved necessary for any participant to be made subject to designation to promote reconstitution pursuant to Article XXV, Section 5(a)(ii).

5. Reconstitution was incorporated in the provisions relating to the Special Drawing Account to discourage the prolongation of balance of payments deficits which allocations of special drawing rights might otherwise permit, the use of special drawing rights for longer-term financing, and the disproportionate use by participants of special drawing rights because of a preference for the retention of other reserve assets. A contrasting view advanced at the time of the drafting of the amendment of the Articles was that a legal obligation to reconstitute could not easily be reconciled with the view that special drawing rights should be endowed with the character of a reserve asset. Experience with the operation of the Special Drawing Account in general, and with the reconstitution provisions in particular, has been relatively short and has been affected by exceptional developments in the international monetary system, including marked increases in other reserves for a wide range of participants. Thus, it is difficult to draw firm conclusions from experience as to whether or not an obligation to reconstitute is an important element in safeguarding the special drawing rights scheme.

6. There is a widespread opinion among Executive Directors that, as the requirement to maintain average holdings of special drawing rights at a level of 30 per cent of average allocations over five-year periods constitutes a constraint on the use of special drawing rights, its abrogation would enhance their character as a reserve asset. It is, however, the view of the Executive Directors that, under the prevailing uncertainty as to the nature of the reform of the international monetary system and the future role of the various assets in reserves, a decision whether to abrogate or modify the rules of Schedule G should better be postponed. At the time this Schedule was adopted it was envisaged that the first basic period would cover five years, which would have allowed longer experience, even under the present system. Under Article XXV, Section 6(b) the rules for reconstitution must be reviewed again before the end of the next basic period and it is expected that at that stage the future role of special drawing rights in a reformed monetary system will have become clearer, thus providing a firmer basis for consideration of the modification or abrogation of the rules of reconstitution.

7. In the light of these considerations, the Executive Directors recommend that the Board of Governors adopt the following resolutions.

Resolution Submitted to the Board of Governors

The Board of Governors, having received a report from the Executive Directors on the rules for reconstitution set out in Schedule G of the Articles of Agreement, and having reviewed the rules for reconstitution in accordance with Article XXV, Section 6(b) and Article XXVII(a)(i), hereby resolves to make no changes at this time in the rules set forth in Schedule G of the Articles of Agreement.

(B) Report by the Executive Directors to the Board of Governors (December 5, 1977)

1. Under Article XXV, Section 6(b) of the Fund’s Articles of Agreement, the rules for reconstitution set out in Schedule G must be reviewed before the end of each basic period. In accordance with Article XXVII(a)(i), these reviews are to be conducted by the Board of Governors. As a result of such a review, the Fund may modify existing rules, or adopt new rules, or take a decision to abrogate all rules for reconstitution. The adoption of new or modified rules, or the abrogation of existing rules, requires a majority of 85 per cent of the total voting power of participants in the Special Drawing Account.

2. It will be recalled that the Board of Governors reviewed the rules for reconstitution at the end of the first basic period in December 1972 and resolved to make no changes in the rules set forth in Schedule G of the Articles of Agreement for the second basic period. The present review under Article XXV, Section 6(b) must be completed by the end of the second basic period on December 31, 1977 and, unless new rules are adopted or a decision is made to abrogate the rules, the present rules will continue to apply. The Executive Directors have considered the rules for reconstitution set out in Schedule G and are submitting this Report to the Board of Governors. The Executive Directors recommend the adoption of the resolution set forth in paragraph 6 below.

3. Under paragraph 1(a)(i) of Schedule G, a participant’s net use of its special drawing rights must be such that the average of its daily holdings over a five-year period will not be less than 30 per cent of the average of its daily net cumulative allocation of special drawing rights over the same period. Under paragraph 1(b) of Schedule G, participants are also required to pay due regard to the desirability of pursuing over time a balanced relationship between their holdings of special drawing rights and their holdings of other reserve assets.

4. In accordance with Schedule G, paragraph 1(a)(ii), since December 31, 1971, the Fund has made monthly calculations for each participant so as to ascertain whether and to what extent a participant has a need to obtain special drawing rights in order to maintain the required average holdings of 30 per cent. Since the first review in 1972, a large number of participants have obtained SDRs, either from the Fund’s General Account or other participants in order to reconstitute their holdings. By October 31, 1977, a total of SDR 1,965 million had been obtained by 52 participants to promote reconstitution, of which SDR 1,379 million was obtained directly from the Fund’s General Account against payment of currencies acceptable to the Fund, SDR 296 million against participants’ own currencies in connection with purchases from the General Account and SDR 290 million in transactions by agreement with other participants under Article XXV, Section 2(b)(ii). It has not proved necessary for any participant to be made subject to designation to promote reconstitution pursuant to Article XXV, Section 5(a)(ii).1

5. Pursuant to a request by the Interim Committee “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,” the Executive Directors have recently begun their examination of these issues as well as the question of an allocation of SDRs. They are of the view that the question of whether the present reconstitution provisions should be retained, modified, or abrogated cannot be resolved independently of decisions about other major aspects of the Special Drawing Account. These include the principles of designation, the valuation of and yield on the SDR, and the greater freedom to use SDRs under the amended Articles. The outcome of the Executive Directors’ consideration of these aspects will be a major factor in any future review of the present reconstitution requirements. The Executive Directors, therefore, propose to review the reconstitution provisions again when the amended Articles come into effect as part of their review of the characteristics and uses of the Special Drawing Right. Under amended Article XIX, Section 6(b), the rules for reconstitution can be reviewed at any time by the Executive Directors and a decision can be taken by a 70 per cent majority of the total voting power in the Special Drawing Account.

6. In the light of the foregoing, the Executive Directors recommend that the Board of Governors adopt the following resolution.

Resolution Submitted to the Board of Governors

The Board of Governors notes the Report of the Executive Directors entitled “Special Drawing Account—The Rules for Reconstitution” and having conducted its review of the rules for reconstitution in accordance with Article XXV, Section 6(b) and Article XXVII(a)(i), requests the Executive Directors to continue their examination of the rules for reconstitution as part of their review of the characteristics and uses of the Special Drawing Right, and to submit a report and recommendations to the Board of Governors at an appropriate time.

The Executive Board’s decision (No. 5936-(78/168) S) reviewing the rules for reconstitution of SDRs is reproduced below, p. 557.

Resolution No. 28-2, adopted by the Board of Governors effective December 18, 1972.

One participant, Democratic Kampuchea, however, failed to meet the requirement. The participant could not be informed of its obligations because of the inability of the Fund to communicate through normal channels with the authorities of Democratic Kampuchea.

Resolution No. 33-1, adopted by the Board of Governors effective January 4, 1978.

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