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IMF History (1972-1978) Volume 3
Chapter

Allocation of SDRs for the Third Basic Period

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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 Managing Director was required to report to the Board of Governors six months before the end of the second basic period, that is, by June 30, 1977, whether he could propose an allocation of SDRs for the third basic period. The report of the Managing Director of June 29, 1977 indicating that he was unable to propose an allocation is reproduced as (A) below.

By October 1978, the Managing Director was in a position to propose an allocation of SDRs for the third basic period. His report to that effect and the resolution adopted by the Board of Governors in December 1978 agreeing to the Managing Director’s proposal are reproduced as (B) below.

(A) Report by the Managing Director to the Board of Governors and to the Executive Directors (June 29, 1977)

Article XXIV, Section 1(a), of the present Articles1 provides that “In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.” Decisions to allocate or to cancel SDRs are made by the Board of Governors on the basis of proposals of the Managing Director, concurred in by the Executive Directors. Before making any proposal, “the Managing Director, after having satisfied himself that it will be consistent with the provisions of Section 1(a) of this Article, shall conduct such consultations as will enable him to ascertain that there is broad support among participants for the proposal.” 2 Article XXIV, Section 4(c), of the present Articles provides that not later than six months before the end of each basic period the Managing Director shall either make such a proposal or report to the Board of Governors and to the Executive Board that “there is no proposal which he considers to be consistent with the provisions of Section 1 of this Article that has broad support among participants.”

The present basic period, which is the second one, began as an “empty” period on January 1, 1973 in the absence of a proposal by the Managing Director and will terminate at the end of this calendar year. I now wish to report that at the present time I am not in a position to make a proposal with respect to the next (third) basic period, which starts on January 1, 1978.

The possibility of an SDR allocation was not discussed by the Executive Board between 1973 and 1977, and major changes occurred in the international monetary system during that period. Indeed, such changes began to take place immediately following the first allocation. A figure of approximately SDR 9.5 billion had been agreed for the basic period of three years, 1970-72. This amount was expected to be approximately equal to the gap between the anticipated growth of reserve needs (of perhaps SDR 4-5 billion a year) and the predicted increase in the supply of reserves other than SDRs (some SDR 1-1.5 billion a year). During the period, however, there was a dramatic shift in the trend of reserve increases. In the three years 1967-69, members’ reserves had risen by about SDR 6 billion. But in 1970-72 they rose by about SDR 68 billion (about SDR 15 billion in 1970, SDR 30 billion in 1971, and SDR 23 billion in 1972) with less than SDR 9 billion of this total coming from the SDR allocation.

When it came time to consider an allocation for the second basic period, there was considerable support for a further allocation over a short basic period of two years. Some members favored an annual figure roughly the same as in the first basic period, others were prepared to accept an amount approximately half this size, and some did not see the need for any allocation. On June 26, 1972, just over six months before the beginning of the second basic period, the Managing Director reported that he was unable to find sufficient support for an allocation proposal but indicated that he would continue his consultations. These consultations, in the second half of 1972, led to the conclusion that there was not broad support for any proposal, and the Managing Director ceased his consultations after the very large increase in foreign exchange reserves (about US$20 billion) that took place in the first quarter of 1973.

Major changes have occurred and are occurring in the international monetary system, and the question of an SDR allocation should be considered in relation to these continuing developments. In my view, some important issues still remain open, and the request of the Interim Committee that the Executive Directors give the subject further study provides an opportunity to see whether these questions can be resolved within the near future. From the consideration that has been given to the question of an SDR allocation in recent weeks, I would judge it unlikely that I shall be able to make a proposal before January 1, 1978. Thus, it may be expected that the third basic period will start as an empty period.

Active consideration of the issues involved is being planned for the months ahead. In their communiqué of April 29 the Interim Committee reached the following conclusions:

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.

I should note that I can make a proposal at any time during the third basic period when I am satisfied that the requisite conditions of Article XXIV, Section 4(b), are fulfilled, and indeed am obliged to do so by Article XXIV, Section 4(c). If the outstanding questions can be resolved, I will submit a proposal for an SDR allocation as soon as I am satisfied that one can be made that will be consistent with the requirements of the Articles, or, if such a proposal cannot be made, I will report to the Board of Governors and the Executive Board at an appropriate time.

(B) Proposal by the Managing Director of the International Monetary Fund (October 25, 1978)

Introduction

Article XVIII, Section 4(a) and (b) of the Articles of Agreement of the Fund provides in relevant part that:

(a) Decisions under Section 2(a), (b), and (c) or Section 3 of this Article shall be made by the Board of Governors on the basis of proposals of the Managing Director concurred in by the Executive Board.

(b) Before making any proposal, the Managing Director, after having satisfied himself that it will be consistent with the provisions of Section 1(a) of this Article, shall conduct such consultations as will enable him to ascertain that there is broad support among participants for the proposal.

On June 29, 1977, the Managing Director made a report to the Board of Governors entitled “Report by the Managing Director to the Board of Governors and to the Executive Directors on the Allocation of Special Drawing Rights (Article XXIV, Section 4(c)),” 1 which concluded that, with respect to the third basic period, which would start on January 1, 1978, the Managing Director was not in a position to make a proposal before January 1, 1978.

The report referred to above noted that the Managing Director can make a proposal at any time during the third basic period when he is satisfied that the requisite conditions of Article XVIII, Section 4(b) are fulfilled, and indeed is obliged to do so by Article XVIII, Section 4(c).

Pursuant to Article VIII, Section 4(a) and (b), I am now submitting to the Board of Governors a proposal for allocation of special drawing rights during the third basic period. Before making this proposal, I have satisfied myself, as required by Article XVIII, Section 4(b), that the proposal will be consistent with the provisions of Section 1(a) of that Article. Section 1(a) provides that:

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

In addition, consultations have been conducted pursuant to Article XVIII, Section 4(b), which have enabled me to ascertain that there is broad support among participants for the proposal set forth in this Report. I refer in particular to paragraph 4 of the press communiqué of the Interim Committee of the Board of Governors of the International Monetary Fund, issued after its meeting on September 24, 1978, which states: “In the Committee’s view the Fund should make allocations of 4 billion SDRs in each of the next three years 1979 to 1981.”

Parts I and II of this report, which follow, dicuss the reasons underlying my proposal and explain its various features. Part III includes the proposal and the draft of a resolution of the Board of Governors approving allocation of special drawing rights in accordance with this proposal.

Part I. Need to Supplement Reserves

1. Basis for Allocation

This proposal to allocate special drawing rights is made in accordance with my conclusion that, as required by Article XVIII, Section 1(a), there is at present “a long-term global need … to supplement existing reserve assets.” The basis for this conclusion is set forth below.

With greater exchange rate flexibility, countries might have been expected to make do with much smaller reserves. Moreover, important changes have taken place in world financial markets in the last decade, and most countries can obtain reserves by making use of international money and capital markets.

Experience shows, however, that countries want to increase their reserves as the level of their international transactions rises, and such increases can be expected to continue in the coming years. While it is true that most countries have a means for satisfying their need for reserves when international capital markets are as free as they are today, the decision to allocate special drawing rights does not depend on a finding that the long-term global need cannot be met except by allocation. A characteristic of a system in which countries add to their gross reserves as their international indebtedness increases is that they are faced with the need for periodic refinancing. This difficulty does not arise when additions to net reserves are made through allocation of special drawing rights.

Another consideration is the objective of making the special drawing right the principal reserve asset of the international monetary system, as set out in Article VIII, Section 7 and Article XXII. Exclusive reliance on the accumulation of reserve currencies to provide the needed reserve increases would hardly be compatible with that objective. Although the role of the special drawing right does not depend on purely quantitative considerations, the amount of special drawing rights in existence is nonetheless relevant. The volume of special drawing rights has not increased since the beginning of 1972, and thus the share of this component in international liquidity has been progressively reduced. When allocation of special drawing rights for 1970-72 was decided upon at the end of 1969, it was thought that thereafter special drawing rights might well account for the bulk of reserve increases. In the event, holdings of reserve currencies have increased much faster than expected, and the actual share of holdings of special drawing rights in reserves excluding gold has declined from about 10 per cent at the beginning of 1972 to about 4 per cent at present. In the absence of allocation, the special drawing right would continue its rapid decline as a proportion of reserves.

In view of these considerations, I have concluded that, in accordance with the Articles, a decision should be taken to resume allocation of special drawing rights.

2. Size and Period of Allocation

Views on the desirable size of allocations of special drawing rights naturally take into account the present magnitude and expected growth of official reserves. The growth of official reserves in turn bears a relationship to the value of world trade, which for the next five years can conservatively be estimated to increase by some 10 per cent a year. The ratio of official reserves to the value of international trade has varied, however, from one period to another, and the increase in reserves could thus be above or below that rate. With the present level of members’ holdings of foreign exchange and Fund-related assets of SDR 230 billion, an average increase of SDR 20 billion a year over the next five years would appear to be a low estimate of the likely growth. Figures of this kind do not, of course, provide precise guidance for determining the appropriate level and time of allocations of special drawing rights, but do offer some point of reference for consideration in making such decisions.

It can be maintained, although this view is not universally shared, that with a highly elastic supply of reserves available through international capital markets, a substantial part of any allocation of special drawing rights could be expected to substitute for increases in official holdings of foreign exchange that would otherwise have taken place. This line of reasoning would suggest that any expansionary effects of allocation would be limited in size. Whatever view is taken of these issues, there can be no question that in the world of today the possible effects on expectations with respect to inflation of a decision to allocate special drawing rights also need to be taken into account. This consideration suggests that allocations at this time should be modest in terms of both annual size and the length of the period for which they should be made.

I have therefore concluded that the Fund should make allocations of SDR 4 billion in each of the next three years 1979 to 1981. In specifying these amounts, I have also had in mind the agreement that has been reached that special drawing rights will be used in partial payment for the quota increases that are to take place under the Seventh General Review of Quotas. The first allocation would be made as of the first day of the month following the effective date of the resolution of the Board of Governors, and the succeeding two allocations would be made as of the same day in each of the subsequent two years.

Part II. Elements of the Proposal

3. Proposed Basic Period

Article XVIII, Section 2(a) specifies that: “Decisions of the Fund to allocate or cancel special drawing rights shall be made for basic periods which shall run consecutively and shall be five years in duration.” That same section, however, allows the Fund to provide that the duration of a basic period shall be other than five years.

On the occasion of the first decision to allocate, a basic period of three years running from January 1, 1970 was prescribed. The second basic period thus began on January 1, 1973; as the Fund did not provide otherwise, that period ran for five years, with the current, i.e., third, basic period beginning on January 1, 1978.

It is proposed that allocations now be made under Article XVIII, Sections 2(c) and 4(c)(ii) for three years of the third basic period, and that the basic period end on the final day of the year in which the last of the three annual allocations is made. The third basic period that began on January 1, 1978 would thus have a terminal date of December 31, 1981 and a duration of four years, with allocations in the last three of those four years.

4. Participation During Basic Period

Article XVIII, Section 2(d) deals with members that become participants after a basic period begins—on this occasion, as from January 1, 1978. New participants may be new or existing members. New participants would include two classes: (a) those that were not participants at the start of the third basic period but that were participants on the effective date of the proposed resolution and (b) those that become participants after the effective date of the resolution. Article XVIII, Section 2(d) declares that a new participant shall not receive allocations in the basic period in which it becomes a participant but authorizes the Fund to decide to permit the member to receive allocations made after it becomes a participant. The decision referred to is taken by the Executive Board by a majority of the votes cast. I would expect that the Executive Board would react sympathetically to any request by a new participant, whether in class (a) or (b), above, to receive allocations made in the third basic period after it becomes a participant.

5. Allocations as Percentages of Quotas

Article XVIII, Section 2(b) provides that: “The rates at which allocations are to be made shall be expressed as percentages of quotas on the date of each decision to allocate,” but the Fund, under Section 2(c) of the same Article, may provide that the basis for allocations shall be quotas on dates other than the dates of decisions to allocate.

On the assumption that the only members receiving allocations were those that are at present participants, the rate for the first allocation would be 10.6 per cent of quotas. The method adopted to express the percentages of quotas for the proposal is designed to ensure that each of the three allocations will be close to SDR 4 billion and that the total amount allocated will be close to SDR 12 billion.2 Specifically, the total would not be increased if the Executive Board should decide, by the date that the resolution of the Board of Governors becomes effective, to make new participants in class (a) of section 4, above, i.e., members that were not participants at the start of the third basic period but were participants on the effective date of the resolution, eligible to receive the allocations for that period.

The total amount of allocations would be reduced, however, if participants entitled to receive allocations “opt out.” 3 In contrast, the total amount of allocations would be increased when any new participants in class (b) of section 4, above, i.e., those that become participants after the effective date of the resolution, are made eligible, by a decision of the Executive Board, to receive allocations made after they become participants.

The proposal also provides that the basis for each allocation shall be quotas on the day before that allocation. This provision is intended to deal with the expectation that increases in quotas under the Seventh General Review are to take place during the third basic period. It would have the result that all participants for which new quotas had gone into effect by the day prior to the allocation in question would receive allocations based on their share in the total quotas prevailing on that day, and that those participants whose new quotas had not gone into effect would receive a much reduced share.

6. Interrelated Issues

The draft resolution provides that it would not become effective unless the draft resolution on the Seventh General Review of Quotas that is being proposed for simultaneous adoption by the Board of Governors is adopted.4 This provision of the draft resolution on allocation is in accordance with paragraph 3 of the Interim Committee’s communiqué of September 24, 1978. In accordance with the same paragraph, the Executive Board has taken decisions on aspects of the special drawing right that are referred to in paragraph 5 of the communiqué. These decisions will become effective on the dates provided for in the decisions if the draft resolution becomes effective.

Part III. Proposal for the Allocation of Special Drawing Rights

I hereby propose that the Fund allocate special drawing rights to the participants in the Special Drawing Rights Department, in accordance with the Articles of Agreement, as follows:

  • The third basic period, which began on January 1, 1978, shall end on December 31, 1981.

  • Allocations during this basic period shall be made as of the first day of the month following the effective date of the resolution of the Board of Governors and as of the same date in each of the subsequent two years.

  • The rate for each participant receiving an allocation shall be the percentage, rounded to the nearest one tenth of 1 percentage point, resulting from dividing SDR 4 billion by the total of quotas on the day before allocation of those participants that were eligible to receive allocations on the date on which this resolution becomes effective.

I further recommend that in accordance with the foregoing proposal, which has been concurred in by the Executive Board on October 25, 1978, the Board of Governors adopt the following proposed resolution.

Proposed Resolution

Whereas the Managing Director has submitted a proposal for the allocation of special drawing rights pursuant to Article XVIII, Section 4, of the Articles of Agreement of the International Monetary Fund;

Whereas in the Report containing his proposal, the Managing Director has declared that, before making the proposal, he had satisfied himself that the proposal would be consistent with the provisions of Article XVIII, Section 1(a) and that, after consultation, he has ascertained that there is broad support among participants for the proposal; and

Whereas the Executive Board had concurred in the proposal of the Managing Director;

Now, therefore, the Board of Governors, being satisfied that the proposal of the Managing Director meets the principles governing the allocation of special drawing rights set forth in Article XVIII, Section 1(a) hereby resolves that:

1. The third basic period, which began on January 1, 1978, shall end on December 31, 1981.

2. The Fund shall make allocations to participants in the Special Drawing Rights Department that are eligible, in accordance with the Articles of Agreement, to receive allocations during the third basic period.

3. Allocations shall be made as of the first day of the month following the date on which this resolution becomes effective and as of the same date in each of the subsequent two years.

4. The rate for the allocations to participants eligible to receive allocations in accordance with 2 above shall be the percentage, rounded to the nearest one tenth of 1 percentage point, resulting from dividing SDR 4 billion by the total of quotas on the day before allocation of those participants that were eligible to receive allocations on the date on which this resolution becomes effective.

5. This resolution shall become effective if it and the proposed resolution on the Seventh General Review of Quotas are adopted by the necessary majority of the total voting power for each.

The references in this report to Article XXIV are to the present Articles [prior to the Second Amendment]. Some of the events mentioned in this report might occur after the Proposed Second Amendment has become effective. It should be noted, therefore, that Article XXIV, Sections 1(a) and 4(a), (b), and (c), will become Article XVIII, Sections 1(a) and 4(a), (b), and (c), respectively, of the amended Articles.

Article XXIV, Sections 4(a) and (b).

Refers to Articles of Agreement in effect before the Second Amendment. The remaining references in this report to the Articles of Agreement refer to the Articles after the Second Amendment.

Because the percentage is to be rounded to the nearest one tenth of 1 percentage point, an allocation could in practice exceed or fall short of the desired amount by not more than one twentieth of 1 percentage point of total quotas, i.e., a difference in absolute terms that would not be greater than about SDR 19 million on the basis of quotas at the present time.

For a participant to be able to “opt out,” in accordance with Article XVIII, Section 2(e), it must not have voted in favor of the resolution and must inform the Fund before the first allocation under the resolution that it does not wish to receive allocations under that resolution.

See pp. 261-63, above.

Resolution No. 34-3 of the Board of Governors, adopted December 11, 1978.

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