7 Should the SDR Become the Sole Financing Technique for the IMF?

James Boughton
Published Date:
December 2004
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Summary of Findings

Analysis of the Fund’s simultaneous experience with two financing techniques for its credit operations—currencies for conditional, and SDRs for unconditional, credit—suggests that it would be beneficial to adopt the SDR technique for both types of operations, because

  • the SDR technique gives creditors a preferred asset—in terms of remuneration and easy usability—that could be further improved by allowing commercial banks to become “other holders” of SDRs;

  • that technique eliminates the need for the current practice of seeking excessively large quota increases, only 30 percent of which can be used to raise Fund lending;

  • the consolidation of the General Resources and SDR Accounts should facilitate finding an economically efficient formula for the allocation of the Fund’s general expenditure, including possibly a higher rate of charge on the net use of SDRs than on SDR creditor positions;

  • the elimination of members’ contributions in SDRs and currencies when their quotas are increased, and hence of the appearance of budgetary commitments, should facilitate the periodic quota rounds, without weakening the role of quotas as the governor of the Fund’s credit extension;

  • the totality of the changes envisaged would make a much needed contribution to the transparency of the Fund’s financial structure, not least by giving the institution a meaningful balance sheet.

An Essential Distinction: SDR as Asset Versus Allocation of SDRs

The introduction of SDRs into the Articles of Agreement of the Fund in 1969 at the end of some five years of negotiation brought two new features to the institution: (1) a new way for the Fund to extend credit, by the allocation of unconditional liquidity to the membership as a whole, in addition to the existing method of providing conditional credit on a case-by-case basis to particular members that encountered payments difficulties; and (2) the financing of this new form of Fund credit by the simple method of making entries on the Fund’s books, in contrast to the prevailing method based on resources contributed by the membership through quotas or, more exceptionally, through lending to the Fund. The new acronym, SDR, became emblematic of the entire novation: its liquidity objective as well as the financing technique supporting it. But in considering the future of the SDR, it is essential to consider the two separately. Other papers at this seminar discuss the merits and demerits of the provision of liquidity by means of allocation to the membership as a whole or to a large subsection of it. This paper will concentrate on the SDR as a financial technique. It will conclude that this technique is superior to that based on contributed currencies and that the Fund would benefit from applying it not only to its unconditional lending (whether maintained at its present level or raised by new allocations) but also to its conditional lending.

Failure to distinguish between the technique and the purpose for which it is used—between the instrument and the transactions conducted with it—gave rise to a debate on the question, as it was phrased, “whether the SDR was money or credit.” But since that is not a meaningful question, it has no answer. The question probably arose from a confusion of two legitimate questions: (1) does the SDR fit under one’s definition of “money,” or should it be considered as quasi-money or as a nonmonetary financial asset? And (2) is the allocation of SDRs an extension of credit, a grant, or perhaps something in between? I have dealt with these questions before (Polak, 1971); in this paper, I have found it convenient to treat the SDR as money, and SDR allocations as the extension of unconditional Fund credit.

The Three Financing Techniques of the IMF

In the course of its history, including its prehistory, the Fund has engaged in two major debates on the technique to be used to provide members with financial resources and it has gained experience with three different techniques for this purpose. This section will touch briefly on these debates and appraise the three techniques in terms of their merits in meeting the objectives of the institution.

The “Mixed Bag of Currencies” of the White Plan1

The plans for postwar monetary cooperation prepared by the United States and the United Kingdom in 1942 both contained provisions to make additional foreign exchange resources available to countries in payments deficit. Under the U.S. (“White”) plan, the resources for this purpose would be contributed to the Fund by each member in gold and its own currency. The Fund would then use its “mixed bag of currencies” to (in effect) extend credit to the countries that had a payments deficit “in that currency.” (The term “credit” was studiously avoided: the Fund “sold” the currency required against an equivalent amount of the currency of the country in deficit, which the latter country was expected to “repurchase” as it overcame its difficulties.) By contrast, the approach in the British (Keynes) plan was based on British banking practice: countries would be given overdraft facilities that, if used, gave the creditor a balance in international currency, called bancor, on the books of the Fund. This, to British thinking, seemed the natural way to proceed: it avoided notions of bilateral payments needs and the “scarce currency” problem and it finessed the question of the source of the capital for the new institution.

Although many other differences between the U.S. and the British plans were rather quickly removed by compromises, it took more than two years, until the Joint Statement in April 1944, before the British acquiesced in the currencies approach. The Americans insisted on this approach with the argument that the U.S. Congress would have difficulties with the introduction of an international currency and with a financial technique that was unfamiliar in the United States, where the term “overdraft” has a connotation of financial impropriety. The more weighty economic argument was that the potential U.S. commitment to give balance of payments assistance to the rest of the world through the Fund would be more than twice as large under the Keynes Plan as under the White Plan: under the latter, the maximum contribution that could be claimed from the United States through the Fund equaled the U.S. quota ($2.75 billion); under the former, the sum of the quotas of all other members (about $6 billion).

The Fund thus began its operations by the technique of “selling” contributed currencies, and for the first ten years or so this proved satisfactory all around—but for two reasons that were specific to the early postwar years. (1) The payments problems for which members approached the Fund were almost exclusively dollar problems, so that there was little question that the U.S. dollar was the currency “needed” under the provisions of the Articles; up to 1958, the Fund used almost exclusively dollars in its transactions. (2) The dollars sold by the Fund were mostly spent on imports from the United States or willingly held if acquired by other countries; thus the United States did not lose gold as a result of the Fund’s use of dollars, and in any event the size of U.S. gold reserves was not a matter of concern at that time.

Halfway House Between the White Plan and the Keynes Plan

All of this changed as a wider range of currencies became de facto convertible in the late 1950s. Convertibility made the specification of a “currency … needed for making in that currency payments …” economically meaningless and thus cleared the way, the Fund’s lawyers cooperating, for a use of a wider range of currencies. But countries were not generally prepared to hold currencies other than the dollar in their reserves; hence the issuers of these currencies could expect to lose reserves as amounts drawn on the Fund were presented for conversion. Having only recently rebuilt their reserves to reasonably comfortable levels, these countries proved reluctant to have their currencies drawn from the Fund if this meant a loss of reserves. Thus, for the Fund to use the wide range of the currencies it held, it was necessary to establish the fact—by a Fund decision on gold tranche drawings, by appropriate publicity, and ultimately (in 1969) by amendment—that reserve positions held in the Fund, created by reductions in the Fund’s holdings of a members currency below quota, fully deserved to be considered reserves.2

These positions, whose value was at the time maintained in gold, made their entry in the statistics on international reserves in about 1963, under the name “gold tranche positions.” Prudence prevented the IMF staff from suggesting that they be called “bancor,” but it was well realized that the Fund’s financing technique had quietly moved at least halfway from the White Plan to the Keynes Plan: although the “acceptance limits” of the White Plan remained in force, the new approach to transactions meant that the extension of credit by the Fund created reserves on the books of the Fund in a way very similar to that envisaged by the Keynes Plan.3

As long as the value of reserve positions in the Fund was expected to be maintained in terms of gold, the issue of the payment of interest on these positions remained subdued, although creditor countries insisted on the inclusion in the First Amendment of a rate of remuneration on these positions (in excess of 25 percent of quota), which was set at 1½ percent, equal to the initial interest rate on the SDR. Over time, as the reference value of these positions moved from gold to the SDR as a basket of currencies, it became accepted that they should normally be remunerated at a competitive market rate; in the Second Amendment this rate was defined as 80 percent of the SDR rate as the minimum and the full SDR rate as the maximum.

The SDR Technique

Thus, by the mid-1960s, when the international discussions on the design of a supplementary liquidity mechanism were about to start, the Fund had developed a system to finance its credit operations, which, although it had not yet been fully sanctioned by new legal provisions, could be seen as a functioning halfway house between the Keynes and the White plans. In the view of the staff, the financing of any new system of unconditional access could either be grafted onto the existing mechanism by means of a set of unconditional drawing rights (as in the gold tranche), or be designed as a separate operation in terms of “units” that would in fact be like Keynes’s bancor. As these alternatives were considered, it became clear that any policy desiderata (magnitude of access, decision-making process, repayability, and so on) could be attached to either of the two technical approaches. As in the 1940s, the real controversy was not about financial techniques but about the degree of control under which any new mechanism would dispense liquidity: under what conditions, to which countries, in which amounts, and subject to what reimbursement. As each of these issues was finally settled in a manner that mostly reflected the views of the majority of the Fund membership, a concession was made to the views of the minority in the choice of the name of the new instrument; it became “special drawing right” rather than “reserve unit” or any other set of words that would suggest the creation of a new asset with recognized reserve characteristics (Gold, 1971).

Experience with Alternative Techniques

The choice made late in the liquidity discussions of the 1960s to choose a different financing technique for the new liquidity mechanism than the one in existence for the Fund’s conditional credit implied that the institution would be running two financial systems side by side. There have now been 25 years of experience with this dual arrangement. What does it tell us about the relative merits of the two approaches?

Experience with the SDR Technique

In many respects the SDR system has worked extremely well in the technical sense as a means of extending credit across the board to the Fund membership and of allowing members to use SDRs as reserve assets. (This, of course, is not a judgment on the success of the SDR scheme in the broader sense, including the lofty objectives that were added to the Articles of Agreement in the Second Amendment: “… promoting better international surveillance of international liquidity and making the special drawing right the principal reserve asset in the international monetary system” (Article V, Section 7).) Although a substantial number of members joined the Fund too late to have benefited from allocations, all members are now “participants” and can hold SDRs. The somewhat novel mechanism of designation, which had its forerunner in the practices with respect to the currencies selected for drawings that the Fund had developed since the late 1950s, has operated without difficulties. Even more significant, this mechanism has been found to be redundant since late 1987: in practice it has been replaced by arrangements that the Fund has established with about a dozen members that are willing to acquire or sell SDRs, within agreed limits, against usable currencies (International Monetary Fund, Annual Report, 1995, pp. 148–50). With these arrangements in place for the conversion of SDRs, members wanting to use their SDRs to acquire currencies do not have to claim a balance of payments need. Another indicator of reduced concern among the membership about acceptance limits was implicit in the proposal made by the countries of the Group of Seven for a special allocation of SDRs to members that had not, or not fully, participated in earlier allocations; with the exception of Switzerland, these were all potential users of SDRs, and 25 years ago any allocation that failed to generate matching increases in acceptance limits of prospective creditor countries would have been considered unthinkable.

Nevertheless, some notable weaknesses in the mechanism have surfaced, which are mainly related to the fact that commercial banks cannot under the Articles be “other holders” of SDRs.4 As a consequence, SDRs cannot be used directly in intervention in exchange markets; nor can they be used as compensating balances for credit granted by banks. These may be at least some of the reasons why countries with precarious reserves—primarily developing countries—typically hold only a small proportion of the SDRs that have been allocated to them.

This experience with the SDR mechanism suggests the desirability of an amendment to the Articles that would permit commercial banks to become “other holders.”5 The objective of this change would be to induce a limited number of commercial banks to make a market in SDRs, at small spreads, essentially as a service to their central bank customers. There are a number of hopeful signs in recent experience with the SDR that suggest that this objective could be achieved. Most industrial countries, including the United States, Germany, and Japan, have been willing to hold SDRs in excess of their allocations; indeed, although the Fund has been able to find willing buyers for SDRs, it has sometimes been unable to find willing sellers. Designation has, as noted, proved to be redundant even without the additional cushion of demand that would be created by bringing commercial banks into the market; the relative decline of SDRs outstanding as a proportion of total reserves (see Box 7.1) may well have been a factor in this development. The interest rate for SDR deposits in private markets, as reported in International Financial Statistics, is very close to the SDR interest rate paid by the Fund. That interest rate, and the fact that members would have a frequent demand for SDRs for payments to the Fund, would provide a strong support level for the SDR in a free market. If judged necessary, this support could be reinforced by maintaining designation (not necessarily in the same manner as under the present Articles) on a stand-by basis.

Experience with the Modified Currencies Technique

The introduction of the SDR system made it possible for the General Resources Account to hold SDRs, and that account received large amounts of them in charges and repayments and, since the Second Amendment, in payments for quotas when these were increased. Thus a substantial part of the business of that account in the last 25 years has been conducted in SDRs and has benefited from the smooth operation of the SDR mechanism. For example, when Mexico drew from the Fund an amount equal to SDR 5.3 billion in February 1995, the Fund used SDR 3.5 billion in SDRs in a single transaction and Mexico sold that entire amount to other members for currencies. But the Fund cannot conduct all its transactions in SDRs (at the end of fiscal 1995, its SDR holdings had been reduced to about SDR 1 billion), and it must therefore rely on being able to draw on its holdings of currencies. Here, it has encountered two difficulties.

Box 7.1Reserves in the Fund Compared with Other Reserves

Countries holding part of their reserves in reserve positions in the Fund or in SDRs have a natural concern about the proportions of their total reserves held in these forms. The table below indicates the development of these proportions from 1970 to 1995 for the industrial countries as a group, which account for the bulk of the credit to the Fund. (Total reserves are defined including gold for 1970 and excluding it for subsequent years.) As is well known, the SDR proportion has declined since the last allocation in the early 1980s, but the proportion of reserves held in reserve positions in the Fund has also been lower in recent years than in most of the 1970s and 1980s.

Reserves of Industrial Countries
Year-endTotalin FundSDRsin FundSDRs
(In billions of SDRs)(In percent of total)
Source: International Monetary Fund, International Financial Statistics.
Source: International Monetary Fund, International Financial Statistics.

First, although the Fund has accepted in principle to pay the full SDR interest rate on reserve tranche positions in excess of a certain minimum holding for each member,6 it has in fact never done so: in the last ten years it has actually reduced the rate paid to creditors from about 90 percent to the statutory minimum 80 percent of the SDR rate, in order to offset uncollectible charges of some members and to build up special reserves against possible future defaults. The below-market remuneration of creditor positions has tended to make agreement on the selection of currencies for use in Fund transactions more difficult; in 1990 the Fund found it necessary, after a long and difficult debate, to modify its policy (which had been in effect for some thirty years) under which the guiding criterion for the choice of creditor currencies had been proportionality to members’ gold and foreign exchange reserves, by introducing an overriding criterion of broad proportionality to quotas (Annual Report, 1992, p. 72; Annual Report, 1995, p. 138).

The difficulties encountered in the use of its holdings of usable currencies, at the same time that the Fund could dispense with the corresponding rules for designation in the SDR mechanism, is one indication of the weakness of the currency mechanism in the execution of the Fund’s standard credit transactions. A more serious weakness results from the attitude the Fund and its creditors have gradually developed toward measures of the Fund’s liquidity. The Fund needs of course a measure—even if it cannot be very precise—of its “liquidity”: the assets it has at its disposal for future transactions. It defines that liquidity as its holdings of “usable” currencies and SDRs, adjusted for commitments under arrangements, less an allowance for needed working balances (reminiscent of a prescribed minimum number of taxicabs to be kept at the station?) and an estimate of amounts of usable currencies that may become unusable.

There might be some advantage in expressing the Fund’s liquidity as a ratio to an indicator of potential demand for drawings, but a reference value for this purpose would be hard to find—although one can note an interesting recent attempt to appraise the liquidity remaining after the large arrangement with Mexico in terms of the number of future “Mexicos” that the Fund might be able to handle. Faced with the difficulty of finding a good general reference value, the Fund has opted for one that looks plausible but is in fact wrongly focused—namely, the total of its “liquid liabilities,” defined as the sum of members’ reserve tranche positions and lending to the Fund.7 Because of the importance that the liquidity ratio has acquired in recent policy discussions in the Fund, it deserves a critical look.

Calls on the Fund’s liquid assets arise overwhelmingly from drawings in the credit tranches, not from reserve tranche drawings by creditor countries. When these countries need to dip into their reserves, they tend to use their holdings of foreign exchange, which, for the major creditors, are many times larger then their reserve tranche positions (see Box 7.1), rather than go through the procedure of reserve tranche drawings on the Fund. In fact, not a single industrial country has made a reserve tranche drawing in the last eight years; in the preceding seven years such drawings from this group of countries totaled about SDR 700 million, or less than 2 percent of the SDR 48.5 billion credit tranche purchases in the same period.

A further curiosity of the liquidity ratio as defined is that while it appears to focus on demands from the Fund’s creditors only, it does not make any allowance for the resources potentially available to meet these demands under the General Arrangements to Borrow (GAB). Yet the GAB were specifically designed to strengthen the Fund in crisis situations affecting the Group of Ten countries—the main creditors of the Fund—and were in fact drawn upon to finance part of the reserve tranche drawing of the United States in 1978. This omission is more than a statistical quibble. Even before the planned doubling in size of the GAB, its resources—SDR 18.5 billion, almost all in usable currencies—account for nearly 60 percent of the SDR 31.6 billion reserve tranche positions of all (GAB and non-GAB) industrial countries (see Box 7.1) and are more than 25 times as large as the total of the reserve tranche drawings made by these countries in the last 15 years.

Over the years, the view has gained ground in the Fund that the liquidity ratio as defined should not, except perhaps for brief periods, fall below 70 percent. There appears to be no record to substantiate the choice of this number—so widely in excess of both the practice in national banking systems and the Fund’s experience with respect to reserve tranche drawings. Yet the 70 percent figure has become well established. In a December 1989 statement to the Executive Directors in connection with the Ninth General Review of Quotas, the Managing Director noted the forecast of a ratio of 56 percent a year ahead, “which is far below the 70 percent ratio which provides the necessary safeguard of the monetary character of the Fund.” The calculations attached to his statement derived the required size of the ninth quota increase on the assumption that the liquidity ratio five years ahead, after the estimated increase in the Fund’s credit over that period, should not fall below 70 percent at the end of the period. And most Executive Directors were reported to share the Managing Director’s views on the required degree of liquidity.8

Finally, the minimum ratio described as 70 percent is in fact an even higher number because of the staff’s practice (mentioned above) of paring some 20 percent (a figure that can be inferred from the data presented in recent Annual Reports) from the actual figure of usable assets to eliminate the part it considers not really usable. Thus the 70 percent ratio stands in fact for a liquidity ratio of (70/80=) 87.5 percent.

The gradual elevation of the 70 percent ratio from an innocuous historical average to a norm does not mean that transactions stop when this figure is reached. Instead, its major influence is on the institution’s approach to the quinquennial quota cycle. The fixation on a high liquidity ratio, together with the unpredictability of the demand for Fund drawings and the traditional slowness of quota reviews, has led to the practice in the Fund to begin to seek large quota increases while it still has large usable resources. But at the same time the approach followed makes quota increases very inefficient in terms of raising the ability of the Fund to engage in net additional transactions. As shown in Box 7.2, the logical outcome of the liquidity ratio approach is that any quota increase raises the lending capacity of the Fund by only about 30 percent of that increase. That same approach, moreover, renders the one instrument specifically designed to strengthen Fund liquidity—quota contributions in SDRs—almost wholly dysfunctional as these SDRs add almost nothing to the Fund’s liquidity ratio.

The case may perhaps be made that quota increases in the Fund are costless to contributing members, in the sense that they receive alternative assets for the SDRs contributed or the amounts of currency used by the Fund. But this argument has not proved convincing to the parliaments of all member countries; and in any event the political exercise of wringing quota increases out of 180 parliaments is not a costless process, as has become increasingly clear in recent quota exercises.

Conclusions on Alternative Techniques

The preceding appraisal of the Fund’s experience with the two financing techniques it has used side by side for the last 25 years has brought to light a fundamental weakness of the currencies technique: it provides creditor countries with an automatic drawing right that is a less satisfactory “asset” than the directly usable SDRs that creditor countries earn when they make their currencies available under the alternative technique. It is time to acknowledge that the view held by many, including the IMF staff, at the time of the SDR exercise, that automatic drawing rights and “units” could be designed to work to equal satisfaction has not been confirmed by the Fund’s experience. The introduction of a market in SDRs among commercial banks, as recommended, would enhance further the comparative advantage of SDRs over currencies as the financing technique for conditional Fund credit.

There is thus every reason for the Fund, after 50 years of applying the currencies technique to its conditional credit activities, to give serious consideration to switching these activities to what has proved to be the superior SDR technique and to unify all its operations under a single financing technique.9 This would give members the same asset in exchange for amounts lent through the conditional and unconditional windows of the Fund. It would, like the dollars and other currencies held by central banks, be a marketable asset. Since 1971, U.S. dollars have not been convertible into gold; central banks have nevertheless willingly held them in ever increasing amounts because they can freely be sold for other assets. In the same way, marketability should suffice for central bank holdings of reserve assets in the Fund, provided these assets have a competitive interest rate and controls are in place to ensure that their issuance is not pushed beyond the absorption capacity of the market (the question of control is discussed below).

Box 7.2Effects of a Quota Increase on Fund Lending Capacity

We consider separately the effects of (1) contributions in the member’s own currency (for 75 percent of the quota increase) and (2) contributions in SDRs (for 25 percent of the increase).

1. Currency contributions. In order to leave an incremental liquidity ratio of 87.5 percent (⅞), almost one-half (7/15) of any currency contribution will have to be added to reserves, while only slightly over one-half (8/15) can be used to extend new credit and thus create new reserve tranche positions of the same amount. Assuming that countries with usable currencies account for ⅔ of the total quota increase, the 75 percent currency contributions of these countries will thus allow a credit expansion of ⅔ x ¾ x 8/15 = 26.7 percent of the total quota increase.

2. SDR contributions. Assume all members contribute 25 percent of their quota increases in SDRs (or in the usable currencies of other members). As these contributions create reserve tranche positions of the same amount, they allow for a credit expansion of only ⅛ x ¼ = 3.125 percent of the total quota increase.

On the assumptions made (which if anything are optimistic), there will be room for a credit expansion of 26.7 + 3.125 = just under 30 percent.

What is particularly striking is the smallness of the effect of the SDR payments, because the liquidity ratio approach subjects these payments to an 87.5 percent “reserve requirement.”

As the Managing Director said in his statement referred to above, the “monetary character of the Fund” requires “the liquidity and immediate usability of members’ claims on the Fund.” But these two attributes of the claims need not be ensured by their encashability, backed by large balances of idle resources; they can be ensured equally well—probably better—by the assets being exchangeable against currencies—as under the SDR designation system, in the proto-market currently organized by the staff, or in a true market run by the leading commercial banks.

The essentially bookkeeping steps required to transform the Fund to using the SDR as its single financing technique raise no questions of principle; being too technical for the text and too integral to the argument to be banned to an annex, these steps, and some of their implications, are described in Box 7.3.

Further Improvements in an SDR-Based Fund

The merger of the two accounts in the Fund, in addition to bringing about much-needed clarity to its finances and considerable simplification to the Articles of Agreement, would also make possible two important improvements in the structure of the Fund.

More Rational Distribution of Costs of the Fund

There is a striking contrast between the ways in which the costs of running the Fund, including the necessary provisioning, are covered in the General and SDR Departments. The expenses of the SDR Department (without any provisioning) are covered by an “assessment” on all participants in proportion to the allocations they have received.10 The costs of the General Department have been covered by a multiplicity of devices, including—in very different proportions over the years—various specific charges on debtors; a premium on the SDR interest rate as part of the periodic charge to debtors; the payment of remuneration to creditors at a rate below the SDR interest rate; and (the most important source in recent years) the non-remuneration of a basic amount, equal to 25 percent of its 1978 quota, for each creditor. Dissatisfied with the inequities and disincentives of the resulting patchwork, Executive Directors searched for a more rational system and reported having reached “a wide consensus … to pursue further the possibility of an amendment of the Articles that would … allow for a quota-based system of sharing the cost of financing the Fund …” (Annual Report, 1995, p. 144). Under such an amendment, members would contribute to the general expenditures of the Fund in proportion to their current quotas, much as they contribute to the expenses of the SDR Department in proportion to the total allocations they have received.

Box 7.3Transposition to an SDR Basis of the Fund’s Conditional Credit Operations

This subject will be discussed in two steps: (1) the operation of future Fund credit transactions on an SDR basis, and (2) the transposition of the transactions outstanding at the time of the change in the system.

(1). The conduct in SDRs of future transactions. The technique envisaged is both simple and familiar: it is the same as that of a commercial bank. When the debtor takes up a certain amount of credit, he receives a balance on the books of the bank in the agreed currency. In the case of the Fund, this is the SDR. Credit creation by the Fund thus raises the amount of SDRs in circulation, just as credit creation by a German bank raises the amount of deutsche mark in circulation. Repayment of Fund credit, or the payment of charges, automatically reduces the SDR circulation. The Fund does not “cancel” the SDRs paid to it; the repayment itself reduces the amount outstanding. The debt of the member will no longer be recorded as additional Fund holdings of the currency of the debtor—the SDR value of which would have to be maintained—but as a Fund claim expressed in SDRs. (The Fund already holds such claims for structural adjustment facility (SAF) loans.) In short, the transition would be from an artificial to a natural structure.

(2). The transposition of outstanding transactions into SDRs. Once it had been decided to finance future Fund transactions by SDR entries, it would be desirable to do away with the existing stock of currencies by extending the same technique retroactively to past transactions. Technically, this would be achieved by the Fund “repaying” all quota subscriptions by returning to each member 100 percent of its quota in its own currency; if the Fund’s holdings of its currency were smaller than that amount, it would pay the balance in SDRs—newly created except for the SDRs held by the Fund on the day of transition. In this way, quotas and the corresponding currency holdings would be eliminated from the balance sheet and creditor countries would acquire an amount equal to their reserve tranche in SDRs. The Fund’s remaining holdings of the currencies of debtor members, which would equal these countries’ use of Fund credit, would appear on the balance sheet as “Fund credit,” the term already in use in the Fund’s statistics. Comparison of Panels A and B of Table 1 below shows how this process of transformation of the Fund’s balance sheet as of April 30,1995, would work out. Quotas, now shown as a RM. entry at the bottom of the balance sheet, would continue to determine a wide range of members’ rights and obligations, but they would no longer reflect financial contributions to the institution. Thus, the role of quotas would have become exactly parallel to that in the SDR Account.

Table 1Balance Sheet of IMF General Department, April 30, 1995(In billions of SDRs)
A. Traditional Presentation
Gold3.6Reserves, etc.3.2
SAF loans1.7Special Disbursement
Other assets1.9Account resources1.8
Total153.5Other liabilities1.5
B. After Repayment of Subscriptions
Fund credit32.1SDRs30.8
SAF loans1.7Borrowing2.0
Gold3.6Special Disbursement
Other assets1.9Account resources1.8
Total39.3Reserves, etc.3.2
Other liabilities1.5
Quotas 145.0
Source: International Monetary Fund, Annual Report, 1995, pp. 138, 231, and 236.Note: Data for the General Resources Account and the Special Disbursement Account have been combined. Also, a number of smaller items have been combined. Totals may not add because of rounding.
Source: International Monetary Fund, Annual Report, 1995, pp. 138, 231, and 236.Note: Data for the General Resources Account and the Special Disbursement Account have been combined. Also, a number of smaller items have been combined. Totals may not add because of rounding.

The balance sheet presented in Panel B of Table 1 is more informative about the Fund’s finances than that in Panel A. Indeed, the Fund must be the only financial institution in the world whose published balance sheet reveals neither the amount of its outstanding credits nor that of its sight liabilities. To find the former, one has to look in the notes to the published balance sheet; the latter are found only in the text of the Annual Report as part of the discussion of the liquidity ratio.

The transformation from Panel A to Panel B, which is essentially a bookkeeping operation, reduces the balance sheet total by approximately three fourths. It also leads to a presentation of the financial size of the Fund that makes it at least somewhat comparable to that of other financial institutions in the world, although it fails to show among the Fund’s assets its large holdings (about SDR 60 billion) of usable currencies.

To bring the consolidation of the Fund’s two departments to its logical conclusion, one would like to present a single balance sheet for the institution as a whole. Perhaps somewhat surprising, however, the Fund does not publish a balance sheet of the SDR Department (which means that there is also no balance sheet of the Fund as a whole!), but it provides a table called “Statements of Allocations and Holdings” that can be converted into an extremely simple balance sheet format (see Table 2).

Table 2Balance Sheet of IMF SDR Department, April 30, 1995(In billions of SDRs)
General Resources Account1.0
Other holders1.0
Quotas 145.0

Combining Panel B of Table 1 and Table 2 leads to a balance sheet of an integrated Fund, as in Table 3, in which the SDR 1.0 billion holdings of the General Resources Account shown in Table 2—a claim of the Fund on itself—are netted out against an equal reduction in allocations, from SDR 21.5 billion to SDR 20.5 billion.

Table 3Balance Sheet of a Consolidated IMF, April 30, 1995(In billions of SDRs)
Fund credit32.1SDRs51.3
SDR allocations (net)20.5Borrowing2.0
Gold3.6Special Disbursement
SAF loans1.7Account resources1.8
Other assets1.9Reserves, etc.3.2
Total59.8Other liabilities1.5

Progress on this matter appears to be stalled on a central political issue: What part of the Fund’s expenses should be covered by a charge proportional to quotas, and what part by a spread between the debit and credit interest rates. In other words, how much of these expenses would be paid by the Fund’s debtors, and how much by its creditors? The new approach also raises a more technical issue—the unfamiliarity with assessment in the General Department and the need for parliamentary approval that its introduction could provoke. Both of these issues appear in a new light once the Fund’s two departments are considered together.

There is an anomaly in the different rates of charge applied to debtor positions in the two departments: in spite of a widely held view in the Fund that conditionality of credit should be associated with some degree of concessionary in its cost, the Fund’s rate of charge for conditional credit (in the General Department) is higher than the rate applying to the use of unconditional credit in the SDR Department. The main historical reason for this lies in the original approach of a rigid separation between the two accounts, which required an exact balance between the interest payments and receipts of the SDR Department. Merging the two departments would remove the need for this anomaly. It would open the possibility of a higher charge on net users of SDRs, which would be expected to encourage early reconstitution and a more balanced distribution of SDR holdings among members. More generally, the introduction into the income structure of the Fund as a whole of additional variables that affect different members in different ways would enlarge the scope for compromises on the distribution of the cost burden.

The novelty that assessment would introduce in the General Department might also appear less formidable if it were noted that in the SDR Department, members are subject not only to an annual assessment of costs—although at a very low rate—but also to an annual interest charge on their net cumulative allocation that is well in excess of anything the Fund might want to collect by way of an assessment to cover administrative expenditures.11

The Changed Function of Quotas in an SDR-Based Fund

Perhaps the principal lesson to be learned from the two sets of negotiations discussed at the beginning of this paper—those that led to the Bretton Woods agreement and those that brought forth the Rio agreement on the SDR—is that the acceptability of a particular technique to finance the Fund will depend crucially on its effects on the membership’s control over the volume of credit extension by the institution.

At present, the Fund’s ability to extend credit is governed by its stock of usable currencies, which in turn is primarily determined by periodic quota reviews. How, then, would the membership exercise control over the total of Fund credit if quota increases no longer served to replenish the Fund’s holdings of currencies? Would quotas still have a function in this context?

Not necessarily: it would be possible to rely simply on the decisions by the Executive Directors to approve individual credits. But this would represent a major loosening of the control that members and their parliaments now have over the financial activities of the institution. There is no reason to expect that a change in financing technique should result in such loss of control. That control could be maintained, in an SDR-based Fund, by instituting a statutory maximum for outstanding SDRs, equal to a certain percentage—presumably 100 percent—of the sum of quotas, plus 100 percent of the sum of net cumulative allocations. Since the present financing technique has given the Fund excessively large quotas for the amount of credit that it wants to extend, this formula would eliminate the need for a general quota increase for one or two decades. Indeed, it might well be considered prudent to include a transitional provision that would, pending a new decision by the Board of Governors, put a lower figure than 100 percent of present quotas on the amount of SDRs allowed to be outstanding as a result of Fund credit operations. Note that a statutory ceiling on outstanding SDRs would preserve the flexibility now existing for the Fund to grant credit by nonmonetary means: the sale of gold (for SDRs) and, more practically, borrowing (again in SDRs).

After the transitional period referred to, the Fund would from time to time require quota increases as world trade, and perhaps especially world capital movements, grew. These quota increases would also provide the opportunity, as they do now, to adjust quotas to changes in the relative economic importance of countries. Parliaments that had to approve quota increases would be aware of what these increases would involve in terms of annual contributions, by way of assessments, to the costs of running the Fund. But quota increases would no longer have to be paid for in SDRs or currencies and thus carry the appearance, though not the reality, of major budgetary commitments.


Reprinted from Michael Mussa, James M. Boughton, and Peter Isard (editors), The Future of the SDR (1996). Copyright 1996 International Monetary Fund.

Horsefield (1969), chaps. 1–2, passim.

Robert Roosa has recorded his discovery of the new asset: “It did not occur to many of us in the United States that, as dollars were paid out by the International Monetary Fund over the early postwar years, we were gaining a valuable asset in the parallel increase in our ‘super-gold tranche’ position, or, more properly, our ‘net creditor position In the Fund’.” (From a 1964 speech published in Roosa (1967), pp. 156–57.)

I recall a visit to the Fund in 1958 by Lucius Thompson-McCausland, an advisor to the Bank of England, who raised the question of when it would become possible to revive the approach to liquidity creation of the Keynes Plan. I could tell him that in a quiet way we were doing exactly that by the approach to the use of nondollar currencies that the staff was developing and indeed putting into practice.

Nor, apparently, have the commercial banks been sufficiently keen on finding a way around this restriction to hold “positions in SDRs” without actually holding SDRs. The Fund itself did discover the needed loophole, as explained in its Annual Report, 1994 (p. 145): “As the Fund cannot hold SDRs in the SDA [Special Disbursement Account] or in its capacity as trustee of accounts administered for the benefit of members [the largest of which is the ESAF trust fund], SDRs for these accounts are held by prescribed holders [in fact, the Bank for International Settlements] on behalf of the Fund.”

Versions of this idea, without the need for amendment, have been proposed by Coats (1982) and Kenen (1983).

Since the Second Amendment of the Articles, this minimum is an amount equal to 25 percent of a member’s quota on April 1, 1978, and a comparable amount for members that joined the Fund after that date.

The first published reference to the “liquidity ratio” so defined is found in the Fund’s Annual Report, 1990, p. 51, but the concept was used in internal documents some years earlier. A chart showing the ratio retroactively to 1979 was first published in the Annual Report, 1993, p. 82.

Duisenberg and Szász (1991), p. 260. Their statement indicating a “consensus” on this issue goes a little too far: there were important exceptions among directors.

For an earlier suggestion along these lines, see Polak (1979).

That assessment is very low as the Fund uses a narrow definition of the expenses allocated to the SDR Department. Thus, none of the costs of the 1994 Madrid Annual Meeting, where the issue of SDR allocation was one of the most prominent subjects, entered into the SDR assessment.

For members holding SDRs equal to their allocation, this charge is offset by the credit interest they receive. But for the many members that hold only few of the SDRs that were originally allocated to them, there is no such offset.

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