Book
Share
IMF History (1972-1978), Volume 1
Chapter

Chapter 18. A Second Oil Facility

Author(s):
International Monetary Fund
Published Date:
February 1996
Share
  • ShareShare
Show Summary Details

ALTHOUGH THE NEWLY ARRANGED OIL FACILITY had just been put in place A when the Governors assembled in Washington at the end of September 1974 for their Twenty-Ninth Annual Meeting, Mr. Witteveen was already advocating another and larger facility for 1975. The world economy was passing through an unusually turbulent period as the largest nonviolent transfer of wealth in human history was taking place, and Mr. Witteveen saw two prime responsibilities for the Fund: to assist all members in devising policies to cope with and adjust to existing circumstances, and to provide many members with financial assistance.

TURBULENT ECONOMIC CIRCUMSTANCES AND GLOOMY PROSPECTS

Press commentary called the Fund’s 1974 Annual Report the gloomiest in the Fund’s history. Total output in industrial countries was declining and a further decline was expected. What was to become the deep recession of late 1974 and of 1975 had started. Yet even with the decline in output, inflation had not abated. In many countries it had become virulent, attaining levels considered unacceptable by most governments. What had been called stagflation in the recession of 1969–71, when stagnant economic growth and inflation coexisted for the first time, was being referred to as slumpflation. In addition to recession and inflation, the unusually large disequilibrium in international payments that had been expected was not only materializing but was expected to become even larger as the recession grew deeper. A combined current account deficit of $30 billion was forecast for the non-oil developing countries for 1975, a deficit even bigger than the $21 billion projected for 1974. Many officials doubted that sufficient financing would be available.

By September 1974 it was also widely accepted that the need for recycling petrodollars (the transferring of dollar revenues from oil exporting to oil importing countries) was likely to remain large in 1975. The only question at issue was the extent to which governmental or intergovernmental agencies should supplement the recycling done through private commercial banks. In the course of 1974 private commercial banks of industrial countries had vastly increased their international lending operations. They were successfully channeling enormous sums of money, mainly through Eurocurrency markets, from lenders in oil exporting countries to borrowers in oil importing countries. Moreover, they had extended their operations beyond the private sphere and were lending to governments overseas, including the governments of several developing countries. Lending to governments was a wholly new development in private international banking.

As a result of the greatly increased financing available from commercial banks, the balance of payments problems of both industrial and several oil importing developing countries turned out to be more manageable than expected after the big increases in oil prices had just taken effect. Concern was arising, however, that the commercial banks might be endangering their liquidity positions and becoming overexposed. Oil exporting countries were lending to banks on short term while oil importing countries were borrowing from banks on medium or long term. Such transformation of the maturities of recycled funds by commercial banks could endanger the banks’ liquidity positions. Even worse, failure of the German Herstatt Bank in June 1974 enhanced fears, among both private bankers and public officials, that outright widespread failures of commercial banks could occur, as had happened in the 1930s. At a minimum, the recycling operations of private banks could mean that oil exporting countries could be faced with certain risks in channeling their growing volume of funds through private money markets and that oil importing countries could find it increasingly difficult to finance their current deficits by borrowing from private banks.

MR. WITTEVEEN’S PROPOSAL AND GOVERNORS’ REACTIONS

To Mr. Witteveen and many other financial officials, these circumstances called for strengthening official ways of financing oil deficits. Therefore, in his opening address to the Governors at the 1974 Annual Meeting, Mr. Witteveen stressed the need for increased official recycling of funds from oil exporters to oil importers and made a strong case for a substantial increase in recycling through the Fund. He argued that, as recycling entered its second year, it was even more important than in the first year to ensure that individual countries start to make adjustments in their balances of payments. Countries had to find ways to reduce rather than to continue to accept their payments deficits. He emphasized that the Fund was uniquely equipped to help countries make these adjustments.1

For 1975 Mr. Witteveen wanted an oil facility to which industrial members as well as developing members might have access. He expected that at least Italy and the United Kingdom, among industrial members, might need financial assistance from the Fund in coping with their payments deficits and that the Fund could play a useful role in working with the officials of these members to devise solutions for these countries’ balance of payments deficits. As he put together his proposal in September 1974, he noted that Greece and Yugoslavia had been among the first customers under the 1974 facility. He was thus interested in the prospect that the Fund might help a number of other relatively developed members—Finland, Iceland, New Zealand, Portugal, Spain, and Turkey—to reduce their payments deficits, a sizable portion of which was related to their imports of oil. (Indeed, several of these members later drew even on the 1974 facility.) While he was willing to have the Fund help finance the payments deficits of developing members, he was convinced that the Fund should not become a financier for developing members only. Moreover, with respect to developing members, he stressed that the weaker members that were not in a position to continue paying market-related interest charges or to assume an increasing burden of external debt would, in any event, have to have other sources of official financing beyond those offered by the Fund.

Mr. Witteveen’s proposal for a larger oil facility in the Fund for 1975 received the support of several Governors, from both industrial and developing members, at the 1974 Annual Meeting. Officials of the United Kingdom were especially interested in having a sizable oil facility or similar arrangement in the Fund. Mr. Healey, emphasizing that industrial members, as well as developing members, were having serious difficulties financing their large oil-related balance of payments deficits and that these difficulties might last for some years, proposed a more permanent arrangement than the Fund’s 1974 oil facility. He advocated the establishment of a mechanism whereby a significant proportion of the surplus revenues of oil exporting countries could be invested in international organizations in exchange for some type of asset issued by the Fund.2 This proposal was reminiscent of the plans proposed by U.K. officials a decade earlier when the question of ways to augment the supply of international liquidity was being discussed.3 Officials of other European countries, too, supported the idea of further recycling of petrodollars through the Fund. Emilio Colombo, calling the oil facility one of the best technical instruments devised to reconcile the long-run interests of oil exporters and oil importers, likewise supported the idea of an enlarged facility for 1975. He suggested that in order to raise more money, the Fund might borrow directly on the world’s capital markets.4 Mr. Fourcade endorsed Mr. Healey’s suggestion for a more permanent investment-type arrangement, as well as the idea of an enlarged oil facility in the Fund for 1975.5

It was primarily the financial officials of the United States, especially Mr. Simon, now Secretary of the Treasury in the new Administration of President Gerald R. Ford, who had reservations about another and still larger oil facility, although Mr. Simon seemed less strongly opposed than he had been to the original idea of an oil facility in January-February 1974. Pointing out that the money markets in the United States had been effectively channeling very large sums of money from foreign lenders to foreign borrowers and that the U.S. Government was letting private commercial banks operate freely, Mr. Simon was in favor of letting private markets recycle petrodollars as much as possible. Recognizing the concern that the banking structure might not be able to cope with strains from the large financial flows expected in the period ahead, he expressed confidence that widespread collapse of commercial banks would not occur.6

The Annual Meeting ended with the need for official financing still in question; certainly the size of any oil facility in the Fund for 1975 was undetermined. The uncertainty about whether another facility would be set up and about its size was reflected in the communiqué issued by the Interim Committee on October 3, 1974, following its inaugural meeting. In addition to electing John N. Turner, Finance Minister of Canada, as Chairman, members of the new Interim Committee expressed themselves only on the oil facility. Their Communiqué stated that the Committee had “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.”7 In other words, the controversial questions as to whether another oil facility was needed and how large it should be were to be debated and resolved in the Executive Board.

The 1974 Annual Meeting also brought out the lines of policy that officials of oil exporting members were to stress for the next few years. Officials of oil exporting members took the occasion to defend their action in raising crude oil prices. Moreover, they wanted the Fund to borrow much more than had been possible for the 1974 facility from members other than oil exporters with payments surpluses. And officials of Middle Eastern oil exporting members began to press for larger quotas and voting power in the Fund. These three themes were evident, for example, in the remarks of Hushang Ansary.8

U.S. PROPOSALS FOR NEW FINANCING MECHANISMS

By November 1974, fear that the private money markets might not be able to recycle petrodollars adequately had grown and there was much more general recognition that official financing arrangements might be needed. It was also becoming more accepted that special financing arrangements would be needed to help some non-oil developing countries which were having a particularly hard time in financing their deficits.

As 1974 went on, problems associated with higher oil prices provided a greater challenge to U.S. political leadership in the world. Unable to effect a quick reversal of opec’s decision to raise oil prices, U.S. officials, especially those responsible for foreign policy in general, sought to have the United States organize the industrial nations, as the largest consumers of oil, to take a stand against actions by opec. By September the U.S. Administration had begun to form concrete proposals, but these were not made public until November. In an address before the Board of Trustees of the University of Chicago on November 14, Secretary of State Kissinger outlined a strategy for cooperative action by oil importing countries.9 Dramatizing the political importance of the crisis created by higher oil prices by comparing it with the grave circumstances of World War II, Mr. Kissinger stated that the collective deficit of industrial countries was “the largest in history and beyond the experience or capacity of our financial institutions,” and noted that for developing countries, “the rise in energy costs in fact roughly equals the total flow of external aid.” Yet 1974 was “only the first year of inflated oil prices.” Emphasizing that times of crisis could be times of creativity, Mr. Kissinger stated that in addition to Project Independence (the U.S. program intended to reduce U.S. oil imports and to develop alternative energy sources within the United States) and coordinated efforts by consuming nations to reduce consumption of oil, new official financial arrangements should be established. He announced that the United States proposed the creation of a “common loan and guarantee facility” to provide for distributing up to $25 billion of oil funds in 1975 and a like amount for the next year if necessary. The facility was to be a mechanism for recycling, at commercial interest rates, funds flowing back to the industrial world from the oil producers. Support from the facility was not to be automatic but contingent on “full resort to private financing and reasonable self-help measures” and on measures to lessen dependence on imported oil. This facility was to serve industrial countries. For developing countries, Mr. Kissinger suggested that there might be established a separate “trust fund, managed by the International Monetary Fund,” to be financed by contributions by member countries and from sales of gold by the Fund, profits from which might be lent to developing members at rates of interest they could afford. Thus, there emerged the idea of a trust fund, which was subsequently created in the Fund.

Four days after Mr. Kissinger’s speech, Secretary of the Treasury Simon, speaking in New York before the National Foreign Trade Convention, elaborated these proposals and the thinking underlying them.10 Like Mr. Kissinger, Mr. Simon called the situation very serious, stating that “the policies of the oil cartel now pose a fundamental challenge to the economic and political structure which has served the international community for a quarter of a century.” Mr. Simon’s remarks made it clear, too, that U.S. officials continued to regard existing oil prices as exorbitant and that U.S. policies were based on the belief that crude oil prices would eventually fall as world consumption of oil declined and consumers accelerated development of their own sources of energy. “To me, the question is not whether oil prices will fall, but when they will fall.”

The essence of the U.S. position was that the price of oil itself, not its immediate repercussions on countries’ balance of payments positions, was the real source of trouble in the world economy. To help bring about lower oil prices and to reduce the economic burden of oil imports, major consuming nations should work together to achieve significant reductions in their imports of opec oil. By coordinating their policies and actions, the oil importing industrial nations could mold themselves into a combined consumer group to counter the actions of opec, whose members were making their decisions collectively. A major new financial mechanism should also be introduced in the oecdto provide stand-by financial assistance for industrial and developed countries. The resources of the International Monetary Fund should be more fully mobilized for all its members. Consideration should also be given to creating a trust fund managed by the International Monetary Fund to help those developing members suffering most and in need of financing on concessional terms. Finally, serious preparations ought to be made for an “eventual dialogue” between the consumer group and producing nations.

Spelling out the details of the proposed “financial safety net” in the oecd, Mr. Simon explained that the facility would have total commitments by all oecdmembers of $25 billion in 1975, with additional resources provided in subsequent years if needed. The facility was to supplement, not replace, private market channels of financing and other official financing. For this reason, it should do its lending on market-related terms. Decisions on the provision of financial support should be based on the overall economic position of the borrower, not on a single criterion such as oil import bills.

Explaining his reasons for supporting a facility that was to be only for oecdmembers, Mr. Simon defended the establishment of a new financial mechanism for industrial countries as also in the interest of developing countries. If economic activity could be maintained in industrial countries, developing countries were all the more likely to continue to receive large capital inflows from them. Also, by helping to assure orderly access by industrial countries to the major capital markets and thereby reducing the danger of their competing unduly for the surplus investment funds of the oil exporters, the new financial mechanism for industrial countries would enhance the ability of many developing countries to attract large amounts of capital, certainly all the capital that they could productively employ. Developing countries with the lowest per capita incomes, however, would still require concessional assistance. While most such assistance would be provided by the oil exporting countries, the International Monetary Fund could establish a trust fund financed by contributions from the opec and from other sources. Mr. Simon suggested also that the Fund might contribute to such a trust fund the profits derived from the sale of some of its gold holdings in the private market. A trust fund of this nature could offer credit at relatively low cost—perhaps 2 to 4 percent—and on moderately long maturities, thus providing funds to those countries most seriously affected by current problems on terms not needed by other borrowers.

At about the same time, Mr. van Lennep, Secretary-General of the oecd, came up independently with a similar proposal. Under Mr. van Lennep’s proposal, instead of each oecdmember contributing money to a common fund, there would be a guarantee arrangement administered by the bis. The bis might borrow funds in various markets or receive deposits directly from oil surplus countries and lend the funds so acquired to industrial countries against a joint guarantee by the participating oecdcountries that the funds would be repaid.

EXECUTIVE BOARD’S CONSIDERATION OF AN OIL FACILITY FOR 1975

These proposals for financial mechanisms through the oecdwere made late in 1974 just as the Executive Board started to consider whether an oil facility should be established in the Fund for 1975 and, if so, how large it should be. In their discussions, the Executive Directors took much the same positions as had been expressed by their Governors at the Annual Meeting two months earlier, but, of course, they were now heavily influenced by the enhanced concern of officials in many countries that private recycling facilities might be inadequate for the continuing large payments deficits expected in 1975. Officials of the United Kingdom again pressed for a large facility in the Fund. Mr. Rawlinson explained to the other Executive Directors that the U.K. authorities wanted the Fund’s oil facility for 1975 to be multilateral and comprehensive, meaning that it should be available for all members, industrial as well as developing. Both he and Mr. Palamenghi-Crispi believed that eventually the oil facility might have to be merged with the Fund’s regular resources, which would then have to be appreciably enlarged through increases in quotas. One of the reasons why the U.K. officials favored a large degree of official financing for oil-related deficits in 1975 was their desire to reserve use of private bank financing for a later period, since they expected that further increases in oil prices might take place.

Mr. Wahl, too, pressed for the rapid establishment of a substantial oil facility for 1975, although French officials did not envision that France itself would use the Fund’s oil facility. It was generally expected, however, that Fund members which were former French colonies in the French franc area, such as Benin, Cameroon, the Central African Republic, Chad, Gabon, Ivory Coast, Niger, Senegal, Togo, and Upper Volta, would need considerable financial help from the oil facility. French financial officials usually supported the positions taken by African officials.

Executive Directors elected by developing members welcomed the heightened recognition of the need for larger official financing facilities but insisted that the proposals of Mr. Kissinger and Mr. Simon did not reduce the need for an oil facility in the Fund for 1975. Mr. Kafka, for instance, emphasized that the proposals of U.S. officials took account of the payments deficits of the industrial nations and of the poorest developing countries but did not allow for the deficits or financial problems of the middle group of countries. Countries such as Argentina, Chile, Colombia, Costa Rica, Peru, and Uruguay were neither industrial nor poor. Nevertheless, they needed assistance in financing their payments deficits. As was evident in the principles stated by Mr. Simon, priority was to be given to financing payments deficits through the private sector. Admittedly, many of these middle-income developing countries could borrow from private sources, but that did not rule out the need for some help from the Fund. Moreover, if proposals such as those of Messrs. Kissinger and Simon were substitutes for, rather than complements to, an oil facility in the Fund, they would damage the interests of the middle group of countries. One key source of official financing would no longer be available. Also, obtaining money from the Fund helped middle-income developing countries to borrow from private sources since it made them more creditworthy. Without an oil facility, the access of these countries both to public and private loans would thus become more difficult.

Mr. Kharmawan agreed with Mr. Kafka’s views, pointing out the similar need for an oil facility of the middle-income countries in Asia. Mr. Monday, noting that 1975—with floating exchange rates and high oil prices, interest rates, and inflation rates—was going to be an exceptionally difficult year for many developing members, argued for as large a facility in the Fund as possible. He and other Executive Directors elected by developing members were concerned that, with U.S. officials pushing for a relatively small facility, while officials of the United Kingdom and other industrial members advocated use of the facility by industrial members, developing members might receive even less from the 1975 oil facility than they had from the 1974 facility.

Estimating the likely use of a 1975 facility, the staff came up with a facility of about SDR 6–8 billion ($7–9.5 billion). This estimate did not allow for drawings by the five members with the largest quotas: the United States, the United Kingdom, the Federal Republic of Germany, France, and Japan. Should any of these five members draw, a facility of SDR 10 billion or larger would be needed. The staff recommended that the amount of the facility be open-ended, depending on how much could be borrowed.

Arguments Against the Facility by U.S. Officials

U.S. officials opposed such a large facility. Mr. Cross explained to the other Executive Directors the reservations of his authorities. First of all, the U.S. authorities started from the premise that it was not good tactics on the part of oil consuming nations passively to accept higher oil prices and to make arrangements for financing the resulting balance of payments deficits. Financing the deficits did not eliminate the real cost of the increase in prices for oil, that is, the sizable losses in real income experienced by oil importing countries as they transferred additional resources to oil exporting countries. Financing deficits only postponed the impact of those losses. Financing deficits, moreover, meant that individual oil importing nations were accumulating larger and larger external debts which they might never be able to repay. In the view of U.S. authorities, preferable solutions lay in coordinated action by consumer countries to reduce oil imports, which in turn would bring oil prices down again. Excessive amounts of official financing made available relatively easily would inhibit such action and delay measures to reduce oil imports.

Second, U.S. authorities did not like a distinction between the oil-related portion of a country’s balance of payments deficits and the rest of its payments deficit. Imports of oil and financial transactions related to oil affected the aggregate of a country’s trade, services, and capital so that it was never really possible to identify the portion of a country’s balance of payments deficit attributable to higher oil prices. As time went on, it became impossible to separate the oil deficit from the rest of a country’s balance of payments deficit. Hence, the Fund did not really determine a member’s balance of payments needs or allocate funds accurately if it concentrated on the size of oil-related payments deficits. The Fund’s assessment of a member’s need for financing should rather be related to the member’s overall financial and balance of payments position, as was done when a member drew on the Fund’s regular resources. U.S. authorities, consequently, advocated that the Fund move toward greater reliance on drawings under the usual credit tranche policies.

Mr. Cross suggested a number of alternative ways in which the Fund could enlarge access to its regular resources. There would be a temporary “stretching” of the credit tranches; instead of the existing 25 percent of quota for each tranche, perhaps 37.5 percent of quota might be allowed. Waivers could be granted for drawings by members making appropriate use of Fund resources, lifting the limits in relation to quotas that members could draw.11 The quotas of members in the Fund could be enlarged. Mr. Cross explained that the principal advantage of these alternatives was that they combined recognition of the potential need for substantially greater access to Fund credit in the extraordinary situation existing in 1975 with preservation of the Fund’s basic policies on assessment and conditionality. They avoided undue reliance on an inappropriate formula for access to money from the Fund as guided drawings under the 1974 oil facility.

Third, the U.S. authorities had a preference for using private channels for financing deficits to the maximum extent possible. The Fund should not finance deficits that could be handled by private commercial banks.

Possibly another reason U.S. officials opposed an oil facility in the Fund was that they believed that oil imports of the industrial countries were more likely to be reduced through their proposal for the oecdsafety net arrangement.

Positions of Other Executive Directors

Most other Executive Directors, however, supported the Managing Director’s proposal for a new and larger oil facility in 1975. Executive Directors from other industrial members made a number of points to counter the arguments that U.S. officials were making against the facility. Mr. Lieftinck objected to the position of U.S. officials on the grounds that it was contrary to the stance taken in favor of an oil facility by the Committee of Twenty in January 1974 and by the Interim Committee at the 1974 Annual Meeting. Mr. Lieftinck emphasized that the oil facility was a crucial source of assistance for the many members that clearly could not make the necessary adjustments to higher oil prices in the short term. Mr. Wahl commented that he had a great deal of interest in, and sympathy with, the arguments made by Mr. Cross; the concept of an oil deficit was becoming less useful as an analytical tool, and increased conditionality was required to ensure adequate adjustment by countries. However, an identifiable oil-related problem certainly remained and posed difficulties with which the normal facilities of the Fund were not designed to deal. Mr. Kawaguchi explained that the Japanese authorities were also in favor of a continued and expanded oil facility in the Fund for 1975. The Japanese authorities were principally preoccupied with countries that had only limited access to financial markets, in particular the non-oil developing countries. In the view of Japanese officials, the major industrial countries should seek financing primarily through private market sources.

Because of the opposition of U.S. officials to an oil facility, there were intense debates in the Executive Board. Much of the argument for and against the oil facility centered on the extent to which countries should cut their oil imports rather than finance large deficits. The emphasis of U.S. officials on adjustment was unusually strong since the Managing Director and officials of the United Kingdom were advocating a large facility that would accommodate some of the financing needs of industrial and developed members of the Fund, including those of the United Kingdom itself. It was these countries especially that U.S. officials believed ought to curb their imports of crude oil, since they were among the world’s largest consumers.

The U.S. view on the need to cut oil imports as an adjustment to higher oil prices had less impact on other financial officials than it might otherwise have had, since the United States produced a sizable percentage of its own oil needs domestically and had much larger reserves of coal and alternative sources of energy than did other countries. Also, the arguments of U.S. officials in international meetings, including those in the Fund, with regard to energy and to oil imports were compromised because at the time the United States was increasing its imports of crude oil and seemed to be doing very little adjusting itself.

These were the positions expressed about a 1975 oil facility in the Fund as the debate went on through November and December 1974. As uneasiness grew that the Eurocurrency markets might not continue to serve as the primary channel of intermediation for funds from oil exporters, support for another oil facility in the Fund gained momentum. When the various proposals for financing oil deficits were discussed by the deputies of the Group of Ten in Paris in November 1974, the deputies of several countries, such as Canada, the Federal Republic of Germany, Italy, the Netherlands, and Sweden, pointed out that whatever the other merits or demerits of proposals for a safety net for oecdcountries, the Fund ought still to have a central role in financing oil deficits. A central role for the Fund meant explicitly that the Fund ought to finance deficits of industrial members as well as those of developing members. A working group of the deputies of the Group of Ten, chaired by Jacques van Ypersele of Belgium, was set up to study the proposals of U.S. officials and of Mr. van Lennep.

Despite the support of many deputies of the Group of Ten for another oil facility in the Fund and because of the reservations advanced by U.S. officials against any facility, both the need for any such facility and its size remained unsettled until the very end of 1974.

RECOMMENDATIONS TO THE INTERIM COMMITTEE AND AGREEMENT BY THE COMMITTEE

Pressed to produce a report to the Interim Committee, scheduled to meet for the second time in mid-January, the Executive Board, after a week of meetings, finally agreed on the afternoon of December 23, 1974 to recommend to the Committee that there be an oil facility for 1975. Access to the facility was again to be determined by a formula which took into account the size of a country’s oil imports and its quota in the Fund, as had the formula for access to the 1974 facility. The formula was again complicated.12 In effect, greater weight was given to a member’s quota than in the 1974 facility and somewhat less weight to the increase in oil costs.

Stricter conditionality was also to be applied to use of the 1975 facility, reflecting the position taken by U.S. officials. The member making a drawing was to describe to the Fund its policies to achieve medium-term solutions to its balance of payments problems and to have the Fund assess the adequacy of these policies. The Fund was also to judge the extent to which reserves could be used to meet the member’s payments deficit. The member was to describe the measures it had taken, or proposed to take, to conserve oil or to develop alternative sources of energy, although these measures were not subject to the Fund’s assessment. As in the 1974 facility, access to the 1975 facility was also to depend on a member’s avoidance of the introduction or intensification of restrictions on trade and capital. The management and staff had favored even stricter conditions in the form of quantitative targets for monetary and fiscal policies, as was done when the Fund approved stand-by arrangements. Most Executive Directors did not want to go so far, however. Executive Directors elected by developing members opposed even the degree of conditionality that was worked out.

When it met at its second meeting in Washington on January 15–16, 1975, the Interim Committee agreed that the oil facility should be continued for 1975 on an enlarged basis. But instead of the SDR 6–8 billion talked about earlier, a figure of SDR 5 billion was agreed as the total of loans to be sought by the Managing Director from major oil exporting members and from other members in strong reserve and payments positions. Any unused portion of the loans negotiated in 1974 was also to be available for 1975. In view of the hard debate preceding this agreement, the oil facility was to be kept under constant review. The Fund’s regular resources were also to be substantially augmented through an increase in quotas.13

Agreement by the Executive Board and by the Interim Committee on an oil facility for 1975 was made possible mainly by paring down the amount involved. But agreement came about, too, because most officials came to believe that some official financing of oil deficits in 1975 was inevitable. Significantly, the ministers and central bank governors of the Group of Ten, meeting in Washington in January 1975 at the same time as the Interim Committee, proposed that a “solidarity fund, a new financial support arrangement” open to the 24 countries of the oecdshould be established as soon as possible.14 This “safety net, to be used as a last resort” was to be about $25 billion.15 It was politically unwise for the officials of the Group of Ten to agree to provide emergency official financing only for industrial countries and relatively more developed countries and not to find some financing for developing countries. They felt that they had to agree to another facility in the Fund for 1975 available to all Fund members. Indeed, the Group of Twenty-Four, also meeting in Washington in January 1975 just ahead of the Interim Committee meeting, had explicitly supported an oil facility for 1975.

Thus again, as for the 1974 oil facility, substantial debate eventually led to agreement on an oil facility for 1975.

THE FACILITY IN OPERATION

On April 4, 1975, after further discussion of the specific arrangements, the Executive Board took decisions establishing the facility for 1975, setting charges for its use, stating that the gold tranche had to be drawn first, and authorizing the necessary borrowing and payment of interest.16 The rate of interest was to reflect market conditions more fully than the average rate of 7 percent on funds lent for the 1974 facility, since officials of oil exporting countries considered that the 7 percent a year rate used for the 1974 facility contained a concessionary element. An average rate of 7.25 percent a year was agreed for borrowing for the 1975 facility. Charges for use of the 1975 facility were raised, by ¾ of 1 percent a year, as listed in Table 6 below. The repurchase provisions and the period for which drawings were to be outstanding remained from three to seven years, as under the 1974 facility.

Table 6.Charges on Transactions Effected Under the 1975 Oil Facility
Charges in percent a year1 payable on holdings in excess of quota, for period stated
Service charge0.5
Up to 3 years7.625
3 to 4 years7.7502
5 to 7 years7.875

Except for service charge, which was payable once per transaction and was expressed as a percentage of the amount of the transaction.

Point at which consultation between the Fund and the member became obligatory.

Except for service charge, which was payable once per transaction and was expressed as a percentage of the amount of the transaction.

Point at which consultation between the Fund and the member became obligatory.

Between the time of the Interim Committee meeting in January and the Executive Board decision of April, the Managing Director, accompanied by members of the staff, traveled to Iran, Lebanon, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela, and to the Federal Republic of Germany, the Netherlands, and Switzerland to arrange financial support for the facility. New borrowing agreements were arranged with seven of the nine members that had lent to the 1974 facility: Iran, Kuwait, the Netherlands, Nigeria, Oman, Saudi Arabia, and Venezuela, all major oil exporting countries, except for the Netherlands. (Canada and the United Arab Emirates did not lend for the 1975 facility.) In addition, agreements were concluded with the governments or central banks of six European countries—Austria, Belgium, the Federal Republic of Germany, Norway, Sweden, and Switzerland—and also with the Central Bank of Trinidad and Tobago, making 14 countries which lent to the Fund for the 1975 facility. There were 15 lending institutions since both the Government of Switzerland and the Swiss National Bank lent separately.

Table 7 below lists the amounts borrowed from each lender.

Table 7.Amounts Borrowed by the Fund for the 1974 and 1975 Oil Facilities(In millions of SDRs)
For 1974For 1975
LenderFacilityFacility1Total
Abu Dhabi100.0100.0
Austrian National Bank100.0100.0
National Bank of Belgium200.0200.0
Canada246.92246.9
Deutsche Bundesbank600.0600.0
Central Bank of Iran580.0410.0990.0
Central Bank of Kuwait400.0285.0685.0
Netherlands150.0200.0350.0
Nigeria100.0200.0300.0
Bank of Norway100.0100.0
Central Bank of Oman20.00.520.5
Saudi Arabian Monetary Agency1,000.01,250.02,250.0
Sveriges Riksbank50.050.0
Switzerland3250.03250.0
Central Bank of Trinidad and Tobago10.010.0
Central Bank of Venezuela450.0200.0650.0
Total3,046.943,855.56,902.4

Totals of agreements concluded in 1975 and 1976.

The SDR equivalent of the Can$300 million which the Government of Canada agreed to lend.

The equivalents of SDR 150 million from Switzerland and SDR 100 million from the Swiss National Bank.

Of which an amount equivalent to SDR 464.077 million was made available for the 1975 facility.

Totals of agreements concluded in 1975 and 1976.

The SDR equivalent of the Can$300 million which the Government of Canada agreed to lend.

The equivalents of SDR 150 million from Switzerland and SDR 100 million from the Swiss National Bank.

Of which an amount equivalent to SDR 464.077 million was made available for the 1975 facility.

The Managing Director was able to borrow a total of SDR 3.856 billion, over SDR 1 billion less than the SDR 5 billion agreed by the Interim Committee. In addition, however, SDR 464 million was carried over from the 1974 facility, making the total amount available for the 1975 facility SDR 4.320 billion. The Managing Director was authorized to make calls under the agreements as funds were needed and to make arrangements for consultations to agree on the media for interest payments. Also, in 1975 some changes were made in the draft standard letter.17

In view of the uncertainty of the demands on and finance for the 1975 facility, access by a member was initially set not to exceed 30 percent of its calculated maximum access. This limit was raised to 50 percent when the Executive Board reviewed the facility in July 1975. Three further reviews of the facility, in November and December 1975 and February 1976, did not change the amount of access. At the review in February 1976, however, it was decided that the final amounts of access should be determined by the Fund after March 12, 1976.18 (Under the initial decision of April 4, 1975, members were required to submit statements of their intentions to request purchases not later than the close of business on February 27, 1976. The Decision of February 11, 1976 extended this date to March 12, 1976.) At the final review of the facility in March 1976, access was increased to 78.46 percent of the calculated maximum access; the latter figure took account of the funds available for financing the remaining purchases by members that had advised the Fund of their intention to request use of the facility by the prescribed date of March 12, 1976.19

Drawings Under the Facility

Drawings under the 1975 oil facility came to over SDR 4.3 billion, the full amount available. Two industrial members—the United Kingdom and Italy—drew SDR 1,780 million. The drawing by the United Kingdom for SDR 1,000 million came in December 1975 when the facility was almost ended and it was apparent that sufficient funds for such a transaction would be available. Eight more developed primary producing members drew SDR 850 million. Thirty-six developing members drew nearly SDR 1.5 billion.

In all, between September 1974 and May 1976, when the 1975 facility was ended, 55 members drew a total of SDR 6.9 billion in 156 transactions under the 1974 and 1975 oil facilities. Table 8 lists the drawings of individual members, grouped into broad economic categories.

Table 8.Drawings Under the 1974 and 1975 Oil Facilities(In millions of SDRs)
Financial Years

Ended April 30
Remaining

Drawings
Member1975119762(May 1976)2Total3
All members2,499.253,966.24436.946,902.43
Industrial members675.001,780.242,455.24
Italy675.00780.241,455.24
United Kingdom1,000.001,000.00
Other developed members794.60851.02262.751,908.37
Finland71.25115.11186.36
Greece103.5051.75155.25
Iceland17.2021.9739.17
New Zealand109.30129.37238.67
Portugal114.76114.76
Spain296.20275.93572.13
Turkey113.2056.6291.49261.31
Yugoslavia155.20129.3756.15340.72
Developing members1,029.651,334.98174.192,538.82
Argentina76.0976.09
Bangladesh51.5025.7814.6991.97
Burundi1.201.20
Cameroon4.627.504.2816.41
Central African Republic3.302.665.96
Chad2.202.20
Chile118.50125.22243.72
Costa Rica18.8412.006.8337.67
Cyprus8.1014.007.9730.07
Egypt20.1911.4931.68
El Salvador17.8917.89
Fiji0.340.34
Ghana38.60138.60
Grenada0.490.49
Guinea3.513.51
Haiti4.804.148.94
Honduras16.7816.78
India200.00201.34401.34
Israel62.0081.25143.25
Ivory Coast11.1710.3521.52
Jamaica29.2029.20
Kenya36.0024.833.1063.93
Korea100.00152.69252.69
Madagascar14.3014.30
Maiawi3.733.73
Mali5.003.998.99
Mauritania3.391.935.32
Morocco18.0018.00
Nicaragua15.5015.50
Pakistan125.00111.01236.01
Panama7.3717.2524.62
Papua New Guinea14.8014.80
Peru52.6652.66
Philippines96.8755.16152.03
Senegal15.529.9125.44
Sierra Leone4.914.979.88
Sri Lanka43.5034.1377.63
Sudan28.7118.3047.01
Tanzania31.5020.6152.11
Uganda19.2019.20
Uruguay46.5848.0794.64
Western Samoa0.420.42
Yemen, People’s Democratic Republic of11.804.607.4223.82
Zaïre45.00132.5377.53
Zambia18.9310.7929.72

Under the 1974 facility.

Under the 1975 facility, except Ghana and Zaïre, which, as noted in footnote 1, were under the 1974 facility.

Components may not add to totals because of rounding of figures for individual members.

Under the 1974 facility.

Under the 1975 facility, except Ghana and Zaïre, which, as noted in footnote 1, were under the 1974 facility.

Components may not add to totals because of rounding of figures for individual members.

As Mr. Witteveen intended, the oil facilities for 1974 and 1975 greatly increased drawings from the Fund and put them again at record levels. To some of the staff, use of the oil facilities at times seemed slower or smaller than might have been expected, causing some staff to wonder whether members really wanted or needed money from the Fund. Relatively slow use of the facility, however, may have resulted from the requirement that members draw only specified portions of their quotas in the Fund. This limitation in effect served as an allocation system. Hence, while some members were not drawing at all, others had drawn their full allotment. As the facilities were periodically reviewed and access to them was increased, further drawings were requested. In the end, all the funds which Mr. Witteveen was able to borrow were used.

In general, almost no conditionality in the form of the macroeconomic policies that the Fund customarily associated with stand-by arrangements was attached to drawings made under the oil facility. As drawings under the oil facilities were requested and approved, governments presented programs to the Fund, but the Fund did not seriously attempt to see that these programs were implemented. In discussions with officials of member governments, the Managing Director and the staff tried to get officials to start thinking in terms of quantitative programs for the longer term in the hope that once this temporary facility had ended members would come to the Fund for additional drawings in the regular credit tranches under standby arrangements and would implement programs that would help their balance of payments adjustment. Two instances of this policy were to some extent successful. Italy and the United Kingdom, which had stand-by arrangements approved by the Fund in 1974 and 1975 respectively, not only drew on these stand-by arrangements as well as under the oil facility, but also came to the Fund later in 1976 and 1977 for further stand-by arrangements, as described in later chapters. When developing members drew under the oil facility, the staff also attempted to work with member governments in setting some quantitative limits on the expansion of the money supply and on budgetary expenditures. However, for the most part the oil facility proved to be an unconditional arrangement and did not lead to members requesting first credit tranche drawings under stand-by arrangements.

RESTRICTIONS AVOIDED

One condition required for drawing on the Fund’s oil facility proved, nonetheless, to be successfully implemented for nearly all members. That condition was that members refrain from introducing or intensifying their restrictions on trade and capital transactions. Avoidance of restrictions was a primary motive of the Managing Director in originally proposing an oil facility in the Fund. In January 1974, the Committee of Twenty and the Executive Board had taken actions asking members to refrain from restrictions. At its final meeting on June 13, 1974 and in an Appendix to the Outline of Reform, the Committee of Twenty had invited members to sign a voluntary declaration concerning trade and other current account measures for balance of payments purposes, and later in June the Executive Directors had established the necessary procedures to implement the declaration. The desire of financial officials that countries avoid resort to restrictions in the new oil crisis was intense.

The voluntary declaration attracted few signatories. By the end of 1974, it had been signed only by Belgium, Botswana, Canada, Denmark, the Federal Republic of Germany, Japan, Liberia, Malawi, Mauritius, the Netherlands, Norway, Oman, and the United States. While 8 of these were large industrial members, the 13 signatories had only about 40 percent of the total voting power in the Fund. Later Austria, Lebanon, and Lesotho also subscribed. Cameroon, Indonesia, Iraq, Jamaica, Sudan, and Zaïre wrote to the Fund stating that they did not wish to subscribe to the declaration. Several large members, including Australia, France, and the United Kingdom, were concerned, as they had been so often in the past, that the Fund might be extending its authority in matters of trade and usurping the jurisdiction of the gatt. As a result of this concern about Fund jurisdiction, most countries belonging to the oecddid not subscribe. Many developing members did not believe that the pledge, which contained a provision to take account of the special circumstances of developing countries, was applicable to them. The Fund’s invitation to members to subscribe to the voluntary declaration was allowed to expire.

In May 1974, a declaration similar to that endorsed by the Committee of Twenty was also adopted by the governments of the countries belonging to the oecd.20 The idea underlying this pledge against resort to trade restrictions was not merely that the signatory governments were to avoid trade restrictions. That assurance alone was not sufficient. Rather, the objective was to prevent countries from taking advantage of certain legal loopholes in their arrangements with the gatt. Under the usual gatt consultations, a country sought permission to impose restrictions for balance of payments purposes on the grounds of its own balance of payments position. The circumstances of the oil crises were different, however: balance of payments deficits were nearly universal. Virtually all countries could justify restrictions on balance of payments grounds. There could be a “snowballing effect” in which the restrictions imposed by one country would be a precedent for the imposition of restrictions by another country. Hence, the objective of the oecdtrade pledge was to persuade all countries from the outset of the oil price rise not to use the legal possibilities open to them under the gatt to impose restrictions.

Although the required number of Fund members did not sign the declaration, an escalation of restrictions on trade and capital movements in the payments crises of 1974 and 1975 was in fact avoided. Most countries did not resort to restrictions on imports or on current invisible transactions as a means of countering their large current account deficits even in 1975 when these deficits became very great. It may well have been unlikely that countries would have rushed into imposing and intensifying restrictions in any event. Once import restrictions had been lifted in the 1960s, there was enormous incentive to keep trade relatively free of restrictions. Domestic consumption and production of most countries depended on continued imports. There was also a desire to keep up imports to restrain increases in domestic prices. And there was genuine concern among financial officials that once any country began seriously to resort to restrictions, other countries might retaliate and restrictions would proliferate. On the positive side, after years of cooperating and meeting in international gatherings to diminish restrictions, officials were eager to continue such cooperation.

Despite these factors holding back any rush into restrictions, it can be concluded that the Fund’s oil facility, the admonitions of the Fund against the use of restrictions, and the strong program of the oecdagainst restrictions were also important in keeping trade and payments relatively free through the crises years 1974–75.

A SUBSIDY ACCOUNT ESTABLISHED

While the Fund’s oil facility was being considered in the first several months of 1974, the international community was made aware of the problems arising in 1974 for some of the poorest developing countries. Several developing countries, especially in Africa and the Middle East, with little domestic industry of their own and low per capita income were still heavily dependent on imports of life-sustaining necessities, such as food and fuel. The Sahelian countries in Africa, for instance, had been experiencing severe drought for a number of years so that their domestic food output was minimal and starvation was prevalent. For many of these countries, imports of petroleum products were also essential; petroleum was used mainly for the internal transportation and distribution of vital commodities, including food. Imports of chemical fertilizers, derived from petroleum products, were also imperative for these countries to maintain even their inadequate levels of food production.

Food prices had already reached high levels in 1972 and 1973. In addition, the cost of capital goods and even of simple manufactured items, such as textiles, imported by these poorer developing countries had been rising for several years. Hence, the announcement in December 1973 of much higher prices for crude oil and consequently for all petroleum products gave rise to concern about the ability of some of the very poor developing countries to pay for essential imports. Their situation could become intolerable.

Accordingly, in May 1974 a United Nations Emergency Operation (uneo) was set up to seek special emergency contributions to disburse to these countries. UN Secretary-General Kurt Waldheim appointed Raul Prebisch as Special Representative for the uneo. Staff of the World Bank and of the Fund as well as of other UN agencies were assigned to work with Mr. Prebisch. The Fund sent two staff members to New York in 1974 to work with him for several months.

In these circumstances, when it appeared likely that the charges would be levied on the use of the oil facility at commercial rates of interest, the question arose of subsidizing the purchases made by at least some developing members. This question became more urgent when a facility for 1975 was being considered. At the 1974 Annual Meeting, for instance, Governors of both developed and developing members spoke in favor of a Subsidy Account in the Fund to give relief from high charges to developing members. When the 1975 oil facility was agreed by the Executive Board and endorsed by the Interim Committee, it was on the understanding that such an account would be set up.

Use of the UN List of Most Seriously Affected Countries

Although the idea of a Subsidy Account was accepted in principle, it was not easy to establish such an account. There was initial disagreement over which members ought to receive subsidies. Some Executive Directors took the position that it was important for the Fund to retain the practice of treating all its members the same. They argued that distinguishing between industrial, relatively more developed, and developing countries in the Fund membership ought to be avoided. Surely, further distinctions between developing countries on the basis of per capita incomes were spurious. Since per capita income statistics were not very reliable, it was certainly wrong to use them as a basis for distinguishing between members in applying Fund policies.

Although some Executive Directors did not want to distinguish between members, others, especially those elected by African members, insisted on the need for relief from high charges for their countries. Moreover, since members had a vested interest in being on the list to receive subsidies from the Fund, the Executive Directors elected by developing members were deeply concerned about the requirements for being on the list, over which there was extensive debate.

The Fund finally decided to use the list made up in the United Nations through the uneo. Although not much money was obtained by the uneo, one of the achievements of the technical staff—an important one so far as the Fund was concerned—was the identification of 41 countries “most seriously affected by the current situation,” that is, by the rise in oil prices superimposed on already high prices for food. The countries identified as msa countries (most seriously affected) had per capita incomes of $400 a year or less in 1971 (many had per capita incomes of $200 a year or less) and were expected to have balance of payments deficits in 1974 and 1975 not smaller than 5 percent of their imports.

These 41 countries became the basis of the Fund’s list. Since Cape Verde and Mozambique, which were on the UN list, were not then members of the Fund, 39 Fund members were eligible to receive payments from the Subsidy Account.21

The Account in Operation

On this basis, the Executive Board took a decision on August 1, 1975 to establish a Subsidy Account.22 There was thus established the first facility designed by the Fund specifically to provide financial assistance to a specified list of members. The assets and records of the Account were to be separate from those of the Fund, but, as trustee of the Subsidy Account, the Fund was to administer it. In the usual manner of trustees, the Fund was to solicit contributions to the Account and to make disbursements once the Account was set up.

While the Fund requested contributions from all members not on the msa list, it expected the contributions to come primarily from oil exporting and industrial countries. Gradually contributions were arranged from 24 members and Switzerland totaling SDR 160.5 million over the life of the Account. As of June 30, 1978, actual contributions amounted to SDR 101 million. The amounts contributed by each of the 25 countries are listed in Table 9.

Table 9.Subsidy Account: Contributions(In millions of SDRs)
Contributions
Anticipated TotalReceived as of
ContributorContributions1June 30, 1978
Australia5.7003.440
Austria2.3002.300
Belgium5.6002.240
Brazil1.8501.388
Canada9.5009.500
Denmark2.2000.960
Finland1.6000.800
France12.9007.527
Germany, Federal Republic of13.7006.841
Greece0.6000.150
Iran6.0004.500
Italy8.6008.600
Japan10.3004.363
Luxembourg0.1080.108
Netherlands6.0006.000
New Zealand1.7000.607
Norway2.1002.100
Saudi Arabia40.00019.810
South Africa1.3501.350
Spain3.4001.470
Sweden2.8002.100
Switzerland3.2853.285
United Kingdom12.0506.692
Venezuela6.0004.498
Yugoslavia0.9000.675
Total160.543101.304

In some cases these amounts were subject to final agreement on amount or on timing, parliamentary approval, and certain conditions. In some cases where contributions were made in installments, budgetary approval was required in each year that a contribution was to be made. SDR amounts might be subject to small adjustments owing to exchange rate changes.

In some cases these amounts were subject to final agreement on amount or on timing, parliamentary approval, and certain conditions. In some cases where contributions were made in installments, budgetary approval was required in each year that a contribution was to be made. SDR amounts might be subject to small adjustments owing to exchange rate changes.

Of the 39 members eligible to receive funds from the Subsidy Account, only 18 had drawn under the 1975 oil facility. Since drawings on the 1975 oil facility were effected over two financial years of the Fund and could be outstanding for up to seven years after the date of drawing, subsidy payments were expected to be made through eight financial years (1976–83 inclusive).23 The objective was to reduce the effective rate of annual charge payable on drawings under the 1975 oil facility by about 5 percent a year. In July 1976 the first subsidy payments were made at the rate of 5 percent a year, that is, 5 percent of the average daily balances of the currency of the member held by the Fund in excess of the member’s quota which the Fund had acquired as a result of the member’s purchases under the 1975 oil facility. The percentage paid was the same for all eligible members.24 The rate of 5 percent a year was continued for the next two financial years.25 The effective cost of using the 1975 oil facility for members receiving the subsidy was thus lowered from 7.71 percent to 2.71 percent a year. Table 10 contains the names of the recipient members and the amounts they received in each of these three years.

Table 10.Subsidy Account: Total Use of 1975 Oil Facility by Most Seriously Affected Members and Subsidy Paid, Financial Years 1976–78(In millions of SDRs)
Total UseSubsidy at 5 Percent for Year Ended
1975April 30,April 30,April 30,
MemberOil Facility1197619771978
Bangladesh40.470.652.002.02
Cameroon11.790.140.590.59
Central African Republic2.660.050.130.13
Egypt31.680.161.571.58
Haiti4.140.070.210.21
India201.347.2310.077.46
Ivory Coast10.350.150.520.52
Kenya27.930.671.391.40
Mali3.990.010.200.20
Mauritania5.320.050.260.27
Pakistan111.012.605.555.55
Senegal9.910.300.500.50
Sierra Leone4.970.030.250.25
Sri Lanka34.130.481.711.71
Sudan18.300.360.920.92
Tanzania20.610.681.031.03
Western Samoa0.420.010.020.02
Yemen, People’s Democratic Republic of12.020.180.600.60
Total551.0313.8227.5124.95

Purchases under the 1975 oil facility began in July 1975 and continued until May 1976. The subsidy amounts shown were calculated on the average daily balances of the currency of the member held by the Fund that were outstanding for purchases under the 1975 oil facility during the year and subject to charges.

Purchases under the 1975 oil facility began in July 1975 and continued until May 1976. The subsidy amounts shown were calculated on the average daily balances of the currency of the member held by the Fund that were outstanding for purchases under the 1975 oil facility during the year and subject to charges.

In November 1978 the decision establishing the Subsidy Account was amended to permit any surplus after payment to the original beneficiaries at the rate of 5 percent to be used to make payments, at a rate not exceeding 5 percent, to seven additional beneficiaries, namely, Grenada, Malawi, Morocco, Papua New Guinea, the Philippines, Zaïre, and Zambia. The addition of these seven members made the list of beneficiaries of the Subsidy Account conform with the list of members that had used the 1975 oil facility that were also eligible for assistance from the Trust Fund.

In summary, although many officials accepted the idea that some relief from what seemed at the time high charges for the use of the 1975 oil facility was desirable for the poorest developing members, the Fund found it difficult to set up and to implement the Subsidy Account. The Executive Directors found it so hard to agree on the selection of members which should be eligible for payments from the Account that the choice of members was made by resorting to the United Nations’ list of msa countries. Moreover, the Managing Director had a difficult time persuading members to contribute to the Account.

Despite these difficulties, the Subsidy Account was an innovative step in the Fund’s evolution. It demonstrated the Fund’s ingenuity in implementing its policies in a flexible manner. Unable under its Articles to differentiate the charges levied on use of its resources by categories of members, the Fund was nonetheless able effectively to lower the charges on the 1975 oil facility for those developing members clearly unable to pay them. The Subsidy Account was also the first arrangement in which the Fund distinguished between developing members and other members, and the first arrangement in which accounts were to be kept separate from those for the rest of the Fund’s operations and transactions and for which the Fund was to serve as trustee; in this way it laid the basis for establishment, in the next year, of the larger and broader Trust Fund. Both the Subsidy Account and the Trust Fund were sufficiently novel precedents that, when the Articles of Agreement were amended in 1978, authority was given to the Fund to administer “resources contributed by members,” a power which the Fund did not previously have in such an explicit way.

OUTCOME OF THE 1973 OIL PRICE RISE

The oil crisis that began in December 1973 lasted until the end of 1978. The end of 1978 can be regarded as the cutoff date for what could later be viewed as the “first oil crisis” or a first round of oil price increases. A second oil crisis or second round of price increases occurred at the end of 1978.

In many respects, the economic and financial impact of the first oil crisis of 1973–78, while not to be minimized, proved considerably less troublesome than initially expected. For the most part, after the temporary embargo on supplies to the United States and the Netherlands was lifted in January 1974, oil importing countries experienced no real shortages of oil. Furthermore, after 1974 the size of the disequilibrium in international payments resulting from the quadrupling of oil prices in 1973–74 turned out to be much smaller than had been forecast. Developments both in oil exporting and in oil importing countries worked to diminish this disequilibrium. As an immediate response to their enlarged oil revenues, all major oil exporting countries stepped up their economic development efforts and undertook massive new projects for social improvements. These countries accordingly expanded their imports of goods and services much more than had been projected by even the most optimistic forecasts. During 1974—78 the members of opec spent nearly $500 billion on imports of goods and services (excluding income paid to foreign investors), roughly 75 percent of their current earnings from exports. Imports grew by an average of 24 percent a year in real terms.

The rate of growth of imports by oil exporting countries was sustained from 1974 onward even though the level of their imports was steadily climbing. Unexpectedly, the most rapid growth of imports of oil exporting countries occurred in countries originally viewed as “low absorbers” of imports because of their relatively sparse population. Saudi Arabia’s purchases from abroad, for example, rose at an average annual rate of over 56 percent in value terms (40 percent in real terms) from 1974 to 1978. As had happened in the United States and in Western European countries after World War II, higher per capita incomes quickly led to higher consumption. In particular higher per capita incomes led to greater and more varied consumption of food. Imports of capital goods also went up sharply. In fact, economists realized that they had underestimated the speed with which expanded levels of public expenditure for development programs could be implemented in oil exporting countries and the effect that public expenditures on these programs would have on increasing imports.26

Also contributing to smaller balance of payments imbalances than had been forecast were declines in the rate of increase of oil imports by many oil importing countries. France, the Federal Republic of Germany, Italy, and Japan especially reduced the rate at which their imports of oil went up, although a reduced rate of increase of oil consumption and of imports in these countries reflected a much lower rate of growth in their economies as a whole than in earlier years. Total oil consumption of Fund members plus Switzerland increased at an average annual rate of only a little more than 1 percent. In addition, new sources of oil in the North Sea, Mexico, and Alaska were discovered, reducing the need for oil imports from opec sources by many countries, including the Netherlands, Norway, and the United Kingdom, and even making them actual or potential oil exporters. As a result of lower demand and enlarged supply, demand for oil from opec was virtually unchanged during 1975–78, and oil prices increased by an average of less than 4 percent a year in nominal terms. This increase was less than half the average annual increase in the prices of goods imported by the opec, so that by the end of 1978 the average terms of trade of the opec were nearly 25 percent below the average of these terms in 1974.

As a result of these developments, most industrial countries, except for Italy and the United Kingdom, avoided deep and prolonged balance of payments deficits. By 1978 the industrial countries as a group had again developed large current account surpluses. These surpluses totaled $33 billion, compared with $7 billion in 1976 and $4 billion in 1977. By 1977 even Italy and the United Kingdom swung sharply from balance of payments deficit into surplus. The combined current account surpluses of the major oil exporters had dropped sharply from $68 billion in 1974 to only $6 billion in 1978; they had been $35 billion in 1975, $40 billion in 1976, and $32 billion in 1977. The current account deficits of what the Fund called the more developed primary producers had also been more than cut in half, from $13–15 billion in 1975, 1976, and 1977 to $6 billion in 1978. The current account surpluses of major oil exporting countries and the counterpart of large deficits by oil importing countries thus ceased to dominate the international payments picture by 1978.

Not only were oil-related deficits reduced but financing for payments deficits proved in the end to be readily available. External lending by private commercial banks to the principal industrial countries rose over threefold. Private commercial banks were thus able to recycle vast amounts of petrodollars without becoming illiquid or overexposed and without bank failures. In fact, it was already apparent by the middle of 1975 that investment of the surpluses of oil exporting countries in national and international financial markets together with the expansion of official financing (through both bilateral arrangements and multilateral facilities) was resulting in a satisfactory channeling of funds into the financing of the current account deficits of oil importing countries, including non-oil developing countries. Therefore, no additional official financing mechanisms among the industrial nations were arranged; the financial safety net in the oecdproposed by U.S. officials was never established.

Non-oil developing countries, however, continued to have large current account deficits: $30 billion in 1974, $38 billion in 1975, $26 billion in 1976, $21 billion in 1977, and $31 billion in 1978. But, together with long-term official financing to the most needy of these countries, private bank lending to other developing countries helped substantially to finance these deficits. Not only was financing available but in the face of their enlarged payments deficits from 1974 onward, non-oil developing countries decided to borrow abroad. To deal with the oil crisis of 1973–78, officials of these countries opted to accumulate large external debts rather than endure the more dismal alternative of reducing their economic growth and increasing domestic unemployment. As a consequence, by 1978 many developing countries had a tremendous amount of external debt. Debt servicing of non-oil developing countries began to emerge as a prime concern of all financial officials. In fact, by the end of 1978, concern was more widespread about the precarious finances of many developing countries than it had been at any time since 1950. The main legacy of the 1973 oil price rise was thus the critical problems attending the large external debt of developing members, described in Chapter 48.

SIGNIFICANCE OF THE FACILITY: A BRIDGE OVER TROUBLED WATER

The amount of money the Fund made available under its oil facility (in effect two facilities) was minute in comparison with the huge current account payments deficits that were eventually financed. But because this money was made available shortly after the start of the oil crisis and continued to be available for about two years until adequate alternative financial arrangements took hold, the Fund’s oil facility did, indeed, serve as a bridge, as Mr. Witteveen had wanted, between the old era of cheap oil and energy and the new era of expensive oil and energy.

In addition to serving as a bridge, the Fund’s oil facility of 1974 and 1975 was an outstanding achievement in a number of other ways. First, it broke new ground in that the Fund, for the first time, undertook to help finance massive balance of payments deficits prevailing for most of its members. In the past when the question had come up as to whether the Fund could help finance balance of payments deficits prevailing on a worldwide scale, the answer had always been that the Fund’s resources were inadequate for broad undertakings. For example, when the Fund was starting operations in 1947, it was decided not to use the Fund’s resources to help European countries with payments deficits stemming from their reconstruction needs and efforts27. Likewise, from time to time in the 1950s, when officials and economists believed that the United States could again have a depressed economy as it had in the 1930s and that many other countries would then experience depressed exports and payments deficits, it was understood that the Fund should not be the source of major balance of payments financing related to a depressed U.S. economy. The Fund’s resources were too small. The oil facility was thus the first time the Fund undertook to participate in the financing of worldwide balance of payments disequilibria.

Second, by realizing at the onset of higher oil prices that huge payments imbalances could endanger the world’s liberal trade and payments regime and worsen international recession, Mr. Witteveen helped to make officials in industrial countries more cognizant of the combined inflationary and recessionary implications of higher crude oil prices and to induce these officials to avoid unsatisfactory policies. While public officials of industrial countries were making decisions on which policies to employ, Mr. Witteveen’s public statements put officials on notice that the international community was opposed to the use of deflationary policies and of restrictions on trade to deal with higher prices. Thus, Mr. Witteveen deserves credit for heading off policies that might have made the oil price rise much worse than it eventually proved to be.

Third, by proposing the official recycling of petrodollars through the Fund and by instituting one of the first governmental borrowing arrangements with oil exporting countries, Mr. Witteveen demonstrated that officials of all countries were prepared to cooperate in dealing with the payments crisis resulting from the abrupt jump in oil prices. At a time when many officials were reacting adversely, he demonstrated the feasibility of handling the rise in oil prices amicably, without conflict between oil importing and oil exporting countries.

Fourth, the institution of official recycling in 1974, and its expansion in 1975, made possible by the Fund’s oil facility, lent encouragement to private bankers for the necessary enlargement of private financing arrangements. The Fund’s oil facility was a useful forerunner of private financing arrangements.

Fifth, the oil facility was important for the Fund as the organization responsible for international monetary arrangements and for cooperation in the international monetary field. As emergency payments problems erupted in 1974 and 1975, it was essential that the Fund take some action. Already the Fund’s influence and functions had been reduced by the collapse of the par value system and the introduction of floating rates earlier in 1973. By the middle of 1973, the Fund’s image had also suffered by the failure of world officials to agree on a reformed system. Thus, by introducing the oil facility, Mr. Witteveen pushed the Fund into action on the world’s most serious financial problem of 1974 and 1975. The Fund proved to be an instrument of help to a great many of its members in time of serious payments need. The Fund had originally been created to help members finance temporary balance of payments deficits so that they could avoid the imposition of restrictions or of deflationary economic policies. The oil facility served this purpose very well in 1974 and 1975.

Sixth, the oil facility had consequences for the Fund’s other financing arrangements. Since charges closer to commercial rates of interest were instituted for drawings under the oil facility, charges close to commercial interest rates were gradually accepted for all Fund transactions. Borrowing agreements on terms more advantageous to the Fund than was the gab also proved to be possible.

The Oil Facility Viewed Against Later Developments

The revolution in Iran that overthrew the Shah at the end of 1978 caused fresh disruptions in supplies of crude oil. It was expected that the relatively ready supply of oil that had prevailed up until 1978, albeit with higher prices, would change. World shortages of oil were anticipated. In view of actual and expected shortages of oil, opec announced at the end of June 1979 a further 24 percent increase in the prices for crude oil, the largest increase in the five and a half years since December 1973. Saudi Arabian light crude oil, for example, went to $18 per barrel and prices for other crude oils went to as high as $23.50 per barrel. In mid-1979 there thus began a second round of oil price increases.

The same problems as had arisen in 1974 were again foreseen. The progress that had been made in improving disequilibria in world payments was expected to be undone, and almost at once. The opec surplus, which had nearly disappeared in 1978, was expected to surge to disturbingly large levels in 1979. While officials of the United States planned new measures with enhanced determination to curb rising levels of oil imports by the United States and hoped to reduce the U.S. current account deficit, the oecd countries as a group were expected to move from surplus into deficit. The payments position of non-oil developing countries, already in considerable deficit as a group, was expected to deteriorate much further. Since developing countries already had accumulated overwhelming external debt, there was concern as to how they could service such debt and yet pay still higher oil import bills. Once more world financing needs seemed acute, and once more international monetary arrangements were expected to incur unusual strains.

These developments are beyond the time frame of this History but the coming of a second oil crisis prompted fresh perspectives on the policies devised to weather the first one. In retrospect, it appeared that officials of several oil importing countries, particularly in the United States, and many of the officials of the Fund had assumed in 1974 and 1975 that the sudden jump in crude oil prices announced in 1973 was an unusual, one-time event, a sort of aberration; at the time relatively few officials spoke even privately of the possibility of big jumps in crude oil prices again in the future. The first round of increases in oil prices was thus relatively quickly accepted as needed to make up for the unduly low prices for oil in the past, and a great many officials operated on the assumption that if these price increases for oil were accommodated, the world economy and the international payments system could then again resume their functioning without unduly disruptive international payments disequilibria.

The second round of oil price increases proved the original assumption unfounded. Consequently, some of those officials who had in 1974 and 1975 argued for the need to finance the larger payments deficits were inclined in 1979 to view these earlier policies as misguided. While oil importing countries had financed deficits, they had not taken the measures needed to conserve oil consumption or to develop alternative energy sources. As a result, industrial countries remained excessively dependent on imported oil, and developing countries had external debts so massive as to cause difficult problems of debt servicing and even fears of default. There was no question that basic measures now had to be instituted, and many officials were inclined to think that they had wasted five years of precious time in taking the measures required to adjust to a radically changed world oil situation. The energy crisis thus became severe only after the end of 1978.

There was a significant change in the reactions of officials in international financing organizations, such as the Fund, to the second large price rise in crude oil prices, compared with the 1973–74 price rise. None seriously suggested that the Fund establish another temporary oil facility. As far as Fund financing was concerned, the extended facility and the supplementary financing facility (described in a later chapter) were thought adequate. The energy problem, moreover, was recognized as long term, and it was believed essential that use of the Fund’s resources be on conditional terms so as to help members adjust their payments positions. To this end, too, the World Bank started financing projects for exploring for oil in developing countries heavily dependent on imported oil and started planning for a possible energy affiliate.

Harry Dexter White and John Maynard Keynes, architects of the international monetary arrangements agreed at Bretton Woods

Pierre-Paul Schweitzer, Chairman of the Executive Board and Managing Director, September 1, 1963-August 31, 1973

Meeting of the Executive Board, December 1, 1972

Meeting of the Executive Board, January 13, 1975

Kenyatta Conference Center, Nairobi, Kenya, site of the 1973 Annual Meeting of Board of Governors

Mzee Jomo Kenyatta, President of Kenya, welcoming Governors, Annual Meeting, Nairobi, September 24, 1973

(Left to right: Robert S. McNamara, President of the World Bank, George M. Chambers, Governor for Trinidad and Tobago and Chairman of the Board of Governors, Mrs. Kenyatta, President Kenyatta)

Committee of Twenty, Inaugural Meeting, Washington, September 28, 1972

(above) Ali Wardhana, Chairman, and C. Jeremy Morse, Chairman of Deputies, discussing Outline of Reform, June 13, 1974 (below) H. J. Witteveen and Messrs. Wardhana and Morse at final press conference, June 13, 1974

Summary Proceedings, 1974, pp. 23 and 26–27.

Statement by the Governor of the Fund for the United Kingdom, Summary Proceedings, 1974, pp. 79–80.

History, 1966–71, Vol. I, pp. 19 and 24.

Statement by the Governor of the Fund for Italy, Summary Proceedings, 1974, p. 104.

Statement by the Governor of the Fund and the World Bank for France, Summary Proceedings, 1974, p. 95.

Statement by the Governor of the Fund and the World Bank for the United States, Summary Proceedings, 1974, pp. 84–85.

Communiqué of Interim Committee, October 3, 1974; Vol. III below, p. 217.

Statement by the Governor of the World Bank for Iran, Summary Proceedings, 1974, p. 160.

This address was reprinted in Department of State Bulletin (Washington), Vol. 71 (December 2, 1974), pp. 749–56. Portions quoted here are on p. 749.

Ibid. (December 9, 1974), pp. 794–803. Quoted portions are on pp. 794 and 795.

For a discussion of waivers by the Fund, see History, 1966–71, Vol. I, p. 322.

Access, which was to be subject to assessment by the Fund of the member’s balance of payments need, was not to exceed the lower of (i) 125 percent of quota, and (ii) 85 percent of the increase in a member’s oil import cost, calculated by multiplying the volume of the member’s net imports of petroleum and petroleum products in 1972 or 1973 (whichever was higher) by $7.50 per barrel; but (iii) a member’s access to the facility was not to be less than one third of the increase in its oil import cost as calculated under (ii) above, nor less than its maximum calculated access under the 1974 facility.

Communiqué of Interim Committee, January 16, 1975, par. 3; Vol. III below, p. 218.

Australia, Austria, Belgium, Canada, Denmark, Finland, France, the Federal Republic of Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

The relevant Communiqué of the Group of Ten was reprinted in IMF Survey (Washington), Vol. 4 (January 20, 1975), p. 19.

E.B. Decisions Nos. 4634-(75/47), 4635-(75/47), 4636-(75/47), and 4638-(75/47), April 4, 1975; Vol. III below, pp. 499–500, 539, 542, 500.

E.B. Decision No. 4741-(75/120), July 11, 1975; and E.B. Decisions Nos. 4916-(75/208), 4917-(75/208), 4918-(75/208), and 4919-(75/208), December 24, 1975; Vol. III below, pp. 539–40, 542.

E.B. Decision No. 4634-(75/47), April 4, 1975, as amended after these reviews; Vol. III below, pp. 499–500.

E.B. Decision No. 4986-(76/47), March 18, 1976; Vol. III below, p. 500.

For a comparison of the declarations of the Fund and of the oecd, see Joseph Gold, “Recent International Decisions to Prevent Restrictions on Trade and Payments,” Journal of World Trade Law (London), Vol. 9 (January/February 1975), pp. 63–78.

Afghanistan, Bangladesh, Burma, Burundi, Cameroon, Central African Republic, Chad, Dahomey (Benin), Egypt, El Salvador, Ethiopia, Ghana, Guinea, Guyana, Haiti, Honduras, India, Ivory Coast, Kenya, Khmer Republic (Democratic Kampuchea), Laos (Lao People’s Democratic Republic), Lesotho, Malagasy Republic (Madagascar), Mali, Mauritania, Niger, Pakistan, Rwanda, Senegal, Sierra Leone, Somalia, Sri Lanka, Sudan, Tanzania, Uganda, Upper Volta, Western Samoa, Yemen Arab Republic, and the People’s Democratic Republic of Yemen.

E.B. Decision No. 4773-(75/136), August 1, 1975; Vol. III below, pp. 500–502.

The Fund’s financial year runs from May 1 to April 30.

E.B. Decision No. 5144-(76/102) SA, July 12, 1976; Vol. III below, p. 502.

E.B. Decisions Nos. 5425-(77/79) SA, May 27, 1977 and 5726-(78/59) SA, April 17, 1978; Vol. III below, pp. 502–503.

Fund staff began to examine the relation between public expenditures in oil exporting countries and imports by these countries. See, for instance, David R. Morgan, “Fiscal Policy in Oil Exporting Countries, 1972–78,” Staff Papers, International Monetary Fund (Washington), Vol. 26 (March 1979), pp. 55–81.

See History, 1945–65, Vol. I, pp. 217–20, and Vol. II, pp. 394–97.

    Other Resources Citing This Publication