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International Monetary Fund, 1953, The Adequacy of Monetary Reserves (paper submitted to the 16th session of ECOSOC), reprinted in Vol. III, pp. 181–229.
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Peter B. Clark is a Senior Advisor in the Research Department of the International Monetary Fund. Jacques J. Polak was the Director of that Department, 1958-1979. They wish to thank Barry Newman, Harry Trines, and J. Onno de B. Wijnholds for comments on an earlier draft.
The report mentions illustrative numbers of $45 billion and $100 billion. The leading proponent of the idea on the Task Force, David A. Lipton, aimed even higher, namely an allocation of $300 billion, with the participants in the New Arrangements to Borrow (NAB) depositing their allocations ($205 billion) in a trust fund to be used only ‘as a last line of defense to defend the international financial system in times of dire threat’ (Lipton 1999, p. 363).
See the UN Report of the High-Level Panel on Financing for Development (the Zedillo Report), available on the UN’s external website.
Article IV, Section 7 of the original Articles of Agreement. The provision gave the United States, the United Kingdom and, had it joined, the U.S.S.R. a veto on a decision for a uniform change of par values.
The most comprehensive collection of the profession’s views on the subject of international liquidity at that time is probably found in International Monetary Fund (1970).
In April 1968, the Group of Ten had decided to sever any link between their official gold stocks and the free gold market.
See International Monetary Fund (2001). In this measure, capital flows relate to cross-border transactions in all financial assets and liabilities except reserve assets, Fund credit, and exceptional financing.
Looking at market-determined exchange rates, they find that it is difficult to detect any change in exchange rate behavior for many countries, with the demise of the Bretton Woods system manifested largely in the shift to floating of the U.S. dollar, the yen, and the deutsche mark.
See IMF Annual Report 2002, Appendix I, Internationa; Reserves.
Members may also have access to official sources of borrowing and grants, but these resources are typically earmarked for development purposes rather than held as reserves.
When the SDR interest rate was originally set at 1.5 percent, it was recognized that there were significant benefits conferred by SDR allocations, which generated proposals to link SDR allocations to aid for developing countries. Now that the SDR interest rate is market determined, attention has shifted to the benefits accruing to countries that face costs of holding reserves substantially above the SDR interest rate.
There are currently six members in arrears on their SDR charges: Afghanistan, the Democratic Republic of Congo, Iraq, Liberia, Somalia, and Sudan (amounting to SDR 104 million or 0.5 percent of allocations). Such arrears do not give rise to an interest risk for net holders because the Fund is required under Article XX, Section 1 to pay SDR holders the full amount of SDR interest; this is achieved by issuing SDRs to meet any shortfall, which are cancelled as overdue SDR charges are settled.
Recognizing that members are subject to contagion, the Fund designed Contingent Credit Lines in an attempt to help insulate countries following appropriate policies from changes in market sentiment.
Of course, there will always be some countries for which the opportunity cost of holding reserves is so high that even modest SDR allocations will exceed the secular increase in their demand for reserves (which may be close to zero), inducing them to spend most or all of any allocations they receive. For example, of all members that received allocations in the 1969-71 period, 10 held smaller total reserves in 1989 than in 1969. Six of these 10 countries were in arrears to the Fund in 1989; countries with overdue obligations to the Fund will not receive their allocations under the special one-time allocation agreed by the Board of Governors in 1997.
Group of Ten, Communiqué of Ministers and Governors and Report of Deputies (1966), para. 29.
It may be recalled in this connection that, in the 1960s and 1970s, when another important provision of the Articles had become meaningless by a change in the system, the Fund also resolved the resulting problem by ignoring it. Under the original Articles, a member purchasing a currency from the Fund had to represent that that currency was “currently needed for making in that currency payments…(Art. V, Section 3(a)(i), emphasis added). That provision lost its meaning when, in 1961, the Fund adopted the policy to use in transactions a wide range of currencies that were, de facto or de jure, convertible, and to prescribe the currencies that members should draw. For the next 17 years, until the provision was eliminated in the second Amendment, it was simply ignored.