IMF Survey: Vol.25, No.7 1996

The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy.


The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy.

Seminar on the Future of the SDR: Seminar Identifies Key Issues, Narrows Differences About SDR’s Role

Opening the March 18–19 Seminar on the Future of the SDR, Stanley Fischer, First Deputy Managing Director of the IMF, noted that the views of international economists were sharply divided over the SDR’s future. The seminar was a historic event that provided the opportunity to re-examine the broad issue of the SDR with the benefit of outside experts. It was a response to a request by the Interim Committee of the IMF’s Board of Governors on the International Monetary System, at its April 1995 meeting, for “a broad review, with the involvement of outside experts, on the role and functions of the SDR in light of changes in the world financial system.” The seminar also, said Fischer, commemorated the fiftieth anniversary of the inaugural meeting of the IMF’s Board of Governors in Savannah, Georgia—the meeting that breathed life into the World Bank and the IMF more than a year after their creation.

John Maynard Keynes, a chief architect of the Bretton Woods institutions, was concerned about the inaugural meeting’s decision to locate the IMF in Washington, Fischer said. Keynes wanted to ensure that the IMF would be a technocratic institution as free as possible from political influence. While he may have been uncharacteristically naive to think that the Bretton Woods institutions could be shielded from political influence, Fischer said, the institutions’ actions were, “to a remarkable extent,” driven by fundamental economic analysis, rather than political concerns. If Keynes were alive today, Fischer added, he would have been more optimistic about the ability of academic, official, and financial communities to work together to improve the world’s financial system.

IMF Executive Board approves SDR 6.9 billion extended Fund facility for Russia. See page 119.

The Second Amendment to the IMF’s Articles of Agreement in 1978 provides that the SDR should become the principal reserve asset of the international monetary system. Was this still an appropriate goal, Fischer asked, or had the SDR become just a “relic of the 1960s,” as Princeton University historian Harold James maintained in his recent history of the postwar monetary system and the IMF’s role in it (see IMF Survey, October 9, 1995, p. 297). While the SDR would continue to exist, Fischer ventured, the issue was what useful role it could play in the global economy. He identified a number of questions for seminar participants:

• Does the global economy still benefit from the existence of the SDR, and who gains and who loses from the SDR?

• Would the SDR’s benefits be enhanced by an allocation targeted at specific groups of countries or implemented as part of a “safety net” or IMF emergency financing mechanism?

• How could the SDR be redesigned to make it more attractive to private financial markets?

• What impact will European economic and monetary union have on the SDR?

Or, looking further ahead, if Europe, the United States, and Japan were to commit to stabilizing their currencies, what contribution could the SDR make?

• Would the SDR provide a better means of financing IMF lending?

Fischer hoped that the seminar would clarify some of the key issues and differences about the SDR’s role. Many IMF Executive Directors in attendance, he said, would be listening for guidance in drafting their report on the SDR to the Interim Committee for consideration at its April 22 meeting in Washington.

Several Issues Remain Unresolved Since the Creation of the SDR

In the first session of the seminar, moderated by IMF Executive Director Alexandre Kafka, participants discussed the origins of the SDR and issues that have repeatedly arisen in the debate on allocations since the SDR’s creation.

Robert Solomon, Guest Scholar at The Brookings Institution, recounted developments in the international monetary system in the 1950s and 1960s that prompted the search for a new reserve asset and led to the creation of the SDR. In the late 1950s, Robert Triffin argued that if the United States continued to run balance of payments deficits to meet the world’s growing need for reserves, its ability to honor its commitment to convert dollars into gold at the official price would be undermined. At the same time, if the United States eliminated its deficits, the rest of the world would lose reserves, which could lead to global deflation (the “Triffin dilemma”). There were also growing concerns about the privileges of the United States as issuer of the principal reserve currency. In response to these two concerns, a series of discussions were held within the Group of Ten (G-10) and the IMF on reforming the international monetary system:

Photo Credits: Denio Zara and Padraic Hughes for the IMF.

1963-64: In a study by the G-10 Deputies on the international monetary system, France proposed the creation of a “collective reserve unit” limited to the G-10. G-10 Ministers concluded that “the need may in time be felt for some additional kind of international reserve asset.”

1964: An IMF staff study on international liquidity concluded that U.S. deficits might not be sufficient to meet the global need for reserves in the future; it proposed new approaches to the creation of reserves through the IMF. In the same year, the Bellagio Group (32 academics from 11 countries) called for reform of the system of reserve creation.

1964-65: The Ossola Group (a G-10 study group on the creation of reserve assets) examined various proposals for reserve creation, including the U.S. proposal to build on the system of drawing rights within the IMF.

1965-66: A series of G-10 Deputies meetings examined various proposals for reserve creation. Meanwhile, the IMF also studied various proposals.

1966: The IMF put forward two proposals, one based on units, the other on drawing rights, both within the IMF; the latter was similar to the U.S. proposal.

1966-61: Joint meetings of the IMF and G-10 Deputies reached agreement on creating a special drawing right within the IMF.

1969: First Amendment of the IMF’s Articles of Agreement. The SDR system was created in the IMF.

1970-72: The first allocation of SDR 9.3 billion was made.

Attitudes toward the SDR after 1969, according to Solomon, were influenced in part by the unanticipated expansion of credit markets and the increase in private capital mobility. Industrial—and, increasingly, developing—countries could increase their reserves by borrowing in capital markets or through capital inflows. “Borrowed reserves,” however, could also increase countries’ indebtedness, necessitating periodic refinancing. Part of the rationale for the second allocation of SDRs (in 1979-81), Solomon noted, was that it would increase members’ share of “owned reserves.” Another rationale was that allocations would move the SDR further toward becoming the “principal reserve asset of the international monetary system,” as called for under the Second Amendment of the IMF’s Articles.

The increase in capital mobility has given a broader group of countries the privileges previously held only by reserve currency countries, thus reducing the asymmetry in the Bretton Woods system, Solomon observed. “While official efforts to create a more symmetrical system did not succeed, market developments have done so,” he said. Greater market access has also disciplined borrowing countries to pursue sound policies. The emphasis in the 1960s on international liquidity was overdone, and more emphasis should have been placed on balance of payments adjustment, Solomon concluded.

Adolfo Diz, former President of the Central Bank of Argentina, said that one of the drawbacks of the original agreement to create SDRs—which has persisted—was the failure to define the “long-term global need” for reserves, and how it would evolve over time.

Rudolf Rhomberg, former Deputy Director of Research at the IMF, also drew attention to issues that have remained unresolved since the original debates. First was the issue of quantitative versus qualitative reserve enhancement: in designing the SDR to deal with the “Triffin dilemma,” emphasis was placed on supplementing existing reserves (quantitative enhancement), and not on restoring confidence in the main reserve currency through substitution of the newly created asset for the “tainted reserve currency” (qualitative enhancement). The concept of a “substitution account” continued to be raised in subsequent discussions but never gained broad support.

Furthermore, while steps have been taken to improve the attractiveness of the SDR since its creation (for example, in terms of its valuation, rate of interest, and rules for holding and use), the SDR has not been integrated into the reserve system. Another issue was that conflicts between monetary and other purposes of reserve creation—in particular, whether new reserves should play a role in development assistance—were debated at the inception of the SDR, but a link between reserve creation and development assistance was never made.

W. Max Corden of Johns Hopkins University observed that in a world of high capital mobility and flexible exchange rates, the original rationale for SDR creation—the avoidance of global deflation—no longer holds, because countries can borrow from capital markets to increase reserves instead of running current account surpluses, and because floating exchange rates insulate countries from world deflation. At the same time, Corden said that an allocation of SDRs today would not be inflationary, because countries could always shield themselves from world inflation by taking offsetting measures that cause their exchange rates to appreciate. He added that IMF lending should be conditional and could be expanded by either increasing IMF quotas or increasing SDRs and allocating them directly to the IMF—and not to individual members.

Sabina Bhatia

IMF Secretary’s Department

Some Facts About the SDR

The special drawing right (SDR) is an international reserve asset created by the IMF in 1969 to supplement existing reserve assets. The SDR serves as unit of account for the IMF and a number of other international and regional organizations. In addition, a few countries peg the exchange rates of their currencies to the SDR. While the SDR has been used at times to denominate financial instruments and transactions outside the IMF by the private sector and some governments, the market for such private SDRs is limited.

Valuation. The SDR was initially valued by the IMF in terms of a fixed quantity of gold and was redefined in June 1974 as a basket of 16 currencies. Since 1981, the SDR basket has consisted of fixed quantities of the currencies of the five IMF members that are the largest exporters of goods and services. The basket is revised every five years, most recently on January 1, 1996. The weights in the basket reflect the relative shares of countries in exports of goods and services and the relative shares of the five currencies in official reserve holdings. For the current basket, the weights, in percent, are 39 for the U.S. dollar, 21 for the deutsche mark, 18 for the Japanese yen, and 11 each for the French franc and the pound sterling. As of March 12, 1996, one SDR was worth $1.46 at market exchange rates.

Allocations. Since the adoption of the First Amendment of the IMF’s Articles of Agreement in 1969, the IMF has been authorized to allocate SDRs to member countries. Decisions to allocate (or cancel) SDRs require an 85 percent majority vote of the Board of Governors and are made for “basic periods,” which, unless otherwise decided, run for five consecutive years. Cumulative allocations to date total SDR 21.4 billion. SDR allocations are distributed in proportion to IMF members’ quota shares. Because of considerable expansion in the IMF’s membership since SDRs were last allocated in 1981, 38 of the IMF’s 181 member countries have never received SDR allocations. Another 37 members have participated in some, but not all, allocations. The current Articles of Agreement do not authorize the IMF to allocate SDRs selectively among members or to itself.

Share of Global Reserves. SDRs are counted as a part of a country’s international reserves, along with official holdings of gold, foreign exchange, and reserve position in the IMF. The share of SDRs in global holdings of nongold reserves has declined from 8.4 percent at the end of 1972, to 6.5 percent at the end of 1981, and to 2.3 percent at the end of 1995.

A Case for Allocations Under Current Articles?

Can a case be made for an SDR allocation under the IMF’s current Articles of Agreement? This question was discussed at a session moderated by Leo Van Houtven, IMF Secretary and Counsellor. Michael Mussa, IMF Economic Counsellor and Director of Research, noted that the impasse over SDR allocations over the past decade and a half reflected a lack of consensus on how to interpret the criterion for allocation under the IMF’s Articles—that SDR allocations meet a long-term global need to supplement existing reserves. Arguing that there is a strong case under the Articles for moderate allocations of SDRs, Mussa said that the concept of global need was not intended to mean that all members must simultaneously face a need to supplement their existing reserves. The intention was that “the performance of the world economy and the functioning of the international monetary system and the balance of payments adjustment process would be improved if other sources of reserve growth were supplemented by SDR allocations.” According to Mussa, the emphasis on “long term” was intended to mean that SDR allocations would not respond to, or seek to ameliorate, cyclical fluctuations in the world economy. The architects of the SDR mechanism expected that the demand for reserves would increase over time and that periodic assessments would be made to meet part of the demand through SDR allocations.

Although the international monetary system for which SDRs were designed has since become extinct, there is basic agreement, Mussa noted, among both opponents and proponents of SDR allocations that the world economy faces a rising need for international reserves and that the demand for reserves can be expected to grow roughly in line with the growth of world output and trade. Mussa acknowledged that this was not in itself a sufficient basis to conclude that there was a need to supplement reserves through SDR allocations. Nonetheless, he argued, SDRs were desirable because they were qualitatively superior to other reserves and were less costly to hold. Because SDRs were “owned reserves,” an allocation would contribute to a permanent addition to the stock of international reserves. SDRs also provided for greater stability in the monetary system, because unlike “borrowed reserves,” they did not have to be periodically financed and were not subject to abrupt withdrawal. For most countries, except very large industrial countries, Mussa noted, the cost of holding other reserves (acquired through borrowing in capital markets or by running current account surpluses) was significant, as reflected in the spread between the borrowing rate and the rate of return on reserve assets. Furthermore, this cost rises as the demand to hold reserves grows. For a number of developing countries, the need to sterilize capital inflows has added to the cost of holding reserves.

By contrast, the economic cost of supplying reserves through SDR allocations is negligible, Mussa said. He concluded that, as the vast majority of the IMF’s membership faces costs of holding reserves substantially higher than the true economic costs of creating reserves through SDR allocations, it could reasonably be argued that allocation would meet the criterion of global need.

Responding to arguments against SDR allocations, Mussa said that a modest allocation of SDR 36 billion—as has been proposed by the IMF’s Managing Director—would have no direct monetary effect in industrial countries. In particular, it would not produce inflationary effects in the world economy via the monetary policies of industrial countries, because reserve inflows arising from countries converting SDRs into reserve currencies could easily be sterilized. It was also unlikely that recipient countries would delay adjustment on the basis of a modest increase in their reserves; indeed, it could be argued that low levels of reserves and the high cost of carrying borrowed reserves could induce countries to adopt undesirably restrictive policies. Finally, according to Mussa, countries would not increase unduly their absorption of goods and services at the expense of other countries, as critics feared. Experience suggested that countries that were net users of SDRs typically held other reserves in larger volume than their use of SDRs. Consequently, modest allocations would not finance unwarranted demands on goods and services. The main problem, in his view, was that, in the absence of allocations, countries facing high costs of reserves would be forced to diminish unduly their use of real resources to meet their growing demand for reserves.

The differences of opinion over allocations had little to do with the criterion of long-term global need, Mussa concluded, but related to the probable distribution of the global benefits of allocations. Opposition to SDR allocations comes mainly from industrial countries, which face low costs of holding other reserves and perceive little benefit from SDR allocations, particularly since the rate of return is no more attractive than rates of return on other reserve assets. On the other side, the main proponents are those countries that face high costs in holding other reserves and have also tended to be persistent net users of SDRs.

To overcome the ambiguities in the Articles, Montek Singh Ahluwalia, Finance Secretary, Government of India, suggested examining the precedents to guide future allocations of SDRs. Unfortunately, he said, precedents were limited and, of the two previous SDR allocations, only the second was relevant to the current global economic situation. Ahluwalia noted that the membership had proceeded with the second allocation, although the original role conceived for the SDR had evaporated with the collapse of the Bretton Woods system and the emergence of international capital markets. Then, as now, a significant portion of the membership was opposed to creating unconditional liquidity for the same reasons offered by opponents today. Also, despite the fundamental changes in the world economy at the time of the Second Amendment, the IMF had envisaged an expanded role for the SDR and had called for making it the principal reserve asset of the international monetary system.

The case for SDRs today, said Ahluwalia, rests not on the “expected shortfalls in the potential supply of aggregate reserves, but rather on the distribution of global reserves in the absence of SDR allocations.” The rapid growth of financial markets had enabled more countries to satisfy their reserve needs by borrowing from markets. For a large number of countries, however, access to markets was either denied or came with a high risk premium. Furthermore, market failure arising from inaccurate perceptions of developing countries’ creditworthiness, “herd” behavior on the part of investors, and contagion effects could rapidly cut off developing countries’ access to financial markets. In such circumstances, Ahluwalia argued, there was a case for periodic general allocations of SDRs, especially as inflationary pressures in the world economy were low.

Horst Siebert, President of the Kiel Institute of World Economics, was unconvinced of the global need to supplement reserves. He noted that growth in world trade over the past few decades had not been hindered by the limited supply of SDRs and that an expansion of SDRs would not necessarily help increase world trade. In the absence of a quantitative yardstick to assess the optimal quantity of SDRs that would need to be supplied for the SDR to play a supplemental role, the economic case for allocations was weak. Siebert saw a clear moral hazard in creating unconditional liquidity, as recourse to such credits would be a disincentive for countries to undertake timely adjustment and structural reform. He added that there was no scope for equity considerations in designing institutional arrangements for international reserves.

In contrast to the situation under the Bretton Woods system, there was currently no shortage of liquidity in the monetary system, Siebert noted. Countries could acquire reserves—albeit at some cost—by running a current account surplus or a capital account deficit, or central banks could obtain foreign currency through portfolio shifts. Siebert saw no future for the SDR. He said that “the IMF may be well advised not to link its legitimacy to the expansion of SDRs. It would be better to concentrate on the problem of preventing national financial crises from spreading worldwide and on helping countries in their access to financial markets.”

John Williamson of the Washington-based Institute for International Economics pointed out that, with the collapse of the Bretton Woods system and the move to floating exchange rates, there was no longer any danger of systemic instability in the absence of creation of additional reserves. If the SDR were to have a future, he added, it would have to be liberated from the criterion of global need, which was no longer relevant.

Williamson accepted that an SDR allocation could be inflationary (both in reserve and nonreserve currency countries) and that it could lead to a resource transfer from industrial to developing countries. In his view, however, this was not an argument against an allocation. Public pension systems were considered desirable in their own right, he said, despite the fact that the payment of pensions had an inflationary impact and entailed a resource transfer.

Is the SDR doomed? Not necessarily, said Williamson. He outlined a few scenarios under which agreement on allocations might be reached, including the possibility that reserve center countries would see merit in using SDRs as conditional liquidity, which would allow “the IMF to develop innovative roles, such as acting as lender of last resort to the banking systems of countries that established currency boards and fixed [their exchange rates] to the SDR rather than to a national currency.”

IMF Executive Director J. de Beaufort Wijnholds broadly agreed with Mussa about the desirability of maintaining the SDR instrument. In particular, he found the argument convincing that SDR allocations were a cost-effective way of meeting the demand for reserves. Wijnholds disputed the suggestion that there was a global shortage of reserves; the IMF staff, he said, tended to overestimate the need for reserves. Pointing to the growing liberalization in industrial and developing countries, he saw no evidence that countries were resorting to restrictive policies to compensate for a reserve shortage. A number of central banks had indeed accumulated excess reserves through their interventions in foreign exchange markets and were acting as de facto investment funds for their governments, he observed.

As for the future, Wijnholds noted that the need for global reserves could decline with the emergence of the European Monetary Union, as the new European central bank would hold reserves that were substantially lower than those held by individual central banks today. Wijnholds’s preference was for an equity allocation to those members that had never received allocations, which, he recognized, would require an amendment of the Articles.

Sabina Bhatia

IMF Secretary’s Department

Camdessus Looks for Progress On the SDR Issue

Following is a summary of remarks by IMF Managing Director Michel Camdessus at the Seminar on the Future of the SDR in Washington on March 18:

It has been about 25 years since the first SDR allocation, and 15 years since the last SDR allocation. Thus, it is “high time” for a fresh look at the issues surrounding the SDR, said Camdessus in luncheon remarks at the seminar on the SDR. He hoped for a consensus to emerge on how to move the SDR debate forward.

Where did the policy debate stand and how might it be advanced, Camdessus asked. He saw broad agreement by the IMF membership on three issues:

• the need to maintain some role for the SDR in the international monetary system and on its usefulness in the IMF’s financial operations and structure;

• the importance of including all member countries in the SDR system; and

• the desirability of an SDR allocation—which was not only warranted but overdue—for the 38 member countries that never received an SDR allocation, although views differed on the form such an allocation should take.

Much of the controversy over SDR allocations, said Camdessus, stemmed from the necessary criterion of the “long-term global need” to supplement global reserves. Some members questioned such a need. Yet since 1981, the global stock of nongold reserves—often acquired at significant cost to members—had risen at an average annual rate of more than 7½ percent, much more than the largest allocations ever discussed by IMF members. This cost to members of acquiring reserves underscored the need to reach a better common understanding of how the SDR could help supplement reserves.

Camdessus noted that the controversy centered partly on how to measure long-term global need but more on how it should be met. The criterion of global need was essential to resist the temptation to create excessive liquidity. But with the global stock of nongold reserves standing at SDR 923 billion at the end of 1995, it was hard to argue that a modest allocation would perceptibly affect global inflation. On the issue of how to meet the long-term global need, Camdessus said that the cost of acquiring and holding reserves was higher than the opportunity cost of providing such reserves through an SDR allocation.

Selected IMF Rates

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The SDR interest rate, and the rate of remuneration, are equal to a weighted average of interest rates on specified short-term domestic obligations in the money markets of the five countries whose currencies constitute the SDR valuation basket (the U.S. dollar, weighted 39 percent; deutsche mark, 21 percent; Japanese yen, 18 percent; French franc, 11 percent; and U.K. pound, 11 percent). The rate of remuneration is the rate of return on members’ remunerated reserve tranche positions. The rate of charge, a proportion (currently 102.5 percent) of the SDR interest rate, is the cost of using the IMF’s financial resources. All three rates are computed each Friday for the following week. The basic rates of remuneration and charge are further adjusted to reflect burden-sharing arrangements. For the latest rates, call (202) 623-7171.

Data: IMF Treasurer’s Department

The Managing Director hoped that the seminar would help clarify the pros and cons of allocating SDRs to meet a small share of the global need for reserves. He drew particular attention to the roughly one third of developing countries and countries in transition with reserves equivalent to less than eight weeks of imports. Many of these countries were pursuing strong reform programs supported by the IMF. But to increase their reserves required either expensive borrowing in the market—to which many countries lacked access—or a compression in domestic demand and imports that could undermine their adjustment efforts and adversely affect the world economy.

Camdessus suggested taking the opportunity of the debate on the IMF’s Eleventh Quota Increase—which would, in any case, require parliamentary approval in some countries—to revive the debate on amending the Articles of Agreement. A general allocation would go a long way toward alleviating the inequity facing IMF members that, had yet to receive an SDR allocation. To achieve still greater equity, an amendment could provide for harmonization of countries’ net cumulative SDR allocations to quota. For example, this ratio could be set at the average ratio of cumulative net SDR allocations to quota for members that had participated in all previous allocations (17.4 percent), or at the ratio of cumulative net SDR allocations to quota enjoyed by the most favored IMF member (25.8 percent).

In looking for the best way to keep the amount of SDRs allocated to a reasonable minimal proportion of world reserves, Camdessus suggested considering a more far-reaching amendment of the Articles to seek a more thorough rationalization of the basis for allocating SDRs to member countries—by establishing the principle that each member’s cumulative net SDR allocation bear some uniform minimum relative to its quota.

Camdessus urged participants to consider the big picture. He noted that the role of the SDR today largely reflected the major changes in the international financial system since the SDR’s introduction. In view of the continuing changes in the system, he suggested that participants consider how the role of the SDR might also evolve so as to improve the functioning of the international financial system in the future.

Although globalization of capital markets was advanced, Camdessus said, markets would continue to evolve in unforeseen ways. While globalization had probably reduced the need for reserves for the few countries with virtually unlimited market access, access was less assured for other countries. Moreover, many countries had become vulnerable to shifts in market sentiment regarding their creditworthiness for reasons largely beyond their own control. If these trends continued, Camdessus said, they would make the case for the SDR as a source of additional liquidity all the more compelling—particularly in times of stress.

The prospective establishment of the “euro” was also likely to affect the international financial system in ways as yet unseen. The system might one day be dominated by the dollar, the euro, and the yen. Under these circumstances, Camdessus asked, could the SDR play a useful role as a central monetary asset? This would be consistent with the membership’s stated goal of “making the SDR the principal reserve asset in the international monetary system.” It could also, in some circumstances, provide the system with a useful anchor in times of systemic crisis. Given this possibility, asked Camdessus, shouldn’t we at least keep the door open for the SDR’s role to evolve along with the monetary system?

Developing a more important role for the SDR now would help keep that option alive, Camdessus said. This could be done by:

• expanding the SDR’s use beyond official holders, leading in time to the development of a private market and, possibly, the determination of the SDR’s value in that market, and helping to prepare for the day when the SDR could serve as an anchor for the system; and

• making regular, modest SDR allocations to help meet a small proportion of the rising global demand for reserves and encouraging the SDR’s use among other entities.

The SDR Plays Small Role in Multicurrency System

Contrary to the goal of the Second Amendment of the IMF’s Articles of Agreement, the SDR has not become “the principal reserve asset in the international monetary system.” Instead, a multiple reserve asset system, dominated by the U.S. dollar, followed by the deutsche mark and the yen, has evolved in the years since the introduction of the SDR. Why has the SDR failed to be competitive with the other major reserve currencies? Christian de Boissieu of the University of Paris addressed this question in a session on stability in a multiple reserve asset system, which was moderated by IMF Executive Director Karin Lissakers.

More than twenty-five years after its introduction, the SDR remains a highly “partial” money, said de Boissieu. Only three countries peg their exchange rate to the SDR; it acts as a unit of account only for the IMF and a number of other international and regional organizations and as a medium of exchange only for very specific operations; its role as a store of value is marginal. Perhaps most important, the use of the SDR outside its official circuit remains limited. No private SDR has emerged.

The global financial landscape of the late 1960s—when the SDR was introduced—was characterized by stable exchange rates, a scarcity of innovative financial instruments, and the possibility of a global liquidity shortage. The SDR was intended to provide the additional liquidity required to sustain growth in world trade and to reduce the dependency of the monetary system on gold and the dollar. Soon after its creation, however, the SDR was overtaken by several structural changes, including the suspension of gold convertibility of the dollar; the transition to floating exchange rates; and the transition from a situation of perceived dollar shortage to one of effective or potential dollar overhang owing to structural imbalances in the U.S. balance of payments.

When the first allocation period ended in 1972, it became clear that further SDR allocations would be unnecessary to counter a threatened shortage of reserves. The transition to floating rates reduced the demand for official reserves, and liquidity demand was supplied by the dollar overhang and the privatization of the international monetary system.

As an “official” currency, and in the absence of the emergence of a private SDR, the SDR could not profit from the privatization of the international monetary system. The absence of a clearing mechanism for SDR transactions was a further impediment to the development of a demand for private SDRs. Further, the SDR was quickly outmoded by more sophisticated financial instruments (for example, derivatives markets). Finally, political pressure has blocked a new allocation of SDRs since the second one.

Competing in a Multicurrency System

The multicurrency system emerged out of the long-run decline in the international role of the dollar and the associated emergence of the deutsche mark and the yen as major reserve currencies. The data showing market shares of the dollar, the deutsche mark, and the yen during 1980-94 suggest, nevertheless, that the dollar will not be fully replaced by another reserve currency in either the short or the medium term. The monetary triad, said de Boissieu, will stay asymmetrical for some time.

As a contender in the multicurrency competition, the SDR faces two serious shortcomings:

• Lack of political credibility. The five countries whose currencies make up the basket that defines the SDR lack cohesion and credibility as an institution (there is no institutionalized Group of 5).

• The basket definition. A basket currency could be competitive as a unit of account and a store of value in a world of high financial volatility. But as a medium of exchange, it is outclassed by its components or by other currencies. In particular, a basket of currencies is exposed to higher transaction costs.

In today’s world of competing currencies, de Boissieu said, the SDR will remain “in the short and long run a partial money,” because in its present form, it cannot satisfy the conditions of the following crucial “proportion rules”:

• The official use of a currency cannot develop over a certain threshold if it is not sustained in the medium and long term by development of the private use of the same currency.

• The financial use of any currency cannot develop over a certain limit if it is not sustained in the medium and long term by the use of the same currency in commercial transactions.

Technically, the SDR’s attractiveness could be enhanced by the creation of a clearing mechanism for operations denominated in SDRs or the creation of a “hard” SDR. But the effects of these improvements on the use of the SDR would be limited, de Boissieu concluded, since the drawbacks of the SDR are more political than technical. As long as the SDR remains an official currency and is not backed by an identifiable central bank, monetary policy, or “lender of last resort,” it will encounter great difficulty in acquiring credibility and marketability.

A Niche for the SDR?

Of the three discussants, only Makoto Utsumi of Keio University envisaged an expanded role for the SDR in the multicurrency system. The fallout from the Mexican financial crisis, he said, had demonstrated the continuing need for countries to hold reserves. The SDR could be used by monetary authorities as a means of diversifying their assets and diminishing the risk of sudden portfolio shifts. Also, through flexible management of SDR allocations and cancellations, global liquidity could be kept under control.

Kathryn Dominguez of Harvard University’s John F. Kennedy School of Government noted that of the potential problem areas the SDR was created to address—global liquidity shortage and overreliance on gold and the U.S. dollar—only the risk associated with a dominant dollar under pressure was still relevant. The SDR might conceivably have a role as a reserve asset, she said, if the United States wanted to alleviate some of the pressure on the dollar. In the absence of a clearing mechanism for the SDR, however, moving SDRs into portfolios would require the creation of substitution accounts or other such instruments.

According to Paul de Grauwe of the Catholic University of Leuven, the SDR’s chances for wide acceptance were fatally handicapped by the “collective good nature of money”: the utility of money for one person is based on the fact that other people use it and not on its intrinsic qualities. A newcomer—even a technically superior money—will have trouble finding a niche, as has happened, he said, with the ECU (European currency unit). The only way for the SDR—even a technically improved SDR—to overcome the collective good nature of money, said de Grauwe, would be by collective political action.

Sara Kane

Senior Editor, IMF Survey

The SDR’s Potential in Unconditional Liquidity

In a session moderated by IMF Executive Director J. E. Ismael, participants discussed the potential of the SDR in the creation of unconditional liquidity, abstracting from the constraints imposed by the IMF’s Articles of Agreement.

Helmut Hesse, President of Landeszentralbank in Niedersachsen, observed that the international monetary system had undergone fundamental change since the 1960s, rendering the original objectives of SDR allocations obsolete. With the marked increase in liquidity in recent decades, it was difficult to argue that there was a shortage of reserves; creditworthy countries could meet their additional reserve needs through low-cost borrowing in international markets. The weak reserve positions of poor countries, according to Hesse, were frequently the result of unsound policies; as such, conditional lending by the IMF was more appropriate than unconditional low-cost financial resources. Hesse saw little future for the SDR instrument as a safety net to deal with Mexico-style crises. The SDR was not designed to deal with such crises and could not be activated on short notice.

For the SDR to fulfill the goal of becoming the principal reserve asset in the international monetary system, Hesse observed, the IMF would need to control official reserves and other sources of global liquidity; more widespread use of the SDR at the expense of the existing reserve currencies would also be necessary. This would require fundamental changes in the monetary system, including upgrading the IMF to a kind of a world central bank with members ceding autonomy over monetary issues, which, Hesse noted, was unlikely. Although he saw no economic rationale for continuing with the SDR system, Hesse said it was unlikely to be abandoned.

Ariel Buira, Deputy Governor of the Bank of Mexico, observed that despite the growth of integrated capital markets, “the prevailing mechanisms for the creation and distribution of world liquidity result in a system that is economically inefficient as well as inequitable.” Among the shortcomings of the current system were:

• asymmetries in access to international liquidity and inequitable distribution of the benefits of liquidity creation, with reserve currency countries enjoying seigniorage privileges;

• underfinancing of most adjustment programs in developing countries;

• deflationary bias in the world economy owing to inadequate access to international liquidity; and

• volatile short-term capital flows.

These shortcomings suggested the need to increase the availability of international liquidity and improve its distribution to help countries achieve their full growth potential. Buira proposed that the IMF assume, as one of its central tasks, responsibility for evaluating and satisfying the liquidity requirements of members. “Just as the central bank of each country estimates the liquidity requirements of its economy every year…so the IMF should conduct an annual exercise to assess the liquidity requirements of the world economy.…”

In pursuit of the goal of reserve creation, the IMF should allocate SDRs in accordance with countries’ reserve needs by estimating their long-run demand for reserves and assessing what portion of the demand could be satisfied through SDR allocations. An alternative approach would be to allocate SDRs on the basis of countries’ access to international capital markets; thus, countries with little or no access would receive a higher proportion of SDRs. Buira favored the concept of the IMF helping members meet unwarranted short-term pressures in financial markets by providing a “safety net.” He suggested establishing an emergency financing facility in the IMF, to provide assistance in the form of short-term Lombard-type loans—that is, swaps of domestic currency against SDRs, or, preferably, advances against collateralized securities.

Muhammad Yaqub, Governor of the State Bank of Pakistan; Azizali Mohammed, Special Advisor to the Governor; and Iqbal Zaidi, Research Advisor in the State Bank, in a joint presentation, argued for selective though moderate annual SDR allocations. In the current system, they noted, countries with little or no market access incurred substantial costs in acquiring reserves. Countries with no market access were forced to obtain reserves through current account adjustment, implying a heavy cost in terms of forgone consumption and investment. Countries without an investment-grade rating could borrow from markets but were compelled to pay a significant risk premium.

Accordingly, they suggested a “focused” allocation for developing and transition economies with large reserve needs but with little or no access to market borrowing. Under this approach, countries eligible for financing from the IMF’s enhanced structural adjustment facility (ESAF) and the World Bank’s International Development Association and transition economies would qualify for allocations if they were unable to borrow from capital markets at low cost and their reserves fell below the equivalent of six months of imports over a three-year period. A number of developing countries would be excluded from allocations under this approach, but even those that were eligible could opt out.

Recognizing that SDR allocations had been resisted in the past on the grounds that the creation of unconditional liquidity undermined the IMF’s conditional lending, they proposed that allocations amount to no more than 20 percent of quotas annually, which was significantly lower than access limits under IMF arrangements. Yaqub, Mohammed, and Zaidi concluded that, although such selective allocations would require an amendment of the IMF’s Articles of Agreement, it appeared to be a way out of the current impasse.

Sabina Bhatia

IMF Secretary’s Department

Exploring the SDR’s Potential in the Provision of Conditional Liquidity

In a session moderated by IMF Deputy Managing Director Alassane Ouattara, seminar participants discussed the SDR’s potential in the creation of conditional liquidity.

In opening the session, Marcello De Cecco of the University of Rome and Francesco Giavazzi of Bocconi University recognized that the world was still not ready for a “world money.” They saw merit, nonetheless, in examining reform of the issue and management mechanisms of the SDR to allow it to help contain speculative attacks against individual currencies and prevent them from spreading to other currencies. The IMF’s existing financing mechanisms, they feared, may be insufficient—both in their volume and speed of mobilization—to manage Mexico-style crises. Making SDR credit lines available to a member’s central bank would be justified in two situations: to help it resist a devaluation not warranted by current policies or to allow it to carry out an orderly devaluation when necessary.

An SDR-based IMF financing mechanism would require three characteristics:

• speed, for crisis intervention;

• a wide distribution of risk; the IMF’s large membership would make such a mechanism particularly attractive for distributing risk widely; and

• temporariness, because a crisis management mechanism should not produce permanent increases in global liquidity.

While an SDR-based financing mechanism could satisfy the above requirements, De Cecco and Giavazzi said it could not avoid the risk of moral hazard, which could result in delays in needed policy adjustments. There was no easy solution to this trade-off. They concluded that while a safety net mechanism that helped a country carry out an orderly devaluation tended to be desirable, use of such a mechanism to help a country avoid a devaluation the authorities considered “unjustified by fundamentals” was much riskier.

Zhu Xiaohua, Deputy Governor of the People’s Bank of China, favored strengthening the SDR as a reserve asset, reforming the reserve creation process, and strengthening the IMF’s role in “orchestrating the international adjustment process.” Qualitative and quantitative improvements to the SDR would permit an SDR-based system to replace the multicurrency “nonsystem” and better “inspire confidence, foster financial stability, and provide adequate and inexpensive reserves in an equitable manner.” The multicurrency system lacked effective international control over global liquidity, Zhu argued; a strengthened IMF could ensure an adequate supply of global liquidity and redress the current uneven distribution of reserves. SDR allocations could provide a stable source of liquidity for developing countries by counteracting “overreaction” of the private capital markets to assessments of countries’ creditworthiness. Zhu thus supported general allocations of SDRs by the IMF, with post-allocation redistribution to benefit developing countries. And by creating a safety net facility—possibly using the SDR—Zhu concluded, the IMF’s resources would be enlarged, enabling it to serve as the lender of last resort to forestall potential financial crises.

Jacques J. Polak, former IMF Executive Director, Economic Counsellor, and Director of Research, proposed that the IMF become a fully SDR-based organization by also applying the SDR financing technique to its conditional lending and not only, as at present, to supplying unconditional liquidity to IMF members.

Consolidation of the IMF’s accounts under an SDR financing technique, Polak argued, would:

• Give IMF creditor members a preferred asset (higher remuneration and easier usability). This could be improved further by amending the IMF’s Articles of Agreement to allow commercial banks to hold SDRs.

• Eliminate the need for seeking excessively large quota increases, only about 30 percent of which can actually be used to raise IMF lending.

• Enable the IMF to unify its two internal accounts and facilitate finding an efficient formula for allocating the IMF’s general expenditure; this could include a higher rate of charge on the net use of SDRs than on SDR creditor positions.

• Eliminate members’ contributions in SDRs and currencies when their quotas are raised (which gives the appearance of major budgetary commitments) and thereby facilitate the periodic IMF quota rounds without weakening the role of quotas in governing IMF credit extension.

• Increase the transparency of the IMF’s financial structure.

To allay member concerns about the loss of control over the volume of credit extended under an SDR-based IMF, Polak suggested that the IMF institute a statutory maximum for outstanding SDRs equivalent to a fraction of the sum of quotas plus 100 percent of the sum of net cumulative allocations. This formula, he said, could preclude the need for a general quota increase for one or two decades.

Discussant Gyorgy Suranyi, President of the National Bank of Hungary, suggested that the IMF—in providing limited financial resources and catalyzing other financing through its surveillance—was playing a role in assisting indebted developing and transition economies that no other player in the system could assume. At the same time, Suranyi questioned the need for an SDR allocation. He maintained that unsustainable macroeconomic policies would not be helped by the creation of international liquidity.

David Cheney

Editor, IMF Survey

How Can the SDR Be Enhanced?

IMF Executive Director A. Shakour Shaalan moderated a session on the dual roles played by the SDR—as an international reserve asset and as an international unit of account. Participants also focused on whether use of the SDR could be enhanced by changing its characteristics.

In his presentation, Alec Chrystal of the City University Business School in London maintained that the initial expectations surrounding the SDR’s introduction had not been realized. The SDR was put forward as a solution to the problem of growing external U.S. dollar liabilities, he said; the SDR’s founders hoped that a supranational reserve asset might eventually replace the dollar as the world’s major reserve currency. But in light of today’s world of mobile capital movements and increasingly liberal financial rules, such expectations had not been realized, said Chrystal. If the SDR were an existing business project, it would probably need to be shut down, and he did not believe it would be introduced today.

Chrystal nevertheless indicated that the SDR had a small but useful role in intergovernmental transactions and should not be abandoned. “But this is not the grandiose role for which it was intended,” he noted. To bring the SDR into line with reality, Chrystal recommended that the IMF’s Articles of Agreement be modified to reflect the SDR’s more limited function as a neutral numeraire for the IMF as well as a convenient transactions medium for the official sector.

Holger Wolf of New York University assessed the performance of the SDR during 1985-94 from two perspectives: how well it compared with other possible currency baskets as an international unit of account, as assessed in terms of the variability (around trends) of a weighted average of bilateral exchange rates against the unit of account; and how well it compared with other baskets in maintaining the purchasing power of reserves in terms of imports. Wolf concluded that the SDR had proven to be a reasonably good unit of account over this period but had not performed well as a reserve basket. Moreover, he found that the change in currency weights necessary to have improved the SDR as a unit of account would have worsened its performance as a reserve basket, and vice versa.

Commenting first, Jonathan H. Frimpong-Ansah of the African Policy Research Company agreed with the presenters’ main contention that the SDR had failed to measure up to its founders’ hopes of becoming the world’s principal reserve asset. The IMF was not enhanced as a managing institution of global liquidity, and the dollar and other reserve currencies were not phased out; therefore, the SDR never became the world’s principal reserve asset, explained Frimpong-Ansah. The unanswered question, he said, was whether the IMF, as a highly credible institution, should continue to promote and manage a reserve asset with diminished credibility and an uncertain future.

H. Robert Heller, President of the International Payments Institute, commented that the use of the SDR was traceable to the absence of a true payments function. One way to redress this weakness, he said, would be to create an SDR payments facility open to both central and commercial banks, which could provide a mechanism for achieving final settlement of cross-currency payments in an efficient and secure manner.

John Starrels

Senior Editor, IMF Survey

Correction: In the March 19 issue, page 93, in the table of fiscal balances in selected countries taken from the Government Finance Statistics Yearbook, the data entries for Germany in 1992 and 1993, for Canada in 1993, and for China in 1989 should have read “not available” (…).

The SDR’s Future in an Evolving Monetary System

This session, moderated by IMF Executive Director Marc-Antoine Autheman, considered how the SDR might be affected by the future evolution of the international monetary system. In his presentation of a paper co-authored with Jeffrey A. Frankel of the University of California at Berkeley, Barry Eichengreen, also of Berkeley, concluded that “for better or for worse,” the future of the international monetary system was unlikely to entail an expanded role for the SDR.

Eichengreen provided three distinct scenarios focusing on the SDR’s potential:

• Over the immediate future, he predicted a high probability of strengthened exchange rate flexibility and capital mobility. In such an eventuality, the SDR’s role would probably weaken further.

• The SDR would not fare much better over the intermediate future either. Under this scenario, the demand for the SDR in Europe would most likely remain weak.

• For the distant future (fifty years hence), Eichengreen similarly asked whether the potential emergence of world monetary blocs or a single global currency would create new demands for SDRs. Probably not, he answered. A more plausible scenario would be a three-currency system led by the dollar and backed up by the deutsche mark and the yen.

What might the SDR offer that the other currencies do not? To answer this question, Eichengreen focused on two functions: supplying adequate reserves and serving as a stable unit of account:

Reserve substitution. If the supply of one of the major reserve currencies ever became so great in relation to other international reserves as to bring its value into question, there could be a case for allocating SDRs to allow portfolio substitution, said Eichengreen, but this scenario was highly unlikely. The most likely course of action available to portfolio holders would be to switch to other currencies in which they had confidence. The multiple currency reserve system might not make for stable exchange rates, but it did not want for reserves. For these reasons, the SDR would most likely remain on the sidelines.

Unit of account. The story is somewhat different regarding the use of the SDR as a unit of account. Economies of scale, noted Eichengreen, tended to make a one-currency system more efficient than a multiple-currency one. The SDR, computed as a basket, was in some ways an “intrinsically more attractive” unit of account than the dollar or other single currencies, he maintained. But a review of the attributes that make for a successful international currency suggested that the SDR would be an unlikely candidate—even if the dollar were to fall from its number one position over the next fifty years. If governments and private agents wanted to hold assets in the form of a composite basket of five currencies, they could do this without the IMF through direct foreign exchange transactions that replicate the SDR basket. Moreover, the SDR simply did not have a natural constituency—an absolute prerequisite for a currency to come into widespread use.

Wendy K. Dobson of the University of Toronto agreed with Eichengreen and Frankel but noted that their paper did not speak to the point that an SDR allocation could serve as a vital source of international reserves for developing countries, where the cost of borrowing from international capital markets remained prohibitive. Dobson thus suggested that the IMF consider establishing a low-cost, SDR-based mechanism to provide liquidity to such countries. Moving beyond considerations associated with the SDR, Dobson maintained that the growth of regional interdependence—as reflected in the emergence of the European Monetary Union—could lead to an enhanced regional surveillance role for the IMF in support of prudent macroeconomic policies among member countries.

Fabrizio Saccomanni, speaking for himself and co-author Tommaso Padoa-Schioppa, both of the Bank of Italy, maintained that while he was in general accord with Eichengreen and Frankel’s major conclusions, their apparent disregard of public goods and institutional considerations concerned him. Saccomanni believed that the challenges faced by central banks in promoting monetary stability and providing lender-of-last resort functions would grow over time and that the SDR might conceivably assist in performing these functions.

Drawing on the experience of the European currency unit (ECU), H. Onno Ruding, Vice Chairman of Citicorp/Citibank, suggested that one way to enhance the SDR’s role would be to amend the IMF’s Articles of Agreement to enable commercial banks to accept SDRs in their transactions. Another possibility would be for the World Bank to adopt the SDR as a unit of account and in its lending operations and for member governments to issue SDR-denominated bonds, as they already do for the ECU.

John Starrels

Senior Editor, IMF Survey

Stand-By, EFF, SAF, and ESAF Arrangements As of February 29

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Note: EFF = extended Fund facility.SAF = structural adjustment facility.ESAF = enhanced structural adjustment facility.Figures may not add to totals owing to rounding.Data: IMF Treasurer’s Department

From the Executive Board

Russia: EFF

The IMF approved a credit for the Russian Federation totaling SDR 6.9 billion (about $10.1 billion) under the extended Fund facility (EFF). The credit, which is being made available over the next three years to support the government’s medium-term macroeconomic stabilization and structural reform program, is equivalent to 160 percent of Russia’s quota in the IMF. Reflecting the expected improvement over time of Russia’s external performance, disbursements under the EFF would be largest in the first year with 65 percent of quota, followed by 55 percent in the second year, and 40 percent in the third year.

Since the dissolution of the Soviet Union in late 1991, the primary objective of Russian economic policy has been to achieve financial stabilization while seeking to make rapid progress in transforming the economy to a market-based system. Until 1994, while progress toward stabilization and market reforms was made in a number of areas, the authorities were unable to sustain adjustment efforts and performance fell short of objectives set under several programs.

The overriding objective of the 1995 economic program, which was supported by a stand-by credit of SDR 4.3 billion (about $6.3 billion), approved in April 1995 (see Press Release No. 95/21, IMF Survey, April 17, 1995), was a substantial and sustained reduction in inflation, since this was an essential condition for setting the stage for economic recovery. This inflation goal was to be achieved through a sharply tighter monetary policy, underpinned by a more restrictive fiscal policy. The authorities complied with all the program’s monetary and fiscal targets and, as a result, inflation fell to low single-digit monthly rates by the end of 1995. Last year also saw the first signs of a recovery of industrial activity, particularly in areas such as energy, metallurgy, and chemicals. Real GDP remained broadly stable in the course of 1995, at an average level roughly 4 percent below that recorded in 1994.

On the external front, the current account surplus widened to $4.7 billion from $3.4 billion in 1994. The introduction, in July 1995, of an exchange rate corridor with the stated purpose, among others, of stabilizing exchange rate perceptions is generally judged to have been a success.

On the structural front, policy performance has been uneven; the restructuring of the banking sector has, for example, been slow, and the pace and scale of the privatization program have been below expectations. Much remains to be done in the area of land reform.

The authorities have decided to build on their policy accomplishments by adopting a bold and comprehensive medium-term program that is designed to accelerate the transformation of the Russian economy toward a fully functioning market-based system, while consolidating macroeconomic stabilization.

Russia: Selected Economic Indicators

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Data: Russian authorities, and IMF staff estimates

Medium-Term Strategy And the 1996 Program

The government’s medium-term macro-economic program, which is supported by the EFF, aims at laying the basis for sustained growth by lowering inflation further toward a single-digit annual rate and achieving medium-term viability of the balance of payments. Real GDP growth is envisaged to accelerate to 2.3 percent in 1996 and 5.1 percent in 1998 and to be sustained at a relatively high rate of 6 percent a year over the rest of the decade. The program envisages a decline in the period average increase in consumer prices to 51.2 percent in 1996 and to 6.9 percent in 1998, from 190 percent in 1995. After a surplus of 1.2 percent of GDP in 1995, the external current account is expected to swing into modest deficits of 0.4 percent in 1996 and 1.7 percent in 1998, as investment recovers and measured private saving declines. The coverage by gross foreign exchange reserves of imports of goods and nonfactor services is expect-ed to rise from the equivalent of 2.5 months at end-1996 to 2.9 months by end-1998.

The critical element of the medium-term strategy is a further reduction in the overall fiscal deficit (of the enlarged government) from about 5 percent of GDP in 1995 to 4 percent in 1996 and to 2 percent in 1998. With the local governments and extrabudgetary funds taken together programmed to maintain a balanced position, the federal fiscal deficit path would be set equal to that for the enlarged government. Deficits of the magnitude projected could be financed without recourse to direct credit from the Central Bank of Russia (CBR) and without undue pressure on interest rates or crowding out of the private sector.

The fiscal adjustment envisaged under the program depends on the ability of the government to improve revenue performance by about 5 percentage points of GDP over the medium term. As well as helping to reduce the deficit, the higher revenues would allow for some increase in spending, including on unemployment compensation, the social safety net, and infrastructure rehabilitation. An improvement in revenue will entail, in addition to selective increases in tax rates, a broadening of the tax base and improvements in tax administration, including through strong efforts to capture the rapidly growing private sector and through reducing tax delinquencies. The effort to broaden the tax base is focused on the elimination of exemptions, particularly with respect to the value-added tax, the profit tax, excises, and import duties. Increases in tax rates under the program are concentrated in the energy sector, with higher excises envisaged on oil, gasoline, and electricity. On the expenditure side, to achieve the program’s fiscal target for the enlarged government in 1996, the government intends to observe strictly the limits on outlays established under the 1996 budget law. In that connection, various spending initiatives announced by the President and the government in early 1996 are either covered by appropriations authorized in the 1996 budget or will be handled by reallocating expenditures within the overall budgetary ceiling.

Achievement of the targeted reduction in monthly inflation to around 1 percent by the end of the year will require continued restraint in the conduct of credit policy. Accordingly, while the demand for money is expected to recover strongly with further stabilization, the pace of overall credit expansion is set to decelerate significantly. Although nominal interest rates are expected to continue to decline rapidly with lower inflation, real interest rates are expected to remain relatively high until well into 1996 because of lags in the full adjustment of price expectations. The program assumes the continuation of the present exchange rate band until the end of June 1996 and a broadly stable nominal exchange rate for the ruble thereafter.

Performance under the program will be monitored through its quantitative targets. Initially, this will be done monthly and, starting in early 1997, on a quarterly basis. In addition, the IMF’s Executive Board will periodically review Russia’s performance under the program. These program reviews will be conducted on a monthly basis during the first year of the EFF and on a quarterly basis thereafter. Disbursements under the EFF will also be made monthly until early 1997 and quarterly thereafter.

IMF Board Considers Debt Issue

IMF Managing Director Michel Camdessus made the following statement after the March 20 meeting of the IMF Executive Board on the debt problems of the heavily indebted poor countries: “The Executive Board of the IMF today considered a framework, proposed in a joint IMF-World Bank staff paper, to address the external debt problems of the heavily indebted poor countries. The approach, which envisages comprehensive action by the international community—including the multilateral institutions—was judged to be consistent with the key principles laid down by the two Boards at their discussions in February, and to be an important step toward resolution of the debt problems of these countries.

“The aim should be to ensure that those countries maintaining sound policies and benefiting from the initiative would emerge with sustainable levels of debt, and that the mechanisms to achieve this should preserve the financial integrity of the IMF and other multilateral institutions.

“The IMF Executive Board will give further consideration to a number of key features of the proposal, including possible mechanisms of IMF participation, beginning with its upcoming discussion on the continuation of the enhanced structural adjustment facility (ESAF) operations. The proposed debt initiative will be further discussed by Ministers at the Spring Meetings of the interim and Development Committees, on the basis of a joint report of the managements of the IMF and the World Bank.”

Structural Reforms

The program envisages a number of structural reforms that are crucial for completing Russia’s transition to a market-based economy. These reforms seek to ensure that goods and factor markets operate efficiently, while taking steps to complete the establishment of the institutional and legal frameworks required by a market economy.

Under the program, Russia will complete the process of trade liberalization by concluding the liberalization of the export regime and by reducing the weighted average import duty rate. The authorities are assigning priority to accession to the World Trade Organization (WTO), a move that should help the government resist pressures for protectionism and would also help guarantee exporters nondiscriminatory treatment and access to the WTO’s dispute settlement mechanisms.

Given the importance of strengthening the banking system, the program addresses issues related to liquidity and financial health and solvency of banks. New instruments to allow banks to better manage their liquidity are being introduced, and further improvements to the payments system are being made. Various steps are being taken to strengthen further the supervisory capacity of the CBR and to increase the effectiveness of prudential regulation.

The program incorporates steps to speed up the privatization process while at the same time making sure that cash privatization is undertaken in a fair and transparent manner. The government also intends to ensure that opportunities for foreign investors to participate in the privatization process are maintained.

Agricultural reform will be a key ingredient of the medium-term strategy, and the program seeks to address underlying problems with respect to uncertainties about private ownership and inefficient procurement practices. In addition, budgetary transfers to the agricultural sector will be better targeted.

Among other structural reforms, the program contains major initiatives in the areas of urban land and real estate, in order to establish a legal framework that allows for full private ownership and development of land and its utilization as collateral. In the area of the securities markets, the program envisages the development of a more effective legal framework for securities transactions, liquidation and reorganization of insolvent enterprises, and protection of outside investors, as well as strengthening of the independence and enforcement power of the Securities Commission.

As regards structural initiatives in the external area, the government intends to take the steps necessary to accept by the end of the year the obligations of Article VIII, Sections 2, 3, and 4, of the IMF’s Articles of Agreement.

Addressing Social Needs

The program includes measures to protect vulnerable groups during the transition and ensure that benefits of growth contribute to reducing poverty. A rationalization of subsidies, with the potential savings from it being significant, should create adequate room for a meaningful improvement in the social safety net. Minimum pension payments are to be increased along with a reform of retirement-age provisions, while minimum unemployment benefits are to be increased together with the elimination of enterprise employment subsidy schemes.

The Challenge Ahead

The task ahead is to build on the notable, but still fragile, steps toward macroeconomic stabilization achieved under the stand-by program by accelerating the transformation of the Russian economy to a fully functioning market-based system in the context of efforts to consolidate stabilization. The program to be supported by the EFF is highly ambitious and its success will require bold efforts on the part of the Russian government. Such efforts deserve the support of the international community. It would be expected that IMF support for the medium-term Russian economic strategy through the EFF would be followed by a comprehensive external debt rescheduling, a development that would allow Russia to avoid a cash-flow problem caused by the bunching of debt-service obligations between 1996 and 2000.

Russia joined the IMF on June 1, 1992, and its quota is SDR 4.3 billion (about $6.3 billion). Its outstanding financial obligations to the IMF currently total SDR 7.1 billion (about $10.4 billion).

Press Release No. 96/13, March 26

Equity Is a Main Issue at SDR Seminar

International reserve assets are likely to remain an important feature of the international monetary system. However, for many countries—including much of the developing world—holding reserve assets is costly. Although the SDR may still have a role to play in the years to come in helping to equalize the costs of holding reserves among the world’s countries, it is unlikely that it will become the principal international reserve asset as envisaged in the IMF’s Articles of Agreement. These were the principal areas of agreement reached during the SDR seminar, said IMF First Deputy Managing Director Stanley Fischer in the closing panel discussion. Nevertheless, he added, the conferees left many issues unresolved while opening up several new avenues for further review and exploration.

The two focal points of the seminar were Michael Mussa’s paper, which presented a rationale for an SDR allocation under the current Articles, and Jacques Polak’s proposal that the IMF become a completely SDR-based organization, which would require a major change in the IMF’s financial structure and operations.

A Positive Role for the SDR

Acknowledging the lack of a consensus in favor of issuing more SDRs under the provisions of the existing Articles, Peter Kenen of Princeton University nevertheless agreed with Mussa that it was possible to interpret the notion of “long-term global need” in a way that would justify an SDR allocation. The argument used by those who oppose a further allocation, he said, was that it would permit governments to pursue irresponsible policies. Market forces, this view suggests, would establish an equilibrium between the demand for and the supply of reserves. Responsible, creditworthy governments could always acquire reserves at interest rates not much higher than what they could earn on those reserves; those who must pay a higher price by borrowing at higher interest rates were “somehow undeserving of less costly access.”

Yet, asked Kenen, if we can always count on market forces, why do governments need reserves at all? The answer, he said, is obvious: a government may need or want financing precisely when the markets are unwilling to provide it. Worthiness and creditworthiness, in short, are not equivalents. Creditworthiness, he said, should be available to asset-poor countries through low-cost reserve assets in the form of SDRs.

Kenen characterized Polak’s proposal for an SDR-backed IMF as “radical but not irresponsible.” The IMF would create SDRs instead of selling currencies to finance borrowing by its members. But the IMF would not be empowered to create SDRs freely or to engage in open market operations for the purpose of adjusting the stock of reserves. The volume of SDRs would depend on the volume of IMF credit outstanding. Three points deserved particular emphasis, said Kenen:

• Quotas would continue to govern decision making in the IMF and access to IMF credit.

• Periodic quota increases are not a sensible way to enlarge the IMF’s resources.

• Governments would not surrender control over the IMF’s credit-creating powers. Overall ceilings on the stock of IMF credit outstanding and the requirement of IMF Executive Board approval of individual drawings would protect against excessive credit expansion by the IMF.

Use of IMF Credit and Loans in February

(million SDRs)

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Note: EFF = attended Fund facility.CCFF = compensatory and contingency financing facility.STF = systemic transformation facility.SAF = structural adjustment facility.ESAF = enhanced structural adjustment facility.Figures may not add to totals shown owing to rounding.

Includes drawings in first credit tranche.

Data: IMF Treasurer’s Department

Polak’s proposal may not be feasible now or for some time, said Kenen, but it raised an interesting question: Which would be preferable—the task of persuading national parliaments to increase IMF quotas every five years or so under the current arrangements; or the task of persuading them to reform the IMF and the method by which it is financed once and for all? The once-and-for-all task would be harder, concluded Kenen, but it could smooth the way for a better functioning IMF and for fewer difficulties in the long run.

The Old SDR in a New World

For Christian Stals, Governor of the South African Reserve Bank, the discussions caused some frustration because of their failure to clarify or resolve important issues—namely, the role of the SDR in the new world, the nature of the SDR, and the role of the IMF as guardian of the SDR.

The SDR, said Stals, was created in a world completely different from the one we live in today, and the potential dangers it was intended to confront no longer exist. For the SDR to meet its objectives, two principles were established governing allocations—perceived long-term global need and global allocation (that is, distribution to all IMF members based on a relative quota ratio formula). Today, Stals said, these two principles had become major obstacles to the use of SDRs to serve the contemporary needs and objectives of the international monetary system. These contemporary objectives—such as ensuring equitable distribution of SDRs to all countries, providing SDRs to countries with little or no access to private capital markets, or enabling poor countries to hold low-cost reserve assets—require selective issues of SDRs and cannot easily be justified against the requirement of global need. The only way to meet these objectives was to amend the Articles of Agreement.

A firm decision has to be made on what the world wants to make of the SDR, said Stals. Is it going to remain a line of credit defined in terms of a basket of national currencies and used mainly among the monetary authorities of the world, or will it evolve into a global money?

We cannot have an international currency without an international central bank, said Stals. He noted that a number of proposals were offered during the seminar that extended the bounds of the IMF, making it more like a central bank. Such proposals, he said, were politically unrealistic. It was unlikely that many countries would be willing to transfer far-reaching powers to the IMF and thus surrender a large part of their monetary policy autonomy. If the major political powers were not prepared to stand behind an international central bank, said Stals, it was a waste of time to try to give the SDR the characteristics of an international money.

The IMF, concluded Stals, is shackled by the rigidities of its Articles and by an outmoded SDR system that cannot provide solutions to the problems of today’s international monetary system. These problems, he suggested, need to be addressed on the following basis:

• clearly defining the role and the functions of the IMF in the current international monetary system;

• identifying the shortcomings and deficiencies of the current system;

• finding new solutions and instruments that enable the IMF to play a useful role in solving today’s problems; and

• restating and confirming the objectives of the IMF as a multinational institution in the future international monetary system.

Asking the Right Questions

Responding to Wendy Dobson’s characterization of the SDR as “a solution in search of a problem,” Alexander Swoboda of the Graduate Institute for International Studies posed the following questions:

• Why was the SDR created? An original aim, Swoboda said, was to try and provide the beginning of a world currency as a substitute for gold. A collectively created money—as opposed to an internally created money or reserve asset, such as the U.S. dollar—allowed for collective action on the part of the international community, rather than a macroeconomic policy entirely dominated by one country. There was no global authority to back this embryonic world currency, however; and also the monetary system under which the SDR was formulated gave way to a regime of floating exchange rates.

• What have been the consequences of the move to floating exchange rates for the interpretation of the need for reserves as stated in Article XVIII? The function of international reserves, Swoboda said, had acquired a substantially different meaning under floating exchange rates. They are no longer perceived as an international entity whose sum total has systemic implications. Rather, they have taken on a national function; individual countries use their reserves as a defense against a run on their currencies and as a means to finance their internal imbalances, rather than to adjust to a world equilibrium. In this context, “global need” could be interpreted to mean the “documented desirability of issuing more reserves.”

• Should the SDR be kept alive? The SDR still had a useful role, said Swoboda. He favored continued small allocations of SDRs to all members and retroactive allocations for new members. Small allocations, he said, would yield efficiency and equity gains and also affirm solidarity within the monetary system. Although he favored development of an international currency, he did not see the SDR as filling that function in the foreseeable future.

Holding the Line on Credit

Alejandro Végh, former Minister of Finance for Uruguay and former IMF Executive Director, also favored a modest allocation of SDRs. He nonetheless expressed a strong preference for conditional lending. For this reason, he said he admired Polak’s proposal for an SDR-based IMF, which, he said, would keep the extension of international credit to a minimum. “When you provide a country’s government with conditional liquidity,” Végh said, “the benefit accruing to the country derives in much larger degree from the conditionality than from the liquidity.” Too much liquidity could, he added, delay adjustment.

The IMF and the international community were in agreement on the need to solve the “equity issue.”


Végh expressed serious reservations about proposals to set up an SDR-based emergency facility or to create a role for the IMF as lender of last resort. He was concerned about the cost of banking crises and bailouts at the national level; it would be dangerous to extrapolate these costs to the international level. Even if the international financial community could afford “more Mexicos,” Végh said, future bailouts might undermine the general welfare of the world economy.

The SDR Within and Beyond the Articles

Two broad themes emerged from the discussions, Fischer said in his summary of the seminar:

• Although its current and future roles remain to be clarified, the SDR should not be abolished, because it might provide a valuable “safety net” if the monetary system got into serious difficulties.

• The IMF and the international community were in agreement on the need to find ways to solve the so-called equity issue—that is, the fact that many IMF members have never received SDR allocations.

Discussions fell roughly into two broad categories, said Fischer: questions relating to the role of the SDR under the current Articles of Agreement, and discussions about the potential role of the SDR if the Articles were to be amended.

Discussions about the SDR under the current Articles focused more on whether they permit an allocation and less on the wisdom of creating more SDRs. The requirement of a perceived long-term global need to replenish the world’s reserves appeared to clash with the principle of equitable distribution. Under the current system, the benefit of creating reserves accrues to the countries that supply them—mainly, the major industrial countries. Other countries that lack the ability to create reserve assets have to go out and borrow them—at a sometimes prohibitively high cost. Although at present most IMF members find reserve acquisition costly, there is much debate about whether such costs constitute long-term global need as defined in the Articles. Mussa’s paper suggested that the costs of acquiring reserves are high enough for a sufficiently large number of countries to satisfy the condition of global need. But other participants found no basis for an allocation within other interpretations of global need. Although the argument remains unresolved, Fischer said that the discussions had “sharpened and clarified” the issues.

A related issue was whether the current Articles permitted the distribution of SDRs to countries that would benefit more from having them than would others that would nevertheless receive them under the global allocation mandated in the Articles. One possibility would be a voluntary post-allocation redistribution of SDRs along the lines suggested by Zhu Xi-aohua: countries that do not need the allocation would make SDRs available for redistribution to other countries through an IMF mechanism.

Although the current Articles call for the establishment of the SDR as the principal reserve asset of the international monetary system, Fischer noted that most discussants found the prospect unlikely in the foreseeable future. It was also unlikely that the SDR would evolve from an unconditional line of credit into a fully fledged world currency.

Finally, several proposals were made for enhancing the demand for SDRs both within the public and private sectors. Some participants thought the use of SDRs in private markets should be encouraged.

Use of the SDR in ways beyond those mandated in the current Articles sparked much discussion about alternative mechanisms and allocations, Fischer said, including selective or partial allocations and other attempts to resolve the equity issue. An underlying point that stood without contradiction, said Fischer, was how to amend the Articles so as to ensure an equitable distribution of the gains from seigniorage that only the major countries now derive from creating reserves.

In the session on the SDR’s future in the monetary system, said Fischer, the discussion moved from backward-looking to forward-looking. Although the focus of the seminar was the future of the SDR, the discussions also raised fundamental questions about the future of the international monetary system and the IMF’s role in the system. Discussion of these fundamental issues, including the role of the SDR, said Fischer, will be high on the IMF Executive Board’s agenda over the coming months and years.

Sara Kane

Senior Editor, IMF Survey

David M. Cheney, Editor

Sara Kane • John Starrels

Senior Editors

Sheila Meehan Assistant Editor

Sharon Metzger Editorial Assistant

David Juhren Staff Assistant

Philip Torsani Art Editor

In-Ok Yoon Graphic Artist

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