The Financial Structure of the Fund Part II: How the Fund's Resources Revolve

In the last issue of Finance and Development (Vol. II, No. 1) the author described the system of quotas, subscriptions, and charges on which the Fund's financial structure is based. In this article he explains the repurchase obligations which are designed to maintain the revolv- ing character of the Fund's resources under the Fund's Articles of Agreement.

Rudolf Kroc

HEN A MEMBER has drawn upon the making nearly all international payments in W Fund's resources it will, whenever the a very small number of currencies. At best, conditions specified by the Articles are present, such offsets will restore a few members' posi- incur a repurchase obligation under the Arti- tions in the Fund, but for the great majority cles of Agreement. Broadly speaking, repur- of countries the repurchase provisions will be chase obligations require a member to repur- the more important. chase specified amounts of its currency from The repurchase provisions aim at protecting the Fund, in exchange for gold and convertible the liquidity of the Fund by restoring, in due currency of other members. These obligations course, its holdings of each member's currency are designed to ensure the revolving character as close as possible to 75 per cent of each of the Fund's resources. member's quota, the level prescribed in the Fund Agreement. The fundamental idea on The revolving character of the Fund's which the repurchase provisions in the Fund resources is also maintained when a drawing Agreement are based is that an increase in a by any member of another member's currency member's monetary reserves indicates an im- is offset by the drawing of its currency from provement in its balance of payments position. the Fund by another member: for example, member A, whose currency is the peso, may When a member's reserves have improved— draw the currency of member B, while A's own provided that its reserves are not less than its pesos are drawn by member C. For most quota—the repurchase provisions of the Fund currencies this possibility is limited in view of Agreement provide, in substance, that it must the long-established commercial practice of reacquire from the Fund its own currency and

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©International Monetary Fund. Not for Redistribution Finance and Development transfer to the Fund gold and convertible cur- the Fund's resources, the member should con- rencies in exchange. Specifically, when such sider whether by the end of the financial year a member's monetary reserves increase between it will have made net use of its own monetary April 30, the end of one financial year of the reserves. In other words, the member must Fund, and the next April 30, repurchase be- consider whether at the end of the year its comes mandatory until the Fund's holdings of monetary reserves are likely to have decreased the member's currency are reduced to 75 per since the beginning of the Fund's financial year cent of the member's quota. Repurchase is to the same extent as the member will have not carried beyond that point. In the Fund drawn on the Fund. If not, the member will Agreement a special significance is attached to have to use its monetary reserves to make a the level of 75 per cent of quota. It constitutes repurchase equal to one half of the increase what may be called the neutral or ideal posi- during the year in the Fund's holdings of its tion, where the member is neither debtor nor currency plus one half of the increase, or minus creditor in the Fund. The Fund Agreement one half of the decrease, during the year, in prohibits a member from reducing the Fund's the member's monetary reserves. Assuming holdings of its currency through repurchase to that a member whose quota is 100, and whose less than 75 per cent of that member's quota monetary reserves at the beginning of the and it also prohibits the use of any currency in Fund's financial year are 150, has a balance of making a repurchase which would increase the payments deficit of 20 in the course of that Fund's holdings of that currency beyond 75 per year, it should finance this deficit by using at cent of the member's quota. least 10 of its own reserves and confine its purchase from the Fund to 10. Should it cover The repurchase provisions are expressed the deficit by drawing 16 from the Fund and in a formula which ensures that no member use 4 of its independent reserves, the calcu- will finance more than one half of any balance lation made at the end of the year would show of payments deficit by drawing on the Fund, an increase in the Fund's holdings of 16 and a or increase its monetary reserves by adding decrease in monetary reserves of 4. The for- drawings from the Fund to its foreign exchange mula, 8 — 2 = 6, would impose a repurchase holdings. This is intended to ensure that the obligation of that amount on the member. Fund's resources are maintained as a second line of reserves for all members. Member Countries' Reserves This formula requires that one half of any The Fund computes each member's mone- increase in the Fund's holdings of a member's tary reserves every year, basing the calcula- currency during the Fund's financial year, at tions on data supplied by the member. For the end of which the computation of the repur- the purposes of the Fund Agreement monetary chase obligation is made, shall be the starting reserves are defined in the Articles. This point for computing this obligation. The mem- definition establishes a concept which is nar- ber can offset against this only one half of rower than that generally used in economic any decrease in its monetary reserves. Thus, analysis and central banking practice, and the in considering whether it should avail itself of Executive Board has had to take a number of

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©International Monetary Fund. Not for Redistribution Financial Structure of the Fund decisions in order to clarify it. Assets are The definition of monetary reserves includes limited to the central holdings of gold and only the convertible currencies of Fund mem- convertible currencies of members; and liabil- ber countries, unless the Fund specifies a non- ities to those short-term obligations represented member currency for inclusion, which so far by the holdings of the currency of the member it has not done. Should a member find it con- whose reserves are being computed by specified venient to hold foreign reserves in Swiss institutions of other members. The term "hold- francs, for instance, these holdings would not ing" has been interpreted to mean ownership. be included in the Fund's computations of that Under this concept, pledged gold will appear member's assets, as Switzerland is not a mem- among the assets of the pledger; and if, at the ber of the Fund. time of the Fund's calculation, the member The concept of monetary reserves as defined still retains the foreign exchange proceeds of in the Articles of Agreement emphasizes their the short-term loan for which gold was pledged liquidity and provides for the inclusion of gold or a part thereof, these will also appear among and short-term assets only. Government obli- the assets. gations with a maturity at issue exceeding 12 The term "convertible" is denned in a spe- months are excluded. If a member invests its cial way for Fund purposes. It is applied only convertible currency holdings, or some part to the currencies of "Article VIII countries," thereof, in such obligations or in other issues, that is to say, countries which do not avail for instance World Bank bonds, these would themselves of those provisions of the Fund not appear among the assets in the Fund's Agreement which permit the maintenance dur- calculation. ing the postwar transitional period of restric- Liabilities deductible from the foregoing tions on payments and transfers for current assets are confined by the Fund Agreement to 1 international transactions. These are the pro- "currency liabilities." These are liabilities rep- visions of Article XIV; some member countries resented by the holdings of the currency of have never been "Article XIV countries"; the member whose reserves are being com- others have abandoned that status and accepted puted by specified institutions of other the obligations of Article VIII. At some time members. after a member had notified the Fund that it was prepared to accept the obligations of The repurchase provisions of the Fund Article VIII it might find itself in economic Agreement cannot be waived; once a repur- difficulties which compelled it to request Fund chase obligation has been established as to approval for the imposition of certain restric- amount and types of reserves payable, it must be discharged. However, the obligation cannot tions. But once a member has ceased to rely be established without the member's agree- on Article XIV it cannot revert to this Article; ment, or failing that, by a decision by the for purposes of computing monetary re- Executive Board, so that the member's rights reserves, its currency would still be considered are safeguarded. On the other hand, the convertible. Executive Board has the power to defer a 1 See "Consultations with the Fund" above, p. 90. repurchase, and this has been done when a

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©International Monetary Fund. Not for Redistribution Finance and Development member country has made out a case for it. by the United States: the United States has But deferment has never been permitted be- drawn acceptable currencies "from the Fund yond five years from the date of the purchase and made them available for dollars at par to to which the repurchase referred. members having repurchases to make, and these members were then able to use these In addition to the repurchase provisions of acceptable currencies to repurchase their own the Articles, there are other provisions, as well from the Fund. as Fund policies and decisions, to ensure the revolving character of the Fund's resources. These play a significant role in the Fund's The Fund's Liquidity operations, but are not discussed in this article. The Fund at present holds gold and cur- rencies to a total value of some $15 billion. Amounts Involved Inconvertible currencies as defined by the Fund amount to about 36 per cent of the currency Repurchases of all types have amounted to holdings. Inconvertible currencies have not the equivalent of $5.6 billion since the incep- been in demand, although some of them have tion of the Fund. The bulk was made in U.S. at times been quite "hard" even without the dollars ($3.6 billion) and in gold ($0.8 bil- formal acceptance by the member of the con- lion), the remainder being distributed among vertibility obligations of the Fund Agreement. ten other convertible currencies. An increase in In addition to the economic reasons resulting the Fund's holdings of U.S. dollars to 75 per in a weak demand for inconvertible currencies, cent of the U.S. quota in 1963 made it impossi- there is the further impediment to their use ble for the Fund to accept further U.S. dollars that the Fund requires repurchases with gold in repurchase, pursuant to the repurchase pro- and convertible currencies in respect of any visions of the Articles of Agreement or in drawing. repurchases not pursuant to these provisions. Repurchases in the latter category thus have to Of the Fund's convertible currency holdings be effected in other convertible currencies on March 31,1965, somewhat less than 45 per which are held by the Fund in amounts below cent were in U.S. dollars and over 30 per cent 75 per cent of the quota of the members whose in sterling. The Fund's gold assets may be used currency is considered. However, many mem- for the replenishment of its holdings of curren- bers maintain their exchange reserves in U.S. cies. Since the Fund would be unlikely to sell all dollars and the necessity to acquire these other its gold, its holdings of currencies of members in currencies to make payment to the Fund in a strong balance of payments position—in repurchase of their currency would have meant other words, of currencies that other members a hardship for these members. In many in- might wish to purchase from the Fund—may stances they do not maintain accounts abroad seem rather limited. However, under the pro- in currencies other than U.S. dollars, and often visions of the Fund Agreement the Fund may the currencies acceptable to the Fund were at also replenish its holdings of a member's cur- a premium against the dollar at the time of rency by borrowing either from the member payment. This difficulty led to recent drawings issuing the currency or from some other source.

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©International Monetary Fund. Not for Redistribution Financial Structure of the Fund

When attempting to assess the contribution December 1964, when they fell below $1 the Fund might make toward meeting balance billion following the drawing by the United of payments deficits that might be incurred by Kingdom. members, it is obviously necessary to estimate With the acceptance of formal convertibility these deficits. This is naturally a very difficult by the major European countries, the possi- task, and it is complicated further by the need bility of heavy outflows from these countries to forecast the effect of measures being taken had also to be taken into consideration. For by members to correct deficits, to forecast the purpose of supplementing its resources, the other members' simultaneous surpluses, and to Fund entered into the General Arrangements make assumptions of what other means of to Borrow (GAB), under which the parties, finance would be available. eight industrial member countries and the The Fund's total sales of currency over a central banks of two others, undertook to lend period of almost 18 years have been $9 billion. to the Fund their currencies up to specified The currency most used was the U.S. dollar amounts totaling $6 billion if needed to fore- ($4.6 billion), followed by deutsche mark stall or cope with an impairment of the inter- ($1.5 billion), French francs ($836 million), national monetary system. The loans would and pounds sterling ($622 million). The bal- have a gold guarantee and would earn interest ance was made up of ten other currencies. It at the rate of l]/2 per cent per annum. If a is perhaps best not to take into account the lender later found itself in balance of payments initial years before the Fund had worked out difficulties it could demand repayment in its present policies. However, if only the years foreign exchange or gold. Switzerland, not a since 1956 are taken into consideration, the Fund member, has agreed to participate up to Fund's average sales each year amount to some a maximum of $200 million under the terms of $850 million, or little more than 5 per cent of bilateral agreements with each participant. Up its present assets. If purchases by the United to the present, the GAB have been used once, Kingdom are excluded, the average annual in connection with the purchase of currencies figure is reduced to $500 million, or about 3 equivalent to $1 billion by the United King- per cent of present assets. On the other hand, dom. A total of $405 million has been made stand-by arrangements have been entered into available to the Fund by eight countries. with members for a total amounting to some- what over $9.5 billion, of which about $3.5 The Fund's Balance Sheet billion has been drawn. One member, the United Kingdom, accounts for more than one The Fund's balance sheet, like many others, third of the total purchases and an even reveals comparatively little, and does not reflect higher proportion of the stand-by arrange- the aforementioned aspects of liquidity. The ments. The Fund's commitments to make cur- amounts made available by the Fund under rencies available under stand-by arrangements the stand-by arrangements and those available were continuously in excess of $ 1 billion—most to the Fund under the GAB are not incor- of the time over $1.5 billion and at times porated in the balance sheet. They are ap- reaching $2 billion—from late in 1961 until pended to the balance sheet in a separate

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©International Monetary Fund. Not for Redistribution Finance and Development statement. Nor are convertible and inconverti- tions tables in the Fund's publication Interna- ble currencies divided, either in the balance tional Financial Statistics, under the heading sheet or in the appended statement covering Net Drawings. currencies and securities held by the Fund. Some member countries show their Fund With the Fund's financial statement, which is position in one way, and others in different published quarterly, a summary of transactions ways, as they are entitled to do. The precise sets forth the purchases, repurchases, move- counterpart of the Fund's accounting may be ments of gold, and utilization of the GAB dur- found in the balance sheet of a central bank ing the period. Outstanding drawings are not where the member's quota is included among recorded specifically in the Fund's accounting the assets and the Fund's accounts maintained records, but statistical information is provided in the member's currency appear among the on a monthly basis in the Exchange Transac- liabilities.

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©International Monetary Fund. Not for Redistribution BALANCE SHEET as at December 31, 1964 Values expressed in U.S. dollars on the basis of established parities (See Note 1)

ASSETS GOLD ACCOUNT Gold with depositories $ 2,179,348,202 (62,267,091.487 fine ounces at $35 per ounce) Investments (See Note 2) $822,651,000 U.S. Government securi- ties maturing within 12 months, at cost $ 799,989,004 Funds awaiting investment 2,507 799,991,511 $ 2,979,339,713 CURRENCIES AND SECURITIES With depositories Currencies $2,732,361,794 Securities 9,863.282,468 $12,595,644,262 (Nonnegotiable, noninterest- bearing demand obligations payable at face value by members in their currencies) Add: Currency adjustment receivable 2,357,843 12,598,002,105 (In accordance with Article IV, Section 8) SUBSCRIPTION TO CAPITAL—RECEIVABLE Balance not due 926,833,224 (members whose par values have not yet been established) WITHDRAWING MEMBER'S CURRENCY 9,999,861 (redeemable by Cuba in gold, or convertible currencies acceptable to the Fund, in five equal annual installments commencing July 1, 1964) OTHER ASSETS (See Note 3) 16,454,955 TOTAL ASSETS $16,530,629,858

CAPITAL, RESERVES, AND LIABILITIES CAPITAL Authorized subscriptions of members $15,849,500,000 RESERVES Special reserve $137,795,895 General reserve 136,633.575 274,429,470 INDEBTEDNESS TO PARTICIPANTS UNDER GENERAL ARRANGEMENTS TO BORROW 405,000,000 PROVISION FOR POTENTIAL REFUNDS OF STAND-BY CHARGES (See Note 4) 650,243 OTHER LIABILITIES (See Note 3) 1,050,145 TOTAL CAPITAL, RESERVES, AND LIABILITIES. . . $16,530,629,858

NOTES : 1. With the exception of the following currencies which, for bookkeeping purposes, are computed provisionally at the follow- ing rates per U.S. dollar: Argentine peso 83.0000 Colombian peso 9.00000 Paraguayan guarani 122.000 Bolivian peso 11.8750 Indonesian rupiah 315.000 Peruvian sol 26.8150 Brazilian cruzeiro 470.000 Korean won 255.000 Vietnamese piastre 35.0000 Chilean escudo 2.70000 Mali franc 246.853 Yugoslav dinar 750.000 2. Made with the proceeds of the sale of 22,856,900.312 fine ounces of gold. Upon termination of the investment, the same quantity of gold can be reacquired. 3. The assets and liabilities of the Staff Retirement Fund are not included, but are reflected in a separate Balance Sheet for that fund. 4. A stand-by charge has, under certain circumstances, to be credited against the service charge for a drawing under the stand-by arrangement: the maximum amount on December 31, 1964 was $650,243. A portion of the stand-by charge is refundable to a member if the arrangement is canceled: the maximum amount on December 31, 1964 was $191,339.

©International Monetary Fund. Not for Redistribution CONSOLIDATION OF STATEMENTS ACCOMPANYING BALANCE SHEET 1 (In millions of units)

Payments on Subscriptions Currencies and Securities with Depositories Total Gold Currency (In member's Exchange US dollar Percentage Member Quota (US dollar equivalent) currency) rate2 equivalent of quota

Afghanistan 22.5 5.6 16.9 1,265.5 45.0000 28.1 125.0 Algeria 60 15.0 — Argentina 280 70.0 210.0 33,199.— 8 83.0000— * 400.— 0 142.—9 Australia 400 58.4 341.6 133.9 224.000t 300.0 75.0 Austria 75 11.2 63.8 68.0 26.0000 2.6 3.5 Belgium 337.5 84.4 253.1 8,328.6 50.0000 166.5 49.4 Bolivia 22.5 5.6 16.9 264.4 11.8750* 22.2 99.0 Brazil 280 70.0 210.0 164,008.0 470.000* 348.9 124.6 Burma 30 4.3 25.7 107.1 21.0000t 22.5 75.0 Burundi 11.25 0.1 — — — —• — Uganda 25 2.3 , United Arab — — — — Republic 120 24.5 95.5 79.6 287.156t 228.7 190.6 United Kingdom 1,950 398.8 1,551.2 880.7 280.000t 2,465.9 126.5 United States 4,125 1,031.2 3,093.8 3,355.5 — 3,355.5 81.3 Upper Volta 7.5 0.8 — — — — — Uruguay 30 7.5 22.5 277.5 7.4000 37.5 125.0 Venezuela 150 37.5 112.5 376.8 3.3500 112.5 75.0 Viet-Nam 22.5 5.6 7.5 262.5 35.0000* 7.5 — Yugoslavia 120 22.9 97.1 129,158.2 750.000* 172.2 143.5

1 In this table, the first ten and the last nine member countries, in alphabetical order, are given as a sample. 2 Parity rates, except for those marked *, which are provisional rates for bookkeeping purposes. Rates marked f represent U.S. cents per currency unit; all other rates represent currency units per U.S. dollar.

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©International Monetary Fund. Not for Redistribution