Transactions involving the Fund’s General Account are overwhelmingly currency transactions—one member purchases another member’s currency against its own currency or a member repurchases its own currency with another member’s currency which is acceptable to the Fund. The net effect of members’ purchases and repurchases is a change in the composition of the Fund’s currency assets, without a change in the total of those assets. However, the composition of the Fund’s currency assets is of great significance in judging the liquidity of the Fund—namely, its ability to finance purchases by members in accordance with agreed policies without straining its currency resources. It is particularly important that the Fund should not need to use in its transactions the currencies of members which have a relatively weak balance of payments and reserves position.
The Fund can increase its total currency holdings by selling gold or special drawing rights (SDRs) held by the General Account to a member for its currency, or by borrowing the currency. Such replenishment operations increase the Fund’s holdings of usable currency which it needs to finance transactions by other members. Up to May 1976 the Fund sold over SDR 3.9 billion of gold, of which the equivalent of almost SDR 1.5 billion was sold to the United States in replenishment of its holdings of U.S. dollars.
However, it has not always seemed appropriate for the Fund to replenish its holdings of currencies by the sale of gold, thereby causing a permanent change in the composition of its assets in favor of currency. An alternative to selling gold is borrowing. The Fund can, with a member’s agreement, borrow its currency—either from the member itself or from some other source. Unlike a sale of gold, borrowing by the Fund increases the Fund’s total resources, albeit on a temporary basis.
Strictly, the Fund’s need for a particular currency to finance another member’s balance of payments deficit should only be “temporary,” as the use of the Fund’s resources is only temporary; the composition of the Fund’s currency holdings should therefore revolve. However, balance of payments surpluses and deficits have not been symmetrically distributed among the Fund’s membership, and deficits and surpluses have not necessarily been “temporary,” and have not necessarily reflected changes in the Fund’s holdings of usable and nonusable currencies. In fact, there is little correlation between the size of a member’s balance of payments position, its reserves, and its quota. Furthermore, not all strong currencies have been used in Fund transactions. Permanent replenishments of particular currencies through the sale of gold have to some extent compensated for these asymmetries.
In the past, replenishment by borrowing was made to meet specific and relatively large-scale drawings by a member. This would include its need for a specific currency which could not be acquired by converting another currency drawn from the Fund, and would also meet the considerably increased use of the Fund’s currency holdings expected as a result of a change in the Fund’s policy on the use of its resources.
There have been two periods in the Fund’s history when the Fund has arranged substantial lines of credit to supplement its own resources. The first was at the time of the widespread adoption of currency convertibility in 1961 which led to the establishment- of the General Arrangements to Borrow (GAB) in 1962. The second set of borrowing agreements was initiated early in 1974, following the sharp increase in the international prices of petroleum and petroleum-related products which transformed the structure of international payments. In the light of that development, the Fund decided early in 1974 to establish a temporary “facility to assist members in payments difficulties resulting from the initial impact of increased costs of imports of petroleum and petroleum products.” This facility (the “oil facility”) would be financed by the Fund borrowing from those countries in strong balance of payments and reserves positions, in particular from the major oil exporting countries.
The GAB were negotiated between the Fund and ten of the main industrialized countries that were members of the Fund, and contained the terms and conditions on which the Fund would borrow from them (see Table 1). Switzerland, which is not a member of the Fund, became associated with the GAB in June 1964.
|SDR equivalents and per cent of quota|
|Participants||Participants’ currency||Oct. 1962||Per cent of quota||Oct. 1966||Per cent of quota||Oct. 1970||Per cent of quota||Oct. 1975||Per cent of quota|
January 24, 1963.
January 27, 1964.
January 24, 1963.
January 27, 1964.
Table 1 shows the amounts up to which the Fund can borrow through the GAB. The amounts are expressed as percentages of the quotas of the participants at the time the GAB came into effect and at subsequent renewals. In terms of quotas, credits available under the GAB are now only half as large as at the time when they were originally negotiated. The amount of resources that the Swiss Confederation would be prepared to make available to participants in the GAB is Sw F 865 million (about SDR 300 million).
Purpose of the GAB
The purpose of the GAB is to supplement the Fund’s resources by financing, for the benefit of the participants of the GAB, exchange transactions or stand-by arrangements that are considered necessary in order to forestall or cope with an impairment of the international monetary system. Convertibility of the major currencies in 1961 was expected to lead to increased capital movements and possibly greater demands on the Fund’s resources. However, some of the industrial countries in strong external positions had relatively small Fund quotas, and the Fund’s holdings of their currency were low, while the balance of payments positions of the two reserve center countries—the United States and the United Kingdom—were relatively weak and they were also relatively more vulnerable to capital outflows. Consequently, the GAB were envisaged primarily as a source of borrowing by the Fund to finance purchases by the two major reserve centers, but any of the participants could qualify in principle for financing under the terms of the Arrangements.
However, the GAB are not a line of credit which the Fund can draw on automatically; it represents a set of conditional commitments to lend to the Fund and the participants can refuse to do so. As a consequence, a rather complicated consultation procedure has been established when the Managing Director of the Fund considers that it would be appropriate to borrow under the GAB. These consultation procedures have been institutionalized in the form of the Group of Ten, which, in the course of time, has taken on a wider consultative role in connection with Fund activities.
The GAB became effective in 1962 for a period of four years, and have been renewed three times. The first renewal was for four years and the two successive renewals were for five years. The last renewal became effective on October 24, 1975. The Swiss authorities decided in October 1975 to extend the period of the agreement to October 1980, the terminal date of the third renewal of the GAB.
On the occasion of the last renewal of the GAB, two important modifications to the original terms and conditions were negotiated. The first permitted the Fund to pay interest and charges on the amounts borrowed in SDRs in the participants’ own currency and in other currencies that are actually convertible, as well as in gold, and also allowed the Fund to repay in SDRs as well as in other assets, again including gold. The other important modification was that the Fund should pay interest—at a rate not lower than 4 per cent per annum—to the participants on the amounts borrowed at the same rate as the Fund received in charges on the drawings for which the borrowing was undertaken. Formerly, the Fund paid interest at a rate of IV2 per cent per annum. In addition, the Fund shall continue to pay a transfer charge of V2 of 1 per cent on the amount borrowed. As a result of the modification in the interest rate, the Fund would receive no net income from a transaction for which the Fund borrowed under the GAB and, with regard to any gold tranche purchases for which it borrowed, it could incur a higher loss than might otherwise be the case.
The Fund has borrowed under the GAB on a number of occasions—to finance drawings by the United Kingdom in the mid- and late 1960s, and also to finance two drawings by France in 1968 and in the fiscal year 1969/70. Total borrowings under the GAB between 1964 and 1970 amounted to the equivalent of SDR 2,155 million. All indebtedness under the GAB was eliminated in 1971, and up to May 1976 the Fund had not borrowed further amounts under the GAB. As can be seen from Table 2, however, on each occasion that the Fund borrowed under the GAB it also decided to sell gold and use some of its own currency holdings to finance the drawing. The Fund has not borrowed from either the United States or the United Kingdom under the GAB but has called on all eight other participants.
|From gold sales||From Fund holdings|
|Amount||As per cent|
|Amount||As per cent|
|Amount||As per cent|
The arrangements increase liquidity
The GAB have added to the Fund’s liquidity in two important ways. First, they have enabled the Fund to preserve its stock of usable currencies better, thereby permitting it to finance more easily drawings by countries that are not members. Second, there have been occasions when activation of the GAB has helped the Fund to preserve its gold stock more than it would otherwise have done—such as when the participant needed specific currencies to settle swap obligations rather than, as would be more usual, to convert the currencies drawn from the Fund into a reserve currency. If the Fund had not been able to borrow the specific currency needed, it might have had to sell gold to replenish its holdings of the currency in question. In 1966, for example, the Fund negotiated a bilateral loan with Italy for the specific purpose of financing a drawing by the United States in Italian lire. This bilateral loan was negotiated on virtually the same terms and conditions as the GAB and was for an amount equivalent to SDR 250 million.
The claims of participants on the Fund which resulted from Fund borrowing under the GAB have proven to be prime reserve assets for the creditors and have been fully usable in times of balance of payments need. Indeed, while the terms and conditions of the GAB provide that the Fund shall repay the lender to the Fund when the Fund itself is repaid, the creditors have on a number of occasions either requested the Fund to encash or liquidate their claims, or to transfer them in order to help meet balance of payments needs. Such claims on the Fund have a high degree of liquidity because the Fund is prepared to give the overwhelming benefit of any doubt to a member representing that it has a balance of payments need for encashment.
Indeed, the Fund consented to requests by France in 1968 and the Deutsche Bundesbank in 1969 for the transfers of their claims on the Fund and also permitted Italy in 1970 to transfer to Japan its claim arising from the bilateral loan agreement with the Fund, which in turn was repaid in 1971. Furthermore, the Fund also repaid a considerable amount of indebtedness to the participants in connection with gold tranche purchases by some of them—examples are Canada in 1968, the Federal Republic of Germany and Belgium in 1969, and Italy in 1970. The Fund also repaid indebtedness when its holdings of currencies permitted, namely to Sweden in March 1971 and to various other participants in August 1971.
The GAB also provide that when the Fund receives repayment for purchases made under the Arrangements, the Fund must repay the participants from which it has borrowed not later than five years after a borrowing. Indeed, there is an incentive for the Fund to repay the creditor when the Fund itself is repaid in view of the interest cost of such borrowing. The Fund did, in fact, repay GAB claims in connection with repurchases by the United Kingdom and by France on a number of occasions. The claims on the Fund arising from Fund borrowing have proven to be highly liquid and readily mobilizable at times of balance of payments need by the participants.
Borrowing for the oil facility
At its Rome meeting in January 1974, the Committee of Twenty (set up in 1972 to study the reform of the international monetary system and related issues) endorsed a proposal of the Managing Director of the Fund that the Fund should urgently explore the establishment of a “temporary supplementary facility.” It was recognized by the Committee that such a facility would, “particularly for non-oil producing developing countries, be only a partial measure, in view of the nature and magnitude of the balance of payments problems created” by the abrupt and significant changes in prospect for the world balance of payments structure following the rise in oil prices. In June 1974, the Fund established a facility to assist members in payments difficulties resulting from the initial impact of increased costs of imports of petroleum and petroleum products, the so-called oil facility. Under that facility, the Fund would make resources available up to December 31, 1975 (later extended to March 1976), which would be supplementary to any assistance that members could obtain under other policies on the use of the Fund’s resources.
The Fund decided to establish a separate lending facility within the General Account since the adjustment many members needed to make because of their oil-related payments deficits was different both in terms of size and urgency from the deficit situations which normally faced individual members. Furthermore, for many countries the oil-related deficits were additional to their need to handle other problems of adjustment.
It was decided to finance transactions under the facility out of resources borrowed specifically for the purpose, rather than from the Fund’s own currency holdings. This decision was taken on a number of grounds. While the Fund’s liquidity was generally regarded as comparatively comfortable in early 1974, due mainly to the relatively low level of drawings in the preceding few years, it was thought that in view of the widespread and large-scale deficits expected in international payments, especially by the developing countries, demands on the Fund’s existing resources would rise rapidly in the course of 1974 and 1975. In borrowing separately for the oil facility the Fund would be able to maintain its stock of usable currencies for use in its regular transactions. As noted earlier, the oil facility was also to provide resources which were additional to those available under the regular facilities of the Fund.
There were, however, two further considerations. First, the balance of payments surpluses following the rise in oil prices were heavily concentrated in the major oil exporting countries, whose Fund quotas (and, hence, Fund’s holdings of currency) were comparatively small. The only practical way over the short run for the Fund to tap the resources of the new surplus countries was to borrow from them. Moreover, borrowing would need to take place at market-related interest rates if anything like the amounts required to cover members’ needs were to be met; borrowing would thereby make an important contribution to the recycling process, not only by effectively transferring funds from the surplus to the deficit countries but also converting short-term deposits into medium-term loans through the intermediation of the Fund. Second, a number of important features of the oil facility were different from the Fund’s regular facilities—for instance, charges under the oil facility were to be higher and the maximum period for which each drawing could be outstanding longer than under the Fund’s regular facilities—and borrowing to finance the facility fitted well into the concept and terms of this special facility.
The oil facility was established for two years. However, the terms and conditions both for purchases under the facility and in the borrowing arranged for it differed between 1974 and 1975. The major differerence between the borrowing arrangements for the oil facility for 1974 and 1975 is in the rate of interest paid by the Fund on its borrowing—7 per cent per annum for 1974 and 7¼ per cent per annum for 1975. Charges on drawings made under the 1974 facility were set to average 7 per cent—so that the Fund made no net income other than from the service charge on the drawing—and 7¾ per cent for the 1975 facility. However, in connection with the 1975 facility the Fund established an interest subsidy account, subscribed by voluntary contributions from members, so that the cost of the drawings under the facility could be subsidized for the most seriously affected members, which were the poorest members. It was hoped that sufficient contributions would be made which, augmented by the income from the invested contributions, would be sufficient to subsidize the charges on drawings by about 5 per cent.
Unlike the GAB, the loans for the oil facility were actual commitments to lend to the Fund up to an agreed amount for the purpose of financing the facility’s transactions. In addition, the Fund could borrow under the agreements in order to repay another creditor which had made a loan to the Fund for the oil facility and had requested repayment because it had a balance of payments need. Calls were made on the loans up to the agreed limits as and when the Fund needed resources to finance specific transactions with a member under the oil facility, but the Fund did not hold borrowed currencies in its accounts.
Some of the main features of the loan agreements are:
• The loans are denominated in SDRs valued on the basket method of valuation currently in effect. However, if the Fund decides to make a change in the way in which the SDR value is determined, then the lender shall have the option to continue to have the loan valued in the SDR that was in effect before the change was made, and the Fund shall have the option to repay the loans.
• The loan would be outstanding for between three and seven years with repayments to be made in eight equal semiannual installments starting after three years. Earlier repayments are provided for under certain circumstances—for instance, the Fund shall repay its creditor when a member makes a repurchase with respect to a drawing that was made from the Fund under the oil facility. A creditor may request repayment of all or part of an outstanding loan on a representation that it has a balance of payments need for repayment; in these circumstances the Fund shall give the overwhelming benefit of any doubt to the representation.
• The loan claims on the Fund are transferable, provided prior consent of the Fund has been obtained and that the transfer is made on terms and conditions acceptable to the Fund.
As with claims arising from borrowing under the GAB, the loan claims resulting from borrowing for the oil facility are highly liquid and are regarded as a primary reserve asset for monetary authorities as they can be quickly mobilized at times of balance of payments need. Furthermore, loans to the Fund are regarded as credit for the purpose of calculating reserve positions in the Fund and for determining the first or second largest amounts of credit extended to the Fund in connection with the appointment of an Executive Director to the Fund’s Board.
Between August 1974 and March 31, 1976 the Fund concluded borrowing agreements with 17 lenders for a total amount equivalent to SDR 6.9 billion for the purpose of financing transactions under the oil facility. Agreements for the equivalent of almost SDR 3.05 billion were concluded in connection with the oil facility for 1974, of which an unused portion, equivalent to SDR 464 million, was made available for use for the 1975 facility. Commitments to lend to the Fund for the 1975 oil facility totaled almost SDR 3.9 billion. The list of lenders, the amounts committed, the currencies in which the loans were to be made, and the quotas of those lenders which are members are shown in Table 3.
|Abu Dhabi||15||100.0||U.S. dollars|
|Austrian National Bank||270||100.0||U.S. dollars|
|National Bank of Belgium||650||200.0||Belgian francs or|
|Deutsche Bundesbank||1,600||600.0||U.S. dollars|
|Bank Markazi of Iran||192||990.0||Iranian rials|
|Central Bank of Kuwait||65||685.0||Kuwaiti dinars|
|The Netherlands||700||350.0||U.S. dollars|
|Norges Bank||240||100.0||Norwegian kroner|
|Central Bank of Oman||7||20.5||U.S. dollars|
|Saudi Arabian Monetary Agency||134||2,250.0||Saudi Arabian riyals|
|Sveriges Riksbank||325||50.0||U.S. dollars|
|Swiss National Bank||*||100.0||U.S. dollars|
|Central Bank of Trinidad and Tobago||63||10.0||U.S. dollars|
|Central Bank of Venezuela||330||650.0||Venezuelan bolívares|
As can be seen from Table 3, while the bulk of the loans was made by some of the major oil exporting countries, a number of industrial countries in comparatively strong payments and reserve positions also made substantial loans for the oil facility. However, the Fund borrowed relatively more from members with comparatively small quotas. While the Fund borrowed a number of different currencies, some of which it had never used in its transactions, in all cases the purchasing member requested conversion into U.S. dollars of the currencies sold by the Fund. As a result of these loans, the total of the Fund’s assets increased from SDR 29.2 billion to SDR 36.1 billion, excluding the negotiated commitments under the GAB.
The first drawings under the facility were made in September 1974 and the last drawings in May 1976, which fully utilized the amounts that had been agreed under the borrowing agreements. The ending of the oil facility in May 1976 brought to a close the Fund’s borrowing program arranged in connection with that facility.
While borrowing in connection with the oil facility is essentially self-liquidating, the liability to repay the loans rests with the Fund. However, when members make repurchases with respect to drawings under the oil facility, the Fund shall repay the loans which it borrowed to finance the original transaction. Furthermore, to the maximum extent possible, the currency used in such repurchases should be the same as the currency the Fund would use in repayment of its debts, thereby leaving unchanged a creditor member’s position in the Fund. This would parallel the situation which prevailed in financing purchases under the facility: the Fund immediately passed to the drawing member the currency borrowed by the Fund, so that the structure and amount of the Fund’s currency holdings were not affected by the transactions under the oil facility.
The two major borrowing episodes—the large-scale resort to activation of the GAB in the mid- and late 1960s and borrowing in connection with the operation of the oil facility between September 1974 and May 1976—underscore the advantages to the Fund of being able to call on countries in relatively strong balance of payments and reserves positions to provide it with urgently and temporarily needed resources to finance other members’ needs. Unlike quota increases, borrowing does not lead to changes in members’ relative positions in the Fund with the consequential changes in voting power, increased drawing rights, and relative shares in any SDR allocations. Unlike replenishment through the sale of gold or SDRs, borrowing does not cause a permanent shift in the composition of the Fund’s assets, with the consequent long-run reduction in liquidity which follows from such sales.
The Fund’s borrowing arrangements are temporary and the Fund’s indebtedness is liquidated as members restore their positions through repurchases and as there are improvements in their balance of payments positions. In the interim, however, the liabilities arising from the borrowing are subject to repayment at any time the creditor makes a representation to the Fund that it has a balance of payments need. Along with members’ reserve positions in the Fund, the borrowing claims are the Fund’s most immediate liquid liabilities. Experience under the GAB suggests that liquidation of such liabilities can be managed without endangering the Fund’s ability to continue to finance members’ balance of payments needs, because of the changing distribution of payments surpluses and deficits and the ability of the Fund to tap the resources of the surplus countries to meet the needs of the deficit countries. It is in the continued exercise of this ability that the Fund, with the cooperation of members, can play a significant role in the balanced functioning of the international monetary system.