chapter 14 Special Drawing Account
- International Monetary Fund
- Published Date:
- October 1985
The amendment of the Articles that became effective on July 28, 1969 conferred a new function on the Fund, established a new facility in the Fund through which this function is performed, and gave members the option to participate in the facility. The new function is the allocation and cancellation of a new reserve asset, special drawing rights (SDRs), in order to meet the long-term global need for a supplement to existing reserve assets,1 and the new facility through which the Fund performs this function is the Special Drawing Account.
In the studies that preceded the amendment, four legal techniques were considered by which the Fund could increase the liquidity unconditionally available to members.2 The first was some development in the Fund’s policies and practices that would not require amendment of the Articles.3 The advantage of this technique was the very fact that it did not bring into play the complicated procedure of amendment. The disadvantage was that the flexibility that could be employed in finding a solution was restricted to what was possible under the original Articles. The desire for greater flexibility triumphed over the traditional reluctance to resort to amendment. A second technique was an agreement between the Fund and certain members under which the Fund would have administered a scheme for the benefit of the other contracting parties.4 This technique ceased to be a practical possibility once it became apparent that any new reserve asset would be made available to all members. The effective choice, therefore, was narrowed down to a choice between the third and fourth techniques, the amendment of the Articles and the creation of a new international institution as an affiliate of the Fund.
There is no legal definition of “affiliate” in international law and organization. The word implies a close connection with another and, it may be presumed, dominant organization, but there are various ways in which that relationship can be arranged. The alternative of an affiliate was much in the minds of those who were working on the creation of a new reserve asset because the World Bank had chosen the technique of an affiliate twice in drafting legal instruments for the performance of new tasks. Moreover, certain organizational features of the Bank’s two affiliates were found attractive enough to be incorporated in the provisions that govern special drawing rights, even though finally the solution of an affiliate was not chosen.
The first of the two affiliates of the World Bank, the International Finance Corporation (ifc), came into being on July 20, 1956, in order to supplement the activities of the Bank by collaborating with private investors in the promotion of private enterprise, without governmental guarantees, when that would contribute to development in circumstances in which sufficient private capital was not available on reasonable terms. The ifc is an entity separate from the Bank, with a legal personality of its own. Its funds are kept separate from those of the Bank, and neither institution is liable for the acts or obligations of the other.
Membership in the ifc is open to members of the World Bank. The governors and alternate governors of the Bank are ex officio governors and alternate governors of the ifc if the country that appoints them is a member of both institutions. An executive director of the Bank is ex officio a director of the ifc if he was appointed by a country that is a member of both institutions or if he was elected with the votes of at least one member of the Bank that is also a member of the ifc. A director of the ifc who is an appointed executive director of the Bank is entitled to cast the number of votes that the member that appointed him is entitled to cast in the ifc. A director of the ifc who is an elected executive director of the Bank is entitled to cast the number of votes that the members of the ifc that elected him in the Bank are entitled to cast in the ifc The President of the Bank is ex officio the Chairman of the Board of Directors of the ifc. The President of the ifc, who acts under the direction of the Board of Directors and the general supervision of the Chairman, is appointed by the Board of Directors on the Chairman’s recommendation.
The International Development Association (ida), the second of the two affiliates, came into being on September 24, 1960 in order to provide financing to meet the needs of members for development on terms that are more flexible and bear less heavily on the balance of payments than those of conventional loans. The ida also is intended to supplement the activities of the Bank. The legal structure of the ida and its relationship with the Bank resemble those of the ifc, but there are certain differences that are designed to create a closer relationship of the ida with the Bank. For example, whereas the President of the ifc acts under the supervision of the Chairman, the President of the ida is also its Chairman. Therefore, the President of the Bank, who has the office of Chairman in the ifc, has both offices in the ida.5 There are also somewhat closer legal ties between the ida and the Bank than between the ifc and the Bank in connection with the organizational structure of the ida. The closer relationship of the ida to the Bank is attributable in large part to the greater similarity in the tasks of the two organizations.
The legal structure of the Special Drawing Account resembles the ifc and the ida in a number of ways. For example, the governors and the executive directors appointed or elected in accordance with the original provisions of the Articles serve the Special Drawing Account as well.6 They do not form separate organs for the purposes of the Special Drawing Account, however, whereas in the ifc and the ida they constitute organs separate from those of the Bank. Again, for the purposes of the Special Drawing Account, governors or executive directors cast only the number of votes allotted to those members that appointed or elected them that are participants in the Special Drawing Account,7 which is the system that prevails in the ifc and the ida in relation to the governors and executive directors of the Bank. In view of these and other similarities, it is not obvious why the Fund did not adopt the solution of an affiliate. The Fund’s Annual Reports for 1965 and 1966 8 refer to the creation of a new institution as one course that might be followed, and the Report for the next year shows that this solution was contemplated as late as June 1967 when it discussed “a scheme for deliberate reserve creation in the form of drawing rights which would be operated in, or in close association with, the Fund.” 9 Between July and September 1967 the choice was made, so that the Outline of a Facility Based on Special Drawing Rights in the Fund that was approved by the Board of Governors at its meeting in Rio de Janeiro in September could declare unequivocally that the facility “is to be established within the framework of the Fund and, therefore, by an Amendment of the Fund’s Articles.” Although the problem of the legal structure of the new facility arose many times before it was settled by the Outline, there was no systematic or sustained discussion of it in the Fund, in the Group of Ten, or in the four joint sessions of executive directors of the Fund and deputies of the Ministers and Governors of Central Banks of the Group of Ten. The problem was resolved by a general and largely tacit understanding that amendment was to be preferred. Because of the way in which this understanding was reached, the records of the long debates include no agreed reasons that explain why the choice was made.
The choice in favor of amendment and against an affiliate was not made because it was the more effective technique for the creation of a new reserve asset. The negotiators realized at an early stage that the substance of the scheme that was being discussed would be the same whatever technique might be chosen. At least eight reasons may be suggested for the decision to amend the Articles and reject the establishment of an affiliate. It must not be assumed, however, that each negotiator accepted every one of these reasons.
(1) It is apt to begin by recalling the wisdom of William of Ockham: entia non sunt multiplicanda praeter necessitatem. There was no disposition to create another international organization unless there was a balance of legal, economic, or political advantage in favor of it, and this could not be demonstrated.10
(2) At one stage in the debate the view was advanced by some that, whatever the full plan that might emerge, one part of it should consist of the creation of reserve units for a limited group of members of the Fund. The advocates of this idea thought that it should be part of the solution because some countries claimed that they bore particular responsibilities in the international monetary system. When this view was advanced in July 1966, it was suggested that the creation of this asset “should take place in close association with the I. M. F.” 11 in contrast to the formula “in, or in close association with, the Fund.” It is not surprising that some technique other than amendment of the Articles would be thought appropriate for a plan that was limited to less than the full membership of the Fund. Once it was concluded that any plan should be unitary and open to all members of the Fund, one argument in favor of some technique other than amendment disappeared.
(3) One of the most fundamental and most difficult issues that had to be settled was the nature of the new resource. At one extreme was the view that its characteristics should leave no doubt that it was a reserve asset that members could use as freely as the gold or currencies in their reserves. This view was often expressed in the proposal that the new reserve asset should be a “unit.” At the other extreme was the view that safeguards and limitations were necessary, for example in order to avoid the danger that the issuance of the new resource would encourage the prolongation of deficits in balances of payments. This view favored a solution that could be subsumed under the heading of “credit.” Its supporters looked with approval at the traditional purchases of exchange that members made from the Fund and had to reverse within a moderate period.
After prolonged debate, it was agreed that the problem should be solved not by any a priori concept but by agreeing on the characteristics with which the new resource should be endowed. The result was a compromise, although one in which the agreed characteristics still gave the new resource the quality of a reserve asset if members wished to regard it in that way.12
Terminology did not cease to be important and it was part of the compromise.13 The new supplements to reserve assets are called special drawing rights in deference to the view that they should resemble credit. A use of them does not give rise to an obligation to reverse that use in the way that purchases from the General Account must be reversed. There is, however, an obligation on a participant to reconstitute its holdings of special drawing rights so that it maintains over time an average balance of 30 per cent of the allocations that it has received,14 but even this limited obligation may be altered or abrogated without the need to amend the Articles.15 Even though the obligation to reconstitute is related only distantly to the obligation to reverse purchases from the General Account, the term “special drawing rights” was helpful because there was an echo in it of the transactions conducted through what is now called the General Account. The language of the original Articles refers consistently to these transactions in terms of purchase and sale, and the words “drawings” or “drawing rights” are never employed. Nevertheless, these terms, although not terms of art, have become established in practice, perhaps because they imply that there are limits on the amounts of exchange that a member can purchase from the Fund.16 To convey the idea that transactions in the new rights belong to the same family as the transactions of the General Account, it was decided to employ, and for the first time give legal recognition to, the term “drawing rights.” To distinguish them from the original drawing rights, however, and to emphasize that they were new and different, it was decided to call them special drawing rights. This compromise almost inevitably implied that special drawing rights would coexist with the original drawing rights in the same institution under an amended charter that would provide for coexistence.
(4) The purposes of the Fund are set out in Article I. They are impressive in their breadth, and no change in them was made in order to accommodate the new facility. The conclusion that no change was necessary was influenced by the difficulties of amending the purposes set out in Article I. It was easier to include a principle in Article XXIV, Section 1 (a), that the Fund must take its decisions on the allocation and cancellation of special drawing rights “in such manner as will promote the attainment of its purposes.” If the allocation and cancellation of special drawing rights were to be governed by the purposes in Article I, the natural place for the facility through which they would be allocated or canceled was the Fund and not some other international organization, which, if created, would have purposes that overlapped those of the Fund.
(5) It is not impossible for an international organization to operate with two sets of resources that are kept distinct and used for different objectives. The Fund for Special Operations established in the Inter-American Development Bank is an example of resources held by an institution that are segregated from its other resources.17 Therefore, if it had been decided that special drawing rights should be backed by special resources, it would have been possible to place those resources in the Fund and keep them separate from the resources held in the General Account. If there are to be separate resources for a new international activity, it is at least arguable, however, that they should be placed in a new international organization. This has been the experience with the ifc and the ida, which have resources of their own.
Special drawing rights are not backed by any resources of gold or currency held by the Fund. Participants receive allocations of special drawing rights but do not deposit any counterpart in the Special Drawing Account. On a transfer of special drawing rights, the quid pro quo for them is provided to the transferor by the transferee and not by the Special Drawing Account.18 The only time that the Account can hold resources, and then briefly, will be when it is helping to carry out the terms of a settlement agreement with a country that terminates its participation in the Special Drawing Account19 or when it is carrying out the liquidation of the facility.20 In practice, therefore, the Account may never hold resources. Special drawing rights are backed by the legal obligations of participants to receive them in return for currency 21 and to provide the necessary means of settlement on the termination of a country’s participation or on the liquidation of the facility. This system made it unnecessary to decide that the facility should take the form of an affiliate for the purpose of keeping resources distinct from those of the Fund.
(6) Most of the liquidity that the Fund provides through the General Account is conditional,22 and the Fund can increase and has increased the volume of conditional liquidity that it can supply by enlarging the quotas of members.23 Both conditional and unconditional liquidity are needed, and although no precise optimum relationship between the global need for them has been demonstrated, there was an intuition that there may be such a relationship. In any event, it was accepted that the need for both kinds would grow over time. With this in mind, the Executive Directors, in their Annual Report for 1965, expressed this view:
It can reasonably be argued that a matter which is of concern to all countries should be handled in an institution that has been organized as an instrument of financial cooperation on a worldwide basis. This would, moreover, be one way of ensuring coordination between the function of providing individual countries with short-to-medium term balance of payments assistance on a conditional basis and any new function of influencing the aggregate supply of world reserves or unconditional liquidity.24
This view prevailed, and although once again it would have been possible to ensure coordination through an affiliate, the more obvious technique was coordination in a single institution. The idea of coordination affected the provisions dealing with the basic periods for which the Fund takes decisions on the allocation or cancellation of special drawing rights. These periods are five years in duration unless the Fund chooses another period.25 Five years is also the period within which the Fund must make a review of the quotas of all members in order to propose any adjustment of them that it deems appropriate.26 The Fund is not required to decide on the allocation or cancellation of special drawing rights at the same time that it decides on the general adjustment of quotas, but the drafters of the new provisions intended to make it possible for the Fund to take contemporaneous decisions.
(7) A number of features of the Special Drawing Account have been derived from the experience of the Fund with its original transactions and operations, and this experience is a continuing process. For example, the Fund has developed, and continues to adapt, a policy, based on economic and financial considerations, that enables the Fund to advise members on the currencies that it is appropriate for them to request when making purchases through the General Account.27 This policy has influenced the general principles that govern the Fund’s designation of the transferees of special drawing rights when participants wish to transfer them, and the Fund is empowered to supplement these principles from time to time.28
It might have been more difficult to ensure a desirable degree of harmony between the policy on the selection of currencies for sale through the General Account and the principles for the designation of transferees of special drawing rights if the function of ensuring harmony had been given to two institutions.
(8) A consideration that might have carried much weight in favor of an affiliate involved the process by which decisions were to be taken on the allocation or cancellation of special drawing rights. An outstanding phenomenon since the Bretton Woods Conference had been the growth in the economic and financial strength of the original members of the European Economic Community (eec). When the amendment of the Fund’s Articles was being negotiated, these members had approximately 16 per cent of the voting power of all members in the Fund, compared with the approximately 22 per cent of the United States. The problem was to assure the members of the eec that they would have an appropriate voice in the affairs of the Special Drawing Account. Most decisions of the Fund are taken by a majority of the votes cast, but a few are taken by special majorities, such as 75 per cent or 80 per cent of total voting power. In order that the eec might have an influence comparable to that of the United States, it was necessary to establish a special majority that did not appear in the original Articles. Had a problem of such sensitivity persisted it might have been easier to resolve it within a new international organization. Ultimately, however, it became possible to reach agreement on a special majority of 85 per cent as part of a much broader compromise.29 Once again, therefore, it became unnecessary to establish an affiliate in order to achieve an objective that in the end members were willing to see achieved through the Fund by the amendment of its Articles.
Each member of the Fund is entitled to become a participant in the Special Drawing Account if it wishes.30 It becomes a participant as of the date that it deposits with the Fund an instrument setting forth that it undertakes in accordance with its law all the obligations of a participant and that it has taken all steps necessary to enable it to carry out all of these obligations.31 This language resembles the description of the content of the instrument that a country must deposit in order to become a member of the Fund. The instrument of participation is lodged with the Fund, however, and not with the Department of State of the United States as the depositary of the Articles of Agreement. Neither a resolution of the Board of Governors nor a decision of the Executive Directors is necessary to permit a member to become a participant, and therefore there are no terms such as those that are included in membership resolutions.32 A participant is entitled to receive allocations of special drawing rights 33 and to have its votes cast when votes are taken on matters pertaining exclusively to the Special Drawing Account.34
No member is required to become a participant in the Special Drawing Account, and on December 31, 1973 nine members of the Fund had not yet become participants. A country cannot become a participant without first becoming a member of the Fund. If a country withdraws from the Fund, it automatically ceases to be a participant.35 A country may terminate its participation in the Special Drawing Account, however, without withdrawing from membership in the Fund.
Notwithstanding what has been said of membership in the Fund as a prerequisite of participation in the Special Drawing Account, a nonmember of the Fund may be permitted to hold special drawing rights.36 Similar permission may be granted to a member that has chosen not to become a participant.37
A nonparticipating or nonmember country may file an application to be an “other holder” of special drawing rights. The application must include “all relevant facts,” and when submitting an application to the Board of Governors the Executive Directors, after consultation with the applicant, must make a recommendation. The By-Law and the Rule that describe the procedure to be followed by the Executive Directors in dealing with an application to be an “other holder” are similar to the By-Law and the Rule that set forth the procedure for dealing with a country’s application to be a member of the Fund.38
The power to permit an applicant to be an “other holder” of special drawing rights is reserved to the Board of Governors.39 For a favorable decision, a majority of 85 per cent of the total voting power of participants is necessary.40 The decision prescribes the terms and conditions on which an other holder may be permitted to accept, hold, and use special drawing rights in operations and transactions with participants and the terms and conditions on which participants may engage in operations and transactions with an other holder.41 The Board of Governors is not authorized to permit operations and transactions between other holders. A “transaction” for the purposes of the Articles is a use of special drawing rights in return for gold or currency; an “operation” is any other permitted use of special drawing rights. Permission to be an other holder does not enable the holder to receive allocations or subject it to cancellations of its holdings of special drawing rights. Allocations and cancellations are confined to participants.42
The eligibility of nonparticipating members or nonmember countries to become “other holders” does not compel the Board of Governors to decide in favor of an application by one of them. The list of potential other holders includes only one other category, “institutions that perform functions of a central bank for more than one member.” 43 The list is short because the concept of “other holders” became involved, during the drafting of the amendment of the Articles, in the doctrinal question whether special drawing rights were to be more like a reserve asset or more like credit. Those who favored emphasis on the latter aspect of special drawing rights resisted a broad eligibility to hold them because in their opinion that characteristic would have been more compatible with special drawing rights as reserve assets.