International Monetary Fund Annual Report 1974...INTERNATIONAL MONETARY FUND ANNUAL REPORT OF THE...

ANNUAL REPORT1974

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INTERNATIONAL MONETARY FUND

ANNUAL REPORTOF THE

EXECUTIVE DIRECTORS FOR THEFISCAL YEAR ENDED APRIL 30, 1974

WASHINGTON, D.C.


Letter of

Chapter 1

Chapter 2

Chapter 3

Transmittal

. DEVELOPMENTS IN THE WORLD ECONOMYProblems of Domestic Policy

Trends in Growth and InflationFactors in the Current InflationAdaptation of Policies

World Trade and PaymentsExchange Rate DevelopmentsMovements of Commodity PricesChanges in the Terms of TradeInternational Payments Developments in 1973The Current Account Picture

External Policies and AdjustmentPolicy Implications of the Oil Situation

AdjustmentFinancing

Current Functioning of the Adjustment ProcessIssues facing the oil importing countriesAdjustment issues for the oil exporting countries

. DEVELOPMENTS IN INTERNATIONAL LIQUIDITYReserve Changes in 1973

Reserve Growth and CompositionCountry Distribution

Factors Affecting the Adequacy of ReservesThe Impact on Reserve Ease of Certain Recent Developments

The move to widespread floatingGoldDevelopments in the oil market

Quantitative Assessment of Reserve EaseManifestations of Reserve EaseConcluding Remarks

. ACTIVITIES OF THE FUNDReform of the International Monetary System

The Committee of TwentyRelated Decisions of the Executive Directors

Interim Committee of the Board of GovernorsGuidelines for the Management of Floating RatesThe Valuation and Interest Rate of the SDR, Remuneration,

and ChargesThe Oil FacilityVoluntary Declaration on Trade Measures

Sixth General Review of QuotasExchange Rates

Pagexiii

12289

13151819202325252526272729

303030363739393940414446

474949505051

5152535353

V


Vi CONTENTS

Special Drawing AccountExchange Rates for SDKs in Transactions by AgreementTransactions with DesignationTransactions and Operations Between Participants and the

General AccountReconstitutionChanges in the Distribution of SDR HoldingsBIS Prescribed as Holder of SDRs

General AccountUse of Fund's ResourcesRepurchasesIncome, Expenses, and ReservesTransactions and Operations in Gold

Consultations with Member CountriesTraining and Technical AssistanceRelations with Other International OrganizationsMembership, Quotas, and Participation in the Special Drawing

AccountExecutive Directors, Management, and Staff

Page555556

575758585860616262636465

6767

APPENDICES

I. The Fund in 1973/74Exchange Rate DevelopmentsSpecial Drawing AccountGeneral Account

Repurchases Under Article V, Section 7(6)GoldIncome and Expenses

Administrative Budget and AuditArticle VIIIPublications

II. Principal Policy Decisions of the Executive BoardA. Procedures for Reviews of External Policies

Managing Director's StatementB. Exchange Rates for the SDR in Transactions Between Participants . .C. Central Rates and Wider Margins: A Temporary Regime — Revised

DecisionD. Gold Payments Under Article V, Section l(b) Amounting to Less

Than One BarE. Bank for International Settlements: Draft Resolution to Become

Holder of SDRsF. Consultations on Members' Policies in Present CircumstancesG. Exchange Rates for the SDR in Transactions Between Participants:

Extension of Suspension of Article XXV, Section 8 (a)H. Bank for International Settlements: Adherence to Resolution No. 29-1

and Termination of SuspensionI. Draft Resolution on Establishment of an Interim Committee of the

Board of Governors on the International Monetary System

71717273737575757575

102102102103

103

105

105108

108

109

110


III.IV.

V.

VI.

VII.

Inde:

CONTENTS

J. Guidelines for the Management of Floating Exchange RatesGuidelines for the Management of Floating Exchange Rates

K. Interim Valuation of the SDR: New Rule O-3 and Method of Deter-mining and Collecting Exchange Rates

a. New Rule O-3b. Method of Determining and Collecting Exchange Rates for the

Purposes of Rule O-3L. Remuneration and Interest Rate on Special Drawing Rights

a. Remunerationb. Interest Rate on Special Drawing Rightsc. Review

M. Chargesa. Charges — Schedulesb. Future Changes in Charges on Fund's Holdings of Members' Cur-

rencies in Excess of Quotac. Timing of Changes in Schedules of Charges

N. Facility to Assist Members in Payments Difficulties Resulting fromInitial Impact of Increased Costs of Imports of Petroleum andPetroleum Products

AttachmentO. Borrowing in Connection with Oil Facility

AnnexP. Voluntary Declaration on Trade and Other Current Account Measures

Letter to MembersDeclaration

Executive Directors and Voting Power

Changes in Membership of Executive Board

Administrative Budget

Comparative Statement of Income and Expenses

Financial StatementsLetter of TransmittalMemorandum by the Audit CommitteeGeneral AccountSpecial Drawing AccountStaff Retirement Fund

x

Vll

Page112112

116116

117118118119119120120

121121

122124124125126127127

129

132

135

137

138138139140144146

151

1?3.4.

567.

LIST OF TABLES

Growth of World Output, 1960-73Price Increases in Developed Countries 1960—73 Price Increases in Less Developed Countries, 1965-First Quarter 1974 . . . .Inflation and Cost Indicators Pertaining to Industrial Countries, 1960-First

Quarter 1974World Trade Summary, 1960-73Terms of Trade Developments, 1960—73Industrial Countries: Balance of Pavments Summaries. 1971-73

456

10n1921


Viii CONTENTS

8. Balance of Payments Summary, 1971-739. Summary of Payments Balances on Current Account

10. Reserves, Credit Tranche Positions, and Other Unused Credit Facilities, Endof Years, 1954-73

11. Sources of Reserve Change, 1964-7312. Composition of Adjusted Global Reserves, End of 1950, 1960, and 1970-

First Quarter 197413. U. S. Balance of Payments and Its Financing, 1968-7314. Official Holdings of Claims on the United States and Other Foreign Exchange,

End of Years, 1969-7315. Identified Official Holdings of Euro-Currencies and Residual Sources of

Foreign Exchange Reserves, End of Years, 1969-7316. Selected Countries with Major Reserve Changes, 197317. Countries' Official Reserves, Adjusted, 1950, 1960, and 1970-March 197418. Estimated Private International Liquidity and Official Reserve Holdings,

1964-7319. Use and Receipt of SDRs in Transactions with Designation, Fiscal Year

Ended April 30, 197420. Acquisition of SDRs for Reconstitution from the Fund's General Account,

January 1, 1972-April 30, 197421. Changes in the Distribution of SDR Holdings, Fiscal Year Ended April 30,

1974I.I. Exchange Rates, July 12, 19741.2. Par Values Established or Changed, Fiscal Year Ended April 30, 1974 . . .1.3. Central Rates Established or Changed in Accordance with Executive Board

Decision No. 3463-(71/126), as Revised by Decision No. 4083-(73/104),Fiscal Year Ended April 30, 1974

1.4. Transfers of Special Drawing Rights, January 1, 1970-April 30, 19741.5. Summary of Transactions and Operations in Special Drawing Rights, Fiscal

Year Ended April 30, 19741.6. Currencies Transferred for Special Drawing Rights, January 1, 1970-

April 30, 19741.7. Transfer of Special Drawing Rights by the General Account, Fiscal Year

Ended April 30, 19741.8. Creditor Positions, Fiscal Years Ended April 30, 1973 and 19741.9. Purchases of Currencies and Special Drawing Rights from the Fund, Fiscal

Year Ended April 30, 19741. 10. Fund Stand-By Arrangements for Members, Fiscal Year Ended April 30,

19741. 11. Purchases and Repurchases Under the Decision on Compensatory Financing

of Export Fluctuations, February 27, 1963-April 30, 19741.12. Summary of Stand-By Arrangements That Became Effective During the

Fiscal Years Ended April 30, 1953-741.13. Summary of Members' Purchases and Repurchases, Years Ended April 30,

1948-741.14. Total Repurchase Obligations Incurred in Accordance with Article V, Sec-

tion 7(6), and Amounts Payable Forthwith by Members, as of April 30,1973

1.15. Repurchases of Currencies from the Fund, Fiscal Year Ended April 30,1974

Page2224

3132

3434

35

353638

44

56

58

597680

8182

83

86

8788

89

90

91

92

93

94

95


CONTENTS

1.16. Currencies and Special Drawing Rights Obtained from the Fund by Mem-bers in Purchases for Their Own Currencies; Currencies, Gold, and SpecialDrawing Rights Used by Members in Repurchases, Fiscal Year EndedApril 30, 1974

1.17. Gold Transactions and Operations by the Fund, Fiscal Years EndedApril 30, 1972-74

1.18. Income and Expenses, Fiscal Years Ended April 30, 1965-741.19. Charges on Transactions Effected After May 1, 1963 and up to June 30,

19741.20. Charges on Transactions Effected After July 1, 19741.21. Charges on Transactions Effected Under the Oil Facility After July 1, 19741.22. Members That Have Accepted Article VIII, April 30, 19741.23. Publications Issued, Fiscal Year Ended April 30, 1974

LIST OF CHARTS

1. Semiannual Changes in Output and Prices in Industrial Countries, First Half1971-First Half 1974

2. Price Increases in Industrial Countries, 1953-First Half 19743. Spot Exchange Rates, January 1973-July 19744. Short-Term Money Market Rates, January 1972-July 19745. Index of Prices of Commodities Exported by Primary Producing Countries,

1971-July 19746. Level and Composition of Reserves, End of Period, 1963-First Quarter 19747. Ratio of Aggregate Reserves to Aggregate Imports of 60 Countries, 1954-738. Comparative Distribution of Actual Reserves and Reserve "Needs," 1968

and 1973I.I. Use of Fund Resources, April 30, 1965-74

ix

Page

96

9698

999999

100101

36

1416

183342

4397

The following symbols have been used throughout this Report:

( . . . ) indicate that data are not available;

( — ) indicates that the figure is zero or less than half the final digit shown, orthat the item does not exist;

(-) is used between years or months (e.g., 1969-74 or January-June) toindicate the years or months covered, including the beginning and endingyears or months;

(/) is used between years (e.g., 1973/74) to indicate a fiscal year.

"Billion" means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The classification of countries employed in the Report is indicated in Table 1 onpage 4.



H. Johannes WitteveenManaging Director and Chairman of the Executive Board

William B. DaleDeputy Managing Director

Executive DirectorsSam Y. CrossAnthony K. RawlinsonGuenther SchleimingerJacques Henri WahlKaichi KawaguchiFrancesco Palamenghi-CrispiRobert BryceNazih DeifByanti KharmawanLindsay B. BrandP. S. N. PrasadJacques de GrootePer AsbrinkPieter LieftinckS. B. Nicol-ColeGuillermo BuesoAlexandre KafkaJahangir AmuzegarCarlos Massad A.Antoine W. Yameogo

Senior Officers

The General CounselThe Economic CounsellorAdministration DepartmentAfrican DepartmentAsian DepartmentCentral Banking ServiceEuropean DepartmentExchange and Trade Relations DepartmentFiscal Affairs DepartmentIMF InstituteLegal DepartmentMiddle Eastern DepartmentResearch DepartmentSecretary's DepartmentTreasurer's DepartmentWestern Hemisphere DepartmentBureau of Language ServicesBureau of StatisticsOffice in Europe (Paris)Office in GenevaInformation Office

Chief Editor

Alternate Executive DirectorsCharles R. HarleyPeter J. BullLore FuenfgeltGerard de MargerieMikio WakatsukiJose Luis MoraGeorge ReynoldsMohamed FinaishNguyen Huu HanhR. van S. SmitW. M. TilakaratnaHeinrich G. SchneiderKnut J. M. AndreassenTom de VriesH. R. Monday, Jr.Francisco SuarezBasilio MartinsCosta P. CaranicasRicardo H. ArriazuSamuel Nana-Sinkam

Joseph GoldJ. J. PolakPhillip Thorson, DirectorMamoudou Toure, DirectorTun Thin, DirectorJ. V. Mladek, DirectorL. A. Whittome, DirectorErnest Sturc, DirectorRichard Goode, DirectorGerard M. Teyssier, DirectorJoseph Gold, DirectorJohn W. Gunter, Acting Director 1

J. J. Polak, DirectorW. Lawrence Hebbard, SecretaryWalter O. Habermeier, TreasurerJorge Del Canto, DirectorJ. S. Haszard, DirectorEarl Hicks, DirectorLeo Van Houtven, DirectorEdgar Jones, DirectorJay H. Reid, Director

Norman K. Humphreys

August 5, 19741 Anwar Ali, Director (on leave).

XI


LETTER OE TRANSFv'lITTATTO THE BOARD OF GOVERNORS

August 5, 1974

My dear Mr. Chairman:

In accordance with Section 10 of the By-Laws of the International MonetaryFund, I have the honor to present to the Board of Governors the Annual Reportof the Executive Directors for the fiscal year ended April 30, 1974.

Yours sincerely,

/s/

H. JOHANNES WITTEVEEN

Chairman of the Executive Board

Chairman of the Board of Governors

International Monetary Fund

Xlll


Chapter 1

Developments in the World Economy

T mid-1974, the world economy was in the^ ^ throes of a virulent and widespread inflation,a deceleration of economic growth in reaction tothe preceding high rate of expansion, and a mas-sive disequilibrium in international payments. Thissituation constitutes perhaps the most complexand serious set of economic problems to confrontnational governments and the international com-munity since the end of World War II.

After more than a decade of generally risingrates of price increase, inflation accelerated rapidlyin the past two years. This acceleration was com-pounded by the upsurge of most primary com-modity prices in the wake of the widespreadeconomic boom and by the recent sharp escala-tion in the price of oil. The average annual rateof inflation in industrial countries, already 7 percent in 1973, reached 12 per cent (in terms ofGNP deflators) in the first half of 1974, wheneven those countries with the lowest rates of priceincrease were experiencing inflation on a scaleconsidered unacceptable. This course of develop-ments, marked by the formation of a deeplyembedded inflationary psychology, has broughtinto focus the need for countries—especially thelargest ones—to pursue a strategy to curb infla-tion before it leads to serious and prolongeddamage to the world economy.

Such an essential strategy must be institutedat a time of marked economic slowdown in theindustrial countries. Under the impact of cyclicalinfluences and of developments relating to oil, thevolume of total output in the industrial countriessuffered an outright (though small) decline in thefirst half of 1974, and the effects of this unusualdevelopment were in process of spreading to theprimary producing countries. Notwithstanding ageneral expectation that expansion of the main

industrial economies will be resumed in the secondhalf of 1974, diagnosis of the balance of expan-sionary and contractionary forces in the worldeconomy is uncommonly difficult and the pursuitof anti-inflation programs centering on policiesof financial restraint involves, of necessity, theincurrence of certain risks.

Severe balance of payments problems are aris-ing from the overlay of higher oil prices upon aninternational payments situation still characterizedby some sizable imbalances at the end of 1973,despite the marked improvement that had occurredin the position of the United States. Unusuallylarge changes are occurring in the current accountbalances of individual countries and in the wholestructure of balance of payments relationshipsbetween oil importing and oil exporting countries.These changes, together with the associated—butstill highly uncertain—shifts in capital flows, maytax the capacity and adaptability of the financialinstitutions and arrangements available for thenecessary channeling of funds from countries withcurrent account surpluses to those with currentaccount deficits. Already clearly evident is theurgent need—magnified by years of decline in therelative magnitude of official development assist-ance—for a greater flow of capital on conces-sional terms and of grant assistance to the numer-ous developing countries that have been severelyaffected by the higher prices of oil and othercommodities.

The unprecedented combination of circum-stances sketched above calls for internationalcooperation of a quality rarely achieved in thepast. In its absence, the pursuit of unduly nation-alistic policies in disregard of their impact onother countries could greatly exacerbate the prob-lems now confronted; taking such forms as com-

1

A


ANNUAL REPORT, 1974

petitive exchange depreciation and trade restric-tions, such policies could cause an internationalrecession and make the eventual adjustmentsmuch more costly to all concerned. Resolute andeffective cooperation, on the other hand, couldminimize those costs and avert the risks of pre-cipitate and short-sighted actions. Appeals forinternational cooperation and mutual understand-ing have been made in previous Annual Reports,but never with greater urgency than at the presenttime.

In light of the appearance of such grave uncer-tainties on the world economic and financial scene,the Committee of Twenty shifted the priority ofits work on international monetary reform to thereaching of agreement on numerous importantaspects of reform affecting the immediate interestsof both developed and developing countries. Fur-thermore, although the results of the Committee'swork on longer-term reform were less comprehen-sive than had been hoped for when the Committeebegan its work in September 1972, a substantialmeasure of agreement has been achieved on thebroad objectives of a reformed system; and theprogram of action initiated at the final meetingof the Committee in June 1974—as described inChapter 3—provides the basis for an evolutionaryprocess of reform which could be of great helpin dealing with current international paymentsproblems, and which could prove, in itself, a sig-nificant step in the evolution of the internationalmonetary system.

Particular comment is called for regardingdevelopments over the past year in the exchangerate field. In an environment of continuing flexi-bility of exchange rate arrangements, progress hasbeen made toward fulfillment of the need—empha-sized in the 1973 Annual Report—"to bringexchange rate policies and practices under theframework of a system founded on internationalagreement and commanding general support." Amajor step in that direction is part of the Com-mittee of Twenty's program of immediate action,and is reflected in the recent decision of theExecutive Directors (summarized in Chapter 3)recommending that members should endeavor toobserve certain guidelines for the management offloating exchange rates. These guidelines will helpto ensure that countries conduct their exchangepolicies in the light of an internationally agreedcode of behavior and will provide a framework for

a continuing international dialogue on the appro-priateness of countries' balance of paymentspolicies.

The three following sections of the presentchapter, under the headings of Problems ofDomestic Policy, World Trade and Payments, andExternal Policies and Adjustment, trace thesequence of developments that have led up to thecurrent situation, analyze its key features, and dis-cuss the economic and financial policy issues withwhich the authorities of member countries arecontending.

Problems of Domestic Policy

Trends in Growth and Inflation

Even before the abrupt change in the oil situa-tion late in 1973, a marked slowing of outputexpansion in the industrial countries was clearlyunder way and was expected to extend into thefirst half of 1974. In most of these countries,absorption of the slack in resource utilization thatdeveloped during the 1970-71 slowdown hadprogressed far enough by mid-1973 to force atapering of the rate of growth in total outputtoward closer conformity with the longer-rungrowth rate of productive capacity. Moreover, thehigh rates of price inflation that accompanied theexpansion of economic activity during the latterpart of 1972 and early 1973 had led the authori-ties of many industrial countries to introduce ortighten policies of financial restraint, and theimpact of such policy actions on real activity hadclearly begun to take effect in some of the largercountries.

For the industrial countries as a group, thegrowth of real GNP dropped from an annual rateof 8 per cent in the first half of 1973 to about3 per cent in the second half (Chart 1). Theincrease for the year as a whole over 1972—6V2 per cent—was still unusually large; and,indeed, 1973 was a year of high economic growththroughout most of the world (Table 1). Totaloutput in the less developed areas is estimated tohave expanded by ll/2 per cent from 1972 to1973, compared with a 5 ¥2 per cent averageannual rate of increase over the 1960s.

The counterinflationary policies that have beenwidely adopted in the industrial countries did notslow the advance of prices in 1973. Under con-

2


DEVELOPMENTS IN THE WORLD ECONOMY

CHART 1. SEMIANNUAL CHANGES IN OUTPUTAND PRICES IN INDUSTRIAL COUNTRIES,

FIRST HALF 1971-FmsT HALF 1974

(Percentage changes in real GNP and GNP deflatorsfrom preceding half year, seasonally adjusted,

at annual rates)

ditions of mutually reinforcing booms, shortfallsin agricultural production, and a steep upsurge inprimary commodity prices fueled by these andother factors, the upward movement of priceswas accelerating on a broad scale in the secondhalf of 1973. As measured by the comprehensiveGNP deflators, the annual rate of price increasein that period (over the first half of 1973) aver-aged 10 per cent for the industrial countries—alevel of inflation that was extremely high in his-torical perspective (Table 2 and Chart 2).

The inflationary upsurge in 1973 was by nomeans confined to the industrial countries. Theaverage rate of price increase in the more devel-oped primary producing countries also rose sharplyin 1973, to twice the rate in 1970 (Table 2). Inthe developing countries, the acceleration of priceadvances was sharp and pervasive; as measuredby consumer price indices, the increase in thesecountries' domestic prices from 1972 to 1973amounted, on average, to about 25 per cent,which was more than double the average annualincrease over a period of years through 1971(Table 3). This acceleration of price inflationtook place against the background of a remark-able expansion of the developing countries' exportearnings, sharp increases in the foreign currencycosts of their imports, and an effective deprecia-tion (on average) of their currencies since 1971.1

The international economic situation and out-look were strongly affected by a sequence ofdevelopments relating to oil late in 1973. Thesedevelopments featured (a) limitations on oil pro-duction imposed during October and Novemberby members of the Organization of Arab PetroleumExporting Countries (OAPEC); (b) a triplingof average export prices for oil, reflecting sharpincreases in posted prices of crude oil in Octoberand, particularly, in December by members of theOrganization of Petroleum Exporting Countries(OPEC); (c) the easing of cutbacks in oil pro-duction that was announced by OAPEC in Decem-ber 1973 and the further lifting of embargo

1 Include, in addition to the countries shown separatelyin the chart, Austria, Belgium, Denmark, Luxembourg,the Netherlands, Norway, Sweden, and Switzerland.

1 This last factor tended to exacerbate the rise ofimport costs in terms of local currency. The recent associa-tion of higher domestic price increases with effectiveexchange rate depreciation in the developing countriesshould not be taken to mean that the latter developmentcaused the former, or that the exchange rate actions wereunwarranted. In many cases, the causation undoubtedlyran in the opposite direction, with high degrees ofdomestic inflation being a principal determinant ofexchange rate policy decisions.

3


ANNUAL REPORT, 1974

TABLE 1. GROWTH OF WORLD OUTPUT, 1960-73

(Percentage changes in real GNP)

Annual Average l

1960-70

Industrial countries

CanadaUnited States

4

54

.8

.2

.0

1960-65

5.1

5.64.9

1965-70

4

43

.5

.8

.2

Change from Preceding Year

1969

4

52

.8

.3

.7

1970

2.6

2.5-0.4

1971

3.7

5.63,3

1972

5.6

5.86.2

1973

6.4

6.85.9

Japan 11.1 10.1 12.1 12.1 10.3 6.8 8.9 10.5

FranceGermany, Fed. Rep. ofItalyUnited Kingdom

Other industrial countries 2

Primary producing countries

More developed areas 3

Less developed areas 4

World 5

5452

4

5

55

5

.9

.9

.6

.7

.9

.6

.8

.5

.0

5.5.5.3.

5.

5.

5.5.

8033

0

3

91

5.1

5452

4

5

55

4

.9

.8

.9

.1

.7

.8

.8

.8

.8

7.78.25.71.6

6.1

7.0

7.36.9

5.2

6.05.84.91.8

5.6

6.4

6.06.6

3.4

5.52.71.62.3

3.2

5.6

5.75.6

4.1

5.43.03.12.3

4.6

5.7

5.65.7

5.6

6.15.35.96.0

4.2

7.1

6.37.5

6.5

Sources: National economic reports, secretariat of the Organization for Economic Cooperation and Development, secretariatof the United Nations, U.S. Agency for International Development, International Bank for Reconstruction and Development,and Fund staff estimates.

1 Compound annual rates of change.2 Austria, Belgium, Denmark, Luxembourg, the Netherlands, Norway, Sweden, and Switzerland.3 Comprise Australia, Finland, Greece, Iceland, Ireland, Malta, New Zealand, Portugal, South Africa, Spain, Turkey, and

Yugoslavia.4 Comprise Fund member countries not listed above as "Industrial countries," or as being in "More developed areas"

(footnote 3, above). In some of the other tables in this chapter, the less developed countries are subdivided to distinguish the"major oil exporters" (Algeria, Indonesia, Iran, Iraq, Kuwait, the Libyan Arab Republic, Nigeria, Saudi Arabia, and Venezuela)and "other developing countries."

6 Fund member countries (listed in Appendix Table I.I) plus Switzerland.

restrictions against the sale of oil to certain coun-tries in March-April 1974; and (d) a host ofmeasures to conserve oil and otherwise curtailthe demand for it, undertaken by virtually allcountries dependent on foreign sources of oil, inreaction initially to the prospect of an extendedperiod of acute oil shortage and subsequently toproblems of adjusting to the new level of oilprices.

The emergence in October-November 1973 ofconstraints on the supply of oil occurred at a timewhen, for other reasons, the economic prospectsof the industrial countries for 1974 entailed thecombination of a slowdown in growth and anaverage rate of inflation at least as serious as in1973. The overlay of the oil cutbacks impliedthat 1974 might be a year of negligible averagegrowth, or even decline, of GNP in the industrialcountries. The significance of the late-Decemberannouncements by OPEC countries with respectto oil pricing and production was thus two sided:on the one hand, a worsened outlook for infla-tion; on the other hand, an easing of widespread

fears of protracted international recession due toa shortage of oil. With the further easing of oilsupply restrictions in the early part of 1974, andwith increases in oil production by certain coun-tries clearly under way, it appeared (a) thatOPEC oil supplies might average, for the year asa whole, roughly the same as for 1973 and (b)that this should be enough to sustain some year-to-year growth in overall economic activity in theoil importing countries (given the oil-economizingmeasures already taken in these countries), pro-vided that the increase in oil prices did not itselfhave a substantial deflationary impact.

Because of declines of real GNP in the UnitedStates, Japan, and the United Kingdom, alongwith a subnormal rate of increase in Germany,total output in the industrial countries as a groupis estimated to show a small decrease in the firsthalf of 1974—by contrast to a "normal" growthrate of 4V2-5 per cent and the unsustainable8 per cent rate of expansion that occurred in thefirst part of 1973 at the peak of the recent boom(Chart 1). Notwithstanding this change with

4



TABLE 2. PRICE INCREASES IN DEVELOPED COUNTRIES, 1960-73

(Percentage changes in GNP deflators)

Annual Average l

Industrial countries 2

CanadaUnited States

Japan

FranceGermany, Fed. Rep. ofItalyUnited Kingdom

Other countries 2> 3

More developed primary producingcountries 2

AustraliaSpainOther countries 2 > 4

1960-70

3.4

3.02

7. /

4.8

4.33.54.54.2

4.4

4.8

2.95.85.2

1960-65

2.6

1.91 A.4

4.9

4.13.65.53.5

4.3

4.7

2.26.65.0

1965-70

4.2

4.24r\.u

4.7

4.43.43.55.0

4.5

4.9

3.65.05.4


1969

4.7

4.54

0. o

4.1

6.63.64.35.4

4.3

4.4

3.93.54.9

1970

5.9

4.8

6.7

5.57.16.67.3

5.9

6.2

4.64.97.4

1971

5.4

3.1

4.5

5.48.06.68.9

7.2

9.0

6.67.4

10.6

1972

4.8

4.8

5.1

5.76.05.87.7

7.3

9.4

7.98.9

10.2

1973

7.2

7.6

12.1

7.26.0

10.57.5

8.3

13.2

11.610.715.0

Sources: National economic reports, secretariat of the Organization for Economic Cooperation and Development, and Fundstaff estimates.

1 Compound annual rates of change.2 Average of percentage changes for individual countries weighted by the U.S. dollar value of their GNPs at current prices

in the preceding year.3 Austria, Belgium, Denmark, Luxembourg, the Netherlands, Norway, Sweden, and Switzerland.4 Finland, Greece, Iceland, Ireland, Malta, New Zealand, Portugal, South Africa, Turkey, and Yugoslavia.

respect to output, the overall rate of price infla-tion in the industrial countries, as already men-tioned, accelerated to an annual rate of 12 percent in the first half of 1974. Only in Germany,among the largest countries, was the inflation rateappreciably less than 10 per cent in that period,and the rates for Japan and the United Kingdomwere substantially higher than the average.

Price inflation in the industrial countries hasaccelerated almost steadily since the mid-1960s.The overall rate of 12 per cent in the first halfof 1974 was far above the average price increaseof about 2l/2 per cent experienced by these coun-tries in the early 1960s, but the main changeoccurred quite recently. In 1972, when inflationwas already considered a worrisome problem,GNP deflators in the industrial countries rose onthe average by some 5 per cent from 1971.

It is only in the past few years that rising costsof primary commodities and fuels have becomesignificant elements in the inflationary trend. From1965 to 1970, the average annual rate of increasein the prices of primary commodities other thanpetroleum was about 2 per cent, and the pricesof petroleum moving in international trade werestable or declining. Manufactured goods and vari-

ous services thus accounted for the bulk of theincrease in GNP prices.

The record of sharply accelerated inflation inthe industrial countries over the past ten yearshas not been accompanied by any step-up in thegrowth of real GNP or by any improvement inthe utilization of economic resources. On thecontrary, the shifting policies intended to copewith recurring problems of overexpansion andslowdown left most industrial countries with higher-than-usual rates of unemployment and/or slackin industrial capacity when the latest boom peakedin the first half of 1973.

For the primary producing countries the sta-tistical picture of the situation evolving in 1974is much less complete. However, the availableprice figures show that the rate of domestic infla-tion increased sharply during 1973 and the firstmonths of 1974 in both the more developed andthe less developed primary producing countries.For example, the approximately 25 per cent riseof consumer prices in the developing countriesfrom 1972 to 1973 was far exceeded by theupsurge of nearly 40 per cent that occurred overthe year ending with the first quarter of 1974(Table 3). With respect to both periods, these

5

5.4 4.5 3.4 5.6


ANNUAL REPORT, 1974

CHART 2. PRICE INCREASES IN INDUSTRIAL COUNTRIES,1953-FiRST HALF 1974

(Percentage changes in GNP deflatorsfrom preceding year)

* Change from first half of 1973 to first half of 1974.1 Austria, Belgium, Denmark, France, Germany, Italy,

Luxembourg, the Netherlands, Norway, Sweden, Switzer-land, and the United Kingdom.

overall averages reflected relatively high inflationrates in the Western Hemisphere region, as wellas in Asia, and considerably more moderate ratesin Africa and the Middle East. In a broader timeperspective, however, a noteworthy feature of therecord is that inflation has developed on a sub-stantial scale in many primary producing (as wellas industrial) countries where low or moderaterates of price increase had been customary.

Growth-depressing influences evidently are atwork in many of the primary producing countries.Because of slower expansion in the industrialworld and other factors, this year's rise in exportvolume for non-oil developing countries seemsbound to be sharply reduced, following increasesaveraging more than 8 per cent in recent years.Many of these countries—particularly the oneswhose own export prices have not shared in thegeneral upswing—are also being hit by a deteriora-tion in the terms of trade; and growth in thevolume of imports essential for development isbeing inhibited by the upsurge of prices for oil,foodgrains, fertilizer, and many types of manu-factured goods.

The major oil exporters are in a very differentposition by reason of the sharp improvement thathas occurred in their terms of trade since 1973.But in these countries, too, inflation looms as aserious problem because of the steadily risingprices of imported goods and the pressures onresources that may emerge in the process of usingpart of the expanded foreign exchange earningsto accelerate the pace of domestic development.

TABLE 3. PRICE INCREASES IN LESS DEVELOPED COUNTRIES, 1965-FmsT QUARTER 1974

(Percentage changes in consumer prices)1

All less developed countries

In Africa

In Asia

In the Middle East

In the Western Hemisphere

AnnualAverage1965-70

13

4

18 2

3

15

Change fromYear

Preceding

1971 1972 1973

10 13

6 5

5 7

5 6

15 21

24

7

19

10

36 2

First Quarter 1973to

First Quarter 1974

37

14

31

16

48 2

Sources: IMF Data Fund and Fund staff estimates.1 Averages of changes in indices expressed in terms of local currency. Weights are proportional to GNP (in U.S. dollars) in 1972.2 Excluding one high-inflation country, the Asian figure in the first column would be 7 per cent; with a similar exclusion, the

Western Hemisphere figures in the last two columns would be 21 per cent and 19 per cent, respectively.

6



In the period ahead, trends of prices and activ-ity in the world economy will depend largely ondevelopments in industrial countries. Unfortu-nately, it is difficult to form a confident judgmentas to the balance of contractionary and expan-sionary forces in those countries. Following, how-ever, are a few of the factors that such a judgmentmust take into consideration.

—One key question concerns the significancethat should be attached to the fact that a slowingdown of economic expansion in most industrialcountries was already in process in the course of1973, prior to the sudden emergence of energyproblems later in the year.

—The tripling of petroleum prices that tookplace late in 1973 is adding to inflation throughits cost-raising effects. At the same time, this pricerise could have a deflationary effect stemmingfrom the much greater increase of imports thanof exports (discussed below) that is occurring inthe trade of oil importing countries with the oilexporting countries. A deflationary effect will befelt to the extent that larger payments for oil maybe financed through diversion from other expendi-tures; this effect will be averted to the extent thatsuch payments are financed out of current saving,although the resultant incurrence of additionaldebt or liquidation of financial assets might invarious ways affect the behavior of consumers andbusiness enterprises over some uncertain periodof time. Some observers view the possible defla-tionary influence of higher oil prices, superim-posed on the cyclical slowdown, as a serious threatto economic expansion. Others believe that expan-sionary forces, both autonomous and government-induced, will prove sufficiently strong to offset it.Views also differ as to the probable timing of anydeflationary impact of higher oil prices—whetheroccurring quickly or taking a good many monthsto show up.

—Perhaps as a broader aspect of the difficultyin judging the economic impact of the oil priceincreases, a larger-than-usual degree of uncer-tainty surrounds the outlook for private spending.Current rates of price inflation represent an essen-tially new situation in the postwar period, and itis thus difficult to judge on the basis of past experi-ence how various groups within the private econ-omy will react to them. Also, the comparativenewness of the situation creates added difficulties

in the area of government policy, both in itsformulation and in the assessment of its effects.

—Related to the above points, and partlyoverlapping them, is the difficulty in gauging howsevere an impact the industrial countries' recentfinancial policies will have, with an uncertain lag,on the level of real activity; these policies have formany months been generally on the side ofrestraint in the endeavor to combat inflation.Moves toward more restrictive fiscal positionshave recently been made by the governments ofseveral major countries, and monetary policies arealmost universally tight. In several countries, nota-bly Italy and the United Kingdom, restrictivefinancial policies are directed toward overcomingsevere balance of payments problems, as well asdomestic inflation. However, postures of restrainthave generally not been assumed in disregard ofconsiderations relating to employment and growthobjectives. The German authorities, for example,acted in December 1973 to forestall the risk of arecession emanating from the cutbacks in oilsupply by lifting most of the stabilization measuresintroduced in the previous May and by takingadditional steps to assist sectors experiencing dif-ficulties; and German monetary policy in recentmonths, while still tight, has not been so restric-tive as it was in 1973. Similarly, several of thesmaller industrial countries adopted measuresdesigned to maintain the upward momentum ofdemand in real terms, generally by giving specificrelief from adverse effects of price increases orfrom adverse side effects of counterinflationaryactions with respect to domestic credit conditions.

Despite the uncertainties in the picture, mostsenior officials of industrial countries recentlyengaged in consultations with the Fund haveexpressed the view that inflation is the dominantproblem of economic policy, and deserving of thehighest priority; that the slowdown in economicactivity during the first half of 1974 is traceableto the effects of a shift to more restrictive policiesduring the 1972-73 period, to the emergence ofshortages and bottlenecks, and to the impact of theoil situation on particular sectors, rather thanto any generalized weakening of demand; andthat the underlying demand situation at mid-1974still appeared to be expansionary. However, therewere significant variations around this generalviewpoint, involving questions about the probabletrends in global economic activity and the degree

7


8 ANNUAL REPORT, 1974

and timing of the restrictive effect on real outputthat might be necessary and appropriate for con-ducting effective anti-inflation policies. There wasan awareness, with differing shades of emphasis,that the possibility of international recession couldnot be ruled out, even though signs of it had notyet appeared.

At mid-1974, economic policy in the industrialcountries was being guided predominantly by theview that provision of stimulus was not neededand would dim the prospects for achieving adeceleration in the rate of inflation. Indeed,national forecasters in most industrial countries(including the three largest ones: the UnitedStates, Germany, and Japan) were projecting anupturn of real GNP in the second half of 1974.However, in the forecasts of both national gov-ernments and international organizations, cogni-zance of the uncertainties inherent in the short-term international outlook was reflected in someopinion that performance with respect to totaloutput might well turn out to be weaker than wasbeing generally projected.

Factors in the Current Inflation

While the inflation problem is thus being widelyaddressed at the national level, as indeed is essen-tial, the origins and continuing dynamics of thepresent inflation must to a great extent be under-stood in a global framework. The rapid inflationof prices now in process is world-wide and appearsto differ from most prior experience in severalimportant respects. Both its overall scale and thenature of its causes and constituent elements arewithout close parallel since World War II.

Clearly, one relevant factor was the unusuallyhigh degree of coincidence in the phasing of busi-ness expansion in many countries during 1972and 1973. In practically all the developed coun-tries, economic activity accelerated sharply andaggregate demand rose to high levels during thisperiod. Nonetheless, it would be difficult to explainthe marked excess of the current inflation rateover earlier rates primarily in terms of a differencein effective levels of real resource utilization.These, as measured by available (and admittedlyimperfect) indicators, were not abnormally highby historical standards in most industrial coun-tries, even at the crest of the boom in the firsthalf of 1973.

It is also relevant to recall that the 1972-73upsurge of global demand was marked by failuresor miscalculations in the conduct of monetary andfiscal policies. In relation to the buoyancy ofprivate demand that materialized during the boomperiod, fiscal policies proved insufficiently restric-tive in a number of instances, and rates of mone-tary and credit expansion permitted by prevailingmonetary policies would have to be characterizedas excessive from the standpoint of controllinginflation. However, since broadly parallel judg-ments are applicable also to the boom phases ofother major postwar business cycles, it cannot betaken as a certainty that laxity of monetary andfiscal policies contributed more to the excessesof the latest boom than it did to those of previousupswings.

Several distinctive features of the recent boomdo appear to offer grounds for an explanation ofthe differential rate of inflation. Among these werethe high rates of price increase sustained throughthe previous slowdown and the upward momen-tum thus already prevailing at the beginning ofthe 1972-73 upswing. The cyclical record of pricefluctuations over a long run of years is broadlysuggestive of an asymmetrical response pattern inwhich the rate of inflation seems to subside lessmarkedly with deceleration of growth than it riseswith acceleration. This pattern has apparentlyhad a cumulative effect on business and consumerexpectations, helping to generate the momentumso readily visible in the record of annual inflationrates over the past ten years or so. Such momen-tum doubtless reflects the evolution of publicattitudes and institutional practices that havebecome geared to an assured expectation of con-tinuing advances in costs, prices, and rates ofremuneration.

Another distinctive feature of the recent boomwas the magnitude of the increase in many primarycommodity prices (even apart from oil). Asdescribed in the next section of this chapter, theupsurge of commodity prices since 1972 has noparallel with earlier peacetime experience—a factsuggesting that to some extent these big increaseswere independent of the general process of infla-tion in the world economy. Shortages attributableto crop failures resulting from drought or floodwere in that category, as were changes in stockpositions emanating from agricultural policy shiftsin key countries. In important respects, however,



the escalation of commodity prices must be seenas responsive to the boom itself. Commodityprices reacted strongly to the main wave of demandpressures in the industrial countries that reachedits crest in the first half of 1973; and these pricesalso were pushed up erratically—especially duringthe latter part of 1973 and the early months of1974—by anticipatory buying in a climate of infla-tionary expectations, of real or threatened short-ages of various materials, and of uncertaintiesconcerning the future values of currencies. Fur-thermore, it is clear that the shortages of 1972-73might have produced less dramatic results if theyhad not occurred in the context of cyclicallybuoyant demand in the industrial world.

Oil developments, especially the incidence oftheir cost-raising influences, have affected manyprice movements since October 1973. The rela-tively low elasticity of demand for oil and itspervasive use in productive processes throughoutthe world imply (given also the short-run limita-tions of supply) that a price increase of the magni-tude witnessed at the turn of 1974 will be trans-lated into an escalation of the costs and prices ofgoods and services produced through use ofpetroleum as a source of either energy or materials.

For many individual countries, the recentincreases in oil and primary commodity prices—like the continuing increases in prices of importedcapital goods—represent a form of imported costinflation that is very difficult to influence or con-trol. Moreover, these elements of cost, in additionto those that are initially generated by internaldemand pressures, are in some measure likely tobe extended and built into the cost structurethrough the process of linking wages to prices,both in formal contractual arrangements and inde facto patterns of labor market adjustments. Asfinal-product prices rise, the escalator clauses ofexisting wage agreements in some countries,together with the cost of living considerations thatenter less formally into wage negotiations on amuch wider scale, tend to generate largely auto-matic increases in wage rates to cover the accel-erated advances in consumer prices. Moreover,producers usually continue raising their prices tocover at least the additional costs; and they areable to raise them by larger amounts in the manysituations permitting imperfectly competitive pric-ing practices. These processes mean that if incomespolicies are absent or ineffectual, and if financial

policies are permissive, strong secondary repercus-sions of the oil and primary commodity priceincreases must be expected.

Clearly, factors such as those enumerated aboveare mutually supporting and reinforcing in theireffects on prices. Their combined strength hasrecently reached such proportions, and has becomeso deeply embedded in public attitudes and expec-tations, that inflationary pressures are likely topersist for some time, even if the stance of finan-cial policies in all the larger countries were pre-sumed to be wholly appropriate in the light of alllegitimate domestic concerns. The problem ofretarding the present momentum of price advancesis greatly complicated by the ease—as suggestedby the phrase "imported inflation"—with whichimpulses originating in one area are transmittedto other parts of the world. The recent rise in oilprices is only one example—though a major one—of the many changes that tend, through theirinfluence on the cost of living, wage demands, andbusiness costs, to be widely generalized among allthe countries concerned, quickly spreading in eachof them to many prices not directly affected bythe initiatory changes. The price explosion thathas occurred in international trade is indicatedby the fact that, following a long period of nearstability, foreign trade prices went up by 13 percent from 1972 to 1973 and by no less than40 per cent from the first quarter of 1973 to thefirst quarter of 1974.2

Adaptation of Policies

Inflation is a world-wide problem that must bedealt with before it gets further out of hand. Itseconomic and social effects were already asource of widespread concern several years ago,when the rate of increase in prices was less thanhalf the present rate. Those effects now loommuch larger.

Since the inflation problem is world-wide, allcountries should be expected to contribute to itssolution. But because of their sheer weight in theworld economy, the chief responsibility in thisregard falls on the industrial countries. However,the rate of price increase in these countries has notshown signs of quickly retreating to an accept-able level—a situation which the public is aware

2 As measured by import unit values of industrialcountries in terms of local currency. (See Table 4.)

9



TABLE 4. INFLATION AND COST INDICATORS PERTAINING TO INDUSTRIAL COUNTRIES, 1960-FmsT QUARTER 1974

(In percentage changes* based on data expressed in terms of local currencies)

Unit values of imports

Labor costs in manufacturingAverage hourly earnings

Adjusted for changes in consumer pricesUnit labor costs

Wholesale pricesConsumer prices

Unit values of exports

AnnualAverage1960-70 2

1

852

23

2


1971

3

1157

36

3

1972

1

1164

44

2

1973

13

1366

127

10

First Quarter 1973to

First Quarter 1974

40

143

10

2111

24

Sources: National economic reports, International Financial Statistics, and Fund staff estimates.1 Averages of changes for individual industrial countries weighted by total trade in 1972.2 Compound annual rates of change.

of and which has contributed to the develop-ment of a strong inflationary psychology. Main-tenance or extension of the recent price declinesin many primary commodities would bring someeasing of inflationary pressures in the industrialcountries; but other elements in the inflationaryprocess remain strong, with price-induced pres-sures for larger nominal wage increa3es threaten-ing to become a particularly active force.

Governments in the industrial world, and else-where, are profoundly disturbed by the prevailingrates of price increase and, as mentioned earlier,view inflation as the most serious problem ofeconomic policy. The efforts already being madeto combat this problem are greatly to be wel-comed, and these must be transformed into aclear-cut strategy of policy.

The fundamental need is to bring about andto sustain a better balance between demand andsupply—between the growth of aggregate ex-penditure and the capacity to produce. Althoughthe policy stance may vary from country tocountry, it will generally be necessary for theindustrial countries, over an indefinite period, tomaintain a somewhat lower pressure of demandon resources than has been customary. Duringthis cooling-off period, demand managementpolicy should aim for a progressively lower rateof price inflation and—to support this aim—should become less ambitious on the growth side.In addition, complementary measures to improvesupply conditions, to strengthen productive capa-city and productivity, and to alleviate cost pres-sures are also clearly called for; without suchmeasures, including those directed specifically to

achieving higher levels of saving and investment,the task of general demand management wouldbe rendered considerably more difficult.

Keeping the growth of aggregate expenditurewithin appropriate bounds will require a new anddifferent approach in national economic policies.Throughout the period since the mid-1960s, theindustrial countries have tended to shade policyrisks on the side of growth and employment andto push their short-term objectives in those areasbeyond a point that was prudent. It is clear thatpolicy decisions must now place more emphasison controlling inflation and maintaining a climateof financial stability; despite the correspondinglylesser emphasis on growth and employment objec-tives, such an approach may be expected to makefor a better growth and employment record overthe longer run.

Persistent application of this approach, despitethe setbacks that could occur, would be a verydemanding task, requiring strength and con-tinuity of political will over a period of years. Inorder to change inflationary expectations, policieswould have to show results so as to earn andretain the confidence of the public.

Given all the uncertainties involved, govern-ments must be careful to avoid policies thatmight inadvertently lead to severe recession andstagnation. This important consideration is in linewith the resolve of member countries, as expressedin the Committee of Twenty's communique afterits January 1974 meeting, to "pursue policies thatwould sustain appropriate levels of economicactivity and employment, while minimizing infla-tion."


DEVELOPMENTS IN THE WORLD ECONOMY 11

Implementation of the demand managementpolicy suggested above requires elaboration, inpart to bring out some of the problems and diffi-culties entailed.

—Because the prevailing rates of price infla-tion are so steep and inflationary expectations areso deeply embedded, there is only limited roomfor maneuver and error in the conduct of fiscaland monetary policies in the industrial countries.In order to avoid triggering still more trouble onthe inflation front, the authorities will need toregulate their policies with considerable cautionfor some time to come. One important require-ment will be to absorb economic slack gradually,rather than quickly, and to avoid overestimationof the capacity or potential growth rates of theindustrial economies. In this regard, allowanceshould be made for the likelihood that potentialgrowth rates in industrial countries have beenreduced, at least temporarily, by the dislocationsin specific sectors of the economy caused byhigher oil prices, environmental considerations,and other factors.

—In setting their target rates of aggregatedemand expansion, it will be necessary for coun-tries to shade decisions in this area on the con-servative side as part of the anti-inflation effort.In this context, growth rates somewhat lower thanthose aimed for in the past might well have tobe accepted. Similarly, unemployment might haveto be somewhat higher—as it recently has beenin most industrial countries—in relation to thetraditional targets.3

—In addition to the growth of real GNP, theother element in the target rate of aggregatedemand expansion—the price factor—would needto be based on a careful policy decision as tohow much the rate of price inflation could andshould be reduced in a given period. This assess-ment would have to take account of specialfactors operating on prices, as well as the basic

3 In many of the industrial countries, the recentlyhigher levels of unemployment are attributable in largepart to structural factors, such as mismatches betweenthe skills and aptitudes of the unemployed and thoserequired by employers. To improve the employmentsituation, primary emphasis should thus be placed onspecific measures; strong expansion of overall demandwould serve mainly to fuel inflation and would be rela-tively ineffective in reducing unemployment. In severalWestern European countries, a feature of the situation isthat unemployment is accompanied by the employmentof large numbers of immigrant workers.

influence of fiscal and monetary policies; specialinfluences may be quite important, of course, withrespect to the prices of primary commodities.Widespread expectations that any increase in theprice level will be accommodated by the authori-ties will have to be eliminated.

—Of the many issues involved in the questionof how fiscal and monetary policies should bedeployed in carrying out an effective demandmanagement policy, perhaps most important isthe need for governments to secure better controlover the national budget. In the past, fiscal policyhas sometimes been so inadequate that it workedat cross-purposes from monetary policy, addingto problems of achieving economic stabilization.Also of importance is the growing need to focusthe incidence or impact of fiscal measures. In theindustrial countries this year, such selectivity inthe implementation of fiscal policy may be calledfor by circumstances in which tight supply condi-tions may be present in certain sectors while othersectors have idle capacity and manpower. Ofcourse, care would have to be taken to avoidimpeding needed intersectoral adjustments.

—One special problem of demand manage-ment at the present time is to assess and deal withthe possibly deflationary effect of higher oil prices.Despite the international attention this phenom-enon has attracted, it is not possible to makeglobal generalizations about the appropriate reac-tion of national governments to it. Depending ontheir differing situations, some may need to offsetit while others may welcome it for its disinfla-tionary value.

With respect to the complementary measuresreferred to above, there undoubtedly are numer-ous areas in which policy actions could help toincrease the supply of goods and services andthereby contribute to the dampening of infla-tionary pressures. Such actions typically yieldtheir full impact only after some time, but thisshould not diminish the interest in seeking toremove artificial restraints on production andgenerally to increase the scope for operation ofcompetitive forces. The recent upsurge of interestin supply conditions, because of the onset ofwidespread shortages, provides an opportunity tospur renewed activity in this neglected area ofeconomic policy.

In some, but not necessarily all, countries, thepresent circumstances also call for renewal of the



search for effective approaches to incomes policy—for efforts to exert direct influence upon themovement of wages and prices in the publicinterest. Such measures are difficult to devise andimplement, and they would have to be geared ineach country to its own institutions, traditions,and situation. In their absence, however, it mayprove very difficult to limit the effects of costpressures on prices and to achieve price modera-tion except at the expense of greater slack andunemployment. By helping to counter the forcesof imperfect competition so prevalent in modernindustrial economies, appropriate incomes poli-cies could serve as useful adjuncts to fiscal andmonetary policies, which must bear the mainbrunt of the anti-inflation effort.

Although the foregoing discussion of domesticeconomic policy issues has been oriented towardconditions in the industrial world, the relevanceof key points to current problems of developingcountries is obvious. One reason is that any sig-nificant improvement in the management of eco-nomic policy by the industrial countries wouldease the inflationary pressures on developingcountries and facilitate the handling of their ownproblems. Because of demand, price, and costfactors influenced partly by developments in theindustrial centers, an important share of the infla-tionary pressure felt by many developing coun-tries in recent years has been external in origin.

Nevertheless, developing countries are alsocontending, in varying degrees, with inflationarypressures of domestic origin. In some parts of theworld, these pressures have arisen from droughtsor other catastrophes. But in many developingcountries inflation is attributable in large measureto insufficient restraint of aggregate demand, oftenstemming from an understandable desire to pusheconomic development as rapidly as physicallypossible or from an inadequate control of theexpansionary domestic effects of sharp rises inexport earnings. In these cases, some of long-standing character, stress must be laid on theavoidance of unduly expansionary monetary andfiscal policies, which have frequently provedcounterproductive for developmental purposes inthe longer run.

The broad approach to stabilization policydiscussed above is thus as applicable to mostdeveloping countries as it is to the industrial

countries. But in the application of economicpolicy principles, of course, account must betaken of the special circumstances faced by thedeveloping countries. For example, constraintson the total labor supply—though not those withrespect to particular skills—are frequently lesssevere in developing countries than in the devel-oped countries, while rigidities due to supplybottlenecks are often more intractable.

There are important differences among devel-oping countries with respect to the problem ofdealing with the current inflation and relatedeconomic difficulties. In general, those countriesthat do not now suffer a balance of paymentsconstraint—notably the major oil exporting coun-tries—are the ones that can afford to presshardest for maximum growth. Their ability todraw on foreign resources should provide bothadded scope for development and a margin ofsafety. Even these countries, however, must exer-cise care to control the pace of development soas to minimize such problems as intensificationof inflation, generation of bottlenecks, and misal-location of resources.

Among the non-oil developing countries, thosethat have in recent years achieved both rapidgrowth and balance of payments surpluses mayto a large extent be able to absorb the burden ofadditional import costs through some moderationof growth rates or of gains in real income andthe forgoing of further reserve accumulations.In formulating their economic policies, thesecountries will have to give high priority to non-inflationary budgetary and monetary policies.They may have to pay particularly careful atten-tion to their effective exchange rates, being cau-tious about effective depreciation in present cir-cumstances and bearing in mind the possiblecontribution of a stable or appreciating effectiverate to avoidance of strains on domestic resources.

For countries whose income levels are amongthe lowest and whose capacity for adjustment oftrade and production is very limited, cutbacks ofeither imports or output for domestic use wouldbe both painful and harmful. In these cases, theinadequacy of the economic base underscores aneed for both supply and demand measures tominimize strains on overall capabilities. However,maintenance of the imports of fuels, fertilizer,capital equipment, and essential consumer goodsthat are necessary to maintain supplies and miti-



gate pressure on prices will be impossible withoutincreased flows of foreign aid and concessionalloans.

World Trade and Payments

International trade and payments developmentsduring the period since the previous AnnualReport have been dominated by exceptionallylarge changes in foreign trade prices and values,bringing substantial shifts in the payments situa-tions and prospects of many countries. Some ofthe changes in trade prices and values havestemmed from the major currency realignmentsof early 1973 and subsequent fluctuations ofexchange rates under a regime characterized bywidespread floating. In addition, importantsources of increases in foreign trade prices have

included the accelerated inflation in the industrialworld, the abrupt increases of oil prices in thelast quarter of 1973, and the rise in primary com-modity prices that began much earlier and con-tinued into 1974.

The recent price increases of internationallytraded goods were largely attributable to thepowerful expansion of demand in the industrialcountries. Suppliers of many products were notable to meet this surge of demand in the shortrun, and rapid emergence of an inflationary psy-chology added to the resultant impact on prices.

Under the impetus of prevailing demand forces,the volume of world trade increased by some121/2 per cent from 1972 to 1973, comparedwith 9 per cent—a rate of growth close to thelong-term average—in the previous year (Table 5).Since about the middle of 1973, however,a tapering of the expansion in world trade has

TABLE 5. WORLD TRADE SUMMARY, 1960-73 l

(Percentage changes in volume, in U.S. dollar value, and in unit value of foreign trade)

World Trade 3

ImportsVolume

Unit value 4

ExportsVolume

Unit value 4

VolumeU. S. dollar valueUnit value 4

Industrial countriesOther developed countries

Less developed countriesMajor oil exportersOther developing countries







AnnualAverage1960-70 2

9101

109

4V26

1l'/2

11

9'/2

7 V2

96

l'/22

-1P/2


1970

9i4'/25

913

6V2SVi

5V25V2

44

9l/2

8

116V2

64

25

1971

6125l/2

63V2

126'/2

5'/2

6'/2

56

6'/25V2

85'/2

54

22 V2-1

1972

9188

\ll/2

1

12l'/2

7'/2

8'/2

88

9'/211

79Vi

813

11

1973

12'/23722

1P/217

2091/2

22Vz20

18'/219'/2

\3l/216

12'/27

19i/2

25

3927 V2

Sources: National economic reports, IMF Data Fund, and Fund staff estimates.1 For classification of countries in groupings shown here, see Table 1 (and especially footnotes 2-4).2 Compound annual rates of change.3 Fund member countries (listed in Appendix Table I.I) plus Switzerland. Based on approximate averages of growth rates for

world exports and world imports.4 Based on indices in U.S. dollar terms.

81\2



CHART 3. SPOT EXCHANGE RATES, JANUARY 1973-JuLY 1974

(Spread from parity or central rate agreed December 1971)1

accompanied the slowdown of real economicactivity in the industrial countries. For a num-ber of primary products moving in internationaltrade, limitations of current supply—includingthose stemming from droughts and other naturalforces—also appear to have been a factor in thisdeceleration (as well as a factor contributing tothe upward pressure on prices). The rate of

expansion of world trade in real terms in thefirst half of 1974 was probably much below thetrend rate, in sharp contrast to the experience in1973.

Changing currency relationships, varying move-ments of commodity prices, and differences indomestic demand conditions and in supply capa-bilities all contributed to substantial shifts in the



CHART 3 (concluded). SPOT EXCHANGE RATES, JANUARY 1973-JuLY 1974

(Spread from parity or central rate agreed December 7977)1

1 Except for Canadian dollars. All data based on Wednesday noon quotations in New York.

external current account balances of individualcountries from 1972 to 1973. Moreover, muchlarger shifts are taking place in 1974, especiallybecause of the sharply higher level of oil prices.These developments, in combination with dif-ferences among countries with respect to mone-tary conditions and interest rates, and against abackground of wide swings in financial marketattitudes and expectations, have produced majorchanges in the magnitude and direction of inter-national capital flows. Despite the absorption ofmany of the resultant exchange market pres-sures through fluctuations in floating rates, therehave also been large shifts in overall paymentsbalances and reserve positions of many countries.

These shifts are discussed below, followingreviews of the exchange-rate, commodity-price,and terms-of-trade developments that have under-lain most of them.

Exchange Rate Developments

An important feature of the past year's inter-national trade and payments developments hasbeen the interaction between balance of paymentsflows and exchange rates under the prevailingsituation of flexible currency values. Externalcurrent account transactions and internationalcapital flows not only have exerted a variety ofpressures on exchange markets but also, in turn,



CHART 4. SHORT-TERM MONEY MARKET RATES, JANUARY 1972-JuLY 1974

(Per cent per annum)

have been affected by the succession of exchangerate fluctuations since early 1973.

The exchange market turbulence in the openingmonths of 1973, the ensuing major currencyrealignments, and the mid-1973 outbreak ofrenewed speculative pressures were described inthe 1973 Annual Report. It may be recalled thatcurrencies in the European narrow marginsarrangement or closely associated with thosecurrencies appreciated against the U. S. dollarfrom early May to mid-July of 1973 by amountsranging from 9 per cent to 18 per cent. (SeeChart 3.) For some time thereafter, through mostof October, the exchange markets were much

calmer, with the U. S. dollar first recovering partof its depreciation against most European cur-rencies and then showing a gradual and moderatedecline from about mid-August to late October.From the end of October through mid-Januaryof 1974, however, the dollar firmed quite sharplyagainst most leading currencies, appreciating bysome 14 per cent against the continental Euro-pean currencies and by about 10 per cent againstthe pound sterling and the Japanese yen (Chart 3).Both sterling and the yen thus rose somewhatin relation to the continental currencies after hav-ing depreciated considerably against them duringthe middle months of 1973.



The October-January appreciation of the dol-lar was in large part a result of improvement inthe U. S. balance of payments on current accountand an unwinding of currency positions built upduring earlier periods of speculative activity. Suchunwinding was facilitated and reinforced by alate-1973 firming of U. S. money market condi-tions and interest rates (Chart 4) coinciding witheasier financial conditions in some continentalEuropean countries, and particularly in Germany.Following the December 1973 announcement ofoil price increases, exchange markets were forseveral weeks dominated by the view that overallpayments positions of most industrial countrieswould be much more adversely affected by thenew situation than would the position of theUnited States, where disproportionate shares ofthe funds accumulated by oil surplus countrieswere expected to be invested. This expectation,coupled with an apparent reluctance of centralbanks to intervene on the foreign exchange mar-kets to stabilize rates, led to a rapid appreciationof the dollar in trading that was at times hectic.Under the exchange market pressures of thatperiod, the Bank of Japan discontinued supportof the yen early in January (although, followinga depreciation of the yen by some 7 per cent, it laterresumed intervention, as deemed necessary); andthe French authorities suspended foreign exchangemarket interventions under the European narrowmargins arrangement, thus permitting an initialdecline of about 5 per cent in the value of theFrench franc in terms of other major currencies.This development put pressure on the Italian lira,which was permitted to undergo a roughly paralleldepreciation.

Toward the end of January 1974, exchangemarket trends were reversed again as a numberof steps were taken to ease controls on capitalflows and thus to facilitate the financing of pros-pective external payments balances. In particular,the United States eliminated its interest equaliza-tion tax, its controls on direct foreign investmentsby U. S. residents, and its voluntary restraints onforeign lending by U. S. financial institutions. Atabout the same time, several continental Euro-pean countries, including Germany, removed con-trols on capital inflows or liberalized deterrentsto foreign borrowing by their residents. Theseactions contributed to a substantial alteration ofboth short-term and long-term capital flows dur-

ing the early months of 1974, and they werereinforced initially (in February) by a relativeeasing of liquidity conditions and interest ratesin the U. S. money market, widely interpreted aspresaging further relaxation of U. S. monetarypolicy in subsequent months. Such expectationswere not borne out, as tighter liquidity andstrongly rising interest rates in the United Statesafter mid-March contrasted with an oppositetrend in some of the major continental centersand the United Kingdom. However, by the timethe latter tendencies had become apparent, are-evaluation of the probable impact of higherenergy costs on the various industrial countrieshad led market participants to the view that thestrengthening of the U. S. dollar during Januaryhad been exaggerated.

Primarily because of the factors suggestedabove, the period from late January throughearly May of 1974 was one of renewed apprecia-tion of most other major currencies against theU. S. dollar. It was also marked by the termina-tion, in March, of the dual exchange markets inFrance and Italy. During the second half of May,another partial reversal of immediately precedingexchange rate movements occurred. A moderatefirming of the U. S. dollar in that period wasfollowed by relatively steady exchange rates dur-ing June and July.

The changes in currency relationships sketchedabove can be meaningfully summarized for eachcurrency in terms of effective exchange rateindices. There are various such indices in use, eachhaving somewhat different characteristics andshowing somewhat different numerical measuresof effective exchange rate change. However,among the indices most frequently applied, thereis broad similarity as to the direction and generalmagnitude of movements. With respect to theU. S. dollar, these calculations indicate that theeffective rate in June 1974 was about the sameas that in April 1973 (just before the pattern ofthe second major currency realignment was dis-rupted), despite the intervening swings in bothdirections. Over the same 14-month period, thepound sterling, the French franc, the Italian lira,and the Japanese yen all showed cumulative effec-tive depreciations, though they started at differentlevels in relation to pre-1973 rates and followedrather different time paths. On the other hand,the effective rate for the deutsche mark in June



was significantly above its April 1973 level, aftermovements upward, downward, and back upagain.

Movements of Commodity Prices

The period since about the end of 1972 hasbeen marked by an extraordinary succession ofincreases in prices of primary commodities. Byfar the largest of these, in terms of both percent-age change and the magnitude of the affectedinternational trade flows, was the approximatetripling of the average export price of crudepetroleum from September 1973 to January1974.4 However, focus on the oil price riseshould not be permitted to overshadow the factthat exceptionally large price increases occurredthroughout a wide range of commodity categoriesduring 1973 and early 1974. While no singleone of these involved a trade magnitude approach-ing that of oil, many are nevertheless highlyimportant in themselves, and some (e.g., zinc,sisal, rice, wheat, and free-market sugar) havebeen subject to price increases of an orderresembling or exceeding that of oil prices. Someof the largest increases were particularly signifi-cant not only as factors in the growth of exportearnings of the producing countries but also aselements of the increased costs confronted byimporting countries in all major regions.

The recent period has thus witnessed largeprice rises in many primary commodities pro-duced by countries throughout the world—byindustrial countries, as well as by those classifiedas primary producing countries in this report.From the beginning of 1973 to April 1974, mar-ket prices of commodities (excluding oil) exportedby primary producing countries rose, on average,by about 70 per cent in U. S. dollar terms (Chart 5).No increase of remotely similar magnitude hadpreviously been recorded during such a shortperiod without the influence of major wars orfears of war, as in the 1950-51 upsurge. Inrecent months, however, prices of a number ofprimary commodities—particularly agriculturalraw materials and certain metals—have recededfrom earlier levels; and there were declines in the

CHART 5. INDEX OF PRICES OF COMMODITIES EXPORTEDBY PRIMARY PRODUCING COUNTRIES, 1971-JuLY 1974

4 This stemmed from a larger increase in "posted" or"tax reference" prices, which for major types of crudepetroleum averaged more than 3l/2 times as high inJanuary 1974 as in the previous September.

(1968-70 = 100)

all-commodity index in June and July, with spec-ulative selling apparently a factor of some impor-tance.

The upsurge in prices and trading activity dur-ing 1973 was highly pervasive, being temperedonly to a minor extent by relative stability inprices for a few products. Among broad cate-gories, foods were the ones subject to the mostsustained and vigorous upward movement, reflect-ing critical deficiencies in supplies for some majorcommodities and the emergence of pronouncedchanges in demand-supply relations for others.Agricultural materials prices rose very rapidlyuntil about the turn of the year, but underwenta marked downward adjustment during the firsthalf of 1974. Prices of metals, which had showna delayed response to the 1972-73 expansion ofindustrial demand, continued to rise steeplythrough April 1974 but turned downward in Mayafter about six months during which market trad-ing often appeared to be subject to intensifiedspeculative activity. However, the recent rever-sals of earlier upward movements came too lateto prevent another sizable increase in the all-



commodity index in the first half of 1974; forthat period, market prices were about 30 percent above the 1973 average.

These fluctuations in commodity prices havegenerated difficult problems for many develop-ing countries. Uncertainties and increased infla-tionary pressures were widely associated with theupswing, while the subsequent reversal has raisedthe familiar specter of declining export earningsat a time when their purchasing power is beingeroded by the continuing rise in prices ofimported manufactured goods. Clearly, the longer-term interests of developing countries would, ingeneral, be better served by a steadier and moresustainable improvement of their external tradepositions.

In part, the current situation in primary com-modity markets can be regarded as one reflectingchanged relationships likely to persist for sometime. For example, the change in the food situa-tion reflects the impact of higher incomes on percapita consumption of meat products, as well aspopulation growth and the exhaustion of surplusstocks of grains previously available to supple-ment current production. More generally, coststructures have shifted; competitive relationshipsamong raw materials have been altered; and anumber of products have moved into cyclicalpositions of serious supply imbalance.

Other elements in the recent commodity boom,however, seem potentially reversible when moresettled conditions emerge in the world economyand the international financial system. Commoditymarkets appear to have been subjected to con-siderable disturbance through speculative trading,partly in reaction to inflation and to exchangerate fluctuations; this was evident even before theadvent of the oil crisis, which injected new ele-ments of disturbance, particularly with respect tocost factors. Moreover, in a climate of rapideconomic change, the sensitivity of commoditymarket behavior to the flow of new informationhas been heightened, as attested by highlyunstable short-term movements in prices andmuch greater trading "velocity."

Market price quotations are not closely orsimultaneously reflected in actual returns forexports, and the volatility of such quotationssince early 1973 makes the impact of prices onrecent foreign trade values particularly difficultto ascertain with any precision. In general, how-

ever, it can be assumed that unit values in foreigntrade, as discussed below, are reflecting the pricechanges just noted only with a time lag andprobably with lessened amplitude; for many com-modities, market quotations are "spot" pricesthat cover only a small proportion of transactionsand are likely to exhibit greater volatility thanunit values.

Changes in the Terms of Trade

The interacting elements of general inflation,oil price increases, and soaring primary com-modity prices have strongly influenced recentmovements of export and import unit values.Such movements are summarized, for recent yearsthrough 1973, in Table 5. In addition, Table 6traces the evolution of the terms of trade formajor groups of countries over the same years.Although corresponding data are not yet availableon a comprehensive basis for much of 1974,some inferences about terms of trade shiftsbeyond the end of 1973 can be drawn fromwhat is known about changes in some principalrelevant prices.

The increases in unit value of oil since 1970loom large in the overall picture, especially withrespect to the first half of 1974. The resultantlarge improvement in the terms of trade for theoil exporting countries since 1970 followed adecade of rather steady deterioration, as broughtout in Table 6. For 1974, the terms of tradeseem almost certain to shift against all majorgroups of countries except the oil exporters, and

TABLE 6. TERMS OF TRADE DEVELOPMENTS, 1960-73 l

(Percentage changes)

Change from PrecedingAnnual YearAverage1960-70 2 1970 1971 1972 1973


Other developedcountries

Less developedcountries

Major oil exportersOther developing

countries

Sources: National economic reports, IMF Data Fund,and Fund staff estimates.

1 For classification of countries in groupings shown here,see Table 1 (and especially footnotes 2-4).

2 Compound annual rates of change.

l/2

l/2

-2

V2

l/2

-V/2

-2

-1

->/2

-2%

i6y4

-6V2

—

4V4

23/4

l/2

-2V2

4%

17y4

6



particularly against those industrial countrieswhose oil imports are large and whose exportsconsist predominantly of manufactured goods.Highly adverse changes in terms of trade arealso in prospect for certain developing countrieswhose own export prices have not shared in thegeneral upward trend. In contrast, the terms oftrade of the major oil exporting countries can beexpected, despite the moderating influence of sig-nificant non-oil exports from such countries asIndonesia and Nigeria, to improve in broadparallel with the increase in the global unit valueof oil in relation to that of manufactured goods.

During 1973 and early 1974, unit values offood, like those of oil, were rising substantiallyfaster than unit values of manufactured goods. Asimilar, though less marked, differential may benoted with respect to other primary commodities(metals and agricultural products other thanfood). Such differential movements can be seenas broadly favorable, apart from changes in oilprices, to the terms of trade of the non-oil devel-oping countries over the whole period since1972.

In the end, however, the current year's recordfor developing countries other than the oil export-ers, as well as for the more developed, primaryproducing countries, could prove to be one ofinitial gains quickly eroded. The recent terms oftrade gains of these countries were concentratedin the movement from 1972 to 1973, and wouldbe partly reversed from 1973 to 1974 if thereshould be a continuation of both the present levelof oil prices and the recent declines in othercommodity prices. Such a development wouldprovide for the industrial countries a partialcounterweight, in the form of some gain in theirnon-oil terms of trade, to the rise in their oilimport costs.

International Payments Developments in 1973

The various factors noted above were instru-mental in producing a number of important shiftsin payments balances from 1972 to 1973. Apartfrom a rise in the surplus of the oil exportingcountries, the main changes in both currentaccount balances and net capital flows were thoseamong individual industrial countries (Table 7),rather than changes in the structure of paymentsrelationships between major groups of countries.

The current account balance of the UnitedStates swung sharply upward, from a deficit of$7 billion in 1972 to a surplus of $3V4 billionin 1973, while the Japanese surplus, amounting to$7 billion in 1972, virtually disappeared and theU. K. and Italian current accounts both showedswings of some $3-3V^ billion from surplus todeficit. The other principal change was a rise ofabout $4 billion in the current account surplus ofGermany, to almost $7 billion.

The 1972-73 shifts in the U. S. and Japanesecurrent account balances were clearly helpful tothe international adjustment process, being broadlyconsistent with the intent of the 1971 and 1973currency realignments. Both shifts, however, weremuch larger than had generally been anticipated—in part because of special efforts undertakento modify the Japanese-U. S. bilateral balance oftrade. The change in that bilateral balance from1972 to 1973, reflecting both an adjustment ofthe yen-dollar exchange rate and various specialmeasures, accounted for well over one third ofthe total change in the U. S. position and morethan two fifths of the Japanese shift. Anothermajor element in the improvement of the U. S.trade balance was the spectacular rise in both theprices and volume of U. S. agricultural exports.For Japan, a contributing factor, despite theappreciation of the yen, was a deterioration of theterms of trade, reflecting that country's particularexposure to the boom in commodity prices.

With respect to the German, Italian, and U. K.current account balances, the 1972-73 changescan scarcely be characterized as welcome fromthe standpoint of the international adjustmentprocess. Both Italy and the United Kingdomrelied heavily on international borrowing by offi-cial or semiofficial agencies or enterprises tofinance adverse shifts, which stemmed to a largeextent in each case from sharp deterioration ofthe terms of trade. In Italy, major strikes thatimpeded exports during the early part of 1973were an important additional factor. The unex-pectedly large rise in Germany's current accountsurplus reflected comparatively favorable cyclicalconditions; under these conditions, the boom inGerman export market areas raised demand forGerman products and absorbed potentially com-petitive outputs, while moderation of domesticdemand expansion enhanced Germany's exportsupply capabilities and curbed the growth of



TABLE 7. INDUSTRIAL COUNTRIES: BALANCE OF PAYMENTS SUMMARIES, 1971-73

(In billions of U.S. dollars)

Canada

United States

Japan

France

Germany, Federal Republic of

Italy

United Kingdom

Other industrial countries 3

Total, industrial countries

197119721973

197119721973

197119721973

197119721973

197119721973

197119721973

197119721973

197119721973

197119721973

Trade

2.61.72.2

-2.7-7.0

0.6

7.89.03.7

1.11.31.6

6.78.2

14.4

0.1

-4.0

0.7-1.7-5.8

-3.2-1.2-1.9

13.110.411.0

Balance on

Servicesand

privatetransfers

-2.3-2.4-2.7

1.5-0.1

2.7

-1.8-2.0-3.6

-0.1-0.3-1.1

-4.6-5.5-7.8

2.22.42.6

2.32.43.5

3.64.35.6

0.7-1.2-0.8

Currentaccount

0.3-0.7-0.5

-1.2-7.1

3.3

6.07.00.2

1.01.00.5

2.02.86.6

2.32.4

-1.3

3.00.7

-2.3

0.43.13.7

13.89.2

10.2

CapitalAccountBalance L

0.50.9

-29.2-4.1-8.6

4.3-4.1-6.5

2.30.6

-2.5

2.22.02.5

-1.4-3.2

1.1

3.1-4.0

2.5

2.4-0.4-0.7

-15.9-12.2-12.1

Allocationof

SDRs

0.10.1

0.70.8

0.10.1

0.20.2

0.20.2

0.10.1

0.30.3

0.30.3

2.02.1

OverallBalance 2

0.90.3

-0.5

-29.8-10.4-5.3

10.43.0

-6.3

3.41.8

-2.0

4.45.09.2

1.1-0.7-0.3

6.5-3.0

0.2

3.03.03.0

-0.1-0.9-1.9

Sources: Data reported to the International Monetary Fund and Fund staff estimates.1 This balance is computed residually, as the difference between the overall balance (less SDR allocations) and the current

account balance; it includes official transfers and net errors and omissions, as well as recorded capital movements.2 Overall balances are measured by changes in official gold holdings, in SDRs, in reserve positions in the Fund, in foreign

exchange assets, in use of Fund credit, and, where data are available, in liabilities to foreign monetary authorities, includingthose arising from "swap" transactions.

3 Austria, Belgium-Luxembourg, Denmark, the Netherlands, Norway, Sweden, and Switzerland.

imports, which was slower in 1973 than ineither of the two preceding years. The structureof German exports, involving a high proportionof capital and other durable goods subject torelatively low price elasticities of demand, facil-itated the maintenance of sales volume despite thesharp increase in foreign currency prices of Ger-man goods associated with appreciation of thedeutsche mark. In addition, and especially incombination with the other factors noted, thesharp effective appreciation of the deutsche markin the first half of 1973 had an upward impacton the terms of trade that worked against reduc-

tion of the current account surplus in the periodimmediately following the appreciation.

For the United States, the United Kingdom,and Italy, swings in capital movements softenedor offset the effects of the 1972-73 currentaccount shifts on overall balances, so that thechanges in the latter were smaller or more favor-able than those on current account alone. ForJapan, however, a rise in net capital outflowscompounded the effect of the shrinkage in the cur-rent account surplus, throwing the overall balancedeeply into deficit and bringing rapid liquidationof reserves built up in previous years. Net capital


22

ANNUAL REPORT, 1974

outflows also pushed the overall balance of Francefrom surplus into deficit.

Despite the large shifts of payments balancesamong individual industrial countries from 1972to 1973, the combined balance of the whole groupwith other countries remained relatively steady,both on current account and on capital account.The traditional current account surplus of theindustrial countries rose moderately to some$10 billion, compared with $9 billion in 1972 and$14 billion in 1971. With the net outflow ofcapital from the industrial countries about the

same in 1973 as in 1972, their collective overallbalance was carried somewhat further into deficitby the nonrecurrence of the SDR allocationsreceived in 1972.

The current account and overall balances ofother large groups of countries were almostequally stable from 1972 to 1973 (Table 8). Themain exception to pattern was a rise of about$3 billion in the current account surplus of theoil exporting countries. The current account deficitof non-oil developing countries was virtuallyunchanged (in the $8-8Vi billion range), and the

TABLE 8. BALANCE OF PAYMENTS SUMMARY, 1971-73


Industrial countries 3

Major oil exporters 3

Other primary producing countries 3

More developed areas

Less developed areas

In the Western Hemisphere

In Asia

In Africa

In the Middle East

Total, all countries

197119721973

197119721973

197119721973

197119721973

197119721973

197119721973

197119721973

197119721973

197119721973

197119721973

Trade

13.110.411.0

10.612.520.4

-14.0-8.2-9.4

-5.6-2.7-4.7

-8.4-5.5-4.7

-2.0-1.2-0.5

-4.1-2.5-2.0

-0.40.10.7

-1.8-1.9-2.9

9.714.822.0

Balance on

Servicesand

privatetransfers

0.7-1.2-0.8

-8.4-10.6-15.7

0.41.22.8

3.24.36.1

-2.9-3.1-3.2

-2.5-3.2-3.6

0.30.40.8

-1.3-1.4-1.3

0.61.10.9

-7.3-10.6-13.6

Currentaccount

13.89.2

10.2

2.22.04.8

-13.6-7.0-6.6

-2.41.61.3

-11.2-8.6-7.9

-4.5-4.4-4.1

-3.8-2.1-1.3

-1.7-1.3-0.6

-1.2-0.8-2.0

2.54.28.4

CapitalAccountBalance l

-15.9-12.2-12.1

1.01.4

-0.8

18.219.816.0

6.15.70.7

12.114.115.4

4.57.47.9

4.53.73.7

1.41.40.8

1.71.53.0

3.38.93.2

Allocationof

SDKs

2.02.1

0.10.1

0.80.9

0.20.3

0.60.6

0.20.3

0.20.2

0.1

0.10.1

2.93.2

OverallBalance 2

-0.1-0.9-1.9

3.33.54.0

5.413.79.5

4.07.62.0

1.46.17.5

0.23.23.8

1.01.92.4

-0.20.30.2

0.50.81.0

8.616.311.6

Sources: Data reported to the International Monetary Fund and Fund staff estimates.1 This balance is computed residually, as the difference between the overall balance (less SDR allocations) and the current

account balance; it includes official transfers and net errors and omissions, as well as recorded capital movements.2 Overall balances are measured by changes in official gold holdings, in SDRs, in reserve positions in the Fund, in foreign

exchange assets, in use of Fund credit, and, where data are available, in liabilities to foreign monetary authorities.3 For classification of countries shown here, see Table 1 (and especially footnotes 2-4).



small surplus of the more developed primary pro-ducing countries that had emerged in 1972 waswell sustained in 1973. For this latter group, thesalient balance of payments change was a sharpdrop in net capital inflows; this centered mainlyin Australia and reflected not only reversals ofearlier speculative movements in the wake of therevaluation of the Australian dollar in December1972 but also measures taken by the Australianauthorities to restrain overseas borrowing by resi-dent companies.

Inflows of capital and aid received by the non-oil developing countries continued to rise in 1973,when they totaled $15Y2 billion, compared with$14 billion a year earlier and $12 billion in 1971.This increased capital inflow in a year of stabilityfor the current account deficit of these countriesas a group raised their combined overall balanceof payments surplus by about $lVi billion, to$7Vi billion. Both the rise from 1972 to 1973and the surplus in the latter year, however, werecentered mainly in the Latin American and FarEast Asian regions. For non-oil countries of theAfrican region, which together had recorded onlya very small surplus in 1972, the change in theoverall balance in 1973 was negligible. The netinflow of capital to these African countries droppedmarkedly in that year, but so did their currentaccount deficit, as a result of improved trade bal-ances. 5 For the oil exporting countries (pre-dominantly in the Middle East), only a minorpart of the 1972-73 rise in their current accountsurplus appears to have been reflected in anyfurther growth of their overall balance of pay-ments surplus. The latter surplus rose by $*/2 bil-lion, to nearly $4 billion, but the bulk of theincrement in current account earnings was appar-ently absorbed by financial flows other thanreserve accumulation (i.e., debt retirement, capitalinvestment abroad, or official transfers to otherdeveloping countries). An outward flow of capital(or aid) from this group of countries totalingalmost $1 billion in 1973 contrasted with aninflow of $1V^ billion in the previous year.

The Current Account Picture

For 1974, the prospect for current account bal-ances is one of startling changes, dwarfing those

recorded for 1973. Barring some unforeseen majordevelopment in the international economy, thesechanges will involve not only large swings in thebalances of a great many individual countries butalso a massive shift in the global structure of bal-ance of payments relationships among broadgroups of countries.

On the central working hypothesis that thelevel of oil export prices prevailing in the first halfof 1974 will be maintained throughout the year,the combined current account surplus of the majoroil exporting countries will go up very sharply—to perhaps $65 billion as an order of magnitude.The increase of some $60 billion over the enlarged1973 surplus would have its counterpart in adeterioration of similar magnitude for all othercountries combined.6 According to the illustrativeestimates shown in Table 9, about two thirds ofthis total deterioration would be incurred by theindustrial countries and one third by the non-oilprimary producing countries. 7 Within these twolarge groups, the impact of recent developmentsis shaping up as a very uneven one and therebyis creating for many individual countries seriousproblems of payments adjustment and financingextending well beyond 1974, as discussed in thefollowing section.

Among the major industrial countries, all exceptCanada face sizable adverse swings in the oilcomponent of their current accounts in 1974. Forthe United Kingdom, Italy, France, and Japan,these swings are being superimposed on currentaccount positions that were already weak or dete-riorating in the first part of 1974. On the otherhand, early 1974 was a period of strength in cur-rent account balances on non-oil transactions forGermany in particular, but also for the UnitedStates and some of the smaller industrial countriesin Europe.

5 As in other regions, this combined result compriseda variety of different experiences on the part of individualcountries.

6 The full counterpart cannot be expected to appear inreported balance of payments statistics of the importingcountries in the same calendar year, chiefly because ofthe time lags mentioned in footnote 2 to Table 9. Forpresent purposes, however, it is more suitable to basethe analysis on a symmetrical recording of oil trade flows(incorporated in the "adjusted" columns of Table 9) con-sistent with an accrual concept of international paymentstransactions.

7 Changes in basic balances occasioned by the higheroil export prices will, of course, be smaller, and perhapssubstantially smaller, as they will also reflect (inter alia)the oil exporting countries' long-term capital investments,such as those flowing under commitments recentlyannounced by the Iranian authorities.



The collective current account balance of themore developed primary producing countriesseems certain to move back into deficit in 1974,following two unusual years of surplus. In addi-tion to a large adverse swing in the oil componentof the collective balance, some deterioration inthe balance on other current account transactionsof this group of countries may result from influ-ences evident in early 1974. These included asignificant slowing of the rise in export volume,continuing expansion of import volume, and somedeterioration of the average terms of trade, evenapart from the rise in oil costs.

The large and heterogeneous group of non-oildeveloping countries faces the prospect of anadverse current account shift of perhaps $13 bil-lion in 1974, raising their combined deficit tosome $21 billion (Table 9).

Most developing countries are net importers ofoil. For them, the impact of the rise in oil costswill vary not only with the role of oil in the econ-omy but also with the structure and adaptabilityof domestic production and foreign trade, as wellas with access to external capital. Fortunately,

many of these countries entered the period ofadjustment to higher oil prices with recentlyimproved terms of trade and relatively highreserves, owing to the 1972-73 upsurge of pri-mary commodity prices. Despite rising prices ofimports, the collective terms of trade of the non-oil developing countries are estimated to haveimproved by some 6-7 per cent from 1972 to1973. (See Table 6.)

The terms of trade gains for developing coun-tries in 1973, although widespread, were by nomeans universal, and a list of exceptions wouldhave to include the exporters of tea, jute, bananas,bauxite, and manufactures. Also to be noted inthis context is the fact that the 1973 and 1974price increases for cereals, while boosting exportprices for some developing countries (as well asfor the developed countries that are the predomi-nant exporters), represented an important nega-tive factor in the terms of trade of other develop-ing countries. Major foodgrains accounted for alarger portion of the rise in the value of importsinto developing countries in 1973 than did oil,reflecting the fact that their use of oil, though

TABLE 9. SUMMARY OF PAYMENTS BALANCES ON CURRENT ACCOUNT J- 2


Adjusted forAsymmetriesDIIP tn Oil 3

Change from1973 to 1974

Major oil exporters


Other developed countries

Other developing countries

Total 6

1973

5

10

1

-8

8

1974

65

-22

-6

-20

17

1973

5

9

1

-8

7

1974

65

-31

-7

-21

6

Total 4

60

-40

-8

-13

-1

Oil

component 5

60

-53

-6

-7

-6

Sources: Data reported to the International Monetary Fund and Fund staff estimates.1 Goods, services, and private transfers.2 For classification of countries in groups shown here, see Table 1 (and especially footnotes 2-4).3 Chiefly because of time lags between exports as reported by the exporting countries and the corresponding imports as re-

corded by their trading partners, a global summation of reported trade balances yields an excess of surpluses over deficits whentrade values are rising. This asymmetry (as reflected in the first two columns of this table) has increased very sharply in the pastfew years of high inflation and greatly accelerated advances in nominal values of world trade flows. For 1974, the increase inthis asymmetry will reflect the particular impact of the major increases in oil prices that occurred, from the standpoint of theexporting countries, just at the turn of the year but that were reflected in the trade statistics of most importing countries onlywith a lag. Insofar as this timing discrepancy relates to oil, its estimated growth from 1973 to 1974 has been eliminated (alongwith certain other oil trade asymmetries of a more technical character) from the data shown in columns 3 and 4 of this table.The resultant figures impute larger deficits to the importing countries than they would in fact report on an unadjusted basis,but have the merit of putting oil deficits and surpluses on a symmetrical basis, in accordance with an accrual concept of balanceof payments accounting.

4 Based on the data after adjustment for asymmetries due to oil.6 Defined for this purpose as changes in the net value of trade in oil (vis-a-vis all partner countries), together with net changes

in other current transactions in which the oil exporting countries are participants.6 Reflects balances of countries covered here with nonreporting countries, plus (quantitatively more important) statistical errors

and asymmetries. (See footnote 3, above.)



vital, was in many cases relatively low in com-parison with that of the developed countries, whiletheir needs for imported food were in some casesrelatively high. Unusual shortfalls of crops becauseof adverse weather increased such needs in 1973and the first half of 1974.

Among countries whose prospective increasesin the cost of oil imports loom especially largein relation to reserves or total imports, a numberare net importers of cereals. Most of these faceadverse non-oil terms of trade shifts from 1973 to1974, and only a few of them (e.g., Korea) havea recent history of buoyant exports. Althoughsome of these countries may find access to inter-national credit markets to cushion the initialimpact of the combined increases in their oil andcereals import bills, it is within this group thatsome of the most severe problems of readjustmentseem likely to arise in 1974. Such problems maybe especially acute for countries (e.g., India,Bangladesh, and Sri Lanka) whose own exportearnings include relatively substantial amountsfrom commodities that have not shared stronglyin the recent primary commodity price upsurge.

External Policies and Adjustment

There are two well-known reasons why theestablishment of higher oil prices during thefourth quarter of 1973 has had such a dominantimpact on the international payments situation.

First, as noted earlier, there is the fact of thelow elasticities of both demand for and supply ofoil in the short run. On the side of demand, thehigher prices now prevailing will undoubtedlybring about a reduction in the use of oil from therate that otherwise would have obtained, but thiswill be a gradual process. The new level of oilprices will also provide substantial incentives forthe development of alternative supplies of energyresources but, again, this will take time, andimportant new sources of supply are unlikely tobecome available in the next year or two.

Second, the major oil exporting countries willbe unable in the short run to raise imports by anamount approaching the prospective buildup intheir export earnings. Although the capacity toabsorb additional imports differs greatly amongmajor oil exporters, it probably will require aperiod of years for import growth of these coun-

tries as a group to narrow substantially the exportsurplus that is now envisaged for them in 1974.In this regard, changes in exchange rates betweensome of the oil exporting countries and othercountries might come under consideration fromtime to time; however, any adjustment of thisnature is likely to be of limited significance in thegeneral picture because of the desires of the oilcountries to diversify their economies and toobtain earning assets abroad, as against providingthe strong stimulus to consumption of importedgoods that would result from substantial apprecia-tion of the currency.

Given the increase in oil prices that took placelate in 1973, these two factors have perforce ledto the emergence of an enormous disequilibriumin international payments on current account—comprising, as discussed above, a surplus for theoil exporting countries estimated at some $65 bil-lion for 1974 and a matching deficit for the restof the world. This disequilibrium, wholly unpre-cedented in size and character, requires particulartypes of policy response on the part of the oilconsuming countries as a group; lack of such aninternationally cooperative response could seri-ously damage the world economy. Furthermore,this new disequilibrium also poses problems withrespect to capital movements. Funds will flow inhuge volume from the oil exporting countries asthey dispose of their enlarged current accountsurpluses; but the question at issue is whether, inthe nature of things, these funds may be expectedto flow in such a way as to prevent the occurrenceof severe payments imbalances or strong exchangerate pressures in many countries.

Policy Implications of the Oil Situation

Adjustment. Oil importing countries may beexpected to do what they can to reduce their com-bined current account deficit through measuresrelating to the price, supply, and conservation ofoil and other sources of energy. However, asindicated just above, such measures will probablyyield substantial results only gradually.

In a note presented to the Committee of Twentyat its Rome meeting in January 1974, the Man-aging Director of the Fund examined the newsituation created by the raising of oil prices anddrew three main conclusions with respect to theappropriate policy reaction of the oil importing



countries: (1) in the short run that group ofcountries would have to accept the deteriorationof the current account in its balance of payments,since attempts to eliminate the additional currentdeficit caused by higher oil prices through defla-tionary demand policies, import restrictions, andgeneral resort to exchange rate depreciation wouldserve only to shift the payments problem fromone oil importing country to another and to dam-age world trade and economic activity; (2) indi-vidual oil importing countries would have to makeadjustments in relation to each other that tookaccount of the new situation (including the abilityto attract capital) and of imbalances previouslyin evidence—with countries affected more stronglyby oil price increases being expected to initiateadjustments through currency depreciation andinternal measures, and countries in a relativelymore favorable situation having to accept the con-sequent deterioration in their current accounts;and (3) it was essential in this process that coun-tries strive to achieve close and effective coordina-tion of their external policies. As discussed later,the second conclusion on the need for oil import-ing countries to make adjustments in relation toeach other implies unusually difficult decisionsregarding the relative importance to be assignedto financing through private and official capitalflows and to adjustment through exchange ratepolicy and internal measures.

These three policy aspects have, in the newsituation, become guidelines of behavior. In itscommunique following the January 1974 meeting,the Committee of Twenty stated that in thepresent difficult circumstances countries "must notadopt policies which would merely aggravate theproblems of other countries" and emphasized theimportance of international cooperation and con-sultation in this context.

To some extent, the distinction between "oil"and "non-oil" current account deficits is not clearin principle, and it will become increasinglyblurred over time. Although this point has con-siderable validity, the distinction in question hasbeen of analytical and practical significance andcan continue to serve as an important datum inthe determination of balance of payments policythroughout the current year and, perhaps, in 1975as well.

Statistical projections of the "oil deficit," andof current account balances in general, are neces-

sarily subject to considerable margins of error.However, in view of the problems encounteredin shaping balance of payments policy, such pro-jections do not have to be precise in order to beuseful. A quantitative approach involving particu-lar focus on oil transactions should be of assist-ance in preventing the adoption of inappropriatepolicies in the present unique and difficult situation.

Financing. After oil prices had been raised inDecember 1973 and the implications of theimpending enlargement of the current accountpositions of the oil exporting countries were beinganalyzed, it was widely believed that the reflowof funds from those countries would, especiallyin the short run, take a relatively liquid form andbe placed predominantly in the internationalcapital markets. It was presumed that most ofthis flow, at least initially, would be directed towardthe Euro-currency market, with perhaps substan-tial amounts going into the U. S. market as well.In broad outline, these expectations seem to havebeen borne out during the past few months inwhich the increase in oil prices was for the firsttime fully reflected in oil payments and capitalflows.

Although financial markets appear to haveoperated reasonably well in the early stages ofthese flows, an immediate question is whether ornot the Euro-currency market will prove adequateover an extended period to the financing task thatis envisaged. With the volume of potential flowsso great as possibly to strain the market's feasiblelimits of expansion, intermediation over any pro-tracted period could prove to be more difficult ifthe oil surplus countries preferred to invest mainlyat short term, since the borrowing countries havea need for at least medium-term finance. For thisand other reasons, including judgments regardingcreditworthiness, Euro-banks may become increas-ingly reluctant to accept short-term deposits or tomake new or additional investments in somecountries badly in need of finance. In these cir-cumstances, some private financial institutionsmay encounter problems with respect to theircapital structure and the relationship between thematurity distributions of their asset portfolios andof their liabilities. Another important question,mentioned earlier, concerns the possibility thatcapital flows in the new situation might becomedisruptive, contributing either to the intensifica-tion of overall payments imbalances or to the



pushing of exchange rates into ranges consideredundesirable (or to both).

If such concerns are valid, they suggest that themajor industrial countries should consider possibleways and means of minimizing the hazards men-tioned above and assuring the maintenance oforderly conditions in the Euro-currency market.Although industrial countries have in the pastbeen reluctant to coordinate their financial policiesin any formal way, the exigencies of the currentsituation call for careful watch over the operationof international financial markets and constantreadiness to extend, if necessary, the areas ofinformal cooperation to prevent the eruption ofvolatile capital flows.

The concerns expressed above also suggest aneed—and this is of prime importance—to pro-mote alternative channels of finance, throughwhich capital can flow from the surplus to thedeficit countries.8 The Fund's recently establishedoil facility is one such channel. Other official facili-ties or arrangements for the purpose of providingshort-term balance of payments financing includethe regular or traditional facilities of the Fund;inter-central bank swap arrangements, which forthe industrial countries involved are not suitablefor the direct financing of oil deficits but couldserve to bridge over a period in which such financ-ing was being arranged; and a heterogeneousvariety of programs involving the provision ofassistance, through both institutional and bilateralarrangements, to the less developed countries.

The extent to which the available official creditfacilities, supplementing recourse to private mar-kets, will prove to be adequate for the needs ofthe developed countries is uncertain, especiallywhen one looks beyond the current year. But inthe case of the developing countries, officialfinancing facilities and arrangements are clearlynot adequate, even with the Fund's new oilfacility. The main lack relates to the provision ofcapital on concessional terms or outright grantassistance to those less developed countries—mostly with extremely low income levels—thathave been affected most severely by recent inter-national economic developments. The problem isboth serious and urgent.

8 Such a need has been pointed up in recent monthsby the development of an apparently widespread andgrowing concern with respect to the viability of com-mercial financing of large and persistent payments deficits.

Despite the efforts being made by internationaland regional financial organizations, the UnitedNations, and the major oil exporting countries,the needs for concessional capital and grant assist-ance remain very large, particularly in terms ofthe prospects for the next few years. In the caseof the oil countries, it is apparent that their capitalflow to the non-oil developing countries, in theabsence of major policy shifts, will rise onlyslowly because of the time involved in workingout organizational procedures and conductingproject appraisals in the institutions being estab-lished for the purpose. Although these institutionscan make a growing contribution to developmentfinance, much of their lending is for projectswhereas the main current need is for balance ofpayments financing. Some nonproject financing,however, is being provided by oil exporting coun-tries outside existing institutional arrangements.Certain proposals have also been made for institu-tionalizing balance of payments financing on con-cessional terms.

Current Functioning of the Adjustment Process

As was discussed above, oil importing countriesas a group have to accept a sharp deteriorationof their current account in 1974, and a largedeficit can be expected to persist for at least thenext several years. Thus, the main question per-taining to adjustment in the period ahead concernsthe distribution of this deficit among individualcountries. The aggregate current account deficitof oil importing countries will be distributed orshared, in one way or another, and the pursuitof consistent, mutually agreed policies in thissphere could have a profoundly beneficial influ-ence on world economic and financial develop-ments. Adjustment issues for the oil exportingcountries—discussed briefly below—are naturallyvery different, but also are of great importance inthe current setting.

Issues facing the oil importing countries. Anyexamination of the working of the adjustmentprocess, as determined primarily by the industrialcountries, must of course start with an assessmentof the macroeconomic setting in which it is totake place. There is general agreement on the needfor a certain flexibility of exchange rates to facili-tate adjustment, but it is also recognized that suchflexibility needs to be complemented by appropri-



ate domestic demand policies. In the past, it hasoften been thought that countries in a relativelystrong external position ought to provide someextra stimulus to domestic demand while thosein a relatively weak external position ought torestrain domestic expenditure. However, such aprescription presupposes that there is a fair bal-ance between the forces tending to push up pricesand those tending to create unemployment. In thepresent circumstances of high inflation, it is evidentthat the customary ground rules are less applicable.

It cannot be argued, for example, that countriesmust subject themselves to rapid rates of priceinflation in the interest of international adjust-ment. Clearly, countries ought not to be expectedto endure price increases of the order of magni-tude prevailing in the recent past for the sake ofsuch adjustment. In the Fund's recent consulta-tions with members, there was general agreementthat policies in respect of external adjustment hadto be viewed in the context of measures employedto deal with the problem of rising prices; it wasfelt that countries—especially the largest industrialcountries—have an international responsibility,in addition to that arising from their domesticobjectives, to make appropriate contributions tothe easing of price pressures in the world economy.

Such a view may mean that countries, in decid-ing on ways to adjust their balance of paymentspositions, should lean toward choices consistentwith the global demand situation and conduciveto the abatement of inflation both nationally andinternationally. At times of generally high demandpressure, more emphasis on adjustment (restraint)of domestic demand and relatively little relianceon exchange rate adjustment9 might thus typicallybe implied for countries in externally weak posi-tions, while an opposite emphasis might be usefulfor countries in externally strong positions. Accord-ing to these criteria, oil importing countries in arelatively strong balance of payments positionwould be expected to go as far as they felt wasreasonable in expanding demand without weaken-ing the fight against inflation, and thereby to pro-vide support to the growth of world trade andactivity. In the externally weaker countries,

demand would be restrained enough to shiftdomestic resources to the balance of payments bydampening imports and facilitating exports.

Besides the macroeconomic setting, more spe-cific elements to be considered in the examinationof adjustment problems in present circumstancesinclude the size of non-oil deficits on currentaccount (including those carried over from theperiod before the oil situation changed), the rela-tive impact of oil, and the ability of countries toattract capital. The assessment of current posi-tions depends critically on the picture for inter-national capital flows. The volume of such flowswill probably be much larger than in the past, andtheir pattern might be quite different, as the oilexporting countries seek investment outlets. To acertain extent the movement of capital will ofcourse be governed by market forces, but recentdevelopments indicate that a sizable portion of theflows may reflect official policies in respect offoreign borrowing.

The evident willingness of countries to borrowin order to cover oil and other deficits suggeststhat there may be some danger that official financ-ing will bulk too large compared with adjustment,referring here to both exchange rate changes anddemand policy adaptations. 10 Unduly heavy offi-cial borrowing enables countries to sustain cur-rency values and domestic expenditures higherthan they otherwise would be; and, in the currentsituation of rapid inflation and high capacityutilization on a rather wide scale, the result maybe to place undue pressures on the resources ofother countries. However, there is also an oppo-site danger that some countries, reacting to thepressure or prospect of mounting indebtedness,may seek to adjust their current account posi-tions at an unduly rapid pace, to the disadvantageof their trading partners. Thus, a key policy ques-tion at present concerns the relative weights to beassigned to adjustment and financing (includingspecial incentives for capital inflows).

It is essential that the various issues pertainingto external adjustment and financing be sorted out

9 The appropriate role of exchange rates in the currentadjustment process must be considered in the light of(inter alia) the substantial extent to which the effectiveexchange rates of major currencies have changed duringthe past few years.

10 This point is particularly relevant to the major indus-trial countries. Many developing countries have incurreda substantial amount of debt in the recent past, and theymight well find that additional borrowing would not bein their interest, at least on the terms available. For suchcountries, the substantive and urgent need, as emphasizedearlier, is for capital on concessional terms or outrightgrant assistance.



and resolved within an international framework.Discussions in the Fund and other internationalorganizations have for some months been directedto this end. However, it is not apparent that coun-tries are in agreement on the policies to be con-sidered appropriate for a satisfactory working ofthe international adjustment process in the com-ing period, or on the magnitude and speed withwhich individual country positions should beadjusted. This situation is perhaps not surprising.In the past, it has been a naturally difficult taskfor surplus and deficit countries to agree on theirresponsibilities in the adjustment process; and thistime the range of relevant issues confronting thestronger and weaker groups of oil importing coun-tries is even more complex, varied, and difficult todiagnose. But this time, too, the stakes involvedin the achievement of a successful adjustment areunusually high.

In present circumstances, for example, it wouldbe a matter of serious concern if failure of thedesired shifts in payments positions to materializecaused deficit countries to resort to measuresrestricting current transactions. Some reactions ofthis type have already occurred, and generaliza-tion of such developments could have grave con-sequences. It is for this reason that the Committeeof Twenty has stressed the importance of avoid-ing a proliferation of restrictions on trade andpayments for balance of payments purposes, andthat the Committee made provision, as part of theprogram of immediate action announced in itscommunique of June 13, 1974, for countries topledge themselves on a voluntary basis to giveeffect to that recommendation.

Adjustment issues for the oil exporting coun-tries. On the assumption that present levels of oilprices and production are sustained, comparativelylittle external adjustment by the oil exporting

countries is feasible in the short or medium run.The main general problem they face immediatelyis how to invest the counterpart of huge currentaccount surpluses outside their countries in waysthat are prudent from their standpoint and thatdo not have undesirable repercussions on others.Beyond the medium run, however, the oil export-ing countries differ substantially with respect tothe prospects for, and nature of, adjustment.

Approximately one half of governmental reve-nues from petroleum exports is concentrated incountries which for the most part have small popu-lations, have high ratios of foreign reserves toimports, and in the past have exported somecapital—all characteristics which signal the dif-ficulty of their employing domestically any sizablevolume of investable resources. These countrieswith relatively low absorptive capacities may beexpected to accumulate large foreign claims overthe coming years, as they transform a depletableresource into financial assets or real assets abroad,including those originating in concessionary lend-ing to less developed countries.

However, most of the other oil exporting coun-tries have large populations, have made use offoreign credits in the past to support their domes-tic investment efforts, and generally can beregarded as having a relatively large potential fordomestic economic development. It seems likelythat, in time, these countries with relatively highabsorptive capacities will be spending a high pro-portion of their sharply expanded volume of for-eign exchange earnings. But, for some time tocome, they too will have larger reserves andshould be in a position to provide loans or assist-ance to others, as well as to repay debt contractedin the past. The main task of these countries isto raise the rate of development spending effec-tively, without intensifying domestic inflation.


Chapter 2

Developments in International Liquidity

Reserve Changes in 1973

Reserve Growth and Composition

HE stock of international reserves increasedduring 1973 by the equivalent of SDR 6.9

billion, after growing by more than SDR 70 billionduring the previous three-year period (Table 10).Aggregate holdings of all countries reached theequivalent of SDR 153 billion at the end of1973, which was slightly more than twice theirlevel at the beginning of 1970.1 The rise of 4.7per cent in this latest year was quite small in thecontext of recent experience; viewed in longerperspective, it was comparable with the growthrates of 3 to 6 per cent reached during 5 of the10 years before 1964. For the first half of 1974,preliminary indications are that official holdingsincreased by some SDR 12 billion or more. Thereserves of the major oil exporting countries as agroup appear to have more than doubled, whilethe net change for all other countries combined islikely to have been quite small. In particular,complete reports for the industrial countries showthat this group's reserves, which account for asubstantial share of the world total, were muchthe same at the end of June 1974 as they hadbeen six months earlier. Partial data for the

1 As in previous Annual Reports, a gross concept ofofficial reserve holdings is used in this chapter; noaccount is taken of reserve liabilities, which for somecountries constitute an offset to reserve assets, althoughthe question of the best measure of reserves for variouspurposes in the light of recent developments is understudy. Reserve assets in this chapter cover SDRs, reservepositions in the Fund, and official holdings of gold andforeign exchange except for the foreign exchange hold-ings of the United States. In the years when U. S. hold-ings were substantial, they were mainly the counterpartof the use of swaps by other countries and could not beused to finance U. S. deficits. Such holdings had in anyevent been reduced to very low levels by the end of1971, so that adjusted world reserves on and after thatdate did not differ significantly from the unadjustedfigures.

developing countries other than the oil exporterssuggest some increase in the holdings of thatgroup during the period.

The net expansion in official reserves in 1973came about in spite of a devaluation of the U. S.dollar that considerably reduced the value of thereserve stock in terms of special drawing rights(SDRs), the unit in which the reserve statisticshave been expressed.2 In February, the value ofthe U. S. dollar was reduced de facto by 10 percent in terms of gold and of other assets held asreserves that had a fixed gold value, notablyspecial drawing rights and reserve positions inthe Fund. As a result, official U. S. dollar hold-ings—including both dollars held in the UnitedStates and Euro-dollar holdings—have declinedin value against SDRs. The reduction in the SDRvalue of such assets—and hence the reductionin the total reserve stock—has been estimated bythe Fund staff at the equivalent of some SDR 8.6billion.

Countries' net use or acquisition of reservecomponents other than foreign exchange, whichfrom 1970 onward had tended to become only aminor factor in explaining overall reserve develop-ments, played an even less important role in 1973(Table 11 and Chart 6). Central banks engagedin few gold transactions, either between them-selves or with the Fund, because of the wide dis-parity between the official gold price and the priceon the private market.3 No further allocation and

2 The impact of the devaluation of the U. S. dollar onthe SDR value of the portion of foreign exchange hold-ings denominated in U. S. dollars has been calculated asaffecting such holdings in mid-February 1973, when theU. S. Government announced that it was seeking con-gressional approval for a devaluation of the U. S. dollarby 10 per cent. Any impact of fluctuations in exchangemarket rates for the U. S. dollar relative to other cur-rencies is not reflected in the statistics on reserve holdings.

3 The gold component of reserves is expressed at itsofficial equivalence in terms of SDRs, which remainedunchanged throughout the period.

30

T


DEVELOPMENTS IN INTERNATIONAL LIQUIDITY 31

TABLE 10. RESERVES, CREDIT TRANCHE POSITIONS, AND OTHER UNUSED CREDIT FACILITIES, END OF YEARS, 1954-73

Gold

ReservePositions

SDRs in Fund

ForeignExchangeAdjusted 1

TotalReserves

Adjusted l

CreditTranchePositionsin Fund

OtherUnusedCredit

Facilities 2

no cancellation of SDRs took place after the firstbasic period ended in 1972, although participants'holdings of SDRs increased by SDR 121 millionas the result of transfers from the Fund's General

Account, mostly because of purchases for pur-poses of reconstitution. The resulting increase inthe General Account's holdings of currencies,together with a small net reduction in the use of

Sources: International Financial Statistics and, for "other unused credit facilities," Fund staff estimates.1 Excluding U. S. holdings of foreign exchange and including throughout the period amounts incorporated in published U. K.

reserves in 1966 and 1967 from proceeds of liquidation of U. K. official portfolio of dollar securities. The figures for 1971 includethe U. K. official assets "swapped forward" with overseas monetary authorities, as reported in U. K. Central Statistical Office,Economic Trends. The figures for 1973 include official French claims on the European Monetary Cooperation Fund.

2 Unutilized drawing facilities under swap arrangements and related credit arrangements between central banks and treasuries.3 A percentage change cannot be calculated, the base number being zero.

In billions of SDKs

19541955195619571958

19591960196119621963

19641965196619671968

19691970197119721973

34,35,36,37,38,

37.38.38.38.40.

40.41.403938

39,37,36,35,35,

.9 —,4 —,1 —,3 —.0 —

9 —0 —9 —9 —,2 —

,8 —8 —9'.5 —.9 —

.1 —

.2 3.1

.1 5.9

.7 8.7

.8 8.8

1.1.2.2.2,

3.3.4,3,3

4,5,656

6,7,6.6,6

,9,9,3.3.6

.3

.6

.2

.8

.9

.2

.4

.3

.7

.5

.7,7,4.3.2

18.18.19.18.18.

17.20.20.21.23.

25.24.24.26.28.

29.44.73.95.102.

15588

82837

04675

61821

54.55.57.58.59.

59.61.63.64.67.

70.71.71.71.73.

75.92.122.145.152.

99854

08808

06899

51198

7.7.7.7.7.

12.13.12.13.13.

13.12.17.18.17.

16.25.27.27.27.

88512

96834

83010

80279

———

—

—1.71.42.0

5.83.84.55.313.1

14.314.211.112.319.6

Annual percentage changes

1955195619571958

19591960196119621963

19641965196619671968

19691970197119721973

1.41.83.51.9

-0.30.32.2—3.5

1.52.5

-2.3-3.4-1.4

0.5-5.0-3.0-0.9—

1.921.2

1.510.6

27.09.9

16.5-8.7

3.8

5.429.417.8

-9.212.9

3.714.4

-17.5-0.5-2.5

2.35.1

-3.5-0.3

-5.013.12.92.9

11.0

5.6-2.3

0.78.66.7

4.048.967.328.97.3

1.73.61.11.6

-0.64.73.20.46.0

3.22.40.30.22.7

2.122.032.519.54.7

0.5-4.3-4.7

1.4

77.66.1

-6.44.30.8

2.8-10.7

38.36.1

-5.8

-1.348.89.01.90.6

3

88.147.8

1.4

3

-16.239.2

193.4-35.3

18.417.7

149.3

9.3-1.0

-21.810.559.9

Annualrate,

compound1954-73 0.1

3 6. 5 9.,5 5.,5 6.8

3


Sources: International Financial Statistics and Fund staff information and estimates.1 Adjusted reserves. See footnote 1, Table 10.2 Variations in IMF gold investments and gold deposits are excluded because they do not give rise to net creditor positions in the Fund.3 Covers only claims of countries, including those denominated in the claimants' own currency.4 Unlike the other components of reserve growth, the deficit is already a flow concept and therefore is not expressed as a change from

the previous year. The U. S. deficit is shown before allocations of SDR 0.9 billion in 1970 and SDR 0.7 billion in both 1971 and 1972.5 Excluding the estimated impact of the December realignment on the value of amounts outstanding at that time.6 Excluding the estimated impact of the February devaluation of the U. S. dollar on the amounts outstanding at that time.7 Excluding the estimated impact of the November devaluation of the pound sterling on the amounts outstanding at that time.8 Excluding the estimated impact of the August devaluation of the French franc on the amounts outstanding at that time.9 Comprises official claims on the European Monetary Cooperation Fund.

10 For explanation, see page 30 above and page 25, footnote 2, of the Annual Report, 7972.11 See Table 15 for more details concerning these Fund staff estimates.12 Includes asymmetries arising from the fact that data on U. S. and U. K. currency liabilities are more comprehensive than data on

official foreign exchange holdings shown in International Financial Statistics. Table 15 provides more details.

ANNUAL REPORT, 1974

TABLE 11. SOURCES OF RESERVE CHANGE, 1964-73 *

(In billions of SDRs)

32

OutstandingFotals at theEnd of 1973Annual Changes in 1964 1965 1966 1967 1968 1969 1970 1971 19721

1973

1. Gold ReservesMonetary goldGold transactions (acquisitions —)

by IMF, BIS, and European Fund

0.7

-0.1

0.2

0.8 -0.9

-1.6

0.2

-0.7

0.1

0.1

0.1

0.3

-2.2

-0.1

-1.0

0.2

-0.5

Countries' gold reserves 0.6 1.0 -0.9 -1.4 -0.6 0.2 -2.0 -1.1 -0.3 35.8

8.8

— — — — — —

_ __ _

3.4-0.3

3.1

3.0-0.2

2.8

3.0-0.1

2.8

0.1

0.1

2. Special Drawing RightsAllocation of SDRsIMF holdings of SDRs (increase -)

Countries' SDR holdings

3. Reserve Positions in the FundUse of IMF creditIMF gold transactions (inflow -f)2

IMF transactions in SDRs (inflow -f)IMF surplus (increase —)

Reserve positions in the Fund

0.4-0.1

1.6-0.3

-0.1

1.0

-0.1

-0.50.1

-0.1

1.2-0.4

-0.1

0.3

-0.1

-0.81.60.3

-0.1

-1.90.40.2

-0.30.10.1

-0.1

-0.1

0.2 1.2 1.0 -0. 6 0.,7 0..2 1.0 -1.3 — -0.2 6.2

4. Foreign Exchange Holdingsa. Official claims on United States3

U. S. deficit on official settlements4

U. S. reserve assets (includingforeign exchange) used intransactions with countries

1.5 1.3 -0.2 3.4 -1.6 -2.7 10.7 30.5 10.2 4.9

-0.2 -1.2 -0.7 -0.1 0.9 1.3 -2.9 -3.06 -0.2 -0.2

Official claims on United-States3 1.4 — -1.0 3.3 -0.8 -1.5 7.8 27. 45 10.0 4.76 55.4b. Official sterling claims on United

Kingdomc. Official deutsche mark claims on

Germanyd. Official French franc claims on

Francee. Foreign exchange claims arising

from swap credits and relatedassistance

f. Correction for effect of valuationchanges on stock of reserves 10

g. Identified official holdingsof Euro-dollars n

h. Identified official holdingsof other Euro-currencies

i. Residual sources of reserves 12

Countries' holdings of foreignexchange

Total reserve change

-0.1 -0.4 -0.1 -0.57 -0.5 0.8 0.5 1.7 0.6 0.2 6.5

0.1 — 0.1 — 0.1 0.1 0.8 -0.45 0.1 -0.7 0.6

0.4 -0.3 0.7 0.9 1.2 -0.1 -2.2 -0.7 — 0.59 0.59

— — — -0.8 — -0.1 — -4.4 — -8.6 —

-0.1 0.5 0.2 1.6 1.0 5.6 l . l 6 6.8 2.06 17.

-0.,4 0. 2 -0.2 -l.O7 0.1 l.l8 1.8 4..75 11.6

1.77.06

5.314.9

1.3 -0.6 0.2 2.1 1.8 1.2 14.5 29.7 21.3 7.0 102.1

2.2 1.7 0.2 0.1 2.0 1.6 16.6 30.0 23.8 6.9 152.8

0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.2 1.3

4.7 1.9



CHART 6. LEVEL AND COMPOSITION OF RESERVES,END OF PERIOD, 1963-FiRST QUARTER 1974


1 Adjusted reserves; see Table 10.

Fund credit and some other minor transactions,reduced members' reserve positions in the Fundby SDR 157 million. Virtually the whole rise incountries' reserves was thus directly attributableto the foreign exchange element, which by theend of 1973 accounted for as much as two thirdsof the total stock (Table 12).

The net accrual of foreign exchange reservesduring 1973 was very unevenly spread over thecourse of the year. Changes in holdings frommonth to month or even from quarter to quarterare not necessarily indicative of significant trendsbecause movements over these short periods areoften greatly distorted by factors that prove to betemporary or reversible. These factors includeseasonal strength or weakness in the balance ofpayments, especially in the trade and servicesitems; swaps between the monetary authoritiesand the commercial banks at certain accounting

dates, undertaken for such purposes as windowdressing or adjustment to domestic liquidityrequirements; sporadic official borrowings; andexchange market intervention to counter specula-tive capital flows, together with arrangementsmade between monetary authorities for financingsuch intervention. Nevertheless, the pattern for1973 clearly suggests a definite slackening in therate of reserve growth and, indeed, a reversalduring the year from a very high rate in the firstmonths to a negative rate toward the end. Anaccumulation of over SDR 11 billion in foreignexchange holdings occurred in the first quarter,the greater part being offset by the reduction invalue of the dollar-denominated portion of thoseholdings that resulted from the devaluation of thatcurrency in February. The second and third quar-ters saw a further increase in foreign exchangereserves totaling just over SDR 7 billion. In thefinal quarter, however, a decline set in thatreduced the aggregate by more than SDR 3billion.

This sequence of events was to some extentparalleled by developments in the "official settle-ments" balance of the United States and itsfinancing (Table 13). Of those sources that canbe identified, the financing of the imbalancebetween the United States and other countriesmade the largest contribution to reserve changeduring 1973, but its influence diminished greatlycompared with previous years. During the three-year period 1970-72, the global financing of allcountries' overall payments imbalances (that is,all sources other than valuation changes) hadadded an average of SDR 23.3 billion annually tocountries' foreign exchange stock, of which 65per cent was in the form of U. S. dollar and otherclaims on the United States. Yet in 1973, whenthe aggregate addition from the financing ofimbalances had fallen to SDR 15.6 billion, lessthan one third of that amount had a counterpartin the corresponding U. S. liabilities. Moreover,the net increase in world reserves during the yearfrom the financing of imbalances with the UnitedStates was due entirely to developments in thefirst quarter, when the increase approached theequivalent of SDR 9 billion. Beginning in thesecond quarter, reductions in official claims on theUnited States began to take place at an accelerat-ing rate; these reductions accumulated to a totalof SDR 4 billion for the remainder of the year.


34

ANNUAL REPORT, 1974

TABLE 12. COMPOSITION OF ADJUSTED GLOBAL RESERVES, END OF 1950, 1960, AND 1970-FmsT QUARTER 1974x

(In per cent)

GoldSDRsReserve positions in the FundForeign exchange

Total

1950

68.9

3.527.6

100.0

1960

61.6

5.832.6

100.0

1970

40.43.48.4

47.9

100.0

1971

29.54.85.2

60.5

100.0

1972

24.56.04.3

65.2

100.0

1973

23.45.84.0

66.8

100.0

First Quarter1974

23.15.74.0

67.2

100.0

Source: International Financial Statistics.1 For the nature of the adjustments, see footnote 1, Table 10.

The value of these claims that are officially held,expressed in terms of SDRs, was slightly lower atthe end of 1973 than it had been at the beginningof the year, because the impact of the devaluationof the dollar on existing holdings outweighed themoderate net new accumulation that took placeover the year.

Claims on the United States continued both toconstitute the bulk of foreign exchange holdingsand to form the largest single type of officialreserves. Other kinds of foreign exchange claimsin aggregate, however, are not notably smaller(Table 14). Despite the considerable dampeningof reserve expansion that characterized global

reserve developments in 1973, the increase inofficially held claims other than those on theUnited States nearly matched the exceptionallylarge increase that had occurred in the previousyear. During 1973, they rose by almost SDR 11billion through transactions to settle paymentsimbalances and, even after making allowance forthe reduction in the SDR value of the dollar-denominated portion because of the devaluation,reached a stock total that is estimated at aboutSDR 47 billion at the end of the year. At thatlevel, they were considerably larger than theworld's holdings of gold valued at the officialprice.

TABLE 13. U. S. BALANCE OF PAYMENTS AND ITS FINANCING, 1968-73


Balance on goods and servicesTransfers and long-term capital

Balance on goods, services, transfers, andlong-term capital

Short-term capital, and errors and omissions, net

Official settlements balance

Financed byReserve liabilities (decrease — )Reserve assets (increase — )

GoldSDRsIMF gold trancheForeign exchange

Total reserve asset transactions

Memorandum item : SDR allocation ( — )

1968

2.0-3.4

-1.4

3.0

1.6

-0.8

1.2—

-0.9-1.2

-0.9

—

1969

1.3-4.9

-3.6

6.3

2.7

-1.5

-1.0—

-1.00.8

-1.2

—

1970

2.9-6.7

-3.8

-6.9

-10.7

7.3

0.8—

0.42.2

3.4

-0.9

1971 *

-0.2-10.4

-10.6

-19.9

-30.5

27.4

0.90.51.40.4

3.1

-0.7

1972

-6.0-4.3

-10.3

0.1

-10.2

9.4

0.5—

0.2—

0.7

-0.7

1973

3.8-4.5

-0.7

-4.2

-4.9

4.6

———

0.2

0.2

—

Reserve asset change including SDR allocation(increase —) -0.9 -1.2

Source: U. S. Department of Commerce, Survey of Current Business.1 The U. S. dollar value of these transactions has been used throughout 1971 as an approximation of their value in terms of

SDRs.

2.5 2.3 0.2



TABLE 14. OFFICIAL HOLDINGS OF CLAIMS ON THEUNITED STATES AND OTHER FOREIGN EXCHANGE,

END OF YEARS, 1969-73 l

Claims on theUnited States

Other ForeignExchangeAdjusted2

Total ForeignExchangeAdjusted l

In billions ofSDRs

19691970197119721973

16.023.846.756.755.4

13.620.327.138.546.7

In per cent

29.644.173.895.2

102.1

19691970197119721973

54.154.063.359.654.3

45.946.036.740.445.7

100.0100.0100.0100.0100.0

Source: International Financial Statistics.1 Adjusted holdings. See footnote 1, Table 10.2 Comprises the types of claims shown in Table 11, lines

4.b-e and 4.g-i; it should be noted that 4.i is the residualitem.

The growth of foreign exchange other thandollar claims in the United States was widely dis-persed over a variety of forms, some of them tradi-

tional but most of rather recent origin (Table 15).A detailed review of developments in this areamust be approached cautiously, since the datathat the Fund staff has been able to compileare not as complete or as reliable as could bedesired. Thus, the composition of only just overtwo thirds of the stock of these other claims atthe end of 1973 has been identified from the sideof either the claimants or the debtors, and theremainder, which is derived as a residual, alsocontains all the errors, omissions, and asym-metries in the recorded reserve statistics, partiallyon an offsetting basis. Furthermore, not muchmore than half of the aggregate growth in claimsin this group through transactions during 1973can as yet be attributed to a specific category ofclaims.

In spite of these reservations about the esti-mates, Euro-dollar claims are clearly the mostprevalent form, next to direct dollar claims, inwhich foreign exchange is now held. IdentifiedEuro-dollar holdings at the end of 1973 accountedfor almost two fifths of foreign exchange other than

TABLE 15. IDENTIFIED OFFICIAL HOLDINGS OF EURO-CURRENCIES AND RESIDUAL SOURCESOF FOREIGN EXCHANGE RESERVES, END OF YEARS, 1969-73

(In billions of SDKs)

1969 1970 1971 1972 19732

1 . Identified official Euro-currency holdingsEuro-dollars

Industrial countriesPrimary producing countries

More developed areasLess developed areas

Western HemisphereMiddle EastAsiaAfrica

Total, primary producing countriesof which, major oil producers

Grand Total

Other Euro-currencies

2. Residual sources of reservesIdentified direct claims on IBRD and IDAIdentified direct claims on other central monetary

institutions 3

Unidentified residual 4

Sources: Fund staff information and estimates. For1 Includes the change in the level of holdings owing2 Includes the change in the level of holdings owing

2.2 5.1

0.5 1.42.0 3.8

0.6 1.20.4 0.60.5 1.00.5 1.1

2.5 5.20.8 1.5

4.7 10.3

0.5 0.7

-0^5 i . l

3.4

1.95.3

1.51.11.01.6

7.22.8

10.6

1.7

0.6

0.84.4

5.7

2.98.7

3.41.91.81.7

11.63.9

17.4

3.6

0.6

0.76.0

5.1

3.09.6

3.72.42.51.0

12.64.0

17.8

5.3

0.6

1.113.3

area and group coverage, see notes to Table 17.to the effect of the realignmentto the effect of the U. S. dollar

in December.devaluation in February.

3 That is, on central monetary institutions other than those in the United States, the United Kingdom, France, or Germany.4 See footnote 12, Table 11. Before 1971, this line includes holdings of non-dollar Euro-currencies and claims

monetary institutions, which were not then separately identified.on other central


36

ANNUAL REPORT, 1974

claims on the United States, and this proportioncould actually be much higher, depending on whatpart of the unidentified residual as well may con-sist of Euro-dollar holdings. Euro-dollars werealso the largest identifiable component (besidesU. S. dollars) contributing to reserve expansion in1973, when the devaluation loss in the stock isexcluded from consideration. Although the indi-cated increase in such holdings was much belowthat of the previous year, this finding must beappraised in the light both of the slower rise inreserves in general and of the large increase in theresidual for 1973 that is as yet unidentified. Theincrement in Euro-dollar assets appears to havebeen quite widely distributed over the primaryproducing countries, although here again thedefects in the data make such a conclusion rathertenuous.

Identified Euro-currencies other than the Euro-dollar have been emerging as significant media inwhich reserves are held. Such holdings more thantrebled over the past two years, reaching anaggregate amount in excess of SDR 5 billion atthe end of 1973. The favored currency of denomi-nation was overwhelmingly the deutsche mark,although occasional use was made of other majorEuropean currencies.

Claims on countries other than the UnitedStates in their own currencies have for some timebeen declining in importance relative to dollarsand Euro-currencies as instruments for holdingreserves. Nevertheless, the known stock of suchclaims has continued to show a steady enlarge-ment and is estimated at the equivalent of SDR 9.5billion at the end of 1973. Over two thirds ofthis total comprises sterling, followed by muchsmaller amounts for the French franc, thedeutsche mark, and a few other European cur-rencies.

Country Distribution

As was to be expected in a year when globalreserve growth was tapering off sharply, largechanges in the reserves of some countries in 1973represented not only overall payments surplusesbut also deficits (Table 16). However, all five ofthe countries showing major declines in theirreserves had experienced major increases in atleast two of the three preceding years. This draw-ing down of recent accumulations was not general,since the five countries with the largest increases

TABLE 16. SELECTED COUNTRIES WITH MAJORRESERVE CHANGES, 1973 l

(In billions ofSDRs)

Current NetChange in Account CapitalAdjusted Surplus InflowReserves2 (Deficit-)3 (Outflow-)4

Major increasesGermany, Fed.

Rep. ofBrazilNetherlandsSpainSaudi Arabia

ArgentinaBelgiumSwedenYugoslaviaAlgeriaTurkey

Total of 11countrieswith majorreserveincreases

Major declinesJapanFranceLibyan Arab

RepublicCanadaAustralia

Total of 5countrieswith majorreservedeclines

5.61.51.01.00.9

0.70.70.60.60.50.5

150

-6.8-1.9

-0.9-0.8-0.6

-11.0

5.6-1.1

1.40.42.6

0.61.41.10.3

-0.50.5

12.2

0.20.5

0.1-0.4

0.7

1.0

2.13.1

-0.80.4

-1.1

0.1-0.8-0.4

0.21.00.1

3.9

-5.4-2.1

-1.0

-1.2

-9.6

Sources: International Financial Statistics and Fund staffinformation and estimates.

1 The difference between current and capital transactionsand the increase in adjusted reserves results from the use(or repayment) of Fund credit and other conditional liquidity,changes in official monetary assets not included in thereserves, changes in liabilities to foreign official holders, andchanges in the valuation of reserves, most of which arosefrom the devaluation of the U. S. dollar in February 1973.

2 For the nature of the adjustments, see footnote 1,Table 10.

3 Balance on goods, services, and private transfers.4 Government transfers and recorded movements of

capital (excluding official reserves and related assets andliabilities) plus net errors and omissions.

in 1973, namely, Germany, Brazil, the Nether-lands, Spain, and Saudi Arabia, had made majorgains in reserves in at least two of the previousthree years. Six other countries recorded majorincreases during 1973 for the first time in the1970-73 period, with the exception of Turkey,which had an increase of comparable size in 1972.

Changes in the gross reserve assets of individualcountries or groups, however, are not necessarilyindicative of the overall strength or weakness of



their balance of payments positions. In particular,reserve holdings may be increased or their declinelimited through borrowing abroad, which is some-times undertaken specifically for those purposes;similarly, the repayment of previous borrowingwill tend to hold down reserve increases or toreduce asset holdings. The listing of countries withmajor declines in gross reserve assets, for example,includes some countries whose overall paymentsposition was actually quite strong. Conversely,some countries whose position was comparativelyweak are not included in the table. These balanceof payments developments are discussed in Chap-ter 1.

The less developed of the primary producingcountries as a group continued to add to theirreserves at a rapid rate, as had also been the casein the previous year (Table 17). The addition togross reserves in 1973 amounted to the equivalentof SDR 7.0 billion, compared with SDR 8.0 bil-lion in 1972, the main factor underlying thisapparent slowdown being the reduction in valueof the stock caused by the devaluation of theU. S. dollar. This latest increase brought the shareof this group in total world reserves to 23.9 percent, a proportion well above the previous high of20.7 per cent that had been attained at the end of1969. Nearly three fourths of the overall improve-ment for the group in 1973 was accounted for bythe growth in the reserves of the major oil export-ers other than the Libyan Arab Republic,together with Argentina and Brazil. The patternfor individual geographic areas showed increasesof 18 per cent for Asia, 29 per cent for the West-ern Hemisphere, and 34 per cent for the MiddleEast. In Africa, however, an aggregate decreaseof 2 per cent was recorded, reflecting the sub-stantial decline in the holdings of the Libyan ArabRepublic; the increase for all other African coun-tries taken together came to 30 per cent.

The more developed of the primary producingcountries as a group had shared to an extraor-dinary degree in the global reserve accumulationthat occurred in 1971 and 1972, much more thandoubling their official holdings in this short spanof only two years. This experience was notrepeated for a third consecutive year. These coun-tries in the aggregate, however, did not undergoany attrition of their total stock during 1973,despite the devaluation of the dollar, and in factincreased their holdings by almost 6 per cent.

The industrial countries were the only group toexperience an actual decline in their reserves dur-ing 1973. Although the reduction was little morethan 1 per cent, it was noteworthy because itsucceeded three annual increases on a hithertounprecedented scale. This lack of notable changein the aggregate was the net outcome of very largemovements in one direction or the other recordedfor a number of the individual countries in thegroup. Japan's official reserve holdings declinedby SDR 6.8 billion while Germany's holdings roseby SDR 5.6 billion, both changes being of a mag-nitude that has rarely been encountered in pre-ceding years. In fact, individual instances of largechange during 1973 were considerably moreprevalent than those of comparative stability; thelatter include Italy, Switzerland, the United King-dom, and the United States.

Factors Affecting theAdequacy of Reserves

This section contains the review of the ade-quacy of global reserve holdings that the ExecutiveDirectors are required to make under Section 10of the By-Laws of the International MonetaryFund. The review this year is being made againstthe background of a number of exceptional devel-opments: (1) the realignment of parities andwidespread adoption of floating exchange rates;(2) developments relating to gold; and (3) thechanges in balance of payments prospects as aresult of developments in the markets for essentialcommodities, particularly oil. All of these develop-ments may well have had a major impact onreserve ease, but to an extent that is still highlyuncertain. The section therefore starts by analyz-ing the individual impact on reserve ease thatmight be expected from each of these develop-ments.

This is followed by the presentation of twotentative approaches to assessment of the degreeof global reserve ease, on the lines that have beendeveloped in previous annual reviews. The firstcompares actual reserve holdings with the volumeof reserves that might be judged appropriate onthe basis of statistical extrapolation procedures.The extrapolation is based on the estimation ofrelationships between reserve holdings and othereconomic variables to which reserve needs are


TABLE 17. COUNTRIES' OFFICIAL RESERVES, ADJUSTED, 1950, 1960, AND 1970-MARCH 1974 l


Total at End of Period

Industrial countriesUnited StatesUnited Kingdom

Total

BelgiumFranceGermany, Federal Republic ofItaly

SwitzerlandOther industrial Europe 2

Total, continental industrial Europe

CanadaJapan

Total, industrial countries

Primary producing countriesMore developed areas

Other European countries 3

Australia, New Zealand, and South Africa

Total, more developed areas

Less developed areasWestern Hemisphere 4

Middle East 5

Asia6

Africa 7

Total, less developed areas 8

of which, major oil exporting countries 9

Grand Total

1950

24.33.4

27.7

0.80.80.20.70 ^1.60.5

5.2

1.80.6

35.4

1.62.1

3.7

2.81.54.10.8

9.81.3

48.9

1960

19.45.1

24.5

1.52.37.03.31 Q2.31.8

20.1

2.01.9

48.5

2.31.3

3.7

2.81.43.12.1

9.62.4

61.8

1970

13.92.8

16.7

2.85.0

13.65.43 ^5.13.8

39.0

4.74.8

65.2

5.72.8

8.5

5.63.35.24.2

18.44.9

92.1

1971

11.98.1

20.0

3.27.6

17.26.3

6.44.9

49.1

5.314.1

88.5

8.14.0

12.1

6.14.95.45.1

21.57.6

122. 1

1972

11.95.2

17.1

3.69.2

21.95.6

6.96.0

57.6

5.616.9

97.2

11.87.4

19.2

9.77.17.25.5

29.59.9

145.9

1973

11.95.4

17.3

4.27.4

27.55.3

7.16.9

63.8

4.810.2

96.0

13.66.7

20.3

13.09.78.45.4

36.511,8

152.8

March1974

12.15.3

17.4

4.06.7

27.35.5

6.66.5

61.6

5.110.3

94.4

13.36.6

19.9

13.711.79.16.4

40.875.5

155.1

Gold

9.70.7

10.4

1.53.54.12.91 Q2.91.0

17.9

0.80.7

29.8

1.90.9

2.8

1.01.00.60.4

3.21.2

35.7

Composition of Reservesat End of March 1974

SDRs

1.80.6

2.4

0.60.11.40.3

A

0.4

3.3

0.50.4

6:6

0.30.3

0.6

0.60.20.50.3

1.60.3

8.8

Reservepositions

in theFund

0.60.1

0.7

0.50.31.20.3O ')

0.4

3.0

0.30.5

4.5

0.30.3

0.6

0.40.20.20.2

1.10.3

6.2

Foreignexchange

—3.9

3.9

1.42.7

20.62.0

3.74.6

37.5

3.58.6

53.5

10.75.1

15.8

11.610.37.75.5

35.013.7

104.3

Source: International Financial Statistics.1 For the nature of the adjustments, see footnote 1, Table 10. Totals may not add because of rounding and because some totals include unpublished data for component

areas.2 Austria, Denmark, Luxembourg, Norway, and Sweden.3 Finland, Greece, Iceland, Ireland, Malta, Portugal, Spain, Turkey, Yugoslavia, and, beginning in 1972, Romania's reserve position in the Fund.4 Argentina, Bolivia, Brazil, Central America, Chile, Colombia, the Dominican Republic, Ecuador, Guyana, Haiti, Jamaica, Mexico, Panama, Paraguay, Peru, Trinidad

and Tobago, Uruguay, Venezuela, and, beginning in 1970, SDRs and reserve position in the fund for Barbados.5 Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Saudi Arabia, the Syrian Arab Republic, and, beginning in 1965, the People's Democratic Republic of

Yemen, and in 1970, Oman.6 Afghanistan, Burma, the Republic of China, India, Indonesia, Korea, Malaysia, Nepal, Pakistan, the Philippines, Singapore, Sri Lanka, Thailand, and Viet-Nam and,

for the Khmer Republic and Laos, SDRs and reserve positions in the Fund.7 Excluding Egypt and South Africa8 Includes residual.9 Algeria, Indonesia, Iran, Iraq, Kuwait, the Libyan Arab Republic, Nigeria, Saudi Arabia, and Venezuela.

3.5 4.4 5.4 5.0 0.4 2.4



thought to be related, taking as the base a periodin which reserve ease is judged to have beensatisfactory. The results of these extrapolationsrequire modification to allow for the effects ofchanges in the underlying structure that haveoccurred since the period of observation. Becausethere have recently been many important struc-tural changes, and the adjustments required bythese are so uncertain, it is considered that, atleast in present circumstances, this approachshould be regarded as supplementary to the sec-ond approach.

The second approach seeks to draw conclusionsregarding the degree of reserve ease from coun-tries' use of such policy instruments as exchangerates, aid, trade and exchange controls, demandmanagement, and international borrowing. Thisapproach has the advantage, in principle, which isparticularly important in the present context, ofpermitting inferences to be drawn about the netimpact of several conflicting factors. Its difficultiesare that it is often questionable as to whetherpolicy measures can legitimately be interpreted asreflections of reserve ease or stringency; that itcannot yield any quantitative estimate of reserveexcess or inadequacy; and that contradictorymanifestations of reserve ease or stringency indifferent countries require weighting before con-clusions as to global reserve ease can be reached.

The Impact on Reserve Ease of Certain RecentDevelopments

(1) The move to widespread floating. It hasgenerally been taken for granted that greaterflexibility in adjusting exchange rates wouldreduce the extent to which countries use reservesin intervention. This would suggest that one of themajor motives for holding reserves would havebeen weakened so far as an important group ofcountries are concerned, and therefore that theglobal need for reserves would have declined.

There appear, however, to be several reasonsfor questioning whether the need for reserves hasdeclined as much as is sometimes assumed. First,even where currencies are floating independentlytheir exchange rates are being managed ratherthan being allowed to float without intervention.Second, there are other motives for holdingreserves in addition to their use in financing pay-ments imbalances, such as the need to preserveconfidence and to serve as a basis for foreign

borrowing. Third, countries whose currencies arepresently floating may be anxious to preserve theoption of returning to a par value system whencircumstances permit, and this would require themaintenance of a level of reserves appropriate tosuch a system. Fourth, the present system is oneof limited floating in that the majority of countriesstill peg their currencies, either to a single inter-vention currency, to a composite of currencies, orto a number of other currencies in the context ofjoint intervention arrangements. It seems likelythat most countries which peg their currency to afloating currency will increase their use of reservesabove the level experienced under a par valuesystem, because the fluctuation of the exchangerates of third currencies in terms of their inter-vention currency will tend to add to the varia-bility of their payments balance.

There is not as yet any statistical evidence of areduction in the utilization of reserves by coun-tries that have allowed their currencies to float.However, experience of the operation of a systemof widespread floating is still too limited to per-mit assessment of the existence or magnitude ofeconomies in reserve use as a result of floating,especially in view of the many other disturbingfactors that have been present since March 1973.Without the absorption of market pressuresthrough exchange rate changes, the strains onindividual countries' reserves in 1973 and early1974 might have been much greater.

(2) Gold. There have been several importantdevelopments relating to gold in the past year.The price on the private market, which hasremained extremely volatile, rose substantiallyover the period, from an average of about $100per ounce in the second quarter of 1973 to over$160 per ounce in the corresponding quarter of1974. (The price was $154 at the end of July1974.) The Washington arrangements of March1968, whereby the Governors of the central banksof the United States and six European countriesagreed not to sell gold on the private market,were terminated in-November 1973. This wasfollowed in December 1973 by termination of theDecember 1969 Fund decision regarding pur-chases of South African gold by the Fund. SinceDecember 1973 there have been a number ofinformal discussions on the future pricing and useof officially held gold, including the conclusion ofthe Ministers of the Group of Ten in June 1974



that gold could be used as collateral at a pricedifferent from the official gold price.

As long as the Washington arrangements werein force, any significant premium of the price onthe private market over the official gold pricereinforced the reluctance of many countries to usetheir gold holdings, which tended to reduce thelevel of effective liquidity. If termination of theWashington arrangements had led central banksto be willing to sell their gold holdings on theprivate market, the central banks that hold sub-stantial quantities of gold would have experienceda major increase in their effective liquidity, whichwould have been further reinforced by the strongrise in the price of gold on the private market.But it is not clear just how large the increase ineffective liquidity—i.e., the expectation of theauthorities involved regarding the sum that couldbe realized in the event of need—would havebeen.

It appears, however, that termination of theWashington arrangements did not result in centralbanks being any more willing to sell gold on theprivate market, perhaps because of the expecta-tion that such action would precipitate a pricedecline, or that prices were likely to rise further.It remains to be seen whether the opportunity ofusing gold as collateral at a price different fromthe official gold price will provide a channel bymeans of which countries will once again becomewilling to use their gold holdings. In any event, itwould clearly be inappropriate to ignore theimplications of developments in the private mar-ket for an assessment of the effective liquidity ofgold holding countries, and it is probable that thecombined effect of the developments of the pastyear has been to increase this effective liquidity,possibly by a substantial sum.

(3) Developments in the oil market. The thirdset of recent developments with major potentialimplications for reserve ease are those relating tothe market for oil. From the standpoint ofimporters the increase in the price of oil has beenparalleled by increases in the prices of some otheressential commodities. The distinctive problemstemming from the oil price increase is that—because of the limited absorptive capacity of anumber of oil exporting countries in the mediumrun—there is virtually no prospect of currentaccount adjustment leading to an end to largereserve accumulation by the oil exporters in

aggregate. This raises a number of complex issues,which require discussion at some length, par-ticularly concerning the probable capital accounteffects of the prospective imbalances.

Although greater supply stringency in the early1970s led to a decline in the extension of crediton favorable terms to oil importers by the oilcompanies, and the production cuts by somecountries late in 1973 resulted in importanttemporary disturbances, the major developmentin the oil market has been the large price increasesof late 1973. This led to a dramatic shift in thebalance of payments outlook, with many oilimporting countries faced with the prospect ofsubstantial current account deficits in place oftraditional outcomes of near balance or of sur-plus. It is not of course true that these currentaccount deficits will lead to a pan passu reductionin the collective reserves of the oil importingcountries, because, either directly or through theEuro-currency markets, much of the volume offunds acquired by the oil exporters will tend toreturn to some of the oil importers on capitalaccount. However, even if the current accountdeficits of the oil importers led to no reduction intheir collective reserves, it might be expected thattheir reserve ease would decline as a result of anincreased demand for reserves, occasioned byuncertainty as to their future success in securingcapital inflows for financing their current deficits,and by an increased need to hold reserves assecurity for borrowing.

Since the oil exporters in aggregate are receiv-ing reserves in excess of their medium-run needs,and in a number of cases reserve holdings are in-tended to generate a permanent flow of interestearnings, reserve increases accruing to them arelikely to have a minimal impact on global reserveease. Consequently an examination of the impactof changes in the supply of reserves on the degreeof reserve ease should concentrate on the impacton the collective reserves of the oil importers,rather than on the global supply of reserves(including the reserves of net exporters).

If the oil exporters were to hold their reservesin the same market and with the same composi-tion as the countries that were losing reserves,whether this be in the form of primary reserveassets, foreign exchange held in the country ofissue, or foreign exchange held in an offshore(i.e., Euro-currency) market, and if the oil



importers were not induced to undertake addi-tional borrowing, the transfer of reserves wouldleave the world total of reserves unchanged andtherefore would reduce the collective reserves ofthe oil importers by an amount equal to the sur-plus of the oil exporters. In other cases, however,the world total of reserves will tend to change.The size of this change, and therefore the impacton the collective reserves of the oil importers, willdepend on the extent to which the initial transferenables the oil importers to recoup their reservelosses through increased borrowing, whetherdirectly from oil exporters, through the mediumof the offshore markets, or via the financial mar-kets of a reserve center.

In the case (which appears to be important inpractice) where the oil importers transfer foreignexchange that they have held in the issuing coun-try and the oil exporters place these funds in theoffshore markets, the transfer could be expectedto increase world liquidity, since the funds placedin the offshore markets by the oil exporters wouldprovide a source from which the oil importerscould replenish their reserves by borrowing, eitherdirectly on government account or indirectly onprivate account. Provided there were suchreplenishment the increase in world reserves wouldapproximate the surplus of the oil exporters, andso leave the collective reserves of the oil importerslargely unchanged. In the converse case, if theoil importers used reserves previously held in off-shore markets and the oil exporters placed thesein the country of issue, there would be a declinein world reserves and a magnified decline in thereserves of the oil importers, except to the extentthat the latter were prompted to borrow in thereserve center. In aggregate both oil exporters andoil importers spread their reserve holdingsbetween the issuing country and the offshore mar-ket, but the oil exporters tend to hold a higherproportion of their reserves in the latter,4 so theprobable outcome is that world reserves will tendto increase while the reserve holdings of the oilimporters will tend to decline.5

4 One reason for this is that the Group of Ten andSwitzerland have agreed to refrain from adding to theirreserves held in the Euro-currency markets.

5 There is also the possibility of oil importers withreserve currency status paying the oil exporters by anincreased issue of liabilities rather than by a transfer ofreserve assets, which would tend to increase the worldsupply of reserves. As long as the reserve currency soacquired was held by the oil exporter in the country of

The impact on reserves of the investmentpolicies of the countries gaining and losingreserves will be reduced to the extent that capitalis mobile. For example, a decision by the oilexporters to deposit additional reserves in theU. S. market rather than the Euro-dollar marketwould not reduce the reserves of the oil importersto the extent that the latter were to borrow morein the United States. The chance of this occurringwas increased by the abolition of controls oncapital outflows by the United States in January1974. However, imperfections in capital mobility,coupled with a U. S. policy of at least partiallysterilizing capital inflows with a view to domesticmonetary management, imply that the extent ofborrowing by oil importers will be smaller thegreater the proportion of their funds that the oilexporters place in the United States. In any event,this analysis would seem to reinforce the previousconclusion that the oil developments are likely tocause a decline in the collective reserves of the oilimporters but by less than the size of their oildeficit. Taking account of the facts that thedemand for reserves by the oil importers is likelyto rise and that the bulk of the oil exporters'reserve increases are in excess of their short-runneeds, there is therefore a presumption that—despite the expected increase in total reserves—the oil developments will tend to reduce reserveease, even without allowing for any effect of theincreasing indebtedness of the oil importers.

Quantitative Assessment of Reserve Ease

As already pointed out, recent developments inthe international monetary system make it dif-ficult to rely to any great extent on measures ofreserve ease based on data predating these devel-opments. Such measures nevertheless remainworth examining as very rough indicators, eventhough their interpretation must be based onparticular assumptions.

The projections of the need for reserves devel-oped in connection with the SDR facility werebased on extrapolation of relationships observedin the past between reserve holdings and otheraggregates to which reserve needs are thought to

issue, world gross reserves would expand in line with theoil exporters' surplus, and oil importers' reserves wouldremain constant. However, placement of the reservecurrency in the offshore market could actually result inan increase in the gross reserves of the oil importers.



be related. Chart 7 shows the development of onesuch indicator, the ratio of reserves to imports, fora sample of 60 countries taken over the period1954-73. Apart from the years 1958 and 1961,this ratio declined continuously until 1970. In thefollowing two years it rose substantially, reachinga level of 38 per pent in 1972 compared with 28per cent in 1970. In 1973, however, it declined toabout 34 per cent, thus indicating a reduction inreserve ease.

CHART 7. RATIO OF AGGREGATE RESERVES TO AGGREGATEIMPORTS OF 60 COUNTRIES, 1954-73 l

(In per cent)

1 Reserves are annual averages of monthly data.Reserves are measured gross, and the sample of 60countries includes the United States.

The statistical estimates of reserve needsreported in last year's review suggested that duringthe period 1971-72 there was a build-up of excessreserves, and that at the beginning of January1973 this excess, which was heavily concentratedin a limited number of countries, was in thevicinity of SDR 20-30 billion. The realignment ofexchange rates in early 1973 had the immediateresult of decreasing the real value of the reservestock. The strong inflationary trends that con-tinued throughout 1973 and the abatement ofreserve growth tended to reduce excess reservesthrough the remainder of 1973. Estimates for theend of 1973, constructed on lines similar to thosemade last year, range from an excess of reservesof SDR 5 billion to a deficiency of SDR 5 billion.

The unqualified application of quantitativeanalysis previously developed therefore suggeststhat by early 1974 the increasing need for reserves

was overtaking the stagnating supply. This con-clusion is, however, dependent on the legitimacyof extrapolating previous relationships despite themajor developments discussed in the precedingsection. Any effect that the widespread adoptionof floating exchange rates may have had in reduc-ing the global need for reserves means that theuse of previous relationships tends to overestimatereserve stringency. Second, to the extent that theeffective liquidity provided by gold exceeds itsbalance sheet value at the official price, reservestringency is again less than suggested by thequantitative estimates. This factor would becomeeven more important if further actions intendedto mobilize gold were adopted. Third, the oildevelopments work in the opposite direction andsuggest that reserve stringency is greater thanwould be indicated by the comparison of globalreserves (including the reserves of the oilexporters) with estimates of reserve needs. Thisfactor was still small in the early part of 1974,although it can be expected to grow rapidly as oilexporters accumulate larger reserves.

Reserve ease is influenced by the distribution,as well as the level, of reserve holdings. Duringthe early 1970s reserves became increasingly con-centrated, and this concentration reduced globalreserve ease for a given level of global reserves.The concentration of reserve holdings in relationto a measure of reserve need is depicted for theyears 1968 and 1973 by the two curves shown inChart 8. A measure of reserve need was con-structed by taking into account, with approxi-mately equal weights (whose exact values weredetermined by a regression equation), the twovariables that have been found empirically to beimportant determinants of the demand forreserves: imports, and export variability. Thediagonal 45-degree line in this diagram indicatesreserve "needs," based on these two factors (butwithout taking account of other factors that maybe relevant), and the curved line indicates theactual distribution of reserves. Hence the bulgebetween the curve and diagonal indicates the dif-ference between the actual distribution of reservesand a distribution in proportion to "need," andthe area between the curve and the diagonalmeasures the extent of inequality (relative to"need") in reserve distribution. It will be observedthat the chart shows a substantial increase ininequality in reserve distribution between 1968



CHART 8. COMPARATIVE DISTRIBUTION OF ACTUALRESERVES AND RESERVE "NEEDS,"

1968 AND 1973

Note. The curved lines in the chart were constructedby ranking countries in order of their ratios of actualreserves to the measure of reserve need. The countrywith the lowest ratio was plotted from the origin; thecountry with the next lowest ratio, and therefore con-tributing the next flattest segment to the curve, wascumulated at the upper right-hand end of the firstcountry's segment; and so on, until the country with thehighest ratio of holdings to need was plotted at the upperright-hand corner of the diagram.

and 1973; the area between the curve and thediagonal in fact increased by 32 per cent overthis period.6 This increase was concentrated inthe period 1970-72; in the last year there was amarginal reduction in inequality. It also appearsthat the increased inequality is to a significantextent associated with the decrease in reserves,relative to "need," of the United States.

It has been traditional to assess reserve ade-quacy solely with reference to official reserveholdings, but substantial private holdings of inter-nationally liquid assets also exist. The concept ofprivate international liquidity refers to holdings ofassets by the private sector which can be realizedreadily to settle international debts, analogouslyto the concept of domestic liquidity as embracingassets which can be realized readily to settledomestic debts. To qualify as a part of private

6 An alternative possible measure of inequality in dis-tribution is the sum of the absolute deviations of actualreserve shares from the shares in global reserve "need."This measure increased by 46 per cent between 1968 and1973.

international liquidity, an asset should be convert-ible, liquid (i.e., short term or readily market-able), and denominated in a unit which does notfluctuate too much in value in terms of the unit inwhich the debts to be settled are denominated.There are serious problems in giving operationalcontent to such a concept. It seems clear that for-eign holdings of short-term claims in convertiblecurrencies, whether held in the country of issue orin the Euro-markets, are a part of private inter-national liquidity. Table 18 shows an attempt toestimate such claims for the years 1964-73,although it is incomplete in that claims held in thecountry of issue are included only for what arethought to be the two principal issuing countriesfor direct claims, the United States and the UnitedKingdom. It might also be argued that privateholdings of gold should be included, but this hasnot been done in view of the difficulty of deter-mining the extent to which private gold holdingsare held with a view to liquidity considerations.In addition, there is a difficulty arising from thefact that holdings of a currency with resident con-vertibility also provide a domestic holder withinternational liquidity: it is impractical to allowfor this factor. Finally, it should be noted that anattempt has been made to net interbank depositsin Table 18.

There are two reasons for believing that privateinternational liquidity may influence reserve ease.The first is that official and private holdings ofinternationally liquid assets are to some extentsubstitutes from the standpoint of the authorities,since there are often possibilities of mobilizingprivate assets to help finance a payments deficit.The second is that there is some tendency forprivate holders to switch between domestic andforeign currency assets, and when this occursunder a system of fixed exchange rates it results inoffsetting variations in official reserve holdingsthat do not reflect underlying imbalances.

The figures shown in Table 18 indicate that thegrowth in private liquidity was strong in a periodwhen official liquidity stagnated (1964-69). In1970 and 1971, the stock of official liquidity grewsubstantially, but growth in private liquidityabated. In 1972 both private and official interna-tional liquidity grew strongly, at rates of 25 percent and 19 per cent, respectively. The decelera-tion of the growth in official liquidity in 1973was accompanied by continued strong growth in


44

ANNUAL REPORT, 1974

TABLE 18. ESTIMATED PRIVATE INTERNATIONAL LIQUIDITY AND OFFICIAL RESERVE HOLDINGS, 1964-73

(In billions of SDKs)

Estimated Private Liquidity Holdings

Other estimated Euro-currencyliabilities 4

Year

19641965196619671968

19691970197119721973

U

C pvfprnal. O. CAlClllCtl

dollarliabilities 1

(1)

11.111.514.215.819.4

28.221.813.918.219.7

U K pvfprnal. IV. CAlCllldl

sterlingliabilities 2

(2)

4.74.94.73.83.5

3.44.05.75.54.4

PC* ifTijit f*H-ELdlllllalCU

Euro-dollarliabilities 3

(3)

6.88.8

11.414.221.5

33.637.837.146.655.5

Deutschemark(4)

0.50.60.71.22.2

2.85.27.39.7

12.6

Swissfranc(5)

0.60.70.91.01.7

2.53.84.24.97.5

Other(6)

0.70.81.00.91.2

1.11.82.43.64.8

EstimatedPri vatpA i ivctic

InternationalLiquidity 5

(7)

24.427.332.936.949.5

71.674.470.688.5

104.5

Offirial\JlLi\fLaiReserve

Holdings 6

(8)

70.071.671.871.973.9

75.592.1

122.1145.9152.8

Sources: International Financial Statistics (7FS); Bank for International Settlements (BIS), Annual Reports; and Fund staffestimates.

1 Taken from 7FS, U. S. country pages, line 4b. It includes short-term liabilities to nonresidents other than central banks,governments, and international agencies.

2 Taken from 7FS, U. K. country pages, line 4c. It includes assets not held for central monetary purposes, or by internationalagencies, and excludes British Government bonds.

3 This series is based on Euro-dollar liabilities to nonresidents, as reported by the BIS, but adjusted for identified official Euro-dollar holdings (and the "unidentified residual item" since 1971), and interbank deposits as estimated by the BIS.

4 These series are based on liabilities presented in the BIS Annual Reports, adjusted for identified official Euro-currency holdings,and interbank deposits, as estimated by the BIS. The same adjustment factor was used for interbank deposits for each of the threecomponents for any given year, although the adjustment factor varied from year to year.

5 This column is the sum of columns 1-6. To the extent that Euro-banks hold dollars with U. S. banks, and these depositsare already counted in the U. S. liabilities column, this figure includes some double counting. To the extent that external liabilitiesof countries other than the United States and the United Kingdom are not covered, and the Euro-currency liabilities excludeliabilities in foreign currencies to residents, this figure will underestimate private international liquidity holdings.

6 See Table 10, page 31.

private international liquidity, measured in SDKs,which increased by 18 per cent. These figures pro-vide an additional possible reason for believingthat the quantitative estimates of reserve easepresented above may overstate the extent to whichreserve stringency has recently been increasing,although they make no allowance for distribu-tional effects.

All of the assets shown in Table 18 arematched by corresponding debts. Presumablyincreased liabilities by a debtor country have someeffect in reducing its reserve ease, in which caseincreased holdings of private liquidity make a netaddition to reserve ease only to the extent thatthere is an asymmetry between the impacts on thecreditor and debtor countries. It is not altogetherclear that such an asymmetry is likely to persistin the changed circumstances following the oildevelopments. Borrowing which is undertaken inorder to finance oil deficits, especially—thoughnot exclusively—when it is done by public sectorborrowers, seems likely to reduce the effective

liquidity of the borrowing countries in a way thatwas not true of borrowing for productive invest-ment. Such borrowing has been extensive in recentmonths, and further accumulation of liabilitiesmust be expected to reduce reserve ease even ifthe official reserves of the borrowing countriesremain constant.

Manifestations of Reserve Ease

The extent to which exchange rate changes con-sist predominantly of either revaluations ordevaluations can provide a useful indication ofexcess reserves or reserve stringency, respectively,although experience in this respect has to be inter-preted in the light of current attitudes towardexchange rate adjustment. Resort to floating isless clear, since it is necessary to infer from otherevidence whether the intention of the float is toprevent further gains or losses of reserves. Therewere a series of exchange rate actions in mid-1973, whose avowed objective was in most cases



that of combating inflation, which were consistentwith the view that liquidity was ample. The mainevents in the first half of 1974 were the floatingof the French franc and the Spanish peseta inJanuary; the de facto revaluation of the Austrianschilling in May; and the floating of the SouthAfrican rand in June. These moves do not reflecta consistent pattern such as was present in mid-1973.

There are a number of policy instruments otherthan the exchange rate mechanism that are usedto affect countries' balance of payments, andalthough the connection between these instru-ments and the desired payments position is moretenuous, examination of their use may also assistin making a judgment of the degree of reserveease. These additional policy instruments can bedivided into two main groups: the first groupcovers a wide variety of measures directly affect-ing international transactions, while the secondgroup influences balance of payments outturns byaffecting domestic economic developments.

As was true in 1972, developments with respectto the volume of foreign aid flows and the tyingof these flows offer little evidence of changes inreserve ease during 1973. The flow of aid underbilateral arrangements was somewhat reduced invalue, at least partly on account of inflation. Theshare of total gross disbursements of official devel-opment assistance from members of the Develop-ment Assistance Committee that is free of pro-curement restrictions has remained at a level ofroughly one third.

There were a considerable number of examplesof limitations, prohibitions, or taxes on exportsduring 1973. In a number of cases these policieswere adopted as anti-inflationary measures, or toprotect domestic supplies of scarce commodities.Such instances suggest that the countries imposingthe restrictions felt sufficiently liquid to be ableto place the interests of domestic consumers aheadof those of foreign consumers despite the result-ing reduction in foreign exchange earnings.Although a number of measures to promoteexports were adopted by both developed anddeveloping countries, the restrictions imposed onexports would seem more significant in the con-text of assessing reserve ease.

As regards import restrictions, a number ofindustrialized countries and more developed pri-mary producing countries continued to relax their

restrictions in 1973. Many developing countriesalso relaxed restrictions, but a large number main-tained restrictions and the overall picture for thisgroup is less clear cut. After the oil developmentsin October, however, there was a reversal indeveloped countries of the earlier trend toward aliberalization of import restrictions. The most con-spicuous examples of this came in May 1974 withthe actions of Italy in imposing a 50 per centimport deposit requirement, and of Denmark inimposing surtaxes on a range of consumer goodswith a high import content. Up to the presenttime, however, restrictive actions have been con-fined to countries with severe payments problems,and there is no evidence of countries whose exter-nal position is close to balance participating in atrend in this direction.

The general pattern found in policies affectingcapital flows is consistent with the pattern foundin measures affecting imports, suggesting reserveease during most of 1973, but with a sharp declineat the end of the year. Measures to curb inflowsand liberalize outflows were widely introduced indeveloped countries in the early part of 1973, butthey were modified or even reversed in the latterpart of 1973 and early in 1974. In fact, early in1974, measures were increasingly taken in devel-oped countries, excluding the United States, tostimulate inflows and curb outflows, includinglarge-scale foreign borrowing by public sectorinstitutions in a substantial number of countries.Developing countries generally maintained effortsto attract capital inflows during 1973, and someof them intensified these efforts in early 1974.

The linkage between reserve ease and demandmanagement policies is particularly controversial.Following a slowdown in economic activity in1970 and 1971, strong economic expansion tookplace in the following two years in the mainindustrial countries. This expansion appeared tobe cresting during 1973, but this was at leastpartially because of the emergence of supply con-straints. During this boom, inflation has emergedas an increasingly important world-wide problem,with annual rates of overall price increases rang-ing between 7 per cent and 16 per cent in theindustrial countries even before the impact of theoil price increases was felt. Although inflation hasmany and complex causes, the lack of success incurbing global inflation may in part reflect theeffect of reserve ease in relaxing the pressure on



countries to pursue anti-inflationary policies, andin intensifying expansionary influences from trad-ing partners.

The use of conditional liquidity and reserveborrowing might provide additional evidence ondevelopments in reserve ease. Use of Fund creditremained minimal during 1973, but started to riseduring the first half of 1974. Swap arrangementswith the Federal Reserve System were increasedby almost 50 per cent in mid-1973, in responseto speculative movements in the foreign exchangemarkets and the use of swap drawings was greaterin 1973 than in 1972, although still modest byprevious standards. Early in 1974, swap arrange-ments were increased further, although outstand-ing drawings actually fell. In contrast, the creditfacilities available within the Fund remainedunchanged from 1970 until the introduction of theoil facility in August 1974. The desirable level ofconditional liquidity through the Fund is currentlyunder review in connection with the general re-view of quotas. Since the last review was under-taken, both the level of reserves and the nominalvalue of trade have come close to doubling.

Concluding Remarks

The factors discussed above suggest that asituation of global reserve ease prevailed duringmost of 1973. However, there are a number ofindications that the degree of reserve ease, whichwas already declining as a result of the reductionin the real value of reserves through the depre-ciation of reserve currencies and inflation duringthe course of 1973, was further reduced by theoil developments that occurred toward the end ofthe year. The symptoms of greater reserve strin-gency in 1974 include an increased tendency fordeficit countries to resort to import restrictions; asharp increase in official encouragement to for-eign borrowing designed to curtail reservedecreases; a widespread wish to maximize accessto the oil facility; and an evident desire by somegold holding countries to mobilize their goldreserves at the highest possible price. On the otherhand, there is as yet no evidence of inappropriatedeflationary policies being dictated by reservestringency (except in a few small developing coun-

tries); inflation continues to be the most seriousglobal problem, and has led a number of coun-tries to use reserves on a large scale to preventthe depreciation of their currencies; import restric-tions have not spread to countries that are notsuffering from unusually large non-oil deficits inthe balance of payments; and the exchange raterealignment of recent years may have reduced thesize of future payments disequilibria and thereforethe need for reserves of a number of countries.

It is, however, a widely held view that thesituation has been changing in the direction ofreserve stringency. It is, of course, possible thatreserve stringency may not emerge because of arenewed growth of foreign exchange holdings,which are not under international management. Asecond possible source of increased reserve easewould be a development which increased the effec-tive liquidity of gold holdings. Neither of thesedevelopments, however, would promote the agreedaim of increasing the role of the SDR as the maininternational reserve asset.

The third possible source of supply of reservesis the Fund. It is a matter for consideration as tothe role which the Fund could play in meeting anyemerging reserve stringency, including the increas-ing difficulty which c6untries might find in financ-ing their oil deficits through private borrowing. Inaddition to the possibility of a new allocation ofSDRs, the Fund could play an important rolethrough increased use of conditional liquidity,which has as a by-product the creation of addi-tional reserves. The use of conditional liquiditymay be expanded by the utilization of facilitiessuch as the oil facility and the Extended FundFacility; there is also the possibility of a largeexpansion in the size of the Fund on the occasionof the impending general review of quotas. Inview of the evidence that reserve distribution hasworsened in recent years, and the facts that con-ditional liquidity can be directed to those coun-tries which have a particular need for additionalliquidity and be used to support programs ofadjustment to changed circumstances, there mightbe a case for substantial emphasis at the presenttime on this aspect of the Fund's potential con-tribution to the provision of liquidity.


Chapter 3

Activities of the Fund

OWARD the end of 1972 and early in 1973the foreign exchange markets were again sub-

ject to growing speculative pressures and to anintensification of large-scale short-term capitalflows. This situation led to further changes in thestructure of exchange rate relationships amongcurrencies and in the nature of the exchange ratesystem. Major developments in this period werethe announcement by the U. S. Government inFebruary 1973 that it was seeking congressionalapproval for a 10 per cent devaluation of the U. S.dollar and a move to a more general floating ofcurrencies. The intensification of inflationary pres-sures during the year, especially in the industrialworld, and the substantial increases in the priceof petroleum and petroleum-related productstoward the end of 1973, brought about a dramaticchange in the prospects for the balance of pay-ments and reserves positions of members and inthe prospects for the working of the internationalmoney and capital markets.

These developments led, in turn, to a change inemphasis in the work of the Committee of theBoard of Governors on Reform of the Interna-tional Monetary System and Related Issues (theCommittee of Twenty). In mid-June 1974 theCommittee presented its final report, together withan Outline of Reform, indicating the general direc-tion in which the international monetary systemcould evolve and proposing that a number of stepsbe taken immediately. At the same time, workingin cooperation with the Committee, the ExecutiveDirectors adopted on June 13, 1974 a set ofimportant decisions that constituted a significantchange in the bases on which Fund operations andpractices are carried out. These decisions aredescribed in detail later in this chapter.

As noted in last year's report, the U. S. authori-ties announced in February 1973 that legislative

action was being sought for a devaluation of theU. S. dollar by 10 per cent. Market rates promptlyreflected the prospective change in the par valueof the U. S. dollar, although the new par valuewas not established with the Fund until passage ofthe relevant U. S. legislation had been completedlater in the year. Consequently, the ExecutiveDirectors took a decision on February 16 applyingRule O-3 so that calculations, other than those forthe U. S. dollar, would be made on the basis of avalue for the U. S. dollar that reflected its prospec-tive par value (US$1 = SDR 0.828948), insteadof its par value (US$1 = SDR 0.921053). As aresult of the decision, the valuation and adjust-ment of the Fund's holdings of a currency weremade on the basis of the new "effective parityrelationship" between the currency involved andthe U. S. dollar. Calculations for transactions inthe Special Drawing Account, again except thosefor the U. S. dollar, were made on the same basis.The decision remained in effect until the new parvalue for the U. S. dollar was established with theFund in October 1973.

Although the prospective value of the U. S.dollar had immediately been reflected in theexchange markets, strong pressures re-emergedin mid-May 1973 which led to a further apprecia-tion of continental European currencies, in termsof U. S. dollars, and those countries adhering tothe European narrow margins arrangement becamereluctant to use SDRs in intra-EEC settlements onthe basis of Rule O-3. In November 1973 theExecutive Directors decided to permit participantsin the Special Drawing Account that engage intransactions by agreement, in which the user ofSDRs purchases balances of its own currency heldby another participant, to employ the par value orcentral rate of the currency involved as an alter-native to the valuation method of Rule O-3. The

47

T



decision of the Executive Directors involved thesuspension, for these transactions, of the equalvalue provision of the Articles of Agreement fora period of 120 days. All transfers of SDKs, otherthan those in the one category covered, continuedto take place at exchange rates based on marketrates in accordance with Rule O-3. The suspensionwas subsequently extended by a Board of Gov-ernors Resolution for an additional period of240 days.

In view of the evident need to preserve inter-national monetary cooperation in a period markedby rapid economic developments and frequentchanges in currency relationships, the ExecutiveDirectors gave renewed attention to the role ofthe Fund's consultations with members and initi-ated toward the end of 1973 a new procedure forspecial consultations with countries whose externalpolicies are of major international importance. Asecond round of these special consultations in thefirst half of 1974 included several of the largerdeveloping countries.

In November 1973 the Executive Board deci-sion "Central Rates and Wider Margins: A Tem-porary Regime" was revised to permit a memberthat maintains a stable rate for its currency interms of an intervention currency, which is itselffloating, to declare that rate to the Fund as acentral rate (see Appendix II).

At a meeting in Rome in January 1974, theCommittee of Twenty issued a communiquestressing the importance, inter alia, of membersavoiding competitive exchange depreciation andthe escalation of restrictions on trade and pay-ments. Subsequently, the Executive Directors tooka decision that called on all members to collab-orate with the Fund in accordance with Article IV,Section 4(a), with a view to attaining the objec-tives outlined by the Committee. The ExecutiveDirectors also stated in their decision that theconsultations of the Fund on the policies thatmembers were following in present circumstanceswould be conducted in the light of these objec-tives.

In a decision taken on June 13, 1974, theExecutive Directors reached agreement on amemorandum recommending that members usetheir best endeavors to observe certain guidelinesfor the management of floating rates. The guide-lines, and the accompanying commentary, are

described in greater detail later in this chapter andare reproduced in full in Appendix II.

The agreement with regard to official gold trans-actions reached in Washington on March 17, 1968between the Governors of seven central banks wasabolished in November 1973. This was followedby a request from South Africa to terminate theFund decision "South Africa: Policy on Sales ofGold to the Fund," which had been adoptedtoward the end of 1969. The Executive Directorsterminated the decision on December 7, 1973.In other developments related to gold, the Fundapproved requests for the postponement of repur-chase obligations under Article V, Section 7(6),incurred in gold, in view of the uncertainty aboutthe future international role of gold; the Bahamaswas permitted to become a member of the Fundwithout paying a portion of its subscription ingold;l and, upon the request of Nepal, the Execu-tive Directors recommended and the Board ofGovernors agreed that the fourth and fifth install-ments of the increase in Nepal's quota be post-poned until April 30, 1976—each of those install-ments included the equivalent of SDR 200,000 ingold.

A major consideration of the Executive Direc-tors in the first half of 1974 was to establish a newfacility in the Fund to assist members in financingthe initial impact of the increase in the cost oftheir oil imports. This facility, which was estab-lished in June, was first discussed with the Execu-tive Directors on the initiative of the ManagingDirector, who recommended it to the Committeeof Twenty at its meeting in Rome in January. Theestablishment of the facility was accompanied by,and was in large part dependent upon, the settle-ment of other related issues, including new bor-rowing arrangements.

In July 1974 the Executive Directors continuedwith their consideration of another special facility,the Extended Fund Facility, designed to providelonger-term financial assistance for countries withstructural balance of payments problems. At thesame time, they were also working on the prepara-tion of draft amendments to the Articles of Agree-

1 Board of Governors Resolution No. 28-3, adopted onJuly 3, 1973 on Membership for the Bahamas, providedfor the subscription to be paid wholly in Bahamiandollars, and for the Bahamas to repurchase, within60 days of having paid the subscription, an amountequivalent to 25 per cent of its quota in gold, SDRs,or convertible currencies acceptable to the Fund.


ACTIVITIES OF THE FUND 49

ment for later consideration by the Interim Com-mittee and for submission to the Board ofGovernors.

Reform of the International MonetarySystem

The Committee of the Board of Governors onReform of the International Monetary Systemand Related Issues (the Committee of Twenty)presented its final report, together with an Outlineof Reform, on June 14, 1974. On the previousday, consistent with a number of the Committee'srecommendations for immediate action, the Execu-tive Directors adopted a series of interrelateddecisions. The outcome of the Committee's workand the decisions adopted by the Executive Direc-tors are summarized below.

The Committee of Twenty

After its establishment by a Resolution adoptedby the Board of Governors on July 26, 1972, theCommittee of Twenty held 6 meetings and itsDeputies met 12 times. In addition, seven tech-nical groups were established to deal with par-ticular aspects of reform. Following its inauguralmeeting in September 1972, the Committee metin Washington in March and July 1973 and inNairobi late in September at the time of theAnnual Meeting. At that meeting the Chairman ofthe Committee submitted to the Board of Gov-ernors an interim report on the work of the Com-mittee, together with a First Outline of Reformthat had been prepared by the Chairman and theVice Chairmen of the Deputies.

Subsequently, at a meeting of the Committeeand the Deputies in Rome in January 1974, theCommittee expressed serious concern at the abruptand significant changes that were in prospect forthe world balance of payments structure andagreed that, in the light of developments that hadtaken place in the world economy, certain impor-tant aspects of reform affecting the interests ofboth developed and developing countries shouldbe given priority, with a view to their early imple-mentation. Other aspects of the reform could beagreed and implemented at a later date. The Com-mittee established a timetable for completing itswork on the reform at a meeting to be held inWashington in June 1974.

Accordingly, following further meetings of theDeputies in Washington in March and in Paris inMay, both the Committee and the Deputies metin Washington in June 1974 to make a number ofrecommendations for immediate action, as setout in a final report and an accompanying Outlineof Reform.2 In its final report, the Committeenoted that the Outline was in two parts. Part I,"The Reformed System," recorded the outcomeof the Committee's discussion of internationalmonetary reform and indicated the general direc-tion in which the Committee believed that thesystem could evolve in the future. It is envisagedthat there should be more effective and sym-metrical adjustment procedures, which, whileleaving the choice of particular policies as far aspossible to the country concerned, would never-theless ensure, through a process of assessmentsupported by reserve indicators and by graduatedpressures, that appropriate action would be takenwhere necessary; that the system of convertibilityshould promote the better management of globalliquidity and the avoidance of uncontrolled growthof reserve currency balances, and that the SDRshould become the principal reserve asset, withthe role of gold and of reserve currencies beingreduced; and that there should be arrangementsto give positive encouragement to economic devel-opment and to promote an increasing net flow ofreal resources to developing countries. Thearrangements envisaged in Part I of the Outlineinvolve an enlargement of the scope of interna-tional surveillance and management in a numberof important areas, and consequently a larger rolefor the Fund.

The Committee recognized in its report that, inview of present uncertainties, it would not beappropriate to attempt at that time to determinethe full details of all aspects of the system, andnoted that a number of areas in which agreementhas not been reached were considered in Annexesprepared by the Chairman and Vice Chairmen ofthe Deputies that accompanied the Outline. It wasenvisaged that arrangements in these areas, asthey were agreed, should be implemented as andwhen the Fund judged it feasible to do so, andthat the Fund might in some cases introduce sucharrangements initially on an experimental basis

2 See International Monetary Reform: Documents ofthe Committee of Twenty (Washington, 1974).



with a view to subsequent agreement on full imple-mentation.

The immediate steps on which the Committeeagreed were set out in Part II of the Outline andin a detailed statement by the Committee attachedto the communique. These included the followingrecommendations: the establishment of an InterimCommittee of the Board of Governors and subse-quently of a Council; the strengthening of Fundprocedures for close international consultation andsurveillance of the adjustment process; the adop-tion of appropriate guidelines for the managementof floating rates during the present period of wide-spread floating; the establishment of a facility inthe Fund to assist members in meeting the initialimpact of increased oil import costs; provision forcountries to pledge themselves on a voluntarybasis not to introduce or intensify trade or othercurrent account measures for balance of paymentspurposes without a finding by the Fund that thereis a balance of payments justification for suchmeasures; improvement of procedures in the Fundfor management of global liquidity; further inter-national study in the Fund of arrangements forgold in the light of agreed objectives of reform;the adoption of an interim method of valuing theSDR in transactions against currencies; measuresof special interest to developing countries, includ-ing the Extended Fund Facility, as well as recon-sideration of the possibility and modalities ofestablishing a link between development assistanceand SDR allocation, and arrangements for carry-ing forward the study of the broad question of thetransfer of real resources to developing countries;and the preparation of draft amendments of theArticles of Agreement, for further examination bythe Interim Committee and for possible recom-mendation at an appropriate time to the Board ofGovernors.

Related Decisions of the Executive Directors

After its meeting in Rome in January 1974, theCommittee of Twenty issued a communique, interalia, inviting the Executive Directors to preparefor the Board of Governors a draft Resolution tocreate an Interim Committee, to cooperate withthe Deputies on the formulation of rules for float-ing, to work out for an interim period the detailsof a method for basing the value of the SDR on a

basket of currencies, and to explore with urgencythe feasibility of establishing a new facility in theFund to help members to finance the initial impactof the increase in oil import costs. Decisions onthese matters, as well as the interest rate on SDRsand new rates of remuneration and charges in theGeneral Account, were adopted on June 13, 1974.On June 26, 1974 the Executive Directors alsotook a decision inviting members of the .Fund tosubscribe to a Declaration on trade and othercurrent account measures for balance of paymentspurposes. The full text of these decisions, whichare summarized below, are reproduced in Appen-dix II.

INTERIM COMMITTEE OF THE BOARD OFGOVERNORS

The Executive Directors adopted a decision 3

approving for submission to the Board of Gov-ernors at the 1974 Annual Meeting a draft Reso-lution recommending the establishment of anInterim Committee of the Board of Governors onthe International Monetary System. The Commit-tee would advise the Board of Governors in super-vising the management and adaptation of theinternational monetary system, including the con-tinuing operation of the adjustment process, andin this connection, reviewing developments inglobal liquidity and the transfer of real resourcesto developing countries; considering proposals bythe Executive Directors to amend the Articles ofAgreement; and dealing with sudden disturbancesthat might threaten the system.

The members of the Committee would be Gov-ernors of the Fund, ministers, or others of com-parable rank. Each member country of the Fundthat appointed an Executive Director and eachgroup of member countries that elected an Execu-tive Director on or after the date on which thelast regular election took place would appoint onemember of the Committee and not more thanseven associates. In addition, Executive Directors,or in their absence their Alternates, would beentitled to attend meetings of the Committee. TheManaging Director would be entitled to participatein all the Committee's meetings.

The Interim Committee would serve until aCouncil of Governors with decision-making powers

3 Executive Board Decision No. 4231- (74/67), adoptedon June 13, 1974 and reproduced in Appendix II.



could be established through amendment of theArticles of Agreement.

GUIDELINES FOR THE MANAGEMENT OF FLOATINGRATES

After discussion of a memorandum 4 entitled"Guidelines for the Management of FloatingRates," the Executive Directors decided to recom-mend, pursuant to Article IV, Section 4(a),of the Articles of Agreement, that in present cir-cumstances members of the Fund should use theirbest endeavors to observe the guidelines set forthand explained in the memorandum. The guide-lines were intended to provide criteria that mem-bers would observe in performing their under-takings and that the Fund would observe inexercising surveillance in present circumstances.

The guidelines were based on the assumptionthat in any situation of floating it may be desirable(a) to smooth out very short-run fluctuations inmarket rates, (b) to offer a measure of resistanceto market tendencies in the slightly longer run,particularly when they are leading to unduly rapidmovements in the rate, (c) to the extent thatit is possible to form a reasonable estimate of themedium-term norm for a country's exchange rate,to resist movements in market rates that appear tobe deviating substantially from the norm, and (d)to take account of members' reserve positions inthe operation of the guidelines covered by (b)and (c). The guidelines also recognize the interestcountries have in intervention conducted in theircurrencies by other countries.

The guidelines also take into account (a) thatnational policies, including those relating to domes-tic stabilization, should not be subjected to greaterconstraints than are necessary in the internationalinterest; (b) that a degree of uncertainty attachesto any estimate of a medium-term normal exchangerate and that on occasion the market view may bemore realistic than any official view; and (c) thatin view of the strength of short-term market forcesit may at times be unavoidable to forego or cur-tail official intervention that would be desirablefrom the standpoint of exchange stability.

The guidelines were intended to provide thebasis for a meaningful dialogue between the Fundand member countries with a view to promoting

international consistency during a period of wide-spread floating. They were termed guidelinesrather than rules to indicate their tentative andexperimental character. They should be adaptableto changing circumstances, and they would bereviewed from time to time in order to make anyadjustments that might be appropriate.

THE VALUATION AND INTEREST RATE OF THE SDR,REMUNERATION, AND CHARGES

On June 13, 1974 the Executive Directorsadopted a decision r> amending Rule O-3 and giv-ing effect, as from July 1, 1974, to the standardbasket system of valuation for an interim period.The decision will be reviewed two years from thedate of its adoption. For the purpose of determin-ing the exchange rates of currencies in terms ofspecial drawing rights, one SDR will be deemedto be equal to the sum of the following amountsof currencies:

U. S. dollar 0.40Deutsche mark 0.38Pound sterling 0.045French franc 0.44Japanese yen 26Canadian dollar 0.071Italian lira 47Netherlands guilder 0.14Belgian franc 1.6Swedish krona 0.13Australian dollar 0.012Danish krone 0.11Norwegian krone 0.099Spanish peseta 1.1Austrian schilling 0.22South African rand 0.0082

The currencies included in the SDR basket arethose of the 16 countries that had a share in worldexports of goods and services in excess of 1 percent of average over the five-year period 1968-72.The amounts were determined in such a way thatthe relative weights for these currencies werebroadly proportionate to the share of these coun-tries in international transactions, using as proxyfor this purpose average exports of goods andservices in the period 1968-72 but modified, par-ticularly with respect to the United States, inrecognition that the proxy does not necessarily

4 Attached to Executive Board Decision No. 4232-(74/67), adopted on June 13, 1974 and reproduced inAppendix II.

5 Executive Board Decision No. 4233-(74/67) S,adopted on June 13, 1974 and reproduced in Appendix II.



provide an adequate measure of a currency's realweight in the world economy in all cases. Accord-ingly, the U. S. dollar was assigned a weight of33 per cent. The Fund will collect exchange ratesof the basket currencies daily in order to calculatea daily rate of the SDR in terms of each currencyfor which a representative rate has been estab-lished.

The Executive Directors also adopted a deci-sion 6 establishing the rate of interest on the SDRat 5 per cent per annum. The interest rate on theSDR will be the same as the basic rate of remu-neration on super gold tranche positions. After aninitial period of six months, unless the ExecutiveDirectors decide otherwise, both rates will be sub-ject to adjustment in relation to a weighted aver-age of short-term market interest rates in theUnited States, Germany, the United Kingdom,France, and Japan. If the weighted average marketrate is below 9 per cent, the rates will be reducedbelow 5 per cent by three fifths of the differencebetween the weighted average market rate and9 per cent. If the weighted average market rateis above 11 per cent, the rates will be increasedabove 5 per cent by three fifths of the differencebetween the combined market rate and 11 percent.

However, in order to bring the Fund's incomeand expenses into balance without raising theFund's charges to undesirably high levels, it hasbeen agreed that, for the next two years, a lowerrate of remuneration will be paid on the segmentof the super gold tranche corresponding to theFund's holdings of currency between 75 and 50per cent of quotas, during any periods when thebasic rate of remuneration is above 314 per cent;the lower rate will then be 2l/2 per cent or half thebasic rate of remuneration, whichever is the higher.Moreover, the lower rate will be increased to theextent that the Fund's net income permits. Theseprovisions for a split rate of remuneration will bereviewed after two years and will lapse in theabsence of a further decision.

Prior to July 1, 1974 the rate of interest on theSDR and the rate of remuneration had been 11/2per cent. These two rates are closely linked underArticle XXVI, Section 3, of the Fund Agreement,which provides that the SDR interest rate shallnot be greater than two per cent or the rate of

6 Executive Board Decision No. 4235-(74/67), adoptedon June 13, 1974 and reproduced in Appendix II.

remuneration, whichever is higher, or smaller thanone per cent or the rate of remuneration, which-ever is lower.

The Executive Directors also adopted a deci-sion 7 establishing a revised schedule of charges onuse of the Fund's resources. The revised charges,except those resulting from purchases under theoil facility, range from 4 per cent on amountsoutstanding up to one year, to 6 per cent foramounts outstanding from four to five years (seeAppendix Table 1.20).

THE OIL FACILITY

The Fund established a special facility to assistmembers in meeting the initial impact of theincrease in oil costs. Resources made availableunder this decision will be supplementary to anyassistance that members may obtain under otherpolicies on the use of the Fund's resources.

Requests for purchases under the Fund deci-sion will be met by the Fund, subject to certainlimits,8 if the Fund is satisfied that the memberneeds assistance because of the increases in thecost of its imports of petroleum and petroleumproducts and because it has a balance of paymentsneed. The Fund will assess each request in orderto determine whether, and the extent to which, themember has such a balance of payments need. Amember that has made a purchase under thisdecision will be expected to cooperate with theFund to find appropriate solutions for its balanceof payments problems.

A further condition for access to the facility isthat the member represents that it is followingpolicies not inconsistent with the undertakings setforth in paragraph 2 of the Rome Communique ofthe ad hoc Committee of Twenty 9 and in Execu-tive Board Decision No. 4134-(74/4), adoptedJanuary 23, 1974 (see Appendix II).

Use of the Fund's resources under this facilitywould be repurchased as soon as the balance ofpayments problem for which the purchase hadbeen made was overcome, and in any event in16 equal quarterly installments to be completednot later than seven years after the purchase.

7 Executive Board Decision No. 4238-(74/67), adoptedon June 13, 1974 and reproduced in Appendix II.

8 See Executive Board Decision No. 4241-(74/67),adopted June 13, 1974, pages 122-23.

9 See International Monetary Reform: Documents ofthe Committee of Twenty (Washington, 1974).



Charges on transactions effected under the oilfacility are set out in Appendix Table 1.21.

The facility will be financed, at least initially,from borrowing by the Fund from oil producingcountries. Calls under these borrowing arrange-ments can be made up to December 31, 1975.Lenders will make available either their own cur-rencies, which they will convert into U. S. dollarson request, or U. S. dollars and a loan to the Fundwill be evidenced by a nonnegotiable instrumentexpressed in terms of SDKs. Interest will be paidquarterly by the Fund at an annual rate of 7 percent and repayment will be completed within anoutside period of 3 to 7 years from the date ofborrowing; provision is also made for early repay-ment under certain circumstances.

Various major oil exporters, including AbuDhabi, Iran, Kuwait, the Libyan Arab Republic,Oman, Saudi Arabia, and Venezuela, have pro-visionally agreed to make resources available tothe Fund in connection with the facility. Canadahas also agreed to participate in this financing.The resources being made available to the Fundfrom these countries total initially the equivalentof about SDR 3 billion. Discussions are being heldwith other members, both oil and non-oil pro-ducers, with a view to increasing the reservesavailable under the facility.

Not later than September 15, 1974, the Execu-tive Directors of the Fund will review develop-ments since the adoption of this decision in thelight of the Fund's existing and prospective liquid-ity. A further review will be conducted not laterthan December 31, 1974.

VOLUNTARY DECLARATION ON TRADE MEASURES

In a communique issued at the end of its finalmeeting on June 13, 1974, the Committee ofTwenty stressed the importance of avoiding theescalation of current account restrictions for bal-ance of payments purposes and invited membersof the Fund "to subscribe on a voluntary basis tothe Declaration concerning trade and other cur-rent account measures for balance of paymentspurposes." The Declaration was annexed to theCommittee's statement. On June 26, 1974 theExecutive Directors took a decision 10 associating

10 Executive Board Decision No. 4254-(74/75),adopted June 26, 1974 and reproduced in Appendix II,together with the Managing Director's letter to membersand the text of the Declaration.

themselves with the invitation and concurring inthe transmission to members of a letter from theManaging Director requesting that members informthe Fund whether they subscribe to the Declaration.

In subscribing to the Declaration, a memberwould represent that, in addition to observing itsobligations with respect to payments restrictionsunder the Articles of Agreement, it would not onits own discretionary authority introduce or inten-sify trade or other current account measures forbalance of payments purposes that are subject tothe jurisdiction of the GATT, or recommend themto its legislature, without a prior finding by theFund that there was balance of payments justifi-cation for such measures. In arriving at its find-ings, the Executive Directors would take intoaccount the special circumstances of developingcountries.

The Declaration will become effective amongsubscribing members when members having 65 percent of the total voting power of members of theFund have accepted it, and shall expire two yearsfrom the date on which it becomes effective unlessit is renewed.

Sixth General Review of Quotas

The Fund's Articles of Agreement require ageneral review of members' quotas at intervals ofnot more than five years. The Executive Directorsmeeting as a Committee of the Whole held theirfirst meeting on April 15, 1974 relating to theSixth General Review of Quotas. Any Resolutionof the Board of Governors relating to the SixthGeneral Review of Quotas has to be adopted byFebruary 8, 1975.

Exchange Rates

After the announcement by the U. S. Govern-ment in February 1973 that it was seeking con-gressional authority for a reduction of 10 per centin the par value of the U. S. dollar, a large num-ber of member countries notified the Fund of newarrangements for their currencies. Two countries(Italy and Japan) decided that for the time beingthey would not ensure the maintenance of speci-fied margins for their currencies in exchange trans-



actions, thus joining three other countries (Can-ada, the United Kingdom, and Switzerland) thathad earlier permitted their currencies to float. InMarch six members (Belgium, Denmark, France,Germany, Luxembourg, and the Netherlands) ofthe European Economic Community, joined laterby two countries (Norway and Sweden) that werenot members of the EEC, decided to maintainfluctuations between their currencies within mar-gins of 2Y4 per cent, but no longer to ensure thatquotations for the U. S. dollar in their marketsremained within specified limits (referred to as theEuropean narrow margins arrangement); at thesame time, the deutsche mark was revalued by3 per cent in terms of SDRs. From late March1973 to mid-May 1974 Austria maintained amaximum margin of 21A per cent between theschilling and the currencies of the countries par-ticipating in the European narrow marginsarrangement, although not formally participatingin that arrangement.11 After May 17, 1974 thismargin was increased to 4^ per cent. Thirty-fivemembers notified the Fund that they had decidedto maintain the exchange rates of their currenciesin terms of the U. S. dollar; most of the otherFund members maintained unchanged their parvalues, central rates, or market rates in terms ofcurrencies other than the U. S. dollar.

After a period of comparatively quiet tradingin foreign exchange markets, strong pressuresre-emerged in mid-May 1973 leading to a sharpappreciation of continental European currenciesin terms of U. S. dollars and to marked tensionamong the currencies participating in the Euro-pean narrow margins arrangement. On June 29,1973 the German authorities communicated tothe Fund a new central rate that revalued thedeutsche mark by a further 5.5 per cent. Laterin the year, the Netherlands and Norway alsorevalued their currencies by 5 per cent to facilitatethe operation of the European narrow marginsarrangement; new central rates were communi-cated to the Fund by the Netherlands, effectiveSeptember 17, and by Norway, effective Novem-ber 16.

In view of the effects on their balance of pay-ments of the sharp movements in exchange ratesof the currencies of major industrialized coun-

11 The Austrian schilling was revalued by 2.25 per centin terms of SDRs in March 1973 and by 4.8 per cent inJuly 1973.

tries, a number of other member countries foundit necessary during the fiscal year to adjust theirpar values or central rates or to adopt moreflexible exchange market arrangements.12 In thethird quarter of 1973, the Fund concurred in parvalue changes proposed by Thailand (July), SaudiArabia (August), and Australia (September); allthese changes revalued the currencies of thesecountries in terms of SDRs. After approval bythe U. S. Congress, the United States proposedand the Fund concurred in a change of the parvalue of the U.S. dollar effective October 18,1973, thereby formalizing the devaluation pro-posed in February. The par values of nine othermember countries—the Dominican Republic, ElSalvador, Guatemala, Haiti, Honduras, Liberia,Mexico, Nicaragua, and Panama—were changedsimilarly in the following weeks. In addition,initial par values were established by Algeria, theBahamas, Qatar, and the United Arab Emirates.

Kenya, Tanzania, and Uganda notified theFund of the adoption of central rates in June 1973that appreciated their currencies from the parvalue; in January 1974 their central rates wereagain changed, reversing the earlier appreciation.Another member—Rwanda—notified the Fund ofa new central rate that involved a depreciationof its currency. Fiji replaced the exchange ratemaintained under its membership resolution by acentral rate involving an appreciation of the cur-rency. Western Samoa adopted a central rateunchanged from the exchange rate it maintainedunder its membership resolution.

A number of countries discontinued the fixedrelationship that they had been maintainingbetween their currency and a reserve currencybecause these relationships were causing excessivemovements in their effective exchange rates. Mem-bers indicating that they would no longer maintainexchange rates within previously applicable mar-gins included Cyprus (July), Finland (June),Greece (October), Iceland (June), Malawi(November), Malaysia (June), Morocco (May),New Zealand (July), Singapore (June), andYugoslavia (July).

Exchange rate trends and relationships beganto shift fairly markedly as early as the thirdquarter of 1973 and particularly toward the endof the year, reflecting the sharp turnaround in the

12 These changes are summarized in Appendix I.



current account balance of the United States in1973 and market expectations of relative changesin the balance of payments positions of the majorindustrial countries as a result of world oildevelopments. By mid-January 1974 the curren-cies of the countries participating in the Euro-pean narrow margins arrangement had fallen toa discount of 6 to 8 per cent of parity or centralrates expressed in terms of the U. S. dollar, incomparison with a premium as high as 18 to 20per cent in July 1973. France notified the Fundthat owing to the balance of payments uncertain-ties that would be affecting the international mone-tary system, it had decided that from January 21,for a period of six months and on a provisionalbasis, the exchange rate between the French francand certain other currencies in the official marketwould not necessarily be confined within prede-termined margins, but that during this periodorderly conditions would be maintained in theexchange market. Spain similarly discontinuedfrom January 22 observance of specified marginsin exchange transactions between the peseta andthe U.S. dollar. On March 21, 1974 Franceabolished the separate market for financial trans-actions that had been established in August 1971;the changes in the structure of the balance of pay-ments and the floating of the franc in the exchangemarket had rendered unnecessary the complexadministrative procedures required by the dualmarket system. Similarly, Italy unified the exchangemarkets for the commercial and financial lira,effective March 22, 1974. In the context of areform of its exchange system, Costa Rica adopteda new par value, effective April 25, 1974.

In June 1974 the situation was that most majorindustrial countries (e.g., Canada, France, Italy,Japan, the United Kingdom, and the UnitedStates) were not maintaining exchange rates withinspecified margins, while other industrial countrieswithin the European narrow margins arrangementwere maintaining a maximum margin in the ratesfor exchange transactions between their currenciesonly among themselves. A large number of othercountries, developed and less developed, wereendeavoring to maintain the exchange rates fortheir currencies roughly unchanged in terms of thecurrencies of their major trading partners takenas a group; most remaining Fund members weremaintaining stable exchange rates for their cur-

rencies in terms of a single intervention currency—usually the U. S. dollar, the pound sterling, orthe French franc.

Special Drawing Account

During the fiscal year 1973/74 the total useof SDKs by participants was SDR 1,123 million.The major part of this total—SDR 996 million—was used in transactions by agreement (that is tosay, without designation by the Fund) involvingonly five participants. The amounts of SDRstransferred in this way were substantially in excessof the totals of SDR 303 million and SDR 380million transferred in similar transactions in thetwo previous fiscal years. However, transactionswith designation (SDR 60 million) and the useof SDRs to make repurchases in the GeneralAccount (SDR 29 million) were at low levelscompared with previous years. The GeneralAccount transferred a total of SDR 185 millionto participants, of which SDR 157 million wasacquired by participants needing to reconstitutetheir SDR holdings. The totals of the differentcategories of SDR transfers are shown in AppendixTable 1.4.

The large increase in transactions by agreementbetween participants resulted from the use ofSDRs by EEC members in settlement of obliga-tions arising from intervention in foreign exchangemarkets under the European narrow marginsarrangement. The reduction in other forms ofSDR use cannot be attributed to any single cause;the increasing need for some participants to retainSDRs in order to meet the reconstitution require-ments probably acted as a brake on SDR use,and the continued uncertainty as to the futurevalue of SDRs in terms of currency during theperiod under review may also have encouragedparticipants to retain their SDRs.

No proposal was made on future allocationsof SDRs during the fiscal year. The ManagingDirector continues to be obliged to make a pro-posal whenever he is satisfied that it could bemade consistently with the Articles.

Exchange Rates for SDRs in Transactionsby Agreement

From the outset of operations in the SpecialDrawing Account, the valuation of currencies in



terms of SDKs has been determined by Rule O-3of the Fund's Rules and Regulations. Prior to theamendment of Rule O-3 on July 1, 1974,13 theexchange rate of the U. S. dollar in terms of SDRswas its par value or prospective par value; theexchange rate of other currencies in terms ofSDRs continued to be determined by the marketexchange rate of these currencies against the U. S.dollar. The methods of valuation, which appliedto all transactions in SDRs between participantsas well as to conversions associated with suchtransactions, gave effect to the "equal value" prin-ciple set out in Article XXV, Section 8(a). Thisprinciple requires that "the exchange rates foroperations or transactions between participantsshall be such that a participant using special draw-ing rights shall receive the same value whatevercurrencies might be provided and whichever par-ticipants provide those currencies."

In March 1973 the EEC members of the Euro-pean narrow margins arrangement agreed thatSDRs would be used as one of the media forsettlement of obligations resulting from interven-tion to maintain the agreed margins. Toward themiddle of 1973, the market rates of the currenciesof several EEC members appreciated stronglyagainst the U. S. dollar. As a result, althoughthese members wished to transfer SDRs amongthemselves to settle obligations arising from inter-vention in the foreign exchange markets, they feltseriously inhibited from doing so under themethod for the valuation of currencies in termsof SDRs set out in Rule O-3, since the use of thismethod had the effect of diminishing the value oftheir SDR holdings in terms of their own cur-rencies. As mentioned earlier, the "equal value"principle was suspended for certain transactionson November 5, 1973.

All transactions by agreement between partici-pants that took place in the period under reviewwere in settlement of obligations incurred underthe European narrow margins arrangement. Theusers of SDRs in these transactions were Belgium(SDR 37 million), Denmark (SDR 5 million),France (SDR 588.5 million), Germany(SDR 100.5 million), and the Netherlands(SDR 264.9 million); and the recipients of SDRswere Belgium (SDR 103.2 million), Denmark(SDR 72.3 million), France (SDR 108.4 mil-

lion), and Germany (SDR 712 million). Thesetransfers of SDRs resulted in a significant redis-tribution of SDR holdings among these countries;on April 30, 1974 the SDR holdings of Belgiumand Germany were 289 and 268 per cent of theirrespective allocations, whereas the SDR holdingsof France were reduced to about 21 per cent ofits allocation.

Of the total of SDR 996 million transferred inthis way, SDR 131 million was transferred inMay 1973. Thereafter, as a consequence of thevaluation difficulties mentioned earlier, there wereno further transactions by agreement until theExecutive Directors took the decision that enablethe amounts of currencies transferred againstSDRs in these transactions to be based on theirpar values or central rates. Following this decisionin November 1973, par values or central rateswere used in all transactions by agreement thattook place during the remainder of the fiscal year.

Transactions with Designation

During the fiscal year there were only six trans-actions with designation, in which a total ofSDR 60 million was used to obtain currencyfrom participants designated by the Fund (seeTable 19). As a result of this low level of trans-actions and the procedures followed in designa-tion, only nine participants were actually desig-nated, although many more were included in the

TABLE 19. USE AND RECEIPT OF SDRs IN TRANSACTIONSWITH DESIGNATION, FISCAL YEAR

ENDED APRIL 30, 1974

(In thousands of SDRs)

Use Receipt

ArgentinaColombiaGreece

HaitiIndonesiaIran

Khmer RepublicMalagasy RepublicPhilippines

Sierra LeoneSouth AfricaTurkey

UgandaYugoslavia

—

900

3,5008,500

1,21337,000

9,000

21,4007,5002,213

10,5003,000

6,000

1,0001,000

7,500

J See page 51, above.Total 60,113 60,113



quarterly designation plans. The plans agreed bythe Executive Directors for the third and fourthcalendar quarters of 1973 and the first quarterof 1974 each made provision for possible desig-nation of SDR 100 million; this limitation ofamount resulted in the inclusion in the plans onlyof those participants considered sufficiently strongto be designated whose holdings of SDKs werebelow their allocations. In order to spread desig-nation over a broader list of participants at a timewhen widespread reserve losses were expected togive rise to greater use of SDRs, the designationplan agreed for the second quarter of 1974 pro-vided for possible designation of SDR 300 millioncovering 26 participants, including the UnitedStates whose balance of payments and reserveposition was considered sufficiently strong to jus-tify it being subject to designation for the firsttime since mid-1970. As mentioned later, it wasnot necessary for any participant to be designatedto receive SDRs under the rules for reconsti-tution.

Transactions and Operations Between Participantsand the General Account

Transfers of SDRs to the General Account insettlement of repurchases totaled SDR 29 million,which was less than half the amount of SDRsused in this way during the previous fiscal yearand represented less than 5 per cent of total repur-chases during the fiscal year. Participants alsoused a total of SDR 29 million in settlement ofcharges in the General Account; this high level,amounting to over 94 per cent of total charges,presumably reflected the fact that the principalalternative medium of payment was gold.

The General Account transferred a total ofSDR 185 million to participants. Of this total,SDR 20 million was transferred in payments to26 participants that exercised their option toaccept SDRs rather than currency in part settle-ment of remuneration on their net creditor posi-tions in the General Account and SDR 157 mil-lion was transferred to participants that neededto reconstitute their SDR holdings.14 As a resultof these receipts and transfers, the General

14 The balance of SDR 7 million was transferred inpurchases of SDRs from the General Account to Romania(SDR 6 million) and Bangladesh (SDR 1 million).

Account's holdings of SDRs declined fromSDR 617 million to SDR 499 million during thefiscal year.

Reconstitution

The rules for reconstitution require participants,over successive five-year periods, to maintain theiraverage holdings of SDRs at not less than 30 percent of the average of their net cumulative alloca-tions. The first five-year period ends on Decem-ber 31, 1974. In accordance with the provisionsof the Articles of Agreement, since the end of1971, the Fund has been making monthly cal-culations to determine whether and to what extenteach participant has a need to obtain SDRs toachieve the required average holding of 30 percent. Participants are permitted to obtain theamounts of SDRs shown by these calculations tobe necessary to meet the reconstitution require-ment. The SDRs may be obtained either fromanother participant with a balance of paymentsneed to use SDRs or from the Fund's GeneralAccount against gold or currencies acceptable tothe Fund or as part of a purchase from the Gen-eral Account in accordance with the Fund's policyon the use of its resources. All acquisitions ofSDRs for purposes of reconstitution that havetaken place in the past fiscal year have involvedtransfers by the General Account. The total ofSDRs acquired for reconstitution since January 1,1972 was SDR 310.8 million, as shown inTable 20.

At the start of the fiscal year 23 participantsneeded to reconstitute their SDR holdings inamounts totaling SDR 147 million. During thefiscal year, as participants obtained and usedSDRs, the composition of the list of participantswith a need to reconstitute, and the amounts theyneeded to acquire, varied from month to month.On October 31, 1973, after a period in whichSDR 124 million had been obtained from theGeneral Account, the list had been reduced to19 participants, needing to obtain a total of onlySDR 57 million. However, by the end of the fiscalyear, the list had expanded to include 24 par-ticipants and the needed amounts totaled SDR 143million. By making acquisitions of SDRs duringthe year, 8 participants eliminated their need toreconstitute and 17 others substantially reducedthe amounts they needed to acquire. During theyear the General Account transferred a total of


TABLE 20. ACQUISITION OF SDRs FOR RECONSTITUTION FROM THE FUND'S GENERAL ACCOUNT,JANUARY 1, 1972-ApRiL 30, 1974

(In millions of SDRs)

1972

Against currencyacceptable to Fund

In purchases

Total

Amount

39.364.2

103.5

Number ofTransactions

278

35

1973

Amount

140.038.0

178.0


609

69

1974Jan. 1-Apr. 30

Amount

18.710.6

29.3


154

19

Total

Amount

198.0112.8

310.8


10221

123

SDR 157 million to 24 participants needing toreconstitute their holdings. Details of the partici-pants and the amounts they acquired are givenin Appendix Table 1.7. In all cases, participantsacquiring SDRs took the initiative to do so,although for a few participants the need to recon-stitute had reached the level at which they weresubject to designation to promote the reconstitu-tion of their holdings; in these latter cases, volun-tary acquisitions made actual designation unneces-sary.15

It is difficult to form a judgment as to how farthe rules for reconstitution have affected the useof SDRs. With few exceptions, however, par-ticipants for which the calculations have shown aneed to reconstitute have rarely made further useof SDRs except in the payment of charges in theGeneral Account. Other participants have alsoappeared to limit their use of SDRs in such a waythat their holdings have remained above 30 percent of their allocation; at the end of April 1974,of the 89 participants with holdings below theirallocations, only 13 had holdings below 30 percent of allocation, while 39 participants had hold-ings in the range from 30 to 60 per cent ofallocation.

Changes in the Distribution of SDR Holdings

The main changes in the distribution of SDRholdings during 1973/74 were the movements ofSDRs among the five EEC countries participatingin the European narrow margins arrangement

15 The Fund calculates participants' needs to recon-stitute in two ways: (i) in terms of a single amount thatmay be obtained in the month following the date of thecalculation, and (ii) as a series of quarterly amounts tobe obtained in each full calendar quarter remaining ina five-year period. When the quarterly amount reaches10 per cent of a participant's net cumulative allocation,that participant is subject to designation to promotereconstitution.

described earlier; the decline in the GeneralAccount holdings by SDR 118 million; and thenet increase of SDR 90 million in the holdings ofless developed countries, which was mainly theresult of the acquisition of SDRs to promotereconstitution but also partly reflected net receiptsthrough designation. Among the industrial coun-tries, the holdings of the United States, the UnitedKingdom, Canada, and Japan were little changed.The principal changes in SDR holdings are sum-marized in Table 21.

BIS Prescribed as Holder of SDRs

By a Resolution of the Board of Governors,adopted on January 21, 1974, by a majority inexcess of the required 85 per cent of the totalvoting power of participants, the Fund prescribedthe Bank for International Settlements (BIS) asa holder of SDRs. The text of the Resolution isreproduced in Appendix II. Under the Resolution,a participant in the Special Drawing Account mayuse SDRs to obtain currency from the BIS withthe assurance that the BIS would use the sameamount of SDRs to obtain currency from the par-ticipant within a period not exceeding six months.The Resolution requires that the Executive Direc-tors discuss the operation of this Resolution intheir Annual Report as part of their review of theoperation of the Special Drawing Account. Duringthe fiscal year no transactions in SDRs took placebetween the BIS and participants.

General Account

As in 1972/73 purchases exceeded total repur-chases during the fiscal year ended April 30,1974. Total purchases were equivalent toSDR 1,058 million, the smallest amount in any




TABLE 21. CHANGES IN THE DISTRIBUTION OF SDR HOLDINGS, FISCAL YEAR ENDED APRIL 30, 1974

(In millions of SDKs)

Holdings

Industrial countriesUnited StatesUnited KingdomBelgiumDenmarkFranceGermany, Fed. Rep. ofNetherlandsOther continental EuropeCanadaJapan

Primary producing countriesMore developed areasLess developed areas

Western HemisphereMiddle EastAsiaAfrica

Total participants

General Account

Net CumulativeAllocations

6,1782,2941,006

20983

485542236586359377

3,137789

2,348579239765465

9,315

—

April 30,1973

6,5817,796

600528

72582826656630467425

2,117641

1,476593119485280

8,698

617

April 30,1974

6,6071,788

594604140100

1,454400632469426

2,209642

1,567623151505288

8,816

499

April 30, 1973-April 30, 1974

Use

1,01186

375

590100265

———

135518421

62730

Receipt

1,037——

11373

108728

922I

22652

17457384738

NetChange

26-8-6

7668

-482628

-25622/

911

903032208

118

-118

year since 1963/64. Nearly 60 per cent of allpurchases were made within the gold tranche,1'5

including purchases by France, Germany, and theNetherlands totaling SDR 438 million related tosettlement of liabilities under the European nar-row margins arrangement. The larger part of thesesettlements, equivalent to SDR 349 million, tookplace after the suspension for certain transactionsof the equal value principle under Article XXV,Section 8(a), in November 1973. Purchases underthe compensatory financing facility amounted tothe equivalent of SDR 212 million, or 20 per centof total purchases, little changed from the previ-ous year.

On April 10, 1974 the Executive Boardapproved a stand-by arrangement for Italy, thefirst one for this member, which authorized pur-chases equivalent to SDR 1 billion over a12-month period.

Repurchases amounted to the equivalent ofSDR 672 million during 1973/74, an increase of

16 The Articles of Agreement define a gold tranchepurchase as "a purchase by a member of the currencyof another member in exchange for its own currencywhich does not cause the Fund's holdings of the mem-ber's currency to exceed one hundred percent of itsquota, provided that for the purposes of this definitionthe Fund may exclude purchases and holdings underpolicies on the use of its resources for compensatoryfinancing of export fluctuations."

24 per cent over the previous year; more than onehalf was made in discharge of obligations incurredunder Article V, Section l(b). Voluntary repur-chases accounted for SDR 138 million (21 percent of the total), compared with SDR 11 million(2 per cent) the previous year. The increasereflected mainly the repurchase by the UnitedStates, equivalent to SDR 110 million, made inaccordance with a decision of the ExecutiveBoard, accepting repurchases up to the equivalentof SDR 400 million.

Although purchases exceeded repurchases dur-ing the fiscal year by SDR 385 million, members'creditor positions were reduced by SDR 283million because of compensating or offsetting useof creditor positions by EEC members of theEuropean narrow margins arrangement, sales ofU. S. dollars rather than use of the currency of acreditor member, purchases of SDRs from theGeneral Account by members using their own cur-rencies, and members' acquisitions of SDRs withcurrencies acceptable to the Fund.

Currencies of members not maintaining ratesfor their currencies within the margins prescribedby the Articles of Agreement or by ExecutiveBoard Decision No. 904-(59/32) continued tobe valued on the basis of representative rates



established under Rule O-3 17 when used in Fundtransactions. Following the establishment of thenew par value for the U. S. dollar with the Fund,on October 18, 1973, Executive Board DecisionNo. 3865-(73/12) G/S lapsed and the provisionsof Rule O-3 applied in the usual way. This deci-sion was adopted on February 16, 1973, afterthe U. S. authorities announced the proposedreduction in the par value of the U. S. dollar, andamended Rule O-3(i) so that all calculationsinvolving currencies other than the U. S. dollarwould be made on the basis of the prospectivepar value for the U. S. dollar.

At the beginning of 1973 the procedures forthe selection of currencies for use in Fund trans-actions was modified to take account of thereluctance of some members to permit reductionsin their creditor positions in the Fund in exchangefor increases in their holdings of foreign exchange.It was in recognition of this situation that theFund's selection of currencies during 1972 hadaimed at an equitable distribution of changes in netcreditor positions; this entailed limiting the selec-tion of currencies usable in purchases to those thatwere acceptable by the Fund in repurchases, andadvising members that currencies used in Fundtransactions should normally be converted into orout of U. S. dollars. This procedure meant thatless emphasis had been placed on equalizing thereserve positions in the Fund of creditor membersin relation to their holdings of gold and foreignexchange.

During 1973, however, when it became appar-ent that purchases were exceeding repurchases,the procedure was resumed of determining theamounts of currencies to be used in purchases inaccordance with the member's holdings of goldand foreign exchange, and the amounts of cur-rencies for use in repurchases (except for Belgianfrancs, Mexican pesos, and Netherlands guilders)in accordance with the member's reserve positionin the Fund. This procedure tended to equalize,for the currencies to which it was applied, thecumulative use of members' currencies relative totheir holdings of gold and foreign exchange.

In January 1974 the United States offered andthe Fund agreed that over a period of threemonths (subsequently extended) the United States

^Executive Board Decision No. 3637-(72/41) G/S,adopted May 8, 1972.

could repurchase up to the equivalent of SDR 400million. It was expected that the United Stateswould acquire currencies for the major part ofsuch repurchases in the course of market opera-tions. Actual repurchases from the Fund duringthe remainder of the fiscal year amounted to onlySDR 110 million.

In accordance with Article XXV, Section 7(/),the Executive Board permitted two members,Bangladesh and Romania, to purchase SDRs fromthe General Account for purposes other thanreconstitution; Bangladesh purchased SDRs infour gold tranche transactions in order to paycharges on balances in excess of quota arisingfrom use of the compensatory financing facility.In connection with a transaction in the first credittranche, Romania purchased an amount of SDRsto be held and used solely for the payment ofcharges in connection with that transaction.

On January 30, 1974 the Executive Boardadopted a decision amending Rules E-2 and E-3of the Fund's Rules and Regulations permitting areduction in the minimum balance of a member'scurrency held by the Fund in its No. 1 Accountsfrom 1 per cent to 1A of 1 per cent of quota.

Use of Fund's Resources

During the year purchases of currencies andspecial drawing rights by 24 members amountedto the equivalent of SDR 1,058 million (Appen-dix I, Table 1.9), a decline of SDR 118 millionfrom the previous year. The equivalent of SDR 280million was purchased by the Netherlands in fiveseparate gold tranche transactions. France andIndia each made purchases of SDR 138 million;France made two gold tranche purchases andIndia a gold tranche purchase and another pur-chase under the compensatory financing facility.

Romania made its first use of the Fund'sresources with a purchase in the gold tranche inMay 1973; it made its first credit tranche pur-chase in November.

Use of their gold tranche positions by 13 mem-bers, for a total amount of SDR 607 million,accounted for more than half the total purchasesin 1973/74. Purchases in the gold trancheincluded SDR 438 million by France, Germany,and the Netherlands, in connection with thesettlement of liabilities under the European nar-row margins arrangement. Developing countries



accounted for 28 per cent of total gold tranchetransactions in 1973/74, compared with 9 percent in 1972/73.

Purchases under stand-by arrangements duringthe year declined from SDR 213 million in1972/73 to SDR 179 million, the smallest amountpurchased under such arrangements in 13 years.The total amount of stand-by arrangementsapproved in 1973/74, equivalent to SDR 1,394million, was SDR 1,072 million above last year'sfigure (see Appendix Tables 1.10 and 1.12). Theincrease was accounted for largely by the stand-by arrangement approved for Italy. With thisexception, all other stand-by arrangements ineffect in 1973/74 were with primary producingcountries.

Use of the compensatory financing facility wasmade by 8 members for a total of SDR 212 mil-lion. This amount, which was slightly higher thanthe previous year, represented the second largestamount purchased under the facility in any oneyear. The largest amount, SDR 220 million, waspurchased in 1967/68, when 12 members usedthe facility. The largest single purchase under thefacility during 1973/74 was made by India forSDR 62 million.

Credit tranche purchases other than understand-by arrangements or special facilities totaledSDR 60 million, of which Nicaragua and Romaniapurchased SDR 12 million and SDR 48 million,respectively.

The currency most used in purchases was thedeutsche mark for the equivalent of SDR 415million, followed by French francs for SDR 126million. Those two currencies together constitutedover half of total purchases, reflecting the usemade of them in settlements under the Europeannarrow margins arrangement.

Repurchases

Repurchases amounted to SDR 672 million,compared with SDR 540 million in 1972/73. Thelargest repurchase during 1973/74, equivalent toSDR 110 million (16 per cent of the total), wasmade by the United States.

Repurchases equivalent to SDR 381 million, or57 per cent of the total, were in discharge of obli-gations incurred under Article V, Section 7(fc) ,of the Fund Agreement, rather more than twiceas much as in 1972/73; SDR 8 million and

SDR 30 million related to obligations incurred asof April 30, 1971 and 1972, respectively; and theremainder, amounting to SDR 343 million, was indischarge of obligations incurred as of April 30,1973 18 (see Appendix Table 1.15).

Voluntary repurchases amounted to SDR 138million, or 21 per cent of the total. In addition tothe repurchase of SDR 110 million relating to theU. S. gold tranche purchase, they included SDR 14million in respect of a purchase under the Com-pensatory Financing Decision and SDR 7 millioneach relating to a credit tranche purchase andto a gold tranche purchase that was regarded ashaving been made under the Buffer Stock Financ-ing Decision.

The sum of SDR 102 million, or 15 per centof the total, was repurchased in accordance withschedules of amounts, approved by the Fund, forrepurchase within five years from the date of pur-chase. Repurchases in respect of purchases understand-by arrangements amounted to SDR 34 mil-lion, or 5 per cent of the total.

Other repurchases totaled SDR 17 million,including SDR 6 million by 21 members in respectof currency payments in excess of 75 per cent ofthe increase in quotas in accordance with para-graph 5 of Board of Governors ResolutionNo. 25-3 on "Increases in Quotas of Members—Fifth General Review";19 SDR 5 million by theBahamas under paragraph 4 of Board of Gover-nors Resolution No. 28-3 on Membership;20 andSDR 4 million by Bolivia in accordance withparagraph 5(ii) of the Decision on the Problemof Stabilization of Prices of Primary Products,

18 Article V, Section 7(b), provides that, subject tocertain limitations, a member shall repurchase an amountof the Fund's holdings of its currency equivalent to onehalf of any increase in the Fund's holdings of its cur-rency that has occurred during the Fund's financial year,plus one half of any increase, or minus one half of anydecrease, in the member's monetary reserves during thesame period, or, if the Fund's holdings of the member'scurrency have decreased, one half of any increase in themember's monetary reserves minus one half of thedecrease in the Fund's holdings of the member's cur-rency. While 19 members had incurred obligations as ofApril 30, 1973 totaling the equivalent of SDR 482 mil-lion, Article V, Section 7(c)(iv), limited the amount tobe discharged forthwith to SDR 271 million (see Appen-dix Table 1.14).

19 See Annual Report, 1970, pages 177-84.20 The Membership Resolution for the Bahamas pro-

vided for a quota of SDR 20 million to be paid in cur-rency, with the provision that SDR 5 million would berepurchased within 60 days after the currency subscrip-tion had been paid.



which states that a member shall repurchase tothe extent that the international buffer stock makesa distribution in currency.

The Executive Board approved scheduling ofrepurchases over periods up to five years fromthe date of purchase for 14 members. The Boardalso agreed that 4 members postpone the dis-charge of repurchase obligations under Article V,Section 7(6), incurred in gold, subject to areview by October 31, 1974.

Three member countries used SDR 3 million ofgold in the discharge of obligations incurred underArticle V, Section 7(fe) , and Schedule B, payableas of April 30, 1973. Use of SDKs totaled SDR 29million, of which SDR 4 million was in dischargeof repurchase obligations incurred as of April 30,1973.

In addition to being the currency most used inpurchases, the deutsche mark was the currencymost used in repurchases for SDR 248 million,or 37 per cent of the total (see AppendixTable 1.16). Net use of deutsche mark amountedto some SDR 168 million.

Income, Expenses, and Reserves

The largest part of the Fund's income is derivedfrom charges on Fund holdings of currencies inexcess of quota, from service payments on pur-chases of currency and SDRs from the GeneralAccount other than those in the gold tranches,and from charges on stand-by arrangements. TheFund's income is also augmented by interest pay-ments on SDRs held by the General Account andfrom assessments to defray the cost of conductingthe business of the Special Drawing Account thatis levied, under Article XXVI, Section 4, on allparticipants in proportion to their net cumulativeallocations (this item is treated as a deductionfrom expenses).

All charges are payable in gold or at the mem-ber's option in SDRs, but charges on stand-byarrangements may be paid in U. S. dollars. Inaccordance with the provisions of Article V,Section 8(/), however, a member may settle itscharges partially in its own currency if its mon-etary reserves are equivalent to less than one halfof its quota.

The schedule of charges on balances in excessof quota that was in effect during 1973/74 (seeAppendix Table 1.19) produced earnings of

SDR 28.2 million during the fiscal year. The high-est earnings, SDR 128.1 million, were in 1970/71.

The schedule of charges is reviewed annuallyby Executive Directors and, as described earlier,a new schedule was introduced effective July 1,1974. This was the first change in the scheduleof charges since May 1, 1963.

The remainder of the Fund's income, equiva-lent to SDR 10.3 million during 1973/74, camemainly from interest payments received on hold-ings of SDRs by the General Account and, to alesser extent, from charges in connection withpurchases from the Fund and stand-by arrange-ments. Interest payments on holdings of SDRswere equivalent to SDR 7.8 million, which showeda decrease for the first time since the allocation ofspecial drawing rights in 1969/70 because oflower average amounts held by the Fund; chargesamounted to SDR 2.5 million, a decrease of22 per cent compared with the previous year.Assessments to cover the expenses of operatingthe Special Drawing Account amounted to SDR 1.0million.

Operational expenses, amounting to SDR 27.2million, again consisted entirely of payment ofremuneration to creditor members as specified inArticle V, Section 9, of the Fund Agreement. In1972/73 these payments totaled SDR 29.3million.

The Fund's net operational income wasSDR 11.2 million, a decrease of SDR 1.0 millionfrom the previous year. Compared with SDR 34million,21 in 1972/73, budgetary and fixed prop-erty expenses increased by SDR 14.4 million in1973/74. Net expenses of SDR 37.2 million werecharged to the Special Reserve, reducing thatbalance to SDR 351.7 million on April 30, 1974.

A summary of income and expenses over thepast ten fiscal years is given in AppendixTable 1.18.

Transactions and Operations in Gold

During the past fiscal year, the Fund receivedgold equivalent to SDR 3.4 million and disbursedgold equivalent to SDR 3.6 million (see Appen-dix Table 1.17). These transactions and opera-tions were connected primarily with repurchase

21 This figure would have been SDR 55.2 million hadit not been reduced by SDR 21.2 million, the SDRequivalent of the proceeds of sale of the Fund's formerheadquarters building.



obligations incurred by members under Article V,Section 7(6), and payment of remuneration tocreditor members as specified in Article V, Sec-tion 9, of the Fund Agreement.22 On April 30,1974 the Fund's gold with depositories was equiva-lent to SDR 5,369.9 million, only fractionallychanged from last year.

At the request of South Africa, the Fund ter-minated its decision entitled "South Africa: Policyon Sales of Gold to the Fund" 23 on December 7,1973. Under this decision, which had beenadopted at the end of 1969, South Africa hadbeen entitled to sell gold to the Fund, inter alia,to meet current foreign exchange needs when theprice of gold in the markets fell to or below theequivalent of the parity price and, regardless ofthe market price, when South Africa had a needfor foreign exchange over a semiannual periodbeyond that which could be satisfied by the saleof all current production of newly mined gold onthe private markets or by sales to the Fund whenthe market price fell to or below the parity price.

South Africa's gold sales to the Fund in theframework of the decision had amounted to theequivalent of SDR 639.75 million in 1970 andSDR 137.55 million in 1971; no sales had takenplace after 1971.

The decision permitted a review when requestedbecause of a major change in circumstances, andin any event after a period of five years. In therequest for termination of the decision, SouthAfrica indicated its view that the termination inNovember 1973 of the agreement reached inWashington in March 1968, which had broughtinto existence the two-tier gold marketing arrange-ments, constituted a major change in circum-stances.

During the year the Executive Directors per-mitted four members—Colombia, Iraq, the Philip-

22 In accordance with Rule 1-9 of the Fund's Rulesand Regulations, remuneration is payable "in gold tothe extent that receipts of gold, during the financial year,in payment of charges under Article V, Section 8(/),exceed payments during that year of gold as transfercharges and interest on borrowings." Rule 1-9 providesthat "any remuneration due to each member and notpayable in gold shall be paid in that member's currency."However, in accordance with Executive Board DecisionNo. 3033-(70/38), the Fund shall offer to pay partici-pants, at their option, in special drawing rights for anyamount of gold or currency payable as remuneration,provided that the General Account's holdings of SDRs atthe end of the financial year exceed the amount ofremuneration payable for that year.

23 See Annual Report, 1970, pages 34-35 and 184-89.

pines, and Turkey—to postpone the dischargeof portions of repurchase obligations, underArticle V, Section 7(&), of the Fund Agreement,that were payable in gold.24 The total amountinvolved was equivalent to SDR 13.2 million. Inpermitting these postponements, the ExecutiveDirectors took note of the statements by the mem-bers that gold payments under present circum-stances presented difficult problems and actedpending clarification of the future role of gold inconnection with the reform of the internationalmonetary system. The respective decisions aresubject to review not later than October 31, 1974.

In November 1973 the Executive Directorstook note of the difficulties faced by members insettling gold with the Fund in amounts of lessthan one standard bar, also in connection withrepurchases incurred under Article V, Sec-tion 7( fo) . The Executive Directors decided thatsuch small amounts shall not be collected.25

Consultations with Member Countries

In 1973/74 the Fund completed 89 regularconsultations with member countries, of which 61were under Article XIV and 28 with Article VIIIcountries. Member countries maintaining restric-tions on current international payments and trans-fers under Article XIV are required to consultannually with the Fund. For members that haveaccepted the obligations of Article VIII, Sec-tions 2, 3, and 4, the consultations are held regu-larly on a voluntary basis.

Consultations are a continuing and an impor-tant element in the work of the Fund. They notonly provide the opportunity for reviewing indetail the economic and financial situation andpolicies of member countries but also establish asingularly effective setting for furthering interna-tional monetary cooperation. Over the years, con-sultations have placed increasing emphasis on theimplications of members' domestic economic andfinancial policies in the context of internationalmonetary stability. They help the Fund to dealquickly with members' requests for the use of

24 These members repurchased an equivalent amountof the Fund's holdings of their currencies with SDRs.

25 Executive Board Decision No. 4087-(73/105),adopted on November 9, 1973 and reproduced in Appen-dix II.



Fund resources and proposals for changes inexchange rates and exchange practices. Also, forthe individual member country, the consultationsprovide an independent appraisal of policy andenable the member to discuss with the Fund anyspecial difficulties arising from the actions orpolicies of other countries.

In recent years the regular consultations haveat times been supplemented by special consulta-tions, and toward the end of 1973 the Fundinitiated a new procedure for special consultationswith members whose external policies were ofmajor importance to the world economy. The firstround of these consultations was held in Novem-ber 1973 with nine member countries whose bal-ance of payments developments and policies havehad a major impact on international currencyrelationships. A second round of discussions, withten members, including several of the largerdeveloping countries, took place in April and May1974.

During the fiscal year Qatar, South Africa, theBahamas, and the United Arab Emirates acceptedthe obligations of Article VIII, Sections 2, 3, and4, bringing to 41 the number of member countrieswith Article VIII status. These members are listedin Appendix Table 1.22.

Training and Technical Assistance

The Fund has continued to provide membercountries with a wide range of technical servicesin the fields of fiscal, monetary, and paymentspolicy, banking, government finance, and statistics.The assistance has been made available in avariety of forms—through Fund representativesand advisors, training at headquarters, staff mis-sions, and the assignment of outside experts—and has again covered about two thirds of theFund's membership. In 1973/74, 35 Fund repre-sentatives or advisors were on assignment of sixmonths or more in 23 countries; 240 governmentofficials from 101 countries attended the IMFInstitute; 72 staff members visited 29 countrieson technical assistance missions; and 119 outsideexperts were on assignments of six months ormore in 51 countries. This assistance was in addi-tion to the general advisory services and technicalassistance made available through the Fund's

regular procedures under Article VIII and Ar-ticle XIV consultations.

The IMF Institute's training facilities wereincreased in 1973/74 when, for the first time, theInstitute was able to conduct three courses simul-taneously. During the year the Institute offeredten courses to 240 officials of member govern-ments and their financial institutions, an expan-sion of 25 per cent over the previous year. Thecourse on Financial Analysis and Policy continuesto be the principal course provided by the Insti-tute, offered for 20 weeks in English, and for 24weeks each in French and Spanish. This course,which places special emphasis on the problems ofless developed countries, surveys the instrumentsof monetary, fiscal, and payments policy andexamines their effectiveness in achieving policyobjectives. It also includes a discussion of thepurposes and operations of the Fund directedtoward promoting a continued improvement inmonetary cooperation among members and intheir relations with the Fund. The Institute offerstwo shorter courses, also in English, French, andSpanish, as required. One is an 8-week coursein Balance of Payments Methodology, held inconjunction with the Balance of Payments Divi-sion of the Research Department; the other is a10-week course in Public Finance, conductedjointly with the Fiscal Affairs Department.

The Central Banking Service provided technicalassistance to 51 member countries during theyear. As in the past, this assistance took twoforms: the provision of advisory services to dealwith specific problems, usually undertaken bystaff members but in some cases also by outsideconsultants; and the assignment of resident expertsin countries, usually for one year or more, toserve in central banks or similar monetary institu-tions. The services provided included assistance inthe setting up of new central monetary institu-tions; the drafting of central banking, generalbanking, and deposit insurance legislation; reviewsof the financial and banking systems of members;and a computer feasibility study for a centralbank. During the year the Central Banking Serviceand the Legal Department, in cooperation withthe area departments concerned, prepared draftbanking legislation in 6 countries and helped inthe revision of draft legislation in 5 other coun-tries. The Central Banking Service manned tech-



nical assistance missions to 15 countries and sentconsultants to 8 countries in 1973/74. In thecourse of 1973/74, 78 outside experts and 14consultants provided technical assistance to 45countries. At the end of the year 61 outsideexperts and 1 consultant were on assignment fromthe Central Banking Service in 38 countries.

The Fiscal Affairs Department maintained itsassistance to member countries at the substantiallyhigher level to which it had increased in theprevious year. A total of 31 countries receivedfiscal technical assistance during the year in theform of staff missions, staff assignments in thefield, use of the services of members of the panelof fiscal experts, and work on fiscal projects under-taken at headquarters. The principal fields inwhich assistance was given were tax policy, taxand customs administration, budgetary systemsand procedures, government accounting and audit-ing, and general financial management. In coop-eration with the Legal Department, advice ondrafting fiscal legislation was given in five coun-tries. At the end of 1973/74, 24 members on thepanel of fiscal experts were on long-term assign-ments in 15 member countries, and groups oflong-term advisors were continuing to operate in2 countries.

The Bureau of Statistics has continued to pro-vide technical assistance in statistics to membercountries, principally for establishing or improvingcentral bank bulletins. This assistance has empha-sized the development and inclusion in bulletinsof financial and general statistics prepared inaccordance with classifications and definitions thathelp to make such data useful for monetaryauthorities and others concerned with monetaryand payments problems. During the past year, theBureau's technical assistance on central bank bul-letins covered 10 countries and also included briefreview visits to assess progress made in centralbank bulletins of 25 countries that had beenassisted by the Bureau in previous years. TheBureau helped to inaugurate new central bankbulletins in 5 countries in 1973/74, and at theend of the period work was well advanced on theestablishment of statistical bulletins in 7 othercountries. Since technical assistance began in thisfield five years ago, the Bureau has helped toestablish 18 central bank bulletins and to bringabout substantial improvements in 16 existingbulletins.

In separate short-term staff missions during theyear, the Bureau assisted 2 countries in the areaof financial statistics and conducted a statisticalseminar for Central African officials and tech-nicians. The Bureau also continued to work withmember governments on the compilation of dis-aggregated data on government finance accordingto the conceptual framework and classificationstandards developed in the Fund.

Relations with Other InternationalOrganizations

The Fund's cooperation with other internationalorganizations, particularly those in the economicand financial area, was brought into sharp focusduring 1973/74 as world events emphasized theneed for coordination in dealing with commoninterests. In addition to its special relationshipwith the International Bank for Reconstructionand Development (IBRD), the Fund continuedto have frequent contacts with the United Nations(UN) and its relevant organs, the Organizationfor Economic Cooperation and Development(OECD), the General Agreement on Tariffs andTrade (GATT), the European Economic Com-munity (EEC), and the Bank for InternationalSettlements (BIS). This liaison is maintained bythe Fund's offices in Paris and Geneva and theoffice of its Special Representative to the UnitedNations, by exchange of pertinent data, and byattendance of headquarters staff at meetings atboth the plenary and working levels. Representa-tives of these organizations attended the AnnualMeeting of the Board of Governors of the Fund,held jointly with those of the IBRD and itsaffiliates in Nairobi, Kenya in September 1973,along with representatives of other organizationswith which the Fund has related interests.Furthermore, officers of the IBRD, the UnitedNations Conference on Trade and Development(UNCTAD), the OECD, the GATT, the EEC,and the BIS attended meetings of the Committeeof Twenty and its Deputies.

The Managing Director, Mr. Pierre-PaulSchweitzer, addressed the 55th Session of the UNEconomic and Social Council (ECOSOC) inGeneva on July 5, 1973, while the new ManagingDirector, Mr. H. Johannes Witteveen, addressedthe 55th Session, Resumed, in New York on



October 16, 1973, when he presented the Fund'sAnnual Report. The Managing Director or hisDeputy attended meetings of the AdministrativeCommittee on Coordination (ACC), while otherstaff attended preparatory and related interagencymeetings. The Managing Director also attendedthe meeting of the OECD Ministerial Council anda monthly meeting of the BIS during the yearunder review. Coinciding with meetings of theCommittee of Twenty, the Managing Director alsoattended meetings of the Ministers of the Inter-governmental Group of Twenty-Four on Inter-national Monetary Affairs and a meeting ofministers and governors of central banks of theGroup of Ten; staff representatives also attendedmeetings of these groups at the Deputies' level.

The Fund was also represented at other meet-ings of UN bodies, including sessions of theGeneral Assembly in New York and of theECOSOC, as well as its regional commissions andother specialized bodies. Fund staff also cooper-ated with various bodies of the OECD, andattended relevant meetings in the EEC, monthlymeetings and the Annual Meeting of the BIS, aswell as a meeting of the Economic and Consulta-tive Committee of the International Chamber ofCommerce, the UN, and the GATT.

The Fund's long-standing cooperation with theGATT with regard to import restrictions imposedfor balance of payments reasons involved staffparticipation and the provision of pertinent docu-mentation for GATT consultations with certainmembers common to both organizations. Duringthe fiscal year Fund staff attended the 29th Sessionof the CONTRACTING PARTIES, meetings of theCouncil of Representatives, and both the prepara-tory meeting in Geneva and the Ministerial Meet-ing in Tokyo relating to the forthcoming multi-lateral trade negotiations.

Cooperation with members with respect to debtrenegotiation and aid coordination involved staffparticipation and provision of relevant documenta-tion to multinational meetings of creditors onChile, Ghana, and the Khmer Republic, as well asa meeting of the Pakistan Consortium. Fund rep-resentatives continued their participation in theperiodic meetings of the Inter-GovernmentalGroup on Aid to Indonesia, and in meetings heldjointly by the IBRD and the Asian DevelopmentBank on the reconstruction and development ofIndochina. Fund staff attended a multilateral con-

ference to consider economic aid for the KhmerRepublic in 1974, an exploratory meeting ofpotential donor countries for Ghana, and meet-ings of the IBRD Consultative Groups on aidcoordination for Colombia, Ethiopia, East Africa(Kenya), Korea, Morocco, Peru, the Philippines,the Sudan, Thailand, and Zaire, as well as meet-ings of the IBRD-sponsored Consortium for Indiaand the OECD-sponsored Consortium on Turkey.Fund staff also attended the Annual Meetings ofthe Boards of Governors of the African Develop-ment Bank, the Asian Development Bank, and theInter-American Development Bank, and partici-pated in a conference held by the Arab Fund forEconomic and Social Development on the expan-sion and flow of investment funds in the regionand in the Annual Meeting of that Fund. In LatinAmerica, Fund staff attended the Annual Meetingof the Inter-American Economic and Social Coun-cil of the Organization of American States (OAS)and continued to cooperate and to provide docu-mentation in connection with the OAS Committeeon the Alliance for Progress' annual countryreviews and other matters of mutual interest. InAfrica, the Fund was represented at the 3rd meet-ing of the Association of African Central Banksin Lagos, Nigeria, and a fact-finding team fromthe Association later visited the Fund.

The experience of Fund staff in economic andfinancial matters occasioned participation in, andin some instances the provision of organizationalassistance to, a number of seminars, including aSeminar on the Problems, Ways, and Means ofPromoting West African Entrepreneurship, orga-nized by the Bank of Sierra Leone in Freetown,for the West African Sub-Regional Committee ofthe Association of African Central Banks; a sta-tistical seminar in Yaounde, Cameroon, held forthe five members of the Bank of Central AfricanStates (Banque des Etats de 1'Afrique Centrale(BEAC)); a Seminar on Investment Policies forSurplus Funds for Arab Oil Producing Countriesin Kuwait; a Seminar on Monetary Policy andPublic Debt Administration, held by the BrazilianCapital Market Institute and the National Asso-ciation of Open Market Institutions, in Rio deJaneiro; a Seminar on Capital Markets, under thejoint auspices of the Central Bank of Uruguayand the OAS Capital Markets Program in Monte-video; a Seminar on Capital Markets, sponsoredby the Government of Bolivia and the OAS in La



Paz; a Seminar on Employment, convened by theGovernment of Mexico and the InternationalLabor Office, in Mexico City; a special technicalmeeting on inflation held by the Monetary PolicyCommittee of the Central American MonetaryCouncil in San Jose, Costa Rica, which was fol-lowed a month later by a Seminar on Inflation inSan Salvador, El Salvador. A Fund staff memberalso delivered a technical paper and chaired around-table discussion at the 7th Annual GeneralAssembly of the Inter-American Center of TaxAdministrators (CIAT) in Guatemala City andanother staff member participated in a meeting forinternational coordination for the developmentof financial markets held in Geneva under theauspices of the International Finance Corporationand the International Savings Banks Institute.

In the area of commodities, staff attended meet-ings of the International Cocoa Organization'sCouncil and the International Tin Council, withwhich the Fund has special relationships in con-nection with its buffer stock facility; the WorldGrain Seminar, held by the Canadian GrainsCouncil in Winnipeg; an International Seminar onCommodity Forecasting Techniques, held by theIBRD in Oxford, United Kingdom; the 16th Ses-sion of the Food and Agriculture OrganizationCommittee on Commodity Problems' Intergovern-mental Group on Grains, in Rome; and variousmeetings of the UNCTAD Committee on Com-modities in Geneva.

Reflecting the Fund's interest in export credits,staff representatives attended the 30th annualgeneral meeting of the Union d'Assureurs desCredits Internationaux (Berne Union) and itsextraordinary general meeting in South Africa, andan ad hoc Group for Fund/Bank cooperationfrom the Berne Union visited Fund headquartersfor an informal exchange of views on statistics andmatters relating to external debt.

Membership, Quotas, and Participationin the Special Drawing Account

The Bahamas became a member of the Fundon August 21, 1973 with a quota of SDR 20 mil-lion, bringing total membership on April 30, 1974to 126 members and aggregate quotas toSDR 29,189 million. The Bahamas also becamea participant in the Special Drawing Account,

bringing the number of participants to 117, withquotas equivalent to 98.5 per cent of the Fundtotal.26 An application from Papua New Guineafor membership in the Fund, after it has attainedindependence, was before the Executive Directorsat the end of the fiscal year.

In early April 1974, Nepal requested postpone-ment to not later than April 30, 1976 of paymentsrelating to the fourth and fifth installments of theincrease in its quota to which it had consented inaccordance with paragraph 6 of the Board of Gov-ernors Resolution No. 25-3 on "Increases inQuotas of Members—Fifth General Review." 27

The fourth and fifth installments, each equivalentto SDR 800,000, are due not later than April 27,1974 and April 27, 1975, respectively. For eachinstallment, an amount equivalent to SDR 200,000is payable in gold. In requesting postponement,the Nepalese authorities stated that payment ofgold in present circumstances presented seriousproblems, especially in view of the uncertainty asto the future role of gold in connection with thereform of the international monetary system. TheExecutive Board accepted Nepal's proposal andrecommended that Board of Governors Resolu-tion No. 25-3, "Increases in Quotas of Members—Fifth General Review," adopted February 9,1970 be amended to permit Nepal to pay thefourth and fifth installments of its quota increasenot later than April 30, 1976. The amendmentwas adopted by the Board of Governors onJune 24, 1974.

Executive Directors, Management,and Staff

A list of Executive Directors and their votingpower on April 30, 1974 is given in Appen-dix III. The changes in membership of the Execu-tive Board during 1973/74 are shown in Appen-dix IV.

Mr. H. Johannes Witteveen, a former Ministerof Finance and Deputy Prime Minister of theNetherlands, was appointed Managing Directorand Chairman of the Board of Executive Direc-

26 The 9 members of the Fund that have not depositedinstruments of participation in the Special DrawingAccount are Ethiopia, Kuwait, Lebanon, the Libyan ArabRepublic, Portugal, Qatar, Saudi Arabia, Singapore, andthe United Arab Emirates.

27 See Annual Report, 1970, pages 177-84.



tors and assumed office on September 1, 1973. Frank A. Southard, Jr., who had served as DeputyHe succeeded Mr. Pierre-Paul Schweitzer, of Managing Director from November 1, 1962.France, whose second term of office expired on In the year ended April 30, 1974, there wereAugust 31, 1973. 153 appointments to the Fund's regular staff and

Mr. William B. Dale, formerly Executive Direc- 110 separations. At the end of the fiscal year, thetor of the Fund for the United States, was staff numbered 1,296 and were drawn from 88appointed Deputy Managing Director and assumed countries. These figures do not include Advisorshis duties on March 1, 1974. He succeeded Mr. (4) and Assistants (74) to Executive Directors.


APPENDICES


Appendix I. THE FUND IN 1973/74

The tables and chart in this appendix supplement the information given in Chap-ter 3 on the activities of the Fund during the past year. For some aspects of the Fund'soperations, data covering longer periods are included. Apart from Table I.I on ex-change rates and Tables 1.19, 1.20, and 1.21 setting out the charges on the use of theFund's resources, the data in the tables and chart do not go beyond April 30, 1974,the end of the Fund's fiscal year. The unit of value employed in most of the tablesand in the chart is the special drawing right (SDR), which is equivalent to 0.888671gram of fine gold. This, in turn, is equivalent to one U.S. dollar of the,weight andfineness in effect on July 1, 1944, the unit of value that was employed in the AnnualReports prior to 1972.l

Exchange Rate Developments

Exchange rate developments from May 1973 to early May 1974 may be summarizedas follows:

May 17-June21, 1973The Fund agreed to the initial par value proposed by Qatar.The Fund noted (i) the middle rate for the U. S. dollar communicated by South

Africa; (ii) that the South African rand continued to be the currency of Botswa-na, Lesotho, and Swaziland, and (iii) the exchange rate actions by Finland, Iceland,Malaysia, Morocco, and Singapore not to maintain exchange rates within specifiedmargins.

June 29-August 10, 1973The Fund noted (iv) the new central rate communicated by the Federal Repub-

lic of Germany and the new rate communicated by Austria; (v) central rates com-municated by Kenya, Tanzania, Uganda, and Western Samoa; (vi) the circum-stances that led Cyprus and Yugoslavia to the decisions not to maintain the spotexchange rates for their currencies within margins hitherto observed; and (vii) thecircumstances that led New Zealand to discontinue the fixed exchange rate relation-ship between the New Zealand and U. S. dollars.

The Fund agreed to the initial par value proposed by Algeria, and concurred inthe new par values proposed by Saudi Arabia and Thailand.

September 9-17, 1973The Fund concurred in the new par value proposed by Australia; it noted (viii)

the exchange rate action by New Zealand to appreciate the market rate for theNew Zealand dollar by 10 per cent; (ix) the exchange rate action communicated byFiji to appreciate the Fiji dollar by 5.3 per cent; and (x) the new central rate com-municated by the Netherlands.

1 For the interim method of valuing the SDR, effective July 1, 1974, see page 51.

71


Appendix I (continued). THE FUND IN 1973/74

October 18, 1973-January 14, 1974The Fund concurred in the new par values proposed by the United States, the

Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Liberia, Mexico,Nicaragua, and Panama.

The Fund noted (xi) the circumstances that led Greece to the decision not tomaintain the exchange rate for the drachma within margins hitherto observed; (xii)the decision of Malawi to cease to maintain the fixed exchange rate relationshipbetween the kwacha and the pound sterling; and (xiii) the new central rates com-municated by Norway, Kenya, Rwanda, Tanzania, and Uganda.

The Fund agreed to the initial par value proposed by the Bahamas.

January 21-23, 1974The Fund noted (xiv) the circumstances that led France to the decision not to

maintain during the next six months and on a provisional basis the exchange ratesbetween the French franc and certain other currencies in the official market withinmargins hitherto observed; (xv) the circumstances that led Spain to the decisionnot to maintain for the time being the rate between the peseta and the U. S. dollarwithin margins hitherto observed; and (xvi) the decision of Tunisia to set the ratebetween the Tunisian dinar and the French franc by taking account of the dailyquotations of the deutsche mark in terms of the commercial franc in the Parisexchange market.

January 21-22, 1974Foreign exchange markets in Austria, Belgium, Denmark, Finland, Germany,

Japan, Luxembourg, the Netherlands, Norway, Spain, and Sweden were closed onJanuary 21, reopening the following day. Exchange markets were open on Janu-ary 21 in France, Italy, and the United Kingdom.

January 28-April 30, 1974The Fund agreed to the initial par value proposed by the United Arab Emirates.

It concurred in the new par value proposed by Costa Rica.The Fund noted (xvii) the new central rate communicated by Fiji, and by the

United Kingdom for the Cayman Islands; and (xviii) the decisions taken by Franceand Italy to terminate the dual exchange markets.

The structure of exchange rates of member countries as it existed on July 12, 1974is shown in Table I.I. Fund action in 1973/74 with respect to par values and centralrates is recorded in Tables 1.2 and 1.3, respectively.

Special Drawing Account

Summary data on SDR transactions between participants and SDR transactionsand operations conducted through the Fund's General Account for the period fromthe first allocation on January 1, 1970 to April 30, 1974 are shown in Table 1.4. Move-ments in the SDR holdings for individual participants during the fiscal year endedApril 30, 1974 are summarized in Table 1.5. In addition, Table 1.6 shows the cur-rencies transferred against SDRs in transactions between participants, and Table 1.7sets out the amounts of SDRs transferred to individual participants from the Gen-eral Account. The operations and transactions in SDRs during the fiscal year endedApril 30, 1974 are discussed in Chapter 3.

72



Net transfers between participants and the General Account during the fiscal yearresulted in a reduction of the General Account's holdings from SDR 617 million onApril 30, 1973 to SDR 499 million on April 30, 1974.

General Account

Tables 1.8 to 1.16 and Chart I.I show data on members' use of the Fund's resources,on their repurchases of balances of their currency held by the General Account, andon stand-by arrangements approved for members by the Fund.

Table 1.8 provides a comparative statement of members' creditor positions, presentedboth by amounts and as percentages of quotas. The table includes 24 members withcreditor positions amounting to more than SDR 50,000 on April 30, 1974; duringthe year the positions of 4 members increased, while those of 11 decreased and 7remained unchanged. Kenya and New Zealand were added to the list at the end of1973/74.

Details on members' purchases and repurchases under the Fund's compensatoryfinancing facility are set out in Table 1.11. Summary data on stand-by arrangementsand on members' purchases and repurchases, since the inception of the Fund, areshown in Table 1.12 and Table 1.13, respectively. The transactions and operations ofthe General Account during the fiscal year ended April 30, 1974 are discussed inChapter 3.

Repurchases Under Article V, Section 7(b)

Article V, Section 7(6), provides that, subject to certain limitations, a membershall repurchase an amount of the Fund's holdings of its currency equivalent to onehalf of any increase in the Fund's holdings of its currency that has occurred duringthe Fund's financial year, plus one half of any increase or minus one half of anydecrease in the member's monetary reserves during the same period, or, if the Fund'sholdings of the member's currency have decreased, one half of any increase in themember's monetary reserves minus one half of the decrease in the Fund's holdingsof the member's currency.

On April 30, 1973 the Fund's holdings of currencies of 62 member countriesexceeded 75 per cent of their quotas. Repurchase obligations pursuant to Article V,Section 7(6), were calculated for 19 of these members. Repurchase obligations bythe 19 members totaled the equivalent of SDR 482 million payable in gold, SDRs, andconvertible currencies as indicated in Table 1.14.

The outstanding balance of repurchase obligations incurred as of April 30, 1971 andApril 30, 1972 payable in subsequent financial years amounted to SDR 35 million, ofwhich SDR 16 million was payable as of April 30, 1973, SDR 10 million not laterthan August 25, 1973, and SDR 9 million in subsequent financial years.2

Article V, Section 7(c)(iv), limits the amounts to be repurchased under Article V,Section 7(6), in any year to 25 per cent of the quota of the member concerned. Thislimitation applied to the obligations of seven members incurred as of April 30, 1973and to the outstanding balance of the obligations of one member incurred as ofApril 30, 1971 and 1972, thus reducing the total amount to be discharged as ofApril 30, 1973 to SDR 287 million—SDR 271 million in respect of obligationsincurred as of April 30, 1973, and SDR 16 million in respect of outstanding balancesof obligations incurred as of April 30, 1971 and April 30, 1972. In August 1973

- Annual Report, 1973, page 68.

73



Nigeria agreed with the revised calculation of its repurchase obligation incurred asof April 30, 1972. The obligation payable in convertible currencies equivalent toSDR 20.1 million was discharged in November 1973. Also in August 1973, Iraq dis-charged the part of its April 30, 1971 and 1972 repurchase obligations payable inconvertible currencies equivalent to SDR 6.9 million that was scheduled to be repur-chased not later than August 25, 1973.3 The member requested and the Fund agreedto further postponement of the discharge of the balance, equivalent to SDR 3.1 mil-lion payable in gold.

During the year four members (Colombia, Iraq, the Philippines, and Turkey)requested postponement of the discharge of that part of their repurchase obligationsthat was payable in gold, totaling the equivalent of SDR 13.2 million. In permittingthe postponements the Executive Directors took note of the reasons advanced by therespective authorities of the members concerned that a payment of gold in presentcircumstances would present them with serious problems and that they would appre-ciate postponement pending the clarification of the future role of gold in connectionwith the reform of the international monetary system. These decisions are subject tofurther review before October 31, 1974.

In November 1973 the Executive Directors also decided that if a payment dueunder Article V, Section 7(fc) , includes an amount of gold equal to less than onestandard bar, such amount shall not be collected.

Five members, which in accordance with Article V, Section 7(c)(iv), dischargedamounts equivalent to 25 per cent of their respective quotas, also subsequently dis-charged additional amounts. Indonesia and Peru discharged the balance of their obli-gations incurred as of April 30, 1973; Nicaragua repurchased the equivalent ofSDR 4.25 million, which discharged the balance of the April 30, 1971 repurchase obli-gation and part of the repurchase obligation incurred as of April 30, 1972; the Philip-pines repurchased the equivalent of SDR 17.25 million and El Salvador the equivalentof SDR 6,245, which discharged part of the balance of their obligations incurred as ofApril 30, 1973.

The outstanding balance of repurchase obligations incurred as of April 30, 1971,1972, and 1973 amounted to SDR 156 million, of which SDR 81 million was payableas of April 30, 1974, SDR 13 million after expiry of postponement, and SDR 62 mil-lion in subsequent financial years.

During the fiscal year 1973/74, repurchases in discharge of obligations incurredunder Article V, Section 7(6), totaled SDR 381 million. Of this total, SDR 3 millionwas payable in gold, SDR 4 million in special drawing rights, and SDR 374 million inconvertible currencies (Table 1.15). Of the amount payable in convertible currencies,the equivalent of SDR 297 million was calculated in currencies that the Fund couldnot accept or could accept only up to a limited amount in repurchases as of April 30,1972 and April 30, 1973; this resulted from the limitation imposed by Article V, Sec-tion 7(c)(iii), providing that repurchases shall not be carried to a point at which theFund's holdings of any currency required to be used are above 75 per cent of the quotaof the member concerned. In accordance with Schedule B, paragraph l(d), of theFund Agreement and paragraph 1 of Executive Board Decision No. 3049-(70/44),4

other convertible currencies were selected in substitution for these currencies.The sum of SDR 381 million repurchased in discharge of obligations incurred under

Article V, Section 7(6), of the Fund Agreement represented 57 per cent of totalrepurchases during the fiscal year 1973/74. Of this amount, SDR 8 million and

3 Annual Report, 1973, page 68.4 Decision adopted May 20, 1970 and reproduced in Selected Decisions of the International

Monetary Fund and Selected Documents (Sixth Issue, Washington, 1972), pages 64-66.

74



SDR 30 million related to obligations incurred as of April 30, 1971 and April 30, 1972,respectively; the remainder, SDR 343 million, was in discharge of obligations incurredas of April 30, 1973.

Gold

The Fund's transactions and operations in gold over the last three fiscal years arecovered in Table 1.17.

Income and Expenses

Table 1.18 shows a summary of income and expenses of the General Accountover the last ten fiscal years. Details are provided in Chapter 3.

The Fund's schedule of charges on balances in excess of quota that was in effectfrom May 1, 1963 to June 30, 1974 is shown in Table 1.19. New schedules ofcharges that came into effect on July 1, 1974 are shown in Tables 1.20 and 1.21.

Administrative Budget and Audit

The administrative budget approved by the Executive Directors for the period May 1,1974 to April 30, 1975 is presented in Appendix V. Comparative income and expensefigures for the fiscal years ended April 30, 1972, 1973, and 1974 appear inAppendix VI. Appendix VII gives the Opinions of the Audit Committee, together withthe audited Balance Sheets of the General Account and Special Drawing Account as atApril 30, 1974, the Statement of Income and Expenses, the Statement of Reserves, theStatement of Source and Use of Special Drawing Rights, and the audited Balance Sheetof the Staff Retirement Fund as at April 30, 1974.

Article VIII

A list of the member countries that had accepted the obligations of Article VIII, Sec-tions 2, 3, and 4, by April 30, 1974 is presented in Table 1.22.

Publications

Table 1.23 lists publications issued by the Fund during the past fiscal year.

75


TABLE I.I. EXCHANGE RATES, JULY 12, 1974

(Currency units per unit listed)

ON

Member

Afghanistan 4

Algeria 4

Argentina 4

AustraliaAustria

'Bahamas 4

'BahrainBangladesh 4

Barbados'Belgium 4

'BoliviaBotswanaBrazil4

'Burma'Burundi

CameroonCanadaCentral African Republic 4

ChadChile4

'China, Republic ofColombia 4

Congo, People's Republicof the

Costa Rica 4

Cyprus

Dahomey'DenmarkDominican Republic 4

EcuadorEgypt 4

Currency

afghanidinarpesodollarschilling

dollardinartakadollarfranc

pesorandcruzeirokyatfranc

francdollarfrancfrancescudo

new Taiwan dollarpeso

franccolonpound

franckronepesosucrepound

Member Maintains Exchange Rate Against 1

OtherPound French Spanish currencies

U. S. dollar sterling franc peseta in group 3

45.00

5.000.672272

5

1.000.394737

18.96774.80

48.6572

20.005

6.8654.8138

78.7501

50.005

50.0050.00

750.00

38.0025.68

50.008.57

5

50.007.57831

1.0025.000.391305

Market Rates 2

U. S. dollar

3.92157CD

18.17

37.945

0.666667

0.9756

0.344828

5.9550

5


El SalvadorEquatorial Guinea 4

•Ethiopia*FijiFinland

colonpesetadollardollarmarkka

2.50

2.072370.80

1.00

FranceGabonGambia, The

*Germany, Federal Republic ofGhana 4

GreeceGuatemalaGuinea 4

GuyanaHaiti

HondurasIceland

*IndiaIndonesia

*Iran

*IraqIreland 4

IsraelItalyIvory Coast

*JamaicaJapan

*Jordan*KenyaKhmer Republic 4

Korea

*KuwaitLaos 4

LebanonLesothoLiberia

*Libyan Arab Republic*Luxembourg 4

Malagasy RepublicMalawiMalaysia

francfrancdalasideutsche markcedi

drachmaquetzalsylidollargourde

lempirakronarupeerupiahrial

dinarpoundpoundlirafranc

dollaryendinarshillingrielwon

dinarkippoundranddollar

dinarfrancfranckwachadollar

5

5

50.004.00

1.15385

5

1.0020.4628

5.21145.00

2.005

18.9677415.0068.1747

0.2960531.00

4.205

50.00

0.9090915

0.3214287.14286

375.00398.90

0.296053600.00

5

5

1.00

0.296053

50.006

5

3.6707

4.8138

3.21979 2.5570

30.03

95.40

644.475

292.80

2.2750.666667

48.6572 37.945

0.80002.4242


TABLE I.I (concluded). EXCHANGE RATES, JULY 12, 1974

(Currency units per unit listed)

Member

MaliMaltaMauritaniaMauritius 4

Mexico

Morocco 4

'Nepal 4

'NetherlandsNew ZealandNicaragua 4

oo NigerNigeria

'Norway'Oman'Pakistan

PanamaParaguay 4

Peru4

PhilippinesPortugal

'QatarRomania 4

'Rwanda'Saudi ArabiaSenegal

Sierra LeoneSingapore

'Somalia 4

South AfricaSpain

Currency

francpoundouguiyarupeepeso

dirhamrupeeguilderdollarcordoba

francnairakronerial Omanirupee

balboaguaranisolpesoescudo

riyalleufrancriyalfranc

leonedollarshillingrandpeseta

U. S. dollar

12.50

10.56

7.00

0.3453959.90

1.00126.0038.706.78

3.9473714.38 6

92.843.55001

6.23270

Member Maintains Exchange Rate Against l

OtherPound French Spanish currenciessterling franc peseta in group 3

100.005

10.0013.3333

5

3.355075

50.005

6.87145

5

50.00

2.006

5

5

Market Rates 2

U. S. dollar

0.3636

4.255

2.63300.6867

0.5882355.4050

25.1889

2.4876

0.666667 57.0470


Sri Lanka 4

Sudan 4

Swaziland'SwedenSyrian Arab Republic

TanzaniaThailandTogoTrinidad and TobagoTunisia

Turkey 4

"Uganda"United Arab EmiratesUnited Kingdom 4

United States

Upper VoltaUruguay 4

Venezuela 4

Viet-Nam 4

* Western Samoa

Yemen Arab Republic*Yemen, People's Democratic

Republic of4

Yugoslavia 4

*Zai're*Zambia

rupeepoundrandkronapound

shillingbahtfrancdollardinar

lirashillingdirhampounddollar

francpesobolivarpiastretala

rial

dinardinarzairekwacha

15.600.348242

5

3.675

7.1428620.00

50.004.80

5

13.507.142863.94737

5

50.001,125.00

4.285620.00

0.596174

5

0.3453955

0.500.642856

0.6666675.50094 4.3880

0.4167

0.4193

4.396

14.8148

* The member is availing itself of wider margins in accordance with Executive Board Decision No. 3463-(71/126), as amended by Executive Board DecisionNo. 4083-(73/104), adopted November 7, 1973.

1 Rates other than market rates as notified to the Fund.2 Representative rates for the currencies of Austria, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Norway,

South Africa, Spain, Sweden, and the United Kingdom. Other rates are selling rates in New York.3 Belgium, Denmark, Germany, Luxembourg, the Netherlands, Norway, and Sweden maintain maximum margins of 21A per cent for exchange rates in trans-

actions in the official markets between their currencies and those of the other countries in this group. Rates shown are central rates established under ExecutiveBoard Decision No. 4083-(73/104), expressed in terms of SDRs.

4 Member maintains multiple currency practice and/or dual exchange market.5 The member has notified the Fund that its currency is not being maintained within specified margins.6 The rate at which the Fund computes its holdings of lei.


TABLE 1.2. PAR VALUES ESTABLISHED OR CHANGED,FISCAL YEAR ENDED APRIL 30, 1974

From

Member

AlgeriaAustraliaBahamas

Costa RicaDominican RepublicEl Salvador

GuatemalaHaitiHonduras

LiberiaMexicoNicaragua

PanamaQatarSaudi Arabia

ThailandUnited Arab EmiratesUnited States

Currency

dinardollardollar

colonpesocolon

quetzalgourdelempira

dollarpesocordoba

balboariyalriyal

bahtdirhamdollar

Grams of goldper unit

(initial1.04360

(initial

0.1341390.8185130.327405

0.8185130.1637030.409256

0.8185130.06548100.116930

0.818513(initial

0.197482

0.0354164(initial

0.818513

Units perSDR

par value)0.851544

par value)

6.625001.085712.71429

1.085715.428572.17143

1.0857113.57147.60003

1.08571par value)

4.50000

25.0921par value)

1.08571

To


0.1800001.095780.736662

0.08595800. 736662 i0.294665

0.7366620. 147332 2

0.368331

0.7366620.05893300.105237

0. 736662 3

0.1866210.207510

0.03683310.1866210.736662

Units perSDR

4.937060.8109941.20635

10.33841. 20635 i3.01587

1.206356. 03176 2

2.41270

1.2063515.07938.44447

1. 20635 3

4.761904.28255

24.12704.761901.20635

Date

7/18/739/9/7312/17/73

4/25/7410/27/7310/18/73

10/18/7310/26/7310/19/73

10/18/7310/17/7310/18/73

11/16/736/14/738/10/73

7/15/732/23/7410/18/73

1 This was a central rate, February 16 to October 26, 1973.2 This was a central rate, February 20 to October 25, 1973.9 This was a central rate, February 23 to November 15, 1973.


TABLE 1.3. CENTRAL RATES ESTABLISHED OR CHANGED IN ACCORDANCE WITH EXECUTIVE BOARD DECISIONNo. 3463-(71/126), AS REVISED BY DECISION No. 4083-(73/104), FISCAL YEAR ENDED APRIL 30, 1974

From

Member

FijiGermany, Fed. Rep. ofKenya

NetherlandsNorwayRwandaTanzania

Uganda

Western Samoa

United KingdomCayman Islands

Currency

dollardeutsche markshilling

guilderkronefrancshilling

shilling

tala

dollar


To

Units per Grams of goldSDR per unit

(no par value or central rate)0. 261615 *0. 103133 2

0.106763 l

0. 252265 l

0. 123170 *0.00888671 2

0. 103133 2

0.1 06763 1

0. 103133 2

0. 106763 i

3. 39687 *8. 61675 2

8. 32377 !3. 52282 *7. 21500 i

100. OOO2

8. 61675 2

8. 32377 *8. 61675 2

8. 32377 i(no par value or central rate)

Separate Currency

1. 06641 2

of Nonmetropolitan Area

0. 833333 2

0.9208280.2760030.1067630.1031330.2648740.1293280.007934560.1067630.1031330.1067630.1031331.23565

0.883994

Units perSDR

0.9650783.219798.323778.616753.355076.87145

112.0008.323778.616758.323778.616750.719193

0.994737

Date

2/25/746/29/736/20/731/14/749/17/7311/16/731/7/747/2/731/14/747/2/731/14/747/26/73

1/28/741 Central rate.2 Par value.



TABLE 1.4. TRANSFERS OF SPECIAL DRAWING RIGHTS,JANUARY 1, 1970-ApRiL 30, 1974


Transfers between participantsTransactions with designationTransactions without designation

General AccountTransfers from participants

Repurchases (net)Charges (net)AssessmentsInterest received on General Account

holdings

Transfers to participantsPurchasesReplenishment of participants*

currenciesReconstitutionRemunerationRestoration of participants' holdings l

Distribution of net incomeOther 2

Total transfers

General Account holdings at end of period

Jan. 1, 1970-Apr. 30, 1970

15520

175

183291

—

213

—

——————

—

388

213

1971

348286

633

35766

1

4

429

—

123—18—91

151

1,213

490

Fiscal Years

1972

267380

647

501301

7

540

—

214615298

—

120

1,307

910

Ended April 30

1973

117303

420

68301

10

108

292

—107

2———

401

929

617

1974

60996

1,056

2929

1

8

67

7

—15720———

185

1,308

499

Total

Jan. 1, 1970-Apr. 30, 1974

9461,985

2,931

1,138184

5

30

1,357

299

144311

5629171

857

5,145

4991 Under Article XXV, Sections 2(6)(ii) and l(e).2 Under Article XXVI, Section 5.

82


TABLE 1.5. SUMMARY OF TRANSACTIONS AND OPERATIONS IN SPECIAL DRAWING RIGHTS,FISCAL YEAR ENDED APRIL 30, 1974

(In thousands ofSDRs)

Transactions and Operations

HoldersParticipants

AfghanistanAlgeriaArgentinaAustraliaAustria

BangladeshBarbadosBelgiumBoliviaBotswana

BrazilBurmaBurundiCameroonCanada

Central African RepublicChadChileColombiaCongo, People's Republic of the

Costa RicaCyprusDahomeyDenmarkDominican Republic

EcuadorEgyptEl SalvadorEquatorial GuineaFiji

FinlandFranceGabonGambia, TheGermany, Federal Republic of

Between participants

ReceivedTntal1 Uldi

Holdings on ThroughMay 1, 1973 designation Other

97741,84752,418 21,400

234,72485,891

2,768527,589 103,166

9201,568

157,0875,2133,601

10,509466,878

1,159550

1,09317,280 7,5002,549

3,88310,4484,447

72,014 72,2966,782

5,6101,5363,7281,8601,378

67,538581,820 108,382

4,7262,177

825,850 712,080

and

Used Received

5,500

2,737

1,066

37,048 4,6032,500

955,085

390

2,4085,000

421

4,97040

30,500220

244588,531

100,463 8,816

participants[the

Used

2,260

3,675

1,066

344

582

1401,3101,447

14893

51

421,255

101

3176

Interest,Charges,

anHdllU

- Assess-ment (Net)

-149+ 19

-1,417+ 112+ 129

+5,878-156

+53-205-45-1

+ 1,591

-49-57

-805-525-29

-108+22-1

+275-118

-86-632-120-13

+88-1,193

-2-3

+7,233

Positions at April 30, 1974

Totalholdings

4,06941,86671,463

234,83686,020

2,768604,187

2,9191,568

157,2359,5123,556

10,508468,859

9691,5913,841

24,5282,426

3,77510,4704,447

139,6146,654

5,48230,1503,7281,8471,378

67,870100,478

4,693, 2,0981,453,517

cumulativeallocations

12,75340,290

152,520225,64576,745

2,769209,346

12,7531,569

152,52020,844

6,56710,513

358,620

4,3654,449

54,65454,4414,449

11,0168,8984,449

82,76414,535

11,22965,24411,6552,7121,378

61,470484,980

4,7912,331

542,400

Holdingsas per cent

01 neicumulativeallocations

31.9103.946.9

104.1112.1

100.0288.622.9

100.0

103.145.654.1

100.0130.7

22.235.77.0

45.154.5

34.3117.799.9

168.745.8

48.846.232.068.1

100.0

110.420.798.090.0

268.0

Between

General Account Net


TABLE 1.5 (concluded). SUMMARY OF TRANSACTIONS AND OPERATIONS IN SPECIAL DRAWING RIGHTS,FISCAL YEAR ENDED APRIL 30, 1974

(In thousands of SDKs)

HoldersParticipants

GhanaGreeceGuatemalaGuineaGuyana

HaitiHondurasIcelandIndiaIndonesia

IranIraqIrelandIsraelItaly

Ivory CoastJamaicaJapanJordanKenya

Khmer RepublicKoreaLaosLesothoLiberia

LuxembourgMalagasy RepublicMalawiMalaysiaMali

MaltaMauritaniaMauritiusMexicoMorocco

Tntal1 UldlHoldings onMay 1, 1973

9,69525,23611,4842,7734,056

3,0045,4076,344

245,25735,116

33,94123,21139,28827,891

341,816

15,2976,819

425,1387,547

17,096

4,11126,106

1,295853

3,301

7,3428,7274,597

63,1292,344

5,0872,1277,311

127,76216,189

Transactions and Operations


Received and the

Thrniirrhinrougn . . .designation Other Used Received Used

192,213

2,140 1,38345

900 119 6814

31010,500 3,172 3,319

3,0003,140

136

1,061

509

181

3,500 2041

19526

8,500

2,511105

1

80

Positions at April 30

Interest,Charges,

- Assess-ment (Net)

-309-312

— 7-94-42

-63-48-17

-1,250-786

-411-30-1

-228+ 338

+ 14-169+676

-2+21

-87+56-48-12-95

-1-9-8

+ 13-80

-1-35-2

+42-349

Totalholdings

9,40427,13611,4773,4363,969

1,4795,3556,327

243,69744,683

36,53020,04139,42327,663

343,216

15,3106,141

425,8137,528

17,117

32026,1611,247

6463,179

7,341217

4,59060,6312,159

5,0872,0927,309

127,88415,840

Netcumulativeallocations

30, 12346,19411,8688,3046,780

6,5678,5177,419

326,22090,156

61,89623,21739,21342,810

318,000

14,26817,673

377,4007,587

15,600

8,51722,2304,4491,5699,537

7,3458,7305,085

60,6187,542

5,0884,4497,374

124,17039,189

,1974

Holdingsas per cent

of netcumulativeallocations

31.258.796.741.458.5

22.562.985.374.749.6

59.086.3

100.564.6

107.9

107.334.7

112.899.2

109.7

3.8117.728.041.233.3

99.92.5

90.3100.028.6

100.047.099.1

103.040.4


General Account and


NepalNetherlandsNew ZealandNicaraguaNiger

NigeriaNorwayOmanPakistanPanama

ParaguayPeruPhilippinesRomaniaRwanda

SenegalSierra LeoneSomaliaSouth AfricaSpain

Sri LankaSudanSwazilandSwedenSyrian Arab Republic

TanzaniaThailandTogoTrinidad and TobagoTunisia

TurkeyUgandaUnited KingdomUnited StatesUpper Volta

UruguayVenezuelaViet-NamWestern SamoaYemen Arab Republic

Yemen, People's Dem. Rep. ofYugoslaviaZaireZambia

Total ParticipantsGeneral Account

Total

2,214655,855

58,1266,1174,425

42,45387,986

74217,5092,582

6,56640,99720,583

306

5,6265,7114,531

37,423128,722

13,3726,358

902107,039

3,627

6,60228,5355,0837,1327,617

38,08213,623

600,3691,795,547

4,429

860118,17619,751

2122,129

7,79537

6,8768

8,697,746617,090

9,314,835

264,912

6,000

1,213

1,000 37,000

1,0009,000

7,500

60,113 995,925 1,056,038

4,8741

11,757

3,0526,2002,120

875

1,95914,448

459

5,011

9

10,539

33,959

14,045

184,872

51511

-3,082

3,49723

3,7604,705

238

300

46

1,8363,435

373

582

9,624257

4,362

1,545

942

58,040

+4,506-177-48-1

-31+ 167

-853-148

-1-20

-447+38-64

-90-39-32

-967+26

-314-193-29-11

-144

-117-3-1

-207-108

-273-44

-6,197-7,723

-1

-218+76-2

-32-566-489-348

-8,774+8,774

—

2,214400, 323

57,9505,5534,414

45,50588,153

74224,9162,411

6,56537,21724,4836,0002,362

5,2364,4594,453

465128,824

13,18217,178

959107,028

7,912

6,48528,5325,0826,9257,509

29,1854,322

594,1801,787,824

4,428

6,819118,25319,748

2122,129

7,76339,3856,387

12,764

8,815,804499,031

9,314,835

2,215236,46069,402

8,9434,449

45,55576,320

74281,63912,372

6,56740,47951,495

6,567

11,4427,8456,567

88,920126,135

33,97824,9122,712

107,02517,034

14,32228,5425,085

20,81114,713

50,30713,896

1,006,3202,293,980

4,449

23,937112,29019,758

2122,130

9,87369,29139,18924,588

9,314,835—

9,314,835

100.0169.383.562.199.2

99.9115.5100.030.519.5

100.091.947.5

36.0

45.856.867.80.5

102.1

38.869.035.4

100.046.4

45.3100.0100.033.351.0

58.031.159.077.999.5

28.5105.3100.0100.0100.0

78.656.816.351.9

94.65.4

100.0



TABLE 1.6. CURRENCIES TRANSFERRED FOR SPECIAL DRAWING RIGHTS,JANUARY 1, 1970-ApRiL 30, 1974


Transactions with designationBelgian francs

Provided directly to participants

Deutsche markConverted to U. S. dollars

French francsProvided directly to participantsConverted to pounds sterlingConverted to U. S. dollars

Italian lireProvided directly to participants

Pounds sterlingProvided directly to participantsConverted to French francsConverted to U. S. dollars

U. S. dollarsProvided directly to participantsConverted to French francsConverted to pounds sterling

Total

Transactions without designationBelgian francsDanish kronerDeutsche markFrench francsNetherlands guildersPounds sterlingU. S. dollars

Total

Jan. 1, 1970-Apr. 30, 1970

1.0

—

———

—

—

———

—

148.95.1

—

154.0

155.0

—————

20.0—

20.0

Fiscal Years Ended April 30

1971

—

—

3.58.0

14.0

25.5

4.0

27.46.7

45.8

79.9

227.13.67.5

238.2

347.6

——————

285.5

285.5

1972

—

—

22.3—

21.0

43.3

—

56.31.3

53.4

111.0

112.5——

112.5

266.8

—————

25.0355.0

380.0

1973

—

—

———

—

—

59.9—

5.4

65.3

51.2——

51.2

116.6

————

11.7291.8

—

303.5

1974

—

3.0

———

—

—

——

3.0

3.0

54.1——

54.1

60.1

37.05.0

100.5588.5264.9

——

995.9

Total

- Jan. 1, 1970-Apr. 30, 1974

1.0

3.0

25.88.0

35.0

68.8

4.0

143.68.0

107.6

259.2

593.98.77.5

610.0

946.1

37.05.0

100.5588.5276.6336.8640.5

1,984.9

86


Appendk I (continued). THE FUND IN 1973/74

TABLE 1.7. TRANSFER OF SPECIAL DRAWING RIGHTS BY THE GENERAL ACCOUNT,FISCAL YEAR ENDED APRIL 30, 1974


Participant

AfghanistanArgentinaBangladeshBelgiumBolivia

BrazilBurmaCanadaChadChile

ColombiaDominican RepublicEgyptEl SalvadorFinland

Germany, Federal Republic ofGhanaGuineaHaitiIndonesia

IrelandItalyKenyaMaltaMexico

NetherlandsNew ZealandPakistanPhilippinesRomania

RwandaSouth AfricaSpainSri LankaSudan

SwazilandSyrian Arab RepublicUnited KingdomUruguayYugoslavia

Zambia

Total

Reconstitution

5,5002,737

2,500

5,085—

2,4085,000

42140

30,500220

—

—19

2,140119

3,172

————

—11,7573,052

—

2,120——

1,95914,448

4595,011

—10,53933,959

14,045

157,213

Payment ofRemuneration

. ——

4,603

95—

390——

—~

244

8,816————

1361,061

11

80

4,8741

———

—8

75——

—9

——

—

20,394!

Purchases——

1,066

————

—~

—

—————

————

———

6,200

—————

————

—

7,2661 Includes amounts of less than SDR 500 each paid to an additional 11 participants.

87



TABLE 1.8. CREDITOR POSITIONS, FISCAL YEARSENDED APRIL 30, 1973 AND 1974l

April 30, 1973 April 30, 1974 Change from Previous Year

Creditor position Per centMember (Million SDRs) of quota

AustraliaAustriaBelgiumBrazilCanada

DenmarkEthiopiaFinlandFranceGermany, Federal Republic of

IrelandItalyJapanKenyaKuwait

MexicoNetherlandsNew ZealandNorwaySingapore

South AfricaSpainSwedenVenezuela

1.260.9

339.06.3

25.2

0.10.1

16.364.1

679.6

12.164.0

244.8—4.5

5.3358.7

—7.20.1

0.55.05.7

28.6

0.222.652.21.42.3

0.48.64.3

42.5

10.06.4

20.4—

6.9

1.451.2

—3.00.3

0.21.31.88.7

Creditor position Per cent(Million SDRs) of quota

7.156.5

298.56.35.5

76.70.1

16.34.5

795.1

10.126.9

223.00.43.5

5.369.70.12.80.1

0.55.03.2

29.0

1.120.945.9

1.40.5

29.50.48.60.3

49.7

8.32.7

18.60.85.4

1.410.0

—1.20.3

0.21.31.08.8

Million SDRs

+5.9-4.4

-40.5—-19.7

+76.6——

-59.6+115.5

-2.0-37.1-21.8+0.4-1.0

-289.0+0.1-4.4

—

—-2.5+0.4

Per centof quota

+0.9-1.7-6.3

—-1.8

+29.5——

-4.0+7.2

-1.7-3.7-1.8+0.8-1.5

-41.2—

-1.8—

—-0.8+0.1

Total 1,929.7 1,646.3 -283.41 Excluding amounts of SDR 50,000 and less. A creditor or super gold tranche position corresponds to the difference between

the Fund's holdings of a member's currency and 75 per cent of quota. Balances on No. 2 Accounts have been included.

88



TABLE 1.9. PURCHASES OF CURRENCIES AND SPECIAL DRAWING RIGHTS FROM THE FUND,FISCAL YEAR ENDED APRIL 30, 1974


Member Purchasing

AfghanistanBangladeshBurmaChileEcuador

EgyptFranceGermany, Fed. Rep. ofGuineaGuyana

HaitiIndiaIsraelJamaicaNetherlands

NicaraguaPakistanPhilippinesRomaniaSri Lanka

SudanSwazilandUruguayZambia

Total

WithinGold

Tranche

—1.074

——

0.65

138.0019.65

—0.58

3.6676.2032.505.46

280.38

——

47.504

—

0.461.36

—

607.47

Within CreditTranches

Understand-by

arrangements Other l

7.50 —— —— —

39.50 —2.00 —

— —— —— —

4.00 —

— —

— —13.25 —

— —

— 12.0060.00 —

— —— 47.504

— —

19.00 —— —

15.00 —19.00 —

179.25 59.50

UnderDecisionon Com-pensatoryFinancing

——

15.00——

47.00——

6.005.00

62.00—

13.25—

—38.75

—24.50

———

211.50

Total Purchases

Currencies

4.00—

15.0034.502.65

24.00138.00

19.653.869.58

3.66138.2032.5031.96

280.38

12.0058.2638.7588.8024.50

10.50—

16.3618.91

1,006.02

Specialdrawingrights 2

3.503

1.07—

5.003

—

23. OO3

——

2.143

—

————

1.743

—6.203

—

8.503

0.463

—0.103

51.70

Total

7.501.07

15.0039.502.65

47.00138.00

19.656.009.58

3.66138.2032.5031.96

280.38

12.0060.0038.7595.0024.50

19.000.46

16.3619.00

1,057.721 In accordance with Executive Board Decision No. 102-(52/ll), adopted February 13, 1952. (See Selected Decisions of the

International Monetary Fund and Selected Documents (Sixth Issue, Washington, 1972), pp. 22-25.)2 In accordance with Article XXV, Section 7(/), of the Articles of Agreement.3 In accordance with Executive Board Decision No. 3457-(71/121) G/S, as amended by Executive Board Decision No. 3829-

(72/144) S, adopted December 15, 1972.4 Transaction prior to the establishment of an initial par value in accordance with Executive Board Decision No. 1687-(64/22),

adopted April 22, 1964. (See Selected Decisions, p. 56.)

89



TABLE 1.10. FUND STAND-BY ARRANGEMENTS FOR MEMBERS, FISCAL YEAR ENDED APRIL 30, 1974

(In millions ofSDRs)

Member

AfghanistanBoliviaBurmaChileColombia

EcuadorEl SalvadorGuyana

Haiti

HondurasIndonesiaItalyJamaicaKoreaLiberiaPakistan

Panama

Philippines

Sri LankaSudanUruguayZambia

Total

TotalNumber ofStand-BysApproved

forMember

5122

1215

9117

13

128129

105

7

11

6561

Date ofInception

June 18, 1973Jan. 17, 1973Feb. 2, 1973Jan. 30, 1974May 1, 1972June 6, 1973July 3, 1972Sep. 8, 1972May 15, 1972May 15, 1973July 6,1972July 6, 1973June 7, 1972May 4, 1973Apr. 10, 1974June 1, 1973Apr. 2, 1973May 17, 1973May 18, 1972Aug. 11, 1973June 22, 1972Aug. 3, 1973May 11, 1972May 16, 1973Apr. 30, 1974Aug. 9, 1973June 27, 1972May 4, 1973

Date ofExpiration

June 17, 1974Jan. 16, 1974Feb. 1, 1974Jan. 29, 1975Apr. 30, 1973June 5, 1974July 2, 1973Sep. 7, 1973May 14, 1973May 14, 1974July 5, 1973July 5, 1974June 6, 1973May 3, 1974Apr. 9, 1975May 31, 1974Dec. 31, 1973May 16, 1974May 17, 1973Aug. 10, 1974June 21, 1973Aug. 2, 1974May 10, 1973May 15, 1974Apr. 29, 1975Aug. 8, 1974June 26, 1973May 3, 1974

AmountApproved1972/73

27.3013.50

40.00

16.508.752.80

4.00

15.00

20.00

100.00

9.00

45.00

20.00

321.85

Amount NotPurchased atExpiration

9.25—

40.00

——

2.80

4.00

15.00

20.00

16.00

9.00

10.00

—

126.05

AmountApproved1973/74

10.00

79.00

20.00

4.00

4.00

50.001,000.00

26.50

4.00

75.00

9.00

45.0024.5024.00

19.00

1,394.00

AmountNot PurchasedApril 30, 1974

2.50

39.50

20.00

—

4.00

50.001,000.00

13.25

4.00

15.00

9.00

45.0024.50

5.00

—1,231.75

90



TABLE 1.11. PURCHASES AND REPURCHASES UNDER THE DECISION ONCOMPENSATORY FINANCING OF EXPORT FLUCTUATIONS,

FEBRUARY 27, 1963-ApRiL 30, 1974l


Purchases

Member

AfghanistanArgentinaBangladeshBrazilBurma

BurundiChile

Colombia

Dominican RepublicEcuador

Egypt

El SalvadorGhanaGuatemala

GuineaGuyanaHaiti

Iceland

India

IraqJamaicaJordan

Khmer Republic

New ZealandPeruPhilippinesSri Lanka

SudanSyrian Arab Republic

Uruguay

ZaireZambia

Total

Date

June 5, 1968Mar. 3, 1972Dec. 15, 1972June 7, 1963Nov. 21, 1967Sep. 21, 1971Feb. 1, 1974June 9, 1970Dec. 14, 1971Dec. 22, 1972Mar. 22, 1967Apr. 19, 1968 3

Apr. 19, 1968 3

Dec. 6, 1966Oct. 15, 19693

Oct. 15, 1969 3

Oct. 15, 1963Mar. 18, 1968Aug. 14, 1973Dec. 16, 1969Dec. 20, 1966Feb. 5, 1968 3

Feb. 5, 1968 3

Mar. 26, 1974Mar. 26, 1974Aug. 11, 1967Dec. 6, 1967Nov. 10, 1967Nov. 26, 1968Dec. 28, 1967Feb. 19, 1974Nov. 8, 1967 3

Mar. 20, 1974Nov. 15, 1971Jan. 3, 1973Mar. 14, 1972Apr. 18, 1973May 10, 1967June 20, 1972May 18, 1973Mar. 21, 1967Apr. 17, 1968Jan. 24, 19723

Jan. 26, 1972June 22, 1973Feb. 15, 1974June 1, 1965Sep. 18, 1967Jan. 25, 1972Feb. 7, 1968May 17, 1972July 5, 1972Dec. 14, 1971Aug. 7, 1972Aug. 8, 1972

Amount

4.8064.0062.5060. OO2

7.506.50

15.002.50

39.5039.5018.900.953

0.953

6.603.503

2.753

16. OO2

23.0047.006.25

17.253.003

3.253

6.005.001.301.003.753.75

90.0062.0017. 503

13.254.502.856.256.25

29.2030.7538.7519.5019.304.703

14.7518.605.90

11. 252

9.5012.509.50

17.2528.2519.0016.003.00

982.30

Related

Total

4.80——

60.007.50

——

2.50——

18.900.950.956.603.502.75

16.0023.00

—6.25

17.253.003.25

——

1.301.003.753.75

90.00—17.50—

4.501.25

——

29.2030.75

—19.5019.30

————

11.259.50

—9.50

—————

429.25

Repurchases

Underparagraph (7)of amended

decision———————

0.80——

7.700.950.953.30

—————

4.300.751.60

———

0.120.203.753.75

80.00———————————————————

5.00—————

113.17

OutstandingBalance

April 30, 1974—

64.0062.50

——

6.5015.00

—39.5039.50

————————

47.00————

6.005.00

—————

62.00—

13.25—

1.606.256.25

——

38.75——

4.7014.7518.605.90

——

12.50—

17.2528.2519.0016.003.00

553.051 All items are under the decision as amended by Executive Board Decision No. 2192-(66/81), adopted September 20, 1966,

except where noted.2 Under Executive Board Decision No. 1477-(63/8), adopted February 27, 1963.3 Date and amount of reclassification of previous purchases.

91



TABLE 1.12. SUMMARY OF STAND-BY ARRANGEMENTS THATBECAME EFFECTIVE DURING THE FISCAL YEARS ENDED

APRIL 30, 1953-74l


Number Amount

19531954195519561957

19581959196019611962

19631964196519661967

19681969197019711972

19731974

22229

1115141524

1919242425

3226231813

1315

55.0062.5040.0047.50

1,162.28

1,043.781,056.63363.88459.88

1,633.13

1,531.102,159.852,159.05575.35591.15

2,352.36541.15

2,381.28501.70313.75

321.851,394.00

Total 347 20,747.171 Includes renewals and extensions for one year or less,

except the renewals each six months of the stand-by arrange-ment for Belgium granted in June 1952 until that memberpurchased the full amount of the equivalent of SDR 50million in April 1957.

92



TABLE 1.13. SUMMARY OF MEMBERS' PURCHASES ANDREPURCHASES, YEARS ENDED APRIL 30, 1948-74


19481949195019511952

19531954195519561957

19581959196019611962

19631964196519661967

19681969197019711972

19731974

Total Purchasesby Members

606.04119.4451.8028.0046.25

66.12231.2948.7538.75

1,114.05

665.73263.52165.53577.00

2,243.20

579.97625.90

1,897.442,817.291,061.28

1,348.252,838.852,995.651,167.412,028.49

1,175.431,057.72

Total Repurchasesby Members

—24.2119.0936.58

184.96145.11276.28271.6675.04

86.81537.32522.41658.60

1,260.00

807.25380.41516.97406.00340.12

1,115.511,542.331,670.691,656.863,122.33

540.30672.49

Total 25,859.16! 16,869.322

1 Includes purchases that raised the level of the Fund'sholdings of the drawing members' currencies to no more than75 per cent of quota. These purchases are not subject torepurchase.

2 Includes repurchases that reduced the Fund's holdingsof members' currencies below the amounts originally paidon subscription account and repurchases of members'currencies paid in settlement of charges. Excludes sales ofcurrencies of members held by the Fund in excess of 75 percent of quota, as a result of previous purchases, and adjust-ments due primarily to settlement of accounts with countriesthat have withdrawn from the Fund; these sales and adjust-ments have the effect of repurchase.

93



TABLE 1.14. TOTAL REPURCHASE OBLIGATIONS INCURRED IN ACCORDANCE WITH ARTICLE V,SECTION 7(6), AND AMOUNTS PAYABLE FORTHWITH BY MEMBERS, AS OF APRIL 30, 1973


Total Repurchase Obligations Incurred

Specialdrawing Convertible

Amounts Payable Forthwith

Specialdrawing Convertible

Member

ColombiaEcuadorEl SalvadorHondurasIndonesia

JamaicaJordanKoreaMalawiMalaysia

MauritiusNicaraguaNigeriaPeruPhilippines

Sierra LeoneTanzaniaUpper VoltaYugoslavia

Total

Gold

148—612

23

1026

——

——

3,034788

———14

4,178

rights

——24—

244

296281

——

—1

3,2521,759

————

5,605

currencies

32,1967,599

13,2106,245

103,480

5,1677,2047,4931,850

228

3,0351

73641,572

112,450

1,2173,600

147125,233

472,663

Total

32,3447,599

13,2956,247

103,747

5,4637,3347,5001,850

228

3,0351

73747,858

114,997

1,2173,600

147125,247

482,446

Gold

148——2

14

—6

——

——

1,346258

——

6

1,780

rights

——8

—153

296—

1——

—1

1,443575

————

2,477

currencies

32,1967,5998,7426,245

64,833

5,1675,7507,4931,850

228

3,035—

73627,96137,917

1,2173,600

14751,744

266,460

Total

32,344!7,5998,7502

6,2473

65,000*

5,4635,7507,5005

1,850228

3,0356

73730,750738,7508

1,2173,600

14751, 750 9

270,7171 Member discharged the equivalent of SDR 32,196,000 with convertible currencies; payment of balance accrued in gold equiv-

alent to SDR 148,000 postponed.2 Member discharged the equivalent of SDR 8.75 million of its repurchase obligation, which was payable forthwith in accord-

ance with paragraph 2(c) of Executive Board Decision No. 3049-(70/44). (See Selected Decisions of the International MonetaryFund and Selected Documents (Sixth Issue, Washington, 1972), pp. 64-66.) Owing to the limitation of Article V, Section 7(c)(iv),the balance of the repurchase obligation incurred as of April 30, 1973 was payable at the end of the subsequent financial yearor years. However, member discharged a portion of the balance of the obligation equivalent to SDR 6,245 on January 10, 1974.

3 Member discharged the equivalent of SDR 6,245,000 with convertible currencies; balance accrued in gold being less than onestandard bar was not collected in accordance with Executive Board Decision No. 4087-(73/105), adopted November 9, 1973.

4 Member discharged the equivalent of SDR 65 million of its repurchase obligation which was payable forthwith in accordancewith paragraph 2(a) of Executive Board Decision No. 3049-(70/44). Owing to the limitation of Article V, Section 7(c)(iv), thebalance of the repurchase obligation incurred as of April 30,1973 was payable at the end of the subsequent financial year or years.However, member completed discharge of the balance of the obligation incurred in special drawing rights and in convertiblecurrencies on March 15, 1974; in accordance with Executive Board Decision No. 4087-(73/105), balance accrued in gold beingless than one standard bar was not collected.

5 Member discharged the equivalent of SDR 7,494,000 payable with special drawing rights and convertible currencies; balanceaccrued in gold being less than one standard bar was not collected.

6 Member discharged the portion of its repurchase obligation incurred as of April 30,1971 equivalent to SDR 6,750,000, whichwas payable as of April 30, 1973. Member also repurchased the equivalent of SDR 4,253,156 during 1972/73, discharging thebalance of the April 30, 1971 repurchase obligation and a portion of the repurchase obligation incurred as of April 30, 1972.Owing to the limitation of Article V, Section 7(c)(iv), the repurchase obligation incurred as of April 30, 1973 and the balance ofthe April 30, 1972 obligation will be payable at the end of the subsequent financial year or years.

7 Member discharged the equivalent of SDR 30,750,000 of its repurchase obligation, which was payable forthwith in accordancewith paragraph 2(c) of Executive Board Decision No. 3049-(70/44). Owing to the limitation of Article V, Section 7(c)(iv), thebalance of the repurchase obligation incurred as of April 30,1973 was payable at the end of the subsequent financial year or years.However, member completed the discharge of the balance of the obligation on January 10, 1974.

8 Member discharged the equivalent of SF3R 38,492,000 payable forthwith in special drawing rights and convertible currenciesin accordance with paragraph 2(c) of Executive Board Decision No. 3049-(70/44); the amount payable forthwith in gold equiva-lent to SDR 258,000 was postponed. The member also discharged a portion of the balance of the obligation equivalent toSDR 17,250,000 in convertible currencies. Owing to the limitation of Article V, Section 7(c)(iv), the balance of the repurchase obli-gation incurred as of April 30, 1973 will be payable at the end of the subsequent financial year or years.

9 Member discharged the equivalent of SDR 51,744,000 payable forthwith in convertible currencies in accordance with para-graph 2(c) of Executive Board Decision No. 3049-(70/44); the amount payable forthwith in gold being less than one standard barwas not collected. Owing to the limitation of Article V, Section 7(c)(iv), the balance of the repurchase obligation incurred as ofApril 30, 1973 will be payable at the end of the subsequent financial year or years.

94



TABLE 1.15. REPURCHASES OF CURRENCIES FROM THE FUND, FISCAL YEAR ENDED APRIL 30, 1974


Repurchases in Respect of

MemberRepurchasing

AfghanistanBahamasBoliviaBurmaBurundi

Central African RepublicChadColombiaCongo, People's

Republic of theDominican Republic

EcuadorEgyptEl SalvadorGabonGambia, The

GhanaGuineaGuyanaHaitiHonduras

IndonesiaIraqJamaicaJordanKorea

LesothoLiberiaMalawiMalaysiaMali

MauritaniaMauritiusNicaraguaNigerNigeria

PakistanPanamaPeruPhilippinesSenegal

Sierra LeoneSomaliaSri LankaSudanSwaziland

Syrian Arab RepublicTanzaniaTurkeyUnited StatesUpper Volta

UruguayYugoslavia

Total

Purchasesunder stand-byarrangements

——

——

1.5

—7.1

——

————

—2.0

—

—

———

1.0———

————

_——

0.3—

—

—

—9.6——

12.1—

33.5

Schedulesapprovedby Fund

5.0——

8.5—

1.1—

—6.0

4.5———

6.01.9—

0.8i

—

—

—

0.1

——

1.0

———

-3. 1 3

40.01.0———

—12.37.50.3

4.8————

4.4—

102.0

Article V,Section 7(b)

—————

—32.2

——

7.6—

8.8——

——

6.2

103.76.98

5.55.87.5

—1.80.2

—

3.011. 0*

—20.8s

—47.955.7

— '

1.2——

—

3.6——

0.1

51.7

381. 3 2

Voluntary OtherRepurchases Repurchases

— —— 5.0— 3.6— —— 0.1

— 0.1— 0.1— —

— 0.17.5 —

— 0.2— —

i— 0.1

— 0.7— —— 0.1— 0.2— —

— 3.1— —

—— —

— 0.1— 0.4— —

7.0 —— 0.2

— 0.1— —— —

i— —

— 0.9— —

13.6 —— —— 0.3

i— 1.0— 0.6— 0.1

—— —— —

110.1 —— —

— —

138.3 17.3

Total

5.05.03.68.51.6

0.11.2

39.3

0.113.5

7.64.78.8

i0.1

6.71.92.10.96.2

103.710.05.55.87.5

0.21.41.87.21.2

0.13.0

11.0— i

17.7

40.91.0

61.556.00.3

1.2i

13.38.10.4

4.83.69.6

110.10.1

16.551.7

672.51 Less than SDR 50,000.2 Total includes SDR 8 million and SDR 30 million relating to Article V, Section 7(£), repurchase obligations

incurred as of April 30, 1971 and April 30, 1972, respectively, as follows: 1971—SDR 8 million by Nicaragua;1972—SDR 6.9 million by Iraq, SDR 3 million by Nicaragua, and SDR 20.1 million by Nigeria.

3 Reversal of amount repurchased in 1972/73, which was included in repurchase data for that year.

NOTE. Included in the table are repurchases equivalent to SDR 5.8 million by Jordan and SDR 30.8 million byPeru relating to purchases under the decision on compensatory financing of export fluctuations.

95



TABLE 1.16. CURRENCIES AND SPECIAL DRAWING RIGHTS OBTAINED FROM THE FUND BY MEMBERS IN PURCHASES FOR THEIROWN CURRENCIES; CURRENCIES, GOLD, AND SPECIAL DRAWING RIGHTS USED BY MEMBERS IN REPURCHASES,

FISCAL YEAR ENDED APRIL 30, 1974


Currencies and SDRs Obtained by Members

Purchases

Currencies, Gold, and SDRs Used by Membersin Repurchases

Medium

SDRsGold

Australian dollarsAustrian schillingsBelgian francsCanadian dollarsDanish kroner

Deutsche markFrench francsGuatemalan quetzalesIrish poundsItalian lire

Japanese yenKuwaiti dinarsMexican pesosNetherlands guildersNorwegian kroner

Swedish kronorU. S. dollars

Total

For EEC settlementsby France, Germany,and the Netherlands

—

—5.7

—87.6

235.0109.7

———

————

——

438.0

Othercountries

51.7—

30.117.531.830.42.0

180.516.0

—2.0

18.8

80.5——

43.52.0

8.5104.4

619.7

Total

51.7—

30.117.537.530.489.6

415.5125.7

—2.0

18.8

80.5——

43.52.0

8.5104.4

1,057.7

UnitedStates

——

—19.1

——

87.2————

3.9————

——

110.1

Othercountries

25.0—

7.512.38.88.08.0

34.610.7

—4.09.5

30.9——

9.53.6

8.5—

181.0

UnderArticle V,

Section 7(6)

4.51

3.1

13. 71

8.51

38. 9 *30. 01

5.0

125. 8 *22.0

2

35.3

53. 91

1.02

34. 9 *2.9

2.0—

381. 31

Total

29.53.1

21.220.866.738.013.0

247.632.6

2

4.044.8

88.61.0

2

44.46.5

10.5—

672.51 Total includes SDR 8 million and SDR 30 million relating to Article V, Section 7(6), repurchase obligations incurred as of

April 30, 1971 and April 30, 1972, respectively, as follows: 1971—SDR 0.1 million in SDRs, SDR 2.7 million in Australiandollars, SDR 1.2 million in Austrian schillings, SDR 2 million in Belgian francs, and SDR 2 million in Netherlands guilders;1972—SDR 6.9 million in Canadian dollars, SDR 10 million in deutsche mark, and SDR 13.1 million in Japanese yen.

2 Less than SDR 50,000.

TABLE 1.17. GOLD TRANSACTIONS AND OPERATIONS BY THE FUND,FISCAL YEARS ENDED APRIL 30, 1972-74

(In millions of SDRs)

1972 1973 1974

Increase in gold holdings due toSubscriptionsRepurchases of currency by membersCharges paid by membersReacquisition from United StatesPurchases under Article V, Section 6(a) v

81.6506.246.4

400.0105.0

60.92.83.9

3.00.4

Total increase 1,139.2 67.6 3.4

Decrease in gold holdings due toSales under Article VII, Section 2(ii)

of which sales in connection with Fifth General Review of QuotasInterest on Fund borrowingRemuneration paid to members

Total decrease

Net increase or decrease (— )

121.27.52.7

22.7

146.6

992.6

28.5

28.5

39.1

3.6

3.6

-0.2

1 All these purchases were from South Africa.

96



CHART I.I. USE OF FUND RESOURCES, APRIL 30, 1965-74


1 Belgium, Canada, Denmark, France, Italy, Japan, the Netherlands, and Norway.

97



TABLE 1.18. INCOME AND EXPENSES, FISCAL YEARS ENDED APRIL 30, 1965-74


Operational incomeService and stand-by charges, etc.Charges on balances in excess of

quotasInterest on holdings of special

drawing rights

Total operational income 1

Deduct: operational expensesRemunerationOther

Net operational income

Administrative budget expensesDeduct: assessments levied on partic-

ipants for estimated expenses ofoperating the Special DrawingAccount

Fixed property expensesNet valuation adjustment loss

Total administrative budgetand fixed property expensesand net valuation adjust-ment loss

Net income or expenses (— ) 3

1965

11.8

35.9

—

47.7

—4.6

43.1

13.0

—4.6

—

17.6

25.5

1966

15.6

65.7

—

81.3

—16.1

65.2

15.0

—5.7—

20.7

44.5

1967

7.1

82.5

—

89.6

—17.8

71.8

18.1

—3.3—

21.4

50.4

1968

7

82

89

11

77

21

0

21

55

.4

.0

.4

—.9

.5

.3

.5

.8

.7

1969

14.6

107.4

—

122.0

—22.3

99.7

24.4

—4.5—

28.9

70.8

1970

13.0

124.7

0.4

138.1

27.219.1

91.8

28.6

0.96.5—

34.2

57.6

1971

3.2

128.1

4.3

135.6

37.411.8

86.3

33.2

0.97.5—

39.9

46.4

1972

3.0

62.0

7.2

72.2

30.51.2

40.5

37.1

1.017.7

—

53.7

-13.3

1973

3.2

28.2

10.2

41.6

29.3—

12.2

39.4

0.7-4.82

0.1

34.0

-21.7

1974

2.5

28.2

7.8

38.5

27.2—

11.2

43.5

1.05.90.1

48.4

-37.21 Excludes income from investments transferred to the Special Reserve until February 15, 1972.2 Represents sale of Fund's former headquarters building for the equivalent of SDR 21.2 million from which fixed property

expenses of SDR 16.4 million have been deducted.3 Net income was transferred to the General Reserve until the fiscal year ended April 30, 1968. Of the SDR 55.7 million,

SDR 70.8 million, SDR 57.6 million, and SDR 46.4 million net income in 1968, 1969, 1970, and 1971, respectively, SDR 18.3million, SDR 38.9 million, SDR 40.0 million, and SDR 33.9 million were transferred to the General Reserve and SDR 37.5million, SDR 31.9 million, SDR 17.5 million, and SDR 12.5 million were distributed under the provisions of Article XII,Section 6(a) and (6), of the Fund Agreement. The net expenses for the fiscal years ended April 30, 1972, 1973, and 1974 havebeen charged against the Special Reserve.

98



TABLE 1.19. CHARGES ON TRANSACTIONS EFFECTED AFTERMAY 1, 1963 AND UP TO JUNE 30, 1974

Charges in per cent per annum l for period stated andfor portion of holdings in excess of quota by (per cent)

More thanBut not more than

Service charge 2

0 to 3 months3 to 6 monthsl/2 to 1 year1 to ll/2 years1 1/2 to 2 years2 to 2V2 years21/! to 3 years3 to 3y2 years3 1/2 to 4 years4 to 4*/2 years

050

0.5

0.02.02.02.02.53.03.54.03

4.55.0

50100

0.5

0.02.02.02.53.03.54.03

4.55.0

100

0.5

0.02.02.53.03.54.03

4.55.0

1 Except for service charge, which is payable once pertransaction and stated as per cent of amount of transaction.

2 No service charge is payable in respect of any gold tran-che purchase effected after July 27, 1969.

3 Point at which the Fund and the member consult.

TABLE 1.20. CHARGES ON TRANSACTIONS EFFECTEDAFTER JULY 1, 1974

Charges in per cent per annum, 1 payable on holdingsin excess of quota, for period stated:

Service charge 0.5Up to 1 year 4.01 to 2 years 4 . 52 to 3 years 5.03 to 4 years 5 . 5 2

4 to 5 years 6.01 Except for service charge, which is payable once per

transaction and stated as per cent of amount of transaction.2 Point at which the Fund and the member consult.

TABLE 1.21. CHARGES ON TRANSACTIONS EFFECTEDUNDER THE OIL FACILITY AFTER JULY 1, 1974

Charges in per cent per annum,1 payable on holdingsin excess of quota arising from drawings under theOil Facility for the period stated:

Service charge 0.5Up to 3 years 6.8753 to 4 years 7.0002

5 to 7 years 7.1251 Except for service charge, which is payable once per

transaction and stated as per cent of amount of transaction.2 Point at which the Fund and the member consult.

99



TABLE 1.22. MEMBERS THAT HAVE ACCEPTEDARTICLE VIII, APRIL 30, 1974

MemberEffective Dateof Acceptance

ArgentinaAustraliaAustriaBahamasBahrain

BelgiumBoliviaCanadaCosta RicaDenmark

Dominican RepublicEcuadorEl SalvadorFijiFrance

GermanyGuatemalaGuyanaHaitiHonduras

IrelandItalyJamaicaJapanKuwait

LuxembourgMalaysiaMexicoNetherlandsNicaragua

NorwayPanamaPeruQatarSaudi Arabia

SingaporeSouth AfricaSwedenUnited Arab EmiratesUnited Kingdom

United States

May 14, 1968July 1, 1965August 1, 1962December 5, 1973March 20, 1973

February 15, 1961June 5, 1967March 25, 1952February 1, 1965May 1, 1967

August 1, 1953August 31, 1970November 6, 1946August 4, 1972February 15, 1961

February 15, 1961January 27, 1947December 27, 1966December 22, 1953July 1, 1950

February 15, 1961February 15, 1961February 22, 1963April 1, 1964April 5, 1963

February 15, 1961November 11, 1968November 12, 1946February 15, 1961July 20, 1964

May 11, 1967November 26, 1946February 15, 1961June 4, 1973March 22, 1961

November 9, 1968September 15, 1973February 15, 1961February 13, 1974February 15, 1961

December 10, 1946

100


Appendix I (concluded). THE FUND IN 1973/74

TABLE 1.23. PUBLICATIONS ISSUED, FISCAL YEAR ENDED APRIL 30, 1974

Reports and Other Documents

Annual Report of the Executive Directors for the Fiscal Year Ended April 30, 1973 (English, French, German, andSpanish). Free

Summary Proceedings of the Twenty-Eighth Annual Meeting of the Board of Governors. FreeTwenty-Fourth Annual Report on Exchange Restrictions. Free

Subscription Publications

Balance of Payments Yearbook

Volume 24, 1967-71 (clothbound). US$6.00

Volume 25, 1968-72 (monthly, loose-leaf). US$7.50 (binder available for US$3.50)

Direction of Trade, issued jointly with IBRD; monthly with annual supplement. US$10.00 a year

International Financial Statistics, monthly (English and a combined English, French, and Spanish edition), and annualsupplement. US$20.00 a year

Staff Papers, three times a year. US$6.00 a year

University libraries, faculty members, and students may obtain the four subscription publications listed above at thereduced rates of US$12.00 for all four publications, or US$5.00 for International Financial Statistics and US$3.00 eachfor the other publications.

For users of Fund publications that have access to a computer, tape subscriptions to International Financial Statis-tics, Direction of Trade, and the Balance of Payments Yearbook are available at US$1,000 a year per tape subscrip-tion. This price includes the book version of the publication. Universities may obtain the tape subscription for US$300a year.

Books

Instruments of Monetary Policy in the United States: The Role of the Federal Reserve System, by Ralph A. Young.US$1.25

Surveys of African Economies. US$5.00 a volume

Volume 4, covering Democratic Republic of Congo (Zaire), Malagasy Republic, Malawi, Mauritius, and Zambia, wasissued in French during the fiscal year.

Volume 5: Botswana, Lesotho, Swaziland, Burundi, Equatorial Guinea, and Rwanda (English; French edition inpreparation)

The volumes in this series are available to university libraries, faculty members, and students at a reduced price ofUS$2.50 a volume.

Pamphlet Series

No. 17 Operations and Transactions in SDRs: The First Basic Period, by Walter Habermeier, in English, French, andSpanish. Free

Other

Finance and Development, issued jointly with IBRD; quarterly (English, French, German, and Spanish, and an annualedition in Portuguese). Free

IMF Survey, twice monthly. Private firms and individuals are charged for delivery.

101


Appendix II. PRINCIPAL POLICY DECISIONS OF THE EXECUTIVE BOARD

A. Procedures for Reviews of External Policies

The Executive Directors concur in the statement of the Managing Director on pro-cedures for reviews of external policies . . . .

Decision No. 4076-(73/101)October 31, 1973

Managing Director's Statement

On August 29, 1973 the Executive Directors considered a staff memorandum reviewingprocedures for special consultations on exchange rate policies. At that meeting there wasgeneral agreement on the importance of Fund reviews of exchange rate policies and theneed to develop appropriate procedures for such reviews. The staff had proposed thatspecial consultations be held, in between the annual consultations, with members whoseexchange rate policies have a major impact on the international monetary system. Thisproposal was supported by a number of Directors. Others preferred a more informalapproach with ad hoc arrangements to be made by the Managing Director. An alterna-tive suggested by one Executive Director envisaged "multicountry" consultations basedon a staff report reviewing current exchange market and exchange policy matters in anumber of countries. In concluding the meeting, the Acting Chairman had said that thestaff would follow up suggestions made by Executive Directors and the subject would bebrought back to the Board as soon as practicable after the Annual Meeting.

I have carefully considered the views expressed by the Executive Directors at theabove meeting and in subsequent private discussions. I am mindful of the degree ofconsensus arrived at in the Committee of Twenty on the subject of special procedures inconnection with adjustment in the reformed system. I strongly believe that we need todevelop new procedures in the interim to ensure that exchange policies in general andexchange rate developments in particular are consistent with the general objectives ofthe Fund. I also believe that there are advantages at this time in following an approachthat allows a measure of flexibility but that also is sufficiently broad-based to lead to ageneral review of exchange rate developments.

In the light of these considerations I propose, as a preliminary step, to ask senior staffmembers to hold, under my direction, informal discussions for two or three days withhigh officials of each of a number of countries that have a major impact on internationalcurrency relationships. There would not be a fixed list but in the first round of discus-sions I would consider including Belgium, Canada, France, Germany, Italy, Japan, theNetherlands, the United Kingdom, and the United States. The discussions would becentered on balance of payments developments and policies having an important impacton exchange markets. Immediately upon their return to headquarters the staff wouldadvise me of the results of these discussions and I would then consider what furtheraction might be useful at that stage. In any event, with due care to safeguard the con-fidentiality of information and views on matters of a particularly sensitive nature, Iwould arrange for the Executive Directors to receive as soon as possible a unifiedaccount of developments and policies.

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Appendix II (continued). PRINCIPAL POLICY DECISIONS

I believe that discussion of this subject by the Executive Directors should take placein the context of the review of general developments and prospects of the world economyderiving from the periodic exercise on the world economic outlook which should hence-forth be undertaken three times each year, though not always on as elaborate a scaleas in the past.

As a conclusion of the discussion by the Executive Directors, I envisage a statementby the Chairman summing up the views of the Directors on overall foreign exchangedevelopments and policies.

If the Executive Directors agree with this procedure, I would propose that informalstaff visits be arranged to begin in mid-November. This would allow Board discussion ofthe report to be scheduled before the meeting of the Deputies of the Committee ofTwenty in January.

B. Exchange Rates for the SDR in Transactions Between Participants

1. In view of the development of unforeseen circumstances threatening the operationsof the Fund with respect to the Special Drawing Account, the operation of Article XXV,Section 8(0) is suspended, pursuant to Article XXIX, Section 1, with respect to trans-actions under Article XXV, Section 2(fe) ( i ) for a period of 120 days startingNovember 6, 1973.

2. The earliest practicable date for a meeting of the Board of Governors pursuant toArticle XVI, Section l ( fc ) , is the date of the 1974 Annual Meeting of the Board ofGovernors of the International Monetary Fund.

Decision No. 4078-(73/102) SNovember 5, 7975

C. Central Rates and Wider Margins: A Temporary Regime—Revised Decision x

Preamble

This decision is adopted by the Executive Directors in order to indicate practices thatmembers may wish to follow in present circumstances consistently with Article IV,Section 4(0) and Board of Governors Resolution No. 26-9,2 which called on all mem-bers to collaborate with the Fund and with each other in order to maintain a satisfactorystructure of exchange rates within appropriate margins. The decision is intended toenable members to observe the purposes of the Fund to the maximum extent possibleduring the temporary period preceding the resumption of effective par values withappropriate margins in accordance with the Articles.

Paragraph 1. Par Values and Wider Margins

(a) A member will be deemed to be acting in accordance with Article IV, Sec-tion 4(a) and Resolution No. 26-9 if it takes appropriate measures, consistent with theArticles, to permit spot exchange transactions between its currency and an interventioncurrency, the issuer of which operates on the basis of a par value or a central rate, onlyat rates within 21A per cent from the parity between the two currencies. If a central rate

!For original decision, No. 3463-(71/126), see Annual Report, 1972, pages 85-87.2 Summary Proceedings of the Twenty-Sixth Annual Meeting of the Board of Governors (Wash-

ington, 1971), pages 331-32.

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is in effect for the intervention currency, parity for the purpose of this paragraph shallbe deemed to refer to the relationship between the par value of a member's currencyand such central rate.

(b) A member that avails itself of wider margins under (a) above shall notify theFund. Paragraphs 5 and 6 of this decision shall then apply to the member.

(c) A member's intervention currency means a currency which the member repre-sents to the Fund that it stands ready to buy and sell in order to perform its obligationsregarding exchange stability.

Paragraph 2. Central Rates

(a) A member which temporarily does not maintain rates based on a par value forits currency in accordance with Article IV, Section 3 and Decision No. 904-(59/32)3

but, by means of appropriate measures consistent with the Articles, maintains a stablerate in terms of an intervention currency as the basis for exchange transactions in itsterritories may communicate to the Fund a rate for its currency for the purposes of thisdecision. This rate or a rate subsequently communicated in accordance with this para-graph shall take effect as the central rate for the purposes of this decision unless theFund finds it unsatisfactory.

(b) A central rate for a member's currency may be communicated in gold, units ofspecial drawing rights, or another member's currency.

Paragraph 3. Central Rates with Wider Margins

A member that communicates a central rate under paragraph 2(a) and avails itselfof the wider margins of paragraph l(a) on the basis of its central rate shall notify theFund, and if the Fund has not found the central rate unsatisfactory the member will bedeemed to be acting in accordance with Article IV, Section 4 ( a ) and ResolutionNo. 26-9 if it takes appropriate measures, consistent with the Articles, to permit spotexchange transactions between its currency and an intervention currency only withinmargins of 21A per cent of the central rate in terms of the intervention currency. Inaddition, paragraphs 5 and 6 shall apply.

Paragraph 4. Central Rates without Wider Margins

If a member that communicates a central rate under paragraph 2(a) does not notifythe Fund under paragraph 3 that it avails itself of the wider margins of that paragraph,the member shall take appropriate measures to ensure that spot exchange transactionswithin its territories between its currency and an intervention currency shall take placeonly within margins of 1 per cent of the central rate in terms of the intervention currency.

Paragraph 5. Multiple Currency Practices and Discriminatory Currency Arrangements

Notwithstanding paragraphs 1 and 3 above, no member shall permit, except asapproved or authorized under Article VIII, Section 3 or Article XIV, Section 2:

a difference in excess of 2 per cent between any two buying or any two selling ratesfor spot exchange transactions between its currency and the currencies of other mem-bers; or

a spread in excess of 2 per cent between a buying and a selling rate for spotexchange transactions between its currency and the currency of another member.

3 Selected Decisions of the International Monetary Fund and Selected Documents (Sixth Issue,Washington, 1972), page 11.

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Paragraph 6. Intervention

Appropriate measures for the purposes of paragraphs l(a), 2(a), and 3 above shallinclude intervention by a member's authorities in the exchange markets within the mem-ber's territories in order to maintain rates for spot exchange transactions in accordancewith this decision. In their intervention in exchange markets members shall refrain fromactions incompatible with the purposes of the Fund.

Paragraph 7. Members Maintaining Narrow Margins Against an Intervention Currency

(a) A member will be deemed to be acting in accordance with Article IV, Sec-tion 4(a) and Board of Governors Resolution No. 26-9, if (a) the rate for its currencyis maintained consistently with the Articles or the member's Membership Resolutionand (b) the member permits transactions between its currency and an intervention cur-rency only within margins of 1 per cent of the said rate in terms of the interventioncurrency.

(b) Subparagraph (a) shall apply to a member in respect of the separate currencyof a territory under Article XX, Section 2(g) for which margins of 1 per cent aremaintained for transactions between the separate currency and the metropolitan currency.

Paragraph 8. Review

This decision shall be reviewed from time to time as necessary.

Decision No. 4083-(73/104)November 7, 1973

D. Gold Payments Under Article V, Section 7(6) Amountingto Less Than One Bar

If a payment due under Article V, Section 7(b) includes an amount of gold equal toless than one standard bar, such amount shall not be collected.

Decision No. 4087-(73/105)November 9,1973

E. Bank for International Settlements: Draft Resolution toBecome Holder of SDRs

I. The Bank for International Settlements, by a letter dated September 12, 1973,applied to be permitted to accept, hold, and use special drawing rights underArticle XXIII, Section 3, of the Articles of Agreement of the Fund, and pursuant toSection 25 of the By-Laws, the Executive Directors have consulted with the representa-tives of that Bank and have agreed upon the terms and conditions which, in the opinionof the Executive Directors, the Board of Governors may wish to prescribe for permittingthat Bank to accept, hold, and use special drawing rights.

II. The Board of Governors is requested to vote without meeting pursuant to Sec-tion 13 of the By-Laws. Pursuant further to this By-Law, the Executive Directors waivethe requirement that Governors shall not vote on any motion presented by the ExecutiveDirectors until seven days after the dispatch of the motion.

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III. The Secretary is authorized and directed to send to each member of the Fund byrapid means of communication, on or before November 30, 1973, the Explanatory Notesand Appendix thereto together with the following communication:

The Bank for International Settlements by a letter dated September 12, 1973applied to be permitted under Article XXIII, Section 3 to accept, hold, and usespecial drawing rights. The Executive Board, after consultation with representa-tives of the Bank for International Settlements, has taken note of the ExplanatoryNotes and Appendix thereto, which is sent to Governors for their information, andapproved the following Resolution for submission to the Board of Governors fora vote without meeting pursuant to Section 13 of the By-Laws of the Fund. If theResolution is adopted while the suspension under Executive Board DecisionNo. 4078-(73/102) S is still in effect, the Executive Directors intend to decideunder paragraph 9 to permit the Bank to engage in transactions.4 The exchangerates for transactions under the Resolution would be determined under Rule O-3.

DRAFT RESOLUTION5

Prescription of the Bank for International Settlementsas a Holder of Special Drawing Rights

WHEREAS the Bank for International Settlements, by a letter dated September 12,1973, applied to be permitted under Article XXIII, Section 3, of the Articles of Agree-ment of the International Monetary Fund to accept, hold, and use special drawing rightsin certain transactions with participants; and

WHEREAS pursuant to Section 25 of the By-Laws of the Fund, the Executive Directors,after consultation with the Representatives of the Bank for International Settlements,have recommended that the Bank for International Settlements be prescribed as a holderon the terms and conditions set forth in this Resolution; and

WHEREAS the Bank for International Settlements has indicated its concurrence in theproposed terms and conditions;

Now, THEREFORE, the Board of Governors, having considered the recommendationsof the Executive Directors, hereby RESOLVES that: The Bank for International Settle-ments is prescribed as a holder of special drawing rights on the following terms andconditions:

1. Definitions: As used in this Resolution:(a) "Fund" means the International Monetary Fund.(b) "Bank" means the Bank for International Settlements.(c) "Participant" means a participant in the Special Drawing Account of the

Fund.(d) "Articles" means the Articles of Agreement of the Fund.(e) "Article" refers to an identified provision of the Articles.(f) "Need to use special drawing rights" means need as defined in Article XXV,

Section 3(a).2. Application of General Provisions: The provisions of the Articles, By-Laws, Rules

and Regulations, and decisions of the Fund that apply to all holders shall applyunder this Resolution.

^ See Decision No. 4159-(74/10) S, pages 109-10.5 Adopted by the Board of Governors as Resolution No. 29-1, effective January 21, 1974.

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3. Acceptance, Holding, and Use by the Bank:(a) Acceptance: The Bank may accept special drawing rights and provide cur-

rency in a transaction in agreement with a participant, which agreementincludes an undertaking by the Bank and participant that the Bank will usethe same amount of special drawing rights to obtain currency from thatparticipant within a period of up to six months.

(b) Holding: The Bank may hold special drawing rights accepted in accordancewith (a) above or received from the Fund as interest on its holdings ofspecial drawing rights.

(c) Use: The Bank may use special drawing rights to obtain currency in a trans-action in agreement with a participant:

(i) to fulfill the Bank's undertaking assumed in accordance with para-graph 3(a) above; or

(ii) after consultation with the Fund, to dispose of special drawing rightswhen the Bank finds that a participant has failed to carry out the agree-ment referred to in paragraph 3(a) above; and

(iii) to dispose of special drawing rights received from the Fund as intereston the Bank's holdings of special drawing rights.

The Bank shall return special drawing rights to a participant which is required toaccept them in accordance with paragraph 4(a) (ii).

(d) Exchange rates: In all transactions under this Resolution the rules whichdetermine the exchange rates applicable to participants under the Articles atthe time of each transfer of special drawing rights shall also apply to theBank.

4. Use and Acceptance by Participants:(a) Use:

(i) A participant that represents to the Fund that it has a need to usespecial drawing rights may enter into a transaction in accordance withparagraph 3(a) above by giving notice to the Fund.

(ii) The Fund shall not challenge the representation in (a)(i) above. TheFund, however, may require the participant to accept special drawingrights from the Bank, for currency acceptable to the Bank, to the extentthe Fund later finds that the participant did not have a need to usespecial drawing rights.

(b) Acceptance: A participant may accept special drawing rights in accordancewith paragraph 3(c) above. A participant shall accept special drawing rightsfrom the Bank and provide currency as required under (a) (ii) above.

5. Information and Recording: The Fund shall inform the Bank of all matters rele-vant to the acceptance, holding, and use of special drawing rights by the Bank.The Bank and the participant shall inform the Fund promptly of the facts necessaryto record any transaction in which the Bank accepts or uses special drawing rights.

6. Consultation and Review: The Bank and the Fund will remain in close consul-tation with respect to this Resolution. The Executive Directors shall review thisResolution at least once every three years and submit any recommendation thatthey consider appropriate to the Board of Governors.

7. General Undertaking of Bank: The Bank undertakes, in its acceptance, holding,and use of special drawing rights, to collaborate with the Fund in order to facilitatethe effective functioning of the Special Drawing Account and the proper use ofspecial drawing rights in accordance with the Articles and this Resolution.

8. Annual Report: The Executive Directors shall discuss the operation of this Reso-

107



lution in their annual report as part of their review of the operation of the SpecialDrawing Account.

9. Suspension: During any period in which a suspension under Article XXIX, Sec-tion 1, is in effect, transactions under this Resolution shall be suspended unlessthe Executive Directors decide otherwise.

10. Termination: The prescription hereunder may be terminated either by the Bank,or by the Fund on the decision of the Executive Directors, by transmitting a noticein writing to the Fund or the Bank at its principal office. Termination shall becomeeffective on the date the notice is received. After termination the Bank may hold,receive, and use special drawing rights only in accordance with paragraphs 3(b),(c), and (d), above, and participants may accept special drawing rights from theBank under paragraph 4(b) above.

11. Adherence to Terms and Conditions:(a) The Bank may adhere to this Resolution6 within six months of the effective

date of this Resolution, which date shall be the date of its adoption by theBoard of Governors.

(b) Adherence hereunder shall be in the form of a letter to the Fund, acknowledg-ing these terms and conditions and bearing signatures which legally committhe Bank.

Decision No. 4096-(73/110) SNovember 26, 1973

F. Consultations on Members' Policies in Present Circumstances

1. The Committee on Reform of the International Monetary System and RelatedIssues on January 18, 1974 reviewed important recent developments and agreed that, inthe present difficult circumstances, all members, in managing their international pay-ments, must avoid the adoption of policies which would merely aggravate the problemsof other members. Accordingly, the Committee stressed the importance of avoidingcompetitive depreciation and the escalation of restrictions on trade and payments; andemphasized the importance of pursuing policies that would sustain appropriate levels ofeconomic activity and employment, while minimizing inflation. It was also recognizedthat recent developments would create serious payments difficulties for many developingcountries. The Committee agreed that there should be the closest international coopera-tion and consultation in pursuit of these objectives.

2. The Executive Directors call on all members to collaborate with the Fund inaccordance with Article IV, Section 4(a), with a view to attaining these objectives. Theconsultations of the Fund on the policies that members are following in present circum-stances will be conducted with a view to the attainment of these objectives.

Decision No. 4134-(74/4)January 23, 1974

G. Exchange Rates for the SDR in Transactions Between Participants:Extension of Suspension of Article XXV, Section 8(a)

I. The Board of Governors is requested to vote without meeting pursuant to Sec-tion 13 of the By-Laws of the Fund upon a draft resolution extending the period of the

6 The Bank for International Settlements adhered to this Resolution by letter dated January 30,1974.

108



suspension of the operation of Article XXV, Section 8(0) with respect to transactionsunder Article XXV, Section 2(b) (i).

II. The Secretary is authorized and directed to send a communication substantiallyas follows to each member of the Fund, by airmail or other rapid means of communica-tion, on or before February 5, 1974:

1. In view of the development of unforeseen circumstances threatening the operationsof the Fund with respect to the Special Drawing Account, the Executive Direc-tors of the Fund decided on November 5, 1973 to suspend the operation ofArticle XXV, Section 8(0), with respect to transactions between participantsconducted pursuant to Article XXV, Section 2(fc)( i ) , for the maximum period of120 days for which the Executive Directors can adopt a suspension. This periodwill end on March 5, 1974. As this threat to the operations of the Fund withrespect to the Special Drawing Account continues to exist and the period ofsuspension may be extended beyond March 5, 1974 only by the Board of Gover-nors, the Executive Directors have concluded that they should recommend to theBoard of Governors the extension of the suspension.

2. Accordingly, the Executive Directors of the Fund have approved the submissionof the following draft resolution to the Board of Governors of the Fund for a votewithout meeting pursuant to Section 13 of the By-Laws, and waive the require-ment that Governors shall not vote on any motion presented by the ExecutiveDirectors until seven days after the dispatch of the motion:

DRAFT RESOLUTION7

Extension of Suspension of Operation of Article XXV, Section 8 ( a )

RESOLVED:That the suspension of the operation of Article XXV, Section 8 ( a ) with respect

to transactions under Article XXV, Section 2(fc) ( i ) , which was decided by theExecutive Directors on November 5, 1973 for a period of 120 days ending onMarch 5, 1974, shall be extended for an additional period of 240 days ending onOctober 31, 1974.

Decision No. 4145-(74/6) SFebruary 1, 1974

H. Bank for International Settlements: Adherence toResolution No. 29-1 and Termination of Suspension

I. In accordance with Paragraph 9 of Board of Governors Resolution No. 29-1,the Executive Directors decide that, during any period in which the operation ofArticle XXV, Section 8(a) is suspended pursuant to Article XXIX, Section 1 withrespect to transactions under Article XXV, Section 2( fe ) ( i ) , transactions under Resolu-tion No. 29-1 shall not be suspended.

7 Adopted by the Board of Governors as Resolution No. 29-2, effective March 4, 1974.

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II. The Secretary is authorized to transmit to the Bank for International Settlementsdecisions of the Fund that apply to all holders and affect the acceptance, holding, anduse of special drawing rights by the Bank.

Decision No. 4159^(74/10) SFebruary 19, 1974

I. Draft Resolution on Establishment of an Interim Committee of theBoard of Governors on the International Monetary System

The Executive Board approves for submission to the Board of Governors at the 1974Annual Meeting the following draft Resolution on Establishment of an Interim Com-mittee of the Board of Governors.

Decision No. 4231-(74/67)June 13, 1974

DRAFT RESOLUTION

WHEREAS the Committee of the Board of Governors of the International MonetaryFund on Reform of the International Monetary System and Related Issues has recom-mended that it would be desirable to establish by amendment of the Articles of Agree-ment a permanent and representative Council with appropriate powers; and

WHEREAS it is desirable, pending the establishment of the Council, to establish anInterim Committee of the Board of Governors on the International Monetary Systemwith an advisory role, and with a composition similar to that of the Council; and

WHEREAS it is desirable that the Interim Committee shall come into existence whenthe Committee on Reform of the International Monetary System and Related Issuesceases to exist;

Now, THEREFORE, the Board of Governors hereby RESOLVES that:

1. Composition of the Interim Committee

(a) There shall be established an Interim Committee of the Board of Governorson the International Monetary System. The members of the Committee shall be gover-nors of the Fund, ministers, or others of comparable rank. Each member of the Fundthat appoints an executive director and each group of members of the Fund that electedan executive director on or after the date on which the last regular election took placeshall appoint

(i) one member of the Committee, and not more than(ii) seven associates.

Each member of the Committee and each associate shall serve until a new appointmentis made.

(b) Members of the Committee, associates, and executive directors or in theirabsence their alternates, shall be entitled to attend meetings of the Committee, unlessthe Committee decides to hold a more restricted session. Each member of the Fundthat appoints an executive director and each group of members of the Fund referred toin (a) above may designate an alternate to participate in the place of the member ofthe Committee at any meeting when he is not present. Participation in respect of eachitem on the agenda of a meeting shall be limited to one person, who shall be a memberof the Committee, an associate, or an executive director.

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(c) The Committee shall select a Chairman, who shall serve for such period as theCommittee determines. The Chairman of the Board of Governors, or a governor desig-nated by him, shall convene the first meeting of the Committee and shall preside over ituntil a Chairman has been selected.

(d) The Managing Director shall be entitled to participate in all meetings of theCommittee, and may designate a representative to participate in his place at any meetingwhen he is not present. The Managing Director or his representative may be accom-panied normally by not more than two members of the staff, unless the Committeedecides to hold a restricted session.

2. Representation of members not entitled to appoint a member of the Committee

A member of the Fund not entitled to appoint a member of the Committee maysend a representative to participate in any meeting of the Committee when a requestmade by, or a matter particularly affecting, that member is under consideration. TheCommittee shall determine, upon request by the member, whether a matter under con-sideration particularly affects the member.

3. Terms of reference

The Committee shall advise and report to the Board of Governors with respect tothe functions of the Board of Governors in:

(i) supervising the management and adaptation of the international monetarysystem, including the continuing operation of the adjustment process, and in this connec-tion reviewing developments in global liquidity and the transfer of real resources todeveloping countries;

(ii) considering proposals by the Executive Directors to amend the Articles ofAgreement; and

(iii) dealing with sudden disturbances that might threaten the system.In addition, the Committee shall advise and report to the Board of Governors on

any other matters on which the Board of Governors may seek the advice of theCommittee.

In performing its duties, the Committee shall take account of the work of otherbodies having specialized responsibilities in related fields.

4. Procedures

(a) The Committee shall meet ordinarily three or four times a year. The Chair-man may call meetings after consulting the members of the Committee, and shall consultthe membfers of the Committee on calling a meeting if so requested by any member ofthe Committee.

(b) A quorum for any meeting of the Committee shall be two thirds of the mem-bers of the Committee.

(c) Meetings of the Committee shall be held within the metropolitan area inwhich the Fund has its principal office, or at such other places as the Committee mayprovide or, in the absence of such provision, as the Chairman shall determine afterconsulting the members of the Committee.

(d) Appropriate arrangements shall be made for the effective coordination of thework of the Committee and of the Executive Directors. The Secretary of the Fund shallserve as the Secretary of the Committee.

Ill



(e) In reporting any recommendations or views of the Committee, the Chairmanshall seek to establish a sense of the meeting. In the event of a failure to reach aunanimous view, all views shall be reported, and the members holding such views shallbe identified. Reports of the Committee shall be made available to the ExecutiveDirectors.

(f) The Committee may invite observers to attend during the discussion of anitem on the agenda of a meeting, and may determine any aspect of its procedure thatis not established by this Resolution.

J. Guidelines for the Management of Floating Exchange Rates

The Executive Directors have discussed the attached memorandum entitled "Guide-lines for the Management of Floating Exchange Rates." They recommend, pursuant toArticle IV, Section 4(a), that, in present circumstances, members should use their bestendeavors to observe the guidelines set forth and explained in the memorandum. Con-sultations with members with floating currencies will be based on the memorandum.These guidelines will be reviewed from time to time in order to make any adjustmentsthat may be appropriate.

Decision No. 4232-(74/67)s June 13,1974

Guidelines for the Management of Floating Exchange Rates

INTRODUCTION

There is widespread agreement that the behavior of governments with respect toexchange rates is a matter of international concern and a matter for consultation andsurveillance in the Fund. This is no less true when rates are floating than when they arecontained within fixed margins and are changed by par value and central rateadjustments.

The Fund cannot legally authorize floating but it can exercise surveillance over themanner in which members fulfill their undertaking, under Article IV, Section 4(a),"to collaborate with the Fund to promote exchange stability, to maintain orderlyexchange arrangements with other members, and to avoid competitive exchange altera-tions." The following guidelines, though not exhausting the possibilities of action by theFund under this Article, are intended to provide criteria that members would observe inperforming their undertaking and that the Fund would observe in exercising surveillancein present circumstances.

These guidelines are based on the assumption that in any situation of floating it maybe desirable (a) to smooth out very short-run fluctuations in market rates and (b) tooffer a measure of resistance to market tendencies in the slightly longer run, particularlywhen they are leading to unduly rapid movements in the rate, and (c) to the extent thatit is possible to form a reasonable estimate of the medium-term norm for a country'sexchange rate, to resist movements in market rates that appear to be deviating substan-tially from that norm. Guidelines of this kind are necessary, inter alia, in order to arriveat a clear conception of what competitive exchange alteration is, and to provide safe-guards against it.

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The guidelines also take into account:(a) that national policies, including those relating to domestic stabilization, should

not be subjected to greater constraints than are clearly necessary in the internationalinterest;

(b) that a degree of uncertainty necessarily attaches to any estimate of a medium-term normal exchange rate, that this uncertainty is particularly great in present circum-stances, and that on occasion the market view may be more realistic than any officialview whether of the country primarily concerned or of an international body; and

(c) that in view of the strength of short-term market forces it may at times beunavoidable to forego or curtail official intervention that would be desirable from thestandpoint of exchange stability if such intervention should involve an excessive drainon reserves or an impact on the money supply which it is difficult to neutralize.

The guidelines are intended to provide the basis for a meaningful dialogue betweenthe Fund and member countries with a view to promoting international consistencyduring a period of widespread floating. They are termed guidelines rather than rules toindicate their tentative and experimental character. They should be adaptable to chang-ing circumstances. No attempt is here made to indicate the precise procedures throughwhich they would be implemented. These will be considered later, but they must essen-tially rest on an intensification of the confidential interchange between the member andthe Fund.

In the application of the guidelines it is to be expected that, in view of the emphasislaid by the Committee of Twenty at their fifth (Rome) meeting on the importance inpresent circumstances of avoiding competitive depreciation, particular attention wouldbe attached to departures from the guidelines in the direction of depreciation. Specialconsideration will also be given to the manner in which the guidelines should be appliedby developing countries, taking account of the stage of evolution of their exchangemarkets and intervention practices.

The guidelines should be understood in the light of the commentary which follows.

THE GUIDELINES

(1) A member with a floating exchange rate should intervene on the foreignexchange market as necessary to prevent or moderate sharp and disruptive fluctuationsfrom day to day and from week to week in the exchange value of its currency.

(2) Subject to (3)(b), a member with a floating rate may act, through interventionor otherwise, to moderate movements in the exchange value of its currency from monthto month and quarter to quarter, and is encouraged to do so, if necessary, where factorsrecognized to be temporary are at work. Subject to (1) and (3) (a), the member shouldnot normally act aggressively with respect to the exchange value of its currency (i.e.,should not so act as to depress that value when it is falling, or to enhance that valuewhen it is rising).

(3) (a) If a member with a floating rate should desire to act otherwise than inaccordance with (1) and (2) above in order to bring its exchange rate within, or closerto, some target zone of rates, it should consult with the Fund about this target and itsadaptation to changing circumstances. If the Fund considers the target to be within therange of reasonable estimates of the medium-term norm for the exchange rate in ques-tion, the member would be free, subject to (5), to act aggressively to move its ratetowards the target zone, though within that zone (2) would continue to apply.

(b) If the exchange rate of a member with a floating rate has moved outsidewhat the Fund considers to be the range of reasonable estimates of the medium-term

113



norm for that exchange rate to an extent the Fund considers likely to be harmful to theinterests of members, the Fund will consult with the member, and in the light of suchconsultation may encourage the member, despite 2 above, (i) not to act to moderatemovements toward this range, or (ii) to take action to moderate further divergencefrom the range. A member would not be asked to hold any particular rate againststrong market pressure.

(4) A member with a floating exchange rate would be encouraged to indicate to theFund its broad objective for the development of its reserves over a period ahead andto discuss this objective with the Fund. If the Fund, taking account of the world reservesituation, considered this objective to be reasonable and if the member's reserves wererelatively low by this standard, the member would be encouraged to intervene morestrongly under Guideline (2) to moderate a movement in its rate when the rate wasrising than when it was falling. If the member's reserves were relatively high by thisstandard it would be encouraged to intervene more strongly to moderate a movementin its rate when the rate was falling than when it was rising. In considering targetexchange rate zones under (3), also, the Fund would pay due regard to the desirabilityof avoiding an increase over the medium term of reserves that were recognized by thisstandard to be relatively high, and the reduction of reserves that were recognized to berelatively low.

(5) A member with a floating rate, like other members, should refrain from intro-ducing restrictions for balance of payments purposes on current account transactions orpayments and should endeavor progressively to remove such restrictions of this kindas may exist.

(6) Members with a floating rate will bear in mind, in intervention, the interests ofother members including those of the issuing countries in whose currencies they inter-vene. Mutually satisfactory arrangements might usefully be agreed between the issuersand users of intervention currencies, with respect to the use of such currencies in inter-vention. Any such arrangements should be compatible with the purposes of the fore-going guidelines. The Fund will stand ready to assist members in dealing with anyproblems that may arise in connection with them.

COMMENTARY

General

Certain of the terms used in the guidelines may be defined as follows:(i) "A member with a floating exchange rate" means a member whose currency is

floating independently in the sense that it is not pegged, within relatively narrow margins,to any other currency or composite of currencies. Members whose currencies are peggedto particular floating currencies, or to composites of such currencies, within thesemargins would be exempt from these guidelines, though not from any general principlesrelating to adjustment. Members which, though their currencies are pegged to anothercurrency, change the peg frequently in the light of some formula relating, e.g., to priceindices, would be expected to discuss this formula and any changes therein with theFund. Members whose currencies are pegged to a composite of other currencies (e.g.,members whose effective rates are fixed) would likewise be expected to discuss withthe Fund the composite in question and any changes therein. Members whose currenciesare floating jointly under mutual intervention arrangements with relatively narrowmargins would be exempted from the intervention guidelines so far as intervention ineach other's currencies is concerned, but would be held responsible to the Fund for theirexchange market intervention vis-a-vis the rest of the world. As regards capital controls,official financing, and other measures to influence capital flows, each member belonging

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to such a group would be responsible for its measures judged in relation to its overallbalance of payments situation.

(ii) "Exchange market intervention" would normally be measured by the movementof reserves, adjusted as appropriate for compensatory official borrowing. Considerationmight also be given to including in the concept of intervention changes in official foreignexchange positions other than reserves.

(iii) "Action to influence an exchange rate" includes, besides exchange market inter-vention, other policies that exercise a temporary effect on the balance of payments andhence on exchange rates, and that have been adopted for that purpose. Such policiesmay take the form of official forward exchange market intervention, official foreignborrowing or lending, capital restrictions, separate capital exchange markets, varioustypes of fiscal intervention, and also monetary or interest rate policies. Monetary orinterest rate policies adopted for demand management purposes or other policiesadopted for purposes other than balance of payments purposes would not be regardedas action to influence the exchange rate.

(iv) Where the terms "exchange rate" or "exchange value" are employed with respectto any currency it is assumed that these would normally be expressed in terms ofeffective rates, i.e., the value of the currency would be measured relative to a representa-tive set of currencies rather than relative to its intervention currency alone. The setchosen for this purpose should, in principle, vary from country to country, and thecurrencies in the set should be weighted according to their importance to the country inquestion. The composition of the set might be based on trade and financial relationshipsor on trade relationships alone. If trade-weighted, it might be derived from the Multi-lateral Exchange Rate Model, or based on bilateral trade relationships. In some casesthe basket used for the valuation of the SDR might be satisfactory for this purpose also.In some cases, finally, the rate vis-a-vis a single currency might provide a satisfactoryapproximation to an effective rate.

On Guideline (1)

Known large once-for-all or reversible transactions would be largely offset and theireffects spread over time. In addition, intervention would be undertaken to moderatelarge day-to-day or week-to-week movements in rates due to speculative or otherfactors. Such intervention, if properly conducted, should tend to net out over time.

It is unlikely to be necessary for the issuer of the principal intervention currencyitself to intervene from day to day in the manner described in this guideline.

On Guideline (3)

(i) The concept of a medium-term norm for an exchange rate is employed explicitlyin (a) and implicitly in (b) of Guideline (3). By this is meant a rate that would tendto bring about equilibrium in the "underlying" balance of payments, i.e., in the overallbalance in the absence of cyclical and other short-term factors affecting the balance ofpayments, including government policies which are, or, on internationally acceptedprinciples, ought to be temporary. If the member concerned so proposes and the Fundagrees, "equilibrium" could allow for an internationally appropriate rate of increase ordecrease in the member's reserves. The "medium-term" might be considered to refer toa period of about four years. Seasonal, speculative, and cyclical factors whose effectswere reversible over such a period would be ignored.

(ii) An advantage of conceiving medium-term norms or target zones in terms ofeffective rates is that so long as the effective rate remains constant the balance of tradeor currency payments of the floating country would not be greatly affected by changes

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in the relative exchange rates of the currencies of other countries. This should reducethe frequency with which it would be necessary to change zone boundaries, or themagnitude of the changes involved. It would be open to a member if it so desiredto express its target rate or zone not as one that is constant over time but as one thatis rising or falling at a certain rate or at a rate dependent, for example, on an index ofrelative price or cost levels.

(iii) Under Guideline (3)(b) the Fund would be authorized to take the initiative insituations where it considered that a member's rate was likely to become harmful to theinterests of members whether as a result of market forces or of action by the member.Recommendations to a member under this provision would be made by the ExecutiveDirectors, on a proposal by the Managing Director, but the Managing Director wouldnot make such a proposal except after consultation with the member.

(iv) The greater the degree of uncertainty regarding the balance of payments situa-tion and prospects of a country the wider would be the range of reasonable estimatesof the medium-term norm for its exchange rate, and the wider would be the deviationbeyond this range which would occur before the Fund would make any suggestionsunder Guideline (3) (b). The Fund's right to make suggestions under this guideline will,in any case, be exercised with restraint.

(v) In any suggestions the Fund might make under Guideline (3)(b), it would givea preference to liberalizing as opposed to restricting ways of exercising a given effect onexchange rates, but would bear in mind the distinction between capital controls appliedfor temporary balance of payments reasons and those applied for other economic andsocial reasons.

On Guideline (6)

This guideline would imply that in their use of their customary reserve currenciesmembers with a floating rate, while recognizing the need of issuing countries for reason-able freedom of exchange rate movement, should not be precluded from intervening ina manner conformable with the guidelines. Among the problems that might ariseregarding the use of intervention currencies, in the resolution of which the Fund mightbe of service, are those regarding the circumstances in which a member might intervenein a currency other than its customary reserve currency, the problem of interventionsthat move the value of the currency of intervention in an undesirable direction, and theproblem of mutually offsetting interventions.

K. Interim Valuation of the SDR: New Rule O-3 and Method ofDetermining and Collecting Exchange Rates

(a) New Rule O-3

1. Effective July 1, 1974, and subject to the addition of the amount of each currencylisted in paragraph (a), which will be calculated in the manner set out in SM/74/142,dated June 13, 1974, on the last business day before this decision becomes effective,Rule O-3 of the Fund's Rules and Regulations entitled "Exchange Rates" shall beamended to read as follows:

(a) For the purpose of determining the exchange rate in terms of special drawingrights for a currency provided in a transaction between participants or involved in a

116



conversion associated with such a transaction one special drawing right shall be deemedto be equal to the sum of:

U. S. dollar 0.40Deutsche mark 0.38Pound sterling 0.045French franc 0.44Japanese yen 26Canadian dollar 0.071Italian lira 47Netherlands guilder 0.14Belgian franc 1.6Swedish krona 0.13Australian dollar 0.012Danish krone 0.11Norwegian krone 0.099Spanish peseta 1.1Austrian schilling 0.22South African rand 0.0082

(b) One special drawing right in terms of the United States dollar shall be equalto the sum of the equivalents in United States dollars of the amounts of the currenciesspecified in (a) above, calculated on the basis of exchange rates established in accord-ance with procedures decided from time to time by the Fund.

(c) One special drawing right in terms of a currency other than the United Statesdollar shall be determined on the basis of the rate of the special drawing right in termsof the United States dollar as established in accordance with (b) above and an exchangerate for that currency determined as follows:

(i) for the currency of a member having an exchange market in which theFund finds that a representative rate for spot delivery for the UnitedStates dollar can be readily ascertained, that representative rate;

(ii) for the currency of a member having an exchange market in which theFund finds that a representative rate for spot delivery for the UnitedStates dollar cannot be readily ascertained but in which a representativerate can be readily ascertained for spot delivery for a currency asdescribed in (i), the rate calculated by reference to the representativerate for spot delivery for that currency and the rate ascertained pursuantto (i) above for the United States dollar in terms of that currency;

(iii) for any other currency, a rate determined by the Fund.2. Rule O-3 as amended by this decision shall be reviewed two years from the date

of this decision.Decision No. 4233-(74/67) S

June 13,1974, as amended byDecision No. 4261-(74/78) S

July 7, 1974

(b) Method of Determining and Collecting Exchange Ratesfor the Purposes of Rule O-3

1. The determination under Rule O-3(b) of the equivalents in United States dollarsof the amounts of currencies listed in Rule O-3(a) shall be based on the following spot

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exchange rates for the United States dollar: against the yen, the representative rateunder Rule O-3(c); against other currencies, the middle rates between buying andselling rates quoted at noon in the London exchange market.

2. If, for any reason, the rate for any currency cannot be obtained in accordance with1. above, the rate shall be the rate quoted at noon in the New York exchange marketor, if not available there, the rates at the fixing in the Frankfurt exchange market. Ifrates against the United States dollar cannot be obtained directly in any market, therates shall be calculated by use of appropriate cross rates.

3. If on any day the rate for a currency cannot be obtained in accordance with 1. or2. above, calculations shall be made on the basis of the rate for the previous businessday unless the Fund decides otherwise.

Decision No. 4234-(74/67) SJune 13,1974

L. Remuneration and Interest Rate on Special Drawing Rights

(a) Remuneration

The following shall be adopted as Rule 1-10:(a) For the six-month period July 1 to December 31, 1974, the rate of

remuneration shall be 5 per cent per annum.(b) Unless the Executive Board, after review in accordance with (e) below,

decides otherwise, the rate of remuneration for each subsequent six-month period shallbe 5 per cent per annum minus three fifths of the amount by which 9 per cent exceeds,or plus three fifths of the amount by which 11 per cent is exceeded by, the combinedmarket interest rate as determined in (d) below. The rates of remuneration calculatedunder this (b) shall be rounded to the nearest 1A per cent.

(c) Notwithstanding (a) and (b) above, for the six-month period endingDecember 31, 1974, and for any of the three subsequent six-month periods in whichthe rate of remuneration under (b) above is more than 31A per cent per annum, therate of remuneration on the amount by which the Fund's holdings of a member's cur-rency are less than 75 per cent but more than 50 per cent of the member's quota shallbe the higher of 2l/2 per cent per annum or one-half of the rate in effect under (a) or(b) above; provided, however, that the rate for any six-month period under this (c)shall be increased to the nearest V4 per cent to the extent that this would have beenpossible with the net income recorded by the Fund for the previous six-month periodon the basis of the amount by which 75 per cent of members' quotas exceeded theFund's average daily holdings of the currencies of these members, up to a maximumequal to the rate in effect under (a) or (b) above. The provisions in this (c) shall bereviewed not later than two years after the adoption of this decision.

(d) The combined market interest rate shall be the average of the daily interestrates for the obligations, combined in accordance with the weights listed below, for thethree-month period ending on the fifteenth day of the last month before the six-monthperiod for which the rate of remuneration is determined:

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Market yields for three-monthU. S. Treasury bills

Three-month interbank depositsrate in Germany

Market yields for three-monthU. K. Treasury bills

Three-month interbank money rateagainst private paper in France

Call money market rate (unconditional)in Japan

Per cent

47

18

13

11

11

100

(e) The Fund will review the rates of remuneration during each six-monthperiod beginning on July 1 and January 1 of each year.

(f) Net income of the Fund, for the purposes of (c) above, shall mean theexcess of the Fund's total income over all expenditures by the Fund during the reviewperiod.

Decision No. 4235^(74/67)June 13, 1974

(b) Interest Rate on Special Drawing Rights

1. Rule Q-l shall be amended as follows:(a) Interest and charges in respect of special drawing rights shall accrue daily

at the rate referred to in (b) below and shall be paid promptly as of the end of eachfinancial year of the Fund. The accounts of participants shall be credited with the excessof interest due over charges or debited with the excess of charges over the interest due.The accounts of holders that are not participants shall be credited with the interest due.

2. There shall be added Rule Q-l (b) as follows:(b) The interest rate on holdings of special drawing rights shall be equal to the

rate of remuneration in effect pursuant to Rule I-10(a) or (b).

Decision No. 4236-{74/67) SJune 13,1974

(c) Review

Executive Board Decisions No. 4235-(74/67) and No. 4236-(74/67) S, adoptedJune 13, 1974, shall be reviewed not later than two years after their adoption.

Decision No. 4237-(74/67) G/SJune 13, 1974

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M. Charges

(a) Charges—Schedules

1. The following shall be adopted as Rule 1-4(h):(h) The calculations under (b)(i) and (c) of Rule 1-4 shall be made separately

in respect of the part of the Fund's holdings of a member's currency subject to(f)(3)(i) and (f)(3)(ii) below.

2. Rule 1-4(f) is amended by the addition of:(3) With respect to each segment of the holdings of a member's currency to the

extent that it represents the acquisition of that currency by the Fund from July 1, 1974":(i) The charge to be levied on each segment that is in excess of 100 per cent

of quota and is not subject to (ii) below shall be 4 per cent per annum for thefirst 12 months, and an additional l/2 per cent per annum for each subsequent12 months.

(ii) The charge to be levied on each segment that is in excess of 100 per centof quota and represents currency acquired by the Fund pursuant to ExecutiveBoard Decision No. 4241-(74/67),8 adopted June 13, 1974 shall be 67/s per centper annum for the first three years, and an additional Vs per cent per annum foreach subsequent 12 months.

3. Rule I-4(g) shall be amended as follows:The Fund and the member shall consider means by which the Fund's holdings of

the currency can be reduced whenever the Fund's holdings of a member's currency aresuch that

(1) the charge under ( f ) (2) above applicable to any segment for any period hasreached the rate of 4 per cent per annum. Thereafter, the charges shall rise in accord-ance with (f)(2) above, provided that the rate shall not increase beyond 5 per centper annum when agreement is reached under this provision for repurchase withinthree to five years after a drawing in accordance with Executive Board DecisionNo. 102-(52/11).9 In the case of agreements on means to reduce the Fund's holdingsbeyond five years, the Fund may adopt higher maximum rates. In the absence of agree-ment on means to reduce the Fund's holdings, the Fund may impose such charges asit deems appropriate after the rate of 5 per cent is reached. When an agreement forrepurchase within three to five years after a drawing is not reached or observed, thecharges to be imposed shall rise in accordance with ( f ) (2) above, provided that whenthe charges payable on any segment have reached 6 per cent, the Fund will review thecharges to be imposed thereafter. In the case of nonobservance, if 5 per cent is payableon any segment at the date of nonobservance, it shall continue to be payable only forthat part of a period of six months for which it has not yet been payable; and when therepurchases to which the nonobservance relates are made or a new agreement forrepurchase not later than five years after the drawing is made all charges in excess of5 per cent shall be reduced to 5 per cent;

(2) the charge under ( f ) (3)( i ) above applicable to any segment for any periodhas reached the rate of 5.5 per cent per annum. Thereafter the charges shall rise inaccordance with ( f ) (3) ( i ) above, provided that the rates shall not increase beyond6 per cent per annum when agreement is reached under this provision for repurchasewithin three to five years after a drawing in accordance with Executive Board DecisionNo. 102-(52/11). In the case of agreements on means to reduce the Fund's holdings

8 See pages 122-23.9 Selected Decisions of the International Monetary Fund and Selected Documents (Sixth Issue,

Washington, 1972), pages 22-25.

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beyond five years, the Fund may adopt higher maximum rates. In the absence ofagreement on means to reduce the Fund's holdings, the Fund may impose such chargesas it deems appropriate after the rate of 6 per cent per annum is reached. When anagreement for repurchase within three to five years after a drawing is not reached orobserved, the charges to be imposed shall rise in accordance with (f)(3)(i) aboveprovided that when the charges payable on any segment have reached 6.5 per centper annum, the Fund will review the charges to be imposed thereafter. In the caseof nonobservance, if 6 per cent is payable on any segment at the date of nonobservance,it shall continue to be payable only for that part of a period of 12 months for which ithas not yet been payable; and when the repurchases to which the nonobservance relatesare made, or a new agreement for repurchase not later than five years after the drawingis made, the charges under (f)(3)( i ) in excess of 6 per cent shall be reduced to6 per cent;

(3) the charge under (f)(3)(ii) above applicable to any segment for any periodhas reached the rate of 7 per cent per annum. Thereafter, the charges shall rise inaccordance with (f)(3)(ii) above, provided that the rate shall not increase beyondTVs per cent per annum when agreement is reached under this provision for repurchasewithin seven years after a drawing in accordance with Executive Board DecisionNo. 4241-(74/67), adopted June 13, 1974. In the absence of agreement on meansto reduce the Fund's holdings, the Fund may impose such charges as it deems appro-priate after the rate of 7Vs per cent is reached. When an agreement for repurchasewithin seven years after a drawing is not reached or observed, the charges to be imposedshall rise in accordance with (f)(3)(ii) above; provided that when the charges payableon any segment have reached 11A per cent, the Fund will review the charges to beimposed thereafter. In the case of nonobservance, if IVs per cent is payable on anysegment at the date of nonobservance, it shall continue to be payable only for that partof a period of 12 months for which it has not yet been payable; and when the repur-chases to which the nonobservance relates are made, or a new agreement for repurchasenot later than seven years after the drawing is made, all charges in excess of IVs per centshall be reduced to JYs per cent.

Decision No. 4238-(74/67)June 13, 1974

(b) Future Changes in Charges on Fund's Holdings of Members'Currencies in Excess of Quota

Changes in any schedule of charges levied under Article V, Section 8(c), ( d ) , and(e) shall apply to all holdings subject to the schedule that are obtained by the Fundafter the date of this decision.

Decision No. 4239-(74/67)June 13,1974

(c) Timing of Changes in Schedules of Charges

The following shall be adopted as Rule 1-4(i):Changes in any schedule of charges levied under Article V, Section 8(c), (d), and

(e) shall apply from the first day of the month following the month during which achange is made.

Decision No. 4240-(74/67)June 13,1974

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N. Facility to Assist Members in Payments Difficulties Resulting fromInitial Impact of Increased Costs of Imports of

Petroleum and Petroleum Products

1. For a period ending on December 31, 1975, the Fund will be prepared to makeresources available to members in accordance with this decision in order to assist themto meet the impact on their balances of payments of increases in the prices of petroleumand petroleum products. Resources made available under this decision will be supple-mentary to any assistance that members may obtain under other policies on the use ofthe Fund's resources.

2. (a) Requests for purchases under this decision by a member will be met by theFund, subject to the limits in (b) and (c) below, if the Fund is satisfied (i) that themember needs assistance because of increases in the cost of its imports of petroleumand petroleum products in 1974 and because it has a balance of payments need, and(ii) that the member is following policies not inconsistent with the understandings setforth in Paragraph 2 of the Rome Communique of the ad hoc Committee of the Boardof Governors on Reform of the International Monetary System and Related Issues andin Executive Board Decision No. 4134-(74/4).10 The Fund shall assess each request inorder to determine whether, and the extent to which, the member has such a balance ofpayments need. In making this assessment the Fund shall take into account the abilityof the member to reduce this need, particularly through an inflow of capital, includingan increase in aid on concessionary terms, or by increased exports to oil exportingcountries, or to meet this need by some use of its reserves. For the purposes of thisdecision, any assistance made available to a member other than under this decisionshall be deemed to finance first the part of the member's deficit that is not attributableto the increased cost of imports of petroleum and petroleum products.

(b) The total of a member's purchases outstanding under Paragraph 2 of thisdecision shall not exceed the smaller of (i) the increase in the cost of the member'snet imports of petroleum and petroleum products over the cost of its imports of thesecommodities in 1972, calculated in accordance with Paragraph 1 of the Attachment tothis decision, minus an amount equivalent to 10 per cent of the member's reserves atthe end of 1973, adjusted for variability of exports in accordance with Paragraph 2of the Attachment to this decision, and (ii) 75 per cent of the member's quota.

(c) The total of a member's purchases outstanding under Paragraph 2 of thisdecision shall not exceed 35 per cent of the amount referred to in (b) above prior toany decision that the Fund may take under Paragraph 8.

3. On the request of a member, the Fund may make an appropriate adjustment inthe total amount of outstanding purchases that a member may make under Para-graph 2(b) above if the Fund is satisfied that this amount should be higher because themember's imports of petroleum and petroleum products in 1972 were abnormally lowbecause of exceptional circumstances.

4. In order to carry out the purposes of this decision, the Fund will be preparedto grant any waiver of the conditions of Article V, Section 3(a)(iii) when necessaryto permit purchases under this decision or to permit purchases under other policies thatwould raise the Fund's holdings of a member's currency above the limits referred to inthat provision because of purchases outstanding under this decision. In addition, theFund will apply its tranche policies to requests by a member for purchases other thangold tranche purchases as if the Fund's holdings of the member's currency did notinclude holdings resulting from any purchases outstanding under this decision.

10 See page 108.

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5. (a) A member that has made a purchase under this decision will be expectedto cooperate with the Fund in order to find appropriate solutions for its balance ofpayments problem. For this purpose the member will consult with the Fund duringthe year and subsequently during the period in which it has purchases outstanding underthis decision, thereby affording the Fund an opportunity to ascertain whether themember's policies are conducive to balance of payments adjustment and to repurchasein accordance with (d) below.

(b) Before submitting a request for a purchase under this decision for 1975, amember will be expected to consult the Fund on its balance of payments prospects andpolicies, including the effect on the balance of payments of the policies it has adoptedor intends to adopt in relation to the oil problem.

(c) A member requesting a purchase under this decision will be expected torepresent that it is following policies consistent with the understandings set forth inParagraph 2 of the Rome Communique of the ad hoc Committee of the Board ofGovernors on Reform of the International Monetary System and Related Issues andthat, while the purchase is outstanding, it will refrain (i) from imposing new, and fromintensifying existing, restrictions on current international payments inconsistently withits obligations under the Fund's Articles of Agreement and (ii) from imposing new, orintensifying existing, restrictions on current international transactions without priorconsultation with the Fund.

(d) A member requesting a purchase under this decision will be expected torepresent that it will make a repurchase corresponding to the purchase, to the extentthat it is still outstanding, as soon as the balance of payments problem for which thepurchase was made has been overcome and, in any event, in sixteen equal quarterlyinstallments to be completed not later than seven years after the purchase, and that itwill make repurchases under this decision, other than those accruing under Article V,Section 7(fc), in the media specified by the Fund at the time of the repurchase. TheFund will specify the media of repurchase consistently with the Articles and after con-sultation with members. The Fund will pay due regard to these consultations and willbe guided by a policy of specifying for repurchase the media in which it will makerepayments in accordance with the terms of borrowing agreements.

6. The Fund will indicate in an appropriate manner which purchases by a memberare made pursuant to this decision.

7. The Fund will levy charges on holdings of a member's currency resulting frompurchases outstanding under this decision in accordance with Executive Board DecisionNo. 4238-(74/67)11 of June 13, 1974.

8. Not later than September 15, 1974, the Executive Directors will review develop-ments since the adoption of this decision in order to decide, in the light of the Fund'sexisting and prospective liquidity, (i) whether purchases under the decision in excessof the limit specified in 2(c) above shall be permitted and (ii) on any adaptations thatshould be made in the provisions of this decision, including changes in the period thatis taken as the basis for calculating the amount of imports of petroleum and petroleumproducts and in the amount representing the increase in the cost of these products.A further review will be conducted not later than December 31, 1974 in order to decidewhether and on what terms to permit purchases with respect to the impact on thebalance of payments of the increased cost of imports of petroleum and petroleumproducts in 1975. The Executive Directors will review this decision at any other timeif they consider it appropriate to do so.

Decision No. 4241-(74/67)June 13, 1974

11 See pages 120-21.

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Attachment

1. The increase in the cost of a member's net imports of petroleum and petroleumproducts referred to in Paragraph 2(b)(i) of the decision will be taken to be equal tothe SDR equivalent of US$5.50 (at 1 SDR equals US$1.20635) multiplied by thevolume in barrels of the member's net imports (i.e., imports less exports) of thesecommodities in 1972.

2. The adjustment for variability of exports referred to in Paragraph 2(b)(i) of thedecision will be made by deducting from the member's reserves at the end of 1973 anamount equal to twice the root mean squared proportional deviation of export valuesfrom a centered five-year moving average (using export series generally covering theperiod 1955-71), multiplied by the SDR value of exports in 1972. If the deductionresults in a negative figure, the maximum amount that the member could purchase underParagraph 2(b)(i) of the decision would equal the increase in the cost of its importsof petroleum and petroleum products, calculated in accordance with paragraph 1 of thisattachment.

O. Borrowing in Connection with Oil Facility

1. The International Monetary Fund deems it appropriate in accordance withArticle VII, Section 2(i) to replenish its holdings of currencies by borrowing to theextent that resources are needed in respect of purchases under the facility establishedby Executive Board Decision No. 4241-(74/67),12 adopted June 13, 1974.

2. A number of members, or institutions within their territories, have indicated theirintention to lend to the Fund for the purposes of the facility. In order to enable theFund to borrow in accordance with these intentions, the draft letter set out in theAnnex to this Decision is adopted as the basis for terms and conditions to be incor-porated in the agreement with each lender under Article VII, Section 2(i) of theArticles of Agreement. The terms and conditions may be adapted for good reason, suchas domestic legal requirements or the character of the lending institution. Each lettersetting forth the terms and conditions to be proposed shall be submitted to the ExecutiveDirectors for their approval.

3. In determining the amounts to be called, the Fund will take into account theproportion of the unutilized balance of each lender's commitment to the total ofunutilized balances under the agreements and the balance of payments and reserveposition and prospects of a lender or of the member country in which it is situated.

4. If the Fund decides to make repayments in accordance with Paragraph 5(b) (i) (B)of the draft letter set out in the Annex to this Decision, repayments will be made tolenders in proportion to the amounts the Fund is committed to repay to each lender.

5. The Fund shall use its best efforts to ensure that currencies borrowed in accordancewith this Decision will be transferred on the same day to purchasers under the facilityreferred to in Paragraph 1 above and that amounts corresponding to repurchases iden-tified in accordance with Paragraph 5(b) (i) (A) of the draft letter set out in the Annexto this Decision will be repaid to lenders on the same day as the repurchase.

Decision No. 4242-(74/67)June 13,1974

12 See pages 122-23.

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Annex

[Your Excellency] [Dear Sir]In accordance with Article VII, Section 2(i) of the Articles of Agreement of the

International Monetary Fund, hereinafter referred to as "the Articles," and pursuant toExecutive Board Decision No. 4241-(74/67), adopted June 13, 1974, Executive BoardDecision No. 4242-(74/67), adopted June 13, 1974, and Executive Board DecisionNo. [borrowing-individual lender], adopted , I have been authorizedto propose on behalf of the International Monetary Fund, hereinafter referred to as"the Fund," that [the lender] agree to lend to the Fund at call during the period endingDecember 31, 1975 [currency of the lender] [United States dollars] in amounts that intotal do not exceed the equivalent of million special drawing rights(SDR ) on the following terms and conditions:

1. All amounts under this agreement shall be expressed in terms of special drawingrights. For all the purposes of this agreement, the value of a currency in terms ofspecial drawing rights shall be calculated at the rate for the currency as determinedby the Fund in accordance with Rule O-3 of the Fund's Rules and Regulations in effectwhen the calculation is made, unless Paragraph 7 applies.

2. (a) Calls under this agreement shall be made only (i) in respect of purchasesunder the facility established by Executive Board Decision No. 4241-(74/67), adoptedJune 13, 1974, hereinafter referred to as "the facility," or (ii) in order to repay aborrowing by the Fund from another lender in connection with the facility when repay-ment is requested by that lender because of a balance of payments need.

(b) When a call is made, [the lender] shall transfer to the Fund's account with[the lender] [the depository for the currency of the lender] [the Federal Reserve Bankof New York] within two business days after the call an amount of [its currency][United States dollars] equivalent to the amount of the call at the rate for the currencyas determined by the Fund in accordance with Rule O-3 of the Fund's Rules andRegulations. [On request, [the lender] shall convert its currency when sold by the Fundinto United States dollars at the rates for the two currencies as determined by theFund in accordance with Rule O-3 of the Fund's Rules and Regulations.]

3. The Fund shall issue to [the lender] on its request a nonnegotiable instrumentevidencing the amount, expressed in special drawing rights, that the Fund is committedto repay under this agreement. Upon repayment of the amount of any instrument andall accrued interest, the instrument shall be returned to the Fund for cancellation. Ifless than the amount of any such instrument is repaid, the instrument shall be returnedto the Fund and a new instrument for the remainder of the amount shall be substitutedwith the same maturity date as in the old instrument.

4. The Fund shall pay interest quarterly at an annual rate of seven per cent on theamount it is committed to repay under this agreement.

5. (a) Subject to the other provisions of this Paragraph 5, the Fund shall repay[the lender] an amount equivalent to any transfer pursuant to a call under Para-graph 2(b) in eight equal semi-annual installments to commence after three years andto be completed not later than seven years after the date of the transfer.

(b) The Fund may repay [the lender] in advance of the repayments required byParagraph 5(a): (i) to the extent that (A) a repurchase is identified as made in respectof a purchase under the facility for which the Fund has borrowed from [the lender], or(B) repayment is necessary in the opinion of the Fund in order to enable repurchasesto be made by members with currency, or (C) [the lender] agrees to receive repayment;or (ii) before a decision to make uniform proportionate changes in the par values of thecurrencies of all members becomes effective.

125



(c) If at any time [the lender] represents that there is a balance of payments needfor repayment of part or all of the amount the Fund is committed to repay under thisagreement and requests such repayment, the Fund, in deciding whether to make repay-ment, shall give the overwhelming benefit of any doubt to the representation.

(d) Repayments under Paragraph 5(b) and (c) shall discharge the installmentsprescribed by Paragraph 5(a) in the order in which they become due.

6. The Fund shall consult [the lender] in order to agree the means in which paymentof interest and repayment will be made, but, if agreement is not reached, the Fund shallhave the option to make payment or repayment in the currency of the lender, thecurrency borrowed, or [special drawing rights or United States dollars, or both].

7. If the Fund decides to make a change in the way in which the value of the unit ofspecial drawing rights is determined, (i) [the lender] shall have the option to have theunit of value of the special drawing right in effect under Rule O-3 before the changecontinue to apply for the purposes of this agreement; (ii) the Fund shall have the optionto repay any amounts it is committed to repay, and to make repayment oji the basis ofthe unit of value of the special drawing right in effect under Rule O-3 before the change.

8. [The lender] may transfer all or part of its claim to repayment under this agree-ment with the prior consent of the Fund and on terms and conditions acceptable tothe Fund.

9. [If [the lender] withdraws from the Fund, [the lender's] agreement to lend shallterminate and the amount that the Fund is committed to repay under this agreementshall be repaid in accordance with the terms of this agreement, provided that repaymentshall be made, at the option of the Fund, in the currency of [the lender] or in UnitedStates dollars, or in such other currency as may be agreed with [the lender].] [If themember country in which [the lender] is situated withdraws from the Fund, [the lender's]agreement to lend shall terminate, and the amount that the Fund is committed to repayunder this agreement shall be repaid in accordance with the terms of this agreement,provided that repayment shall be made, at the option of the Fund, in the currency ofthat member or in United States dollars, or in such other currency as may be agreedwith [the lender].]

10. In the event of liquidation of the Fund the amounts the Fund is committed torepay to [the lender] shall be immediately due and payable as liabilities of the Fundunder Paragraph 1 of Schedule E of the Articles. For the purpose of Paragraph l(a)of Schedule E the currency in which the liability is payable shall be, at the option ofthe Fund, [the currency borrowed] [the currency of the lender if it differs from thatcurrency] or United States dollars or any other currency agreed with [the lender].

11. Any question of interpretation of this agreement that does not fall within thepurview of Article XVIII of the Articles shall be settled to the mutual satisfaction of[the lender] and the Fund.

If the foregoing proposal is acceptable to [the lender], this communication and yourreply shall constitute an agreement between [the lender] and the Fund, which shall enterinto force on the date on which the Fund receives your reply.

Very truly yours,H. JOHANNES WITTEVEEN

Managing Director

P. Voluntary Declaration on Trade and Other Current Account Measures

1. The ad hoc Committee of the Board of Governors on Reform of the InternationalMonetary System and Related Issues, in the detailed statement issued at the end of its

126



sixth and final meeting in Washington on June 12-13, 1974, stressed the importanceof avoiding the escalation of restrictions on trade and payments for balance of paymentspurposes and invited members to subscribe on a voluntary basis to the Declarationconcerning trade and other current account measures for balance of payments purposesannexed to its statement. The Executive Directors associate themselves with thisinvitation.

2. The letter from the Managing Director to members requesting them to informthe Fund whether they subscribe to the Declaration concerning trade and other currentaccount measures for balance of payments purposes, as set forth [below], shall be sentwithout delay to all members.

Decision No. 4254-(74/75)June 26, 1974

Letter to Members

Sir:The ad hoc Committee of the Board of Governors of the International Monetary

Fund on Reform of the International Monetary System and Related Issues, in a state-ment issued at the end of its sixth and final meeting in Washington on June 12-13, 1974,has stressed the importance of avoiding the escalation of restrictions on trade and pay-ments for balance of payments purposes and has invited members of the Fund "to sub-scribe on a voluntary basis to the Declaration concerning trade and other currentaccount measures for balance of payments purposes" annexed to the Committee'sstatement.

The Executive Directors of the Fund associate themselves with the invitation of thead hoc Committee and have asked that I send the text of the Declaration for considera-tion by the authorities of all members.

The text of the Declaration is enclosed with this letter.I shall be grateful if members will consider subscribing to this Declaration and will

inform me whether they do subscribe to it.Very truly yours,

H. JOHANNES WITTEVEENManaging Director

Declaration

A. A member of the Fund that subscribes to this Declaration represents thereby that,in addition to observing its obligations with respect to payments restrictions under theArticles of Agreement of the Fund, it will not on its own discretionary authority intro-duce or intensify trade or other current account measures for balance of paymentspurposes that are subject to the jurisdiction of the GATT, or recommend them to itslegislature, without a prior finding by the Fund that there is balance of payments justifi-cation for trade or other current account measures.

B. A member that subscribes to this Declaration will notify the Fund as far inadvance as possible of its intention to impose such measures. If circumstances precludethe Fund from making the finding referred to in A above promptly after such notifica-tion, the member may nevertheless impose such measures, but will withdraw themeasures, within such a period as may be fixed by the Fund in consultation with themember concerned, if the Fund finds that there is no balance of payments justificationfor trade or other current account measures.

127


Appendix II (concluded). PRINCIPAL POLICY DECISIONS

C. In arriving at the findings referred to above, the Executive Directors are requestedto take into account the special circumstances of developing countries.

D. In connection with this Declaration arrangements will be made for continuingclose coordination between the Fund and the GATT.

E. This Declaration shall become effective among subscribing members when mem-bers having 65 per cent of the total voting power of members of the Fund have acceptedit, and shall expire two years from the date on which it becomes effective unless it isrenewed.

128


Appendix III. EXECUTIVE DIRECTORS AND VOTING POWERon April 30, 1974

DirectorAlternate

APPOINTED

VacantCharles R. Harley

Anthony K. RawlinsonPeter J. Bull

Guenther SchleimingerLore Fuenfgelt

Jacques Henri WahlClaude Beaurain

Kaichi KawaguchiMikio Wakatsuki

ELECTED

Francesco Palamenghi-Crispi(Italy)

Jose* Luis Mora (Spain)

Robert Bryce (Canada)George Reynolds (Ireland}

Nazih Ahmed Deif (Egypt)Mohamed Finaish (Libyan Arab

Republic}

Byanti Kharmawan (Indonesia)Nguyen Huu Hanh (Viet-Nani)

Lindsay B. Brand (Australia)R. van S. Smit (South Africa)

CastingVotes of

United States

United Kingdom

Germany

France

Japan

ItalyMalta

*PortugalSpain

BarbadosCanadaIrelandJamaica

AfghanistanBahrainEgyptIraqJordan

"Kuwait"Lebanon"Libyan Arab Rep.OmanPakistan

"Qatar"Saudi ArabiaSomaliaSyrian Arab Rep.

"United Arab EmiratesYemen Arab Rep.

BurmaFijiIndonesiaKhmer Rep.KoreaLaosMalaysiaNepalPhilippines

"SingaporeThailandViet-Nam

AustraliaNew ZealandSouth AfricaSwazilandWestern Samoa

Votesby

Country

67,250

28,250

16,250

15,250

12,250

10,250410

1,4204,200

38011,2501,460

780

620350

2,1301,340

480900340490320

2,600450

1,590440750400350

850380

2,850500

1,050380

2,110374

1,800620

1,590870

6,9002,2703,450

330270

General Special DrawingAccount Account

Per Percent cent

Total of Total ofvotes * total votes * total

67,250 21.35 67,250 21.81

28,250 8.97 28,250 9.16

16,250 5.16 16,250 5.27

15,250 4.84 15,250 4.95

12,250 3.89 12,250 3.97

16,280 5.17 14,860 4.82

13,870 4.40 13,870 4.50

13,550 4.30 9,380 3.04

13,374 4.25 12,754 4.14

13,220 4.20 13,220 4.29

129


Appendix III (continued). EXECUTIVE DIRECTORS AND VOTING POWERon April 30, 1974

DirectorAlternate

ELECTED (continued)

P. S. N. Prasad (India)W. M. Tilakaratna (Sri Lanka)

Jacques de Groote (Belgium)Heinrich G. Schneider (Austria)

Per Asbrink (Sweden)Knut J. M. Andreassen (Norway)

Pieter Lieftinck (Netherlands)Tom de Vries (Netherlands)

S. B. Nicol-Cole (Sierra Leone)H. R. Monday, Jr. (The Gambia)

Guillermo Bueso (Honduras)Francisco Sudrez (Mexico)

Alexandre Kafka (Brazil)Basilio Martins (Brazil)

Jahangir Amuzegar (Iran)Costa P. Caranicas (Greece)

CastingVotes of

BangladeshIndiaSri Lanka

AustriaBelgiumLuxembourgTurkey

DenmarkFinlandIcelandNorwaySweden

CyprusIsraelNetherlandsYugoslavia

BotswanaBurundi

*EthiopiaGambia, TheGuineaKenyaLesothoLiberiaMalawiNigeriaSierra LeoneSudanTanzaniaTrinidad and TobagoUgandaZambia

Costa RicaEl SalvadorGuatemalaHondurasMexicoNicaraguaVenezuela

BrazilColombiaDominican RepublicGuyanaHaitiPanamaPeru

AlgeriaGhanaGreeceIranMoroccoTunisiaYemen, People's

Dem. Rep. of

Votesby

Country

1,5009,6501,230

2,9506,750

4501,760

2,8502,150

4802,6503,500

5101,5507,2502,320

300440520320490730300540400

1,600500970670880650

1,010

570600610500

3,950520

3,550

4,6501,820

680450440610

1,480

1,5501,1201,6302,1701,380

730

540

General Special DrawingAccount Account

Per Percent cent

Total of Total ofvotes1 total votes1 total

12,380 3.93 12,380 4.02

11,910 3.78 11,910 3.86

11,630 3.69 11,630 3.77

11,630 3.69 11,630 3.77

10,320 3.28 9,800 3.18

10,300 3.27 10,300 3.34

10,130 3.22 10,130 3.29

9,120 2.89 9,120 2.96

130


Appendix III (concluded). EXECUTIVE DIRECTORS AND VOTING POWERon April 30, 1974

GeneralAccount

Special DrawingAccount

DirectorAlternate

CastingVotes of

Votesby

CountryTotalvotes *

Percentof

totalTotalvotes *

Percentof

total

ELECTED (concluded)

Carlos Massad A. (Chile)Ricardo H. Arriazu (Argentina)

Antoine W. Yameogo(Upper Volta)

Samuel Nana-Sinkam (Cameroon)

ArgentinaBoliviaChileEcuadorParaguayUruguay

CameroonCentral African Rep.ChadCongo, People's

Rep. of theDahomeyEquatorial GuineaGabonIvory CoastMalagasy Rep.MaliMauritaniaMauritiusNigerRwandaSenegalTogoUpper VoltaZaire

4,650620

1,830580440940

600380380

380380330400770510470380470380440590400380

1,380

9,060 2.88 9,060 2.94

9,020 2.86 9,020 2.93

315, 0442 100.00 308, 314' 100.00

* Not a participant in the Special Drawing Account.1 Voting power varies on certain matters pertaining to the General Account with use of the Fund's resources

in that Account. In voting on matters relating exclusively to the Special Drawing Account, only the number ofvotes allotted to members which are participants may be cast.

2 This total does not include the votes of China, which did not participate in the 1972 Regular Election ofExecutive Directors, and of the Bahamas and Romania, which joined the Fund after that election.

131


Appendix IV. CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

Changes in the membership of the Executive Board between May 1, 1973 andApril 30, 1974 were as follows:

Alfredo Phillips O. (Mexico) resigned as Alternate Executive Director to GuillermoBueso (Honduras), effective May 19, 1973.

Francisco Suarez (Mexico) was appointed Alternate Executive Director to GuillermoBueso (Honduras), effective May 20, 1973.

M. M. Ahmad (Pakistan) was appointed Alternate Executive Director to NazihAhmed Deif (Egypt), effective June 8, 1973. He resigned, effective August 28, 1973.

Koichi Satow (Japan) resigned as Alternate Executive Director to Kaichi Kawaguchi(Japan), effective June 14, 1973.

Mikio Wakatsuki (Japan) was appointed Alternate Executive Director to KaichiKawaguchi (Japan), effective June 15, 1973.

Marc Vienot (France) resigned as Executive Director for France, effective June 30,1973.

Jacques Henri Wahl (France) was appointed Executive Director for France, effectiveJuly 1, 1973.

Claude Beaurain (France), formerly Alternate Executive Director to Marc Vienot(France), was appointed Alternate Executive Director to Jacques Henri Wahl (France),effective July 1, 1973.

Mohammed Yeganeh (Iran) resigned as Executive Director for Algeria, Ghana,Greece, Iran, Morocco, Tunisia, and the People's Democratic Republic of Yemen, effec-tive August 7, 1973.

Jahangir Amuzegar (Iran) was elected Executive Director by Algeria, Ghana, Greece,Iran, Morocco, Tunisia, and the People's Democratic Republic of Yemen, effectiveAugust 8, 1973.

Costa P. Caranicas (Greece), formerly Alternate Executive Director to MohammedYeganeh (Iran), was appointed Alternate Executive Director to Jahangir Amuzegar(Iran), effective August 8, 1973.

Mohamed Finaish (Libyan Arab Republic) was appointed Alternate Executive Direc-tor to Nazih Ahmed Deif (Egypt), effective August 29, 1973.

Erik Brofoss (Norway) resigned as Executive Director for Denmark, Finland, Ice-land, Norway, and Sweden, effective October 31, 1973.

Andre van Campenhout (Belgium) resigned as Executive Director for Austria, Bel-gium, Luxembourg, and Turkey, effective October 31, 1973.

Per Asbrink (Sweden) was elected Executive Director by Denmark, Finland, Iceland,Norway, and Sweden, effective November 1, 1973.

Sven Lampe (Sweden), formerly Alternate Executive Director to Erik Brofoss (Nor-way), was appointed Alternate Executive Director to Per Asbrink (Sweden), effectiveNovember 1, 1973. He resigned, effective January 31, 1974.

132


Appendix IV (continued). CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

Jacques de Groote (Belgium) was elected Executive Director by Austria, Belgium,Luxembourg, and Turkey, effective November 1, 1973.

Heinrich G. Schneider (Austria), formerly Alternate Executive Director to Andrevan Campenhout (Belgium), was appointed Alternate Executive Director to Jacques deGroote (Belgium), effective November 1, 1973.

Carlos Bustelo (Spain) resigned as Alternate Executive Director to FrancescoPalamenghi-Crispi (Italy), effective November 16, 1973.

Jose Luis Mora (Spain) was appointed Alternate Executive Director to FrancescoPalamenghi-Crispi (Italy), effective December 17, 1973.

Knut J. M. Andreassen (Norway) was appointed Alternate Executive Director toPer Asbrink (Sweden), effective February 1, 1974.

William B. Dale (United States) resigned as Executive Director for the United States,effective February 28, 1974.

133


Appendix IV (concluded). CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

The following served at certain times during 1973/74 as Temporary Alternate Execu-tive Directors to the Executive Directors indicated:

Temporary AlternateExecutive Director

Vittorio Barattieri (Italy)Luis Barrios (Uruguay)Miss C. J. Batliwalla (India)Geoffrey F. Carmody (Australia)J. A. Crosby (Peru)

Miss Anne Doize (Belgium)

Roberto Galvez (Honduras)

Mehdi Garadaghipour (Iran)

Francisco Garcia-Palacios (Venezuela)Paolo Giorgieri (Italy)Fouad K. Hussein (Egypt)Thomas Leddy (United States)Gerard de Margerie (France)Marc S. Nan Nguema (Gabon)

Olafur Petursson (Iceland)

Adelio Pipino (Chile)Carlo Polpettini (Italy)Roberto Recalde (Argentina)Fabrizio Saccomanni (Italy)Edward W. Shann (Australia)Maung Shein (Burma)Jorge Tersoglio (Argentina)

Jean R. Vallet (France)

Jan M. G. Vanormelingen (Belgium)Mohamed A. Wasfy (Egypt)J. B. Zulu (Zambia)

Executive Director for whomTemporary Alternate Served

Francesco Palamenghi-Crispi (Italy)Carlos Massad A. (Chile)P. S. N. Prasad (India)Lindsay B. Brand (Australia)Alexandre Kafka (Brazil)Andre van Campenhout (Belgium)Jacques de Groote (Belgium)Guillermo Bueso (Honduras)Mohammed Yeganeh (Iran)Jahangir Amuzegar (Iran)Guillermo Bueso (Honduras)Francesco Palamenghi-Crispi (Italy)Nazih Ahmed Deif (Egypt)William B. Dale (United States)Jacques Henri Wahl (France)Antoine W. Yameogo (Upper Volta)Erik Brofoss (Norway)Per Asbrink (Sweden)Carlos Massad A. (Chile)Francesco Palamenghi-Crispi (Italy)Carlos Massad A. (Chile)Francesco Palamenghi-Crispi (Italy)Lindsay B. Brand (Australia)Byanti Kharmawan (Indonesia)Carlos Massad A. (Chile)Marc Vienot (France)Jacques Henri Wahl (France)Jacques de Groote (Belgium)Nazih Ahmed Deif (Egypt)S. B. Nicol-Cole (Sierra Leone)

134


Appendix V. ADMINISTRATIVE BUDGET

Letter of Transmittal

August 5, 1974


The administrative budget of the Fund approved by the Executive Board for the FiscalYear ending April 30, 1975 is presented herewith, in accordance with Section 20 of theBy-Laws. The presentation also shows actual expenses for the past two fiscal years.

I should like to point out that it is of course impossible to predict whether the amountsbudgeted will, in fact, meet the requirements of the Fund's program. The amounts shownare estimates of requirements on the basis of the expected level of activities. Should con-tingencies arise or present plans change materially, the management would recommendappropriate amendments to the Executive Board.

Yours sincerely,/s/

H. JOHANNES WITTEVEENChairman of the Executive Board

Chairman of the Board of GovernorsInternational Monetary Fund

135


Appendix V (concluded)

ADMINISTRATIVE BUDGET AS APPROVED BY THE EXECUTIVE BOARD FOR THE FISCAL YEAR ENDINGAPRIL 30, 1975 COMPARED WITH ACTUAL EXPENSES FOR THE FISCAL YEARS ENDED

APRIL 30, 1973 AND 1974

(Values expressed in special drawing rights) *

Fiscal YearEnding

Apr. 30, 1975

I.

II.

III.

IV.

V.

Category of Expense

BOARD O F GOVERNORS

EXECUTIVE DIRECTORSSalariesOther compensations and benefitsTravel

Total

STAFFSalariesOther compensations and benefitsTravel

Total

SPECIAL SERVICES TO MEMBER COUNTRIES

OTHER ADMINISTRATIVE EXPENSESCommunicationsOffice occupancy expensesBooks and printingSupplies and equipment .Data processing servicesMiscellaneous

Total

TOTAL 2

Budget

1

2

3

1974

32

3

11

6

46

,402

,074655547

,276

,913,893,401

,208

,854

,347,318934827891898

,217

,959

,580

,028,698,105

,831

,818,243,714

,775

,608

,870,027,224,290,119,580

,110

,904

Fiscal Year EndedApr. 30, 1974

RevisedBudget

2

2

3

1863

28

3

11

1

6

43

,660,791

,023,252563,681472,492

,059,425

,151,376,747,165,969,393

,867,934

,358,289

,320,576,254,141795,950809,176759,643

,061,768

,001,254

,947,693

ActualExpenses

2

2

2

1863

28

3

11

1

5

43

,659

,008514469

,992

,150,669,914

,734

,280

,246,247762802741

,020

,821

,488

,848

,003,894,338

,235

,850,006,663

,519

,388

,850,104,664,788,401,975

,782

,772

Fiscal YearEnded

Apr. 30, 1973

ActualExpenses

1

1

3

1663

26

3

11

5

39

,335,825

,990,991552,089525,775

,068,855

,485,537,108,397,718,389

,312,323

,304,520

,248,412,032,770792,202652,064740,313882,377

,348,138

,369,661

1 The administrative budget is expressed in terms of U. S. dollars and converted to SDR equivalents. For the fiscal year endedApril 30, 1973 the effective rates were US$1 = SDR 1 for the period May 1-8, 1972 and US$1 = SDR 0.921053 for the periodMay 9, 1972 through April 30, 1973. For the fiscal year ended April 30, 1974 the effective rates were US$1 = SDR 0.921053for the period May 1, 1973 through October 17, 1973 and US$1 = SDR 0.828948 for the period October 18, 1973 throughApril 30, 1974. The administrative budget for the fiscal year ending April 30, 1975 has been established at the rate of US$1 =SDR 0.828948.

2 Net administrative expenses for the fiscal year ended April 30,1974 totaled SDR 42,488,355 after deduction of SDR 1,000,417reimbursed to the General Account by assessments levied on the net cumulative allocations of participants in the Special DrawingAccount. The comparable figures for the fiscal year ended April 30, 1973 were SDR 38,671,046 and SDR 698,615, respectively.

136


Appendix VI. COMPARATIVE STATEMENT OF INCOME AND EXPENSES

(Values expressed in special drawing rights)

Fiscal Year Ended

OPERATIONAL INCOMEOperational charges

Received in goldReceived in special drawing rightsReceived in members' currencies

Total

Charges on balances in excess of quotasReceived in goldReceived in special drawing rightsReceived in members' currencies

Total

Interest on holdings of special drawing rights

Total Operational Income

Deduct: Operational expensesRemuneration

Paid in goldPaid in special drawing rightsPaid in members' currencies

Total

Apr. 30, 1972

534,0532,241,564

251,769

3,027,386

22,231,59236,261,254

3,532,644

62,025,490

7,181,322

72,234,19s1

28,532,5361,981,750

5,040

30,519,326

Apr. 30, 1973

731,3682,299,694

174,684

3,205,746

2,221,50323,141,7252,811,624

28,174,852

10,203,011

41,583,609

3,621,24720,393,6355,318,696

29,333,578

Apr. 30, 1974

10,0002,341,284

102,622

2,453,906

366,04225,900,120

1,968,637

28,234,799

7,773,651

38,462,356

315,0716,394,055

20,520,305

27,229,431

Transfer charges and interest on indebtednessPaid in gold 1,193,849Paid in U. S. dollars 19,593

Total 1,213,442

Total Operational Expenses 31,732,768 29,333,578 27,229,431

NET OPERATIONAL INCOME 40,501,430 12,250,031 11,232,925

EXPENSES 2

Administrative budget expenses 36,058,8103 38,671,0463 42,488,355 3

Fixed property expenses 17,710,950 16,354,269 5,862,331Net valuation adjustment loss — 138,438 92,493

TOTAL EXPENSES2 53,769,760 55,163,753 48,443,179

EXCESS OF EXPENSES OVER INCOME BEFORE DEDUCTIONOF EXTRAORDINARY ITEM 13,268,330 42,913,722 37,210,254Deduct: Proceeds from the sale of headquarters

building — 21,171,914 —

EXCESS OF EXPENSES OVER INCOME 13,268,330 21,741,808 37,210,254

1 Excludes income from investments of SDR 17,537,157 transferred to Special Reserve.2 Excludes operational expenses which have been deducted from operational income.3 After deduction of SDR 1,024,629 for fiscal year 1972, SDR 698,615 for fiscal year 1973, and

SDR 1,000,417 for fiscal year 1974 reimbursed to the General Account by assessments levied on the net cu-mulative allocations of participants in the Special Drawing Account.

137


Appendix VII. FINANCIAL STATEMENTS OF THE GENERAL ACCOUNT,SPECIAL DRAWING ACCOUNT, AND STAFF RETIREMENT FUND

Letter of Transmittal

August 5, 1974


In accordance with Section 20(b) of the By-Laws of the Fund, I have the honorto submit for the consideration of the Board of Governors the audited financial state-ments of the General Account, the Special Drawing Account, and the Staff RetirementFund for the year ended April 30, 1974, together with two memoranda from the AuditCommittee, which include the audit opinions.

In conformity with the By-Laws, the external audit of the Fund has been performedby an Audit Committee consisting of auditors nominated by three member countries.At the Fund's request, Ghana, Korea, and the United States nominated auditors to serveon this Committee. They respectively nominated Mr. E. S. Okunor, Deputy Auditor-General of Ghana; Mr. Chong Jik Ahn, Deputy Superintendent of Banks, Office of BankSupervision and Examination, Bank of Korea; and Mr. Steve L. Comings, AssistantCommissioner, Comptroller, Bureau of Government Financial Operations, U. S. Treasury.The auditors thus nominated were confirmed by the Executive Directors.

It will be noted that, in the year under review for the General Account, operationalincome amounted to SDR 38,462,356 and operational expenses amounted toSDR 27,229,431 resulting in net operational income of SDR 11,232,925. Administrativebudget and fixed property expenses and a net valuation adjustment loss amounted toSDR 48,443,179 which resulted in an excess of expenses over income of SDR 37,210,254for the fiscal year. Pursuant to Executive Board Decision No. 708-(57/57), adoptedNovember 27, 1957, this excess of expenses over income has been charged against theSpecial Reserve.

The detailed report of the Audit Committee is being submitted separately to theBoard of Governors.

Yours sincerely,A/

H. JOHANNES WITTEVEENChairman of the Executive Board

Chairman of the Board of GovernorsInternational Monetary Fund

138


Appendix VII (continued)

MEMORANDUM BY THE AUDIT COMMITTEE

June 28, 1974

To the Managing Directorand the Executive Directors


Our report, dated June 28, 1974, submitted through you to the Board of Governors,on the audit of the financial records, operations and transactions of the General Accountand the Special Drawing Account of the International Monetary Fund, for the fiscal yearended April 30, 1974, includes the following paragraphs relating to the authority for theaudit, the scope of the audit, and the audit opinion:

AUTHORITY FOR THE AUDIT

The audit for the fiscal year ended April 30, 1974, was carried out pursuant to andin accordance with the requirements of Section 20(b) of the By-Laws of the Inter-national Monetary Fund. In accordance with the provisions of the By-Laws, Ghana,Korea, and the United States were each invited to nominate a member to serve on anexternal audit committee. The appointments of the three members nominated wereconfirmed by the Executive Board.

SCOPE OF THE AUDIT

We have examined the Balance Sheet of the General Account of the InternationalMonetary Fund as at April 30, 1974, the Statement of Income and Expenses, and theStatement of Reserves for the fiscal year then ended, and the schedules related thereto;and the Balance Sheet of the Special Drawing Account of the International MonetaryFund as at April 30, 1974, the Statement of Source and Use of Special DrawingRights for the fiscal year then ended, and the schedules related thereto. Ourexamination was made in accordance with generally accepted auditing standards,and accordingly included such tests of the accounting records, giving consideration tothe extent of internal control and the internal audit work performed by the InternalAuditor, and such other auditing procedures as we considered necessary in the circum-stances. In the course of our audit, reference was made to the Articles of Agreement,the By-Laws, the Rules and Regulations, the Resolutions of the Board of Governors,the minutes of the Executive Board, and the General Administrative Orders of theInternational Monetary Fund.

AUDIT OPINION

In our opinion, these Statements, together with the notes appearing thereon, presentfairly the financial position of the International Monetary Fund as at April 30, 1974,and the results of the operations and transactions in the General Account and theSpecial Drawing Account for the fiscal year then ended, in conformity with generallyaccepted accounting principles, applied on a basis consistent with that of the precedingyear.

AUDIT COMMITTEE:/s/ E. S. Okunor, Chairman (Ghana)/s/ Chong Jik Ahn (Korea)/s/ Steve L. Comings (United States)

139


Appendix VII (continued)Exhibit A (General Account)

INTERNATIONAL

GENERAL

BALANCE

as at April

Amounts expressed in(one SDR is equivalent to

ASSETS

GOLD WITH DEPOSITORIES (See Note 1) SDR 5,369,854,618

SPECIAL DRAWING RIGHTS 499,031,271

CURRENCIES AND SECURITIES (See Note 2)With depositories

Currencies SDR 6,279,402,892Securities 17,577,704,502

(nonnegotiable, noninterest-bearing demandobligations, payable at face value bymembers in their currencies)

SDR 23,857,107,394Add: Currency valuation adjustments receivable (net) 59,009,142 23,916,116,536

(in accordance with Article IV\ Section 8}

SUBSCRIPTIONS TO CAPITAL—RECEIVABLEBalances of initial quotas—not due SDR 146,105,479Balance of an increase in quota—not due (Contra) 1,600,000 147,705,479

OTHER ASSETS (See Note 3) 10,201,183

TOTAL ASSETS SDR 29,942,909,087

NOTES:

1. Excludes gold held under earmark for members equivalent to SDR 333,104.

2. Total outstanding purchases of members amount to SDR 3,469 million. Currency ladings in excess of members'quotas subject to Fund charges amount to SDR 1,052 million. Total creditor positions of members amount toSDR 1,646 million.

140


Appendix VII (continued)Exhibit A (General Account)

MONETARY FUND

ACCOUNT

SHEET

30, 1974

special drawing rights0.888671 gram of fine gold)

CAPITAL, RESERVES, AND LIABILITIES

CAPITALSubscriptions of members SDR 29,189,400,000

RESERVES (Exhibit C)Special reserve SDR 351,686,573General reserve 365,579,703 717,266,276

SUBSCRIPTION IN RESPECT OF AN INCREASE IN QUOTACONSENTED TO BUT NOT YET EFFECTIVE

Balance not due (Contra) 1,600,000

PROVISION FOR POTENTIAL REFUNDS OFSTAND-BY CHARGES (See Note 4) 3,079,375

OTHER LIABILITIES (See Note 3) 31,563,436

TOTAL CAPITAL, RESERVES, AND LIABILITIES SDR 29,942,909,087

3. The established policy of the Fund is to write off against income the total expenditures incurred during the yearfor fixed property, furniture, and equipment (including automotive equipment). The assets and liabilities of theStaff Retirement Fund are not included in this Balance Sheet.

4. The charge for a stand-by arrangement is credited against the service charge for funds drawn under the arrange-ment. A member that cancels a stand-by arrangement will be paid a refund, which will be the prorated portionof the remaining stand-by charge.

/s/ W. O. HABERMEIER /s/ H. JOHANNES WITTEVEENTreasurer Managing Director

141


Appendix VII (continued)Exhibit B (General Account)


GENERAL ACCOUNT

STATEMENT OF INCOME AND EXPENSES

for the year ended April 30, 1974

Amounts expressed in special drawing rights(one SDR is equivalent to 0.888671 gram of fine gold)

OPERATIONAL INCOMEOperational charges SDR 2, 453,906Charges on balances in excess of quotas 28 , 234 , 799Interest on holdings of special drawing rights 7,773,651

Total operational income SDR 38,462,356

Deduct : Operational expenses-remuneration 27 , 229 , 43 1

NET OPERATIONAL INCOME SDR 1 1 , 232, 925

EXPENSES (See Note 1)Administrative budget expenses:

Board of Governors SDR 2,659,848

Executive DirectorsSalaries SDR 2,008,003Other compensations and benefits 514,894Travel 469,338 2,992.235

StaffSalariesOther compensations and benefitsTravel

Special services to member countries

OtherCommunicationsOffice occupancy expensesBooks and printing (See Note 2)Supplies and equipment (See Note 3).Data processing servicesMiscellaneous (See Note 4)

SDR 18,150,8506,669,0063,914,663

SDR 1,246,8501,247,104

762,664802,788741,401

1,020,975

28,734,519

3,280,388

5,821,782

Subtotal

Deduct: Assessments levied on participants forestimated expenses of operating theSpecial Drawing Account

Net administrative budget expense

Fixed property expenses (See Note 3)

Net valuation adjustment loss

SDR 43,488,772

1,000,417

SDR 42, 488, 355

5,862,331

92,493

TOTAL EXPENSES (See Note 1) 48,443,179

EXCESS OF EXPENSES OVER INCOME SDR 37,210,254(Charged against the Special Reserve ^====

pursuant to Executive Board DecisionNo. 708-(57/57), adopted November 27, 1957)

NOTES:1. Excludes operational expenses which have been deducted from operational income.2. After deduction of SDR 116,870 for sales of Fund publications.3. The established policy of the Fund is to write off against income the total expenditures incurred during

the year for fixed property, furniture, and equipment (including automotive equipment).4. After deduction of SDR 423,455 for food service sales and SDR 70,001 for miscellaneous administrative

income.

142


Appendix VII (continued)Exhibit C (General Account)


GENERAL ACCOUNT

STATEMENT OF RESERVES



SPECIAL RESERVE (See Note)

Balance, April 30, 1973 SDR 388,896,827

DeductExcess of expenses over income (Exhibit B) 37,210,254

Balance, April 30, 1974 SDR 351,686,573

GENERAL RESERVE

Balance, April 30, 1974 365,579,703

TOTAL RESERVES (per Balance Sheet) SDR 717,266,276

NOTE: Income from investments in U. S. Government securities was placed to this reserve from November 1,1957 until February 15, 1972, when the Fund's gold investment program was terminated. Pursuantto Executive Board Decision No. 708-(57/57) any administrative deficit for any fiscal year of theFund must be written off first against this reserve. Under Article XII, Section 6(c), of the Articles ofAgreement, the Fund may make transfers from this reserve to the General Reserve.

143


Appendix VII (continued)Exhibit A (Special Drawing Account)


SPECIAL DRAWING ACCOUNT

BALANCE SHEET

(See Note 1)

as at April 30, 1974Amounts expressed in special drawing rights

(one SDR is equivalent to 0.888671 gram of fine gold)

ALLOCATIONS

Net cumulative allocations of specialdrawing rights to participants (See Note 2) SDR 9,314,835,400

HOLDINGS

Holdings of special drawing rights (See Note 3) (Exhibit B)

ParticipantsHoldings above allocations

Allocations SDR 3,388,427,000Received (net) 1,780,183,085 SDR 5,168,610,085

Holdings below allocationsAllocations SDR 5,926,408,400Used (net) 2,279,214,356 3,647,194,044 SDR 8,815,804,129

General Account 499,031,271

SDR 9,314,835,400

NOTES:1. This statement of the Special Drawing Account is a summary of net cumulative allocations of special

drawing rights by the Fund to participants and the corresponding holdings of such special drawing rightsby participants and the General Account.

2. Under Articles XXX and XXXI of the Fund Agreement, which cover termination of participation in andthe liquidation of the Special Drawing Account, respectively, a participant has an obligation to pay to theFund an amount equal to its net cumulative allocation of special drawing rights and any other amountsthat may be due and payable because of participation in the Special Drawing Account. The Fund also hasan obligation to redeem special drawing rights in accordance with these Articles.

3. Special drawing rights allocated by the Fund do not constitute claims by holders against the Fund to pro-vide currency, except as prescribed by the provisions of Article XXX and XXXI relating to the terminationof participation and liquidation. Participants may use their special drawing rights to obtain currency inaccordance with the provisions of Article XXV, and under Section 5 of this Article they are entitled torequest the Fund's assistance in the form of designation of participants to provide currency in exchangefor special drawing rights. The obliga^n of a participant to provide currency for special drawing rightsdoes not extend beyond the point at which its holdings of special drawing rights in excess of its net cumu-lative allocations are equal to twice its net cumulative allocation or such higher limit as may be agreedbetween a participant and the Fund. A participant may, however, provide currency in excess of theobligatory limit or any agreed higher limit.


144


Appendix VII (continued)Exhibit B (Special Drawing Account)


SPECIAL DRAWING ACCOUNT

SOURCE AND USE OF SPECIAL DRAWING RIGHTS



Participants General Account Total

1,335,799,793

145

Total Holdings as at April 30, 1973 8,697,745,710 617,089,690 9,314,835,400

Source of Special Drawing Rights ReceivedTransactions with Designation

(Article XXV, Sections 2(d) and 3(a))Transactions without Designation

(Article XXV, Section 2(b) (i))Net InterestTransfers Between Participants and the General Account

Purchases .RepurchasesChargesReimbursement of Special Drawing Account ExpensesRemunerationReconstitution

60,113,000

995,924,63221,723,948

7,266,0033,083,333

92,613

20,393,635157,212,732

1,265,809,896

7,773,651

32,604,39228,611,4371,000,417

69,989,897

60,113,000

995,924,63229,497,599

7,266,00335,687,72528,704,0501,000,41720,393,635157,212,732

Use of Special Drawing RightsTransactions with Designation

(Article XXV, Sections 2(d) and 3(a))Transactions without Designation

(Article XXV, Section 2(b) (i))Net ChargesTransfers Between Participants and the General Account

PurchasesRepurchasesChargesReimbursement of Special Drawing Account ExpensesRemunerationReconstitution

Total Holdings as at April 30, 1974 (per Balance Sheet)

60,113,000

995,924,63229,497,599

32,604,39228,611,4371,000,417

1,147,751,477

8,815,804,129

7,266,0033,083,333

92,613

20,393,635157,212,732

188,048,316

499,031,271

1

9

60,

995,29,

7,35,28,1,20,157,

,335,

,314,

113,

924,497,

266,687,704,000,393,212,

799,

835,

000

632599

003725050417635732

793

400


Appendix VII (continued)

STAFF RETIREMENT FUND

MEMORANDUM BY THE AUDIT COMMITTEE

June 28, 1974

To the Managing Directorand the Executive Directors


Our report, dated June 28, 1974, submitted through you to the Board of Governors,on the audit of the financial records, operations and transactions of the Staff RetirementFund of the International Monetary Fund for the fiscal year ended April 30, 1974,includes the following paragraphs relating to the authority for the audit, the scope ofthe audit, and the audit opinion:

AUTHORITY FOR THE AUDIT

The audit of the Staff Retirement Fund of the International Monetary Fund for thefiscal year ended April 30, 1974, was carried out pursuant to and in accordance withthe requirements of Section 20(b) of the By-Laws of the International MonetaryFund. All assets and income of the Staff Retirement Fund, in accordance withArticle 9, Section 1, of the Staff Retirement Plan, are the property of the InternationalMonetary Fund and are held and administered by it separately from its other propertyand assets.

SCOPE OF THE AUDIT

We have examined the Balance Sheet of the Staff Retirement Fund of the Inter-national Monetary Fund as at April 30, 1974, the Statement of Changes in FinancialPosition for the fiscal year then ended, and the schedules related thereto. Our exami-nation was made in accordance with generally accepted auditing standards, andaccordingly included such tests of the accounting records, giving consideration to theextent of internal control and the internal audit work performed by the InternalAuditor, and such other auditing procedures as we considered necessary in the circum-stances. In the course of our audit, reference was made to the Articles of the StaffRetirement Plan and to the decisions of the Pension, Administration, and InvestmentCommittees created under the Plan.

AUDIT OPINION

In our opinion, these Statements, together with the notes appearing thereon, presentfairly the financial position of the Staff Retirement Fund of the International MonetaryFund as at April 30, 1974, and the results of its operations and the changes in itsfinancial position for the fiscal year then ended, in conformity with generally acceptedaccounting principles applied on a basis consistent with that of the preceding year.

AUDIT COMMITTEE:/s/ E. S. Okunor, Chairman (Ghana)/s/ Chong Jik Ahn (Korea)/s/ Steve L. Comings (United States)

146


Appendix VII (concluded)Exhibit I


STAFF RETIREMENT FUND

BALANCE SHEET

as at April 30, 1974

Amounts expressed in U. S. dollars

ASSETS

CASH AT BANKS $ 52,876

INVESTMENTS

BondsAmortized cost (market value, $13,918,100)

Notes insured by U. S. Government $ 2,768,696International development banks 8,308,248Corporate 5,701,824

Total amortized cost $16,778,768Add: Net realized losses 2,226,408

Funds originally invested $19,005,176Deduct: Amortized net realized losses —444,758

Adjusted book value of bonds $18,560,418

Stocks (Common)Cost (market value, $33,296,367) $39,001,823Deduct: Net realized gains -4,255,932

Funds originally investedAdd : Recognized appreciation

Adjusted book value of stocks

Total Investments

ACCRUED INTEREST ON BONDS, AND ACCRUED CONTRIBUTIONSFROM PARTICIPANTS AND INTERNATIONAL MONETARY FUND .

$34,745,8912,088,000

36,833,891

RECEIVABLE

55,394,309

461.339

TOTAL ASSETS $55,908,524

LIABILITIES AND RESERVES

PARTICIPANTS' ACCOUNT $11,671,183

ACCUMULATION ACCOUNT 33,771,832

RETIREMENT RESERVE ACCOUNT 10,465,128

ACCOUNTS PAYABLE 381

TOTAL LIABILITIES AND RESERVES $55,908,524


147


INDEX


INDEX

An asterisk (*) denotes a table; a dagger (t) denotes a chart.

ABU DHABIOil Facility in Fund, 53

AFGHANISTANExchange rate, 76*

Purchase from Fund, 89*, 91*Repurchase from Fund, 91*, 95*Special drawing rights, 83*, 87*

90*Stand-by arrangement with Fund,

ALGERIAExchange rate, 54, 71, 76*, 80*International reserves, 36*Special drawing rights, 83*

ARGENTINAArticle VIII status, 100*Exchange rate, 76*International reserves, 36*, 37Purchase from Fund, 91*Special drawing rights, 56*, 83*,

87*ARTICLES OF AGREEMENT

Amendment, 48, 50Article VIII, members accepting

obligations of, 64, 100*Article XXV, Section 8 (a), suspen-

sion of "equal value" principle,47-48, 56, 59, 103, 108-109

AUSTRALIAArticle VIII status, 100*Balance of payments, 23Creditor position in Fund, 88*Exchange rate, 54, 71, 76*, 80*International reserves, 36*, 38*Prices, 5*Special drawing rights, 83*

AUSTRIAArticle VIII status, 100*Creditor position in Fund, 88*Exchange rate, 54, 71, 76*Special drawing rights, 83*

BAHAMASArticle VIII status, 64, 100*Exchange rate, 54, 72, 76*, 80*Membership in Fund, 48, 67Repurchase from Fund, 61, 95*Special drawing rights, 67

BAHRAINArticle VIII status, 100*Exchange rate, 76*

BALANCE OF PAYMENTS, 1, 12, 14, 20,23, 40; adjustment process,25-29; summary, 22*; see alsoINDUSTRIAL COUNTRIES, PRI-MARY PRODUCING COUNTRIES,and individual countries

BANGLADESHExchange rate, 76*Purchase from Fund, 60, 89*, 91*Special drawing rights, 83*, 87*

BANK FOR INTERNATIONAL SETTLE-MENTS (BIS), 58, 105-108

BARBADOSExchange rate, 76*Special drawing rights, 83*

BELGIUMArticle VIII status, 100*

Creditor position in Fund, 88*Exchange rate, 15t, 54, 76*Special drawing rights, 56, 59*, 83*,

87*BOARD OF GOVERNORS

Council of Governors, 50Interim Committee, 48, 50Resolutions, 47, 58, 106-108, 110-

12BOLIVIA

Article VIII status, 100*Exchange rate, 76*Repurchase from Fund, 61, 95*Special drawing rights, 83*, 87*Stand-by arrangement with Fund,

90*BOTSWANA

Currency, 71Exchange rate, 76*Special drawing rights, 83*

BRAZILCreditor position in Fund, 88*Exchange rate, 76*International reserves, 36, 37Purchase and repurchase from

Fund, 91*Special drawing rights, 83*, 87*

BUDGET OF FUND, 135-36BUFFER STOCK FINANCING BY FUND,

61BURMA

Exchange rate, 76*Purchases and repurchases from

Fund, 89*, 91*, 95*Special drawing rights, 83*, 87*Stand-by arrangement, 90*

BURUNDIExchange rate, 76*Purchase and repurchase from

Fund, 91*, 95*Special drawing rights, 83*

CAMEROONExchange rate, 76*Special drawing rights, 83*

CANADAArticle VIII status, 100*Balance of payments, 21*, 23Creditor position in Fund, 88*Exchange rate, 14t, 53, 54, 76*International reserves, 36*, 38*Oil Facility in Fund, 53Output, 3t, 4*Prices, 3t, 5*, 6tSpecial drawing rights, 21*, 59*,

83*, 87*CAPITAL MOVEMENTS, 1, 15, 17, 25-

27, 28, 40-41, 45; see alsoINDUSTRIAL COUNTRIES, PRI-MARY PRODUCING COUNTRIES,and individual countries

CAYMAN ISLANDSCentral rate, 72, 81*

CENTRAL AFRICAN REPUBLICExchange rate, 76*Repurchase from Fund, 95*Special drawing rights, 83*

CENTRAL RATES OF MEMBERS, 47,54, 71-72, 81*, 104

CHADExchange rate, 76*Repurchases from Fund, 95*Special drawing rights, 83*, 87*

CHILEExchange rate, 76*Purchases from Fund, 89*, 91*Special drawing rights, 83*, 87*Stand-by arrangement, 90*

CHINA, REPUBLIC OFExchange rate, 76*

COLOMBIAExchange rate, 76*Purchases from Fund, 91*Repurchases from Fund, 63, 74,

91*, 94*, 95*Special drawing rights, 56*, 87*Stand-by arrangement, 90*

COMMITEE ON REFORM OF THE INTER-NATIONAL MONETARY SYSTEMAND RELATED ISSUES (Com-mittee of Twenty)

Communiques, 10, 26, 29, 48, 50,52, 53

Declaration on trade measures,126-28

International monetary reform, 2,47, 49-50, 110

COMMODITIES, PRIMARY, 1, 3, 8, 9,13, 18-19, 20, 24; see alsoPETROLEUM

COMPENSATORY FINANCING BY FUND,59, 60, 61, 91*

CONGO, PEOPLE'S REPUBLIC OF THEExchange rate, 76*Repurchase from Fund, 95*Special drawing rights, 83*

CONSULTATIONS WITH MEMBERS, 28,48, 50, 63-64, 102-103, 108

COSTA RICAArticle VIII status, 100*Exchange rate, 55, 72, 76*, 80*Special drawing rights, 83*

CYPRUSExchange rate, 54, 71, 76*Special drawing rights, 83*

DAHOMEYExchange rate, 76*Special drawing rights, 83*

DECLARATION ON TRADE MEASURES BYMEMBERS, 50, 53, 126-27

DENMARKArticle VIII status, 100*Creditor position in Fund, 88*Exchange rate, 15t, 54, 76*Import restrictions, 45Special drawing rights, 56, 83*

DEPUTY MANAGING DIRECTOR, 68DOMINICAN REPUBLIC

Article VIII status, 100*Exchange rate, 54, 72, 76*, 80*Purchase and repurchase from

Fund, 91*, 92*, 95*

151


152 INDEX

DOMINICAN REPUBLIC (continued)Special drawing rights, 59*, 83*,

87*ECUADOR

Article VIII status, 100*Exchange rate, 76*Purchases from Fund, 89*, 91*Repurchases from Fund, 91*, 94*,

95*Special drawing rights, 83*Stand-by arrangement, 90*

EGYPTExchange rate, 76*Purchases and repurchases from

Fund, 89*, 91*, 95*Special drawing rights, 83*, 87*

EL SALVADORArticle VIII status, 100*Exchange rate, 54, 72, 77*, 80*Purchase from Fund, 91*Repurchase from Fund, 74, 91*,

94*, 95*Special drawing rights, 83*, 87*Stand-by arrangement, 90*

EQUATORIAL GUINEAExchange rate, 77*Special drawing rights, 83*

ETHIOPIACreditor position in Fund, 88*Exchange rate, 77*

EURO-CURRENCY MARKETS, 27, 32*,35, 36, 40, 41 (fn), 43, 44*

EXCHANGE MARKETS, 15, 16, 17, 33,47, 54, 56, 72, 105

EXCHANGE RATESDevelopments, 2, 13, 16-18, 25, 27,

47, 53-55, 71-72European narrow margins arrange-

ment, 16, 17, 47, 54, 55, 56,59, 60, 61

Floating: guidelines for, 2, 48, 51-52, 112-16; impact on reserves,39, 44

List as of July 12, 1974, 76-79*Spot quotations, 14 1, 15t

EXECUTIVE BOARD DECISIONSBank for International Settlements:

Adherence to Resolution No.29-1 and Termination of Sus-pension, 109-10

Bank for International Settlements:Draft Resolution to BecomeHolder of SDRs, 105-108

Borrowing in Connection with OilFacility, 124-26

Central Rates and Wider Margins:A Temporary Regime — RevisedDecision, 301, 303-304, 103-105

Charges, 120^-21Consultations on Members' Policies

in Present Circumstances, 108Draft Resolution on Establishment

of an Interim Committee ofthe Board of Governors on theInternational Monetary System,110-111

Exchange Rates for the SDR inTransactions Between Partici-pants, 103

Exchange Rates for the SDR inTransactions Between Partici-pants: Extension of Suspension

of Article XXV, Section 8(a),108-109

Facility to Assist Members in Pay-ments Difficulties Resultingfrom Initial Impact of IncreasedCosts of Imports of Petroleumand Petroleum Products, 122-24

Gold Payments Under Article V,Section 7(6), Amounting toLess Than One Bar, 105

Guidelines for the Management ofFloating Exchange Rates, 112-16

Interim Valuation of the SDR:New Rule O-3 and Method ofDetermining and CollectingExchange Rates, 116-18

Procedure for Reviews of ExternalPolicies, 102-103

Remuneration and Interest Rate onSpecial Drawing Rights, 118-19

Voluntary Declaration on Tradeand Other Current AccountMeasures, 126-28

EXECUTIVE DIRECTORSList and voting power, 129-31Membership changes, 132-34Reviews and studies, 48-49See also EXECUTIVE BOARD DECI-

SIONSEXTENDED FUND FACILITY, 46, 48, 50FIJI

Article VIII status, 100*Exchange rate, 54, 71, 72, 77*, 81*Special drawing rights, 83*

FINANCIAL STATEMENTS OF FUND,138-47

FINLANDCreditor position in Fund, 88*Exchange rate, 54, 71, 77*Special drawing rights, 83*, 87*

FRANCEArticle VIII status, 100*Balance of payments, 22, 23Creditor position in Fund, 88*Exchange rate, 15t, 17, 54, 55, 72,

77*International reserves, 36*, 38*Official claims in francs, 32*, 36Output, 3t, 4*Prices, 3t, 5*Purchase from Fund, 59, 60, 89*,

96*Special drawing rights, 21*, 56,

59*, 83*GABON

Exchange rate, 77*Repurchase from Fund, 100*Special drawing rights, 83*

GAMBIA, THEExchange rate, 77*Repurchase from Fund, 100*Special drawing rights, 83*

GENERAL ACCOUNT TRANSACTIONSCharges, 50, 53, 57, 60, 62, 96*,

99*, 120^21Creditor positions of members, 59,

60, 88*Holdings of special drawing rights,

57, 58, 62, 72, 82*, 85*Purchases by members, 31, 58-59,

60-61, 62, 89*, 91*, 93*, 96,97t

Repurchases by members, 48, 55,57, 59, 60, 61-62, 72-75, 91*,93*, 94*, 95*, 96*

Transfers of special drawing rights,31, 55, 57, 58, 87*

Use of currencies, 60, 61, 62, 74,96*, 120-21

GERMANY, FEDERAL REPUBLIC OFArticle VIII status, 100*Balance of payments, 20, 21, 23Capital controls, 117Creditor position in Fund, 88*Economic policy, 7Exchange rate, 15t, 17, 20, 54, 71,

77*, 81*Foreign trade, 20International reserves, 36, 37, 38*Official claims in deutsche mark,

32*, 36Output, 3t, 4Prices, 3t, 5*Purchase from Fund, 59, 60, 89*,

96*Special drawing rights, 21*, 56,

59*, 83*, 87*GHANA

Exchange rate, 77*Purchase and repurchase from

Fund, 91*, 95*Special drawing rights, 84*, 87*

GOLDFund-South Africa agreement, 39,

48, 63Holdings by Fund, 63International reserves, 30, 31*, 32*,

33t, 34*, 38*, 39-40Official transactions, 48Payments to Fund, 63, 105Role in new system, study of, 50Transactions by Fund, 48, 62-63,

74, 96*Washington arrangements, 39-40,

48, 63GREECE

Exchange rate, 54, 72, 77*Special drawing rights, 56*, 84*

GROUP OF TEN, 39-40, 41GUATEMALA

Article VIII status, 100*Exchange rate, 54, 72, 77*, 80*Purchases and repurchases from

Fund, 91*Special drawing rights, 84*

GUINEAExchange rate, 77*Purchase from Fund, 89*, 91*, 95*Special drawing rights, 84*, 87*

GUYANAArticle VIII status, 100*Exchange rate, 77*Purchase and repurchase from

Fund, 89*, 91*, 95*Special drawing rights, 84*Stand-by arrangement, 90*

HAITIArticle VIII status, 100*Exchange rate, 54, 72, 77*, 80*Purchases and repurchases from



INDEX 153

HONDURASArticle VIII status, 100*Exchange rate, 54, 72, 77*, 80*Repurchase from Fund, 94*, 95*Special drawing rights, 84*Stand-by arrangement, 90*

ICELANDExchange rate, 54, 71, 77*Purchases and repurchases from

Fund, 91*Special drawing rights, 84*

INCOME AND EXPENSES OF FUND, 52,62, 98*, 137

INDIAExchange rate, 77*Purchases and repurchase from

Fund, 60, 61, 89*, 91*Special drawing rights, 84*

INDONESIAExchange rate, 77*Repurchase from Fund, 74, 94*,

95*Special drawing rights, 56*, 84*,

87*Stand-by arrangement, 90*

INDUSTRIAL COUNTRIESBalance of payments, 20, 21, 22,

23, 24*, 25-26, 27Capital movements, 20, 21, 22,

45Economic policies, 2, 5, 7, 8, 9-13,

25-27, 28Economic situation and prospects,

1, 4, 7, 8, 45Exchange rates, 55International reserves, 30, 35*, 37,

38*Output, 1, 2, 3 1, 4, 5Prices, 1, 2, 3, 4-5, 6t, 9, 10*,

12, 45Purchases from fund, 97 1Special drawing rights, 21*, 22*Terms of trade, 19*, 20See also individual countries

INFLATION, 1, 2-12, 28, 45, 46INTEREST RATES, 16t, 17INTERNATIONAL MONETARY SYSTEM

Reform of 2, 47, 49-53, 110INTERNATIONAL ORGANIZATIONS

Fund relations with, 65—67INTERNATIONAL RESERVES

Adequacy, 37-46; exchange ratechanges, 44-45; floating ex-change rates, 44, 45; goldmarketing arrangements, 39-40; oil price increases, 40-41,46; trade restrictions, 45, 46

Conditional liquidity, 46Credit facilities, 31*Developments, 30-37Distribution, 36, 42-43, 46Euro-market holdings, 35-36, 43Foreign exchange, 30, 31*, 32*,

33, 34*, 35, 38*Gold holdings, 30, 31*, 32*, 33 1,

34*, 38*Impact of U. S. balance of pay-

ments deficit, 33-34Industrial countries, 30, 35*, 37,

38*Measurement concept, 30(fn)Official holdings, 43, 44Petroleum producers, 30, 35*, 38*

Primary producing countries, 30,35*, 37*, 38*

Private holdings, 43, 44Ratio of reserves to imports, 42Reserve positions in the Fund, 30,

31*, 32, 33t, 34*, 38*Sources of change, 32*Special drawing rights, 30, 31*,

32*, 33t, 34*, 38*, 46Swap credits, 32*, 46Total, 30, 31*, 33 1

IRANExchange rate, 77*Oil Facility in Fund, 53Special drawing rights, 56*, 84*

IRAQExchange rate, 77*Purchase from Fund, 91*Repurchase from Fund, 63, 74,

91*, 95*Special drawing rights, 84*

IRELANDArticle VIII status, 100*Exchange rate, 77*Creditor position in Fund, 88*Special drawing rights, 84*, 87*

ISRAELExchange rate, 77*Purchase from Fund, 89*Special drawing rights, 84*

ITALYArticle VIII status, 100*Balance of payments, 20, 21, 23Creditor position in Fund, 88*Economic policy, 106Exchange rate, 14t, 17, 53, 55, 77*Import restrictions, 45International reserves, 37, 38*Output, 3t, 4*Prices, 3t 5*Special drawing rights, 21*, 84*,

87*Stand-by arrangement, 59, 61, 90*

IVORY COASTExchange rate, 77*Special drawing rights, 84*

JAMAICAArticle VIII status, 100*Exchange rate, 77*Purchase and repurchase from

Fund, 89*, 91*, 94*, 95*Special drawing rights, 84*Stand-by arrangement, 90*

JAPANArticle VIII status, 100*Balance of payments, 20, 21, 23Creditor position in Fund, 88*Exchange rate, 14t, 17, 20, 53, 55,

77*International reserves, 36*, 37, 38*Output, 3t, 4Prices, 3t, 5, 6tSpecial drawing rights, 21*, 59*,

84*JORDAN

Exchange rate, 77*Purchases and repurchases from

Fund, 91*, 94*, 95*Special drawing rights, 84*

KENYAExchange rate, 54, 71, 72, 77*, 81*Creditor position in Fund, 88*Special drawing rights, 84*, 87*

KHMER REPUBLICExchange rate, 77*Purchase from Fund, 91*Special drawing rights, 56*, 84*

KOREAExchange rate, 77*Repurchase from Fund, 94*, 95*Special drawing rights, 84*Stand-by arrangement, 90*

KUWAITArticle VIII status, 100*Creditor position in Fund, 88*Exchange rate, 77*Oil Facility in Fund, 53

LAOSExchange rate, 77*Special drawing rights, 84*

LEBANONExchange rate, 77*

LESOTHOCurrency, 71Exchange rate, 77*Repurchase from Fund, 95*Special drawing rights, 84*

LIBERIAExchange rate, 54, 72, 77*, 80*Repurchase from Fund, 95*Special drawing rights, 84*Stand-by arrangement, 90*

LIBYAN ARAB REPUBLICExchange rate, 77*International reserves, 36*, 37Oil Facility in Fund, 53

LUXEMBOURGArticle VIII status, 100*Exchange rate, 54, 77*Special drawing rights, 84*

MALAGASY REPUBLICExchange rate, 77*Special drawing rights, 56*, 84*

MALAWIExchange rate, 54, 72, 77*Repurchase from fund, 94*, 95*Special drawing rights, 84*

MALAYSIAArticle VIII status, 100*Exchange rate, 54, 71, 77*Repurchase from Fund, 94*, 95*Special drawing rights, 84*

MALIExchange rate, 78*Repurchase from Fund, 94*Special drawing rights, 84*

MALTAExchange rate, 78*Special drawing rights, 84*, 87*

MANAGING DIRECTOR, 48, 67-68, 102-103

MAURITANIAExchange rate, 78*Repurchase from Fund, 95*Special drawing rights, 84*

MAURITIUSExchange rate, 78*Repurchase from Fund, 94*, 95*Special drawing rights, 84*

MEMBERSHIP IN FUND, 48MEXICO

Article VIII status, 100*Creditor position in Fund, 88*


154 INDEX

MEXICO (continued)Exchange rate, 54, 72, 78*, 80*Special drawing rights, 84*, 87*

MOROCCOExchange rate, 54, 71, 78*Special drawing rights, 84*

NEPALExchange rate, 78*Quota in Fund, 48, 67Special drawing rights, 84*

NETHERLANDSArticle VIII status, 100*Creditor position in Fund, 88*Exchange rate, 15t, 54, 71, 78*,

81*International reserves, 36, 38*Purchase from Fund, 59, 60, 89*,

96*Special drawing rights, 56, 59, 87*

NEW ZEALANDCreditor position in Fund, 88*Exchange rate, 54, 71, 78*International reserves, 38*Purchase and repurchase from

Fund, 91*Special drawing rights, 84*, 87*

NICARAGUAArticle VIII status, 100*Exchange rate, 54, 72, 78*, 80*Purchase from Fund, 61, 89*Repurchase from Fund, 74, 94*, 95*Special drawing rights, 84*

NIGERExchange rate, 78*Repurchase from Fund, 95*Special drawing rights, 84*

NIGERIAExchange rate, 78*Repurchase from Fund, 74, 94*, 95*Special drawing rights, 84*

NORWAYArticle VIII status, 100*Creditor position in Fund, 88*Exchange rate, 15t, 54, 72, 78*,

81*Special drawing rights, 84*

OIL FACILITY IN FUND, 27, 47, 50,52-53, 122-26

OMANExchange rate, 78*Oil Facility in Fund, 53Special drawing rights, 84*

PAKISTANExchange rate, 78*Purchase and repurchase from

Fund, 89*, 95*Special drawing rights, 84*, 87*Stand-by arrangement, 90*

PANAMAArticle VIII status, 100*Exchange rate, 78*Par value, 54, 72, 81*Repurchase from Fund, 95*Special drawing rights, 84*Stand-by arrangement, 90*

PAPUA NEW GUINEAMembership in Fund, 67

PAR VALUES OF MEMBERS, 54, 103-104,71-72, 81*

PARAGUAYExchange rate, 78*Special drawing rights, 85*

PERUArticle VIII status, 100*Exchange rate, 78*Purchase from Fund, 91*Repurchase from Fund, 74, 91*,

94*, 95*Special drawing rights, 85*

PETROLEUMPrice increases, 1, 3, 5, 17, 18, 20,

23; impact on: internationalreserves, 40-41, 47; other costsand prices, 9, 13; payments posi-tions, 15, 17, 25, 47, 55; worldeconomic situation, 3—4, 7;see also OIL FACILITY IN FUND,PRIMARY PRODUCING COUN-TRIES — LESS DEVELOPED, andindividual countries

PHILIPPINESExchange rate, 78*Purchase from Fund, 89*, 91*Repurchase from Fund, 63, 74,

94*, 95*Special drawing rights, 56*, 85*,

87*Stand-by arrangement, 90*

PORTUGALExchange rate, 78*

PRIMARY PRODUCING COUNTRIESBalance of payments, 22, 23, 24,

25-26, 27Capital movements, 1, 23, 27, 45Economic policy, 12, 25-26, 28Euro-dollar assets, 36Exchange rates, 55Foreign trade, 6, 18, 19, 20International reserves, 30, 35*, 38*Output, 1, 2, 4*Prices, 3, 6Purchases from Fund, 60-61, 97tSpecial drawing rights, 59*Stand-by arrangements with Fund,

61Terms of trade, 19*Trade restrictions, 45See also PRIMARY PRODUCING COUN-

TRIES — LESS DEVELOPED, PRI-MARY PRODUCING COUNTRIES— MORE DEVELOPED, and in-dividual countries

PRIMARY PRODUCING COUNTRIES —LESS DEVELOPED

Africa, 6, 22*, 23, 35*, 37*, 38*,59*

Asia, 6, 22*, 23, 35*, 37*, 38*, 59*Balance of payments, 22*, 27International reserves, 37, 38*Middle East, 6, 22*, 23, 35*, 37*,

38*, 59*Output, 4*Petroleum exporters

Balance of payments, 22, 23,24*, 25, 26, 27, 29

Capital movements, 23, 28Foreign trade, 3, 5, 19, 20International reserves, 30, 35*,

37,40Oil Facility in Fund, 53Terms of trade, 19*

Special drawing rights, 22*, 58, 59*Terms of trade, 19*Western Hemisphere, 6, 22*, 23,

35*, 37*, 38*, 59*

See also PRIMARY PRODUCING COUN-TRIES and individual countries

PRIMARY PRODUCING COUNTRIES —MORE DEVELOPED

Balance of payments, 22, 23, 24-25International reserves, 35*, 37Output, 4*Prices, 5*Special drawing rights, 22*, 59*See also PRIMARY PRODUCING COUN-

TRIES and individual countriesPUBLICATIONS OF FUND, 101*QATAR

Article VIII status, 64, 100*Exchange rate, 54, 71, 78*, 80*

QUOTAS OF FUND MEMBERS, 53, 61,96*

RECONSTITUTION, 31, 55, 57, 58, 82*REMUNERATION, 50, 52, 57, 63, 82*,

118-19REPRESENTATIVE RATE, 52, 59, 116-17ROMANIA

Exchange rate, 78*Purchase from Fund, 60, 61, 89*Special drawing rights, 85*, 87*

RULES AND REGULATIONS OF FUNDRules E-2 and E-3, Subscriptions,

60Rules 1-4 and I- 10, Repurchases

and Charges in Respect ofGeneral Account Transactions,120-21

Rule O-3, Exchange Rates, 47, 48,51, 56, 60, 116-18

Rule Q-l, Interest, Charges, andAssessments in Respect ofSpecial Drawing Rights, 119

RWANDAExchange rate, 54, 72, 78*, 81*Special drawing rights, 85*, 87*

SAUDI ARABIAArticle VIII status, 100*Exchange rate, 54, 72, 78*, 81*International reserves, 36Oil Facility in Fund, 53

SENEGALExchange rate, 78*Repurchase from Fund, 95*Special drawing rights, 85*

SIERRA LEONEExchange rate, 78*Repurchase from Fund, 94*, 95*Special drawing rights, 56*, 85*

SINGAPOREArticle VIII status, 100*Creditor position in Fund, 88*Exchange rate, 54, 71, 78*

SOMALIAExchange rate, 78*Repurchase from Fund, 95*Special drawing rights, 85*

SOUTH AFRICAArticle VIII status, 64, 100*Creditor position in Fund, 88*Exchange rate, 71, 78*Gold sales to Fund, 39, 48, 62International reserves, 38*Special drawing rights, 56*, 85*,

87*SPAIN

Creditor position in Fund, 88*


INDEX 155

SPAIN (continued)Exchange rate, 55, 72, 78*International reserves, 36Prices, 5*Special drawing rights, 56*, 85*

SPECIAL DRAWING RIGHTSAllocations, 21*, 22*, 30, 34*, 38,

46, 83-85*; and developmentassistance, 50

BIS as holder of, 58, 105-108Currencies transferred for, 86*Designation, 55, 56-57, 82*, 83-

85*Distribution of holdings, 58, 82*Holdings by General Account, 58,

82*, 85*Holdings by participants, 31, 56,

58, 83-85*Interest rate, 50, 52, 118-19International reserves, 30, 31*, 32*,

33t, 34*, 38*, 46Participants in Special Drawing Ac-

count, 67Total use, 55Transactions and operations sum-

mary, 83*, 86*Transactions by agreement, 47—48,

55-56, 82*, 103, 108-109Transfers by General Account, 31,

57, 82*, 87*Transfers, summary statement, 47,

82*Valuation, 50, 51, 116-17

SRI LANKAExchange rate, 79*Purchases and repurchases from


STAFF APPOINTMENTS, 68STAND-BY ARRANGEMENTS FOR MEM-

BERS, 59, 61, 90*, 92*SUDAN

Exchange rate, 79*Purchases and repurchase from


SWAP ARRANGEMENTS, 27, 32*, 46SWAZILAND

Currency, 71Exchange rate, 79*Purchase and repurchase from


SWEDENArticle VIII status, 100*Creditor position in Fund, 88*Exchange rate, 15t, 54, 79*International reserves, 36*Special drawing rights, 85*

SWITZERLANDExchange rate, 14t, 54International Reserves, 37, 38*,

41 (fn)SYRIAN ARAB REPUBLIC

Exchange rate, 79*Purchase and repurchase from


TANZANIAExchange rate, 54, 71, 72, 79*, 81*Repurchase from Fund, 94*, 95*Special drawing rights, 85*

TECHNICAL ASSISTANCE AND TRAINING,64-65

THAILANDExchange rate, 54, 71, 79*, 80*Special drawing rights, 85*

TOGOExchange rate, 79*Special drawing rights, 85*

TRINIDAD AND TOBAGOExchange rate, 79*Special drawing rights, 85*

TUNISIAExchange rate, 72, 79*Special drawing rights, 85*

TURKEYExchange rate, 79*International reserves, 36Repurchases from Fund, 63, 74,

95*Special drawing rights, 56*, 85*

UGANDAExchange rate, 54, 71, 72, 79*, 81*Special drawing rights, 56*, 85*

UNIT OF VALUE, 71UNITED ARAB EMIRATES

Article VIII status, 64, 100*Exchange rate, 54, 72, 79*, 80*

UNITED KINGDOMArticle VIII status, 100*Balance of payments, 20, 21, 23Economic policy, 7, 17Exchange rate, 14t, 17, 54, 55, 79*International reserves, 37, 38*Official claims in pounds sterling,

32*Output, 3t, 4Prices, 3t, 4, 5Purchases from Fund, 97 1Special drawing rights, 21*, 59*,

85*, 87*UNITED STATES

Article VIII status, 100*Balance of payments, 1, 17, 20,

21, 23, 33, 34Capital controls, 17Capital movements, 21, 26, 41

Economic policy, 17Exchange rate, 30, 47, 53, 54, .60,

72, 79*, 80*; developments,16, 17, 55

International reserves, 37, 38*Official claims in dollars, 32*, 33-

34, 35, 36Output, 3t, 4Prices, 3t, 5*, 6tPurchases from Fund, 97 1Repurchase from Fund, 59, 60, 61,

94*, 95*Special drawing rights, 21*, 34*,

59*, 85*UPPER VOLTA

Exchange rate, 79*Repurchase from Fund, 94*, 95*Special drawing rights, 85*

URUGUAYExchange rate, 79*Purchases and repurchases from


VENEZUELACreditor position in Fund, 88*Exchange rate, 79*Oil Facility in Fund, 53Special drawing rights, 85*

VIET-NAMExchange rate, 79*Special drawing rights, 85*

WESTERN SAMOAExchange rate, 54, 71, 79*, 81*Special drawing rights, 85*

WIDER MARGINS FOR EXCHANGERATES, 103-104

WORLD TRADE, 9, 13-15, 19-20YEMEN ARAB REPUBLIC

Exchange rate, 79*Special drawing rights, 85*

YEMAN, PEOPLE'S DEMOCRATIC RE-PUBLIC OF

Exchange rate, 79*Special drawing rights, 85*

YUGOSLAVIAExchange rate, 54, 71, 79*International reserves, 36*Repurchase from Fund, 94*, 95*Special drawing rights, 56*, 85*,

87*ZAIRE

Exchange rate, 79*Purchase from Fund, 91*Special drawing rights, 85*

ZAMBIAExchange rate, 79*Purchases from Fund, 89*, 91*Special drawing rights, 85*, 87*Stand-by arrangement, 90*


International Monetary Fund Annual Report 1974...INTERNATIONAL MONETARY FUND ANNUAL REPORT OF THE...

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