Strains on the monetary system
The sharp rise in world market oil prices in late 1973 and early 1974 has had a dramatic effect on the world economy over the short term, especially in its impact on the whole field of international trade and payments. An early warning on the scale of the disruption that might be anticipated in the course of this year was delivered by the Managing Director of the International Monetary Fund, H. Johannes Witteveen, in a speech to the World Banking Conference in London on January 15. “The international monetary system is facing its most difficult period since the 1930s,” Mr. Witteveen said. “As a result of recent developments in oil prices and supply, 1974 will almost certainly be a year of staggering disequilibrium in the global balance of payments…. Higher oil prices will give a sharp twist to the inflationary spiral, while energy supply shortages may accentuate a slowdown in economic activity that was anyway likely to occur. Coming at a time when there is no agreement on monetary reform, this combination of circumstances will place strains on the monetary system in excess of any that have been experienced since the war.”
Subsequent events have substantiated Mr. Witteveen’s forecast. According to Fund statistics, the total international reserves of industrialized countries declined to the equivalent of SDR 91.3 billion at the end of February 1974, from SDR 100.5 billion at the end of September 1973, an indication of the growing weakness in the balance of payments of a number of industrial countries.
The largest Fund stand-by since 1969, and the first for an industrialized country in the wake of increased oil prices, was a stand-by arrangement for the Government of Italy, which was approved by the Fund on April 10. The arrangement, authorizing purchases of foreign exchange up to the equivalent of SDR 1,000 million over the next year, is in support of the Government’s financial program of strengthening Italy’s balance of payments position and moderating domestic inflationary pressures, while maintaining a high level of employment of domestic resources. The Government’s objective under the program is to reduce the country’s nonoil current account deficit in the course of 1974 and eliminate it before the end of 1975. It is intended to follow policies of demand management in order to restrain the growth of imports and free resources for export. Over the longer term the Government plans to foster increased productive investment and reduce the size of the public sector deficit.
International balance of payments pressures are expected to be especially serious for the non oil-producing countries of the less developed world. Although these countries import only a fraction of the oil consumed by the industrialized countries, the majority of their oil imports are used in sectors vital to their economies, so that any price increases or shortfalls in supplies have an immediate impact on their development efforts.
When the extent of the disruption that the international economy would suffer this year first became apparent, the Managing Director developed a proposal for a special credit facility in the Fund. This was outlined in a paper presented to the Committee on the Reform of the International Monetary System and Related Issues (the Committee of 20) at its meeting in Rome on January 17 and 18. The proposed facility, which the Committee of 20 agreed should be urgently explored, would assist Fund member countries in meeting the impact of the increase in oil import costs by permitting drawings in amounts linked to their oil-related deficits, the size of their resources, and their Fund quotas.
Access to the facility would be subject to an assessment of members’ balance of payments positions and would be supplementary to their access to other Fund resources. Its financing would call for borrowing to supplement the Fund’s existing resources and the interest rate for drawings would be related to market rates.
In February, Mr. Witteveen, accompanied by Robert S. McNamara, President of the World Bank, went to Teheran at the invitation of the Iranian Government to discuss the possibilities for Iranian financial support. Under a program proposed by the Shah of Iran, and announced on February 21 at the end of the visit, Iran would set aside at least $1,000 million this year, the bulk of the money to go to the proposed supplementary facility.
On April 1, Mr. Witteveen returned to the Middle East for further discussions on the proposed arrangement with senior officials of oil-producing countries in the region, including Algeria, Saudi Arabia, Kuwait, Iraq, the United Arab Emirates, and the Libyan Arab Republic. It was planned that he would visit other oil-producing countries later.
Between his two trips to the Middle East, Mr. Witteveen conducted a special review of the impact of the energy situation on the economies of developing countries, during a meeting with the Presidents of the World Bank, the Inter-American Development Bank (IDB), the African Development Bank, and the Asian Development Bank at the Washington headquarters of the IDB. In a communiqué issued following the meeting, the heads of the five international agencies re-emphasized the responsibility of advanced countries to provide aid and pointed out that the oil-exporting countries have a greater capacity now to share the burden of the additional aid effort.
The Fund’s Executive Board
Meanwhile, the Executive Board of the Fund began a comprehensive discussion of an outline for the supplementary facility, reviewing such topics as its financing, the interest rates which should be charged, and requirements for borrowing. The question whether transactions made under the facility should be at current market rates prompted renewed attention also to the charges at present levied by the Fund for transactions within the General Account and there were suggestions that it might be appropriate to review the level of these charges. The Fund’s schedule of charges has not been changed since 1963, despite a number of major developments since that date within and outside the Fund.
Also important in connection with the Board’s consideration of the supplementary facility was the question of the valuation of SDRs, since it was apparent that the oil-exporting countries in supporting the new facility would count on some arrangement for maintaining the value of their credits to the Fund. It had been agreed by the Committee of 20 that the SDR should be valued in terms of what is called the “standard basket” of currencies, which would enable the SDR to function during the interim period of general floating. However the Board continued work on such issues as the number and weighting of component currencies in the proposed “basket” and possible rates of interest.
In addition, the Board considered the preparation of a draft resolution for the Board of Governors to create an advisory Committee of the Board of Governors pending the establishment of a permanent Council of Governors. Other areas which the Executive Board reviewed included the liquidity of the General Account of the Fund and the feasibility of setting up an extended arrangement in the Fund under which Fund resources might be made available to members for a period longer than the three to five years permitted under current purchase arrangements.
Following the Rome meeting of the Committee of 20, four technical groups that had been formed after the Annual Meeting in September 1973 continued their work on four separate aspects of the reform. They focused on the areas of adjustment, with particular reference to a reserve indicator structure and financial pressures; intervention and settlement, particularly on a possible multicurrency intervention system; global liquidity; and the transfer of real resources from developed to developing countries. By the time the Deputies of the Committee of 20 met in March, the first three groups had completed their work, while the fourth—on the transfer of resources-continued its work during the spring.
The Deputies met at Fund headquarters March 27-29 under the chairmanship of C. Jeremy Morse to review the progress made toward reform in the light of the energy crisis and other recent developments in the monetary field. At a press conference after the meeting, Mr. Morse said that as a result of the technical groups’ work the Deputies had “been able to add a lot of detail, to flesh out the proposals that were in the Nairobi outline (the First Outline of Reform), and to illustrate how the various parts of the system might work without, however, resolving the differences that were outstanding in September.” A new chapter had been added to the outline, he explained, “on action that could be taken in the interim (pending the more complete reform of the monetary system)… which could be set in course immediately, if the ministers agreed to it.” Further drafting of a revised and enlarged outline of the reform was now required.
Mr. Morse said the interim measures which had been reviewed in detail by the Deputies included ways in which “we could preserve and maintain in some modest way the principles that we have agreed on in the reform system, in the areas of the adjustment process, and of keeping some control over global liquidity.” Specifically, the interim steps discussed at the meeting included—besides the establishment of a new Council of Governors with an advisory interim Committee and an interim system of valuation for the SDR—the setting up of guidelines for floating exchange rates, which Mr. Morse said would not be “firm or hard rules”; some modest application of the principles agreed for the reformed system in relation to the adjustment process and to the surveillance and management of international liquidity; and possible ways of assisting developing countries, particularly those which are oil importers. In addition, the Deputies briefly discussed the role of gold in the interim period.
Mr. Morse announced that the Deputies would hold their next meeting in Paris from May 7 to 9, with the final meeting of the Committee of 20 scheduled for Washington, on June 12 and 13.
The Deputies of the Group of 24, representing developing countries, met in Washington prior to the meeting of the Deputies of the Committee of 20. They reviewed recent developments and the progress of the work on the reform of the monetary system in the light of the particular interests of the developing countries.
Exchange rate developments
On January 25, the Government of France advised the Fund that for a period of the next six months and on a provisional basis the exchange rates between the French franc and certain other currencies in the official market would not necessarily be confined within the margins observed hitherto. On the same date, the Government of Spain advised the Fund that the rate between the peseta and the U.S. dollar would not necessarily be confined within the margins observed hitherto.
Initial par value
An initial par value for the United Arab Emirates dirham was established with the Fund, effective 12:01 a.m., Washington, D.C. time, on February 23.
Stand-by arrangement and compensatory financing purchases
The Fund approved a stand-by arrangement for the Government of Chile on January 30, authorizing purchases of currencies up to the equivalent of SDR 79 million over the next 12 months, to support the Government’s economic and financial program designed to lay the basis for a recovery in output, halt inflation, and improve the country’s balance of payments situation.
During the first quarter of 1973 the Fund agreed to six purchases under the compensatory financing facility, which assists countries experiencing shortfalls in export earnings largely attributable to circumstances beyond their control. Purchases under the facility were announced by the Fund on January 30 by Burma, in the amount of SDR 15 million, on February 13 by Sri Lanka, SDR 5.9 million; on February 15 by India, SDR 62 million; on March 18 by Jamaica, SDR 13.25 million; and on March 22 by Guinea and Guyana, SDR 6 million and SDR 5 million, respectively.
Purchases from the Fund’s General Account during the first quarter of 1974 totaled the equivalent of SDR 273 million, with repurchases totaling the equivalent of SDR 222.2 million. Total gross purchases from the General Account since the beginning of Fund operations reached the equivalent of SDR 26,525.4 million at the end of March, with net drawings equivalent to SDR 3,402.3 million. Fund holdings of selected currencies as of the end of March are shown in Table 1.
|Currency||Amount (SDR millions)||Per cent of quota|
Special Drawing Account
Transactions between participants during the first quarter of 1974 included a total of SDR 98.1 million transferred in transactions by agreement between the participants concerned. The users of SDRs in these transactions were France and the Netherlands and the transfers were made in connection with settlements of obligations arising from exchange market interventions. The recipients of SDRs were Belgium (SDR 9 million), Denmark (SDR 25 million), France (SDR 47 million), and Germany (17 million).
In other transactions between participants. Sierra Leone and Uganda used a total of SDR 10.2 million to acquire currency. The recipients of the SDRs transferred in these transactions were Argentina (SDR 5 million), Colombia (SDR 1.5 million), Greece (SDR 1.2 million), and Indonesia (SDR 2.5 million).
During the quarter; the Fund’s General Account received SDR 1.2 million from 5 participants that used SDRs in repurchases in the General Account and SDR 7.5 million from 24 participants in payment of charges relating to their use of the Fund’s resources.
The General Account transferred SDR 22.5 million to participants during the quarter in order to promote reconstitution of their SDR holdings.
The General Account’s holdings of SDRs at the end of March were SDR 493.6 million.
Ian S. McDonald
|Member||Amount agreed||Amount purchased||Undrawn balance|