International Monetary Fund
Published Date:
January 1979
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The amended Articles of Agreement of the International Monetary Fund refer to the objective of “making the special drawing right the principal reserve asset in the international monetary system.” 1 But relatively little is done in the Second Amendment to make the special drawing right (SDR) the core of the transactions of the Fund itself. The main assets of the Fund’s General Department 2 continue to be balances of the currencies of all members. The standard transaction of the General Department is still the sale of one currency for another currency, with the sale of SDRs listed as an optional possibility “instead of the currencies of other members.” 3 The Fund has power to borrow currencies, but not SDRs.4

Even before the Second Amendment went into effect, a large increase had taken place in the extent to which the SDR was used in drawings and in repurchases, as well as in various payments to the Fund (charges) and in payments by the Fund (remuneration). A further increase in the use of SDRs in drawings will be possible when, pursuant to the Seventh General Review of Quotas, 25 per cent of quota increases will be paid in SDRs. But, under the present structure of the Fund, such use of the SDR in the General Department can only be partial. For example, the additions to the Fund’s liquidity arising from the quota contributions in strong currencies can only be used by the sale of these currencies.

Interest has recently been expressed, in the Executive Board and in the Interim Committee, in the possibility of a more radical change in the General Department under which this Department would be put fully on an SDR basis. This paper explores the basic economic justification for a General Department restructured in this way, the broad outline of the structure that would have to be established, the liquidity effects that would have to be considered, the effects of these changes on other provisions, some of the simplifications that would be brought about, and the steps involved in the transition from a Fund consisting primarily of currencies to one based fully on the SDR. The structure of the balance sheet of such a Fund is described in the Appendix.

Three preliminary points need to be stressed:

1. The changes that would be brought about by a restructuring of the General Department on an SDR basis would not change any of the fundamentals of that Department. There would be no change in members’ access to the Fund’s conditional credit, the ability of the Fund to grant credit, the terms for repurchase, the obligations of members to extend credit through the Fund, etc.

2. Nevertheless, these changes would not be unimportant. The following improvements may be noted—

(a) The separation of the Fund into two departments, one of which holds large amounts of the “currencies” 5 of all members, would disappear.

(b) The distinctions that exist at present between asset positions that are the counterpart of conditional credit granted by the Fund and those that arise from the acceptance of SDRs would disappear. These distinctions cover such aspects as the rate of interest earned, the method of use, and the liquidity of the assets.

(c) The change would permit a more rational distribution among members of the collective cost of the Fund’s holdings of gold, as well as the elimination of the present dependence of the Fund’s net income on the amount of drawings outstanding in one particular range of members’ quotas (the “unremunerated reserve tranche”).

(d) The change would bring about a major simplification of the Fund and would thus help to promote understanding of the working of the institution, both among the Fund’s membership and by the public at large.

3. This study sketches a restructured Fund, in which transactions could be conducted entirely in SDRs, and compares it with the present Fund. While the Fund as presently constituted can make quantitatively larger use of SDRs and can expand the use of SDRs to more categories of its financial operations,6 the transition to a restructured Fund cannot, beyond a certain point, be gradual. It would require a major restructuring of the Fund’s financial operations and of its assets and liabilities at one moment in time, and this could not take place without a major amendment of the Articles of Agreement. At a time when the Fund has only recently reached the conclusion of a long-drawn-out process of amendment, thoughts about the types of changes described above—whose realization would entail a new amendment—are likely to be of interest more because of their long-term value for a better understanding of the Fund than as proposals for action in the near future.

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