- International Monetary Fund
- Published Date:
- January 1979
The substitution of an additional acceptance obligation for an equal supply of currencies would not affect the liquidity of the Fund as a whole. However, as the sources of liquidity for the two present Departments would be merged, their liquidity would become the same. This would be desirable in itself, in that it would remove one of the differences between Fund-related assets in members’ reserves. But these brief observations on liquidity call for a clarification of the concepts involved.
While it is possible to compare the liquidity of the General Department with that of the Special Drawing Rights Department on certain very simple assumptions, one has always to bear in mind that the concept of “liquidity” in each Department, and in the General Department in particular, is highly complex, so that any reasonably simple approach to the concept may fail to indicate all relevant considerations.
Any measure of liquidity compares certain assets against certain claims. For purposes of liquidity ratios, the assets can be measured as all resources that can potentially be used to meet claims or as only those assets that can be used for this purpose at a particular moment. The first definition includes all the Fund’s holdings of currencies and all acceptance obligations under the SDR system, while the second would count only holdings of “usable currencies” (i.e., the currencies of countries whose payments and reserve position was judged sufficiently strong to justify the Fund in selling their currencies) or perhaps some rough estimate of “usable amounts” of “usable currencies,” and correspondingly narrowed concepts relating to the usable component of acceptance obligations. Among the claims to be compared with these alternative definitions of assets, a distinction can be made between liquid claims and contingent claims. The distinction does not apply in the Special Drawing Rights Department, where all claims (i.e., holdings of SDRs) are liquid. In the General Department, by contrast, liquid claims are limited to reserve tranche positions, loan claims, and amounts available under stand-by arrangements; “drawing rights” in or beyond the credit tranches that are not covered by stand-by arrangements are contingent claims in the sense that they can be exercised only if the Fund finds that the conditions for use are met. At any moment in time, therefore, all of the Fund’s holdings of SDRs and currencies (subject to the criterion of balance of payments and reserve strength) are available to meet its liquid liabilities. But as the amount of Fund credit outstanding increases, the stock of liquid claims rises while the stock of currencies remains unchanged (or, if borrowed currencies are sold, increases by the same absolute amount as the credit extended) and becomes on average less “usable”: the expansion of credit involves the sale of “usable” currencies and the receipt of currencies of members that are in need of balance of payments financing.
In a Fund in which the two Departments were merged, all liquid claims would be SDR holdings or loan claims; to meet these, the Fund would be able to use its enlarged supply of “usable” acceptance obligations. This same source of liquidity would be used as the Fund approved credit operations.
In the present Special Drawing Rights Department, the ratio of the total of acceptance obligations to the amount of SDRs in existence is not affected by transactions in SDRs; it always stands at 2: 1. A comparable ratio in the General Department—total holdings of currencies and SDRs to total liquid claims—is not invariant with Fund transactions, but declines as Fund credit expands. At the end of July 1978, shortly after the quota increases under the Sixth General Review had taken effect, that ratio stood at well over 2: 1; the General Department held SDR 41 billion in currencies (including SDR 7.6 billion as the counterpart of borrowing) against reserve positions in the Fund of about SDR 17 billion and stand-by and extended arrangements of a little over SDR 1 billion.13 Of the SDR 17 billion in reserve positions in the Fund, SDR 7.6 billion represented loan claims under the General Arrangements to Borrow (GAB) and the oil facility.14
Merger of the liquidity structure of the two Departments would not obviate the need to provide for an extension of that liquidity in certain circumstances. This could be done by one or the other, or both, of the techniques now available for this purpose in the two Departments: borrowing, or agreement to accept SDRs beyond the acceptance obligation. In fact, the economic difference between these two techniques would tend to disappear in a Fund where the two Departments were integrated. If a strong surplus country lent currency balances to the Fund, it would acquire a claim expressed in SDRs. The claim would, according to the Fund’s practice, be a liquid one, although perhaps in form, though not in substance, slightly less liquid than holdings of reserve positions in the Fund or SDRs. It might or might not carry a higher interest rate than SDRs. Higher rates apply under the oil facility and the supplementary financing facility. However, the rate of interest on GAB claims was originally equal to that on the SDR; at present it varies with the rate of charge paid by the user of the currency borrowed, with a minimum of 4 per cent per annum, and may range on either side of the SDR interest rate.
By agreeing to a higher acceptance limit, a participant would indicate its willingness to acquire more SDRs in exchange for currencies. Although one participant has held SDRs slightly in excess of its acceptance obligation, there has never been agreement between the Fund and a participant on a higher acceptance limit. It may be noted in passing that, although this possibility was considered at the time of the drafting of the First Amendment, the present Articles do not make it possible to sweeten such agreement by the payment of a higher interest rate. The technique of borrowing, with which there is experience and which is more flexible,15 may thus appear preferable to that of agreement on excess holdings. Whether such borrowing is done in the form of currencies or SDRs is essentially of cosmetic importance. The borrowing of currency might look odd for an SDR-based Fund; yet the lender might not hold enough SDRs to lend SDRs from its own holdings. But no substantive problem would arise if the Fund either (a) borrowed currency from a member and then passed it on as credit in the equivalent amount of SDRs to another member in a simultaneous transaction, or (b) borrowed SDRs from a lender which the same lender acquired on the same day against currencies in a series of simultaneous transactions.16