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ANNUAL REPORT

1980

©International Monetary Fund. Not for Redistribution

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INTERNATIONAL MONETARY FUND

ANNUAL REPORTOF THE

EXECUTIVE BOARD FOR THEFINANCIAL YEAR ENDED APRIL 30, 1980

WASHINGTON, D.C.


Contents

PageLetter of Transmittal xiii

Chapter 1. DEVELOPMENTS IN THE WORLD ECONOMY 1Introduction 1Domestic Economic Developments and Policies 4

Industrial Countries 4Developing Countries 12

Oil Exporting Countries 13Non-Oil Developing Countries 13

International Trade and Payments 15Overview 15Industrial Countries 21

Swings in Current Account Balances 21Exchange Rate Developments 24

Oil Exporting Countries 25Non-Oil Developing Countries 28

Financing Patterns and External Debt 31Policy Considerations 34

Chapter 2. DEVELOPMENTS IN THE INTERNATIONAL MONETARY SYSTEM .. 40Exchange Rate Arrangements and Policies 40

Policies Influencing Exchange Rates Between Major Currencies . . . . 41Policy Developments 41Developments Within the EMS 45Variability of Exchange Rates Among Major Currencies 47Implications of Greater Efforts to Influence Exchange Rates 48

Exchange Rates and the Adjustment Mechanism 50Industrial Countries 50Non-Oil Developing Countries 51Oil Exporting Countries 51

Surveillance 52Principles and Procedures of Surveillance 52Experience with Surveillance Procedures 53Changes in Exchange Arrangements 53Current Issues Relating to Surveillance 53

International Reserves and Liquidity 58Recent Developments in International Reserves . 58Foreign Exchange Reserves 61

Currency Composition 61Rates of Return on Major Currencies 64

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CONTENTS

PageFund-Related Assets 66Reserve Transactions with Banks 68

Composition of Official Holdings 68Regulation and Supervision of the Eurocurrency Markets 69

International Liquidity and Adjustment 69Recycling 69The Provision of Liquidity by the Fund 70

The Adequacy of International Reserves 71The SDR and Its Uses 72

Chapter 3. ACTIVITIES OF THE FUND 73Transactions and Operations in the General Resources Account 76

Purchases 76Reserve Tranche Purchases 76Credit Tranche Purchases and Stand-By Arrangements 76Extended Fund Facility 77Compensatory Financing Facility 78Buffer Stock Facility 78Supplementary Financing Facility 78

Repurchases 80Fund Liquidity 81Borrowing 81

General Arrangements to Borrow 82Oil Facility 82Supplementary Financing Facility 82

Membership and Quotas 83Membership and Participation in the Special Drawing

Rights Department 83Seventh General Review of Quotas 83

Charges and Remuneration 83Gold 84

Gold Sales 84Gold Auctions 85Gold Distribution 85

Trust Fund 85The Subsidy Account 89Special Drawing Rights 90

Allocations 91Transactions and Operations in the Special Drawing Rights

Department 91Between Participants 91

Transactions by Agreement 93Transactions with Designation 93

Transactions and Operations Between Participants and theGeneral Resources Account 93

Inflows 95Outflows 95

Other Holders of SDRs 95Income, Expenses, and Reserves 96Consultations with Member Countries 96Training and Technical Assistance 97Relations with Other International Organizations 99Executive Directors and Staff 100

VI


CONTENTS

PagePublications 100

Appendices 101I. The Fund in 1979/80 105

II. Principal Policy Decisions of the Executive Board 131III. Press Communiques of the Interim Committee and the

Development Committee 152IV. Executive Directors and Voting Power on April 30, 1980 168V. Changes in Membership of Executive Board 171

VI. Administrative Budget 174VII. Comparative Statement of Income and Expense 175

VIII. Financial Statements 176

Index 201

LIST OF TABLES

Chapter 1. DEVELOPMENTS IN THE WORLD ECONOMY1. Industrial Countries: Changes in Output and Prices, 1963-79 82. Developing Countries: Changes in Output and Prices, 1967-79 . . . . 123. World Trade Summary, 1962-79 164. Terms of Trade Developments, 1962-79 175. Payments Balances on Current Account, 1973-80 176. International Banking: Global Sources and Uses of Funds,

1976-79 197. Global Balance of Payments Summary, 1976-79 208. Industrial Countries: Balance of Payments Summaries, 1976-79 . . . 229. Non-Oil Developing Countries: Current Account Deficits as

Percentage of GDP and of Merchandise Imports, 1973-79 3010. Non-Oil Developing Countries: Current Account Financing,

1973-79 32

Chapter 2. DEVELOPMENTS IN THE INTERNATIONAL MONETARY SYSTEM11. Eight Industrial Countries: Sum of Monthly Changes in

Official Reserves Excluding Gold, Relative to Exports,March 1973-April 1980 45

12. Average Monthly Variability of Effective Exchange Rates,April 1973-December 1979 48

13. Exchange Arrangements of Member Countries on April 1, 1978and June 30, 1980 54

14. Official Holdings of Reserve Assets, End of Years 1973-79and End of May 1980 59

15. Quantity and Price Changes Affecting the SDR Value ofOfficial Holdings of Foreign Exchange, by Currency andin Total, over Contiguous Periods, End of First Quarter1973-End of 1979 62

16. Share of National Currencies in SDR Value of Total OfficialHoldings of Foreign Exchange, Compared with Shares inSDR Valuation and Interest Rate Baskets, End of SelectedQuarters, 1973-79 64

17. National and SDR Rates of Return Realized on Money Market

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CONTENTS

PageInvestments in Specified National Currencies, Annuallyfrom End of First Quarter, 1973-80, and Period Averages 65

18. Composition of the Change in Official Holdings of ForeignExchange Reserves, 1973-79 68

Chapter 3. ACTIVITIES OF THE FUND19. Selected Financial Activities by Type and Country, 1974-80 7420. Flow of Transactions in the General Resources Account and

Resulting Stocks, Financial Years Ended April 30, 1974-80 7721. Supplementary Financing Facility Commitments and Purchases

Under Stand-By and Extended Arrangements, April 30, 1980 7922. Use of Supplementary Financing Facility Under Special

Circumstances Clause, April 30, 1980 8023. Fund Gold Auctions: Summary Statistics, June 2, 1976-

May 7, 1980 8624. Sales of Gold to Members in Four Distributions 8725. Trust Fund: Loan Disbursements and Distribution of Profits

from Gold Sales, by Region, 1977-80 8826. Subsidy Account: Total Use of 1975 Oil Facility by

Beneficiaries, and Subsidy Payments in the FinancialYear Ended April 30, 1980 89

27. Subsidy Account: Contributions 9028. Summary of Transfers of SDRs, May 1, 1970-April 30, 1980 9229. Use and Receipt of SDRs in Transactions by Agreement,

Financial Year Ended April 30, 1980 9330. Use and Receipt of SDRs in Transactions with Designation,

Financial Year Ended April 30, 1980 9431. Summary of Average Rates of Periodic Charges, Interest on

SDR Holdings, Remuneration, and Interest on Borrowing,Financial Years Ended April 30, 1979 and 1980 97

LIST OF CHARTS

Chapter 1. DEVELOPMENTS IN THE WORLD ECONOMY1. Major Industrial Countries: Growth of Real GNP/GDP,

1977-Second Quarter 1980 22. Fourteen Industrial Countries: Hourly Remuneration in Manu-

facturing and Consumer Prices, First Half 1971-FirstHalf 1980 6

3. Fourteen Industrial Countries: Labor Costs in Manufac-turing, First Half 1971-First Half 1980 7

4. Major Industrial Countries: Real GNP Per Employee, 1958-79 95. Industrial Countries: Changes in External Assets and

Liabilities, Bank and Nonbank Components, 1967-79 186. Major Industrial Countries: Payments Balances on Current

Account, Including Official Transfers, 1975-FirstQuarter 1980 23

7. Major Industrial Countries: Relative Costs and Prices ofManufactures, Adjusted for Exchange Rate Changes, 1971-Second Quarter 1980 26

8. Non-Oil Developing Countries: Ratios of Debt to Exports ofGoods and Services and to Domestic Output, 1972-79 33

Vlll


CONTENTS

Page9. Non-Oil Developing Countries: Debt Service Ratios, 1973-79 34

10. Industrial Countries: Energy Consumption and Prices, andGasoline Taxes, 1970-79 36

Chapter 2. DEVELOPMENTS IN THE INTERNATIONAL MONETARY SYSTEM11. Eight Industrial Countries: Indices of Effective Exchange

Rates, January 1975-June 1980 4212. Eight Industrial Countries: Monthly Changes in Official

Reserves Relative to Exports and in Exchange Rates,January 1978-June 1980 44

13. Eight Industrial Countries: Short-Term Interest Rates andChanges in Narrow Money, January 1978-June 1980 46

14. Growth of One SDR Invested in a Specified National Currencyor in SDRs with Interest Compounded Quarterly, End ofFirst Quarter, 1973-80 67

Chapter 3. ACTIVITIES OF THE FUND15. Use of Fund's Resources as at April 30, 1970-80 7616. SDR Interest Rate, Rate of Remuneration, and Short-Term

Interest Rates, July 1974-September 1980 84

The following symbols have been used throughout this Report:

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

(—) indicates a figure too small to record in the table or that the itemdoes not exist;

(-) is used between years or months (e.g., 1972-80 or January-June)to indicate the years or months covered, including the beginningand ending years or months;

(/) is used between years (e.g., 1979/80) to indicate a financial year.

"Billion" means a thousand million.

Minor discrepancies between constituent figures and totals are due torounding.

The classification of countries employed in the Report is indicated in Tables 1and 2 on pages 8 and 12.

IX


International Monetary Fund

J. de LarosiereManaging Director and Chairman of the Executive Board

William B. DaleDeputy Managing Director

Executive Directors

Sam Y. CrossWilliam S. RyrieGerhard LaskePaul Mentr6 de LoyeTeruo HiraoMahsoun B. JalalJoaquin MunsH. O. RudingBernard J. DrabbleLamberto Dini

Alternate ExecutiveDirectors

Donald E. SyvrudLionel D. D. PriceGuenter WinkelmannThierry AulagnonAkira NagashimaYusuf A. NimatallahAriel BuiraTom de VriesMichael CaseyCosta P. Caranicas

Executive Directors

Robert J. WhitelawMohamed FinaishJacques de GrooteJahangir AmuzegarAlexandre KafkaS. D. DeshmukhMatti VanhalaByanti KharmawanFestus G. MogaeSamuel Nana-SinkamFrancisco Garces

Alternate ExecutiveDirectors

Richard J. LangKadhim A. Al-EydHeinrich G. SchneiderMohammed YeganehJose Gabriel-PenaD. Lakshman KannangaraGisli BlondalSavenaca SiwatibauSemyano KiingiAbderrahmane AlfidjaJulio C. Gutierrez

Senior Officers

Counsellor Walter O. Habermeier*Economic Counsellor William C. Hood*Counsellor L. A. Whittome*Adjustment Studies Charles F. Schwartz, DirectorAdministration Department Roland Tenconi, DirectorAfrican Department J. B. Zulu, DirectorAsian Department Tun Thin, DirectorCentral Banking Department P. N. Kaul, DirectorEuropean Department L. A. Whittome, DirectorExchange and Trade Relations Department . . . C. David Finch, DirectorFiscal Affairs Department Richard Goode, DirectorIMF Institute Gerard M. Teyssier, DirectorLegal Department George Nicoletopoulos, DirectorMiddle Eastern Department A. Shakour Shaalan, DirectorResearch Department William C. Hood, DirectorSecretary's Department Leo Van Houtven, SecretaryTreasurer's Department Walter O. Habermeier, TreasurerWestern Hemisphere Department E. Walter Robichek, DirectorOffice of External Relations Azizali F. Mohammed, DirectorBureau of Language Services Bernardo T. Rutgers, DirectorBureau of Statistics Werner Dannemann, DirectorOffice in Europe (Paris) Aldo Guetta, DirectorOffice in Geneva Fernando A. Vera, Director

Chief Editor Norman K. Humphreys

* Alphabetical listing.

August 14, 1980

xi


LETTER OF TRANSMITTALTO THE BOARD OF GOVERNORS

August 14, 1980

Dear Mr. Chairman:

I have the honor to present to the Board of Governors the Annual Report of theExecutive Board for the financial year ended April 30, 1980, in accordance withArticle XII, Section 7 ( a ) of the Articles of Agreement of the International Mone-tary Fund and Section 10 of the Fund's By-Laws. In accordance with Section 20of the By-Laws, the administrative budget of the Fund approved by the ExecutiveBoard for the financial year ending April 30, 1981 is presented in Appendix VI andthe audited financial statements of the General Resources Account, the SpecialDrawing Rights Department, the Subsidy Account, the Trust Fund, and the StaffRetirement Fund for the year ended April 30, 1980, together with the reports ofthe External Audit Committee thereon, are presented in Appendix VIII.

Yours sincerely,

/s/

J. DE LAROSIERE

Chairman of the Executive Board

Chairman of the Board of Governors

International Monetary Fund

xiii


Chapter 1Developments in theWorld Economy

Introduction

During the period from the beginning of 1979 to themiddle of 1980, the world economic situation wasmarked by three disturbing features. Rates of inflation inmost countries remained very high and, indeed, acceler-ated; growth of real output in the industrial countriesbegan to slow down markedly, threatening to halt theexpansion of world trade and to turn into another inter-national recession; and large surpluses and deficits re-emerged in the external balances on current account formajor groups of countries, giving rise to widespreadconcern about the ability of some countries, particu-larly in the non-oil developing group, to sustain thefinancing of current account deficits on the scale pro-jected. In varying degrees, the more than doubling ofoil prices after the end of 1978 was a major factor inall three of these disturbing elements in the global eco-nomic picture.

However, not all aspects of the international eco-nomic situation at mid-1980 were disturbing. Rates ofinflation in the industrial countries as measured bygross national product (GNP) deflators remained lowerthan those evidenced by consumer price indices ordomestic expenditure deflators, signifying that second-ary effects of higher import prices had not yet, at least,permeated the basic structures of domestic costs andincomes. The slowdown in economic activity, while initself far from welcome, was undoubtedly tending to re-lieve some of the upward pressures on prices. Further-more, the distribution of current account balancesamong the major industrial countries was less trouble-some from the standpoint of international adjustmentthan in the previous sharp swing of the industrialgroup's combined current account balance from surplusto deficit in 1974. At mid-1980, accordingly, the re-cycling of surplus funds from the oil exporting coun-tries to the countries with large current account deficitsappeared, by comparison with the earlier experience, tohave proceeded with less intensive competition on thepart of industrial countries for funds urgently needed

by many non-oil developing countries. Also, exchangerate relationships among major currencies presentedfewer difficulties in the past year or so than in theperiod 1974-75, even though changes in exchange ratesfor a few of the principal currencies were substantial.

Among the features of the world economic scenethat have a disturbing character, the first and foremostis the prevailing rate of inflation in the industrial coun-tries. The general level of prices has been rising muchfaster in most of those countries since 1970-72 thanduring the previous decade, despite the recession in1975 and the moderate character of the economicrecovery since then. As measured by GNP deflators, theaverage annual increases of domestic prices in industrialcountries since 1972 have all been in the 7-12 per centrange, compared with an average of only about 4 percent in the preceding decade. Moreover, there has beena widespread acceleration of inflation among industrialcountries during the past year. As already noted (anddiscussed more fully below), the acceleration was con-siderably more pronounced in terms of final productprices entering into domestic expenditures than in termsof overall GNP prices, which do not reflect directeffects of price increases for imported goods. Importprices paid by the industrial countries rose faster in1979 and the first half of 1980, mainly because of theoil price rise, than did domestic prices in those coun-tries.

The prevailing high rate of inflation in the industrialworld, as distinguished from the recent acceleration ofinflation, is attributable to a variety of factors operativeover a period of many years. In retrospect, a principalfactor was the application of unduly expansionary fis-cal and monetary policies, whose effects were com-pounded by structural rigidities of an economic andsocial character, as well as by periodic external shocks,in an economic environment that was a very difficultone for policymakers. The present stress on demandmanagement policies aimed at containment of inflationand inflationary expectations attests to a conviction thatreduction of the present high inflation is a precondition

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ANNUAL REPORT, 1980

for renewal of domestic growth and achievement ofinternational equilibrium.

Even before the onset of the present slowdown, theaverage rate of expansion of economic activity in theindustrial countries since 1976 had remained fairly

moderate. After the 1975 recession, it did not exceed4 per cent in any of the past three years. Indeed, itdropped appreciably below that figure in 1979, reflect-ing the initial weakening of the U.S., U.K., and Cana-dian economies. (See Chart 1.) Given the recent signs

Chart 1. Major Industrial Countries: Growth of Real GNP/GDP, 1977-Second Quarter 1980(In per cent)

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CHAPTER 1: DEVELOPMENTS IN THE WORLD ECONOMY

of a cyclical downturn of economic activity in theUnited States, it is now expected that the average in-crease in output of the industrial countries in 1980 maybe only about 1 per cent, encompassing outright de-clines for the United States and the United Kingdom,along with generally lower rates of expansion in theother industrial countries.

For 1981 as a whole, a similarly low average rate ofexpansion would seem to be in prospect. Such factorsas the absence of a boom in fixed investment precedingthe current slowdown and an apparently satisfactorybalance in the inventory positions of business enter-prises should limit the degree and duration of thecyclical slowdown now under way, especially if rates ofincrease in consumer prices taper off as expected duringthe second half of 1980. However, it is extremely diffi-cult to gauge the balance of expansionary and contrac-tionary forces in the period ahead, and the possibility ofinternational recession cannot be ruled out.

The most obvious aspect of the unbalanced patternof external balances on current account that hasemerged among major groups of countries is the rise inthe current account surplus of the oil exporting coun-tries. With the escalation of oil prices during 1979 andthe first half of 1980, that surplus has again been build-ing up rapidly, more or less as it did in 1974. As agroup, the oil exporting countries are expected to havea current account surplus of some $115 billion in 1980,compared with $68 billion in 1979 and only $5 billionin 1978.1

Meanwhile, the combined current account balance ofthe industrial countries, having already shifted from asurplus of $33 billion in 1978 to a deficit of $10 billionin 1979, continues to move more deeply into deficit.For 1980, the deficit may well exceed $50 billion. Ofthe projected negative shift of more than $80 billionfrom 1978 to 1980, the bulk—more than $60 billion-will probably be concentrated in the accounts of themajor industrial countries and, indeed, almost entirelyin the three (the Federal Republic of Germany, Italy,and Japan) whose current account positions werestrongest in 1978. However, the projected increase ofthe current account deficit of the smaller industrialcountries to more than $20 billion may present moreserious problems for some of them than are posed forthe major countries by the larger swing in theiraccounts.

The non-oil developing countries, whose capital-importing economic structure was reflected in a currentaccount deficit of $36 billion in 1978, incurred a $53billion deficit in 1979 and will probably have one ap-

1 These and other current account balances in this section aremeasured in terms of goods, services, and private transfers, asshown in Table 5. For the industrial countries, balances inclu-sive of official transfers are provided through 1979 in Table 8and for 1980 in Table 5, footnote 1.

preaching $70 billion in 1980. Moreover, the deficit ofthis group will tend to rise considerably higher in 1981.

The ability of the non-oil developing countries tofinance such deficits, while following appropriate ad-justment policies, is one of the major issues confrontingthe Fund, as well as the countries themselves. In termsof magnitude, the surplus funds accruing to the oilexporting countries can be said to afford a source ofsufficient financing, provided that the "recycling" pro-cess can be made to work smoothly enough. To do so,it will have to reconcile wide differences between thedistribution of deficits among oil importing countries—especially the non-oil developing countries and thesmaller industrial countries—and the distribution ofinitial placements of surplus funds by the oil export-ers, mainly in financial institutions and capital marketsof a relatively few industrial countries where suchplacements are feasible.

The debts and debt service obligations of many non-oil developing countries are already large, and thecapacity and willingness of some countries to withstandthe costs of still larger debts are widely questioned. Atthe same time, prudential considerations may inhibitcontinued expansion of lending to developing countriesby some of the private financial institutions that com-prise major outlets for funds placed abroad by the oilexporting countries. Such lending appears to be takingon a more selective character, and this tendency maybecome stronger in 1981. Unless satisfactory move-ments of loanable funds to the oil importing developingcountries take place, curtailment of import growth bysuch countries is all too likely. Such curtailment wouldbe a depressive influence on world trade, as well as ahindrance to domestic investment and growth in manyof the developing countries.

For these reasons, the Fund has been giving activeconsideration to means that it might use to facilitatethe movement of funds to countries that may not havesufficient access to funds from private sources. Manycountries may require considerable time to carry outnecessary structural adjustments, and may need bothfinancial assistance from the Fund and the Fund's helpin devising realistic programs of structural adjustment.A considerable number of developing countries willalso need larger concessional assistance of types pro-vided by international institutions and national govern-ments. Close cooperation among these various agenciesis required at the present juncture in order to secureadequate coordination between the specialized assist-ance of development lending institutions or aid grantingagencies and the general macroeconomic approach ofthe Fund's operations.

As indicated in the foregoing summary, a pervasivefactor in the present situation of the world economy isthe influence of the oil price increases of 1979 and

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ANNUAL REPORT, 1980

1980. Fund staff estimates of the economic impact ofthese increases on current account balances, on prices,and on real economic activity have been presented, andthe methodology has been described, in a recent publi-cation.2 Highlights of those estimates are as follows:(i) The estimated increase in the average price of oilfrom 1978 to 1980 (about $18.50 a barrel, from alittle under $13 a barrel to $31.25 a barrel) implies arise of about $170 billion in the export earnings of thegroup of oil exporting countries, plus another $20-oddbillion in such earnings of non-Fund members and ofnon-oil developing countries that are net exporters ofoil; the estimated additions to oil bills total somethinglike $155 billion for the industrial countries as a groupand about $35 billion for developing countries that arenet importers of oil. These large flows are the principalgenerator of the estimated 1978-80 changes, notedabove, in current account balances of major groups ofcountries, (ii) The direct impact of the estimated1978-80 oil price change on prices (broadly, on thegeneral level of domestic demand deflators) in the in-dustrial and non-oil developing countries might be ofthe order of ^/2 per cent, implying an addition to theannual rate of inflation averaging some 21A per cent forthis two-year period—the timing of actual effects oninflation rates being uncertain. The estimate does notcover any indirect effects on final-product prices or onnon-oil energy prices, (iii) The direct deflationary im-pact on aggregate demand outside the oil exportingcountries that may be expected to result from a diver-sion into oil import payments of expenditures thatwould otherwise be directed toward other goods andservices can be estimated at something like 2 per cent ofGNP in the major groups of countries that are net im-porters of oil. This estimate relates to the short run anddoes not include any allowance for indirect or "multi-plier" effects that might be associated with the expend-iture diversion. With respect to both the price impactand the deflationary impact, effects will be larger orsmaller depending on the nature of any policy responseto the oil price increases on the part of the oil importingcountries.

The recurrence of pressure on energy supplies andof substantial oil price increases during the past yearand a half has underlined the need for vigorous pursuitof more effective energy policies in oil consuming coun-tries. Efforts to conserve energy—especially oil—andto accelerate investment in both existing and potentialenergy resources and technologies will need to be inten-sified. Progress in energy conservation since 1974, al-though significant, has been impeded in many countries

by policies with respect to taxation, regulatory issues,and related matters that, by blunting the impact ofhigher oil prices on oil consumers, have failed to pro-vide appropriate price incentives for needed shifts inspending and resource allocations.

Diversification of energy production, so as to reducedependence on oil, is still in a very early stage, partlybecause of inadequate incentives for substitution andenvironmental problems associated with some of thealternative sources of energy. Large-scale investments,involving long lead times, are likely to be required.Thus, long-run solutions for current energy problemsshould be based on careful appraisal of costs and risks,aimed at development of new energy supplies in bothdeveloped and developing countries, and at reorienta-tion toward products and productive techniques thatare less energy intensive. In the meantime, however,there is considerable evidence that reductions in energydemand obtained through appropriate pricing policiesand other conservation measures can play an importantrole.

The remainder of this chapter provides a more de-tailed review of world economic developments, begin-ning with the evolution of domestic production, de-mand, prices, and policies and then dealing with inter-national trade and payments. In both the domestic andthe international sections of the discussion, separatetreatment is given to major groups of countries. In thisconnection, it should be noted that the classification ofcountries utilized here differs from the one employed inprevious Annual Reports,3 so that many of the keyfigures are not directly comparable with seeminglysimilar figures in earlier Reports. The last part of thechapter discusses some of the major economic policyproblems now faced by member countries and thentouches on issues raised by these problems for the Funditself, focusing primarily on the intertwined role in pay-ments adjustment and financing that the Fund mustplay in the period ahead.

Domestic Economic Developments and Policies

Industrial Countries

Inflation. The widespread worsening of inflation inthe industrial countries during 1979 and the first half

2 World Economic Outlook: A Survey by the Staff of the In-ternational Monetary Fund (Washington, May 1980), Appen-dix B, Section 2.

3 In essence, the framework of classification has been shiftedfrom four to three major groups of countries: an enlargedgroup of 21 industrial countries and two main groups of devel-oping countries, comprising the oil exporting countries (an un-changed grouping) and the non-oil developing countries (agrouping enlarged to include 7 countries formerly classifiedas "more developed primary producing countries"). Membersof the former category of "more developed primary producingcountries" have been regrouped partly with the industrial coun-tries as well as partly with the non-oil developing countries.(See Tables 1 and 2 for specifics of the present classification.)

4



of 1980 exerted a generally unsettling influence on eco-nomic activity and policy formulation. Upward move-ments of prices in the industrial countries began toaccelerate early in 1979, even before the main impactof that year's increases in oil prices was felt. Followingthe decision of the Organization of Petroleum Export-ing Countries (OPEC) at the end of June to introduceoil export prices substantially higher than those previ-ously announced, further momentum was added to theupward trend as the higher oil prices were passedthrough to final-product prices in the oil importingcountries during the second half of the year. The trendwas also strengthened somewhat by a similar pass-through of price increases for a number of foodstuffsand other primary commodities whose prices werebuoyant in the early or middle part of 1979. The rateof inflation of consumer prices in the industrial coun-tries, which had averaged some 7-8 per cent per annumfrom 1976 through 1978, despite a decline in the realprice of oil during that period, rose to an annual rateof about 13 per cent in the first half of 1980 (by com-parison with the immediately preceding half year).Only in the first half of 1974 has a higher semiannualincrease in consumer prices been recorded in the in-dustrial countries during the past quarter century.

The acceleration in the first half of 1980 was notonly unusually pronounced but also widespread. Al-most every industrial country had a higher rate of infla-tion of consumer prices in the early months of 1980than in 1978. Degrees of acceleration, however, werefar from uniform from country to country. In Canadaand some of the smaller European countries, the step-up in the pace of price advances was rather moderate.But unusually rapid increases in consumer prices—ranging up to 15 per cent or more at annual rates in thefirst half of 1980, although tapering off somewhat to-ward midyear—occurred in a number of countries, in-cluding the United States, the United Kingdom, andItaly. The dispersion of consumer price inflation ratesamong industrial countries, and particularly among theseven largest ones, has thus widened over the past year.

The generally high and uneven rates of inflationamong the major industrial countries have been asource of difficulty in the conduct of policies relating toexternal payments positions and to the maintenance ofstability in exchange markets. This situation compli-cates the task of achieving a general containment ofworldwide inflation.

The consumer price indices reflect, of course, notonly price changes of domestic origin but also changesin prices of imported goods and services. Although suchindices are useful in the measurement of changes in realincomes of workers or households, they do not furnisha satisfactory basis for gauging underlying inflationarypressures within the industrial countries. For that pur-

pose, requiring a focus on indigenous costs and incomesearned in domestic production of goods and services,attention is better directed toward GNP deflators.

Measured in terms of such deflators, which may beviewed as comprehensive indices of total domestic unitcosts, the acceleration of inflation since 1978 has beenmuch less pronounced, except in the United Kingdom,where prices of domestically produced oil affect the de-flator, as well as the consumer price index. For the in-dustrial countries as a group, the weighted average ofincreases in GNP deflators in 1979 exceeded the corre-sponding average for 1978 by only 1A of 1 per cent(73/4 per cent versus ll/2 per cent, as shown inTable 1), and was virtually identical with the 1976 and1977 figures. The slight acceleration from 1978 to 1979(on a year-to-year basis) stemmed from a combinationof continued deterioration of the price performance ofthe United States and an arrest or partial reversal of theprevious trend toward lower rates of inflation in theother industrial countries.

The tendencies evident during 1979 extended into1980. For the first half of 1980, the GNP deflators forCanada, France, and the United States are estimated tohave risen at annual rates of roughly 10 per cent, thosefor Italy and the United Kingdom at rates in the neigh-borhood of 20 per cent, and those for the Federal Re-public of Germany and Japan at rates of less than 5 percent. The weighted average increase for the seven majorindustrial countries was 9 per cent, compared with all/2 per cent rate 12-18 months earlier. Although theindividual rates in the first half of 1980 differed widely,most of them were significantly above the correspond-ing rates in the earlier period.

The limited movement of GNP deflators in the indus-trial countries during the current surge of inflation canbe attributed primarily to the absence of any markedacceleration of wage advances. As of mid-1980, in-creases in compensation of employees remained mod-erate, relative to the experience of the period 1972-74,in both nominal and real terms. (See Chart 2.) Indeed,increases in hourly earnings in the manufacturing sec-tors of the industrial countries over the period since1978 have not, on average, accelerated nearly as muchas those in consumer prices. This experience contrastswith that of the period 1972-74, when rates of increasein wages accelerated markedly and almost concurrentlywith increases in consumer prices, especially in majorindustrial countries other than the United States.

At least since the early 1970s, wage movements inU.S. manufacturing industries, as shown in Chart 2,have demonstrated greater independence of short-termchanges in consumer prices than have those in the otherindustrial countries. During the 1972-74 bulge in con-sumer prices, increases in U.S. industrial wages laggedconsiderably behind, so that real wages were eroded;

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ANNUAL REPORT, 1980

Chart 2. Fourteen Industrial Countries: Hourly Re-muneration in Manufacturing and Consumer Prices,First Half 1971-First Half 1980(Changes in per cent) 1

L Over preceding half year, seasonally adjusted annual rates.

but they subsequently "caught up" by continuing toaccelerate for several quarters after the acceleration ofconsumer price increases had tapered off. A perhapseven more pronounced lag in responsiveness of U.S.wages to the changes in consumer prices since 1978 isagain resulting in a cumulative shrinkage of real wages,building up the potential for another surge in wage de-mands and a period of unduly large wage increases.Averting such a development, however, has been oneof the primary objects of public policy over the pastyear, not only in the United States but also in the otherindustrial countries. If such policy succeeds in contain-ing the response of hourly earnings until the currentbulge in consumer price increases has receded, subse-

quent moderation of wage demands should becomeeasier.

For the industrial countries other than the UnitedStates, the average rate of increase in hourly earnings,in contrast to that in U.S. industry, has remainedconsistently above the average rate of increase in con-sumer prices, as generally warranted by the continuanceof substantial productivity gains. However, the marginhas been much narrower since 1976 than in the early1970s (lower panel of Chart 2). Particularly in theEuropean countries, de jure or de facto indexation hastended to preserve the increased labor share of realnational income that resulted from the large wage gainsof the early 1970s and the impact of the deep recessionof 1974-75 on profits of enterprises. From the stand-point of investment incentives in the European indus-trial countries, avoidance of a renewed spurt in wagesis essential to avert a further squeeze on profits.

A striking contrast between the United States and theother major industrial countries with respect to interre-lationships of prices, wages, productivity, and profitsover the past decade is suggested by the data shown inChart 3. In the lower panel are plotted composite in-creases in unit labor costs (reflecting changes in bothwages and productivity) and in deflators for valueadded in manufacturing for the six largest industrialcountries other than the United States, along with thecumulative difference between these two sets of in-creases. It may be inferred from this difference that thelabor share of value added rose sharply in the first halfof the 1970s. Since 1975, it has tended to decline, butonly gradually. It would appear that indexation(whether implicit or explicit) has limited the scope foradjustment to what was provided by a relatively smallerosion of earlier real wage gains. In the United States,on the other hand, the implied labor share of valueadded in manufacturing has remained virtually stablesince 1976 at about the pre-1974 level.

Several features of the recent inflationary surge sug-gest that it may have reached a crest in the first half of1980, provided that there are no further exogenousshocks and that the present stance of demand manage-ment policies is maintained. The increase in the realprice of oil after the end of 1978 was perhaps the mostimportant single factor in the late 1979 and early-1980price acceleration. In the United States, for example,energy prices (dominated by oil) accounted for morethan three fifths of the entire acceleration (amountingto about 4V2 percentage points) in the consumer priceindex from the four-quarter period ended in March1979 to the corresponding period a year later. Part ofthe acceleration in this case stemmed from a phaseddecontrol of domestic crude oil prices beginning in mid-1979. If increases in energy prices should taper off dur-ing the remainder of 1980, an important element in re-

6



Chart 3. Fourteen Industrial Countries: Labor Costsin Manufacturing, First Half 1971-First Half 1980(Changes in per cent)

1 Change from preceding half year, seasonally adjusted an-nual rate.2 Cumulative change from average share for 1968-70.

cent rates of inflation in the industrial countries wouldbe removed. Temporary influences exerted by certainmore specific factors, such as the increase in U.K. value-added taxation and the emergence of very high U.S.mortgage interest rates, also appear to be fading. Iffeedbacks of the spurt in consumer prices on wages andother incomes can be contained, there will be a goodchance of significant abatement of the inflation of con-sumer prices. The fact that producer prices in the in-dustrial countries rose less rapidly in the second quarterof 1980 than in the first quarter lends credence to thispossibility.

Output and employment. Economic expansion in theindustrial countries, which proceeded at a relativelymodest pace under conditions of continuing high infla-tion after the 1975 recession, became somewhat morehesitant, on average, in 1979. That year's increase inthe real GNP of the industrial group as a whole slippedto 3Vi per cent, compared with about 4 per cent ineach of the preceding two years (Table 1).

During the first half of 1980, a more pronouncedslowing of growth in total output of the industrial coun-tries set in, and the short-term prospect at midyear wasclearly one of marked deceleration, reflecting particu-larly the recession under way in the United States. Adecline in national output of the United Kingdom isalso in process, reflecting strong actions of the authori-ties in an effort to halt inflation and reorient economicpriorities. In the other major industrial countries, andalso in the smaller ones as a group, aggregate demandremained relatively buoyant through the latter part of1979 and the first quarter of 1980, but is expected toweaken noticeably during the remainder of the year andto show a substantial deceleration for 1980 as a whole.In combination with the U.S. and U.K. downturns,decelerations elsewhere may well result in an overallincrease in GNP of about 1 per cent from 1979 to1980.

This worsening of growth performance and prospectsreflects the increasing drag exerted by the negative im-pact of accelerated inflation on real incomes of largesegments of the population, by the tightening of finan-cial policies to choke off the inflation, and by the grow-ing diversion of domestic expenditures into paymentsfor imported oil.4 The roles of these and other factorshave differed from country to country, as have the cir-cumstances in which such influences have operated.Consequently, the strength and timing of responses evi-dent in the various national economies have displayedconsiderable differences.

In particular, the course followed by the U.S. econ-omy over the past year and a half has been dissimilarto the evolution of economic activity in most of theother industrial countries. Such an absence of paralleltendencies in the major industrial economies has helpedto prevent the emergence of another boom during therecovery from the 1975 recession; and it may serve tolimit the degree of the slowdown now in process.

4 Over a long period of time, and under conditions of suffi-cient flexibility of wages, prices, investment schedules, and pub-lic policies, economic activity financed through recycling ofsurplus funds accruing to the oil exporting countries might beexpected to compensate for the "drag" exerted by the diversionnoted here. In the short run, however, and under actual condi-tions considerably more rigid than those just hypothesized,funds "recycled" to the industrial countries cannot fully replacethe productive activities aborted by the diversion of expend-itures.

7


ANNUAL REPORT, 1980

Table 1. Industrial Countries: Changes in Output and Prices, 1963-79(Percentage changes)

Real GNPCanadaUnited StatesJapan

France 2

Germany, Fed. Rep. ofItaly 2

United Kingdom 2

Average1963-72 J

5.53.9

10.5

5.54.54.82.9

Change from Preceding Year1973

7.65.5

10.0

5.44.96.97.8

1974

3.6-1.4-0.6

2.80.44.2-1.2

1975

1.2-1.31.5

0.3-1.8-3.5-0.7

1976

5.55.96.5

4.65.35.93.7

1977

2.25.35.4

3.02.61.91.0

1978

3.44.46.0

3.63.52.63.5

1979

2.72.36.0

3.34.45.00.9

Other countries3

All industrial countries

Of which,Seven larger countries4

European countries

4.9

4.7

4.74.5

5.5

6.2

6.35.7

3.5

0.3

-0.21.9

-0.3

-0.6

-0.7-1.1

3.6

5.3

5.64.4

1.6

3.8

4.22.3

2.2

4.0

4.33.0

2.8

3.4

3.53.4

GNP deflatorCanadaUnited StatesJapan

France 5

Germany, Fed. Rep. ofItaly5

United Kingdom 5

Other countries 3

All industrial countries

Of which,Seven larger countries 4

European countries

3.63.64.9

4.84.15.05.1

5.6

4.3

4.15.0

9.25.7

10.8

7.76.0

11.76.7

9.5

7.4

7.18.0

15.29.4

20.0

11.26.8

18.314.9

12.4

12.1

12.011.6

10.89.68.6

13.16.7

17.427.2

13.1

11.3

11.013.6

9.55.25.7

9.73.2

18.014.3

10.6

7.6

7.09.7

7.06.05.5

9.13.8

18.913.8

10.1

7.6

7.19.7

6.37.34.1

9.73.9

14.110.6

9.1

7.4

7.18.6

10.38.92.0

9.63.9

15.114.4

8.0

7.7

7.78.7

1 Compound annual rates of change.2 GDP at market prices.3 Include Australia, Austria, Belgium, Denmark, Finland, Iceland, Ireland, Luxembourg, the Netherlands, New Zealand, Norway,

Spain, Sweden, and Switzerland.4 As listed separately above.5 GDP deflator.

In the United States, the past year and a half wasa period of hesitation and eventual downturn. Growthof real GNP over the four quarters ended with the firstquarter of 1980 amounted to % of 1 per cent, reflectingsubstantial declines in expenditures on residential struc-tures and motor vehicles. Aggregate outlays for allother types of goods and services (accounting fornearly nine tenths of GNP) increased by about 3 percent over the same four quarters. It was the buoyancyof these latter components of aggregate demand thatstaved off a U.S. recession for almost a year. The strongperformance of U.S. exports and continued buoyancyof fixed business investment contributed to the mainte-nance of aggregate demand, but the critical factor(without which it is doubtful that business investmentwould have been so well sustained) appears to havebeen the willingness of consumers to reduce their rateof saving in order to maintain the bulk of their con-sumption expenditures despite the inroads of consumerprice inflation on their real incomes. The ratio of per-sonal saving to disposable personal income in theUnited States dropped to 3V2 per cent (an extraordi-

narily low rate in the perspective of recent decades)during the last quarter of 1979 and the first quarter of1980, compared with about 5 per cent in 1977 and1978, and with rates in the 6-8 per cent range duringother years of the 1970s. A partial reversal of this dipin the personal saving rate appears to have occurred inthe second quarter of 1980, when consumer demandweakened.

In contrast to the weakening of growth in real domes-tic demand and output in the United States during 1979and early 1980, growth of output in most of the otherindustrial countries remained moderately buoyant—and growth of real domestic demand more so—throughthe early months of 1980. The principal exceptionswere Canada (closely affected by U.S. developments)and the United Kingdom, where strong counterinfla-tionary policies were implemented in the spring of 1979.Elsewhere in the industrial world, and particularly inthe Federal Republic of Germany, Italy, and Japan,the quickening of economic activity observed in 1979generally persisted through the first quarter of 1980.Only in the months just before midyear did signs of

8



softening of demand in some of these countries appearin statistics for orders and stock building and in surveysof business investment intentions.

The buoyancy of economic activity in most industrialcountries during 1979 led many firms to hire additionalemployees on a scale reminiscent of the early 1970s. Inthe Federal Republic of Germany, for instance, em-ployment increased by 2 per cent in 1979, on top ofa IVi per cent rise in 1978, after having stagnated in1976 and 1977. Even in the United States, where theslackening of output growth did result in somewhatslower hiring, employment rose sufficiently to absorb asizable increase (2l/2 per cent) in the labor force. Ingeneral, unemployment rates thus tended during 1979either to remain fairly stable or to decline slightly, asin the Federal Republic of Germany and Canada. InFrance and Italy, however, unemployment rates rosesomewhat, partly because of demographic factors. Forthe entire group of industrial countries, the averageunemployment rate was about 5 per cent in 1979, mar-ginally lower than in 1978 and about l/2 of 1 per-centage point below the average of the preceding threeyears.

During the second quarter of 1980, the steady or im-proving trends in employment that were evident during1979 took a turn for the worse. The U.S. unemploy-ment rate jumped from about 61A per cent in March,after being relatively stable throughout 1978 and 1979,to 734 per cent in May and June. Increases in unem-ployment were also reported during the second quarterin a number of other industrial countries, althoughthese were of modest size.

Associated with the generally modest pace of growthin output in the industrial countries over the past sev-eral years has been a shortfall of productivity gains be-low past trend rates. Developments on this score havebeen especially disappointing in the United States andCanada, where large increases in employment duringthe period 1977-79 were roughly proportionate to con-current increases in output, signifying no overall ad-vance in output per worker. This lack of improvementin productivity, by limiting performance on the supplyside of the economy, has been one of the factors mak-ing containment of inflation difficult. (See Chart 4.)

Developments outside North America have beenmore encouraging on this score, productivity gains hav-ing generally rebounded in step with expansion of totaloutput since the middle 1970s. For the major industrialcountries other than the United States and Canada, realGNP per employee increased at an average rate of closeto y/2 per cent in 1978 and 1979, compared with anaverage annual rate of a little under 2Vz per cent overthe preceding four years. Current rates of advance inproductivity, however, remain considerably below theaverage increase of 5 per cent per annum recorded for

Chart 4. Major Industrial Countries: Real GNP PerEmployee, 1958-79 l

(Indices, United States in 1973=100)

1 Intercountry differences (for 1973) are based on a study bythe United Nations and the World Bank. Irving B. Kravis andothers, International Comparisons of Real Product and Pur-chasing Power (Johns Hopkins University Press, 1978).

the same countries during the 15-year period from1958 to 1973. Although unemployment rates are rela-tively high in some of the countries, it is doubtful thatthe shortfall of productivity gains below previous aver-age rates can be attributed to cyclical considerations.The strength of employment trends in several of thecountries concerned would seem to cast doubt on anyhypothesis that there is substantial scope for fuller utili-zation of workers already employed. In the Federal Re-public of Germany, for instance, the 3V^ per cent risein employment from 1977 to 1979 suggests that theaccompanying 2V4 per cent per annum growth of realGNP per employee was probably at least as closely re-flective of underlying productivity trends as the coun-try's rate of 4Vi per cent per annum over the period1958-73. A similar interpretation would seem plausiblefor most other industrial countries as well, although theevidence is less clear for countries where slack in re-source utilization is substantial, as in France and Italy.The implication of these observations is that normative

9


ANNUAL REPORT, 1980

standards of productivity growth in industrial countriesduring the period ahead will probably be much closerto the recent average rate (slightly less than 2 per centper annum for the whole group of industrial countries)than to the average of 3% per cent per annum over thepast two decades.

It appears that the productivity slowdown has beenrather pervasive not only internationally but alsoamong broad economic sectors of each of the majorindustrial countries. Averages computed for each offive sectors (industry, agriculture, commerce, govern-ment services, and other services) in those countriesindicate that rates of increase in productivity in everysector except government services5 were lower by 1-2percentage points in the period 1976-78 than in theperiod 1960-73. The overall difference was not espe-cially concentrated in particular sectors, nor did it re-flect significant shifts in the relative importance of sec-tors with different rates of gain in output per unit oflabor. Explanation of the productivity slowdown, there-fore, would seem to depend primarily on such general-ized factors as lower rates of capital accumulation,shifts in the composition of the labor force, changedwork attitudes and habits, higher energy costs, andinflation.

Stance of policies. In an economic environmentfeaturing strong upward momentum of prices, exten-sive indexation of nominal incomes, unsettled expecta-tions, and the latest increases in the price of oil andother energy products, the authorities of virtually allthe industrial countries accorded top priority in 1979and the first half of 1980 to the containment of infla-tion. This priority was reaffirmed in the communiqueissued at the conclusion of the April 25, 1980 meetingof the Interim Committee of the Fund's Board of Gov-ernors in Hamburg, which—after expressing "greatconcern at the dramatic and widespread rise in rates ofinflation since its meeting in Belgrade"—went on tostate that "the Committee agreed that the top prioritybeing given in many countries to the fight against infla-tion must not be relaxed" and that ". . . success in re-ducing inflation was considered a condition for betterinvestment performance and resumption of satisfactorygrowth over the longer term."

The views embodied in the foregoing quotationstemmed from a widespread conviction that inflationmust be brought under better control as soon as pos-sible and reduced substantially over the medium termand longer term, despite the short-run costs, in termsof forgone output and employment, that might be in-curred through the necessary actions. Most national

5 Where conventional measurement of output in the nationalaccounts prevents meaningful estimation of productivitychanges.

authorities in the industrial countries have come to be-lieve that the risks involved in this approach are lessthreatening than the danger, otherwise posed, that eco-nomic developments in the 1980s might be marred byperiodic interruptions of growth such as those en-gendered by the inflationary spurts of the 1970s.

In most of the industrial countries, the priority as-signed to combating inflation found its principal expres-sion in the monetary sphere, where policies were tight-ened appreciably during 1979 and the first part of1980, rather than in fiscal measures. Nominal interestrates rose progressively throughout most of 1979 andescalated sharply further in early 1980. The increaseswere especially sharp in the United States in the after-math of actions taken by the monetary authorities ontwo occasions, first in October 1979 and then in March1980. By March, short-term interest rates in the UnitedStates averaged some \ll/2 per cent, compared with10 per cent a year earlier.

During the middle part of 1979, increases in yieldson financial assets denominated in deutsche mark andin sterling were rising faster than U.S. rates. Althoughthese increases stemmed from anti-inflationary mone-tary policies, they had the incidental effect of puttingupward pressures on interest rates in other countries.In late 1979 and early 1980, it was the escalation ofU.S. rates that constituted the main source of such pres-sures—again as a by-product of the effort to checkdomestic inflation. The cumulative result was a rapidfurther upward spiraling of yields on financial claimsthroughout the industrial world. By Match 1980, short-term rates in each of the major industrial countrieswere some 5-8 percentage points above correspondinglevels a year earlier. (See Chart 13.) While long-termgovernment bond yields were also generally higher,these showed somewhat lesser increases (2V2-5 per-centage points).

Although inflation was also accelerating during theperiod indicated (and generating expectations thatdoubtless contributed to the upward movements of in-terest rates), it was considerably outpaced in mostcountries by the increases in nominal interest rates. Therise in real interest rates thus implied represented apervasive new restraining influence on borrowing andspending.

The rise in interest rates reflected, in addition to theacceleration of inflation, the generally declining pathtraced—under restrictive monetary policies—by ratesof expansion of the principal monetary aggregates innearly all the industrial countries since 1978. On ayear-over-year basis, the average growth of broadlydefined stocks of money in the major industrial coun-tries, after having risen from 11 per cent in 1977 to12 per cent in 1978, receded to a little less than 11 percent in 1979. Moreover, the rise during the course of

10



1979 was still slower, dropping back to less than 10 percent for the first time since the late 1960s.

The deceleration of growth in narrowly definedmoney stocks (Chart 13) was even more pronounced,as holdings of these tended to be discouraged by theescalation of interest rates, which favored shifts intohigher-yielding financial assets. During the course of1979, the average rate of expansion of narrow moneyholdings in the major industrial countries was only6 per cent, compared with 11 per cent during the pre-ceding year.

Official targets for expansion of monetary aggregatesin 1980 imply a continuing shift toward greater re-straint. In no case have announced targets been ad-justed upward to reflect or accommodate the unex-pected price shocks of the past year. Rather, targetsestablished earlier have been reaffirmed or even low-ered. In some countries, moreover, actual rates ofexpansion of key "monetary aggregates in the early partof 1980 dropped below targeted ranges or toward thelower ends of those ranges. Given the additional in-creases in nominal values of economic transactionslikely to result from the unexpectedly high rates of in-flation in the period under discussion, the degrees ofmonetary expansion now contemplated are likely toexert even more significant restraint than originallyenvisaged.

On the other hand, the marked slowing of real eco-nomic activity that became apparent in the secondquarter of 1980 is bringing new forces to bear on finan-cial markets. Easing of demands for credit and declinesof interest rates from recent peaks may well alter thesetting for growth of monetary aggregates as the yearprogresses. Indeed, striking developments of this typehave already occurred in the United States, where thesudden drop in demands for bank credit occasioned bythe onset of the current U.S. recession led both to arapid fall in interest rates—by some 8 percentagepoints for short-term assets—and to an outright decline inthe stock of money. This decline occurred without anyshift in the basic stance of policy as enunciated in officialstatements and embodied (essentially through actions ofthe monetary authorities) in growth of bank reserves.

The extraordinarily sharp movements in U.S. interestrates over the past year stem in part from a shift in theoperating techniques of the Federal Reserve Systemfrom primary emphasis on interest rate objectives toprimary emphasis on bank reserves. As a result of thischange, random or unexpected financial disturbancesnow tend to be absorbed more extensively, in the firstinstance, by changes in interest rates, and less fullythan heretofore by changes in monetary aggregates.Such tendencies make for noticeably more variability ofU.S. interest rates than has usually been observed inthe past, and may pose some new difficulties, at least

transitionally, with respect to international capital flowsand foreign exchange markets.

Shifts toward restraint in the design and applicationof fiscal policy during 1979 and early 1980, as notedabove, were generally less marked than those with re-spect to management of money and credit. On thewhole, fiscal positions in the industrial countries in1979 differed relatively little from those in 1978. Suchchanges as were introduced, however, were mostly inthe direction of less expansionary policies.

A somewhat more general swing toward restrictivepolicies is evident in the central government budgets ofthe industrial countries for 1980, but such shifts haveremained cautious. Most of the budgets (translated intocalendar 1980 terms) have called for reductions indeficits of the central governments, typically byamounts equivalent to something like 1A-V2 of 1 percent of GNP. However, given the projected slowdown ingrowth of real GNP in most of these countries from1979 to 1980, the relatively modest changes contem-plated in the fiscal balances as ordinarily projected maytranslate into contractionary impulses of some con-sequence on a cyclically adjusted basis.

Despite the shifts away from fiscal stimulus, most ofthe 1980 budgets still involve sizable deficits. For tenof the larger industrial countries, including all sevenof the largest, fiscal information available on a rela-tively uniform basis indicates a weighted average deficiton the order of 3V4 per cent of GNP in 1980. Althoughthat average is below the peak recorded in 1975 (5l/2per cent of GNP), each of the national figures encom-passed is about twice as high (in proportion to GNP)as the largest corresponding deficit incurred in any ofthe three years immediately preceding 1975.

Except notably for the United States, where the cen-tral government deficit has declined markedly in rela-tion to GNP since 1976, the deficits of most industrialcountries have either remained near the levels of thatyear (as percentages of GNP) or tended to increase—in some cases rather substantially. This circumstancemakes it difficult for the countries concerned, even ifabatement of inflation should soon begin, to contem-plate fiscal countermeasures against deflationary ten-dencies. The threat of rekindling price pressures willremain imminent for some time and maintenance ofcontrol over monetary aggregates will generally con-tinue to call for restraint of public sector deficits, espe-cially where private saving has declined noticeably. Forthe near term, these constraints may mean that fiscalpolicy can prudently go no further in a number ofcountries than to permit the working of the so-calledautomatic stabilizer mechanisms and to strengthen"supply" policies, such as those providing fiscal incen-tives or support for restructuring of energy use andproduction.

11


ANNUAL REPORT, 1980

Developing Countries

From 1978 to 1979, average rates of expansion ofreal output in most of the developing countries were rel-atively modest in historical perspective. (See Table 2.)Available evidence suggests that the results to beexpected for 1980 may be no better, on average, al-though important exceptions among individual coun-tries or particular groups of countries will doubtless beapparent again. The moderately weak growth recordof 1979 was widely accompanied by accelerated ratesof inflation (Table 2), and data for the first part of1980 imply another year of exceptionally rapid average

increases in consumer prices among developing coun-tries.

Almost all developing countries have been affectedduring the past year or so by both the intensification ofinflation in the industrial countries and the recentslackening of growth in those countries. But externalfactors, notably the higher cost of energy, have affectedindividual developing countries in different ways andto different degrees. Since these countries also face awide range of problems of domestic origin, great varietyis evident in their policies and programs.

In recognition of this diversity, emphasis is placedbelow on selected groups and subgroups of developing

Table 2. Developing Countries: Changes in Output and Prices, 1967-79(Percentage changes)

Average1967-72 l

Change from Preceding Year1973 1974 1975 1976 1977 1978 1979

Real GDPOil exporting countries2

Oil sectorNon oil sectors

Non-oil developing countries3

By areaAfricaAsiaEurope4

Middle EastWestern Hemisphere

By analytical groupNet oil exporters5

Net oil importersMajor exporters of manufactures *Low-income countries7

Other net oil importers

9.0

5.9

5.04.96.86.46.8

5.95.97.74.05.5

10.7

13.29.7

6.7

3.86.25.84.88.4

7.46.59.63.54.5

8.0

-1.012.3

5.5

6.93.94.0

7.3

6.25.36.92.94.9

-0.3

-11.112.4

4.4

2.96.54.48.83.0

5.14.33.56.14.2

12.1

13.311.1

5.5

4.96.27.51.84.7

4.85.66.43.26.3

6.2

2.19.3

5.1

1.76.85.76.84.4

3.65.35.15.35.8

2.7

-4.27.3

5.0

2.76.94.06.34.7

5.84.95.44.34.6

2.9

3.02.8

4.7

2.63.53.57.96.3

7.24.26.3

-0.13.9

Consumer PricesOil exporting countries 2

Non-oil developing countries 3

AfricaAsiaEurope 4

Middle EastWestern Hemisphere

Non-oil developing countries excludingsix high-inflation countries 8

AfricaEuropeMiddle EastWestern Hemisphere

8.0

9.34.55.57.93.9

13.3

7.84.08.02.7

12.5

11.3

20.39.7

15.113.112.732.2

13.39.5

12.58.9

13.8

17.0

27.215.427.318.422.135.3

23.314.918.813.425.4

18.8

27.915.110.614.923.452.0

16.214.513.514.423.2

16.6

24.013.20.1

12.420.755.1

13.511.010.916.027.6

15.4

27.016.97.8

16.118.751.1

19.314.312.212.134.5

9.7

23.414.85.9

22.321.041.7

16.212.512.310.629.0

11.0

29.120.310.328.726.648.7

21.115.616.312.536.6

1 Compound annual rates of change.2 Comprise Algeria, Indonesia, Iran, Iraq, Kuwait, Libyan Arab Jamahiriya, Nigeria, Oman, Qatar, Saudi Arabia, the United

Arab Emirates, and Venezuela. This group includes only those countries whose oil exports (net of any imports of crude oil) bothaccount for at least two thirds of the country's total exports and are at least 100 million barrels a year (roughly equivalent to 1 percent of annual world oil exports). These criteria are at present applied to averages for 1976-78.

3 Include all Fund members not mentioned in footnote 2 or in Table 1 (except the People's Republic of China), plus certainessentially autonomous territories for which adequate statistics are available. The regional subgroups conform to the classification inInternational Financial Statistics.

4 Comprises Greece, Malta, Portugal, Turkey, Yugoslavia, Cyprus, and Romania.5 Comprise Bahrain, Bolivia, Congo, Ecuador, Egypt, Gabon, Malaysia, Mexico, Peru, the Syrian Arab Republic, Trinidad and

Tobago, and Tunisia.6 Include Argentina, Brazil, Greece, Hong Kong, Israel, Korea, Portugal, Singapore, South Africa, and Yugoslavia.7 Thirty-nine countries whose per capita GDP, as estimated by the World Bank, did not exceed the equivalent of US$300 in 1977.8 Excluded here are six relatively large developing countries (Argentina, Chile, Ghana, Israel, Turkey, and Zaire) for which rates

of inflation are estimated to have been at least twice as high as the respective averages for the areas in which they are located for anyof the years covered in this table.

12



countries, rather than on any averages or aggregatescovering the entire group. The discussion begins withthe oil exporting countries, whose present position inthe world economy is unique, and then deals with themuch larger group of non-oil developing countries,stressing key distinctions among several analytical orregional subdivisions within that group.

Oil Exporting Countries

During 1979 and the first part of 1980, after severalyears of adjustment following the oil price increases in1973-74, the financial resources of the oil exportingcountries were again greatly enlarged as a result ofincreases in oil prices. Use of these resources to pro-mote the long-run development of their economies is, ofcourse, a major objective of these countries. However,the pace at which many of them can usefully reinvestoil export earnings in domestic development is con-strained by both economic and other considerations.Particular constraints against unduly rapid further ab-sorption have developed in countries where high ratesof domestic expansion in recent years have been madepossible by rapid growth of the expatriate labor force.In some cases, the resulting high proportions of foreignworkers in the labor force have made continuation ofthis process undesirable in the view of the nationalauthorities.

The authorities of several oil exporting countrieshave been relatively successful over the past few yearsin implementing policies aimed at eliminating the excessdemand conditions that existed in the mid-1970s. Theyare now concerned with avoiding a renewed buildup ofinflationary pressures or re-emergence of supply bottle-necks such as those experienced a few years ago. More-over, some of the countries that had current accountdeficits in 1978 have been utilizing part of their recentlyincreased financial resources to build up foreign ex-change reserves or to reduce reliance on external debt.

For these reasons, most of the oil exporting countrieshave been pursuing considerably more restrained de-mand management policies in 1979 and early 1980than those implemented following the oil price in-creases in 1973-74. Some relaxation of financial poli-cies, however, became evident in several countries asthe expansion of financial resources available to themproceeded. Among the actions taken were additions topreviously strict budgetary appropriations, easing ofimport restrictions imposed earlier by a few countries,and steps to foster the expansion of credit to the privatesector by bolstering the liquidity of commercial banks.

These policy responses had little impact on economic

activity in 1979, both because the shift toward some-what more expansionary policies took place mostly inthe latter part of the year and because of lags in imple-mentation or in reactions of the private sectors. Formost of the oil exporting countries, accordingly, ratesof expansion in their non-oil sectors remained similarto those in 1978. A major exception, however, wasIran, where economic activity was severely impaired.As a result, the average rate of growth in real non-oilgross domestic product (GDP) for the whole group ofoil exporting countries (in which Iran has a largeweight) declined from more than 7 per cent in 1978 toabout 3 per cent in 1979.

Present indications are that the recent shift towardsomewhat more expansionary policies will be main-tained throughout 1980. Thus a recovery of growth inaggregate non-oil GDP of the oil exporting countries toat least the 1978 rate would seem probable, particularlyif economic activity in Iran does not weaken further.Since the absorptive capacity of several countries in thegroup has been greatly increased during the past half-dozen years, no emergence of significant excess demandconditions is likely to result from this development. Incombination with another sizable increase in importprices, however, the firming of domestic demand in theoil exporting countries is expected to bring a moderaterise irr the average rate of inflation (as measured bychanges in consumer price indices) in 1980. That ratehad already risen slightly in 1979, following three yearsof appreciable decline (Table 2).

Except in 1979, non-oil GDP of the oil exportingcountries has risen much faster in real terms in everyyear since the early 1970s than the average for totalGDPs of other developing countries. However, becauseof the relative stability in the volume of oil production,this has not been true of the overall average rate ofeconomic growth in the oil exporting countries. In 1978and 1979, that rate has been on the order of 2V^-3 percent, and the 1980 figure seems likely to be even lower,reflecting an expected decline in output of oil and theheavy weight of the oil sector in total GDP of thesecountries. However, in terms of a measure such as realnational income, which takes account of changes in theterms of trade, the economic gains of the oil exportingcountries since 1978 have been quite large.

Non-Oil Developing Countries

This section undertakes to summarize domestic eco-nomic developments, as reflected in rates of growth andinflation, in developing countries other than those in-cluded in the oil exporting group. In view of the great

13


ANNUAL REPORT, 1980

diversity of the 110 countries covered here,6 generaliza-tions regarding their economic problems and policiesare difficult. Comments on these issues are based largelyon various analytical or geographic subdivisions of themain non-oil group.

For the group as a whole, the average rate of eco-nomic growth in the past several years—while holdingup better than that of the industrial world—was lowerthan during the late 1960s and early 1970s. Since 1976,this average rate has hovered around 5 per cent perannum, compared with about 6 per cent in the period1967-72. The difference, although seemingly moderate,must be viewed with concern in the light of two relatedconsiderations—the rapid population growth character-istic of this group of countries (averaging some 2l/2 percent per annum) and their urgent need for acceleratedimprovement of real incomes. The shortfall of recentgrowth rates below the average of the late 1960s andearly 1970s is proportionately larger on a per capitabasis than in the aggregate, and therefore correspond-ingly more disturbing. Available information for thefirst half of 1980 does not suggest any real improve-ment, apart from gains in agricultural output that mightbe expected to result from a return to normal weatherconditions in southern Asia, where the conditions wereparticularly adverse in 1979.

^ Two common denominators are now tending to limitgrowth prospects for many non-oil developing coun-tries. Increased costs of oil and other essential importsare eroding the real value of both export earnings andborrowed funds; and the slowdown in the industrialworld, where the principal export markets of the devel-oping countries are found, is constraining the scope forexpansion of export volume. With prices for most typesof export also sensitive to demand conditions and ratesof inflation in major trading partners, a generalizedslowdown of the kind now in process must be expectedto exert an inhibiting influence of some importance onproductive activity in many developing countries. Suchactivity, it must be emphasized, also responds to manyinfluences originating within the developing countriesthemselves, imparting great diversity to the paths fol-lowed by their economies.

The disappointing overall growth rate of the non-oildeveloping countries over the past several years com-prises an uneven distribution of gains among varioussubgroups of those countries. In 1979, the average forthe whole group was bolstered by strong advances in a

/-

6 As noted earlier, the present classification of "non-oil de-veloping countries" has wider coverage than the one used inprevious Annual Reports, reflecting the addition of seven coun-tries formerly classified as "more developed primary producingcountries." Because of the relatively large size of some of thesecountries, their addition to the group has had a significant effecton a number of the statistical averages or aggregates presentedin this Report, most of which are not closely comparable withsimilar figures appearing in earlier Annual Reports.

small number of countries that are net exporters of oil(although they do not meet the criteria used in thisReport for inclusion in the main oil exporting group7).Aided by the financial resources accruing from their oilexports, the dozen countries in the oil exporting sub-group achieved in 1979 an average increase of 7 percent in real GDP, in contrast to an average of only4 per cent for the great majority of developing coun-tries that are net importers of oil.

Within the oil importing group, moreover, a dispro-portionate share of the increase in output in 1978-79was attributable to a subgroup of 11 middle-incomecountries whose exports of manufactures have becomerelatively large. Output of this group, stimulated in partby continuing gains in its exports of manufacturedgoods, showed a percentage increase half again as largeas the average for all oil importing developing coun-tries. (See Table 2.)

^ By far the weakest growth performance among thesubgroups of non-oil developing countries listed inTable 2 was that of the low-income countries, whichtogether appear to have achieved no growth at all in1979. Reflected in this stagnation of the subgroup'saggregate output, however, was a negative change inIndia, which accounts for 45 per cent of the total forthe subgroup (and for 58 per cent of its population).India's output was depressed in 1979 by the impact ofexceptionally bad weather on agricultural production.

£ For the 38 low-income countries other than India,most of which are relatively small, real growth re-mained positive in 1979, averaging a little more than2 per cent, but left no margin for per capita incomegains. This relative weakness of the low-income coun-tries was by no means new, as their growth rates havelagged appreciably behind those in other major groupsof non-oil developing countries throughout the periodsince the mid-1960s.

This record provides, of course, part of the explana-tion why the countries in question are in the low-incomecategory. A more basic explanation, however, is to befound in the low rates of investment characterizingmost countries in this group. Apart from India, the low-income countries as a group have used resources equiva-lent to only about 14 per cent of their relatively smalloutput for investment purposes. Such a ratio stands inmarked contrast to an average of 20-23 per cent for allnon-oil developing countries and compares even moreunfavorably with an investment ratio of 23-25 per centfor the major exporters of manufactures in the group.

Very low rates of domestic saving have been asso-ciated with the low average investment ratio of 14 percent. Indeed, they represent in many cases one of thecrucial limiting factors with respect to investment.

7 See Table 2, footnote 2.

14



Largely because it is difficult to raise domestic savingratios where per capita incomes are very low in relationto basic consumption requirements, the low-incomecountries are extraordinarily dependent on resourcesfrom foreign governments and international agenciesfor any increase in their capacity to raise investmentoutlays and growth rates. The importance of additionalconcessionary financing for these purposes is clear. Un-der existing circumstances, indeed, a number of low-income countries may need additional external assist-ance even to maintain present rates of investment andgrowth., Regionally, the concentration of low-income coun-tries in Africa is reflected in a particularly weak averagegrowth record for that area in recent years. Even withthe improvement that accompanied the return to morefavorable weather conditions in 1979, particularly inthe Sahel region of West Africa, the average growthrate for the African area remained below 3 per cent.Below-average expansion was also registered in theEuropean developing countries, and a further slow-down for them appeared to be under way in the firstpart of 1980. Restraint of domestic demand is urgentlyneeded in some of these countries, for both internal andexternal reasons; and most of them will be stronglyaffected by the deceleration of economic activity nowin process in the European industrial countries. An-other area in which aggregate output of non-oil devel-oping countries rose less than the average in 1979 wasAsia. This result, however, reflected the temporarydepression of India's output by unfavorable agriculturalconditions, as noted earlier. Growth in other Asian de-veloping countries remained fairly strong in 1979, al-though not so strong as during the three precedingyears. In general, mainly because of policies, Asia hashad the best record on growth and prices among theregions over the past several years.

/ The regions of strongest growth in 1979 were theMiddle East and the Western Hemisphere. In the Mid-dle East, this result reflected the continuing impact ofrapid expansion in the non-oil sectors of most neighbor-ing oil exporting countries during recent years. For theWestern Hemisphere group, a sharp cyclical recovery inArgentina and maintenance of growth rates in the otherlarge countries of the area, including Brazil, outweighedweaker performances in some of the smaller LatinAmerican and Caribbean countries.

In the non-oil developing countries, as in the indus-trial countries, a clear tendency toward higher rates ofinflation emerged in 1979. For the entire group, theaverage rise in consumer prices in 1979 approached30 per cent, compared with about 24 per cent in 1978.For both years, the average was markedly affected by afew extremely high national rates of inflation in rela-tively sizable countries. When these are excluded (as in

lines 8-11 of Table 2), the averages for 1978 and 1979are appreciably lower (16 per cent and 21 per cent,respectively), but the degree of acceleration is virtuallythe same.

Much of this recent acceleration can be attributed tohigher import prices stemming from faster inflation inindustrial countries and from the rise in oil prices sincethe end of 1978. However, domestic factors also ex-erted a significant influence in the same direction. Inmany of the non-oil developing countries, fiscal condi-tions have remained expansionary in the face of wide-spread supply shortages; and for the group as a whole,the weighted average rate of increase in stocks ofmoney in 1979 continued to exceed by a wide marginthe corresponding average for earlier years of the1970s. It is clear that financial policies in many of thesecountries have been more expansionary than might beconsidered desirable from the standpoint of combatinginflation, thus reinforcing, rather than offsetting, the in-flationary pressures of external origin. At the presenttime, there is little basis for expecting any slackening ofprice increases in this group of countries for 1980.

As in the past, rates of inflation in 1979 variedwidely among individual non-oil developing countriesand regional groups. Exclusive of the high-inflationcases mentioned above (and in Table 2), regional aver-ages of consumer price advances from 1978 to 1979ranged from about 10 per cent in Asia and 12 per centin the Middle East to more than 35 per cent in theWestern Hemisphere. The acceleration of price in-creases in 1979, however, was pervasive. In none of theregional or analytical subgroups shown in Table 2 wasthe consumer price increase lower than the one recordedfor 1978. The prevalence of such high rates of inflationrepresents a serious deterrent to the expanded domesticsaving needed to maintain investment and growth in thecurrent adverse circumstances.

International Trade and Payments

Overview

World trade developments since 1978 have featuredlarge changes in prices and terms of trade, coupled withmoderate expansion in volume through 1979 but withsigns of a marked slowing during 1980. The averageincrease in foreign trade prices (unit values) from1978 to 1979 was about 18!/2 per cent in terms ofU.S. dollars (15 per cent in terms of SDKs), and evenlarger increases appear to be in process for 1980. (SeeTables 3 and 4.)

Mainly because of the large price increases, the totalvalue of world trade rose more sharply in 1979 than inany other year since 1974 (when an even more explo-

15


ANNUAL REPORT, 1980

Table 3. World Trade Summary, 1962-791

(Percentage changes in volume and in unit value of foreign trade)

World trade 3

VolumeUnit value (U.S. dollar terms)

(SDR terms) 4

Average1 962-72 2

921/2

2

1973

1323 Vi121/2

1974

5*72401/2391/2

Change1975

-598

from Preceding Year1976

1227

1977

598

1978

51/210

21/2

1979

61/2

18V2

15

Volume of tradeImports Industrial countries

Developing countries9!/2 121/2 -81/2 14 51/2 81/2

Exports

Oil exporting countriesNon-oil developing countries

Industrial countriesDeveloping countries


96

9

97

211/2

121/2

131/212i/2

81/2

37i/28

7Vi

-13

42-4

-41/2

-111/2

1931/2

11

141/214

145

5

—6V/2

61/28

6

-3V/2101/2

-IP/2

8

6»/2

2SVi

Unit value of trade in SDR terms 4

Imports

Exports





2

22

2

311/2

111/2

11

14

10

27i/222

38i/2

27i/245i/2

221/2

202V/2331/2

8

91/271/2

101/2

3V2

-3

6V/2

6V2

7

51/2

IP/2

101/2

8

71/28

7

8V/211

21/2

51

51/2

-6V/2

-3

15

1115i/2

12

421/2121/2

1 Figures are rounded to the nearest l/2 of 1 percentage point.2 Compound annual rates of change.3 Sum of the groupings shown separately, based on approximate averages of growth rates for world exports and world imports.4 For years prior to 1970, an imputed value of US$1.00 has been assigned to the SDR.

sive upsurge of foreign trade prices took place). Be-cause manufactured goods constitute the dominant com-ponent of trade flows, the price component of the in-crease in world trade from 1978 to 1979 stemmedmainly from the accelerated general inflation of pricesfor exports of such goods; but the year's large per-centage change in oil prices also contributed impor-tantly to the total rise in value. Prices of primary com-modities other than oil rose slightly faster than those ofmanufactured goods in 1979, but not by a wide enoughmargin to prevent a 2l/2 per cent deterioration of theterms of trade of the non-oil developing countries.

Although price movements dominated the 1978-79rise in world trade values, the growth of volume in thatyear was the strongest since 1976—6V2 per cent, com-pared with 5-51/2 per cent in the two intervening years(Table 3). All of these recent yearly gains, however,were relatively modest by past standards. Over the dec-ade ended in 1972, for example, the volume of worldtrade expanded at an average annual rate of 9 per cent.

7 The expansion of trade volume from 1978 to 1979was rather strong in relation to the concurrent moder-ate and somewhat faltering growth of aggregate demandin the industrial countries, which are the principal mar-kets for internationally traded goods. A major factor inthe relatively high elasticity relationship thus impliedwas the strength of investment demand and the achieve-ment of comparatively good domestic growth recordsduring the past year by the European industrial coun-

tries, whose imports are relatively large in relation todomestic output. Japan's import demand was also quitestrong in 1979. The slowdown in the United Statesdampened U.S. import growth substantially, but theUnited States has a much lower weight in the trade ofthe industrial countries than in their total output.

The outlook for growth of world trade volume in1980 and 1981 is poor. Developments during the firsthalf of 1980 seem to presage a year-to-year gain nomore than half the size of the increase in 1979, andreal growth of world trade during the course of thecurrent year may well prove virtually flat, if not declin-ing. These discouraging prospects stem, of course, fromthe influence of the U.S. recession and the probableslowdown in other major industrial countries on globalimport demands. The only import demands expected toremain buoyant throughout 1980 are those of the oilexporting countries.

As of mid-1980, two factors seemed likely to limitthe severity of the current setback to world tradegrowth. First, the difference between the cyclical posi-tion of the U.S. economy and the positions of most ofthe other major industrial economies has already cush-ioned the impact of the initial phase of the U.S. slow-down; and nonsynchronization of the respective posi-tions in subsequent phases of adjustment to cyclical in-fluences may help to prevent a sharp decline in thevolume of world trade. Second, the onset of the currentslowdown was not preceded by a massive buildup of

16

2 4



Table 4. Terms of Trade Developments, 1962-791

(Percentage changes)

Industrial countries

Developing countriesOil exporting countriesNon-oil developing countries

Average1 962-72 2

—

1— 1

Change from Preceding Year1973

-1

151V2

1974

-11

137-8

1975 1976

2J/2 -1

-5 41/2-9V2 3'/2

1977

-1

13

1978

3

-lOVi

-4

1979

-21/2

28-21/2

Reference: World trade prices (in U.S. dollarterms) for major commodity groups3

(a) Manufactures(b) Oil(c) Non-oil primary commodities

(market prices)

34

21/2

17i/240V2

55

22226

28

121/2

51/2

-18

6

12

991/2

20

141/2

-5

141/249

161 Based on foreign trade unit values.2 Compound annual rates of change.3 As represented, respectively, by: (a) the United Nations' export unit value index for the manufactures of the developed countries;

(b) the oil export unit values of the oil exporting countries; and (c) the International Financial Statistics index of market quotationsfor non-oil primary commodities.

inventories in the industrial countries, as was the1974-75 recession, and this circumstance should mili-tate against any sharp swing to inventory liquidation.

The sharp alterations of current account balances ofmajor groups of countries from 1978 to 1980, sum-marized in the introductory section of this chapter anddelineated more fully in Tables 5 and 7, are manifesta-tions, in the main, of the foreign trade price movementsand terms of trade shifts just described. Differentialrates of growth in domestic economic activity have alsoplayed a part, and may have a larger role in the nearfuture. In particular, the main impact of the currentcyclical slowdown on non-oil developing countries maynot be felt until 1981. However, the principal influenceof differential cyclical phasing to date has been its im-pact upon the distribution of the combined current

account balance of the industrial group among indi-vidual countries within that group (discussed in thenext section of this chapter), rather than upon the bal-ances of the respective major groups.

The main counterpart of the rise in the current ac-count surplus of the oil exporting countries from 1978to 1979 was a large swing from surplus to deficit in thecurrent account balance of the industrial countries,which are the principal importers of oil, and a furthersubstantial deterioration is in prospect for 1980. Al-though there was also a sizable adverse swing in thecombined balance of the non-oil developing countriesin 1979, the bulk of the current account deficit of thatgroup, as in previous years, reflected the basic capitalimporting structure of their balance of payments rela-tionships with the rest of the world. These countries are

Table 5. Payments Balances on Current Account, 1973-801

(In billions of U.S. dollars)

Industrial countriesSeven larger countriesOther countries

Developing countries


By areaAfricaAsiaEuropeMiddle EastWestern Hemisphere

Total 3

1973

19.314.15.2

6.6-11.5

-2.1-2.6

0.3-2.3-4.814.4

1974

-11.6-3.8-7.8

67.8-36.9

-4.8-9.9-4.4-4.4

-13.319.3

1975

17.923.0

-5.1

35.0-45.9

-9.1-8.8-4.8-6.6

-16.57.0

1976

-0.59.0

-9.6

40.0-32.9

-8.2-3.4-4.2-5.3

-11.86.6

1977

-4.19.3

-13.4

31.9-28.6

-6.2-1.5-7.5-4.9-8.5-0.8

1978

33.436.1

-2.7

5.0-35.8

-7.0-5.6-5.1-5.7

-12.42.6

1979

-9.82.9

-12.7

68.4-52.9

-4.9-13.5-9.3-7.9

-17.45.7

1980 2

-50-29-21

115-70

-51 On goods, services, and private transfers. For the industrial countries, alternative current account balances including official

transfers are given for the years 1976-79 in Table 8. Projected 1980 balances including official transfers are —$75 billion for theindustrial countries as a group, —$51 billion for the seven larger countries, and —$24 billion for the other industrial countries. Forclassification of countries in groups shown here, see Tables 1 and 2.

2 Fund staff projections.3 Reflects errors, omissions, and asymmetries in reported balance of payments statistics, plus balance of listed groups with other

countries.

17


ANNUAL REPORT, 1980

deficient in national saving—in relation to their domes-tic investment outlays—and have long depended onsubstantial inflows of capital and aid to cover this gap.Partly because many of them have always tended tostretch their borrowing capabilities to supplementmeager domestic resources, the incurrence of currentaccount deficits in 1979 and 1980 that exceed the nor-mal structural levels is creating problems of a difficultand painful nature. Since the additional borrowing en-tailed is not, generally speaking, bringing a significantlylarger inflow of real resources, the developmental capa-bilities of many non-oil developing countries are beingseriously constrained. (The situation of these countriesis reviewed in a later section of this chapter.)

Although the industrial countries are absorbing thebulk of the current account shift engendered by the ris-ing surplus of the 12 oil exporting countries, their ca-pacity to withstand the deterioration of their externalpositions is far greater than that of most non-oil devel-oping countries for two obvious reasons. First, theirgreater wealth and higher real incomes mitigate thehardship entailed in any reduction of growth in real in-come; and second, the initial placement of the bulk ofthe surplus funds accrued by the oil exporting countriesin financial institutions and markets in the industrialcountries means that the latter, as a group, encounterno particular difficulty in financing their collective cur-rent account deficit. However, the inflow of capital andreserve funds from the oil exporting countries tends tobe concentrated in a few of the main financial centers,or in affiliated banking enterprises, so that flows to indi-vidual industrial countries are not necessarily wellmatched with the shifts in their respective current ac-count positions. These individual shifts are beingaffected, of course, by differing cyclical conditions anddomestic energy positions.

If the international trade and payments mechanism isto function smoothly in dealing with the major struc-tural adjustments now in process, the financial inflowsreceived in various forms from the oil exporting coun-tries—in the first instance chiefly by financial institu-tions in a few large industrial countries—must be redis-tributed in such fashion as to bring a satisfactory match-ing of net capital movements with current account bal-ances. Such redistribution, both within the industrialgroup and toward non-oil developing countries, wasaccomplished predominantly by private financial insti-tutions and markets in the period 1974-75, and thebulk of the rechanneling of funds now needed willdoubtless be handled in similar fashion. Indeed, a verylarge shift in the pattern of balances from 1978 throughmid-1980 has already been accommodated, for themost part, through private financial intermediation.This has not occurred, however, without strains; andthese may intensify as the imbalances on current ac-

count continue and the claims of investing institutionson borrowers in heavily indebted countries build up.Under these conditions, a clear need for public andinternational financial institutions to assume a largerrole in the intermediation may well emerge.

Various aspects of the role of private financial insti-tutions in the process of global financial intermediationare brought out in Chart 5 and (on a somewhat differ-

Chart 5. Industrial Countries: Changes in ExternalAssets and Liabilities, Bank and Nonbank Components,1967-79(In billions of U.S. dollars)

ent statistical basis) in Table 6. The chart, based onaggregations of national balance of payments records,points up the great expansion from the early 1970s tothe middle 1970s in the proportion of total outflows ofcapital from the industrial countries that took the formof banking claims (including claims of one industrialcountry on another). After a pause in 1977, the growthin relative importance of banking transactions among

18



capital outflows from the industrial countries acceler-ated again in 1978 and 1979.

Largely because of the scale of intercountry move-ments of both banking funds and other capital withinthe industrial group itself, the scale of gross inflowsrecorded by the industrial countries (lower panel ofChart 5) has increased broadly in parallel with the risein outflows. The liability side of the international bank-ing accounts of the industrial countries was somewhatless expansive than the asset side in the middle 1970s,but more so in 1979 as bank deposits of oil exportingcountries were routed partly to residents of the indus-trial countries whose banks received the deposits.

Table 6, based directly on banking statistics (as com-piled from national sources by the Bank for Inter-national Settlements) rather than on balance of pay-ments records, undertakes to separate interbank depos-its from the gross changes in claims and liabilities ofbanks in the industrial countries and in certain so-calledoffshore banking centers. The changes in net claims andnet liabilities, thus measured, are more revealing thanthe gross flow data as regards sources and uses of funds

channeled internationally through private banks. Thetable shows a geographical breakdown of the fundsobtained by reporting banks from sources other thanbanks in the reporting areas, along with a similar distri-bution of net lending (excluding deposits with otherbanks inside the reporting areas).

The fact that every group of countries listed in thetable has both substantial placements with the reportingbanks and substantial loans from them attests to thesize, scope, and flexibility of the intermediary facilitiesprovided. Here, it is noteworthy that the only groupwith a consistent record of either net placements in ornet borrowing from the reporting banks over the pastfour years is the group comprising non-oil developingcountries. In combination, these countries were net bor-rowers in each of the years 1976-79, even though vari-ous countries in the same group were also an importantsource of funds for the reporting banks, mainly throughplacements of official reserves. The particularly heavynet use of international banking funds by non-oil devel-oping countries in 1979, it may be noted, comprisedsome reduction in the gross placement of deposits, as

Table 6. International Banking: Global Sources and Uses of Funds, 1976-791


1976 1977 1978 1979

SourcesChanges in

Gross liabilitiesInterbank deposits

Net liabilitiesOf which, to residents of

Industrial countries2

Oil exporting countriesNon-oil developing countriesOther countries, including n.e.o.J

9636

60

3012144

11434

80

5113115

194105

89

587

204

26488

176

113361611

UsesChanges in

Gross claimsInterbank deposits4

Net claimsOf which, on residents of


Oil exporting countriesNon-oil developing countriesOther countries, including n.e.o.3

Memorandum item: Net sources ( + )/uses ( —) ofinternational banking funds


On account ofResidentsNonresidents

Oil exporting countriesNon-oil developing countriesOther countries, including n.e.o.3

10636

70

319

246

10-1

3-10-2

11034

75

4310139

-5832

-4

215105

110

45183215

34

2113

-11-12-11

21888

130

707

4310

-3

-464329

-271

1 The figures in this table, being taken from records of banks as reported to their respective national authorities, are not necessarilyfully consistent with the balance of payments statistics summarized in Tables 7 and 8. In principle, however, changes in bankingclaims on, and liabilities to, nonresidents, as shown above, are components of the capital flows shown in the other two tables. Forclassification of countries in groups shown here, see Tables 1 and 2.

2 Including branches of U.S. banks in the main offshore banking centers.3 In addition to countries not specified above, or amounts unallocated, this item includes any mismatching of assets and liabilities

ensuing from the assumption noted in footnote 4.4 Assumed equal to the BIS measure of such interbank deposits from the liability side.

19

9 3


ANNUAL REPORT, 1980

Table 7. Global Balance of Payments Summary, 1976-79(In billions of U.S. dollars)

Industrial countries 3

Oil exporting countries 3

Non-oil developing countries 3

By analytical group 3

Net oil exporters

Net oil importers

Major exporters ofmanufactures

Low-income countries

Other net oil importers

Total, all countries 6

1976197719781979

1976197719781979

1976197719781979

1976197719781979

1976197719781979

1976197719781979

1976197719781979

1976197719781979

1976197719781979

Trade

-13.0-17.6

8.7-36.1

65.361.641.1

110.4

-26.9-22.3-29.7-42.6

-4.3-3.2-3.5-1.0

-22.7-19.1-26.2-41.6

-12.6-7.6-9.3

-19.1

-2.9-2.7-6.1-8.4

-7.2-8.8

-10.9-14.0

25.421.720.131.7

Balance on

Servicesand

privatetransfers

12.513.524.826.3

-25.3-29.7-36.1-42.0

-6.0-6.2-6.1

-10.3

-2.8-3.4-3.7-6.0

-3.2-2.9-2.3-4.4

-0.2-0.4-0.1-1.8

-1.3-0.5-0.4-0.9

-1.7-2.0-1.8-1.7

-18.8-22.4-17.4-26.0

Currentaccount

excludingofficial

transfers

-0.5-4.133.4

-9.8

40.031.95.0

68.4

-32.9-28.6-35.8-52.9

-7.1-6.5-7.2-7.0

-25.9-22.0-28.6-45.9

-12.9-8.0-9.4

-20.9

-4.1-3.2-6.5-9.4

-8.9-10.8-12.7-15.6

6.6-0.8

2.65.7

CapitalAccountBalance l

-4.6 4

3.3 4

-21.64

13.84

-31.3-21.6-11.6-46.9

41.440.153.363.9

6.68.58.3

10.1

34.931.545.153.8

17.811.820.423.9

6.76.48.0

11.1

10.413.316.718.8

5.421.820.130.8

Change in BalanceLiabilities Financed byto Foreign Changes

OfficialAgencies 2

15.438.729.2

-12.2

——

4.30.40.70.2

1.3———

3.00.50.70.1

1.90.50.2

-0.8

-0.1-0.3-0.1

0.2

1.20.20.60.7

19.739.129.9

-12.0

in ReserveAssets

10.238.041.1

-8.1

8.8 5

10.3 5

-6.6 5

21.55

12.811.918.211.0

0.82.01.13.1

12.09.9

17.18.0

6.84.3

11.22.2

2.52.91.41.9

2.72.74.63.9

31.760.252.724.4

1 This balance is computed residually as the difference between the balance financed by changes in reserve assets and the sum ofthe current account balance and the change in liabilities to foreign official agencies; it includes net errors and omissions, as well asreported capital movements, government transfers, SDR allocations, valuation adjustments, and gold monetization. (See also foot-note 2.)

2 The concept of "liabilities to foreign official agencies" used in this table encompasses use of Fund credit and short-term balanceof payments financing transactions in which the liabilities of the borrowing country are presumably treated as reserve assets by thecreditor country.

3 For classification of countries in groups shown here, see Tables 1 and 2.4 See footnote 6.5 The changes in reserve assets of the oil exporting countries as reported here are based on reserve asset holdings as reported in

International Financial Statistics. Large additional changes in holdings of external financial claims by official agencies of the oil ex-porting countries are included in the column "Capital Account Balance" of this table. The dividing line between capital movementsand reserve asset changes remains uncertain for some oil exporting countries.

6 Global balance of payments aggregations inevitably contain many asymmetries arising from discrepancies of coverage or classifi-cation, timing, and valuation in the recording of individual transactions by the countries involved. A major area of asymmetricalclassification during recent years concerns the recording of official claims placed in Eurocurrency markets. Some of these transac-tions, although treated as changes in reserve assets by the investing countries, are recorded as capital inflows by the recipient coun-tries (mainly, the industrial countries). Had such transactions been recorded symmetrically, the global summations would show botha larger net capital outflow and a larger aggregate change in liabilities to foreign official agencies. If identified Eurocurrency reserveplacements (shown in terms of SDRs in Table 18 of this Report) were assumed to have been placed in industrial countries, then theadjusted net capital outflows from those countries would amount to $12.8 billion, $13.6 billion, $24.4 billion, and —$11.2 billion overthe years 1976, 1977, 1978, and 1979, respectively.

20



well as a major expansion of borrowing from the re-porting banks.

Each of the other three groups of countries listed inTable 6 has a recent history of being, on a net basis,sometimes on the depositing side of the internationalbanking accounts and sometimes on the borrowing side.Contrasts in the direction of net international move-ments of banking funds from year to year illustrate theflexibility of the channels thus provided. In 1976, forinstance, the net movement was mainly from residentsof the industrial countries (through banks in their ownrespective countries), and secondarily from oil export-ing countries, to non-oil developing countries. In 1978,however, the oil exporting countries as well as the non-oil developing countries drew on funds raised entirely inthe industrial countries. In 1979, the industrial coun-tries as a group joined the non-oil developing countriesin drawing on funds originating in the oil exportingcountries. The 1979 data also show a notable move-ment of funds to residents of some industrial countries,through banks in their own countries, from residents ofother industrial countries. All the corresponding move-ments are likely to be larger in 1980, reflecting a largercash surplus to be placed by the oil exporting countriesand increased demand for credit by deficit countries.Even if those countries find nonbank outlets for ahigher proportion of their investible funds, placementswith international banking institutions are likely toshow a considerable increase, with attendant potentialfor strains on the banks' capacity to reroute such fundsin a fashion mutually satisfactory to themselves andtheir customers.


Swings in Current Account Balances

Apart from the large swings in the current accountbalance of the industrial countries as a group, discussedearlier in this chapter, a number of shifts in the distri-bution of individual balances within the group have oc-curred in recent years. The shifts since 1978 have beenconditioned mainly by the sharp rise in oil import pay-ments (against the background of differing positionswith respect to the role of imported oil in total use ofenergy), by contrasting cyclical positions, and, in sev-eral cases, by effects of major changes in demand poli-cies and in exchange rates.

Since 1975, the dominant swings within the group ofindustrial countries have been those in the U.S. currentaccount balance, first from a large surplus to a largedeficit while the combined balance of the other indus-trial countries was moving into substantial surplus, andthen—since 1978—back toward balance or surplus

over a period in which current account balances ofother industrial countries were again, in the aggregate,shifting into deficit. The amounts involved in thesepartly reciprocating swings were quite large, even interms of the calendar-year statistics shown in Table 8;and they were considerably larger in terms of annualrates for the extreme quarters of each phase. In thesecond phase of these swings, the combined current ac-count balance of industrial countries other than theUnited States deteriorated by some $90 billion, from asurplus of about $40 billion in 1978 to a deficit equiva-lent to roughly $50 billion at an annual rate in the firsthalf of 1980.Lj The countries sharing most heavily in this shift wereJapan, with a deterioration of well over $30 billion (interms of annual rates) and the Federal Republic ofGermany, with a deterioration of more than $20 billion.(See Chart 6.) For the remaining industrial countries(still apart from the United States), the combined ad-verse movement in the recent period (on the order of$35 billion) was only slightly larger in nominal termsthan the one from 1973 to 1974, despite the escalationof world trade values in the interim.

Certain features of recent changes in the currentaccounts of industrial countries stand in noteworthycontrast to those in 1974. On the earlier occasion, thelargest adverse changes among major industrial coun-tries occurred in the accounts of countries (especiallyItaly and the United Kingdom) whose external posi-tions at that time were already relatively weak, whilethe current account balance of the Federal Republic ofGermany, already in substantial surplus in 1973, roseconsiderably further in 1974, notwithstanding the in-crease in that country's oil import payments. The resultwas an intensification of pre-existing pressures on exter-nal payments positions within the group of industrialcountries, resulting in protracted instability in exchangemarkets. Since 1978, on the other hand, the largestadverse changes in current accounts have occurred inthose that were most strongly in surplus in 1978, whilethe U.S. position—one of the weakest among major in-dustrial countries in that year—has improved substan-tially despite a greatly increased oil import bill. Theseresults have conformed broadly to the strategy enun-ciated by the Interim Committee of the Fund's Boardof Governors at its April 1978 meeting and by the gov-ernmental leaders' meeting at the Bonn "summit" inJuly of that year.

Differences in the pace and timing of economic ex-pansion since the 1975 recession have accounted inlarge part for the foregoing developments. Cumulativegrowth of real domestic demand in the United Statesfrom 1975 to 1978 exceeded that in the other six largeindustrial countries by some 5V2 percentage points, butthe difference was more than reversed from 1978 to the

21


ANNUAL REPORT, 1980

first half of 1980. The main elements in the reversalwere brisk increases in real domestic demand in Japanand the Federal Republic of Germany at a time of verylittle increase in the United States.

Particularly for Japan and the United States, laggedeffects of sizable changes in exchange rates (discussedbelow) appear to have contributed significantly to thecurrent account changes since 1978. Largely becauseof the sharp appreciation of the effective rate for theyen in 1978, Japan's share of world export markets formanufactured goods declined substantially in both 1978and 1979. Although effects of the weak export perform-ance on Japan's current account balance were masked

in 1978 by a large improvement in the terms of trade,they were reinforced in 1979 by reversal of that terms-of-trade gain as the exchange rate for the yen droppedrapidly from its 1978 peak. Growth in the volume ofU.S. exports, in contrast, was strong throughout 1978and 1979, outpacing market growth by wide margins inboth years and recouping the export market losses ofthe two years preceding the 1977-78 depreciation ofthe dollar. The dollar depreciation also played a partin the virtual arrest of growth in the volume of U.S. im-ports in 1979, as well as in certain elements of therapid rise in the U.S. surplus on external service trans-actions (notably those involving tourism).

Table 8. Industrial Countries: Balance of Payments Summaries, 1976-79(In billions of U.S. dollars)

Balance on

United States

United Kingdom

Canada

France

Germany,Fed. Rep. of

Italy

Japan

Other industrialcountries 4

Total industrialcountries

1976197719781979

1976197719781979

1976197719781979

1976197719781979

1976197719781979

1976197719781979

1976197719781979

1976197719781979

1976197719781979

Trade

-9.3-30.9-33.8-29.4

-6.4-3.5-2.3-6.3

1.72.93.43.8

-4.6-2.7

0.7-1.6

15.218.423.214.7

-4.2-0.1

2.9-1.0

9.817.125.3

1.8

-15.2-18.9-10.8-18.0

-13.0-17.6

8.7-36.1

Servicesand

privatetransfers

18.221.024.234.0

5.75.07.05.9

-5.7-7.1-7.8-8.3

-0.21.14.54.8

-7.9-10.5-10.3-15.1

2.74.36.39.3

-5.8-5.9-7.3-9.6

5.65.58.15.4

12.513.524.826.3

Currentaccount

excludingofficial

transfers

8.9-9.9-9.6

4.5

-0.71.64.7

-0.4

-4.0-4.1-4.4-4.4

-4.8-1.6

5.23.2

7.27.9

13.0-0.4

-1.64.29.28.3

4.011.218.0

-7.9

-9.6-13.4-2.7

-12.7

-0.5-4.133.4

-9.8

Capital Account Balance

Total 1

-19.5-24.9-22.9

6.6

-0.113.2

-6.92.2

4.52.94.33.7

1.82.3

-2.10.7

-3.5-4.7-2.8-1.9

2.81.6

-2.3-5.5

-0.2-4.6-7.8-5.0

9.617.418.913.0

-4.63.3

-21.613.8

Long-Termcapital

andofficial

transfers

-19.7-17.8-14.6-19.7

-0.53.5

-8.4-10.1

8.03.72.63.7

-2.8-0.7-4.5-7.1

-4.3-9.4-5.7-0.2

-1.0-0.7-1.5-2.5

-1.0-3.6

-13.9-13.5

-0.87.5

-2.5-3.0

-22. 15

-17.45

-48.6 5

-52.5 5

Other2

0.3-7.2-8.326.3

0.49.71.5

12.3

-3.5-0.9

1.7—

4.63.02.47.8

0.74.83.0

-1.6

3.72.4

-0.8-3.0

0.8-1.0

6.18.5

10.49.9

21.516.0

17.420.727.166.3

Changes inLiabilitiesto Foreign

OfficialAgencies 3

13.135.431.1

-13.6

-0.61.9

-2.10.4

———

0.2-0.6

0.30.1

0.21.63.2

-0.3

0.7-0.6-3.6-1.1

—

—

1.71.10.42.3

15.438.729.212.2

BalanceFinanced by

Changesin Reserve

Assets

2.50.6

-1.4-2.5

-1.416.7

-4.32.2

0.5-1.3-0.1-0.7

—2.80.23.44.0

3.94.8

13.5-2.6

1.95.23.31.6

3.86.6

10.2-12.9

1.85.2

16.62.7

10.238.041.1

-8.1

Memo:CurrentAccountIncluding

OfficialTransfers

4.5-14.1-14.3-0.6

-2.1-0.3

1.5-4.8

-3.9-4.1-4.6-4.3

-5.9-3.0

3.81.5

3.64.08.6

-6.3

-2.82.56.45.1

3.710.917.6

-8.7

-10.8-15.0-4.7

-14.7

-13.7-19.1

14.2-32.8

1 See Table 7, footnote 1.2 Includes SDR allocations, recorded net movements of short-term capital, net errors and omissions, and gold monetization.3 See Table 7, footnote 2.4 Australia, Austria, Belgium-Luxembourg, Denmark, Finland, Iceland, the Netherlands, New Zealand, Norway, Spain, Sweden,

and Switzerland.5 See Table 7, footnote 6.

22



Chart 6. Major Industrial Countries: Payments Bal-ances on Current Account, Including Official Transfers,1975-First Quarter 1980 1


1 Seasonally adjusted, annual rates.

With respect to recent changes in current accountbalances of major industrial countries other than Japanand the United States, the influence of exchange rate

changes is much less apparent. The country mostaffected by that factor since 1978 is the United King-dom, where the substantial effective appreciation ofsterling has contributed to a sharp deterioration of in-ternational price competitiveness and a marked weak-ening of the U.K. trade performance in manufacturedgoods. Rising production of North Sea oil has offsetthis weakness, although it has also contributed to theappreciation of sterling; and the impact of decliningdomestic demand on the volume of imports should pro-vide a further offset in 1980. Canada's terms of tradeand current account position are also benefiting, rela-tive to most of the other industrial countries, fromvirtual self-sufficiency with respect to oil.

The current account balances of France and Italycontinued to show fairly sizable surpluses in 1979,although their terms of trade and trade balances beganto weaken in the latter part of the year, largely in reflec-tion of rising oil import prices. In both cases, substan-tial further movements in the same direction appearedto be in process in the first half of 1980. The terms oftrade and trade balance of the Federal Republic ofGermany are being similarly affected, and that coun-try's current account, unlike that of either France orItaly, includes a large and growing deficit on servicesand private transfers, as well as the largest net outflowof official transfers of any industrial country. Inclusiveof all transfers, its current account showed a deficit of$5.7 billion in 1979, contrasting markedly with the sur-pluses of previous years; and a larger deficit is in pros-pect for 1980.

When account is taken of the adverse movement inthe terms of trade for the major industrial countries asa group during 1979, of the size and variability of eachcountry's current account balance in relation to its owneconomy, and of the medium-term history and typicalstructure of its external accounts, the main shifts from1978 to the first half of 1980 can be characterized asfollows. Clearly, the largest favorable shift has beenthat in the U.S. current account, which was weak in1978 but is now relatively strong (partly for cyclicalreasons), notwithstanding the dimensions of U.S. oilimports. Canada's position has also improved, althoughless dramatically, in the comparative sense of beingrelatively well sustained over a period of markedlyadverse change for most of the industrial countries. Ina similar relative sense, the external current accountpositions of the United Kingdom and France, bothmoderately strong in 1978, can be considered to havebeen fairly well sustained to date. The positions of thethree other major industrial countries have been sub-stantially modified since 1978. The Federal Republicof Germany, Japan, and Italy, which had the largestsurpluses in the major industrial group at that time,have shifted to the opposite end of the spectrum. For

23


ANNUAL REPORT, 1980

these three countries, even the estimated balances oftransactions with countries other than the oil exportersdeteriorated from 1978 to the first half of 1980. Theunfavorable cyclical situations (from the standpoint ofexternal balances) and the comparatively low rates ofinflation in the Federal Republic of Germany andJapan, however, provide considerable assurance againstundue weakening of the external current accounts ofthose two countries.

The large increase since 1978 in the combined cur-rent account deficit of the smaller industrial countries,to which brief reference has been made, has been some-what less uneven than the pattern of changes amongthe major industrial countries. With few exceptions, the14 smaller countries in the group had sizable currentaccount deficits in 1979, and most of these will doubt-less be larger in 1980. Norway, whose current accountis moving into surplus because of North Sea oil produc-tion, and Switzerland, which apparently remains in sur-plus, are exceptions. In addition, Australia and theNetherlands, because of their energy endowments, arenot sharing in the adverse movement. Among the othersmaller industrial countries, the magnitude of adverseshifts from 1978 to 1979 generally reflected the extentof each country's reliance on imported oil. Most ofthese countries are likely to undergo further markeddeterioration in their external payments accounts in1980, partly for the same reason and partly because theexpected slowdown of economic activity in the largerindustrial countries will tend to stifle growth in demandfor exports of the smaller ones.

Financing of current account deficits was not aserious problem for the smaller industrial countries in1979, nor did it become particularly difficult for any ofthem in the first half of 1980. Given the strong reservepositions of many countries in this group, their favoredcredit status in international financial markets, and thecurrent liquidity of those markets, the smaller industrialcountries appear better equipped to deal with theemerging situation than most developing countries.Nevertheless, a number of the smaller industrial coun-tries may face a need for substantial adjustments oftheir external positions over the medium term.

Exchange Rate Developments

The period since the exchange crisis of October 1978lias been one of broad—although by no means uninter-rupted—stability of effective exchange rates for most ofthe major currencies.8 Exceptions are the pound ster-

8 The indices of effective exchange rates discussed in this sec-tion are the indices from the Fund's multilateral exchange ratemodel, reported in International Financial Statistics.

ling, which appreciated by some 19 per cent fromNovember 1978 through mid-July 1980, and the Japa-nese yen, which depreciated even more rapidly throughearly April 1980 but recovered appreciably during thenext three months.

/, In retrospect, October 1978 can be viewed as a sig-nificant turning point in the trends of exchange rates formost of the major currencies, and in the general tenorof the foreign exchange markets. For the currencies ofthe United States, Canada, and Italy, it marked thetransition from an extended period of depreciation (interms of effective exchange rates) to a period of rela-tively little net change in either direction. In mid-July1980, each of these three currencies was within 2 per-centage points of its average value (on an effective-ratebasis) in November 1978. This leveling off contrastedwith depreciations in the range of 10-18 per cent forthe same currencies over a preceding period of roughlysimilar length, from January 1977 to November 1978.

For the pound sterling, the sequence of trends beforeand after October 1978 was the reverse. Nearly twoyears of relative stability preceded that date, while theappreciation noted above followed it. With respect tothe Japanese yen, the contrast between the two periodswas even sharper, the depreciation of the 17 monthsended in April 1980 having been preceded by an effec-tive appreciation of nearly 50 per cent during 1977 andthe first 10 months of 1978.

Only the French franc and the deutsche mark, amongmajor currencies, can be said to have continued sinceOctober 1978 to display roughly the same tendenciesevident in the previous two years. Gradual appreciationof the deutsche mark and a virtually unchanging effec-tive rate for the French franc remained features of theexchange markets. (See Chart 11.)

On the whole, the tone of those markets was appre-ciably less discordant during 1979 and the first half of1980 than in the two years prior to the October 1978watershed, although since that date substantial interven-tion has at times been necessary to prevent wider fluc-tuations. Except for the pound sterling, no major cur-rency showed a larger change in external value duringthe recent period than during the earlier one, and thevirtual absence of cumulative change in effective ratesfor several key currencies signifies an improved climatefor foreign exchange transactions. In this respect, thestability of the U.S. dollar—except for a brief period oftemporary appreciation while U.S. interest rates wererising to their recent peaks in the early months of 1980—was particularly important.

In considerable part, the improved climate in foreignexchange markets stemmed from the extensive realign-ment of current account balances of the three largestindustrial countries, discussed above. Capital flows,however, also continued to play an important—and

24



sometimes dominant—role in foreign exchange mar-kets, and such flows were geared, during much of thepast 18-20 months, to nominal interest differentials thatwere generally stabilizing. In the main, such differen-tials tended most of the time to neutralize differences inrates of inflation and in market expectations regardingfuture exchange rate movements. In many cases, par-ticularly among the smaller industrial countries, thisneutralization was a reflection of monetary policiesaimed, inter alia, at precisely that result. A broad pat-tern of correspondence between interest rates and de-grees of inflation was thus apparent.

In recent months, the foregoing relationships be-tween differentials in interest rates and those in ratesof inflation have again broken down as far as relation-ships involving the U.S. dollar are concerned. The pre-cipitous drop in U.S. interest rates accompanying theonset of the U.S. recession, while understandable interms of the Federal Reserve System's emphasis onmonetary aggregates, has left U.S. rates noticeably be-low those of other major industrial countries at a timewhen inflation differentials, in themselves, would stillseem to call for an opposite relationship. The drop inU.S. interest rates, however, appears to be part of acyclical evolution that will probably add substantialstrength to the U.S. current account, at least for thetime being. Market recognition of this linkage may pre-vent exchange market disturbances of the type that theinverted interest differentials might otherwise tend toinduce.

A feature of exchange market developments duringthe past year and a half was the introduction of theEuropean Monetary System (EMS) in March 1979.The EMS arrangements, described in last year's AnnualReport, appear to have functioned without unduestrains on the participating countries to date. Tensionshave arisen from time to time among the currencies in-volved in these arrangements, particularly during thesecond half of 1979, when the deutsche mark was ris-ing substantially against the U.S. dollar and a numberof other currencies. Under such circumstances, it be-came difficult for some of the weaker currencies in thegroup to be kept within the agreed band. In the latterpart of 1979, however, adjustments were made in ex-change rate relationships among the participating cur-rencies, and tensions eased during the next severalmonths.

When developments of the past 18 months with re-spect to exchange rates of the major industrial countriesare viewed in combination with changes in the mostclosely relevant price relationships, as in Chart 7, it isclear that the principal changes in international pricecompetitiveness (i.e., in "real" effective exchange rates)have been those for Japan, whose international com-petitive position has markedly improved, and for the

United Kingdom, whose competitive position has con-siderably worsened since 1978. In the longer-term per-spective of the past decade, these recent changes inprice competitiveness for Japan and the United King-dom are seen to be essentially reversals of earlierswings in the competitive positions of both countries.By far the most noticeable cumulative movements overthe longer period, as shown in the chart, are the markedimprovements in the competitive positions of the UnitedStates and Canada, along with the opposite shift in theposition of the Federal Republic of Germany. Franceand Italy, like Japan and the United Kingdom (al-though with much less pronounced swings in the inter-vening years), have finished the decade with real effec-tive exchange rates not very different from those at thebeginning.


Since the early 1970s, the current account balanceof the oil exporting countries has displayed much widervariations than the corresponding balances of the othergroups of developing countries discussed below. Thecurrent account surplus of the oil exporting group rosefrom about $7 billion in 1973 to $68 billion in 1974,declined irregularly to $5 billion in 1978, and thensurged up again, to $68 billion in 1979. It is expectedto rise further in 1980, to about $115 billion, and to re-main large for some time. The difference between theprojected 1980 figure and the previous peak in 1974corresponds roughly to the general increase in worldtrade prices over the intervening period. In real terms,therefore, the 1980 surplus would be broadly similar inmagnitude to the one recorded in 1974.

The degree of adjustment apparent in the balance ofpayments record of the oil exporting countries from1974 to 1978 was notable both for its size and for itscontradiction of expectations held at the beginning ofthe period. The most important single factor in thisadjustment was a sharp rise in imports, which morethan doubled in volume. Net payments for services andremittances by expatriate workers also became verylarge. The capacity of the oil exporting countries toabsorb real resources from the rest of the world thusproved much stronger than had been anticipated. Inaddition, two other factors contributed to the shrinkageof the current account surplus. The terms of trade ofthe oil exporting countries declined by some 11 percent over the period 1974-78 (mainly in the last ofthose years); and the volume of their oil exports stag-nated because of expanding oil production in otherareas and weak demand in major importing countries.

Another aspect of the change in the combined cur-rent account surplus of the oil exporting countries from

25


ANNUAL REPORT, 1980

Chart 7. Major Industrial Countries: Relative Costs and Prices of Manufactures, Adjusted for Exchange RateChanges, 1971-Second Quarter 1980 1

(Indices, 1973 = 100)

1 Indices of the type shown here are frequently referred to as indicators of real effective exchange rates.2 Annual deflators for gross domestic product originating in manufacturing with quarterly interpolations and extrapolations (be-

yond the latest available annual data) based on wholesale price data for raw materials and manufactures.3 Hourly compensation divided by potential "output per man-hour."

26



1974 to 1978 was that it became more unevenly dis-tributed. By 1978, 6 of the 12 countries in the group,after accounting for more than one third of the 1974surplus, had moved into deficit and were borrowingsubstantial sums in international capital markets. Incontrast, the other 6 countries still had surpluses (ag-gregating about $20 billion) in 1978.

In 1979, the sharp rise in oil export prices—averag-ing nearly 50 per cent on a year-to-year basis—restored surpluses in the external current accounts ofall except 2 of the countries that had been in deficit in1978. However, more than half of the 1979 increase inthe combined surplus of the 12 countries accrued tothe ones that had remained consistently in surplus, astheir share of the whole group's oil exports rose withthe fall in Iranian oil production. Some of these coun-tries, because of international considerations, are pro-ducing oil at rates higher than their authorities considerdesirable over the longer run from the standpoint oftheir own economic interests. Another important factorin the resurgence of the oil exporters' current accountsurplus in 1979 was the interruption of growth in thevolume of their imports, which had already tapered offconsiderably during the preceding three years in reflec-tion of policy shifts toward restraint of domestic de-mand in a number of countries. Mainly because of thesharp drop in Iran's imports, the aggregate volume ofthe group's imports declined by about 11 per centin 1979.

Oil export prices at the end of 1979 were muchhigher than the average for that year, since they hadincreased in a succession of changes beginning on Jan-uary 1 and recurring intermittently throughout the year.In addition, all the oil exporting countries increasedtheir prices further during the first two months of 1980(in most cases, retroactively to the beginning of theyear), and again in April or May. Large price increasesintroduced by countries that are not included in the oilexporting group have also contributed to the rise in theaverage world oil export price since 1978. By mid-1980, after additional adjustments of prices followingthe June OPEC meeting, the average price of oil ex-ported by the oil exporting countries had reachedroughly $32 per barrel. In the absence of further majorchanges,9 the full-year average would exceed that of1979 by some 65 per cent and would be about 2l/2times the corresponding average for 1978.

In terms of aggregate oil export values, part of theincrease in oil prices from 1979 to 1980 is expected tobe offset by a decline of about 11 per cent in thevolume of oil exports from the oil exporting countries.The expectation of such a decline reflects the prospect

9 I.e., on the assumption of an unchanged average oil pricein real terms during the remainder of the year.

of a substantial fall in world oil consumption coupledwith a further rise in oil production outside the oilexporting group. Other expected offsets to the 1980increase in oil prices include a marked upturn in thevolume of merchandise imports of the oil exportingcountries and a significant rise in net payments forservices and private transfers, notwithstanding the pros-pective enlargement of inflows of investment incomeearned on external financial assets.

The prospect of an upturn in imports stems partlyfrom the general shift toward more expansionary poli-cies by most of the oil exporting countries since thelatter part of 1979 and from an easing of import restric-tions by some of them. The absence of certain excep-tional factors that held down the aggregate imports ofthe group in 1979 will also be a major factor.

Current account surpluses seem likely to accrue toall the oil exporting countries in 1980. However, themajor share of the projected overall increase is againexpected to be recorded in the accounts of the six coun-tries that have remained consistently in surplus through-out the 1970s. Although there are no grounds for ex-pecting that imports and other current account pay-ments by these six countries will rise at significantlydifferent rates from those of the other countries in theoil exporting group, such payments are likely to remainsmaller in proportion to the value of oil exports in thecase of the "surplus" countries, reflecting the fact thatthey now account for more than two thirds of the totalvolume of exports supplied by the whole group.

Beyond 1980, the present outlook suggests a strongerpersistence of large current account surpluses for theoil exporting countries than in the years immediatelyfollowing the oil price rise in 1973-74. As noted ear-lier, financial policies and domestic economic expansionin the oil exporting countries seem likely to remainmore moderate than in the previous period. Also, thetighter balance of oil supply and demand now in pros-pect is expected to militate against decline in the termsof trade.

In 1979, the net cash inflows available for disposi-tion by the oil exporting countries rose substantiallyless than their current account surplus, primarily be-cause of a shift in oil sector capital transactions andsecondarily because of a decline in external borrowing.The latter development reflected the improvement ofcurrent account positions, particularly of the countriesin the group that had recorded deficits in 1978, whilethe main element of the shift in oil-sector capitaltransactions was an increase in accounts receivable foroil exported but not yet paid for. This increase, stem-ming from the prevalence of much higher oil pricestoward the end of 1979 than a year earlier, wouldhave been considerably larger if credit terms on oilexports had not been reduced from 60 days to 30 days

27


ANNUAL REPORT, 1980

by most of the oil exporting countries during 1979. In1980, a different relationship of the net cash inflow tothe current account balance of the oil exporting groupseems likely, the cash surplus being expected to showa somewhat larger increase than the current accountsurplus.

Although available information regarding the dis-position of the net cash surplus in 1979 remains in-complete, it suggests that a high proportion of the fundsinvolved was placed in bank deposits and short-termgovernment securities in the industrial countries. Thispattern of disposition resembles that observed in 1974,but will probably be followed (as in the years after1974) by gradual reinvestment of some of the fundsinitially held in liquid forms and a general trend towarddiversification of asset holdings. The likelihood of shiftsinto longer-term and less liquid forms of assets stemspartly from the concentration of the combined currentaccount surplus of the oil exporting group in countrieswith already strong liquidity positions and partly fromthe increasing share of private capital in financial out-flows from several oil exporting countries. In general,the propensity of private investors to acquire such as-sets as real estate and corporate equities or bonds ishigher than that of official agencies.

The net flow of funds from oil exporting countriesdirectly to other developing countries, mostly in theform of official foreign aid provided on concessionalterms, is estimated to have amounted to about $8 billionin 1979, although lack of adequate information on ac-tual disbursements of aid makes these estimates some-what uncertain. It is expected that such disbursementswill increase in 1980. Activities of both bilateral andmultilateral aid institutions sponsored by the oil export-ing countries are expanding, and announced or antici-pated government contributions to them should facili-tate this expansion. In addition, concessional financingof oil sales to developing countries, some of which arereceiving interest-free long-term loans, is increasing.

In 1979, as in 1978, holdings by the oil exporters ofclaims on the Fund and the World Bank declined. In-vestments in World Bank bonds and loans under thesupplementary financing facility were more than offsetby repayments of oil facility loans.


A number of adverse external influences are cur-rently operative on the foreign trade and paymentspositions of the non-oil developing countries. Theiroil import bills rose substantially during 1979 and thefirst half of 1980, and the accelerated inflation of pricesfor imports of manufactures added even more substan-tial sums to the total cost of their imports. Although

rising prices have also contributed substantially to theiraggregate receipts for exports, their overall terms oftrade have deteriorated by several percentage pointssince 1978. Even at unchanged terms of trade, foreigntrade price increases as steep as those witnessed since1978 would have led to a considerable rise in the cur-rent account deficit of the non-oil developing countriesbecause of the difference in magnitude between theirimports and their exports.

Another adverse factor at the present time is theemerging weakness of growth in import demands of theindustrial countries, coupled with protectionist actionsby some of them. Export earning prospects for the non-oil developing countries are dimmed by these develop-ments, and high costs of borrowing in internationalfinancial markets exacerbate the difficulty of acquiringthe goods and services needed to maintain adequateprogress in development.

The combined current account deficit of this entiregroup of countries rose from $36 billion in 1978 to $53billion in 1979, and the projections shown in Table 5indicate another large increase, to $70 billion, in 1980.On present prospects, a further substantial rise can beexpected for 1981 unless lack of appropriate financingforces the adoption of measures to curb importsseverely.

Adverse factors contributing to the projected deterio-ration of $34 billion in the aggregate current accountbalance of non-oil developing countries from 1978 to1980 have differed substantially in relative importanceamong individual countries in the group. For all ofthem taken together, roughly two thirds of the 1978-80deterioration might be attributed to the merchandisetrade accounts and a little less than one third to largernet payments for services and private transfers, amongwhich enlarged payments of interest on external debtare a significant element. The projected deteriorationof the trade balance of this group of countries reflectsonly a slight difference between the respective per-centage increases in imports and exports in real terms.In the main, it stems from the decline in the terms oftrade and the unequal effects of a given percentagechange in foreign trade prices on the two sides of thetrade account.

The estimated change in the terms of trade index isa composite result of many changes in prices of bothexports and imports. Disaggregation of such an indexto identify separate contributions of Jhe relevant pricechanges is not a fully meaningful exercise. Neverthe-less, several observations based on available foreigntrade price or unit value series may help to explainthe recent deterioration in terms of trade of the non-oildeveloping countries.

The estimated increase in unit values of exports ofthese countries from 1978 to 1980 is slightly larger, in

28



percentage terms, than the corresponding increase inunit values of exports of the industrial countries. Tothe extent that an index of the latter can be taken as aproxy for an index of import unit values of the non-oildeveloping countries in bilateral trade with the indus-trial countries, it can be inferred that the 1978-80change in terms of trade vis-a-vis the latter group wasvery small (and, indeed, slightly positive). The overalldeterioration in the terms of trade, therefore, must beascribed entirely to bilateral trading relationships withthe oil exporting countries and the centrally plannedeconomies and other nonmembers of the Fund. Dataon bilateral terms of trade between the non-oil devel-oping countries and these other countries do not exist.However, inasmuch as the rise in oil prices far exceededthat in any other important category of trade, the gen-eral significance of the oil price increases in the changein the terms of trade during this period is clear.

An important issue relating to oil import bills istheir distribution among countries. A relatively few ofthe oil importing developing countries, because of theirsize and degree of industrial development, account fora very large proportion of the group's oil import bill.The predominant share of those few countries, in turn,is mainly a reflection of their economic size, and onlysecondarily a manifestation of above-average use of oilin relation to national output. For example, the 12 larg-est importers of oil among the non-oil developing coun-tries account for about three fourths of the value of netoil imports by that whole group and for nearly twothirds of its aggregate GDP, as well as roughly half ofits total imports. For a majority of these 12 countries,ratios of net oil imports to total imports are in the20-30 per cent range. For the other oil importing de-veloping countries, the corresponding ratios are some-what lower but not of a greatly different order ofmagnitude. Included here are a great many countrieswhose own oil bills, while not representing an impres-sive percentage of the aggregate for the whole oil im-porting group, are nevertheless large in relation to theirown economies.10

Table 7 subdivides the data on current account bal-ances of non-oil developing countries to show separateestimates for both the net oil exporters and the net oilimporters within the larger group. In addition, a furthersubdivision of the oil importers among three subgroupsis shown. Each of the subgroups has displayed certaincharacteristics with respect to its external paymentsaccounts.

The net exporters of oil that are here classified asnon-oil developing countries comprise 12 countries

10 More specific comments on these distributional aspects ofthe oil imports of non-oil developing countries were made inWorld Economic Outlook: A Survey by the Staff of the Inter-national Monetary Fund (Washington, May 1980), page 32.

whose oil exports are either not such a dominant shareof their total exports or not so large in absolute termsas those of countries in the main oil exporting groupdiscussed in another section of this chapter. Like mostof the other non-oil developing countries, these 12 dif-fer from the main group of oil exporting countries inthat their current account balances have tended to showsizable deficits even in recent years of sharp increase inoil prices. At the same time, the terms of trade andexternal payments position of the subgroup under dis-cussion have been subject, at least since 1973, to in-fluences rather different from those operating on mostnon-oil developing countries. Within the latter category,the subgroup of net oil exporters is the only one likelyto have a lower current account deficit in 1980 than ineither 1978 or 1979. Current account deficits of eachof the three oil importing subgroups of developingcountries rose substantially from 1978 to 1979, andthey appear to be rising further in 1980.

Countries in the oil exporting subgroup have main-tained considerably higher rates of import growth thanthe other subgroups of non-oil developing countries,making use not only of the export earnings resultingfrom higher oil prices but also of favorable access tointernational credit markets. Heavier borrowing in suchmarkets made it possible for accumulation of reservesby the oil exporting subgroup to increase in 1979, incontrast to sharply reduced rates of reserve accumu-lation by the oil importing subgroups.

Another subgroup whose balance of payments posi-tions and recent experience differ substantially fromthose of the majority of non-oil developing countriescomprises 11 middle-income countries that have be-come relatively important exporters of manufactures.Although few in number, they include some of theeconomically largest developing countries, so that theyaccount for major shares of most economic or financialaggregates relating to the non-oil developing group.They are also countries whose domestic output andforeign trade have grown considerably faster during the1970s than the average for oil importing developingcountries, although their ability to sustain this per-formance is now being jeopardized by tendencies to-ward increased protectionism in some of their impor-tant markets. Other threats to the performance of thesecountries are posed by the slowdown in the industrialcountries and by a high degree of vulnerability to anyconstriction of international capital markets.

The major exporters of manufactures, because oftheir relative wealth and rapid growth, have achievedpreferential status in international credit markets, andthus greater flexibility of external financing than seemsto be available to most developing countries. Thischaracteristic, along with the comparative flexibility foradjustment of external trade transactions that stems

29


ANNUAL REPORT, 1980

from relatively high incomes and diversified domesticproduction structures, has engendered a record of highvariability in the combined current account balance ofthe manufacturing subgroup. Frequently, but not con-sistently, its members have accounted for a high pro-portion of the current account deficit of all non-oildeveloping countries. Their share was well over onehalf in 1975, for example, but dropped to the 25-30per cent range in 1977 and 1978. It rebounded to al-most 45 per cent in 1979 and may go higher in 1980.

Although the current account deficit of the major ex-porters of manufactures now represents a large propor-tion of the combined deficit of all oil importing devel-oping countries, it is not particularly large in compari-son with relevant magnitudes in their own economies.Even in 1979, a year of relatively large deficit on cur-rent account for the manufacturing subgroup, its deficitrepresented only 3V2 per cent of GDP and 15 per centof imports, compared with ratios ranging up to 6V2 percent of GDP and 32 per cent of imports for othersubgroups of non-oil developing countries shown inTable 9.

The manufacturing exporters, while utilizing by farthe largest net capital inflows of any subgroup, havedepended least on official financing. Funds have flowedto the manufacturing countries chiefly in the form oflong-term private capital, including substantial amountsof direct investment capital. However, these countrieshave covered past upturns in their current accountdeficit to a considerable extent through swings in theirshort-term capital and reserve accounts, and suchswings again played an important role in the upsurge ofthe current account deficit from 1978 to 1979. Most ofthe major exporters of manufactures were relativelywell positioned to accommodate an adverse currentaccount swing in this fashion, as they had accumulatedboth official reserves and other short-term foreign

claims on an unusually large scale in 1978. It was thisflexibility of external financing that enabled the manu-facturing exporters to maintain a substantially higherrate of import growth than other oil importing develop-ing countries in 1979; and a similar difference is likelyto be observable for 1980, although with weaker im-port trends for all the oil importing subgroups.

An extreme contrast to the two subgroups dis-cussed above is presented by the low-income countries.These countries, defined in Table 9 to encompass 39non-oil developing countries whose 1977 per capitaGDP is estimated to have been equivalent to no morethan US$300 (averaging only about one tenth of theaverage for the manufacturing subgroup), are charac-terized by low rates of national saving, of domesticinvestment, and of overall economic growth. Rates ofexpansion of both exports and imports of these coun-tries have been relatively weak during the entire periodsince the middle 1960s.

Current account deficits of most low-income coun-tries (with the notable exception of India, which bulkslarge in the statistics for this subgroup) have long beenexceptionally high, by comparison with other non-oildeveloping countries, in relation to either domestic out-put or imports. Despite such heavy external deficits,however, the aggregate volume of imports obtained bythe low-income countries in 1979 was only about5 per cent larger than in 1973. Since India's importgrowth record was better than the average, the realimport gains of other low-income countries over thisperiod were negligible. Lack of satisfactory growth inthe real purchasing power of export earnings was theprincipal reason for this disappointing record. Real ex-port earnings (i.e., current export receipts deflated byan index of import prices) declined appreciably in1978 and slightly further in 1979; and they do notappear likely to recover in 1980.

Table 9. Non-Oil Developing Countries: Current Account Deficits as Percentage of GDP and of MerchandiseImports, 1973-79l

1973 1974 1975 1976 1977 1978

1 For country classifications, see Table 2.

1979

Non-oil developing countriesNet oil exportersNet oil importers

Major exporters of manufacturesLow-income countriesOther net oil importers

Non-oil developing countriesNet oil exportersNet oil importers

Major exporters of manufacturesLow-income countriesOther net oil importers

<2.02.91.91.53.11.2

<12.422:510.87.5

35.45.5

5.24.45.46.25.04.0

25.325.625.226.444.214.3

As per

6.07.15.76.04.56.5

— As percentage30.242.827.927.041.523.7

•cent age of3.94.93.73.42.55.4

of mercha20.629.819.116.724.820.9

GDP3.04.42.82.01.65.5

ndise imports -15.625.113.99.3

15.821.2

3.24.23.11.93.05.7

16.824.015.59.1

27.322.1

>4.03.34.03.53.75.8

>19.117.319.315.332.821.8

30



This rigidity of import purchasing power is com-pounded by limitations inherent in the nature of theexternal financing available to the low-income coun-tries. These countries are extraordinarily dependent onforeign official and international agency sources offinancing, which in recent years have covered close toone third of their imports. In 1979, that proportion wasmore than twice as high as the average for all non-oildeveloping countries. Conversely, the role of privatelong-term capital has been relatively small.

Moreover, many of the low-income countries (par-ticularly those in Africa) entered the current period ofintensified balance of payments pressures with alreadyweakened international liquidity positions. With allow-ance for their use of reserve-related credit facilities,their reserve positions were deteriorating in nominalterms—and much more substantially, of course, in realterms—during both 1978 and 1979. Little scope forreduction of reserves is now available to them, andthey may have to make considerable use of short-termand/or official compensatory financing to cover thecurrent account deficits now in prospect for 1980 andbeyond.

Nearly 50 oil importing developing countries remainoutside any of the subgroups discussed above. Thesecan be characterized, generally speaking, as middle-income exporters of (non-oil) primary products. Theyinclude a number of sizable developing countries (aswell as many small ones), but very few at the upperend of the per capita income scale. Although somemanufactures are included in their exports, primaryproducts predominate. Total export earnings of coun-tries in this subgroup have tended to run ahead of theaverage for other developing countries in years of un-usually strong commodity prices, but behind it in otheryears, broadly paralleling the average over time.

During the period since the early 1970s, the currentaccount deficit of the middle-income primary productexporters has risen more steadily and consistently, inrelation to GDP or to imports, than that for any of theother subgroups of non-oil developing countries. Thisrise, continuing rather strongly through 1979 and into1980, was accompanied and underpinned by a pro-gressive increase in the net inflow of externally bor-rowed funds. These have been obtained from both pri-vate and official sources, with private capital, especiallyin short-term forms, tending to become a more promi-nent element in the past year or so. The middle-incomesubgroup reduced its accumulation of reserves from1978 to 1979, and is likely to cease accumulatingreserves in 1980.

The foregoing discussion of current account develop-ments has focused on analytical subgroups of non-oildeveloping countries, rather than on the regional group-ings utilized in previous Annual Reports. However, a

summary breakdown of current account balances forfive regional groupings is included in Table 5. Themost recent regional differences—those with respect toincreases in current account deficits since 1978—reflectmainly the concentration of low-income countries inAfrica and the location in Asia and the WesternHemisphere of a number of the rapidly growing export-ers of manufactures that have had strong access to in-ternational capital markets in support of continuingimport expansion. Several of the European developingcountries, which in the past had also relied to a sub-stantial extent on capital inflows from private foreignsources, have more recently made active efforts torestrain increases in borrowing from abroad.

Financing Patterns and External Debt

With reference again to the entire group of non-oildeveloping countries, the financing of the increase intheir combined current account deficit from 1978 to1979 involved three main elements. Their net externalborrowing rose by $7 billion, from about $38 billion to$45 billion; the inflow of funds that do not generatedebt (chiefly official transfers and foreign direct invest-ment, but including SDR allocations) was enlarged byabout $3 billion, to nearly $19 billion; and additions toreserves were lowered by $7 billion, from $18 billionin 1978 to some $11 billion in 1979. As shown inTable 10, these changes matched the rise of $17 billionin the group's combined current account deficit from1978 to 1979.

For 1980, the current account projection included inTable 5 would suggest another increase of similar sizein net borrowing and a further cutback in the accumu-lation of reserves, without much further expansion ofnondebt-generating inflows. In all probability, outrightreductions of reserves will be necessary for a number ofindividual countries whose external borrowing capacityis limited and whose international payments positionscome under severe pressure as they attempt to maintainthe flow of needed imports at rising costs.

The 1979 and 1980 increases in net foreign borrow-ing do not appear to be following the pattern of the1977 and 1978 flows. The net flow of long-term capitalfrom private financial institutions was actually a littlesmaller in 1979 than in 1978, and the current concernwith prudential considerations on the part of commer-cial banks engaged in international financial operationssuggests a further slight decline in 1980. On the otherhand, there has been a sharp rise in short-term credits,including those resulting from longer lags in paymentson current obligations; and a relatively moderate risein flows of long-term capital from official sources, in-cluding the oil exporting countries, seems to be in pros-

31


ANNUAL REPORT, 1980

Table 10. Non-Oil Developing Countries: Current Account Financing, 1973-79(In billions of U.S. dollars)

Current account deficit 1

Financing through transactions that do not affect net debt positionsNet unrequited transfers received by governments of non-oil

developing countriesSDR allocations, gold monetization, and valuation adjustmentsDirect investment flows, net

Net borrowing and use of reserves 3

Reduction of reserve assets (accumulation, — )Net external borrowing 4

Long-term from official sources, net 5

On concessionary terms 6

On nonconcessionary terms 6

Other long-term borrowing from nonresidents, netFrom financial institutions 5

Through bond issues 5

Other sources 7

Use of reserve-related credit facilities, net 8

Other short-term borrowing, netResidual errors and omissions 9

1973

11.59.8

4.90.64.3

1.7-9.3

11.05.53.71.86.64.00.52.10.3

-1.4

1974

36.913.22

6.9 2

0.85.5

23.7 2

-1.224 .9 2

9.6 2

6.5 2

3.110.28.60.31.31.65.1

-1.6

1975

45.911.7

7.4-1.0

5.3

34.22.0

32.211.47.14.3

14.79.20.25.32.46.5

-2.8

1976

32.912.1

7.6-0.2

4.7

20.8-12.7

33.510.26.63.6

17.610.9

1.15.64.33.9

-2.5

1977

28.614.4

8.31.05.1

14.2-11.9

26.112.48.14.3

15.815.62.6

-2.40.4

-0.8-1.7

1978

35.816.2

8.02.06.2

19.6-18.2

37.813.38.74.6

25.119.33.02.80.71.1

-2.4

1979

52.919.4

10.70.87.9

33.5-11.0

44.515.910.75.2

23.417.32.04.10.2

} so) 5-°1 Net total of balances on goods, services, and private transfers, as defined for Balance of Payments Yearbook (with sign reversed).2 Excludes the effect of a revision of the terms of the disposition of economic assistance loans made by the United States to India

and repayable in rupees, and of rupees already acquired by the U.S. Government in repayment of such loans. The revision has theeffect of increasing government transfers by about US$2 billion, with an offset in net official loans.

3 I.e., financing through changes in net debt positions (net borrowing, less net accumulation—or plus net liquidation—of officialreserve assets).

4 Includes any net use of nonreserve claims on nonresidents, errors and omissions in reported balance of payments statements forindividual countries, and minor deficiencies in coverage.

3 Public and publicly guaranteed borrowing only.6 Loans on "concessionary terms" are defined to include all loans containing a grant element greater than 25 per cent.7 Including suppliers' credits, acquisition of long-term external assets, and errors and residuals arising from mismatching of data

taken from creditor and debtor records.8 Comprises use of Fund credit and short-term borrowing by monetary authorities from other monetary authorities.9 Errors and omissions in reported balance of payments statements for individual countries, plus minor omissions in coverage.

pect. The bulge in net short-term inflows since 1978 isbroadly reminiscent of the one that occurred in 1974and 1975, when the last previous major upsurge in thecurrent account deficit of the non-oil developing coun-tries was in process. The shock-absorbing role implicitin this variability of short-term capital movements, likethat associated with changes in official reserves, is help-ing to keep demands for long-term credit considerablysteadier than the aggregate current account deficit andtotal financing requirements of these countries.

The steadier course of long-term borrowing has beenreflected in progressive additions to the outstandingpublic and publicly guaranteed long-term debt of thenon-oil developing countries. Such debt approached$250 billion at the end of 1979, and will doubtless behigher by several tens of billions of dollars at the endof 1980. Even the end-1979 figure was twice theamount outstanding at the end of 1975 and well overthree times the corresponding end-1973 total. Much ofthe increase, of course, reflects the effects of both realgrowth and the inflation of the 1970s on values of inter-national transactions. However, the ratio of the out-standing debt to exports of goods and services (takenas a rough scale factor in discounting the impact of

inflation and growth on the size of the debt) has alsorisen; it was about 80 per cent in 1979, compared with76 per cent in 1975 and 70 per cent in 1973. Ratiosof the same year-end debt totals to the estimated GDPof the non-oil developing countries are estimated, re-spectively, at 18V4 per cent, 15 per cent, and 14 percent. (See Chart 8.)

All of the foregoing ratios—and especially the debt/export ratio—are generally higher for the low-incomecountries than for the majority of other non-oil devel-oping countries. In 1978 and 1979, for example, theaverage debt/export ratio for the low-income subgroupwas close to 200 per cent. To a much less striking de-gree, relatively high debt/export and debt/GNP ratiosalso prevail in the net oil exporting subgroup. In thatcase, however, they give rise to little concern at thepresent time. The corresponding ratios are relativelylow for the major exporters of manufactures among thenon-oil developing countries, chiefly because compara-tively high rates of domestic saving in the manufactur-ing subgroup have permitted larger shares of investmentto be financed from internal sources of funds.

Changes in the composition of the external debt ofthe non-oil developing countries during the 1970s have

32



Chart 8. Non-Oil Developing Countries: Ratios ofDebt to Exports of Goods and Services and to DomesticOutput, 1972-79 *(In per cent)

Sources: World Bank Debtor Reporting System and Fundstaff estimates.

1 The debt ratios plotted in this chart relate only to externalpublic or publicly guaranteed debt with an original or extendedmaturity of more than one year.

been no less important than the change in its magni-tude. The principal compositional shifts have beenthose toward a higher proportion of debt to privatecreditors, with a correspondingly lower proportion toofficial creditors, and toward a more prominent role ofprivate financial institutions (mainly commercial banks)among the private creditors. By the end of 1979, fourfifths of the privately held debt was owed to financialinstitutions, compared with about half in 1973, and the

share of all private creditors in the total was close tohalf, compared with just over one third in 1973.n Al-though concern of the private financial institutions re-garding "exposure" in developing countries may slowor halt these trends during 1980, these institutions areexpected to continue playing a leading role.

Between three fifths and two thirds of the total pub-lic and publicly guaranteed debt of non-oil developingcountries is owed by countries in the Western Hem-isphere and in the Asian region. Such a concentration isessentially a reflection of the location in those areas ofa number of the economically largest developing coun-tries that have leaned heavily on external financing toaccelerate their development. Shares of the variousmajor regions have not changed very notably duringthe past half-dozen years.

Within each region, of course, individual countrieshave differed greatly in their propensity and ability torely on external financing. The debt, accordingly, isunevenly distributed, partly as a manifestation of dif-ferences in size among the economies of the non-oildeveloping countries, but also partly for a variety ofother reasons. For example, about two dozen countriesin two of the analytical subgroups discussed above—the major exporters of manufactures and the net ex-porters of oil—have issued well over half of all thepublic and publicly guaranteed long-term debt out-standing at the end of 1979. In contrast, the 39 low-income countries account for only about one fifth ofthe debt.

Differences among countries and groups of countrieswith respect to the structure of external debt are alsostriking. Official creditors account for more than fivesixths of the debt of the low-income subgroup, for ex-ample, but for well under half of the indebtedness ofthe manufacturing and oil exporting subgroups. Oneclass of private creditors—financial institutions—holdsmore than half of the outstanding external debt of thenet oil exporters but less than 10 per cent of the debtof the low-income countries, whose shares of all creditextended by private institutions to non-oil developingcountries is only about 3 per cent.

For non-oil developing countries as a group, the shiftfrom official to private sources of credit over the pastdecade has involved an appreciable increase in both in-terest and amortization payments, over and above theincrease associated with the general rise in interestrates. Private credits usually call for higher interestrates and shorter average maturities than those typicalof loans—many of them on highly concessional terms—from foreign government agencies and international

11 These figures relate only to public and publicly guaranteedlong-term debt; the proportions indicated would be higher forboth 1973 and 1979 if comparable data on nonguaranteedprivate debt could be included.

33


ANNUAL REPORT, 1980

lending institutions. These factors, while tending in thecircumstances of recent years to raise debt service pay-ments in relation to outstanding indebtedness, havecaused only moderate average increases in relation toexport earnings of the debtor countries as a group.12

In the average debt service ratio for the whole group,however, very heavy weight is given to the major ex-porters of manufactures, whose own debt service ratiosare comparatively very low and have not risen verymuch in recent years, partly because of the buoyancyof their export earnings. Both interest and amortizationpayments of the low-income countries have risen quitesharply as percentages of export earnings since 1977,and their overall debt service ratio, so expressed, is nowvery substantially higher than the corresponding ratiosfor the other subgroups of oil importing developingcountries. (See Chart 9.)

Under the international conditions likely to prevailover the next year or so, an increasing number of coun-tries may thus be confronted with problems inherent inthe shortening of maturities and higher interest charges(even with some subsidence from early-1980 levels)that have pushed the debt service ratios upward. Suchdifficulties seem likely to emerge on a selective basis,rather than as a general problem, since most countrieswhose creditworthiness is maintained can expect to"roll over" maturing loans, taking advantage of thepropensity of lending institutions to use receipts fromsuch loans to make new loans to broadly similar cate-gories of borrowers. The low-income countries, how-ever, are poorly positioned to absorb any further rise intheir debt service burdens, and it is with respect tothese countries that the debt service issue is most worri-some.

Policy Considerations

The 1970s witnessed profound changes in commonlyaccepted views regarding the role that central authori-ties should play in the economy. Policymakers and eco-nomists alike have been obliged to re-examine postu-lates that they had come to take for granted during the1950s and 1960s.

One basic postulate concerned the "fine-tuning" viewof economic policy, the failure of which became ob-vious in the course of the 1970s. During the 1950sand 1960s, the relatively stable growth rates prevailingin most of the industrial world—coupled with goodprice performance—had led to a certain belief that na-tional economies could be managed effectively throughshort-term adjustments of fiscal and monetary policies;

12 See footnote 11; ratios of debt service payments to exportearnings would be appreciably higher if fully comprehensivedata were available.

Chart 9. Non-Oil Developing Countries: Debt ServiceRatios, 1973-79 1

(As a percentage of exports of goods and services)

Sources: World Bank Debtor Reporting System and Fundstaff estimates.

1 The debt service ratios plotted in this chart relate only toexternal public or publicly guaranteed debt with an original orextended maturity of more than one year.

and in many countries this belief, in turn, led to a short-term emphasis on growth and employment objectives.In retrospect, it seems clear that it was not primarilymanagement of the economy, but the existence of ex-ceptionally favorable conditions for growth, that wasresponsible for the generally good economic record ofthe 1950s and 1960s. When these conditions changedduring the 1970s, it was not possible to prevent therecurrence of major fluctuations in activity levels. Fur-ther, the general approach to national economic policyproved overly ambitious as it often had destabilizingeffects because discretionary measures were put intoeffect too late, the measures were based on faulty eco-nomic forecasts, or consumers and enterprises hadlearned to anticipate policy changes. Recognition ofthe limits of anticyclical policies had become wide-

34



spread by the time of initial recovery from the 1974-75recession, and many national authorities were fullyconscious of the need for reorienting economic policiestoward the medium term. Nevertheless, in the new anddifficult setting of high inflation and high unemploy-ment, attempts to bring about a gradual reduction inthe rates of growth of nominal demand during the nextfew years were often tempered or reversed by strictlyshort-term considerations. Most recently, the top prior-ity that has been accorded anti-inflation policy appearsto signal a definitive change in this regard; a basicchallenge is to sustain it.

The changes in economic conditions that developedduring the 1970s, it should be emphasized, were ofmajor significance. For one thing, it became clear thatdirection of fiscal and monetary policies toward theachievement and maintenance of unduly low unemploy-ment rates can be very costly in terms of inflation. Inthe late 1960s and particularly during the 1970s, anumber of economic, social, and political factorsbrought about an increase in unemployment and adecrease in productivity growth throughout the indus-trial world. The change in the real price of energyplayed a role in those broad developments, but otherfactors such as changes in the composition of the laborforce and governmental regulations intended to achievequalitative improvements in output or working condi-tions were probably even more important. In manycases, national authorities sought to offset the impactof these factors on productivity and unemployment byhaving recourse to expansionary monetary and fiscalmeasures. At least in part, such efforts reflected a lagin recognition that the slowing of growth in potentialoutput had become a new limiting factor. Since in-creases in nominal demand could not change the effec-tive labor supply or the rate of technical progress, theireffects were ultimately felt on the price level. These re-peated experiences were gradually, but firmly, trans-lated into higher inflationary expectations on the partof the public, making the problem of inflation moreintractable.

The importance of an efficient system of economicincentives to the process of economic growth was alsohighlighted by economic developments of the 1970s.Countries with such a system of incentives were ableto achieve relatively high growth rates despite a lackof comparative advantage in natural resources, whileothers better endowed with resources were stagnating,or even regressing, under the weight of price and traderestrictions and of unrealistic exchange rates. The1970s also revealed more clearly the types of economicincentive that are conducive to growth, and in this re-gard pointed up the need to minimize the negativeeffects of governmental redistributive income programson productivity and economic growth, notwithstanding

the laudable intent of such programs. Increased atten-tion is also being focused on the harmful effects ofsome fiscal and financial practices—including undulyhigh rates of income taxation—on the incentives tosave and invest by the community at large.

Further, the 1970s showed a continued increase inthe degree of interdependence among countries anddemonstrated the importance of international coopera-tion. In the field of exchange rate policies, a clear mes-sage from the latter 1960s and early 1970s was thatbalance of payments disequilibria should not be al-lowed to persist for too long; once disequilibria areembedded in the economic structure, adjustment be-comes a difficult and costly process even with exchangerate flexibility. Developments since 1973, on the otherhand, have also shown that an exchange rate that isallowed to be freely determined by market forces canat times become excessively variable or go too far inone direction. These developments have led to renewedattempts by the authorities to exercise some degree ofinfluence over their exchange rates through market in-tervention or other instruments, notably monetarypolicy.

In the prevailing mixed system, however, possibilitiesfor inconsistencies or conflicts among nations in theconduct of their economic policies are abundant, andinternational surveillance over exchange rate policiesis of clear-cut importance. A further lesson of the1970s was that no international monetary system canfunction well when underlying domestic economic andfinancial conditions are unstable in a number of themajor industrial countries. Surveillance must, therefore,focus to a large extent on the achievement of morestable domestic conditions. (Fund surveillance is dis-cussed further in Chapter 2.)

The issue of interdependence involves more than thequestion of the exchange rate system. No matter whatthat system may be, the various national economies arestrongly related, both in the short run and in the longrun, through income effects of international trade andservice transactions. Interdependence is clear not onlyamong industrial countries but also among the variousgroups of countries—industrial, non-oil developing,and oil exporting. They are all also bound togetherthrough the functioning of an integrated world capitalmarket. Thus, any significant economic decision by amajor country or group of countries cannot fail to haveeffects, positive or negative, throughout the rest of theworld. A fundamental principle of international coop-eration, therefore, is that countries should always bemindful of others in their economic policies andactions.

Several examples of policy requirements arising fromthe interdependence of countries may be cited. First,there is urgent need for a strong flow of grants and

35


ANNUAL REPORT, 1980

concessional loans from the industrial and oil exportingcountries to the non-oil developing countries, particu-larly those in the low-income category. Second, becauseof their heavy weight in the world economy, the majorindustrial countries have an international responsibilityextending beyond the provision of official developmentassistance. This includes maintenance of open marketsand avoidance of protectionism; it also includes, morebroadly, both coordinated efforts in exchange marketintervention and appropriate conduct of national eco-nomic policies in accordance with the principles of theinternational adjustment process established in theFund (as summarized in the 1977 Annual Report,page 12). Adherence to such principles would (a) en-sure provision of all feasible support to the generallevel of economic activity and (b) counter forces mak-ing for disequilibrium in the distribution of currentaccount balances—a disequilibrium that, as experienceof the past few years has shown, can have very disturb-ing effects on foreign exchange markets.

' Another example of the importance of internationalcooperation concerns the energy problem. Clearly,there is need for cooperation among energy importingand exporting countries for the purpose of developinga basis for more stable conditions in the world oil mar-ket. Such cooperation calls for the group of oil export-ing countries—given their importance on the supplyside of the world oil market—to pay due regard tointernational considerations in the pursuit of their oilpolicies consistent with their own national interests.Among the other countries, those that produce substan-tial amounts of oil have an international responsibilitysimilar to that of the oil exporting group. All the oilimporting countries, including the ones that also pro-duce oil, have the particular responsibility of strength-ening present efforts to use energy more efficiently, toconstrain the demand for oil, and to increase the supplyof alternative sources of energy in order to contributeto the achievement of orderly oil market conditions.More reliance on the price system and on direct gov-ernmental measures to reduce the ratio of energy con-sumption to GNP and to help in the development ofnew energy sources is required. Without such efforts,the economic impact of energy problems could inten-sify during the 1980s and place a severe constraint oneconomic growth in both industrial and developingcountries., In sum, the various developments that have beentouched on tend to show that—with full awareness ofthe interdependence of countries and the importance ofinternational cooperation—the proper central focus ofnational economic policy is the establishment andmaintenance of an environment conducive to economicgrowth with price stability. A basic element of such anenvironment is a price and incomes system that is not

Chart 10. Industrial Countries: Energy Consumptionand Prices, and Gasoline Taxes, 1970-79(Indices, 1972=100)

1 For "energy" (in all forms) and for "gasoline," the energydata relate to final consumption; for "petroleum products," theyinclude amounts used in production of electricity, scaled to finalconsumption of electricity. The data for 1979 are for the secondquarter.

2 Typical consumer prices (including taxes), as of January 1in each year, for 21 products in 15 industrial countries, deflatedby overall consumer price indices, and weighted by 1977 finalconsumption weights (1979 estimated).

3 Weighted average of ad valorem rates of taxation (value ofthe gasoline tax divided by the tax-inclusive price).

* Second quarter 1979.

distorted by misguided controls. Another element is alevel of public expenditure that does not put undueconstraint on the conduct of monetary policy or limitwork and investment incentives in the private sector.A third element is the avoidance of frequent discre-tionary changes in policies that tend to decrease thecredibility of the authorities.

36


Because of inadequate policy management and theexternal shocks of the 1970s, national authorities arenow faced with the major problems of high inflation,low productivity growth, unemployment, rising energycosts, and international payments imbalances inheritedfrom that period. To deal with these problems willrequire firmness and steadfastness—indeed, courage—on the part of the authorities. Policy prescriptions willof course differ among countries, but they must never-theless be built on certain general principles.

Reducing inflation has to be the first priority, if onlybecause the achievement of targets concerning growthand employment, as well as viability of the externalposition, is dependent on it. On the basis of harshexperience, it is now generally agreed that restorationof adequate saving and investment incentives, renewalof satisfactory productivity gains, and efficient alloca-tion of resources require a marked lowering of inflationrates and of inflationary expectations. For that purpose,the central authorities should design their monetaryand fiscal policies so as to obtain a gradual decrease inthe rate of growth of nominal domestic demand—aiming at a rate consistent with the growth of potentialoutput and a feasible adjustment path for inflation. Asmentioned above, this need for gradual adjustment hasbeen recognized for a number of years but, at least upto 1979, when the stance of policies in the industrialcountries stiffened noticeably, the degree of adjustmentwas so gradual as to be almost imperceptible. It nowseems to be recognized that, while gradualism is theonly feasible course from the standpoint of economic,social, and political considerations, adjustment meas-ures should be decisive so as to bring about a reductionof inflationary expectations. Further, such a policy ofadjustment should not be interrupted as soon as thelevel of economic activity tends to weaken. Any at-tempt to offset that development through fiscal ormonetary expansion would only impair the credibilityof the anti-inflation policy stance of the authorities andratchet the economy to an even higher rate of inflationthat would ultimately call for a still more costly processof adjustment. While restoration of satisfactory andsustained economic growth is the target, it is a targetthat in most countries can be reached only through areduction in inflation brought about by a difficult periodof adjustment—with the extent and duration of thedifficulty dependent primarily on the speed with whichinflationary expectations can be curtailed.

An actively "stimulative" monetary policy should beavoided because, in addition to the impairment of credi-bility, its practical effect would be to provide liquidityto banks or corporations that are already highly liquid.The record of the 1960s and 1970s seems to show thataggressive monetary expansion during recession periodscontributes very little to revival of real demand and


output at the time when such revival is most needed,but leaves a legacy of bank liquidity that will tend tofrustrate efforts to moderate credit expansion at a laterstage. However, the kind of restraint being suggesteddoes not imply passivity of monetary or credit policyfrom a countercyclical point of view. With the slacken-ing of demands for credit by business enterprises thatis typical of a cyclical easing, interest rates are boundto fall (as has been demonstrated again in the past fewmonths), and the availability of credit to nonbusinessborrowers is bound to rise—in an automatically stabi-lizing way, even without accelerated provision of re-serves to the banking system by the central bank. Like-wise with respect to fiscal policy, reliance in counteringrecessionary tendencies should be placed—with due re-gard for differences in national fiscal systems—on thewell-known stabilizing effects that automatically emergewith the decline in tax revenues and the rise in certaincategories of expenditure.

The policy of reducing the rate of growth of nominaldomestic demand over the medium term should beaccompanied by a policy that aims at achieving a con-sistent reduction in the growth of nominal incomes.Most attempts during the 1970s to establish formal in-comes policies encountered failure because they lackedadequate support of either the private sectors or publicpolicies in the fiscal and monetary fields. Also, this is acontroversial area—strongly affected by political, so-cial, and institutional considerations—in which fewgeneralizations are applicable to individual countries.In some countries, nevertheless, measures to restrainthe growth of incomes can serve as useful adjuncts tofiscal and monetary policies, and they would seem tobe especially appropriate at the present time in view ofincreased cost pressures of external origin. Measuresthat would exclude oil prices from the mechanism ofwage indexation, and thus serve to limit self-defeatingwage-price spirals, are of particular importance in thisregard. In a less formal way, further steps by nationalauthorities to increase public understanding of the in-flationary mechanism, and to counter the influence ofshort-sighted pressure groups, could be helpful by im-pressing upon the general public the limitations of realincome gains that are implied by the weak behavior ofproductivity growth in many countries during recentyears and by the rapid escalation of energy prices.

The fight against inflation should be accompanied byfurther measures that aim at establishing an economicenvironment more conducive to economic growth. Amore stable overall price level is a major part of thatenvironment, but only a part. A change in the fiscalsystem of many countries to remove existing disincen-tives against saving and investment seems to be calledfor, and selective tax adjustments could make a positivecontribution to the supply side of the economy through

37


ANNUAL REPORT, 1980

the provision of actual incentives for productive invest-ment. A reconsideration of the overall levels of publictaxation and expenditure may be needed in a number ofcases. More attention should also be given to the massof controls and restrictions of various kinds that haveaccumulated over the years in developing as well asindustrial countries. While some may be needed on so-cial or other grounds, many are likely to be founddetrimental to the interests of the community at large.

One special factor that will have a predominant in-fluence on the environment for economic growth duringthe 1980s—as discussed above—is the supply and costof energy. The seriousness of the situation in that areais now widely recognized.

A further factor that will condition the growth envi-ronment is the external payments constraint faced bymany non-oil developing countries. Structural adjust-ments are needed in these countries, where (as in theindustrial countries) policy decisions made under thepressure of harsh developments have often led to harm-ful restrictions and controls and an excessive level ofpublic expenditure. Correcting this situation and adjust-ing to higher energy prices are bound to take time, andmeans will have to be found to finance large paymentsimbalances during the adjustment period. Failure to doso not only would seriously impair the long-term eco-nomic development of non-oil developing countries butalso could have a significant impact on growth in theindustrial countries.

In the foregoing review of developments in the worldeconomy, a feature of particular interest and impor-tance to the Fund is the prevalence of large and stillgrowing imbalances in current external payments ofmember countries. It is evident that many members willneed unprecedented amounts of external financing dur-ing the prospective period of adjustment.

In the provision of such financing, much will clearlydepend on the manner in which surplus funds accruingto the oil exporting countries are redistributed, throughvarious international channels, to ultimate borrowers inother countries. In the main, this channeling of fundscan be expected to operate through market mechanisms,with private commercial banks and international capi-tal markets continuing to play a predominant role. It isto be hoped that expanded flows through established in-ternational development institutions and official agenciesof national governments will also make a significantcontribution. However, the shifts in external balancesnow in progress are so large, and have occurred so sud-denly, that the possibility of deficiencies in flows

through the existing commercial and official channelscannot be disregarded. Such flows are expected toprove generally adequate through 1980, notwithstand-ing the problems of some individual countries, but theirprospective adequacy in relation to the needs probablyemerging in 1981-82 is uncertain. Both in size and induration, the imbalances now in prospect seem likelyto exceed those witnessed in the past.

In this situation, the Fund is prepared to play alarger role in the financing of members' imbalances.This larger role has been endorsed by the InterimCommittee, at its meeting in Hamburg during April1980. It would involve both the lending of greateramounts in relation to quotas than have usually beenauthorized in the past and a stretching of adjustmentand assistance over longer periods. Implementation ofsuch enlarged financing by the Fund is being elabo-rated. Furthermore, it is to be noted that the InterimCommittee at its Hamburg meeting, while recognizingthat the Fund is presently in a relatively liquid position,has approved the proposal put forward by the ManagingDirector to start discussions with potential lenders onthe terms and conditions under which the Fund couldborrow to increase its resources, if and when the needarose.

There is a strong belief in the Fund that financingand adjustment must go hand in hand. While there maybe cases where a country's external imbalance can beexpected to be corrected on the basis of existing poli-cies, and all that is required is temporary financing, inmost instances financing will need to be accompaniedby a strong effort on the part of the borrowing memberto adjust its unbalanced external position. In these cir-cumstances, there must be a prospect of correcting theexternal imbalance over a reasonable period, althoughthis may, under present and evolving circumstances,take longer than in the past. Maintenance of these prin-ciples is essential both for preservation of the Fund'srevolving resources and for promotion of optimal ad-justment. At the same time, flexibility with respect tothe choice and implementation of particular adjustmentpolicies, addressed to the specific problems of the con-cerned countries, must be preserved. There is generalagreement that appropriate adjustment policies shouldemphasize the fostering of improved supply and growthcapabilities, as well as fiscal and monetary programsdesigned to keep aggregate demand realistically alignedwith the actual evolution of supply.

While the Fund is not directly involved in the spe-cifics of investment planning, it will intensify its col-laboration with the World Bank and, as appropriate,with other developmental-financing institutions in orderto assist countries to adjust their payments imbalancesin ways that contribute to long-term growth. Coopera-tion is particularly important in the area of energy de-

38



velopment, where the Fund is stressing price and tax nornic and financial framework of adjustment programspolicies that would create appropriate incentives to is necessary to ensure that supply policies are coordi-complement the efforts of other institutions to promote nated with demand policies for the purpose of dealingand finance adequate investment in productive facilities. with structural inadequacies that are often at the root ofMore generally, the Fund's emphasis on the broad eco- current problems.

39


Chapter 2Developments in theInternational Monetary System

Certain trends that have characterized the evolutionof the international monetary system in recent years,particularly in the period since 1978, persisted duringthe period under review. In the determination of ex-change rates, the monetary authorities of a number ofindustrial countries maintained or increased efforts toinfluence the course of exchange rate movements. Thistendency has manifested itself, inter alia, in some in-crease since 1978, compared with earlier years of theperiod of floating exchange rates, in the level of officialintervention in foreign exchange markets and in the pur-suit of monetary policies tending to stabilize exchangerates. The variability of exchange rates among majorcurrencies in 1979 appears to have declined somewhatfrom that observed on average in the first several yearsof the period of floating. The question arises whethermeasures by the industrial countries to influence ex-change markets, as well as the greater stability of ex-change rates, can on balance be expected to assist orhamper the pursuit of their macroeconomic objectives.

Surveillance over members' exchange rate policiesexercised by the Fund under Article IV of the Articlesof Agreement is designed to assist members in avoidingboth excessive variability of exchange rates, which canbe disruptive without serving an economic purpose, and

undue rigidity of rates, which can cause distortions inthe economy and hinder the international adjustmentprocess without improving economic stability. Proce-dures for conducting this surveillance have evolved fur-ther during the year under review, especially with re-spect to discussion of developments in the pattern ofexchange rates between major currencies in the contextof the world economic outlook. These topics are treatedin the first part of this chapter.

Developments in the area of international liquidityare closely linked to countries' exchange rate policiesand, in particular, to intervention in the exchange mar-kets. More generally, these developments are affectedby the nature and severity of influences disturbing bal-ance of payments equilibrium in the world economy,the modalities of financing external imbalances, and thefunctioning of the adjustment process. Preferences ofcentral monetary institutions with respect to the form inwhich their reserves are held can influence not only theasset composition of global reserves but also their ag-gregate amount. These matters and related develop-ments are discussed in the second part of this chapter,which also treats the Fund's role in providing condi-tional liquidity and in supplementing the global supplyof international reserve assets.

Exchange Rate Arrangements and Policies

Previous Annual Reports have described both thecontribution made by floating exchange rates to the ad-justment process and the problem of excessive exchangerate variability. As noted in the 1979 Annual Report,efforts were intensified, beginning late in 1978, to dealwith excessive exchange rate movements between themajor currencies. These efforts, which were in somecountries related to endeavors to stem inflationary pres-sures, have continued through 1979 and the first quarterof 1980; they are discussed below, with special attentionpaid to the experience of the European Monetary Sys-

tem (EMS) in its initial year and to the implications ofthe more active efforts to prevent excessive exchangerate fluctuations for the successful pursuit of domesticeconomic objectives and external adjustment. A furthersection treats the role of exchange rate adjustments indealing with the large payments imbalances presentlyprevailing. These questions are of special significance tothe Fund because of its responsibilities for surveillanceover exchange rate policies. The first part of the chapterconcludes with a review of the Fund's experience withsurveillance.

40


CHAPTER 2: DEVELOPMENTS IN THE INTERNATIONAL MONETARY SYSTEM

Policies Influencing Exchange RatesBetween Major Currencies

Since the onset of widespread floating of exchangerates, the industrial countries have been faced with thedifficult question of the degree to which the determina-tion of exchange rates should be left to the free play ofmarket forces. Periods of relative stability of rates alter-nated with phases of instability, during which exchangerate fluctuations were perceived as excessive in relationto the adjustments required to offset divergences in un-derlying price and current account developments. Thedesire to deal effectively with occasional disorderly mar-ket conditions was strengthened by concern about theimpact of apparently unjustified exchange rate move-ments on domestic inflation and external competitive-ness. This section summarizes recent policy develop-ments influencing exchange rates, the effect of thosedevelopments on exchange rate variability, and theirimplications for overall economic conditions in thecountries affected.

Policy Developments

A number of developments in the world economysince 1978 have contributed to underlying strains in ex-change markets. Among these developments have beencontinued substantial divergences among the major in-dustrial countries in rates of inflation and economicgrowth, the differential impact of oil price increases ontheir economies, and uncertainties as to the future ofmonetary and fiscal policies.1 Nevertheless, the varia-bility of exchange rates was on the whole lower in 1979and the first quarter of 1980 than it had been in 1978.The shift in current account positions of the FederalRepublic of Germany, Japan, and the United States thatoccurred in 1979 (see Chapter 1) was one factor calm-ing foreign exchange markets. The reduction in exchangerate variability may also have been related to the tend-ency on the part of some industrial countries to intensifyefforts to influence exchange rates. These efforts wereperhaps a reaction to the instability in foreign exchangemarkets in the latter half of 1978 and also a conse-quence of growing concern about the impact of foreignexchange movements on the domestic economy. Theywere manifested by more active intervention policies bythe industrial countries and, among certain countries, agreater coordination of monetary policies in the light ofdevelopments in exchange markets.

As a result of the interplay of these developments,there were fewer sharp changes in exchange rates in1979 than in 1978, when major exchange rate realign-

ments took place (Chart 11). With the important ex-ceptions of Japan and the United Kingdom, and, to alesser extent, Switzerland, effective exchange ratestended to remain close to levels prevailing at the end of1978 (as for Canada, France, Italy, and the UnitedStates) or to proceed along their respective historicaltrends (as for the Federal Republic of Germany untilthe latter part of 1979).

In the aftermath of the monetary measures announcedon November 1, 1978, the United States pursued a pol-icy of monetary restraint designed to deal with infla-tionary pressures, accompanied by active exchange mar-ket intervention to correct excessive exchange ratemovements, which had contributed to these pressures.This policy, in combination with a greatly improved cur-rent account balance, led to a shift in market sentimentregarding the dollar. This sentiment, fortified by thestrong impact that the oil price increases were expectedto have on some of the other major industrial countries,accounted for the relative strength of the dollar in thefirst half of 1979.

On March 13, 1979, the EMS was formally imple-mented. With regard to exchange rates, its principaleffect was to include France, Ireland, and Italy in acommon margins arrangement with EEC members ofthe former "snake."2 On the whole, exchange marketswere reasonably stable until the third quarter, and therewere few notable policy shifts during this period. Bymid-June, the dollar came under heavy selling pressureand depreciated despite a large-scale intervention pro-gram coordinated by the authorities of the UnitedStates, the Federal Republic of Germany, and Switzer-land. In July, all three of these countries increased theirdiscount rates, maintaining restrictive monetary policies.The decline of the dollar slowed. Meanwhile, strainsamong the currencies of countries participating in theEMS had appeared. These strains were dissipated inSeptember by the revaluation of the deutsche mark andthe devaluation of the Danish krone.3

Several important policy changes were announced inOctober. Most industrial countries raised their discountrates, and the United States initiated a policy packagedesigned to ensure better control over the expansion ofcredit and money, to help curb speculation in the finan-cial, foreign exchange, and commodity markets, and todampen inflationary pressures. The U.S. measures in-cluded an increase of 1 percentage point in the discountrate, the imposition of a marginal reserve requirement

1 For a description of these developments, see Chapter 1.

2 The members of the EMS are Belgium, Denmark, France,the Federal Republic of Germany, Ireland, Italy, Luxembourg,the Netherlands, and the United Kingdom. The United King-dom does not participate in the common margins arrangement.Italy's margins are 6 per cent on either side of its bilateral cen-tral rates, compared with 2l/4 per cent for the other participants.

3 Developments within the EMS are discussed in greater detailin the following subsection.

41


ANNUAL REPORT, 1980

Chart 11. Eight Industrial Countries: Indices of Effective Exchange Rates, January 1975-June 1980(Monthly average of daily rates, 1975 = 100)1

1 The weights for calculating effective exchange rates are derived from the Fund's multilateral exchange rate model.

42



of 8 per cent on managed liabilities (including borrow-ings from the Eurocurrency markets), and a shift inemphasis from the federal funds rate to the growth ofbank reserves as the operating target of monetary policy.The U.S. measures elicited strong expressions of supportby central banks in other industrial countries.

* The first half of 1980 saw a quick rise and a subse-quent decline in the exchange rate of the U.S. dollarvis-a-vis most of the other major currencies. The sharpincreases in U.S. interest rates and the decline in manycommodity prices, as well as the anti-inflation programannounced on March 14, 1980, combined to strengthenthe dollar substantially by the end of the first quarter.When U.S. interest rates turned down, while those ofother industrial countries remained at higher levels ordeclined to a lesser extent, the dollar adjusted in anorderly manner.

I , The two major currencies that experienced largemovements in their exchange rates were the pound ster-ling, which appreciated during 1979, and the Japaneseyen, which depreciated. The rise in sterling can be at-tributed to the sharp increases in oil prices, given theUnited Kingdom's near self-sufficiency in oil, as well asto the strong anti-inflationary measures adopted by thenewly elected government. The Bank of England inter-vened fairly heavily at times in the first half of 1979 tomoderate the appreciation of the pound and raised itsdiscount rate substantially in order to contain the growthin the money supply within the official target range.

The Japanese yen experienced strong downwardpressure throughout 1979. The authorities intervenedvery strongly to moderate the yen's decline during thefirst half of 1979, over which period Japan's foreignexchange reserves fell by $8 billion, and at the sametime raised the discount rate and encouraged capitalinflows into Japan. As the pressure on the yen continued,the authorities followed monetary policies that discour-aged capital outflows and continued heavy interventionin exchange markets, as a result of which, foreign ex-change reserves fell further by $4.5 billion in the latterhalf of 1979 and by $1.8 billion in the first quarter of1980. The yen stabilized in March 1980, in part becauseof a new program designed to attract capital, and sincemid-April has substantially appreciated. In April andMay, foreign exchange reserves rose by $2.7 billion.

/ , Except for an initial weakness early in 1979, theCanadian dollar remained stable with respect to the U.S.dollar. To some extent this stability can be ascribed toCanada's current and anticipated future position as anet energy exporter in a period of increasing oil prices,as well as to a view that external competitiveness hadbeen restored over the previous two years. It was, how-ever, in part a result of actions by the authorities to pre-vent Canadian short-term interest rates from divergingtoo far from those in the United States. These actions

were also in line with Canadian domestic policy objec-tives.

To obtain an overall view of how the authorities re-sponded to exchange rate pressures over the last year, itis useful to examine some measures of official interven-tion and monetary policy. The changes in internationalreserves excluding gold, used as a rough measure of offi-cial intervention,4 suggest that the authorities havestepped up their activity in the foreign exchange marketssince the latter part of 1978. As measured by the sum ofthe absolute values of monthly net changes in non-goldreserves, expressed as a percentage of current exports,total official activity in the foreign exchange market ofeight industrial countries has been increasing steadilysince the mid-1970s (Table 11). The increase from1977 to 1979 was most pronounced for Canada, France,the Federal Republic of Germany, Japan, and theUnited States. For these countries, with the exception ofFrance, intervention appears to have risen sharply fromthe earlier years of the floating period. For the threeother countries, there was a decline in intervention be-tween 1977 and 1979, which was especially marked forthe United Kingdom. Nonetheless, the sharp increase inintervention by the three largest industrial countries hasno doubt had a particularly significant effect on ex-change markets in general.

A comparison of changes in total non-gold reserveswith changes in exchange rates for these eight countriesindicates that intervention during 1978 and 1979 moved,in general, counter to the direction of market pressures(Chart 12). The extent to which this was the case wasprobably greater than indicated by Chart 12, whichshows only net intervention for the month as a whole.

The proxy for intervention used in Table 11 hasserious limitations as an indicator of the volume of offi-cial activity in exchange markets: for example, it takesaccount neither of intervention activity in different di-rections within the same month nor of official compen-satory borrowing. Where figures measuring such activityare available, they indicate that the reserve changesshown in Table 11 on the whole underestimate boththe volume of intervention and its recent increase. Forexample, gross intervention by the U.S. authorities,measured by total sales and purchases of foreign ex-change, rose from approximately $19 billion in 1978 to$23 billion in 1979. These amounts were in sharp con-trast to gross intervention prior to 1978, when the cumu-lative total from March 1973 to December 1977 wasonly half of the 1978 figure. By comparison, the sum ofmonthly changes in official reserves without regard to

4 The change in the value of reserves can be no more than arough measure of intervention in the foreign exchange market,since it does not take into account valuation changes owing toexchange rate variations, swap operations between the monetaryauthority and commercial banks, and other indirect forms ofintervention.

43


ANNUAL REPORT, 1980

Chart 12. Eight Industrial Countries: Monthly Changes in Official Reserves Relative to Exports and in ExchangeRates, January 1978-June 1980

dn oer cent)

1 For each country, the change in reserves is expressed as a percentage of average monthly exports for the period 1978-79. Thechange in reserves is defined in Table 11, footnote 1.

2 The exchange rate at the end of each month is measured in U.S. dollars per unit of domestic currency for all countries exceptthe United States, for which the effective exchange rate derived from the Fund's multilateral exchange rate model is used.

44



Table 11. Eight Industrial Countries: Sum of Monthly Changes in Official Reserves Excluding GoldRelative to Exports, March 1973-April 1980l

(In per cent)

CanadaFranceGermany, Fed. Rep. ofItalyJapanSwitzerlandUnited KingdomUnited States 3

Eight industrial countries

Mar. 1973-Dec. 19762

4.386.949.06

15.348.22

63.558.892.098.74

1977

5.361.496.38

15.738.01

72.5027.49

1.4810.00

1978

10.394.89

12.4011.9315.0656.55

8.161.92

10.55

1979

7.013.88

13.2811.3814.9050.54

8.805.66

10.69

Jan. -Apr.1980 *

9.4619.6611.9129.557.82

42.8311.544.58

12.601 Monthly changes are summed without regard to sign for the periods shown. Changes in reserves are here defined as the total of

changes in foreign exchange holdings, reserve positions in the Fund, and holdings of SDRs, minus changes in use of Fund credit andcumulative SDR allocations. In calculating these changes, foreign exchange holdings are valued in U.S. dollars (except for theUnited States, as explained in footnote 3), and all changes in the SDR-denominated reserve components are converted into U.S.dollars at average monthly exchange rates. The figures for 1979 and 1980 have been adjusted by excluding the value of ECUsissued against gold holdings of EMS members.

2 Annual rate.3 For the United States, foreign exchange holdings were valued in SDRs for the purpose of calculating changes, which were then

converted into U.S. dollars at current exchange rates.

sign was about $3 billion in 1978 and $10 billion in1979. Intervention statistics published by the FederalRepublic of Germany indicate that total intervention bythe Bundesbank was larger in 1978 and 1979, andincreased by greater amounts after 1977, than reservechanges alone would indicate. Against this, U.K. datashow that when compensatory official borrowing is in-cluded in the definition of intervention, total interven-tion was somewhat greater before 1978, and somewhatless in 1978 and thereafter, than indicated by reservefigures alone.

In addition to official intervention, monetary policiesappear to have played a part in the dampening of exces-sive exchange fluctuations since late in 1978. Therehave been episodes of coordination of monetary policiessince 1978, but the degree of coordination is difficult toassess, in part because coordination does not necessarilyimply that monetary policies of participating countriesmove in the same direction, nor does a parallel move-ment necessarily imply intentional coordination. It isnevertheless noteworthy that there were several in-stances when monetary policies moved in tandem—forexample, discount rate increases in most industrial coun-tries in the latter half of 1979—and that these parallelmovements tended to prevent excessive exchange ratefluctuations by limiting the size of, and changes in, inter-est rate differentials. Movements in the latter are indi-cated in Chart 13. The growth in money supply (alsoshown in Chart 13), which provides another measureof monetary policy, indicates similar parallel move-ments during the second and last quarters of 1979,when the authorities of France, the Federal Republicof Germany, Japan, Switzerland, and the United King-

dom pursued a more restrictive monetary policy. Inlarge part, these episodes reflected a congruence ofobjectives, particularly with respect to the commoneffort to reduce inflation, and the effects of these poli-cies on exchange markets were in considerable part afortuitous by-product. Among the EMS participants,however, efforts to coordinate monetary policies weremore explicit. For this and other reasons the experienceof the EMS in its first year is worthy of special atten-tion.

Developments Within the EMS

The EMS, which was established to create a greatermeasure of monetary stability within the EuropeanCommunity, represents a major modification of ex-change arrangements and international policy coordina-tion. It differs from the snake not only through the in-clusion of France, Ireland, and Italy in a common mar-gins arrangement but also through the introduction ofinnovative features, such as the establishment of theEuropean Currency Unit (ECU), plans for the estab-lishment of a European Monetary Fund, and the diver-gence indicator.5 The fact that participating countries inthe EMS conduct 44 per cent of their external tradewith each other (compared with 30 per cent for the

5 The divergence indicator is a measure of the divergence ofthe market rate expressed in ECUs for each EMS currencyfrom its ECU central rate. When the indicator reaches one ofthe thresholds established for each member, the authorities attheir option may respond by undertaking official intervention,central rate changes, monetary policy measures, or other domes-tic policy measures.

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ANNUAL REPORT, 1980

Chart 13. Eight Industrial Countries: Short-Term Interest Rates and Changes in Narrow Money, January 1978-June 1980

1 The interest rates for France, the Federal Republic of Germany, Italy, and Japan are the call money rates; for the United States,the federal funds rate; for Canada and the United Kingdom, the three-month treasury bill rates; and for Switzerland, the three-month interbank deposit rate.

2 Three-quarter moving average of quarterly percentage changes (at annual rates) in narrow money, defined as currency plusdemand deposits.

46



members of the previous snake arrangement) impliesthat stable exchange rates among the participants wouldgo far toward stabilizing their effective exchange rates.

The relative calm of exchange markets in the first halfof 1979 facilitated the successful functioning of theEMS in its early months. Within the EMS, interest ratedifferentials seem to have been important in determiningexchange rate movements. The French franc was a ben-eficiary of capital inflows, largely from the Federal Re-public of Germany and partly in response to higher in-terest rates in France. The lira remained at the top ofthe band around its central rate, partly because of rela-tively high interest rates in Italy. When the authoritiesin the Federal Republic of Germany tightened monetarypolicy, the authorities of the other EMS currenciesquickly raised their interest rates to maintain the dif-ferentials against the deutsche mark. At the same time,the authorities of all EMS countries engaged in heavyintervention in order to dampen the depreciation of theircurrencies against the U.S. dollar.

The technical features of the EMS were reviewed inmid-September and no changes were made, althoughtensions had arisen within the EMS as a result of dis-parities in current account positions and inflation ratesamong the participating countries. On September 23,1979 the deutsche mark was revalued by 5 per centagainst the Danish krone and by 2 per cent against theother participating currencies. The strains within theEMS subsided following this realignment, but on No-vember 30, 1979, the Danish authorities announced afurther devaluation of 4.76 per cent of the krone againstall other participating currencies. The U.S. dollarstrengthened against the deutsche mark and other cur-rencies in the first quarter of 1980, and intervention wasnecessary on most days to support the Belgian francand the Danish krone. In March 1980, the authoritiesof the Federal Republic of Germany intervened heavilyto moderate the depreciation of the deutsche markagainst the dollar in order to avoid excessive changes inthe rate, in view of the expectation that the tendency forthe deutsche mark to depreciate would soon be reversed,as it was, in fact, in April.

A coordinated policy vis-a-vis the U.S. dollar hasbroadly been followed by the EMS participants. Thus,while there has been an increase in intervention by par-ticipants using European currencies to support bilateralrates—which was relatively rare under the "snake"—intervention in U.S. dollars has continued on a largescale, mainly to reduce fluctuations of EMS currenciesvis-a-vis the U.S. dollar or to carry out necessary adjust-ments. For example, the ECU appreciated by about7 per cent against the U.S. dollar between mid-March1979 and the end of the year.

As a guide to intervention policy and occasionalrealignments of bilateral central rates among EMS par-

ticipants, the divergence indicator has to date signaledthe need for adjustment only for the weaker currencies.Intervention limits were frequently reached before thedivergence thresholds of the currencies concerned werebreached. The realignments of EMS currencies that havetaken place so far have been carried out in a smooth andorderly manner.

Variability of Exchange Rates AmongMajor Currencies

In assessing the impact of more active official inter-vention and of increased orientation of monetary poli-cies toward exchange rate objectives, it is worthwhile tocompare recent exchange rate movements with those inprevious years. These movements result from closelyrelated developments in underlying economic factors,official policies designed to influence exchange markets,and shifts in expectations in those markets. In some re-spects, exchange markets tend to behave like otherfinancial markets: at times, they go through periods ofunusual volatility, and it is not always evident, evenwith the benefit of hindsight, which economic forceshave induced the increased volatility. For these reasons,shorter-term fluctuations—i.e., movements that reversethemselves within a day, a week, or a month—cannotalways be distinguished, at the time of their occurrence,from the longer-term movements of exchange ratesspanning several quarters or perhaps years. A large ir-reversible shift in the exchange rate may occur within ashort period of time, and long-term readjustments areoften accompanied by large short-term fluctuations.

A useful measure of short-term variability of ex-change rates is the average divergence of the monthlypercentage change in the effective exchange rate fromthe average of monthly changes during the period ex-amined. This measure of variability suggests that forthe industrial countries exchange rates were substan-tially more stable during 1979 than during 1978 andthe average of the years 1973-77 (Table 12). For de-veloping countries, the reduction in the variability of theeffective exchange rate in 1979 paralleled that in theindustrial countries, but was less marked.

The experience of individual industrial countries con-firms the general increase in exchange rate stability al-ready noted (Table 12). France, the Federal Republicof Germany, Japan, Switzerland, and the United States,as well as the group of uother industrial countries," allshow a sharp reduction in the variability of exchangerates in 1979 compared with both 1978 and the earlieryears of floating. The reduction from 1978 to 1979 wasmore moderate for Canada and Italy than it was for theother countries. Italy has maintained a remarkablysteady and low level of effective exchange rate vari-

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ANNUAL REPORT, 1980

Table 12. Average Monthly Variability of EffectiveExchange Rates, April 1973-December 19791

(In per cent)

1 973-76 2

Industrial countries

CanadaFranceGermany, Fed. Rep. ofItalyJapanSwitzerlandUnited KingdomUnited StatesOther industrial countries

Developing countries 3

Pegged to U.S. dollarPegged to SDRPegged to French francOther developing countries

1.41

0.871.621.821.981.361.421.450.741.41

1.60

1.471.930.811.87

19771.13

1.140.500.980.601.681.730.970.421.21

0.98

0.560.630.251.63

19781.44

1.401.611.330.733.133.381.610.941.22

1.67

1.571.990.701.99

19790.96

1.210.640.640.682.030.912.160.600.87

1.48

1.532.580.371.53

1 Monthly import-weighted effective exchange rates are used inthese calculations. Variability is defined here as the standard de-viation of monthly percentage changes in the effective exchangerate about the average percentage change during each year.Figures for groups of countries are unweighted averages ofthose for the countries in each group.

2 Annual average, with the period April-December used for1973.

3 Countries are classified according to their exchange arrange-ments as of June 30, 1980.

ability for the lira for the past three years, in contrastto the earlier years of floating. The variability of theeffective exchange rate of the pound sterling declinedduring 1978, but increased again in 1979 to a levelabove the average for the floating period as a whole.

While the authorities in industrial countries havetaken measures to limit excessive exchange rate fluctua-tions, the private sector has increasingly sought to re-duce the impact of exchange rate variability by diversi-fying exchange risk in the forward exchange markets,which have become wider and more differentiated inrecent years, and also in the financial markets, e.g., byhedging through trade credits in the invoice currency.In addition, there seemed at times to have been largeportfolio shifts between financial and commodity mar-kets. For example, there were occasions when sharpexchange rate movements were reflected in gold prices,as funds shifted out of one currency were placed notonly in other currencies but also in nonfinancial assets,including gold.

Implications of Greater Efforts toInfluence Exchange Rates

The foregoing discussion has outlined the recent tend-ency toward increased official efforts to influence devel-opments in exchange markets. These efforts have beenintensified since the last quarter of 1978 because of thelarge and disruptive exchange rate movements occurring

at that time, the growing realization that the marketcannot always be relied upon to perform the function ofdampening fluctuations in exchange rates, and percep-tions regarding the harmful effects of excessive fluctua-tions. The policy of smoothing such fluctuations involvesmeasures aimed at both maintaining orderly conditionsin exchange markets and counteracting the tendency forexchange rates to overshoot the mark in moving to newequilibrium levels. Such measures are complicated bythe need for the authorities to judge whether market-determined movement in the exchange rate signals alonger-run change justified by underlying economic con-ditions rather than a temporary fluctuation based onephemeral causes. Hence, while official intervention canassist the process of adjustment by preventing exchangerate movements unjustified by underlying factors, it mayalso at times prevent movements in rates that wouldhave fostered adjustment.

Moreover, the adverse effects of excessive exchangerate fluctuations must be seen in proper perspective. Inparticular, they need to be compared with the harmfulconsequences of protracted deviations of exchange ratesfrom their medium-term equilibrium levels. The policiespursued by different countries reflect their perceptionsregarding the balance between the economic costs ofexcessive exchange rate fluctuations, on the one hand,and those of protracted deviations from equilibriumrates, on the other. While the consequences of suchdeviations are well known, the effects of excessive fluc-tuations are less clear and bear some discussion.

A principal reason for taking measures to stabilizeexchange rates is the fear that exchange rate variationsapparently unrelated to underlying economic conditionswould have perverse effects on patterns of trade andproduction, thereby impeding desired adjustments incurrent accounts. After some years of experience withfloating rates, the private sector might be expected tobe more aware of the often temporary nature of changesin price competitiveness induced by exchange rate fluc-tuations and accordingly respond only to those changesin relative wages and employment opportunities thatare regarded as permanent. There may nevertheless begood reason for concern that overshooting of exchangerates could lead to unnecessarily large fluctuations inprices, wages, and employment, because the initialchanges in exchange rates may induce reactions in pricesand wages that are subsequently not easily reversed.

Another reason for official actions to dampen ex-change rate fluctuations has been the belief that suchfluctuations in exchange rates have been damaging tothe growth of foreign trade and investment. Althoughstatistical studies and business surveys have yet to showclear evidence on this point, it is admittedly difficult tocome to a judgment on this question. Such a judgmentimplies a comparison with more stable exchange rates,

48



but greater stability might not have been achievable dur-ing this period without at times suppressing rate move-ments that were justified by underlying economic devel-opments, and this in turn could have discouraged for-eign trade and investment. Moreover, in view of thevarious contemporaneous developments that have hadadverse effects on both economic growth and pricestability since 1973, there is some question whether theoccasional tendency toward excessive fluctuations ofexchange rates has been one of the symptoms of thesedevelopments or an additional cause of slow growth andinflation.

A further reason for official actions to influence ex-change markets is that market-determined movements inexchange rates may, at times, hamper anti-inflationarypolicies. It has, moreover, been argued that the morefreely floating are exchange rates, the weaker is thepolitical support for anti-inflationary policies. There isindeed some evidence that under the par value systemthe contractionary demand-management measures takenby countries with balance of payments deficits tended tobe stronger than the expansionary measures taken bycountries with surpluses of comparable magnitude.While this tendency alone would have produced amarked deflationary bias in the world economy, therewere also many instances during that period when coun-tries with higher than average inflation rates resorted toan increased use of exchange restrictions or exchangerate action rather than to anti-inflationary monetary andfiscal policies. The effect of floating exchange rates inthis respect would appear to be a neutral one. To besure, floating rates permit countries to maintain inflationrates above the world average without changes in theprice competitiveness of their traded-goods sectors.Equally, however, market-determined exchange ratesassist countries with relatively low rates of inflation ininsulating their economies from the impact of higherrates of inflation in the rest of the world. Whether, un-der market-determined exchange rates, there is any sys-tematic tendency for low-inflation or high-inflationcountries to adjust to the average is uncertain: whilelow-inflation countries may at times resist appreciationof their currencies in order to avoid harming their ex-port sectors, there is also pressure on the authorities ofhigh-inflation countries to avoid inflation, since thedepreciation of their currencies tends to reinforcedomestic price increases by raising import prices. Onbalance, the resistance of a government to inflationarypressures appears to have much less to do with theextent of exchange rate management than with thecountry's past history of inflation and unemployment,its industrial and labor union structure, and the effec-tiveness with which policies can be implemented throughits monetary and fiscal institutions.

A related concern is that some countries might be

drawn into a vicious circle of inflation and currencydepreciation, based on the feedback effects of move-ments in exchange rates on import prices, money wages,domestic prices, and export prices, and the fact that theeffects on prices and wages are more rapid than thecorrective effects on the current account. The extent towhich exchange rate changes lead to a vicious or vir-tuous circle depends on the characteristics of an econ-omy, such as its size and openness as well as the degreeof wage and price indexation that is present. There isevidence for the industrial countries suggesting that thesmaller and more open is a country, the greater is theextent to which domestic price effects of a depreciationare apt eventually to offset much, if not all, of thecompetitive advantage gained by the depreciation. Theauthorities of these economies face especially great diffi-culties in resisting the inflationary pressures generatedby a depreciation of their currencies. Nevertheless, ex-change rate depreciation and domestic inflation bothtypically reflect an excessive rate of money expansion,and the domestic currency cannot depreciate indefinitelyunless accompanied by an accommodating monetarypolicy that is excessively expansionary relative to thatof other countries.

A further reason why large, frequent fluctuations inexchange rates may raise rates of inflation above whatthey would otherwise be has to do with the supposi-tion that effective depreciation of a country's currencytends to accelerate the domestic rate of inflation whilean appreciation does not have a corresponding dampen-ing effect on inflation because of the downward inflexi-bility of wages and prices. Empirical evidence showsthat import prices do fall after exchange rate apprecia-tions and that domestic prices do not seem to react in asignificantly different manner to positive and negativechanges in import prices. Nevertheless, money wagestend in general to be highly rigid in a downward direc-tion. There is thus some basis for concluding that wageand price effects of depreciations and appreciations aresomewhat asymmetrical. There is also an additionalworry for the authorities in countries with deeply em-bedded inflationary expectations that those expectationswould be immediately exacerbated by a depreciation ofthe domestic currency while they may respond moresluggishly to an appreciation.

While there are often good reasons for active officialintervention in exchange markets and other policy meas-ures to influence exchange rates, such actions can attimes be at the expense of attaining domestic monetarytargets. This is true both of intervention, to the extentthat its monetary impact cannot readily be offset byother monetary measures, and of monetary policies em-ployed to influence exchange rates. The benefits ofmeasures to stabilize exchange rates must be weighedagainst their domestic monetary impact.

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ANNUAL REPORT, 1980

The balance between fostering orderly market condi-tions and allowing appropriate exchange rates to beestablished in the market is important, not only for theindustrial countries involved but also for the rest of theworld. Large exchange rate fluctuations for the majorcurrencies unfavorably ailect the conditions under whichmost of world trade is transacted. It is, however, in theinterest of all members to allow those exchange ratemovements to take place that foster international adjust-ment, and this concern must continue to be a primeconsideration in framing exchange rate policies.

Exchange Rates and the AdjustmentMechanism

Over the last decade, exchange rate movements havecontributed to required adjustments in the current ac-count, but this contribution was subject to a numberof limitations. For the industrial countries, short-runfluctuations in exchange rates have not always reflectedunderlying economic conditions, and this has led to fearsthat rate changes may often fail to transmit to the mar-ket the signals required to stimulate the desired adjust-ments. Moreover, when exchange rates have moved inthe required direction, the impact on the current accounthas typically been slow in taking hold and, in the shortrun, even perverse, because of low short-run price elas-ticities of import demand and export supply.

The appropriate use of exchange rate policies to helpin correcting excessive payments imbalances differs ac-cording to the prevailing world economic situation andthe circumstances of the country concerned. While theaggregate current account surplus of oil exporting coun-tries, and the corresponding deficit of the rest of theworld, is not likely, for reasons discussed below, to beamenable to adjustment through changes in exchangerates, such changes may nevertheless be justified forcertain individual countries. In formulating and assess-ing exchange rate policies, the widely varying circum-stances of each country must be carefully considered.In doing so, there are somewhat different sets of factorsto take into account for industrial, non-oil developing,and oil exporting countries.


Major progress was achieved in 1979 in reducing oreliminating excessive current account imbalances amongthe major industrial countries, and exchange ratechanges appear to have played a significant role in ac-complishing this change. The appreciation of the effec-tive exchange rates, relative to inflation rate differen-tials, that occurred in 1977 and 1978 in the Federal Re-

public of Germany, Japan, and the United Kingdomseems to have been in part responsible for the subse-quent decline in their current account balances. For theFederal Republic of Germany and Japan, the oil priceincreases also played a major role in this decline, andfor all three countries current account balances wereaffected as well by cyclical and structural factors. Theimprovement in the current account of the United Statesappears related to the effective depreciation of the U.S.dollar in 1977 and 1978. The relative current accountperformance of individual industrial countries in 1979thus appears to have been influenced by movements inexchange rates and relative prices, even though the rela-tive cyclical evolution of domestic demand has also beena significant factor.6

While exchange rates have played an important rolein reducing current account imbalances, the questionarises of whether, and to what extent, measures shouldbe taken to influence exchange rates so as to facilitatecorrection of prospective imbalances of industrialcountries created in large part by the oil price increasesin 1979. Industrial countries as a group can reduce theircurrent account deficit, consistent with an orderly inter-national adjustment process, only by reducing their oilimports or increasing their exports to the oil exportingcountries. An important consideration in this regard isthe expectation that the rate of increase of imports ofoil exporting countries is likely to be smaller than it wasafter the 1973-74 oil price increases and that the importexpansion of these countries will in large part be inde-pendent of exchange rate policies in the industrial coun-tries. The depreciation of the currency of an individualindustrial country could, nevertheless, be a helpful con-tribution to international adjustment if its balance ofpayments position were judged to be weak relative tothat of other industrial countries. Such a judgment woulddepend, inter alia, upon the impact of relative cyclicalpositions on both the capital and current accounts, aswell as upon the effects on domestic saving and invest-ment of the changes in trade and capital flows inducedby the new level of oil prices. In view of the importanceof oil imports, judgments as to the usefulness of ex-change rate movements would also have to take intoaccount differences among the industrial countries intheir capacity to exploit domestic energy resources, inthe available scope for additional energy conservation,and in the ease with which funds can be attracted fromoil exporting countries to finance productive invest-ment. Such judgments would also have to be made inthe light of the feasibility and desirability of reducingdivergences in growth and inflation trends among coun-tries by means of cooperative policy action.

6 See Chapter 1.

50




Difficult choices are faced by the non-oil developingcountries in determining how to adjust to the increasedoil prices. This adjustment effort is hampered by theslowing in the pace of industrial activity in the rest ofthe world, as well as by protectionist barriers to certaintypes of their exports to the industrial countries. Asexplained elsewhere in this Report, financing of pay-ments imbalances will be required on a large scale.Nevertheless, the aim of the non-oil developing coun-tries will be to achieve structural adjustments in theireconomies that permit the eventual attainment of sus-tainable current account deficits—by export expansionto oil exporting and industrial countries and by avoidingtoo rapid a rate of growth of imports from those coun-tries. They will attempt to pursue this aim without sac-rificing their fundamental objective of a satisfactorypace of economic development. For some of these coun-tries with large external disequilibria, exchange ratepolicies can play an essential complementary role in thisadjustment effort.

/ In the short run, significant expansion in the value ofexports is often difficult for developing countries toachieve because, in many cases, supply elasticities athome and demand elasticities abroad are low. In thelonger run, supply elasticities are larger and there isgreater scope for export expansion, especially for ex-porters of manufactured goods. For the latter, in par-ticular, active exchange rate policies have often provedhelpful in maintaining their price competitiveness.While for individual countries that export primary prod-ucts such policies may prove useful, for exporters of aparticular primary product as a group, attempts toachieve rapid increases in such exports will, in mostcases, simply lead to lower overall export revenues, be-cause the price and income elasticities of demand formany primary goods tend to be low. For most non-oildeveloping countries, however, as for others, exportexpansion could be facilitated by the removal of existingtrade barriers in the industrial countries.

While more rapid growth of the developing countriesnormally requires larger imports of investment goods,there is considerable scope for eventually reducing de-pendence on certain types of imports. Import substitu-tion in the manufacturing sector can be achieved on asignificant scale in a number of countries but is oftenlimited by the dependence on essential imports of capi-tal equipment and raw materials, as well as by thecharacter of resource endowments. The capacity for effi-cient import substitution can also be hindered by pricedistortions arising from government policies. For coun-tries importing foodstuffs, a gradual movement towardimport substitution is often possible, since most devel-oping countries have possibilities for substantially rais-

ing the productivity of agricultural resources. Anothertype of import substitution, which is of special interestin present circumstances, is the development over thelong run of domestic energy resources, for which thereis considerable scope in many countries. To be sure, theinvestment requirements for both agricultural and en-ergy development are large and will normally entailsubstantial foreign assistance. Some scope may alsoexist for import substitution for the group of developingcountries as a whole through the expansion of tradewithin the group, which can be facilitated by regionaltrade and payments arrangements.

In programs designed to achieve the types of struc-tural adjustments just described, exchange rate actionplays an important role where such adjustments requirechanges in relative prices facing producers and consum-ers or involve the elimination of exchange and traderestrictions. Exchange rate action, to be effective, needsto be accompanied by supporting policies that encour-age efficient resource allocation and investment and pre-vent an excess of aggregate demand over supply fromoffsetting, through general inflation, the initial changesin the relative prices of traded and nontraded goods.Additional measures are often required to accompanyexchange rate action, for instance, the removal of con-trols and restrictions, public investment in certain areas,or changes in the structure of taxes and subsidies.


In many oil exporting countries, the process of adjust-ment initiated by the rise in oil revenues has been ac-companied by a deterioration in their non-oil currentaccounts, domestic inflation, a rise in the prices of non-traded goods relative to those of traded goods, and atendency toward corresponding changes in the structureof domestic production. These developments have beenvery important in bringing about balance of paymentsadjustment on current account. At the same time, how-ever, they have also been regarded as interfering withthe efforts of these countries to create a more diversifiedbase of non-oil production.

The question of what is the correct exchange rate pol-icy for the oil exporting countries to follow under thesecircumstances does not have a simple answer. Normally,a country with a persistent balance of payments surpluswould be expected to consider an appreciation of itscurrency as an appropriate element in a mix of correc-tive policies. In the special conditions in which the oilexporting countries presently find themselves, however,such a step would have little relevance for the majordecisions to be made by these countries in the comingyears with respect to the rate of petroleum production,the pace of import expansion and domestic economic

51


ANNUAL REPORT, 1980

development, and the allocation of their foreign invest-ments. These decisions are largely independent of ex-change rate policies, since they are affected mainly bythe rates of return on investment abroad, the real termsof trade between petroleum and the goods imported byoil exporting countries, and the absorptive capacity oftheir economies. Moreover, in some oil exporting coun-tries, the dominance of government involvement ensuresthat the structure of domestic production is determinedlargely by government decisions without regard to mar-ket incentives. In these instances, the effects of exchangerate changes are likely to be much smaller than in mostnon-oil developing countries.

Nevertheless, in a number of oil exporting countriesthe market plays a significant role; and in these coun-tries another objection is raised against a policy thatresults in an appreciation of the national currency,namely, that it discourages diversification of the econ-omy by reducing the competitiveness of the non-oiltraded goods sector. The desirability of encouraging thegrowth of this sector, and the correct timing of suchencouragement, varies considerably among economies,depending on the projected time span and size of oilearnings, as well as on the immediate developmentneeds of each country.

Where encouragement of the non-oil traded goodssector is desired, suitable incentives may include specialgovernment assistance to certain activities and changesin the structure of taxes and subsidies. The use of ex-change rate policy to foster a more diversified non-oilsector—as has sometimes been suggested—would ingeneral be a less effective way of encouraging this devel-opment than would policies aimed directly at reducingthe growth of consumption expenditure or at augment-ing the share of expenditure devoted to investment. Thisis especially so in countries that already have large bal-ance of payments surpluses, since in these circumstancesexchange rate depreciation tends to result in increases inwages, prices, and money supplies that offset the initialeffect of the depreciation on relative prices and domesticexpenditure.

Surveillance

This section provides a general review and analysisof the Fund's first two years of experience with the prin-ciples and procedures for surveillance over the exchangerates of its member countries. The Second Amendmentof the Articles of Agreement gives Fund members free-dom to choose their exchange arrangements, except fora prohibition against maintenance of the value of a cur-rency in terms of gold. At the same time, each countryundertakes, under Article IV, "to collaborate with theFund and other members to assure orderly exchangearrangements and to promote a stable system of ex-

52

change rates," and the Fund is required to engage infirm surveillance over members' exchange rate policiesto ensure that they are consistent with this broad objec-tive. In order to perform this function, the Fundadopted, in April 1977, a set of principles for the guid-ance of members' exchange rate policies, as well asprinciples and procedures for Fund surveillance overthese policies, which became the basis for surveillanceas soon as the Second Amendment entered into forceon April 1, 1978.

Principles and Procedures of Surveillance

Three principles for the guidance of members' ex-change rate policies were devised as a means of ensuringthat each member country follows exchange rate poli-cies compatible with its general obligations under Arti-cle IV:

A. A member shall avoid manipulating exchange rates orthe international monetary system in order to prevent effec-tive balance of payments adjustment or to gain an unfaircompetitive advantage over other members.

B. A member should intervene in the exchange market ifnecessary to counter disorderly conditions which may becharacterized inter alia by disruptive short-term movementsin the exchange value of its currency.

C. Members should take into account in their interventionpolicies the interests of other members, including those ofthe countries in whose currencies they intervene.7

The principles of Fund surveillance over exchangerate policies provide a list, which is not exhaustive, ofdevelopments that might indicate the need for discus-sions between the Fund and a member country. Thesedevelopments include protracted large-scale interventionin one direction in the exchange market; an unsustain-able level of official or quasi-official borrowing or lend-ing for balance of payments purposes; various kinds ofrestrictions or incentives affecting current transactionsor capital flows; abnormal encouragement or discour-agement to capital flows through financial policies forbalance of payments purposes; and exchange rate be-havior that appears to be unrelated to underlying eco-nomic and financial conditions.

The procedures for surveillance oblige each memberto notify the Fund promptly of any changes in its ex-change arrangements and to hold regular consultationsunder Article IV. They require the Executive Board toengage in periodic reviews of broad developments inexchange markets and to undertake an annual reviewof the general implementation of surveillance. They alsoprovide that the Managing Director is to keep in closecontact with members concerning their exchange ar-rangements and stand ready to discuss, at the member'sinitiative, any contemplated changes in these policies. Ifthe Managing Director considers that a member's ex-

Executive Board Decision No. 5392-(77/63), adoptedApril 29, 1977. See Annual Report, 1977, pages 107-109.



change rate policies may not be in accord with theexchange rate principles, he is to initiate special discus-sions with the member and, if necessary, report thematter to the Executive Board.

Experience with Surveillance Procedures

In practice, the Fund's surveillance over exchangerate policies is conducted on two distinct but comple-mentary levels. The first, surveillance at the global level,is concerned with ascertaining whether or not there is abroad international consistency in members' balance ofpayments and exchange rate policies. This concern isgrounded in the Fund's role of assistance to membersin achieving international economic and financial stabil-ity. Global surveillance is carried out in the context ofthe regular discussions of the world economic situationand outlook that take place both in the Executive Boardand at the meetings of the Interim Committee. Thesediscussions are the primary means by which the Fundreviews major exchange rate developments affecting theworld economy, as well as the consequences that arisefrom the policy stances of those countries that are im-portant for the international adjustment process.

The assessments reached in these discussions aretaken into account by the Fund in implementing the sec-ond aspect of surveillance, which is that of identifying,and encouraging the correction of, inappropriate ex-change rates and exchange rate policies of individualmember countries. This task is carried out largelywithin the framework of the regular Article IV consulta-tions with members. These consultations take place an-nually, whenever possible, and include consideration ofthe observance by a member of the principles of surveil-lance and of its general obligations under Article IV.These consultations are completed by conclusionsreached in the Executive Board, which take the form ofa summing-up by the Managing Director of the viewsexpressed by Executive Directors during the discussionof the staff report on the Article IV consultation.

In the interval between Article IV consultations, theManaging Director may initiate special discussions witha member if he considers that the member's exchangerate policies may not be in accord with the exchangerate principles. In January 1979, in response to concernthat these standard procedures might give rise to uneventreatment of members according to the type of exchangearrangement being maintained, the Executive Board de-cided to institute a supplemental surveillance procedure.Under the supplemental procedure, the Managing Di-rector would initiate informally and confidentially a dis-cussion with a member before the next regular consulta-tion under Article IV whenever he considered that amodification of a member's exchange arrangements orof its exchange rate policies, or the behavior of its ex-

change rate, may be important or may have importanteffects on other members. This supplemental procedurepermits the Fund to look into exchange rate develop-ments or situations of importance without the presump-tion that the member in question has not complied withits obligations under Article IV.

Changes in Exchange Arrangements

When the Second Amendment of the Articles ofAgreement entered into force, all countries were re-quired to notify the Fund of the exchange arrangementsthat they intended to apply after April 1, 1978. Theywere also required to notify the Fund promptly of anychanges in their exchange arrangements. Since April1978, many countries have revised their views aboutwhat constitutes an appropriate exchange rate regime.As has already been noted, several industrial countrieshave altered their intervention policies in a significantway, and another group has recently formed the cur-rency area of the European Monetary System. Someadjustments in exchange arrangements and policies havealso taken place in many developing countries over thepast two years as their circumstances have changed.These adjustments are shown in Table 13, in which theexchange rate regime that each country adhered to onJune 30, 1980 is compared with the one that was firstnotified to the Fund in April 1978. Since some coun-tries have notified the Fund of adjustments on morethan one occasion, column 2 of Table 13 indicates thenumber of times that the Fund's classification of a coun-try's exchange arrangements has changed during thisperiod. During the period under review in this Report,from the beginning of 1979 to the end of June 1980,24 members notified the Fund of changes in their ex-change arrangements resulting in a reclassification un-der the categories shown in Table 13. To a consider-able extent, the changes in exchange arrangements thatoccurred during this period, as well as earlier, weremotivated by the desire to prevent excessive fluctua-tions in members' effective exchange rates.

Current Issues Relating to Surveillance

A basic precept of the exchange rate system set forthin the amended Articles of Agreement is that exchangemarket stability should be achieved through the pursuitby member countries of stable underlying domestic eco-nomic and financial conditions. To the extent that mem-bers' policies and performance regarding growth and in-flation differ, they should allow their exchange rates toadjust in an orderly manner, rather than attempting tomaintain inappropriate exchange rates through suchmeasures as extensive official intervention, large accom-

53


ANNUAL REPORT, 1980

Table 13. Exchange Arrangements of Member Countries on April 1, 1978 and June 30, 1980 1

Arrangements on April 1, 1978

Industrial countriesCurrency pegged to

Pound sterlingIreland

Other currency compositeAustriaFinlandNew ZealandSweden

Cooperative arrangementsBelgium2

Denmark2

Germany, Fed. Rep. of 2

Luxembourg2

Netherlands 2

Norway,

Other arrangementsAustraliaCanadaFranceIcelandItalyJapanSpainUnited KingdomUnited States

Developing countriesCurrency pegged to

U.S. dollarBahamasBarbadosBoliviaBotswanaBurundi

Costa RicaDjibouti3

Dominica 3

Dominican RepublicEcuador

EgyptEl SalvadorEthiopiaGhanaGrenadaGuatemalaGuyanaHaitiHondurasIndonesiaIraqJamaicaKoreaLao People's Democratic RepublicLiberia

Libyan Arab JamahiriyaMaldivesNepalNicaraguaOman

PakistanPanamaParaguayRomaniaRwanda

Numberof

Changes

1

__

—1

—__

————1

___

1_

1

._. ...__

——

„,__

11

—_.

—___

——

——__

1

—,

—_—_

1

21

———1

_.

—__.̂__—

U.S.dollar

/V

VV/V•//•••/V,]////•I///V/I//VvV

Arrangements on June 30, 1980Currency pegged to Fvrh^npe rate.

Other Cooperative adjusted accord- OtherPound French Other currency exchange ing to a set of arrange-sterling franc currency SDR composite arrangements indicators ments

//V i/•

/•///

/

i//

/ //

//V•

•/

/

/

/w

Jr

54



Table 13 (continued). Exchange Arrangements of Member Countries on April 1,1978 and June 30,19801

Arrangements on June 30, 1980Currency pegged to Exchange rate

Number Other Cooperative adjusted accord- Otherof U.S. Pound French Other currency exchange ing to a set of arrange-

Arrangements on April 1,1978 Changes dollar sterling franc currency SDR composite arrangements indicators ments

Somalia — /South Africa 1 /St. Lucia3 — /St. Vincent3 — /Sudan — /Suriname — I/Syrian Arab Republic — I/Trinidad and Tobago — I/Venezuela — /Yemen Arab Republic — /Yemen, People's Democratic

Republic of — I/Pound sterling

Bangladesh 1 I/Gambia, The — /Seychelles 1 /Sierra Leone 2 /

French francBenin — I/Cameroon — I/Central African Republic — I/Chad — I/Comoros — I/Congo — /Gabon — I/Ivory Coast — /Madagascar — I/Mali — I/Niger — /Senegal — /Togo — /Upper Volta — /

Other currencyEquatorial Guinea 2 /Guinea-Bissau 1 I/Lesotho — i/Solomon Islands3 1 /Swaziland — /

SDRBahrain 1 JBurma — I/Guinea — I/Jordan — I/Kenya — I/Malawi — I/Mauritius — JSao Tome and Principe — /Tanzania 1 JUganda — /United Arab Emirates 1 ./Zaire 2 •/Zambia — !/

Other currency compositeAlgeria — JCape Verde3 — /Cyprus — JFiji — JIndia 1 ^Kuwait — JMalaysia — JMalta — J/Mauritania — JMorocco — !/Singapore — JThailand — !/Tunisia — !/Western Samoa 1 /

55


ANNUAL REPORT, 1980

Table 13 (concluded). Exchange Arrangements of Member Countries on April 1,1978 and June 30,19801

Arrangements on June 30, 1980Currency pegged to

Arrangements on April 1,1978

Numberof

ChangesU.S.

dollarPoundsterling

Frenchfranc

Othercurrency SDR

Other Cooperativecurrency exchange

composite arrangements

Exchange rateadjusted accord- Other

ing to a set of arrange-indicators ments

Exchange rate adjusted accordingto a set of indicators

ArgentinaBrazilColombiaPortugalUruguay

Other arrangementsAfghanistanChileGreeceIranIsraelLebanonMexicoNigeriaPapua New GuineaPeruPhilippinesQatarSaudi ArabiaSri LankaTurkeyViet NamYugoslavia

1

—__

—1

__

i /"T—-_i2_

__

--

—1

—

////

/

/

/I/

//I/V/ //////

/ •1 No current information on the exchange rate system of Democratic Kampuchea is available. The table also excludes the cur-

rency of the People's Republic of China, since notification of exchange arrangements has not yet been received from the Chineseauthorities.

2 Prior to March 13, 1979, the category "cooperative exchange arrangements" refers to the European common margins arrange-ment; since that date it refers to the European Monetary System.

3 The following countries joined the Fund after April 1, 1978: Cape Verde (November 20, 1978); Djibouti (December 29, 1978);Dominica (December 12, 1978); St. Lucia (November 15, 1979); St. Vincent (December 28, 1979); and Solomon Islands(September 23, 1978).

modating official capital movements, or restrictions ontrade or payments.

Within this general framework, the Fund's approachto surveillance over members' exchange rate policies isflexible and permits an evolution of principles and pro-cedures in accordance with the accumulation of experi-ence regarding various exchange arrangements and poli-cies, and in response to relevant developments in theinternational monetary system. The experience of thelast few years suggests that it is far from easy to attaina smooth and steady evolution of exchange rates wheneconomic objectives and policies differ markedly amongcountries. Over this period, broad trend movements inexchange rates have generally been in the right directionin the sense that the currencies of low-inflation coun-tries have tended, on balance, to appreciate while thoseof high-inflation countries have depreciated. Neverthe-less, the evidence indicates that, especially during pe-riods of high domestic instability, market forces some-times tend to result in exchange rate movements that donot reflect underlying economic and financial develop-ments. This has led to policy initiatives in two areas.First, there has been an increasing tendency to inter-vene more extensively in exchange markets and to form

wider currency blocs. Second, national authorities havemade a greater effort, in part through discussions with-in the Executive Board and the Interim Committee, toformulate the broad outlines of economic policy in thelight of developments in the world economy.

A number of members have also called for the Fundto exercise firmer surveillance over the exchange ratepolicies of both surplus and deficit countries. The con-cern about rising worldwide inflationary pressures, thelarge fluctuations in the values of major currencies, andthe existence of serious external adjustment difficultiesin many countries have given rise to a widespread feel-ing that progress would be desirable in improving theinternational adjustment process and in strengtheningconfidence in the present exchange rate system. Theseconcerns have led to a wide-ranging discussion by theExecutive Board of the Fund's evolving practices in thisarea, with the objective of enhancing the contribution ofsurveillance to international monetary stability. In thisdiscussion, a number of general aspects of recent prac-tice were noted.

In the first place, Fund surveillance activities have inmany cases been concerned with situations in whichunstable domestic economic conditions and policies of

56



excessive rigidity of exchange rates led to overvaluedcurrencies, rather than with situations in which balanceof payments surpluses called for the revaluation of apegged exchange rate. This asymmetry may be exacer-bated by the current world economic situation. In theimmediate future there is only limited scope for thelarge current account surpluses of certain oil exportingcountries to be adjusted through exchange rate changes.While some part of the aggregate current account deficitof oil importing countries is borne by countries in a rea-sonably strong overall external position, another por-tion may be borne by countries with exchange rates thatare out of line with underlying conditions and are main-tained only through unsustainable levels of compensa-tory borrowing or use of trade and exchange controls,all of which have harmful economic effects both on thecountries themselves and on others. For such coun-tries, in view of the increasing urgency of adopting cor-rective policies as time passes, the Fund has encouragedtimely adjustment through exchange rate action andsupporting measures. In order to soften the deflationaryimpact of measures taken to restore equilibrium in defi-cit countries, however, the Fund must also direct sur-veillance at countries that are in an overall surplus posi-tion, while recognizing the limitations, already noted,of exchange rate policy in adjusting the current sur-pluses of some oil exporting countries.

It is also important to avoid limiting surveillance toextreme cases, since its main purpose is to prevent theemergence of severe external imbalances that wouldeventually make disruptive adjustment measures un-avoidable. The Fund has, therefore, also focused itsattention on cases of incipient imbalances that couldbecome severe at a later stage if no corrective measureswere taken. The main difficulty with this procedure isthe differentiation between countries in which an overallstabilization strategy has a good prospect for successeven without a change in the exchange rate and coun-tries in which a stabilization program could not be ex-pected to succeed without depreciation of the currency.

The Fund has also made use of its wider authority tooversee the compliance of members with their obliga-tions to pursue domestic economic policies that willpromote a stable system of exchange rates. This becamenecessary in many instances where the behavior of theexchange rates for a number of currencies was a sourceof concern as a result of domestic economic policies.The causes of "excessive variability" of exchange rateshave often been wide divergences in inflation rates andthe difficulties encountered by monetary authorities incontrolling the growth of monetary aggregates. It is onlyby dealing directly with these factors that exchange ratevariability can be checked.

The Fund strives for greater international coordina-tion of domestic policies among its members to limit

excessive exchange rate volatility in order to promotethe steady expansion of trade and output. Coordinationdoes not, however, mean that countries with a lowerthan average rate of domestic price increase shouldhave to compromise domestic stability for the sake oflimiting exchange rate movements. Furthermore, it isnot always feasible or desirable to harmonize cyclicalmovements in activity levels in major industrial coun-tries. In many cases, it is not so much coordination asan improvement in demand management policies thatis required. In particular, it has become more crucialfor member countries to abide by the obligations under-taken by them to seek stable underlying domestic eco-nomic conditions, not only for their own sake but alsobecause unstable domestic conditions are disruptive tothe exchange and trade system as a whole./ When the principles and procedures of surveillancewere adopted in April 1977, it was recognized that itwould not be possible to produce a comprehensive setof rules applicable to all situations that might arise inthe future. Instead, the Fund chose to take a pragmaticapproach that would allow the practices of surveillancegradually to emerge from the experience accumulatedin dealing with individual cases. In line with these con-siderations, the decision establishing the principles ofsurveillance also specified that they should be reviewedat two-year intervals, or more frequently if the needarose. April 1, 1980 marked the end of the first period,and this review has just been completed by the Fund.

In their review, Executive Directors reiterated thatbecause of the considerable freedom of exchange ar-rangements permitted under the present system, firmsurveillance under Article IV is an essential element inensuring orderly and stable international monetary rela-tions. Furthermore, they expressed the view that sur-veillance must continue to be directed not solely towardthe exchange rate policies of members but also towardtheir general economic policies and the overall con-sistency of these policies across countries. As regardsthe implementation of procedures for surveillance, Ex-ecutive Directors stressed that the effectiveness of theFund's role depends not so much on formal or rigidprocedures as on the quality and candor of the dialogue ibetween the Fund and each of its member countries. Inimplementing surveillance, the Fund should thereforerely as much as possible on persuasion, rather than onprescription. The importance of confidentiality and flex-ibility was also emphasized./ In general, Executive Directors felt that the proce-dures that were established by the original decision onsurveillance were adequate to the task. This decisionprovides a basis for the evolution of practices to dealwith the kinds of exchange rate problems that have beenencountered over the past two years. It recognizes that

57


ANNUAL REPORT, 1980

market forces alone cannot always ensure that exchangerates reflect underlying economic conditions while ac-knowledging the dangers of excessive exchange raterigidity. It also reflects the view that, since exchangerate problems are too complex to justify sole relianceon statistical indicators for judging the appropriatenessof countries' exchange rate policies, the Fund shouldcontinue to adhere to a judgmental approach.

For the time being, Executive Directors concluded,effective implementation of existing procedures is moreimportant than the introduction of additional proce-dures. They considered, moreover, that it is importantto achieve uniform implementation of surveillance with

respect to all countries—whether surplus or deficit,large or small, developed or developing. To this endthe Fund should continue to monitor closely the poli-cies of countries where exceptionally large paymentsimbalances occur or appear likely to occur. The Fundshould also expand its efforts to monitor the policiespursued by major industrial countries and their inter-national consistency in the context of its regular analysisand discussion of the world economic outlook. Finally,the Managing Director of the Fund should initiate sup-plemental surveillance procedures in a discreet and con-fidential manner whenever he considers it appropriateto do so.

International Reserves and Liquidity

Developments in international liquidity are intimatelylinked with exchange rate movements and with themonetary and exchange rate policies that countries pur-sue in view of their macroeconomic objectives. A coun-try can use its reserves, together with official borrowingor lending, to finance temporary payments imbalances—deficits or surpluses—and thereby modify the ex-change rate movements that would otherwise takeplace. The global stock of reserves is influenced in anumber of ways by developments in the exchange mar-kets and by the response of monetary authorities totemporary imbalances. First, the authorities of manycountries may at times intervene in the same direction,thereby increasing or reducing aggregate holdings of theprincipal reserve currency. Second, the SDR prices ofreserve currencies may change and cause a change inthe value of foreign exchange reserves measured inSDKs. Third, movements in the rates at which interestcan be earned on short-term investments in reserve cur-rencies affect the growth of these currency holdings.

The following sections deal with the growth of inter-national reserves and with changes in their composition.After a description of the most recent developments,factors contributing to the change in the SDR values offoreign exchange reserves and Fund-related assets areanalyzed for the past seven years of floating amongmajor currencies. This review of international reservesis extended in a later section to conditional and uncon-ditional liquidity provided by the Fund and in Euro-currency markets to furnish a broad basis for assessingthe adequacy of international reserves. The role of theSDR is discussed in the final section of this chapter.

Recent Developments in International Reserves

Total reserves excluding gold, as reported in Inter-national Financial Statistics, increased by 11 per cent

(SDR 26 billion) in 1979, compared with annualgrowth rates of 8 per cent in 1978 and about 19 percent in 1977 and 1976 (Table 14). As in past years,the growth of foreign exchange reserves in 1979 ac-counted for most of the rise in non-gold reserves. How-ever, in contrast to earlier years, official holdings of na-tional currencies rose little (SDR 5 billion). Rather, the1979 increase in foreign exchange reserves resulted inlarge part from the issuance, by the European MonetaryCooperation Fund, of European Currency Units (ECUs)equivalent to some SDR 20 billion against deposits of aportion of EMS members' gold holdings. Since March1979 the members of the EMS have deposited 20 percent of their official holdings of gold and U.S. dollarswith that Fund. The ECUs issued against gold add tothe total of recorded foreign exchange reserves, whilethe ECUs issued against dollars change only the com-position, and not the size, of such reserves. Changes inthe currency composition of official foreign exchangeholdings will be discussed in greater detail below. Thetotal of Fund-related assets increased by SDR 1.3 bil-lion. This change resulted from an increase of SDR 4.4billion in holdings of special drawing rights (somewhatmore than the annual allocation of SDR 4 billion),which was partly offset by a decline of SDR 3.1 billionin reserve positions in the Fund resulting from the re-duction by SDR 2.2 billion in the Fund's net borrowingunder the oil facilities and from the repayment of anoutstanding credit tranche drawing by the United King-dom of SDR 0.8 billion. The volume of gold held incountries' official reserves declined by almost 10 percent, mainly as a result of the deposits of gold by mem-bers of the EMS in the European Monetary Coopera-tion Fund. The market value of official gold holdingsnevertheless doubled between the end of 1978 and theend of 1979, since the decline in volume was muchmore than offset by a rise of 124 per cent in the marketprice (measured in SDRs).

58



Total reserves excluding gold increased for all threemajor country groups. For the industrial countries, thistotal rose proportionately less (by 7 per cent) than theaverage for all countries, and it would have declined ifa part of the gold stock of EMS member countries hadnot been converted into ECUs; for the major oil export-ing countries, it increased at a rate twice (22 per cent)

the average rate of increase; and for the non-oil devel-oping countries it grew by little more than average(12 per cent). However, developments differed greatlyamong countries, particularly those in the last group,with a single country (Argentina) accounting for morethan half of the SDR 6.3 billion growth in non-goldreserves for the entire group of non-oil developing

6.28.8

15.0101.6

8.88.9

17.7126.5

12.68.8

21.4137.3

17.78.7

26.4160.3

18.18.1

26.2200.3

14.88.1

22.9221. 1 2

11.812.524.2

246.0

12.116.228.3

258.7

Table 14. Official Holdings of Reserve Assets, End of Years 1973-79 and End of May 19801

(In billions of SDKs)May

1973 1974 1975 1976 1977 1978 1979 1980

All countriesTotal reserves minus gold

Fund-related assetsReserve position in the FundSpecial drawing rights

Subtotal, Fund-related assetsForeign exchange

Total reserves excluding goldGold3

Quantity (millions of ounces)Value at London market price

Industrial countriesTotal reserves minus gold

Fund-related assetsReserve positions in the FundSpecial drawing rights



116.6

1,02094.9

4.97.1

12.065.777.7

144.2

1,018155.1

6.27.2

13.364.978.3

158.7

1,017121.9

7.77.2

14.968.783.7

186.7

1,013117.4

11.87.2

19.173.792.7

226.5

1,015137.8

12.26.7

18.9100.0118.9

244.12

1,022177.3

9.66.4

16.0127.2143.1

270.2

9304

361.4

7.79.3

17.1135.9153.0

287.0

934381.5

7.811.919.6

143.3162.9


Oil exporting countriesTotal reserves minus gold





Non-oil developing countriesTotal reserves minus gold





87481.3

0.30.30.6

10.210.8

343.1

0.91.42.3

24.927.2

11010.2

874133.1

1.90.32.2

35.037.2

345.2

0.71.42.1

25.727.8

10816.5

872104.5

4.30.34.6

42.447.1

354.2

0.61.21.8

25.327.1

10812.9

872101.2

5.40.35.8

49.154.9

374.3

0.51.11.6

36.237.8

10111.7

881119.6

5.40.45.7

55.261.0

344.7

0.51.11.6

44.045.6

9813.2

884153.4

4.40.54.9

40. 1 2

45.0 2

366.3

0.91.22.1

52.854.9

9917.2

789 4

306.7

3.01.04.0

51.055.0

3714.2

1.02.13.1

58.161.2

10239.6

789322.1

3.11.54.6

57.662.2

3915.8

1.22.84.0

56.860.8

10442.6

Source: International Financial Statistics.1 "Fund-related assets" comprise reserve positions in the Fund and SDR holdings of all Fund members. Claims by Switzerland on

the Fund are included in the line showing reserve positions in the Fund. The entries under "Foreign exchange" and "Gold" compriseofficial holdings of the Netherlands Antilles, Switzerland, and Fund members except the People's Republic of China, for which dataare not published. Figures for 1973 include official French claims on the European Monetary Cooperation Fund.

2 Beginning with April 1978, Saudi Arabian holdings of foreign exchange exclude the cover against the note issue, which amountedto SDR 4.3 billion at the end of March 1978.

3 One troy ounce equals 31.103 grams. The market price is the afternoon price fixed in London on the last business day of eachperiod.

4 The decrease recorded in the quantity of countries' official gold holdings from the end of 1978 to the end of 1979 reflects mainlythe deposit by the nine member countries of the European Monetary System of 20 per cent of their gold holdings with the EuropeanMonetary Cooperation Fund. The European Currency Units (ECUs) issued in return for these deposits are shown as part of thecountries' official foreign exchange holdings.

59


ANNUAL REPORT, 1980

countries combined. The reversal in 1979 of the sharpdecline in the reserves of oil exporting countries thathad occurred during the previous year resulted chieflyfrom the increase in petroleum prices, which strength-ened the external payments position of these countries.This development, together with the relatively strongexternal payments position of the United States, mayalso explain the slower growth of reserves excludinggold in the two other country groups in 1979 comparedwith the preceding year. The market value of gold hold-ings of industrial countries rose by SDR 153 billionduring 1979. The corresponding increases for oil ex-porting countries and non-oil developing countries wereSDR 8 billion and SDR 22 billion, respectively. How-ever, the significance of such changes is limited on ac-count of the instability of gold prices and other factorsdiscussed later.

The London market price of gold, which had risensteeply during the first few weeks of 1980, was littlehigher at the end of May than it had been at the end of1979. While the market value of official gold holdingsthus rose only moderately in the first five months of1980, gold valuation adjustments continued to play amajor role in raising official holdings of ECUs. TheEuropean Monetary Cooperation Fund values the golddeposited by member countries (20 per cent of theirholdings) at the lower of (1) the average market priceover the six preceding months and (2) the averagemarket price on the penultimate working day precedingthe swap period for which the ECU price of gold hold-ings is to be established.8 According to this formula, theprice of gold used by the EMS rose from ECU 165 perounce for the first swap period started March 13, 1979to ECU 211 for the third swap period ended January 8,1980. During 1979, the resulting revaluation of thestock of gold deposited, whose volume remained essen-tially unchanged at 85 million ounces after July 1979,amounted to almost SDR 5 billion. Further gold revalu-ations, to ECU 371 per ounce, added almost SDR 15billion to foreign exchange reserves during the first fivemonths of 1980. A small depreciation of the ECU rela-tive to the SDR prevented that figure from being evenlarger.

The depreciation of the ECU against the SDR coin-cided with appreciation of the U.S. dollar against theECU from the start of the fourth (January 8, 1980) tothe start of the fifth (April 9, 1980) swap period. By

8 The dual approach to gold valuation reflects concern aboutdistortions arising from the instability of gold prices. By con-trast, only the second method is used to value the dollar hold-ings of the members of the EMS, i.e., current rather than aver-age exchange rates are applied for that purpose exclusively.Neither the gold nor the dollars against which ECUs are issuedare transferred permanently to the European Monetary Coop-eration Fund, and both remain under the administration of thecountries making these "deposits," with the interest on dollarbalances accruing to the depositors.

itself this would have caused more ECUs to be issuedagainst dollars. However, the sales of U.S. dollars byforeign official holders in the face of upward pressureson the dollar were so large during the fourth swapperiod as to lower the ECUs issued against 20 per centof the dollar holdings of EMS members at the start ofthe fifth swap period. On balance, the SDR value ofECUs issued against U.S. dollars thus declined from apeak of SDR 14 billion at the end of the third quarterof 1979 to SDR 11 billion at the end of May 1980, withchanges in the SDR value of U.S. dollars contributingvery little to this outcome. Since the SDR value ofECUs issued against gold doubled from SDR 17 bil-lion to SDR 34 billion over the same period, ECUs is-sued against gold accounted for three fourths of allECUs outstanding at the end of May 1980. At thattime, ECUs valued at almost SDR 46 billion were avail-able for the settlement of multilateral balances that mayarise from intervention operations between membersof the EMS.9

Gold price changes and the ensuing valuation adjust-ments have therefore dominated changes in non-goldreserves via the ECU in recent months, just as they didduring much of 1979. The additional ECUs issued,some SDR 13 billion, exceeded the increase of SDR 11billion in official holdings of foreign exchange for allcountries over the first five months of 1980, and theforeign exchange holdings of industrial countries (in-cluding ECUs) grew by only SDR 7 billion. Fund-related assets increased by about SDR 4 billion. SDRholdings rose by SDR 3.7 billion on account of the sec-ond allocation of SDR 4 billion in the third basic pe-riod being made at the beginning of 1980. Reservepositions in the Fund increased by SDR 0.3 billionfrom a five-year low point reached toward the end of1979, mainly because repurchases of sterling in Januaryand April 1980 had raised the reserve position of theUnited Kingdom to SDR 0.4 billion at the end ofMay 1980. On the other hand, continued reductions inthe Fund's net borrowing under the oil facilities werenot quite matched by increased net borrowing underthe supplementary financing facility. Altogether, non-gold reserves rose at an annual rate of 15 per cent inthe first five months of this year, but this rate of in-crease is expected to decline as the year progresses.

As explained in more detail later in this chapter, thedemand for non-gold reserves may be affected by therise in the market value of official gold holdings. Eventhough that market value is subject to large fluctuationsand its future evolution is therefore subject to consid-erable uncertainty, its present high level may have somedepressing effects on the demand for non-gold reserves.

9 The United Kingdom, which holds about 8 per cent of allECUs issued, does not participate in the exchange ratemechanism.

60



However, national authorities appear to treat gold moreoften as a permanent store of wealth than as a sourceof funds for conducting transactions and market inter-vention. For this reason it remains appropriate to con-centrate on the demand for non-gold reserves.

To relate developments in reserves excluding gold tothe growth of international transactions—taken as aproxy for payments imbalances—it is useful to take along-term approach. During the first seven years of thefloating exchange rate regime, from the end of March1973 to the corresponding date in 1980, official hold-ings of foreign exchange increased by a factor of 2.5,from SDR 98 billion to SDR 248 billion while worldexports of merchandise, measured in SDRs, almostquadrupled, rising by a factor of 3.6 over the sameperiod. If world export prices (the export unit valueindex converted to SDRs), which rose by a factor of2.7 over the same period, were applied to deflate theSDR value of the foreign exchange component of inter-national reserves, the purchasing power of these re-serves over world exports would be found to be about4 per cent lower in March 1980 than it had been sevenyears earlier. On this same basis, the "real" value ofSDRs and reserve positions in the Fund would eachhave fallen by over one fourth. Although non-gold re-serves need not grow at the same rate as the value oftrade, and changes in the availability of borrowed re-serves also matter as explained later, the reduction inthe "real" value of non-gold reserves over the pastseven years is remarkable in view of the 35 per centgrowth in the volume of world exports. During a periodmarked by cyclical and price instability, supply shocks,and other factors contributing to payments imbalances,the world as a whole thus appears to have reduced itsreserve cushion against further imbalances.

Foreign Exchange Reserves

This section describes the sources and characteristicsof the growth in official holdings of foreign exchange,valued in SDRs, over the past seven years of floatingamong the currencies of the major industrial countries.It shows how the composition of official foreign ex-change reserves has changed as a result of changesboth in the quantities of holdings of national currenciesand in their SDR prices. It analyzes how official hold-ings of currencies would have grown if they had earnedthe corresponding national short-term market rates ofinterest. Rates of return in a common unit of accounton short-term investments in various currencies arecalculated, and the hypothetical growth of the SDRvalue of these currency holdings is compared with thenotional growth of the SDR itself that would have oc-curred if it had earned interest at the "combined mar-

ket rate," i.e., at the weighted average of the five na-tional money market rates that enter into the calcula-tion of the SDR rate of interest.

Currency Composition

The currency composition of the increase in foreignexchange reserves in 1979 differed from that of previ-ous annual increments (Table 15). In the years1973-77, the largest part—on average, three fourths—of the increase in foreign exchange holdings consistedof U.S. dollars. A change in this pattern was alreadyobservable in 1978. In that year, the U.S. dollar com-ponent of SDR 10 billion was less than one half of thetotal increment, with much of the remainder taking theform of additions to holdings of deutsche mark (SDR 5billion) and Japanese yen (SDR 3 billion). In 1979,the principal non-dollar currencies held in official re-serves—the deutsche mark, the Japanese yen, the Swissfranc, and the pound sterling—again accounted for anappreciable portion (SDR 9 billion) of the total rise inforeign exchange holdings of SDR 25 billion. Officialholdings of U.S. dollars, however, declined by SDR 17billion. Because the SDR price of the U.S. dollar, whichhad fallen by 7 per cent during 1978, declined by only1 per cent in the course of 1979, almost the entire re-duction in the SDR value of U.S. dollar holdings re-sulted from quantity changes, rather than from pricechanges. The largest part of this reduction was theresult of deposits of U.S. dollars equivalent to SDR 13billion by EMS member countries in the EuropeanMonetary Cooperation Fund against an equal amountof ECUs issued to the depositors. These ECUs, as wellas those issued against gold deposits, are counted aspart of countries' foreign exchange reserves, while theU.S. dollars (and the gold) deposited with the Euro-pean Monetary Cooperation Fund are not counted aspart of countries' reserves. Even if the effects of thissubstitution and of the decline in the SDR value of theU.S. dollar on official holdings of U.S. dollars were leftout of account, these holdings would have decreasedsomewhat during 1979, with sales of U.S. dollars insupport of the Japanese yen not fully compensated bynet acquisitions by the authorities of other countries.As already mentioned, this leaves only a small net in-crease (SDR 5 billion) of national currencies held inforeign exchange reserves, with four fifths of the totalincrease of SDR 25 billion in these reserves stemmingfrom ECUs issued against gold. If one identified theECUs issued against U.S. dollars as dollars and ex-cluded the ECUs issued against gold from foreign ex-change reserves, only a small decline in official holdingsof U.S. dollars and a small increase in foreign exchangereserves would remain. In the official statistics, how-

61


ANNUAL REPORT, 1980

Table 15. Quantity and Price Changes Affecting the SDR Value of Official Holdings of Foreign Exchange,by Currency and in Total, over Contiguous Periods, End of First Quarter 1973-End of 19791

(In millions of SDRs)

U.S. dollarStarting value

Quantity changePrice change

Total change

Pound sterlingStarting value


Total change

Deutsche markStarting value


Total change

French francStarting value


Total change

Swiss francStarting value


Total change

Netherlands guilderStarting value


Total change

Japanese yenStarting value


Total change

ECUStarting value

Quantity change 2

Price changeTotal change

Sum of aboveStarting value


Total change

Total official holdings 3

Starting valueTotal change

Ending value

1973:1to

1974:11

75,15110,856

010,856

6,236199

—202-3

5,1921,054

5021,556

909232

-89143

1,075457

93550

2879432

126

—

88,85012,892

33613,228

98,28516,115

114,400

1974:11to

1975:IV

86,00715,9763,161

19,137

6,233-243-938

-1,181

6,7481,472-11

1,461

1,052479

95574

1,625147295442

413336-6330

7096

715

102,07818,8762,602

21,478

114,40022,947

137,347

1975: IVto

1976:IV

105,14416,323

67817,001

5,052-1,296

-745-2,041

8,2081,1621,0212,183

1,626-66

-139-205

2,0671

161162

743-58

7315

71536336

399

123,55516,4291,085

17,514

137,34722,983

160,330

1976: IVto

1977: IV

122,14536,328

-6,58829,740

3,01141

216257

10,3913,806

9884,794

1,421481563

2,2291,093

5401,633

758272451

1,114722226948

141,06942,065

-4,57937,486

160,33039,964

200,294

1977:IVto

1978:IV

151,88520,137

-10,5859,552

3,267-69-24-93

15,1853,7901,2285,018

1,484401

88489

3,862-363

542179

80910772

179

2,0622,532

3092,841

178,55426,535

-8,37018,165

200,29420,840

221,134

1978:IVto

1979:IV

161,437-16,034-1,325

-17,359

3,174675294969

20,2032,453

9443,397

1,9737552

127

4,0412,035

792,114

988483

30513

4,9033,650

-1,2552,395

027,6914,818

32,509

196,71921,0283,637

24,665

221,13424,891

246,025

1973:1to

1979: IV

75,15183,586

-14,65968,927

6,236-693

-1,399-2,092

5,19213,7374,672

18,409

9091,169

221,191

1,0753,3701,7105,080

287989225

1,214

7,976-6787,298

027,6914,818

32,509

88,850137,825-5,289132,536

98,285147,740246,025

Source: Fund staff estimates.1 The currency composition of foreign exchange is based on the IMF currency survey (see Table 18, footnote 4) and on estimates

derived mainly, but not solely, from official national reports. The numbers in this table should be regarded as estimates that are sub-ject to adjustment as more information is received. Quantity changes are derived by multiplying the change in official holdings of eachcurrency from the end of one quarter to the next by the average of the two SDR prices of that currency prevailing at the correspond-ing dates (except that the average of daily rates is used to obtain the average quarterly SDR price of the U.S. dollar). This procedureconverts the change in the quantity of national currencies from own units to SDR units of account. Subtracting the SDR value ofthe quantity change so derived from the quarterly change in the SDR value of foreign exchange held at the end of two successivequarters then yields the SDR value of the quarterly price change for each currency. All changes are summed over several quartersto yield cumulative changes over the periods shown.

2 Quantity changes in European Currency Units (ECUs) issued against dollars are evaluated by applying the SDR price of theU.S. dollar on the swap date to the estimated change in dollar holdings. Similarly, quantity changes in ECUs issued against gold aredetermined by applying the SDR price of the ECU on the swap date to the ECU price of gold used by the European MonetarySystem and multiplying by the change in the number of ounces.

3 Include a residual whose currency composition could not be ascertained, as well as holdings of currencies other than those shown.

62



ever, the total amount of ECUs outstanding at the endof 1979, almost SDR 33 billion, accounts for 13 percent of aggregate foreign exchange reserves and 12per cent of total reserves excluding gold (comparedwith a share of 9 per cent for total Fund-related assets).

The nominal SDR value of official foreign exchangeholdings is affected by changes both in the quantityheld and in the SDR price of each component currency(Table 15).10 During the first four years of the periodof floating exchange rates, the value of the U.S. dollarin terms of SDRs either remained constant (as duringthe 15 months preceding the introduction of the firstSDR basket in mid-1974) or increased. The SDR valueof official holdings of U.S. dollars thus rose not only asa result of the growth in the volume of these holdingsbut also, although to a much smaller extent, as a conse-quence of the appreciation of the U.S. dollar againstthe SDR. In the following three years, 1977-79, theU.S. dollar depreciated against the SDR, and the SDRvalue of official U.S. dollar holdings decreased as aconsequence of these exchange rate effects by a totalof SDR 18 billion, which offset almost one half of theincrease in the volume of U.S. dollar reserves ofSDR 40 billion over this three-year span. As alreadymentioned, in 1979 a small reduction in the SDR valueof official U.S. dollar holdings stemming from a de-preciation of the dollar against the SDR by about 1 percent was reinforcing a decline in the volume of theseholdings by SDR 16 billion, which was in large partthe result of a substitution of ECUs for U.S. dollarsin the reserve accounts of countries that are membersof the EMS.

The only other substantial reduction in the volumeof official holdings of any currency during the periodunder review was that of sterling in 1975 and 1976.This decline in volume was reinforced by the deprecia-tion of sterling against the SDR in those years. For thedeutsche mark, the Swiss franc, and the Japanese yen,appreciation of the currency against the SDR tendedto reinforce the growth in the volume of official hold-ings, with the decline in the SDR price of the yen byalmost 20 per cent in 1979 constituting the only majordeparture from this pattern.

Measured over the entire period characterized byfloating exchange rates of major currencies, the growthin the volume of holdings of separately identified cur-

10 Since only about 90 per cent of all holdings of foreign ex-change reserves are identifiable by currency for the periodunder review, the cumulative change during this period of al-most seven years in total foreign exchange reserves of SDR 148billion exceeds the change in holdings identified by currencyof SDR 133 billion by about 11 per cent.

The periods examined in Table 15 are annual, except forthe first two periods, which are somewhat longer to accommo-date both a starting point at the beginning of the period offloating exchange rates and a break at the date, in the middleof 1974, when the value of the SDR first came to be determinedon the basis of a currency basket.

rencies (excluding ECUs) of SDR 110 billion was off-set by a decline in the SDR value of currency holdingsresulting from exchange rate changes by SDR 10 bil-lion, or 9 per cent of the volume growth. If ECU hold-ings are included, about half of the decline in theSDR value of foreign exchange reserves stemming fromexchange rate movements is offset by the issue of addi-tional ECUs of almost SDR 5 billion induced by therise in the market price of gold, so that the net declinein holdings resulting from exchange rate and otherprice changes is about SDR 5 billion.

These observations indicate that, while the SDRvalue of a particular currency held in international re-serves can rise or decline significantly as a result ofexchange rate movements even in the absence ofchanges in the volume of the currency being held, ex-change rate effects are not nearly as important in theevolution of foreign exchange reserves as a whole.The determination of the value of the SDR by the valueof a bundle of specified amounts of 16 currencies en-sures that the average change in the SDR price ofthese currencies, weighted by the respective currencyamounts in the SDR basket, must always be zero.Hence, exchange rate changes can affect the total offoreign exchange holdings measured in SDRs only tothe extent that the composition of these holdings differsfrom that of the SDR itself.

These differences in composition have, in fact, beenconsiderable (Table 16). The share of the U.S. dollarin the SDR value of foreign exchange reserves identifiedby currency declined from a peak of 87 per cent at theend of 1976 to 82 per cent at the end of 1978. It thenfell further to 65 per cent at the end of 1979, with athird of this decline resulting from the substitution ofECUs for U.S. dollars, as already described. If ECUsissued against U.S. dollars were added to dollar holdingsand ECUs issued against gold eliminated from the totalin the denominator, the share of U.S. dollars in totalforeign exchange reserves identified by currency wouldbe 78 per cent, rather than 65 per cent, at the end of1979—a decline of 4 percentage points from the end of1978. Official intervention designed to slow the appre-ciation of the U.S. dollar against some currencies, par-ticularly the Japanese yen, contributed to this out-come. Even at 65 per cent, the recorded share of theU.S. dollar in foreign exchange reserves was about twiceas large as its initial weight of 33 per cent in both thefirst and second SDR baskets, which went into effect onJuly 1, 1974 and July 1, 1978, respectively. The sharesof other identified currencies that are also included inthe SDR basket are less than their shares in the value ofthe SDR, although for the deutsche mark the differencein the two shares is small. Hence, whenever the SDRprice of the U.S. dollar declines and the SDR prices ofthese other currencies rise, the net effect on the SDR

63


ANNUAL REPORT, 1980

Table 16. Share of National Currencies in SDR Value of Total Official Holdings of Foreign Exchange,Compared with Shares in SDR Valuation and Interest Rate Baskets, End of Selected Quarters, 1973-791

(In per cent)

U.S. dollar

Pound sterling

Deutsche mark

French franc

Swiss franc

Netherlands guilder

Japanese yen

ECU

Total

1973:1

84.6

7.0

5.8

1.0

1.2

0.3

—100.0

1974:11

84.3

6.1

6.6

1.0

1.6

0.4

—100.0

1975:IV

85.1

4.1

6.6

1.3

1.7

0.6

0.6

—100.0

1976:IV

86.6

2.1

7.4

1.0

1.6

0.5

0.8

—100.0

1977: IV

85.1

1.8

8.5

0.8

2.2

0.4

1.2—

100.0

1978:IV

82.1

1.6

10.3

1.0

2.0

0.5

2.5—

100.0

1979:IV

65. 16

1.9

10.7

0.9

2.8

0.7

3.3

14.7 6

100.0

1979: IVExcluding

ECU2

77.8

2.1

11.7

1.0

3.1

0.7

3.6

—100.0

SDR Basket3

Valu-ation 4

33.0

7.5

12.5

7.5

—

5.0

7.5—

73.0

Interestrate5

49.0

11.0

18.0

11.0

——

11.0

—100.0

Sources: Various Fund publications and Fund staff estimates.1 The detail in each of the first eight columns may not add to 100 because of rounding.2 In this alternative calculation, the SDR value of European Currency Units (ECUs) issued against U.S. dollars (SDR 12,784 million

at the end of 1979) is added to the SDR value of U.S. dollars, but the SDR value of ECUs issued against gold (SDR 19,725 million)is excluded from the total distributed here. This lowers the total identified by currency to SDR 201,659 million at the end of 1979and reduces the total change therein during that year from SDR 24,665 million (Table 15) to SDR 4,940 million.

3 The shares shown for the SDR valuation basket apply precisely only on the date of its inception (July 1, 1978), while the sharesin the SDR interest rate basket have been held fixed since that date. The weights of particular currencies in the SDR valuationbasket change with the SDR prices of these currencies.

4 Apart from the six currencies included in this column, specified amounts of ten other currencies are included in the second SDRbasket, which accounted for the remaining 27 per cent of the value of the SDR on July 1, 1978. Currency weights in the SDRvaluation basket are determined by the shares of issuing countries in total exports of goods and services, except for the weight ofthe U.S. dollar, which was set at a higher level (33 per cent) to take account of its financial importance.

5 The weights of the five currencies in the interest rate basket are approximately equal to the initial weights of the five currenciesin the second SDR valuation basket adjusted so as to sum to 100. The weight of the U.S. dollar was 2 percentage points lower andthat of the pound sterling 2 percentage points higher during the period of the first basket (July 1, 1974 to June 30, 1978).

6 The share of U.S. dollars would rise by 5.8 percentage points and that of the ECU would fall by the same amount if ECUsissued against U.S. dollars were treated as U.S. dollars in foreign exchange reserves.

value of foreign exchange reserves is negative. The rea-son why exchange rate changes had very little net effecton the evolution of the SDR value of the total of officialholdings identified by currency is therefore to be foundin the behavior of the SDR value of the U.S. dollar,which fell only moderately, by about 8 per cent, fromthe end of March 1973 to the end of 1979, althoughthere were wide swings within this period.

Rates of Return on Major Currencies

To analyze one of the factors involved in currencydiversification that may help to explain pressures thatare at times exerted on exchange markets as adjust-ments of currency portfolios are undertaken or at-tempted, it is useful to compare the rates of return, ex-pressed in a common unit of account, that would havebeen earned on short-term investments in major curren-cies. International investors, public and private, arrangetheir portfolios in the light of a number of criteria, in-cluding liquidity, risk, and the expected use of resourcesdenominated in various currencies in the future, in addi-

tion to expected rates of return. Although the returnsthat are expected to prevail in the future are not observ-able, these expectations are formed partly on the basisof past experience. A review of ex post rates of returnon short-term investments in major currencies and inthe SDR can thus shed light on important factorsaffecting the portfolio decisions of international inves-tors, particularly private investors. If such investorsattempt to alter the currency composition of their port-folios rapidly, the authorities of major industrial coun-tries may feel obliged to intervene in the other directionto smooth exchange rate changes because for officialholders yield considerations may be less important thanstabilization objectives.

SDR rates of return on investments in each of fivemajor currencies over a given time span are calculatedby converting SDR 1 into one of these currencies at theexchange rate prevailing at the beginning of the period,investing the proceeds in a suitable short-term instru-ment denominated in that currency, and convertingboth principal and interest back into SDRs at the ex-change rate prevailing at the end of the period. Theown rate of return on the SDR that is used for compari-

64



Table 17. National and SDR Rates of Return Realized on Money Market Investments in Specified NationalCurrencies,1 Annually from End of First Quarter, 1973-80, and Period Averages(In per cent)

Average 2

1973:1to

1974:1

1974:1to

1975:1

1975:1to

1976:1

1976:1to

1977:1

1977:1to

1978:1

1978:1to

1979:1

1979:1to

1980:1

1973:1to

1980:1

1975:1to

1980:1

Short-term assetsdenominated in

U.S. dollarDeutsche markPound sterlingFrench francJapanese yen

Weighted average 3

U.S. dollarDeutsche markPound sterlingFrench francJapanese yen

Weighted average4

7.2112.709.679.197.35

8.74

^7.21

25.315.964.083.40

9.66

8.0810.2712.1013.7813.14

10.17

4.5215.989.08

24.352.78

9.10

5.845.10

10.998.16

11.09

7.19

14.184.42

-4.785.35

17.49

9.35

5.074.32

12.139.017.14

6.49

snp

4.8210.580.432.18

15.43

6.19

5.384.448.299.585.80

6.09

Rotpc nfI\. dlC o \JL

-1.2215.599.54

11.4323.74

7.14

7.393.759.038.424.38

6.68

3.208.00

16.7811.076.59

6.90

10.456.85

14.299.815.99

9.65

13.605.69

23.118.36

-8.63

10.13

7.056.73

10.919.697.80

7.85

6.4912.028.249.348.21

8.34

6.814.89

10.939.006.86

7.21

6.758.798.537.62

10.32

7.93

Source: Fund staff estimates.1 The yields on these investments are assumed to be the same as the interest rates in the SDR interest rate basket. Three-month

treasury bill rates are used for the United States and the United Kingdom, three-month interbank deposit rates for the FederalRepublic of Germany and France, and the call money market rate (unconditional) for Japan.

2 The fixed annual rate is shown that would have yielded the same growth from the beginning to the end of the period indicated,with annual compounding at the variable rates actually available.

3 Since the weights applied are the same as those in the SDR interest rate basket, the resulting series is approximately equal to theinterest rate officially earned on SDR holdings in excess of allocation if such interest were paid at 100 per cent of the weightedaverage of the five national rates in the SDR interest rate basket.

4 While the weights are the same as those in the SDR interest rate basket, they are applied to SDR rates of return and not to thecorresponding national rates in the basket. Since the SDR price of the 5 currencies in the interest rate basket has changed relative tothat of the 11 additional currencies in the SDR valuation basket, the two weighted averages are not the same. The discrepancy arisesfrom the lack of correspondence of the two baskets.

son is equal to the weighted average of the yields onmoney market investments in the U.S. dollar, deutschemark, sterling, French franc, and Japanese yen.11

Realized yields on these short-term investments interms of the currency in which the investment is denom-inated ("national yields") differ systematically amongcurrencies primarily because of differences in expectedrates of inflation. Rates of return on instruments withequal liquidity, terms to maturity, and default risk cal-culated in any common unit of account, such as SDRs,should in principle be equalized through a matching ofexpected exchange rate changes and expected differ-ences in inflation rates. International interest parity,

11 The national yield series employed in all calculations arethe same as those contained in the SDR interest rate basket: themarket yields for three-month U.S. Treasury bills and for three-month U.K. Treasury bills, the three-month interbank depositsrate in the Federal Republic of Germany, the three-month inter-bank money rate against private paper in France, and the callmoney market rate (unconditional) in Japan. For a descriptionof this SDR interest rate basket and the 16-currency SDR valu-ation basket, see Table 16. Not all of these instruments have al-ways been available for investment by foreigners, but compara-ble, although generally somewhat higher, yields have been avail-able on Eurocurrency investments in all five currencies in themost recent years. Problems arising from the lack of corre-spondence between the SDR interest rate and valuation basketsare mentioned in the last section of this chapter.

with full forward cover of the exchange risk, does infact tend to hold ex ante on such instruments when theyare traded in free markets. When viewed ex post, how-ever, this matching tends to be incomplete, at any ratein the short run and in some instances also in the longrun (Table 17). For instance, the rate of return on thedeutsche mark in terms of SDRs was higher than thereturn on the dollar in five of the past seven years.The average annual SDR rate of return over the firstseven years of floating, starting at the end of the firstquarter of 1973, was 12.0 per cent for the deutschemark, compared with 6.5 per cent for the U.S. dollar.Returns on the three other major currencies also ex-ceeded those on U.S. dollar investments, but by margins(l3/4 per cent to 3 per cent) that were considerablysmaller than the margin for the deutsche mark.

These calculations are very sensitive to the choice oftime period: average annual rates of return calculatedover the last five of the seven years covered in Table 17are highest for the yen, in spite of the fact that itsdollar price declined at a rate that exceeded the level ofJapanese interest rates during the past year. Investmentsin instruments denominated in deutsche mark showedaverage annual rates of return that were only 2 percent-

65

Short-term assets


ANNUAL REPORT, 1980

age points higher than the rate of return on the dollarover this more recent period, and returns on invest-ments in other major currencies exceeded the return onU.S. investments by 1 to 2 percentage points perannum.

That rates of return, measured in SDKs, on short-term investments denominated in major currencies di-verge substantially over shorter periods is illustrated inChart 14. An investor who placed one SDK's worth ofdollars at the end of March 1973 (US$1.20635) inU.S. Treasury bills would have dollars worth SDR 1.55seven years later, at the end of March 1980. If he hadinstead invested the same amount in instruments de-nominated in deutsche mark, he would have SDR 2.21at the end of the seven-year period, or almost 43 percent more than for the U.S. dollar investment. Since thedeutsche mark appreciated by almost 46 per centagainst the U.S. dollar over this period, only a smallfraction of the exchange rate change was offset by lowerinterest rates in the Federal Republic of Germany thanin the United States. Returns on sterling were low, andat times negative, during the first three years of the pe-riod examined but have risen sharply during the mostrecent period of 3Y2 years. Returns on investments inother major currencies have also varied substantiallyover time, but the cumulative return on each of themexceeds that on the U.S. dollar over the seven-year spanexamined.

Large and persistent differences in the rates of returnrealized on particular currencies may be a factor bear-ing on changes in international currency portfolios.They may also by themselves bring about shifts in thecomposition of foreign exchange holdings measured inSDRs, if interest receipts on national currency balancesare simply reinvested. SDR rates of return have tendedto be highest on currencies whose relative importancein both official and private holdings of foreign exchangehas been increasing. Furthermore, in 1979, when risingrates of domestic inflation caused rates of return,weighted by the importance of reserve currencies in for-eign exchange reserves, to approach double digits, sim-ple accumulation of interest receipts would have causedforeign exchange reserves to grow by about 10 per cent.Official foreign exchange holdings, excluding ECUs is-sued against gold, actually grew by only 2 per cent in1979. This indicates that countries were content toallow their foreign exchange reserves to grow by lessthan the interest receipts on these holdings.

Fund-Related Assets

From the end of March 1973 to the end of March1980, the share of Fund-related assets in internationalreserves excluding gold fell from 13.2 per cent to 10.2

per cent. The relative importance of Fund-related assetshas thus declined by almost one fourth in spite ofrenewed SDR allocations at the beginning of 1979 and1980 and of increases in the drawing facilities of mem-ber countries. Even after the last of the three consecu-tive annual allocations of SDR 4 billion in the thirdbasic period takes place on January 1, 1981, the shareof SDRs in total international reserves excluding goldwill remain lower than it was at the end of March 1973,and far lower than the peak share of over 10 per centregistered after the last allocation in the first basic pe-riod early in 1972. In addition, reserve positions in theFund equaled only 4.3 per cent of non-gold reserves atthe end of March 1980, compared with 5.5 per centseven years earlier. The four-year program (1976-80)under which the Fund disposed of one third of its goldholdings subtracted about SDR 2 billion from reservepositions in the Fund but increased the liquidity ofmembers both through distribution and through theestablishment of the Trust Fund, financed through theprofits from gold sales by the Fund and designed forlow-interest loans to eligible members.

Official holdings of SDRs by all member countrieslargely reflect past allocations of SDRs. At the end ofMarch 1980, only about 6 per cent of allocated SDRswere held outside of the group of initial recipients,chiefly by the Fund's General Resources Account.There have, however, been shifts in SDR holdings be-tween major country groups. For instance, SDRs havebeen transferred from the non-oil developing countriesto the oil exporting countries. At the end of March1980, the amount of SDRs held by industrial countrieswas almost exactly equal to their cumulative allocationsand that held by oil exporting countries equaled132 per cent of their allocations. Non-oil developingcountries had meanwhile reduced their holdings to68 per cent of their allocations. Not all developingcountries were net users of SDRs, however; notablyBrazil and Argentina, among the larger countries, heldSDRs in excess of allocations. This contributed to SDRholdings for the non-oil developing countries in theWestern Hemisphere remaining much closer to alloca-tions (90 per cent) than those for non-oil developingcountries in other regions—Middle East, 31 per cent;Europe, 32 per cent; Africa, 46 per cent; and Asia,78 per cent. There were also striking differences amongindustrial countries. At the end of March 1980, boththe Federal Republic of Germany and Japan held abouttwice the amount of SDRs originally allocated to them,while the United Kingdom and the United States hadboth made use of more than one fourth of their alloca-tions. The amount of net use of SDRs by these twocountries exceeded the shortfall of holdings from allo-cations for the entire group of non-oil developing coun-tries combined.

66



Chart 14. Growth of One SDR Invested in a Specified National Currency or in SDKs with Interest CompoundedQuarterly, End of First Quarter, 1973-80

67


ANNUAL REPORT, 1980

Changes in aggregate reserve positions in the Fundstem from one of three sources: quota subscription pay-ments in assets other than members' own currencies,drawings other than those in member's reserve tranches,and net borrowing by the Fund under the oil and sup-plementary financing facilities. Reserve positions in theFund fell from a peak of SDR 19.0 billion in mid-1977to SDR 11.8 billion at the end of 1979, the lowest valuesince the third quarter of 1975. Most of the declineoccurred in the reserve position of industrial countries(SDR 5.3 billion). In particular, the U.S. reserve posi-tion in the Fund decreased by SDR 3.3 billion, mainlyas a result of heavy reserve tranche drawings conductedin November 1978. The reserve positions of the oil ex-porting countries also declined steeply—by SDR 2.5billion—on account of repayments of oil facility draw-ings by members, which, in turn, led the Fund to reduceits borrowing under these facilities, mainly from oilexporting countries. On the other hand, reserve posi-tions in the Fund increased by SDR 0.6 billion for thenon-oil developing countries from the middle of 1977to the end of 1979, with little further change recordedin the first few months of 1980. The increase in mem-

bers' quotas by 50 per cent, which has been decidedbut has not yet become effective, will raise the reservepositions of most countries, since 25 per cent of theincrease is to be paid in SDRs. However, Fund-relatedassets as a whole, including the SDR holdings of mem-bers, can rise as a result of quota increases only whenadditional credit tranche drawings ensue.

Reserve Transactions with Banks

Composition of Official Holdings

As in recent years, central banks and other official in-stitutions have continued to hold a significant propor-tion of their foreign exchange reserves in the Eurocur-rency markets. In the period 1973-77, the rise ofSDR 113 billion in foreign exchange reserves resultingfrom transactions (i.e., excluding valuation changes)encompassed an increase of SDR 47 billion in identifiedEurocurrency deposits (Table 18). In 1978, the in-crease in direct claims of SDR 28 billion far exceededthat of Eurocurrency holdings of SDR 2 billion; in

Table 18. Composition of the Change in Official Holdings of Foreign Exchange Reserves, 1973-79l

(In billions of SDRs)

Official claims on countriesUnited StatesOther countries

Subtotal

Identified official holdings ofEurocurrencies

EurodollarsOther currencies

Subtotal

European Currency Units

Residual 2- 3

Total change arising fromtransactions 4

Valuation change 4

Total3

1973

4.71.8

6.5

3.72.0

5.7

—1.9

14.1

-8.4

5.7

1974

8.53.6

12.1

13.50.1

13.6

—-0.4

25.3

-0.5

24.8

1975

4.2

4.2

4.61.7

6.3

—-3.2

7.3

3.6

10.9

1976

11.30.3

11.6

7.3-0.2

7.1

—3.2

21.9

1.1

23.0

1977

30.21.4

31.6

10.34.2

14.5

—-1.3

44.8

-4.8

40.0

1978

24.53.3

27.8

2.2

2.2

—3.8

33.8

-8.7

25. 15

1979

-11.45.0

-6.4

2.0

2.0

32.5

-3.4

24.7

0.2

24.9

Sources: International Financial Statistics and Fund staff estimates.1 More detailed information on changes in official holdings of foreign exchange reserves can be found in the IMF Survey, Vol. 9

(June 3, 1980), page 167.2 Includes identified official claims on the International Bank for Reconstruction and Development, on the International Develop-

ment Association, and on the European Monetary Cooperation Fund, except ECUs, and the statistical discrepancy.3 Small differences between the changes in the IMF Survey and those shown here are due to the inclusion of Romania in

the present table.4 In the corresponding table published in the IMF Survey, monthly changes in national currencies held in foreign exchange reserves

are converted into SDRs through use of the average monthly SDR price of the currency involved, while the average of two adjoiningend-of-quarter SDR prices was applied to quarterly quantity changes in Table 15. (See footnote 1 to that table.) As a result of thisrefinement and because the entire change in the residual and in the ECUs issued in 1979 is attributed to quantity change in the pres-ent table, there are small differences between this table and Table 15 in the way in which the total change in foreign exchange re-serves is decomposed into changes arising from transactions (quantity changes) and valuation changes owing to price effects. Moreimportant differences in the changes in holdings identified by currency, particularly the U.S. dollar, arise from a difference in datasources. This table uses U.S. balance of payments statistics on official claims on the United States to identify such holdings, whileTable 15 is based on the survey on the composition of monetary authorities' gross claims on foreigners conducted by the Fund.

5 The decrease of SDR 4.3 billion in coverage of Saudi Arabia's foreign exchange holdings in 1978 is not reflected in this total orin any of its components.

68



1979, by contrast, direct claims fell by SDR 6 billion,while Eurocurrency holdings again showed a small in-crease of SDR 2 billion. The significant increase in di-rect claims during 1978 was the result of large U.S. defi-cits on both current and capital account. The small risein identified official holdings of Eurocurrencies in partreflected the fact that much of the increase in reservesin 1978 was concentrated among members of the Groupof Ten, which have generally refrained, for most of theperiod since 1971, from redepositing reserve accruals inthe Eurocurrency markets. In addition, oil exportingcountries, some of which hold a substantial proportionof their official non-gold reserves in Eurocurrency as-sets, experienced a substantial decline in total reservesexcluding gold—by SDR 12 billion (adjusted). In1979, declining exchange market pressures on the dollaraccompanied the reduction in the U.S. current accountdeficit. The sharp fall in the capital account deficit rein-forced the swing from accumulation to decumulation ofdirect claims on the United States, even though theexchange of dollar claims for ECUs accounted forabout one third of the difference in accumulation.

There are a number of reasons, however, for inter-preting these reserve changes with caution. First, sincecentral banks or other designated authorities can bor-row from the Eurocurrency markets and from eachother, the reported figures do not reveal the potentialaccess to international liquidity of an individual coun-try. Second, it is possible for monetary authorities tosell a portion of their foreign exchange holdings to theircommercial banks under repurchase agreements; as aresult, these holdings would not be included in the re-ported reserve figures.12 Finally, some central bankshave utilized foreign exchange market intervention tech-niques (especially in the forward markets) and swapsthat have altered the time path for their reserves. Duringperiods of domestic liquidity shortages caused by capi-tal outflows, the central banks have used these swaps toencourage foreign borrowing; and, as a result, the stockof official international reserves has been temporarilyenlarged. Such transactions can be quite large and canhave a major impact on the monetary base of thedomestic economy as well as on the stock of reportedinternational reserves. For instance, central bank moneyis temporarily reduced if the monetary authorities sellforeign exchange to domestic banks under a repurchasecontract. Conversely, central bank money is increased ifthey buy foreign exchange in the spot market and sellit forward, even though this will not produce a lastingeffect on international reserves.

12 In this situation, the central bank would have a domesticclaim on the commercial banks; and the commercial bankswould have a claim on a foreign financial institution.

Regulation and Supervision of theEurocurrency Markets

The growing importance of the Eurocurrency mar-kets has led to some further discussions about the levelof official regulation and supervision of these marketsthat would be appropriate in light of the aim of main-taining the soundness and stability of the internationalbanking system. Last year's renewal of the 1971 agree-ment, under which central banks of the Group of Tenrefrained from depositing reserve accruals in the Euro-currency market for a period of several years, meantthat central banks will not contribute further to thegrowth of that market. A more ambitious proposal, thatthe central banks of the major industrial countriesjointly impose a reserve requirement against Eurocur-rency deposits of their domestic commercial banks andtheir Eurocurrency branches, has received little support.Such reserve requirements would reduce the cost ad-vantage of offshore banking relative to domestic bank-ing operations, but successful implementation would re-quire broad participation among the world's centralbanks. The central bank Governors of the Group of Tencountries reaffirmed in April of this year the cardinalimportance that they attached to the maintenance ofsound banking standards—particularly with regard tocapital adequacy, liquidity, and concentration of risks.Such wide agreement has led the authorities of manycountries to focus on more active supervision of com-mercial banking activity in the Eurocurrency markets.To this end they place high priority on bringing into fulleffect the initiatives already taken by the Committee onBanking Regulations and Supervisory Practices with re-gard to the supervision of banks' international businesson a consolidated basis, improved assessment of coun-try risk exposure, and the development of more com-prehensive and consistent data for monitoring the ex-tent of banks' maturity transformation. All the stepstaken or contemplated so far recognize the importantrole played by banks in recycling large surpluses thathave arisen during the last few years and are likely topersist in coming years.

International Liquidity and Adjustment

Recycling

A major issue confronting the world economy in1980 and beyond is whether international capital mar-kets will be able to play the same role in recycling thesurpluses of the oil exporting countries as they did in1974-76. The increase in crude oil prices from an aver-age of approximately US$13 a barrel in December 1978to more than US$30 in 1980 is expected to lead to an

69


ANNUAL REPORT, 1980

increase of about US$160 billion in the revenue fromoil exports this year compared with 1978, thereby con-tributing to an estimated current account surplus of oilexporting countries of US$115 billion in 1980. Forcomparison, the current account of the oil exportingcountries was nearly in balance in 1978. The modalitiesof recycling these surpluses will be especially importantfor the non-oil developing countries, whose current ac-count deficit is expected to increase from US$53 billionin 1979 to US$70 billion this year and to rise even fur-ther in 1981.

There have been suggestions to the effect that thesolution of the recycling problem is virtually automatic.Since the oil exporting countries will tend to invest theiradditional reserves in liquid form, at least initially, theresulting deposits will provide the international bankingsystem with a matching amount of funds to lend to oilimporting countries. While this recycling process mightwork once again as smoothly as it has in the past, thereare certain factors that could create difficulties.

In the period 1974-76, much of the recycling tookthe form of Eurodollar deposits by the oil exportingcountries being used to finance U.S. dollar loans ar-ranged through large U.S. and European banks. Sincethat time, however, the currency composition of officialdeposits and bank loans has become more diversified,with almost half of the increase in official holdings ofEurocurrencies identified in Table 18 invested in cur-rencies other than the U.S. dollar. Furthermore, risk-averse surplus countries may continue to diversify theirreserve holdings by both currency and location to re-duce political and economic risks on investments placedabroad. For banks, greater concern about loan qualitymay be stimulated by the possibility of a worldwiderecession and by the need to protect their increasinglyslim capitalization base. If international banks, as agroup, should attempt to "upgrade" their portfolios byreducing foreign exposure and directing more of theirnet lending toward domestic markets and low-risk in-struments in major industrial countries, some of thenon-oil developing countries with the most pressing cur-rent account imbalances might find it difficult to obtainfunds from private sources. This could happen eventhough, in the aggregate, the supply of funds fromearned surpluses matched the requirements for financ-ing corresponding deficits. The margins between loanand deposit rates may thus widen appreciably for somenon-oil developing countries.

Margins may widen to some extent for all countriesif banks regard strengthening their capitalization base asimperative and falling interest rates and growing riskaversion facilitate the widening of spreads as they didfrom 1974 to 1975. While this spread is the net costrelevant for the holding of borrowed reserves, declininglending rates reduce the nominal cost of foreign ex-

change borrowed for other purposes. Whether this alsoimplies a fall in real interest costs, for example, on U.S.dollar loans to non-oil developing countries, must beassessed by referring to the expected increase in thedollar price of the exports of these countries and notjust to inflation prospects in the United States. If theterms of trade of non-oil developing countries shoulddecline, their real borrowing costs may rise and this,combined with a cyclical decline in the demand for theirexports and with non-gold reserves that have alreadyfallen from 29 to 24 per cent of merchandise imports(c.i.f., at an annual rate) from the first to the last quar-ter of 1979, could lead to growing difficulties in financ-ing the large current account deficits projected for thisgroup of countries.

The Provision of Liquidity by the Fund

During recent years, the Fund has taken initiatives toincrease the accessibility of its existing resources and toexpand the availability of balance of payments financ-ing. In providing such financing, the Fund plays a rolecomplementary to that of private international financialinstitutions by seeking to reach understandings thatmembers will follow macroeconomic policies aidingtheir balance of payments adjustment. As adjustmentprograms are devised by its members, the Fund appliesthe same basic criteria in consultations with all its mem-bers while paying due regard to the domestic social andpolitical objectives, the economic priorities, and the cir-cumstances of the member. Although the normal periodfor stand-by arrangements is one year, the period maybe extended to up to three years. The Fund encouragesmembers to adopt corrective measures, which can besupported by the use of the Fund's facilities, at an earlystage of the development of balance of payments diffi-culties or, indeed, as a precaution against the emergenceof such difficulties.

The Fund has augmented its resources through in-creases of members' quotas and through borrowing forthe establishment of temporary facilities, such as the oilfacilities of 1974 and 1975 and the supplementaryfinancing facility.13 Although Fund liquidity is currentlyadequate, the size of the projected recycling problemcould lead to heavy utilization of existing resources fora longer period than has been usual in the past, sincethe increase in quotas under the Seventh General Re-view of Quotas (from SDR 39 billion to SDR 59 bil-lion) has not yet come into effect. This may be espe-cially true if the Fund is to be able to support appro-priate medium-term programs, particularly for non-oil

13 See Annual Report, 1979, pages 54-55, for a detailed dis-cussion of these facilities.

70



developing countries that are attempting to adjust to asubstantial change in the relative price of oil.

To enable members to utilize existing liquidity moreeffectively in support of long-range programs of stabili-zation and structural change, the Fund has increasedthe maximum repurchase period under the extendedFund facility from eight years to ten and reduced thenumber and frequency of repurchase installments asso-ciated with this facility. The combined effect of thesemeasures will increase the average life of a drawingunder the extended Fund facility by almost one fifth.There have also been discussions of closer coordinationbetween the Fund and the World Bank in designingadjustment and development programs for membercountries. While such adjustment programs will neces-sarily continue to include demand management policiesto avoid overconsumption in relation to available re-sources, they will also place greater emphasis on thesupply side of the economy. This will require, inter alia,increased importance being attached to long-term en-ergy programs providing for the development of alter-native sources of energy and energy conservation. Suchstructural programs can be put in place only over alonger period than has been typical in past Fund stand-by programs. At its meeting in Hamburg in April 1980,the Interim Committee recommended that the Manag-ing Director begin discussions with possible lenders tothe Fund on the terms and conditions under which theFund could borrow to increase its resources, if andwhen the need arose.

The Adequacy of International Reserves

The preceding discussion of recent developments ininternational reserves and liquidity provides a broadbackground for assessing the adequacy of internationalreserves. Such an appraisal can begin by examining theratio of international reserves (excluding gold) to an-nual merchandise imports. For all countries combined,this ratio has fallen from about 26 per cent in 1973 toabout 22 per cent in 1979. If the United States were ex-cluded—on account of the special status of the dollar asprincipal reserve currency—the corresponding figureswould be 31 per cent and 25 per cent. This decline doesnot necessarily mean that reserves have become lessadequate. The real value of international reserves de-manded appears to grow proportionally less than thevolume of trade. The growing diversification of produc-tion and trade of many economies tends to reduce pay-ments imbalances, and thus reserve needs, relative tothe value of external trade. Indeed, the fall in the ratioof reserves to imports over the years 1973-79 followsa period of almost two decades in which this ratioshowed a declining trend interrupted only briefly during

the period 1970-72.14 More recently, the sharp rise inthe price of primary commodities relative to the priceof manufactures in international trade has also con-tributed to lowering reserves-to-trade ratios in the im-porting countries, since the price elasticity of demandfor such commodities tends to be low. Until recently,however, high rates of inflation that were accompaniedby rapid expansions of money and credit and low realcosts of borrowing provided persuasive evidence againsta global inadequacy in the supply of reserves. Rather,ample borrowing opportunities and lines of credit madeit less pressing to bring actual reserve holdings up tothe level that would provide a satisfactory cushionagainst contingencies even in the absence of new loancommitments. Finally, although loans backed by goldare the exception rather than the rule, the ability ofcountries to borrow by pledging gold as collateral at amoderate discount from the market price has beengreatly enhanced by the more than tenfold increase inthe SDR price of gold over the past decade. The dra-matic increase in the market value of gold reserves mayhave had some depressing effect on the demand for in-ternational reserves excluding gold.

National and international liquidity and credit arenow rather closely linked. In recent years, high rates ofdomestic credit expansion in the major financial centerswere accompanied by high rates of expansion of creditto a large number of developing countries. Althoughthis situation may change, the elasticity of supply ofinternational reserves has remained sufficiently high tomake global reserve holdings determined largely by theeffective demand for reserves. Apart from the facilitiesof Eurocurrency markets, a number of arrangementsmade in an atmosphere of international cooperation—notably the increased opening of national markets toforeign issues, negotiated investments by the authoritiesof some surplus countries in the official obligations ofdeficit countries, and the broadening of swap arrange-ments and lines of credit between central banks—havecontributed to maintaining a high elasticity of supply ofinternational liquidity.

This picture of global reserve adequacy should notobscure the fact that both the distribution of reservesand the terms at which reserves can be acquired areless satisfactory for many non-oil developing countriesthan they appear for the world as a whole. Even thoughthe ratio of reserves to imports for this group of coun-tries was close to the average for all countries excludingthe United States at the end of 1979, current and pros-pective payments imbalances and the variability of ex-port proceeds are proportionally greater for non-oildeveloping countries than for industrial countries, im-

14 The historical pattern is shown in Annual Report, 1975,page 40.

71


ANNUAL REPORT, 1980

plying greater reserve needs. Furthermore, non-oil de-veloping countries are frequently unable, under currentconditions, to increase their reserves in any way otherthan through official foreign borrowing at interest ratesthat are generally higher than those charged to othercountries.

The SDR and Its Uses

In recent years, concern about disturbances that mayarise through attempts by private and some officialholders of foreign exchange to alter the currency com-position of the assets and liabilities in their portfolioshas intensified. Under present conditions of floating ex-change rates among major currencies, relatively unre-stricted international banking transactions and capitalflows, and large payments imbalances in the world econ-omy, disturbances resulting from changing views ondesirable portfolio compositions are potentially disrup-tive. For this reason, there has been a growing recogni-tion that a more central role of the SDR—as the prin-cipal reserve asset in the international monetary system,as an investment vehicle, and as a contract unit of ac-count—would reduce the incentive to seek exchangerisk diversification by other, more costly and potentiallydestabilizing, means.

The Fund has recently taken a number of decisionsto make the SDR more useful in serving these purposes,including the prescription of a number of official entitiesas "other holders" of SDRs and the prescription of ad-ditional ways in which SDRs can be used. These deci-sions are described in detail in Chapter 3. An importantstep in the direction of making the SDR a more usefulasset was the decision, discussed in last year's Report,to raise the interest rate on the SDR from 60 per centof the combined market rate to 80 per cent. Strengthen-ing the role of the SDR in the international monetarysystem requires, among other things, the maintenanceof a sound financial basis as reflected in the overallyield of the asset—composed of nominal return andchanges in the capital value resulting from exchangerate changes—in relation to the yields of other impor-tant assets in the system.

Further attention was drawn to these matters by ex-ploratory work conducted by the Executive Board inconnection with the possible establishment of a substi-tution account, administered by the Fund, that wouldaccept deposits of U.S. dollars in exchange for anequivalent amount of SDR claims. In the period be-

tween the Annual Meetings in Belgrade in September1979 and the meeting of the Interim Committee inHamburg, the Executive Board studied possible featuresof such an account to design a plan for its establishmentalong the lines requested by the Interim Committee inits communique issued in Belgrade. The Committee hadconcluded that such an account, if properly designed,could contribute to an improvement of the internationalmonetary system and could constitute a step towardmaking the SDR the principal reserve asset in the sys-tem. As the Committee had noted, in order for such anaccount to achieve widespread participation on a volun-tary basis and on a large scale, it should fulfill certainrequirements: inter alia, it should satisfy the needs ofdepositing members, both developed and developing; itscosts and benefits should be fairly shared among all par-ties concerned, and it should contain satisfactory provi-sions with respect to the liquidity of the claims, theirrate of interest, and the preservation of their capitalvalue.

In the course of the work of the Executive Board be-tween the two meetings of the Interim Committee,provisional agreement was reached on a large numberof features that a substitution account might possess inorder to conform to the requirements set forth by theCommittee. A number of important issues, however,still remain to be solved, including arrangements forthe maintenance of financial balance in the account, themaximum initial target size of the account, the deter-mination of the rate at which the United States wouldpay interest on the account's U.S. dollar holdings, thesharing of any profits or losses between the UnitedStates and depositors, and the relative voting power ofthe United States and other participants. The InterimCommittee expressed its intention to continue work onthis subject.

On a related issue already mentioned, the InterimCommittee endorsed the intention of the ExecutiveBoard to continue its examination of the SDR valuationand interest rate baskets with a view to simplifying andenhancing further the attractiveness of the SDR. TheCommittee expressed the view that it would be desirablefor the interest and valuation baskets to be identical.This proposed change, which is further discussed inChapter 3, would substantially facilitate the wider useof SDR-denominated assets and liabilities in financialmarkets, and in international transactions generally,and would thus remove a severe obstacle to the estab-lishment of a central role for the SDR in the interna-tional monetary system.

72


Chapter 3Activities of the Fund

The financial year ended April 30, 1980 was againan active one for the Fund, in terms of its financial andother activities and the evolution of its policies.

The most notable development was the substantialincrease in the total volume of financial activity, whichin the financial year 1979/80 reached a record levelof SDR 9.7 billion. This figure takes into account grossdrawings on the General Resources Account, TrustFund loans, gold distribution, distribution to the de-veloping member countries of profits from gold sales,and allocation of SDRs. (See Table 19.) Of this totalvolume of financial activity in 1979/80, about SDR 5.6billion was on account of developing countries. During1979/80 stand-by arrangements were approved for24 member countries, the highest number of such ar-rangements approved in any one year since 1970. To-gether with the four extended arrangements approvedduring the year, the total number of adjustment pro-grams approved was 28, a level previously exceededonly in 1968. At the end of 1979/80, member countrieshad substantial undrawn balances under stand-by andextended arrangements, which amounted to aboutSDR 2.7 billion.

As discussed in Chapter 2, during the year consulta-tions with member countries under Article IV con-tinued to be central to the Fund's work and to be theprincipal means of carrying out the Fund's surveillanceover the exchange rate policies of individual membercountries. Regular consultations were completed for94 countries during 1979/80. In addition, there werespecial consultations with member countries in con-nection with the periodic review of the World Eco-nomic Outlook by the Executive Board, as well as adhoc consultations in accordance with the proceduresrelating to the Fund's surveillance over members' ex-change rate policies.

During the past several years, the Fund has shapedits policies to meet the balance of payments needs of itsmembers in the light of changing world economic con-ditions. Innovations during this period have includedthe 1974 and 1975 oil facilities, the Subsidy Accountfor the 1975 oil facility, the liberalization of the com-

pensatory financing facility, the extended facility, goldsales, the Trust Fund, and the supplementary financingfacility. In connection with the Second Amendment ofthe Articles of Agreement, which became effective inApril 1978, the Fund undertook a wide-ranging reviewand revision of its procedures and policies.

The establishment of new facilities and the evolutionof its policies on the use of its resources have enabledthe Fund to make a considerable contribution to itsmembers' balance of payments needs over the period.Thus, in the difficult circumstances confronting mem-bers since 1973/74, gross drawings on the Fund andloans from the Trust Fund amounted to about SDR 22billion. In addition, other activities of the Fund (goldsales, distribution of profits from gold sales, and SDRallocations) added about SDR 13 billion to the totalvolume of financial activity, amounting to aboutSDR 35 billion, of which over one half went to develop-ing countries.

Since the assistance provided by the Fund (i.e.,drawings on the General Resources Account and TrustFund loans) is of a short-term to medium-term char-acter and is related to the balance of payments needsof its individual members, use of the Fund's resourcesin one period is followed by repurchases in subsequentperiods. The charges payable by members on the Fund'sbalance of payments assistance are lower than wouldotherwise be payable by them on credits from privateinternational markets.

In March 1979, the Executive Board carried out acomprehensive review—the first for over a decade—of the guidelines governing the conditionality attachedto the use of the Fund's resources in the credit tranches.1

The review confirmed and clarified the main elementsof the guidelines that had been operative since 1968,and also introduced several modifications to provide forgreater flexibility in exceptional cases and to take ac-count of individual circumstances of members. The re-sults of programs under stand-by arrangements are re-

Executive Board Decision No. 6056-(79/38), adoptedMarch 2, 1979. (See Annual Report, 7979, pages 136-38.)

73


ANNUAL REPORT, 1980

Table 19. Selected Financial Activities by Type and Country, 1974-80(In millions of SDRs)

Financial Years Ended April 301974 1975 1976 1977 1978 1979 1980 1974-80

Gross drawings1

Trust Fund loans

Gold distribution2

Profits of gold salesdistributed todeveloping countries3

SDR allocations

TotalTotal adjusted for

market value of gold4

Memorandum: Undrawn balancesunder stand-by and extendedarrangements as of April 30,1974-80

450.2 4,121.3 5,267.4

By Type

4,749.7 2,367.3

31.7 268.2

209.7 212.6

— 222.6

450.2

450.2

1,231.8

4,121.3

4,121.3

156.0

5,267.4

5,267.4

4,991.1

5,448.5

3,070.7

3,672.7

1,085.8 3,581.1 3,638.8

By Country5

1,239.2

670.0

220.4

70.6

4,032.6

6,232.8

7,067.4

1,377.5

2,211.1

961.7

230.8

292.7

4,033.2

7,729.4

9,675.8

2,718.0

1 Excluding drawings in the reserve tranche.2 Valued at SDR 35 per fine ounce.3 Distribution in U.S. dollars converted into SDRs at prevailing rate.4 Annual average London price of gold.5 Breakdown of total financial actions adjusted for market value of gold.

20,406.2

1,931.6

873.5

585.8

8,065.8

31,862.9

35,703.2

Industrial countriesUnited StatesUnited KingdomItalyOthers

Developing countriesOil exportingOther developing

AfricaAsiaEuropeMiddle EastWestern Hemisphere

All countries

—————

450.2—450.2

44.0207.847.547.0

103.9

450.2

2,103.6—

—1,675.1428.5

2,017.7—2,017.7

243.6926.5380.0158.8308.8

4,121.3

2,391.3—1,000.0

780.2611.1

2,876.1—

2,876.1578.1871.0611.5133.3682.3

5,267.4

2,674.2159.6

1,766.723.8

724.0

2,774.333.9

2,740.4655.5633.4360.2207.7883.6

5,448.5

2,011.5192.2

1,330.3118.7370.2

1,661.275.6

1,585.6404.3534.6312.7164.1169.9

3,672.7

3,309.11,114.2

404.6164.8

1,625.5

3,758.3436.6

3,321.6934.7

1,114.3288.0305.1679.6

7,067.4

4,027.61,347.4

501.9199.6

1,978.7

5,648.3514.4

5,133.91,403.31,572.4

851.1193.9

1,113.1

9,675.8

16,517.32,813.55,003.62,962.35,738.0

19,185.91,060.5

18,125.44J63.45,860.02,851.01,209.93,941.1

35,703.2

viewed periodically by the Executive Board, but it is tooearly for programs under the new guidelines to havebeen evaluated. Such reviews will enable the ExecutiveBoard to determine when it may be appropriate tocarry out the next comprehensive review of condi-tionality.

Adaptation of the Fund's policies continued in theyear under review. In December 1979, the Fundadopted a decision extending the maximum repurchaseperiod under the extended Fund facility from eightyears to ten years.2 Also, members' access to the com-pensatory financing facility was further liberalized byabolishing the limit of 50 per cent of quota on pur-chases in a single 12-month period, by raising the limitof outstanding purchases from 75 per cent to 100 per

cent of a member's quota, and by changes in calcula-tion of export shortfalls.3

At its meeting in Belgrade in September 1979, theDevelopment Committee asked the Executive Board toexamine in depth the Program of Immediate Action ofthe Ministers of the Group of 24, and to report its find-ings to the Committee at the time of the next AnnualMeeting.4 The Program covers, inter alia, proposalsrelating to the Fund facilities, quotas, SDRs, condi-tionally, appropriate measures for recycling, the sub-stitution account, and adjustment policies with due re-gard to structural and supply-side aspects of programs.

2 Executive Board Decision No. 6339-(79/179), adoptedDecember 3, 1979 and reproduced in Appendix II.

3 Executive Board Decision No. 6224-(79/135), adoptedAugust 2, 1979 and reproduced in Appendix II.

4 The texts of the communiques issued by the Interim Com-mittee and the Development Committee at the time of the1979 Annual Meetings and in Hamburg in April 1980, as wellas the Outline for a Program of Action, are reproduced inAppendix III.

74


CHAPTER 3: ACTIVITIES OF THE FUND

At its meeting in Hamburg in April 1980, the In-terim Committee recognized that, although, in presentcircumstances, the Fund is in a relatively liquid posi-tion, it should stand ready to play a growing role inthe adjustment and financing of payments imbalancesand the recycling process. The Committee encouragedthe Managing Director to start discussions with poten-tial lenders on the terms and conditions under whichthe Fund could borrow to supplement its resources, ifand when the need arose. Meanwhile, supplementaryfinancing facility borrowing arrangements are beingutilized increasingly, and the General Arrangements toBorrow and the associated borrowing agreement withSwitzerland have been renewed for another period offive years until October 23, 1985.

Although the Resolution of the Board of Governorson the Seventh General Review of Quotas was ap-proved nearly one and a half years ago, the quota in-creases of SDR 19.6 billion approved under it havenot yet come into effect. The minimum participationrequirement for the quota increases to be effective willbe met when members having not less than three fourths(SDR 29.3 billion) of the total of quotas on Novem-ber 1, 1978 have consented to increases in their quotas.By June 30, 1980, 62 members accounting for about34 per cent of the total quotas in the Fund as of No-vember 1, 1978 had consented to increases in theirquotas under the Seventh General Review. In thelonger run, the Fund's liquidity needs have to be metprimarily through increases in quotas, which, relative tointernational trade and payments, have been markedlyreduced since the early days of the Fund. However, theFund's policies in regard to the relationship betweenutilization of Fund resources and quotas have beenflexible. The use of Fund resources may extend beyondexisting quota ceilings on members' use of Fund re-sources, if and when special circumstances arise, anddepending upon the type and combination of facilitiesused.

The Fund's gold sales program that was agreed bythe Interim Committee in August 1975, in accordancewith the objective of the gradual reduction of the roleof gold in the international monetary system, was com-pleted in May 1980. Under this provision, the Fundcompleted the fourth sale of gold (at the former of-ficial price of SDR 35 per ounce) to countries thatwere members of the Fund on August 31, 1975. Thisbrought the total amount sold to members under thisprogram to approximately 25 million ounces. Thefour-year program of gold auctions (25 millionounces), which was also completed with the final auc-tion taking place on May 7, 1980, yielded sales pro-ceeds of US$4.6 billion, of which US$1.3 billion hasbeen distributed directly to 104 developing member

countries, and the balance, together with the incomefrom investments, is available for concessionary loansby the Trust Fund to 62 eligible countries.

The Executive Board discussed in July 1980 thefuture of the Trust Fund and reached a broad consensuson a number of issues. These discussions are continuing.

Special drawing rights amounting to about SDR 4billion were allocated to 139 members that were par-ticipants in the Special Drawing Rights Department onDecember 31, 1979. This allocation was the second ofthree consecutive annual allocations, each of SDR 4billion, that the Fund's Board of Governors decidedshould be made as of January 1, 1979-81. The alloca-tions totaling SDR 8 billion at the beginning of 1979and 1980 supplemented the reserve assets of membercountries and raised the total amount of SDRs in ex-istence to SDR 17.3 billion. Since April 1980, all theFund's 140 member countries have been participantsin the Special Drawing Rights Department.

In accordance with one of the major objectives of theSecond Amendment, the Fund took further decisionsdesigned to enhance the role of the special drawingright as an international reserve asset by permitting itsuse in swap arrangements, forward operations, anddonations (grants), and by increasing the number ofofficial institutions that may hold, acquire, and useSDRs, by prescribing five additional institutions as"other holders" of SDRs. The Executive Board, andsubsequently the Interim Committee, examined the SDRvaluation and interest rate baskets, and the Committeereached a general understanding that, in principle, itwould be desirable for the two baskets to be identical.The Executive Board is to consider how and when thisobjective should be implemented.

Prior to the meeting of the Interim Committee inHamburg in April 1980, the Executive Board reachedprovisional agreement on a wide range of features of aplan for a substitution account to be administered bythe Fund that would accept deposits of foreign ex-change for an equivalent amount of SDR-denominatedclaims. However, some basic issues remained to besolved, such as the maintenance of financial balance inthe account. In its communique following the Hamburgmeeting, the Interim Committee expressed its intentionto continue its work on this subject.

The Fund's training facilities and technical as-sistance programs have continued to be made availableto members in the monetary, banking, fiscal, and bal-ance of payments fields, as well as in other areas ofspecial interest to the Fund, in response to requestsfrom members. This assistance has taken the form oftraining at headquarters through the IMF Institute, thestationing of staff members and outside experts in mem-ber countries, visits by technical assistance missions, and

75


ANNUAL REPORT, 1980

the Fund's regular consultation procedures. Directedprimarily, but not exclusively, to developing countries,these services have again covered a broad spectrum ofcountries at all stages of development.

Transactions and Operations in the GeneralResources Account

Purchases in the financial year 1979/80 totaledSDR 2.4 billion, about a third less than the total of thepreceding year, and were made almost exclusively bydeveloping countries. (See Table 20.) The largestamount of purchases was in the credit tranches(SDR 1,106 million) followed by purchases under thecompensatory financing facility (SDR 863 million), inthe reserve tranche (SDR 222 million), and under theextended Fund facility (SDR 216 million). The in-crease in compensatory financing purchases to aboutdouble the amount of the previous year reflected a fallin export earnings of developing countries and theliberalization in the use of the facility up to the maxi-mum of 100 per cent of quota. Repurchases totaled theequivalent of SDR 3.8 billion, compared with SDR 4.9billion in 1978/79. About 50 per cent of total repur-chases related to purchases made in 1973/74 and1974/75 under the oil facility. The total use of theFund's resources as represented by outstanding pur-chases at the end of the financial year has declinedsteadily from the peak of about SDR 16 billion in1976/77 to about SDR 10 billion in 1978/79 and toSDR 8.8 billion in 1979/80. (See Chart 15.)

Chart 15. Use of Fund's Resources as at April 30,1970-80(In billions of SDKs)

During the year, 24 stand-by arrangements were ap-proved for a total equivalent to SDR 2,479 million,compared with 14 arrangements totaling SDR 508 mil-lion in the previous year. All the arrangements ap-proved during 1979/80 were for developing countries;amounts equivalent to SDR 1,448 million were to befinanced from resources available to the Fund underthe supplementary financing facility.

Four extended arrangements—all with developingcountries—were approved for a total of SDR 570 mil-lion (of which SDR 362 million was to be financedfrom borrowings under the supplementary financingfacility), about one half of the amount approved forthe same number of arrangements during 1978/79.One arrangement (with Jamaica) was for an amount inexcess of the normal limit of 140 per cent of quota, inview of the member's special circumstances, as pro-vided for in the supplementary financing decision.

Purchases under the buffer stock financing facilityby four members amounted to a total of SDR 26 mil-lion, compared with SDR 47.6 million purchased bytwo members in the previous year.

As mentioned earlier, the Fund completed the lastof the four sales of gold in distribution to those coun-tries that were members of the Fund on August 31,1975. A total of 6,593,368 fine ounces of gold amount-ing to the equivalent of SDR 231 million was sold formembers' own currencies at SDR 35 per fine ounce.Total sales of gold in the four distributions amountedto 24,977,769 fine ounces, or SDR 874.2 million.

Purchases

Reserve Tranche Purchases

Purchases in the reserve tranche (the gold trancheprior to the Second Amendment of the Fund's Articlesof Agreement), which increased from SDR 136 millionin 1977/78 to SDR 2,480 million in 1978/79 as a re-sult of the SDR 2,275 million purchased by the UnitedStates, declined to SDR 222 million in 1979/80. Allpurchases during the year, except one by New Zealandfor SDR 49 million, were made by 14 developing coun-tries, 9 of which made subsequent use of Fund re-sources under various facilities. The purchases rangedfrom SDR 0.36 million (Dominica) to SDR 60.5 mil-lion (Yugoslavia).

Credit Tranche Purchases andStand-By Arrangements

There was a sharp increase in credit tranche pur-chases during the financial year, mostly under stand-by

76



Table 20. Flow of Transactions in the General Resources Account and Resulting Stocks,Financial Years Ended April 30,1974-80(In millions of SDKs)

Financial Year Ended April 30Type of Transaction

Total purchasesReserve trancheCredit trancheBuffer stockCompensatory financingExtended facilityOil facility

Total repurchases

Gold salesReplenishment up to May 31, 1978Competitive bidsNoncompetitive bidsIn distributions

Outstanding borrowingsIn connection with oil facilityUnder the General Arrangements to BorrowFrom Swiss National BankSupplementary financing facility

Holdings of the General Resources Accountat end of year

Usable currencies 2

SDRsGold3

1974

1,058607239

212

—

672

———

————

6,500499

5,370

1975

5,102981

1,604

18

2,499

518

————

2,499

——

10,100510

5,370

1976

6,5911,324

4615

8288

3,966

960

————

6,465

——

7,800461

5,370

1977

4,910161

2,370—1,753*

190437

868

411201——210

6,702911

89—

5,300771

4,959

1978

2,503136

1,937

322109—

4,485

452239——

213

6,3291,576

154—

11,2001,3714,507

1979

3,7202,480

48548

465242—

4,859

453—18151

220

4,257111——

8,8001,2904,055

1980

2,433222

1,10626

863216—

3,776

419—187

1231

2,474111

—502

10,6001,4073,636

1 In addition, credit tranche purchases equivalent to SDR 39.56 million in the financial year ended April 30, 1976 were reclassifiedas having been made under the compensatory financing decision.

2 "Usable currencies" are those that are available to the Fund for net sales through the operational budget, except for thosecurrencies held by the Fund in excess of quota. Since the Second Amendment became effective on April 1, 1978, the criterion forincluding currencies for net sales is that the members concerned have a balance of payments and reserve position that is considered"sufficiently strong" for that purpose.

3 Valued at SDR 35 per fine ounce.

arrangements, from SDR 485 million in 1978/79 toSDR 1.1 billion. This reflects larger purchases underordinary resources (SDR 643 million) compared withthe previous year (SDR 437 million), as well as theuse of resources for the first time under the supplemen-tary financing facility (SDR 383 million). The largestcredit tranche purchases during the financial year weremade by Turkey (SDR 230 million), Peru (SDR 194million), and the Philippines (SDR 111.25 million).

The 24 stand-by arrangements approved during1979/80 included 6 in the first credit tranche and 18in the second and upper credit tranches. The two-yearstand-by arrangement with Korea for an amount ofSDR 640 million was the largest. Three other stand-byarrangements were also for two years—Costa Rica(SDR 60 million), Kenya (SDR 123 million), andMauritius (SDR 73 million)—and one, Malawi(SDR 26 million), was for a little more than two years.Of the other 19 arrangements approved, 7 were forperiods ranging between 13 and 23 months, 10 for oneyear, and 2 for less than one year. Among the 9 stand-by arrangements that included supplementary financing,4 (with Korea, Mauritius, Peru, and the Philippines)were approved under the special circumstances clausefor amounts in excess of the normal maximum entitle-

ments. The total use of Fund resources under stand-byarrangements by 23 members during 1979/80amounted to SDR 1,026 million, of which 8 membersdrew SDR 383 million under the supplementary financ-ing facility, and the balance was purchased from ordi-nary resources.

Extended Fund Facility

Four extended arrangements were approved by theExecutive Board during 1979/80 in support of pro-grams presented by Guyana, Honduras, Jamaica, andSudan. These arrangements represent an aggregatecommitment of SDR 570 million, of which SDR 362million would be provided with supplementary financ-ing. Of this latter amount, SDR 124 million would beprovided to Jamaica under the special circumstancesclause of the decision on the supplementary financing fa-cility. A total of SDR 216 million was purchased underthe seven arrangements outstanding (including thoseapproved in earlier financial years). Egypt and Haitimade no purchases under their arrangements, and theextended arrangement with Mexico expired during thefinancial year. The undrawn balances under the ex-

77


ANNUAL REPORT, 1980

tended Fund facility decision amounted to SDR 1,132million on April 30, 1980.

In its review of the facility in June 1979, the Execu-tive Board decided that the facility should be reviewedagain when the possibility of access to the supplemen-tary financing facility comes to an end. The maximumrepurchase period under the facility was extended inDecember 1979 from eight years to ten years from thedate of purchase; and the number and frequency of re-purchase installments under the facility were also re-duced. These changes are intended to afford greaterleeway to members for implementing corrective adjust-ments to take effect in the light of their particular cir-cumstances. Recent developments in the internationaleconomy, such as the rising costs of energy, and theprotectionist measures by some countries have not onlycaused a sharp deterioration in the external paymentsposition of many countries but have also added to thecomplexity of adjustments in member countries.

Compensatory Financing Facility

In 1979/80, 19 members purchased a total ofSDR 863 million under the compensatory financingfacility, compared with purchases amounting toSDR 465 million in 1978/79 by the same number ofcountries. The total amount purchased under the fa-cility during the four years ended April 30, 1980 wasequivalent to SDR 3.4 billion, representing about athird of the total purchases other than those made inthe reserve tranche or under the oil facility. Total out-standing purchases under the facility on April 30, 1980,at SDR 2.9 billion, were unchanged from the level ayear earlier. Of the SDR 863 million purchased underthe compensatory financing facility during 1979/80,SDR 615 million was purchased by 18 members underthe amended decision adopted by the Executive Boardon August 2, 1979.5

The amended decision, the adoption of which waspreceded by a comprehensive review of the facility bythe Executive Board, resulted in the following principalchanges: (i) the quota limit on outstanding purchaseswas raised from 75 per cent to 100 per cent of a mem-ber's quota; (ii) the limit of 50 per cent of quota onpurchases in a single 12-month period was eliminated;(iii) receipts from travel and from workers' remittancescould be included with merchandise exports in the cal-culation of the shortfall if adequate statistical datawere available—the option, once exercised by themember, is to be irreversible for five years; and (iv)

5 Executive Board Decision No. 6224-(79/135), adoptedAugust 2, 1979 and reproduced in Appendix II.

the five-year trend in export earnings (and travel andworkers' remittances) was to be calculated as a geo-metric instead of as an arithmetic average.

Buffer Stock Facility

Four purchases (by Australia, Guyana, Jamaica, andNicaragua) totaling SDR 26 million were made in1979/80 in connection with special stocks of sugarconstituted under the terms of the 1977 InternationalSugar Agreement. This brought the total amount pur-chased in connection with that Agreement to SDR 74million, all of which was repurchased by May 21, 1980,following the release in February 1980 of all the specialstocks from the control of the International Sugar Or-ganization.

With the repurchase of the outstanding amounts inconnection with special stocks of sugar, no purchasesare presently outstanding under the buffer stock fa-cility. Financing assistance under the buffer stock fa-cility has also been provided since July 1971 in connec-tion with members' contributions to the buffer stockestablished under the Fifth International Tin Agree-ment, but no contributions to the tin buffer stock werecalled up in 1979/80. Although Fund financing ofloans extended by members in connection with thecocoa buffer stock had been envisaged when the Inter-national Cocoa Agreement came into force in 1973,no loans were necessary throughout the lifetime «f. thatAgreement. The Cocoa Agreement lapsed in March1980.

Supplementary Financing Facility

This facility, which was established on August 29,1977 to provide supplementary financing in conjunctionwith the use of the Fund's ordinary resources to mem-bers facing serious payments imbalances that are largein relation to their Fund quotas, became operational onFebruary 23, 1979. Its main features are as follows:

1. Members can use the facility only under a stand-by arrangement (normally of more than one year andup to three years) reaching into the upper credittranches, or under an extended arrangement (usuallyup to three years), subject to the usual policy condi-tions, phasing, and performance criteria.

2. The amounts available to a member will be ap-portioned between ordinary resources and supplemen-tary financing in prescribed proportions as follows:

(a) Under a stand-by arrangement, the equivalentof 12.5 per cent of its quota along with its first credittranche, and 30 per cent of its quota along with each

78



Table 21. Supplementary Financing Facility Commitments and Purchases Under Stand-Byand Extended Arrangements, April 30,1980(In millions of SDRs)

Supplementary Financing

Country

BoliviaCosta RicaGuyanaJamaica

KenyaKoreaMalawiMauritius

PanamaPeru

PhilippinesSudan

Turkey

Subtotal

Total

Quota

45412574

691601927

45164

21088

200

Arrangement

SBA1

SBA2

EFF3

EFF4

SBA5

SBA6

SBA7

SBA8

SBA9

SBA10

SBA11

EFF12

SBA13

EFFSBA

Amount

66.37560.50062.750

260.000

122.475640.00026.34473.025

66.375285.000

410.000200.000

250.000

522.7502,000.094

2,522.844

Commitment

32.6329.7035.00

227.10

70.73480.00

13.7854.00

32.63232.09

333.00100.00

169.55

362.101,448.11

1,810.21

Purchase

10.8075.1258.625

31.00031.00015.850

30.9092.3756.6116.500

—100.00022.27320.18220.0007.5007.500

17.50070.00055.90932.727

118.975383.418

502.393

Undrawnbalance

21.81824.57526.375

——149.250

70.725449.091

11.405

40.88932.625

.

89.635313.000

—67.500

10.914

243.1251,064.677

1,307.8021 One-year stand-by arrangement (SBA) approved February 1, 1980.2 Two-year SBA approved March 12, 1980.3 Three-year extended Fund facility (EFF) arrangement approved June 25, 1979.4 Two-year EFF arrangement approved June 11, 1979.5 Two-year SBA approved August 20, 1979.6 Two-year SBA approved March 3, 1980.7 Twenty-six month SBA approved October 31, 1979.8 Two-year SBA approved October 31, 1979.9 SBA approved April 18, 1980 for the period April 18, 1980 to December 31, 1980.10 SBA approved July 23, 1979 for the period August 10, 1979 to December 31, 1980.11 SBA approved February 27, 1980 for the period February 27, 1980 to December 31, 1981.12 Three-year EFF arrangement approved May 4, 1979.13 One-year SBA approved July 19, 1979.

of its three upper credit tranches, totaling 102.5 percent of quota.

(b) Under an extended arrangement, which permitsdrawings up to 140 per cent of quota, in an equivalentamount of supplementary finance.

(c) If a member has already used part or all of itscredit tranches, the stand-by or extended arrangementwill include the amount of supplementary financingthat would have been available under the supplemen-tary financing decision if the earlier use had been madeunder that decision.

(d) Purchases may be made beyond the uppercredit tranches wholly with supplementary financing inspecial circumstances.

3. Holdings resulting from these purchases will besubject to repurchase in equal semiannual installmentsthat begin not later than three and one-half years, andare to be completed not later than seven years, afterthe purchase. As of April 30, 1980, 13 members had

obtained total commitments of SDR 2,523 million un-der stand-by and extended arrangements in connectionwith the supplementary financing facility (Table 21).Out of that total, SDR 1,810 million is available insupplementary resources and the balance, amounting to28 per cent of the total commitment, is available inordinary resources. Out of the supplementary re-sources, SDR 1,448 million is available under stand-byarrangements and SDR 362 million under extended ar-rangements.

Of the total supplementary financing resources com-mitted as of April 30, 1980, about SDR 744 millionhas been made available under the special circum-stances clause6 to five members—Jamaica, Korea,Mauritius, Peru, and the Philippines—(Table 22).

All purchases under the facility, amounting toSDR 502 million on April 30, 1980, have been made

6 Executive Board Decision No. 5508-(77/127), Section 5(f),adopted August 29, 1977. See Annual Report, 1978, page 113.

79


ANNUAL REPORT, 1980

Table 22. Use of Supplementary Financing Facility Under Special Circumstances Clause,April 30,1980

Total SupplementaryFinancing Facility

Member

JamaicaKoreaMauritiusPeruPhilippines

Total

Quota *(1)

7416027

164210

(2)1

227.10480.0054.00

232.09333.00

1,326.19

Per centof quota

(3)

306.9300.0200.0141.5158.6

Special Use asPer Cent of

Of Which,SpecialUse1

(4)

123.50316.0026.3363.99

214.35

744.17

Quota(5)

166.9197.597.539.0

102.1

Totalsupplementary

financingfacility

(6)

54.465.848.427.664.4

56.11 In millions of SDRs.

by non-oil developing countries. (See Table 21.) Theuse of resources available under the facility has beenrelatively small up to the present but is expected toexpand appreciably in coming months. The ExecutiveBoard is also considering possible mechanisms to lowerthe cost of using the facility. The facility will be re-viewed by the Executive Board not later than twoyears after its effective date, or earlier if the SeventhGeneral Review of Quotas becomes effective beforethe end of the two-year period.

Repurchases

In 1979/80, aggregate repurchases amounted to theequivalent of SDR 3,776 million, which was about22 per cent below the peak of SDR 4,859 million in1978/79. Repurchases by industrial countries(SDR 1,757 million) represented 47 per cent of thetotal, including SDR 1,293 million by Italy and theUnited Kingdom. The largest amount, 46 per cent ofthe total, represented repurchases in respect of pur-chases made under the oil facility for 1974 and 1975.About 25 per cent of total repurchases related to pur-chases made under the compensatory financing facilityand about 23 per cent were with respect to purchases inthe credit tranches, including those made under stand-by arrangements or extended arrangements. The re-maining 5 per cent, SDR 202 million, represented re-purchases of members' currencies held by the Fund inexcess of 75 per cent of quota on the date of theSecond Amendment (SDR 178 million), which didnot result from purchases, and repurchases in connec-tion with the gold distributions (SDR 24 million).

Following the release, completed on February 21,1980, of special stocks accumulated under the 1977International Sugar Agreement, the six members that

had used the Fund's resources in connection with theirholdings of special stocks were required to repurchaseall outstanding amounts within 90 days from that date.7

Thus, a total amount equivalent to SDR 74 million wasrepurchased by May 21, 1980. In addition, two mem-bers (the Dominican Republic and Western Samoa)were requested to repurchase the amount by which thedrawing made in 1979 under the compensatory financ-ing facility, based on partly estimated export data, ex-ceeded the actual shortfall. While the Dominican Re-public completed the repurchase, Western Samoa re-quested postponement for balance of payments reasons,which was agreed to by the Executive Board. The equiv-alent of SDR 559 million was repurchased by 13 mem-bers in partial and full discharge of obligations in-curred under Article V, Section l(b) in effect beforethe Second Amendment. The Executive Board agreedto the requests of 37 members to schedule their repur-chases, totaling SDR 1,654 million, over periods up tofive years from the date of purchases under facilitiesfor which the repurchase period is three to five years.

The guidelines adopted by the Executive Board forearly repurchases apply to the Fund's holdings of mem-bers' currencies acquired under a stand-by or extendedarrangement approved after October 1, 1977 and toall holdings acquired after April 1, 1978.8 No earlyrepurchase expectations arose during the year, sincemembers that had made purchases subject to the guide-lines for early repurchases were not considered to bein sufficiently strong balance of payments and reservepositions.

7 Executive Board Decision No. 5597-(77/171), adoptedDecember 16, 1977 (Annual Report, 1978, pages 128-29) andExecutive Board Decision No. 5900-(78/138), adopted Sep-tember 8, 1978.

8 See Executive Board Decisions No. 5704-(78/39), adoptedMarch 22, 1978, and No. 6172-(79/101), adopted June 28,1979. See Annual Report, 1978, pages 125-26, and Annual Re-port, 1979, pages 138-39.

80



Fund Liquidity

The Fund's overall liquidity position—that is, therelationship between its liquid liabilities and its readilyusable assets comprising usable currencies and SDRsin the General Resources Account—was under somestrain when liquid liabilities were at their peak in mid-1977, but improved considerably thereafter.9 TheFund's liquid liabilities (as measured by outstandingreserve positions, including loan claims on the Fundencashable in the event of need by the lender, and un-drawn balances under stand-by and extended arrange-ments) increased from SDR 7.4 billion at the end ofApril 1974 to a peak of SDR 22.5 billion in the middleof 1977 as the counterpart of the very large expansionof Fund credit that took place over that period, includ-ing purchases under the oil facility, the compensatoryfinancing facility, and stand-by arrangements by theUnited Kingdom and Italy. Subsequently, the total de-clined to SDR 14.9 billion at the end of April 1980.This improvement in the Fund's liquidity reflectedpartly the decline in liabilities, but also stemmed fromincreases in the Fund's holdings of usable currencies asa result of the payment of quota increases under theSixth Review of Quotas. During 1979/80 the Fund'sholdings of usable currencies increased from SDR 8.8billion at the end of 1978/79 to SDR 10.6 billion atthe end of April 1980.

The Fund's policies and procedures under Article V,Section 3(d) for inclusion in the operational budgetsof currencies to be sold take into account, in consulta-tion with members, their balance of payments and re-serve positions and developments in the exchange mar-kets, as well as the desirability of promoting, over time,balanced positions in the Fund. The Executive Board'sreview of these policies and procedures in August 1979endorsed general guidelines for allocating currencies tobe used, so as to harmonize to the extent possible mem-bers' positions in the Fund through the equalization ofthe ratios of members' Fund positions to their gold andforeign exchange holdings.10 Subsequently, the Fundadopted decisions setting forth guidelines for: (a) theassessment of the strength of a member's balance ofpayments and gross reserve position for the purposes ofdesignation plans, operational budgets, and repurchases

9 Usable currencies are currencies of those members that areconsidered by the Executive Board to be sufficiently strong, inthe light of their balance of payments and gross reserve posi-tions, to be subject to designation and for inclusion for net salesin the operational budget.

10 For all operational purposes, such as the designation plan,the operational budget, and early repurchases, the Fund con-tinues to value gold held in members' reserves at SDR 35 perfine ounce. Members' Fund positions for this purpose are de-fined as their reserve tranche positions plus loans to the Fundthat provide it with usable resources on a continuing basis onterms comparable to those applicable to the use of its cur-rency holdings.

under Article V, Section 7(6);n and (b) the selec-tion and use of currencies and SDRs in the General Re-sources Account.12 The general approach is to use intransfers by the Fund the currencies of members whoseFund positions represent relatively low proportions oftheir gold and foreign exchange holdings, and in re-ceipts by the Fund the currencies of members with rela-tively high proportions. This has yielded a fairly longlist of currencies for use in transfers, and has placedsome emphasis on the use of the currencies of thosemembers whose ratios are furthest from the averageratio, that is to say, those who have made available re-sources through the Fund in amounts that are small inrelation to their reserves. The guidelines also aim atmoderating the use of a currency as the Fund's hold-ings reach low levels in relation to the member's quota.In practice, a large part of the Fund's usable currencyholdings usually tends to be represented by a smallnumber of currencies. Thus, at the end of the financialyear 1979/80, the Fund's holdings of just five creditorcurrencies represented about one half of the total usablecurrency holdings.

The Fund's liquidity is currently not under pressure,and the quota increases under the Seventh General Re-view will, at least initially, improve the liquidity posi-tion as a result of increases in the Fund's holdings ofusable currencies and SDRs. But the quota increaseswill also expand members' drawing rights commen-surately. At the same time, in view of the prospects oflarger and more widespread balance of payments defi-cits with surpluses concentrated on relatively few mem-bers, there is likely to be a reduction in the number,and therefore in the amounts available, of currenciesthat can be considered usable. Moreover, existing credi-tors may draw on their Fund positions. For these rea-sons, and also because of the magnitude of the recycl-ing problem, the Fund is keeping its liquidity underclose review and is exploring the possibility of aug-menting its resources by borrowing. As mentionedabove, the Interim Committee, at its meeting in Ham-burg on April 25, 1980, encouraged the Managing Di-rector to initiate discussions with potential lenders onthe terms and conditions under which the Fund couldborrow funds to increase its resources, if and when theneed arose.

Borrowing

Over the past six years, the Fund has supplementedits resources by borrowing a total of SDR 9.9 billion

11 Executive Board Decision No. 6273-(79/158) G/S,adopted September 14, 1979 and reproduced in Appendix II.

12 Executive Board Decision No. 6274-(79/158), adoptedSeptember 14, 1979 and reproduced in Appendix II.

81


ANNUAL REPORT, 1980

from some of its members and Switzerland under theGeneral Arrangements to Borrow, the oil facility, andthe supplementary financing facility. During 1979/80there was a net reduction of about SDR 1.3 billion inthe Fund's total outstanding borrowing, from aboutSDR 5 billion to about SDR 3.8 billion (equivalent to9.6 per cent of total quotas at the end of April 1980).

General Arrangements to Borrow

The General Arrangements to Borrow (GAB),originally concluded in 1962 for four years betweenthe Fund and ten industrial member countries, havebeen extended a number of times, and, during the yearunder review, all GAB participants formally agreed torenew the arrangement for another period of five yearsfrom October 24, 1980.13 Switzerland's associationwith the GAB, under a separate agreement of June 11,1964 with the Fund, has also been extended until Oc-tober 23, 1985 in parallel with the latest GAB renewal.The maximum credit available to the Fund throughthe GAB in lenders' currencies is equivalent to aboutSDR 6.5 billion, and the balance available on April 30,1980 was SDR 5.7 billion. The last use of the GABwas in connection with a reserve tranche purchase,equivalent to SDR 777 million, made in November1978 by the United States, which was financed en-tirely by borrowings from the Deutsche Bundesbank(SDR 583 million) and Japan (SDR 194 million).During the last five years, borrowings by the Fundunder the GAB totaled the equivalent of SDR 2,353million to finance purchases by Italy, the United King-dom, and the United States. In connection with thepurchases by the United Kingdom and Italy, the Fundalso concluded borrowing agreements with the SwissNational Bank, and a total amount equivalent toSDR 154 million was called up under these agreementsduring the financial years 1976/77 and 1977/78.

Oil Facility

The borrowing arrangements under this facility wereoriginally entered into by the Fund with 17 lendercountries, including Switzerland, in 1974 and 1975 fora total amount of SDR 6.9 billion. During the financialyear 1979/80, the Fund repaid the equivalent of aboutSDR 1.8 billion to these lenders. Several of these re-payments were in advance of the original repaymentschedules, as members made advance repurchases thatthey attributed to the oil facility purchases. By April 30,

1980, the Fund had repaid the equivalent of SDR 4.43billion of indebtedness incurred in connection with theoil facility; the balance of indebtedness on that dateamounted to SDR 2.47 billion.

Supplementary Financing Facility

The Fund has borrowing agreements with 13 mem-bers and the Swiss National Bank to provide, in differ-ent currencies, the equivalent of SDR 7.8 billion assupplementary financing. The individual lenders,amounts, and currencies to be made available underthe agreements are as follows:

Currency14

U.S. dollarsU.S. dollarsBelgian francsU.S. dollarsU.S. dollarsU.S. dollarsJapanese yenKuwaiti dinarsU.S. dollarsU.S. dollarsSaudi Arabian

riyalsU.S. dollarsU.S. dollarsVenezuelan bolivares

Participation in the financing of the facility remainsopen to other lenders whose external positions arestrong, on the same terms as applicable to existing lend-ers, if the Fund finds it necessary to enter into furtheragreements. A creditor's loan claims on the Fund areencashable on demand by the Fund if the creditor rep-resents that it has a balance of payments need, andlenders can, without prior reference to the Fund, trans-fer their claims to any other lender, any Fund member,or certain other official entities at prices agreed betweenthe transferor and transferee. Additional lenders mayalso include institutions that perform the functions of acentral bank for more than one member.

The first borrowing by the Fund under the facilitywas made in May 1979, and by the end of April 1980the Fund had borrowed a total of SDR 502.4 millionfrom 11 lenders.

The interest payable by the Fund on its borrowings isat a rate equal to the average yield for each six-monthperiod starting July 1, 1978 for U.S. Government se-curities with a maturity of five years, rounded upwardto the nearest Vs of 1 per cent. For the six-month period

LenderAbu DhabiAustrian National BankNational Bank of BelgiumCanadaDeutsche BundesbankBanco de GuatemalaJapanCentral Bank of KuwaitNetherlands BankCentral Bank of NigeriaSaudi Arabian Monetary

AgencySwiss National BankUnited StatesCentral Bank of Venezuela

Total

Amount(millionsof SDKs)

15050

150200

1,05030

900400100220

1,934650

1,450500

7,784

13Executive Board Decision No. 6241-(79/144), adoptedAugust 24, 1979 and reproduced in Appendix II.

14 The lending of U.S. dollars by lenders other than theUnited States is subject to the concurrence of the United States,which has been given.

82



ended June 30, 1980, this rate was 11.375 per centa year.

Membership and Quotas

Membership and Participation in the SpecialDrawing Rights Department

Two countries joined the Fund in 1979/80, raisingthe total membership on April 30, 1980 from 138 to140: St. Lucia on November 15, 1979, with a quota ofSDR 3.6 million, and St. Vincent and the Grenadineson December 28, 1979, with a quota of SDR 1.7 mil-lion.

The Executive Board of the Fund decided, with effectfrom April 17, 1980, that the Government of the Peo-ple's Republic of China represents China in the Fundand shall exercise all the rights and obligations of Chinaas the member of the Fund and the participant in theSpecial Drawing Rights Department. China's quota inthe Fund is currently SDR 550 million, and its allo-cations of special drawing rights amount to SDR 114.4million. On May 25, 1980, the Executive Board con-sidered the application for membership by Zimbabweand agreed with the recommendation of the Commit-tee on Membership of a quota of SDR 100 million forZimbabwe, and a proposed maximum quota of SDR 150million under the Seventh General Review.

Both St. Lucia and St. Vincent and the Grenadineselected to participate in the Special Drawing RightsDepartment. In addition, Kuwait became a participantas of April 7, 1980. At the end of the financial year1979/80, all 140 members of the Fund were partici-pants in the Special Drawing Rights Department.

Seventh General Review of Quotas

The Seventh General Review of Quotas was ap-proved by the Board of Governors, with effect fromDecember 11, 1978.15 The proposed increases in quotaswill become effective for an individual member on thelatest of the following three dates: (a) the date of themember's consent to the increase; (b) the date of pay-ment of its increased subscription; and (c) the date onwhich the Fund determines that members having notless than three fourths of the total of quotas on No-vember 1, 1978 have consented to increases in theirquotas. However, if the Fund's determination is in theperiod between July 1, 1980 and October 5, 1980, noincrease in quota will become effective until after Oc-

15 Board of Governors Resolution No. 34-2, adopted Decem-ber 11, 1978. See Annual Report, 1979, pages 121-23.

tober 5, 1980. This provision was designed to ensurethat there would be no changes in quotas during, orshortly before, the 1980 Annual Meeting, when thenext election of Executive Directors will take place.Total quotas on November 1, 1978 were equivalent toSDR 39.0 billion, so that the minimum participationrequirement will be met when members accounting forat least SDR 29.3 billion of total quotas have con-sented to an increase in their quotas.

A member may consent to an increase in its quotaon or before November 1, 1980. The Executive Boardmay extend this period as it may determine. A membercan consent to an increase smaller than the amountproposed for it in the Annex to the Resolution, andlater could consent to an additional amount, up to theproposed maximum, at any time prior to the expirationof the period for consent. As of June 30, 1980, 62members accounting for 34.20 per cent of total quotasin the Fund on November 1, 1978 had consented toincreases in their quotas to the respective proposedmaximum amounts. In addition, Dominica and St.Lucia, which joined the Fund after November 1, 1978,have consented to the corresponding quota increasesprovided for under their membership resolutions. CapeVerde, which was not included in the Resolution, wasgranted the opportunity by a Resolution of the Boardof Governors to increase its quota by 50 per cent, toSDR 3 million, in accordance with the Board of Gov-ernors Resolution on the Seventh General Review.

If all members accept increases in their quotas to themaximum amounts proposed, total quotas in the Fundwould rise as a result of the Seventh General Reviewfrom the current SDR 39,016.5 million toSDR 58,625.6 million.

Charges and Remuneration

The rates of charges levied by the Fund on its hold-ings of currency subject to charges were unchangedduring the year except for charges on use of the supple-mentary financing facility and, for one member,charges on balances of currency in excess of 200 percent of the member's quota that resulted from pur-chases made under a stand-by arrangement that tookeffect prior to February 23, 1979, the date on whichthe supplementary financing facility became operation-al. For the year as a whole, the average rate of chargereceived by the Fund on balances that arise from use ofthe Fund's regular and compensatory financing facili-ties was 5.25 per cent, appreciably less than the averagerate of remuneration—7.06 per cent—paid by theFund on creditor positions in the Fund. Charges forthe use of the supplementary financing facility are based

83


ANNUAL REPORT, 1980

on the rate of interest paid by the Fund on amountsborrowed from lenders under the facility and are ad-justed half-yearly. For the six-month periods endedJune 30 and December 31, 1979, and June 30, 1980,the applicable rates of charge for use of the supple-mentary financing facility were 9.45, 10.075, and11.575 per cent per annum, respectively.

The rate of remuneration during the year was main-tained at 90 per cent of the SDR rate of interest, whichwas set at 80 per cent of the combined interest rate onshort-term instruments in the United States, the FederalRepublic of Germany, the United Kingdom, France,and Japan, rounded to the nearest 1A of 1 per cent. TheSDR rates of interest and the rates of remuneration(Chart 16) applicable over the six quarters beginningApril 1, 1979 were as follows:

Calendar quarterbeginning

April 1, 1979July 1, 1979October 1, 1979January 1, 1980April 1, 1980July 1, 1980

SDR interestrate6JO6.757.759.25

10.258.25

Rate ofremuneration

5^856.0756.9758.3259.2257.425

Shortly before the end of each financial year, theFund considers whether the net income of the Fund forthe year is sufficient to allow the rate of remunerationto be raised above 90 per cent but not above 100 per

cent of the SDR average rate of interest for the year.In considering whether to establish a higher rate of re-muneration for a particular year, the Fund is requiredalso to consider the possibility of reducing its rates ofcharges for use of its regular facilities from the begin-ning of the subsequent financial year. For the financialyear ended April 30, 1980, it was decided not to raisethe rate of remuneration above 90 per cent and it wasalso decided not to reduce the Fund's charges with ef-fect from May 1, 1980. These decisions were taken inthe light of the estimated net income for the year andthe outlook for income for the financial year endingApril 30, 1981.

Gold

Gold Sales

The Fund's gold sales program that was agreed bythe Interim Committee in August 1975, as part of theprogram for gradually reducing the role of gold in theinternational monetary system, was completed inMay 1980. Under that program, 50 million ounces ofgold, or about one third of the Fund's gold holdings asat August 31, 1975, were sold. One half of the amount,

1 For the United Kingdom and the United States, the yield on three-month treasury bills; for France and the Federal Republicof Germany, the rate for three-month interbank deposits; and for Japan, the call money market rate (unconditional).

84

Chart 16. SDR Interest Rate, Rate of Remuneration, and Short-Term Interest Rates, July 1974-September 1980



25 million ounces, was sold to countries that weremembers of the Fund on August 31, 1975 at the formerofficial price of SDR 35 an ounce. These sales were car-ried out in four annual installments, the last of whichtook place in December 1979 and January 1980. Theother 25 million ounces were sold in public auctionsover a period of four years, and the profits from thesesales—i.e., the sales proceeds in excess of SDR 35 anounce—were transferred to the Trust Fund for the ben-efit of developing countries.

Under the Second Amendment of the Articles ofAgreement, the Fund is given a range of powers withrespect to sales of gold on the basis of which it coulddispose of its remaining gold holdings of about 104million ounces after completion of the agreed sales pro-gram. An 85 per cent majority of the voting powerwould be required for a decision to exercise any of thesepowers. Possible further uses of the Fund's remaininggold holdings were considered by the Executive Boardin April 1980, but no decisions were taken.

Gold Auctions

During the year, the Fund held 12 auctions in whichit sold 5.3 million ounces (165.7 tons) of gold to themarket; the sales program was completed with themonthly auction of 444,000 ounces in May 1980. Asmentioned in the 1979 Annual Report, the amount ofgold auctioned each month was reduced in June 1979from 470,000 ounces (14.6 tons) a month to 444,000ounces (13.8 tons) in view of the gold acquired bymonetary authorities entitled to submit noncompetitivebids.16 The auctions continued to attract substantialinterest, mainly from the major private internationalgold traders. Bidding in the last 13 auctions of the salesprogram ranged from 665,000 ounces (20.7 tons), or\l/2 times the amount on offer, to 1.94 million ounces(60.3 tons), or almost 4V2 times the amount to be sold.As in the past, auction prices were close to the prevail-ing market prices and, over the year, increased dra-matically with them; the highest average price in theauctions (US$712.12 an ounce in February 1980)was 6*/2 times as much as the lowest average auctionprice recorded in September 1976. (See Table 23.)

In all, the Fund held 45 public auctions in which itawarded 23.52 million ounces (731.6 tons) to 51 bid-ders on competitive bids, and 1.48 million ounces(46.0 tons) to 13 monetary authorities on noncom-petitive bids. As discussed further below, the proceedsof these gold sales amounted to US$5.7 billion, ofwhich US$1.1 billion represented the capital valueequivalent to SDR 35 an ounce that was added to the

16 See Annual Report, 1979, page 80.

Fund's general resources, and US$4.6 billion repre-sented profits that were channeled to the Trust Fundfor the benefit of developing member countries.

Gold Distribution

Under the agreement reached in the Interim Commit-tee in August 1975 to distribute one sixth (25 millionounces) of the Fund's gold to members, the Fund com-pleted during the financial year the last of four annualsales to countries that were members on August 31,1975 and to Papua New Guinea. Sales of gold to mem-bers in the fourth distribution were made to 127 mem-bers and amounted to 6,593,368 ounces of fine gold(205.1 tons), sold at a price equivalent to SDR 35 perfine ounce. The sale proceeds amounting to SDR 230.8million were added to the holdings of currencies of theFund's General Resources Account. Details of thetotal amounts of gold sold to individual members overthe period are shown in Table 24. Each member's sharewas calculated in proportion to its quota on August 31,1975, and the gold was sold to participating membersunder the provisions of the Second Amendment of theFund's Articles of Agreement.

The major portion of the gold sold in the fourthdistribution, 5,410,459 fine ounces (168.3 tons), waspurchased by 110 members in December 1979. Anamount of 711,142 fine ounces (22.1 tons) was pur-chased by 15 members in January 1980, and an amountof 1,062 fine ounces (0.03 ton) was purchased by onemember in February 1980. With the completion of thisfourth distribution, total sales of gold to the 127 mem-bers over the four-year period amounted to 24,977,769fine ounces (776.9 tons), which added the equivalentof SDR 874.2 million to the currency holdings of theGeneral Resources Account.17

Trust Fund

The Trust Fund, established by the Executive Boardin May 1976 and administered by the Fund, providesadditional balance of payments assistance on conces-sionary terms to eligible developing member countriesthat qualify for assistance by carrying out programs ofbalance of payments adjustment.18 Its resources are

17 Arrangements have not yet been completed with regard tothe distribution to Democratic Kampuchea.

18 The establishment and operation of the Trust Fund werediscussed in Annual Report, 1979, pages 86-87, Annual Report,1978, pages 76-78, Annual Report, 1977, pages 66-67, andAnnual Report, 1976, pages 60 and 111-17. The Trust Fundand Subsidy Account constitute arrangements that are separatefrom the Fund's own resources and accounts. The report of theAudit Committee for the year ended April 30, 1980 is repro-duced in Appendix VIII.

85


ANNUAL REPORT, 1980

Table 23. Fund Gold Auctions: Summary Statistics, June 2, 1976-May 7, 1980

Date(1)

1976June 2July 14Sept. 15Oct. 27Dec. 8

1977Jan. 26Mar. 2Apr. 6May 4June 1July 6Aug. 3Sept. 7Oct. 5Nov. 2Dec. 7

1978Jan. 4Feb. 1Mar. 1Apr. 5May 3June 7JulySAug. 2Sept. 6Oct. 4Nov. 1Dec. 6

1979Jan. 3Feb. 7Mar. 7Apr. 4May 2June 6July3Aug. 1Sept. 5Oct. 10Nov. 7Dec. 5

1980Jan. 2Feb. 6Mar. 5Apr. 2

Place ofDelivery

(2)

New YorkNew YorkNew YorkNew YorkLondon

New YorkNew YorkNew YorkNew YorkNew YorkParisLondonNew YorkNew YorkLondonNew York

New YorkParisNew YorkNew YorkLondonNew YorkNew YorkNew YorkNew YorkLondonNew YorkParis

New YorkNew YorkLondonNew YorkNew YorkNew YorkNew YorkNew YorkParisNew YorkNew YorkLondon

New YorkNew YorkNew YorkNew York

May 7 New York

Total 2

OuncesOunces Bid Awarded(thousands) (thousands)

(3) (4)

2,320.02,114.03,662.44,214.44,307.2

2,003.21,632.81,278.01,316.41,014.01,358.41,439.21,084.4

971.21,356.41,133.6

984.8598.4

1,418.01,367.63,104.01,072.4

797.21,467.6

773.2805.6689.6

1,965.2

1,479.61,489.61,534.41,186.81,514.81,452.41,518.81,138.81,646.0

665.61,798.41,746.0

1,342.41,939.61,412.4

802.81,822.0

780.0780.0780.0779.6780.0

780.0524.8524.8524.8524.8524.8524.8524.8524.8524.8524.8

524.8524.8524.8524.8524.8470.0470.0470.0470.0470.0470.0470.0

470.0470.0470.0470.0470.0444.0444.0444.0444.0444.0444.0444.0

444.0444.0444.0444.0443.2

23,517.5

Sub-scriptionRatio i

(5)

2.972.714.705.405.52

2.573.112.432.511.932.592.742.071.852.582.16

1.881.142.702.605.912.281.703.121.651.711.474.18

3.153.173.262.533.223.273.422.563.711.504.053.93

3.024.373.181.814.10

OuncesAwarded

to NoncompetitiveBidders

(thousands(6)

—————

—————— •

—————

—————

925.220.870.0

133.6134.480.020.0

16.459.2

——

20.0

———————

—————

1,480.3

Competitive Bids_ Number of

Bidders

) Total(7)

3023232425

2121181714151815171819

191719212421222120181416

171918172019202021161618

1017161621

Suc-cessful

(8)

2017141613

157

111413151611127

19

191716151715192010127

13

95

1714175

131649

1315

55

141621

Numberof Bids t

Total(9)

220196380383265

1921871361077583

13611510390

108

10376

127122192137101117897650

102

1591231271071551091131338152

18997

52808469

225

Sue- <cessful(10)

5956413733

4914223835354421322158

646276303628444225252431

23115044561923636

155338

108

546667

Price Range of"Jo. of Non- Successful Bidscompetitive (US$ per

Bids fine ounce)(11) (12)

——

———

———

—————

———

—————5222111

11

——1

———————

————~

126.00-134.00122.05-126.50108.76-114.00116.77-119.05137.00-150.00

133.26-142.00145.55-148.00148.55-151.00147.33-150.26143.32-150.00140.26-145.00146.26-150.00147.61-149.65154.99-157.05161.76-163.27160.03-165.00

171.26-180.00175.00-181.25181.13-185.76177.61-180.26170.11-171.50182.86-183.92183.97-185.01203.03-205.11212.39-213.51223.57-224.62223.03-230.00195.51-196.75

219.13-221.00252.47-252.77241.28-243.26238.71-240.27245.86-247.01280.22-281.37281.06-281.87288.95-291.07332.01-333.50412.51-420.80391.77-398.01425.40-429.31

561.00-564.01711.99-718.01636.16-649.07460.00-503.51500.20-511.15

AverageAwardPrice(13)

126.00122.05109.40117.71137.00

133.26146.51149.18148.02143.32140.26146.26147.78155.14161.86160.03

171.26175.00181.95177.92170.40183.09184.14203.28212.50223.68224.02196.06

219.34252.53241.68239.21246.18280.39281.52289.59333.24412.78393.55426.37

562.85712.12641.23484.01504.90

Profits(In

millionsof U.S.dollars)

(14)

67.1064.0053.8260.2575.35

72.5055.6057.0256.3753.8752.1655.3156.2459.9763.2962.13

67.6869.6572.9270.7866.83

195.6468.9685.84

101.42107.7498.3774.23

84.73109.6092.6291.3798.79

104.73104.84107.84127.73163.20154.26169.27

229.17295.24263.52194.97203.51

4,640.441 The ratio of total bids to the amount on auction.2 Ounces awarded do not add up exactly to the total representing the amount sold owing to variations in the weight of standard gold bars.

derived mainly from the profits realized on the sale of25 million ounces of the Fund's gold for the benefit ofdeveloping member countries. A part of these profitshas been paid directly to 104 developing countries,while the remainder—together with income from invest-ments, income from loans already made to members,

and other transfers to the Trust, less expenses—is avail-able for concessionary lending.

Total profits from the sale of 25 million ounces ofgold over the four-year sales program amounted toUS$4.6 billion, of which US$1.3 billion was distributeddirectly to the 104 developing members. The amount

86



Table 24. Sales of Gold to Members

Member

AfghanistanAlgeriaArgentinaAustraliaAustria

BahamasBahrainBangladeshBarbadosBelgium

BeninBoliviaBotswanaBrazilBurma

BurundiCameroonCanadaCentral African RepublicChad

ChileChina1

ColombiaCongoCosta Rica

CyprusDenmarkDominican RepublicEcuadorEgypt

El SalvadorEquatorial GuineaEthiopiaFijiFinland

FranceGabonGambia, TheGermany, Fed. Rep. ofGhana

GreeceGrenadaGuatemalaGuineaGuyana

HaitiHondurasIcelandIndiaIndonesia

IranIraqIrelandIsraelItaly

Ivory CoastJamaicaJapanJordanKenya

KoreaKuwaitLao People's Democratic RepublicLebanonLesotho

in Four DistributionsFine Ounces

31,665.860111,258.000376,564.794569,126.658231,072.187

17,116.9978,557.999

106,978.87911,125.930

556,289.958

11,123.66931,665.9854,278.867

376,564.56951,349.512

16,260.98429,953.907

941,394.29111,125.99511,125.762

135,220.043470,705.277134,364.51411,126.00027,386.995

22,251.563222,515.702

36,800.97928,241.989

160,894.508

29,953.9886,691.724

23,106.99111,125.708

162,607.999

1,283,718.05312,836.9975,819.577

1,369,327.94574,456.884

118,104.7381,711.539

30,810.00020,497.77417,116.904

16,260.99721,395.99419,683.995

804,429.402222,515.983

164,311.97893,273.618

103,554.980111,257.225855,829.551

44,483.05645,358.961

1,026,995.29219,683.97641,079.961

68,465.91255,628.98611,125.5337,701.9984,278.316

Member

LiberiaLibyan Arab JamahiriyaLuxembourgMadagascarMalawi

MalaysiaMaliMaltaMauritaniaMauritius

MexicoMoroccoNepalNetherlandsNew Zealand

NicaraguaNigerNigeriaNorwayOman

PakistanPanamaPapua New GuineaParaguayPeru

PhilippinesPortugalQatarRomaniaRwanda

Saudi ArabiaSenegalSierra LeoneSingaporeSomalia

South AfricaSpainSri LankaSudanSwaziland

SwedenSyrian Arab RepublicTanzaniaThailandTogo

Trinidad and TobagoTunisiaTurkeyUgandaUnited Arab Emirates

United KingdomUnited StatesUpper VoltaUruguayVenezuela

Viet NamWestern SamoaYemen Arab RepublicYemen, People's Democratic Republic ofYugoslavia

ZaireZambia

Total2

Fine Ounces

24,818.98920,505.33417,116.99922,252.00012,836.998

159,165.21318,826.36813,692.99111,124.69818,827.858

316,656.95096,625.27910,611.998

599,080.944172,877.650

23,105.36611,124.483

115,536.844205,398.687

5,990.856

201,097.44730,807.85317,116.81316,260.994

105,266.981

132,653.664100,131.991

17,116.942162,589.30316,260.959

114,680.68829,024.48221,395.84731,665.60316,260.991

273,865.222338,052.863

83,870.98161,619.9626,846.993

278,144.64842,791.96335,944.820

114,680.97812,834.765

53,916.98341,066.775

129,229.95334,232.81912,836.804

2,396,322.1775,734,062.882

11,124.36859,051.913

282,422.976

53,044.5231,711.7888,557.999

24,819.000177,144.008

96,708.97165,042.532

24,977,768.637

1 Distribution was effected before April 17, 1980, when the Fund decided that the Government of the People's Republic of Chinarepresents China in the Fund.

2 As noted in the text, arrangements have not yet been completed for sale of gold to Democratic Kampuchea. The notional shareof this member in 25 million ounces is 21,396 fine ounces.

87


ANNUAL REPORT, 1980

of profit distributed to each member was calculated onthe basis of its share of Fund quotas at August 31,1975; the quotas of the eligible members were equiva-lent to 27.771 per cent of total Fund quotas. The re-mainder of the profits, together with interest income andother transfers to the Trust, amounted to SDR 2.9 bil-lion at the end of July 1980. A total of over SDR 2.1billion has already been used to make loan disburse-ments to eligible low-income members that qualifiedfor balance of payments assistance; a further amount ofabout SDR 800 million remains available. The finaldisbursement of loans is to be made in January 1981.

While 104 developing member countries were eligibleto participate in the direct distributions of profits fromgold sales, the Ministers of Finance of 8 members ofthe Organization of Petroleum Exporting Countries(OPEC) had decided in 1976 to recommend to theirgovernments that they contribute to the Trust Fundtheir shares in the direct distributions of profits. Ofthese 8 members, 6—Iraq, Kuwait, Qatar, Saudi Ara-bia, the United Arab Emirates, and Venezuela—havemade irrevocable transfers of the full amounts of theirprofit shares to the Trust Fund to add to the resourcesavailable for loan assistance.19 In addition, Yugoslaviahas transferred one third of its share of profits andRomania is lending 10 per cent of its share to the TrustFund. As of July 31, 1980 the total value of theamounts transferred to the Trust by all these memberswas US$122 million.

The profits and loans actually disbursed by the TrustFund so far, including the profit and loan disbursementsin July 1980, totaled about SDR 3.1 billion, of whichover half was disbursed during 1979/80 (Table 25).About three fourths of this total was disbursed amongmembers in Africa and Asia, and the remainder to de-veloping members in Europe, the Middle East, and theWestern Hemisphere. For members that qualified forloans in both periods of the Trust Fund, total disburse-ments of loans and profits represented about 85 percent of their present quotas, or the equivalent of morethan three tranches.

Profits from the sale of gold are available for loandisbursements in each of the two periods of the TrustFund. The first period was for two years and ended onJune 30, 1978, while the second period covers the sub-sequent years through December 31, 1980. Balance ofpayments assistance for a total of SDR 841 million wasprovided to 43 of the 61 eligible members that had

Table 25. Trust Fund: Loan Disbursements and Distri-butions of Profits from Gold Sales, by Region, 1977-80(In millions of SDKs)1

Financial Years Ended April 30

AfricaAsiaEuropeMiddle EastWestern Hemisphere

Total

1977

20.09.1

1.61.0

31.7

1978

130.0199.016.761.583.6

490.8

1979

286.5322.0

8.687.436.1

740.6

19802

660.5635.3

61.3185.1288.7

1,830.9

Total

1,097.01,165.4

86.6335.6409.4

3,094.01 Amounts distributed as profits converted to SDKs at ex-

change rates prevailing on dates of payment.2 Includes profit and loan disbursements in July 1980.

qualified for the first period.20 This represented nearlyone third of these members' present quotas and one halfor more of the assessed need for almost three fourths ofthe qualified members.

As regards the second period, because of the moredifficult economic conditions during 1979 and 1980and because higher gold prices resulted in much largeramounts being available for loans (over SDR 2 billion)than had been anticipated, the Executive Board tookseveral decisions during 1979/80 to permit a greaternumber of eligible members to qualify for assistanceand to accelerate the rate of loan disbursements. InJuly 1979 the Board decided that subsequent interimloan disbursements would be made on a quarterly, in-stead of a half-yearly, basis. In April 1980 the Boarddecided to extend the second period by six months (toDecember 31, 1980) and to extend to November 1,1980 the final date by which a program had to beginfor a member to qualify for a loan. It was also agreedat that time that an interim loan disbursement wouldbe made at the end of July 1980 and that the seventhloan disbursement in respect of the Trust's second pe-riod would be made in January 1981.21

At the end of July 1980 the total amount availablefor disbursement as loans in the Trust Fund's secondperiod was SDR 2.1 billion, taking account of invest-ment income and the annual reimbursement of expensesto the General Resources Account for conducting thebusiness of the Trust Fund, which amounted toSDR 700,000 in 1979/80. By July 31, 1980, a total ofSDR 1.3 billion had been transferred as interim loandisbursements in the Trust Fund's second period to 49

19 The seventh of these members—the Socialist People'sLibyan Arab Jamahiriya—has so far transferred about onefourth of its profit share. As to the eighth member—Iran—theFund was advised in June 1980 that Iran wished instead toreceive its profit share in full. As of July 31, 1980, Iran's profitshare was held by the Trust pending action by the ExecutiveBoard.

20 These 61 members were countries that were Fund memberson August 31, 1975 and had per capita incomes of less thanSDR 300 in 1973. For the Trust's second period, the cutoffpoint was a per capita income of less than US$520 in 1975; atotal of 59 members are eligible on that basis for Trust Fundloans in the second period.

"Executive Board Decisions No. 6201-(79/121) TR andNo. 6202-(79/121) TR, adopted July 3, 1979, and No. 6466-(80/68) TR, adopted April 9, 1980 and reproduced in Appen-dix II.



of the 59 eligible members that had qualified for assist-ance. This represents over two fifths of the qualifiedmembers' present quotas. All interim disbursementshave been made on the assumption that all 59 eligiblemembers will qualify for loans in the second period.

Trust Fund loans are made on the basis of 12-monthbalance of payments programs of at least first-credit-tranche conditionality; however, programs in the sec-ond period must be separate from those used as thebasis for loans in the first period. Trust Fund loansmust be made to each qualified member in amountsrepresenting the same percentage of members' quotason December 31, 1975, subject to any limitation ofneed as decided by the Fund as Trustee after a re-exam-ination if necessary.

Trust Fund loans are disbursed in U.S. dollars, butthe amounts are denominated in SDKs. They bear in-terest at a rate of Vi of 1 per cent per annum, payablehalf-yearly in a currency specified by the Fund (U.S.dollars, thus far), and, unless otherwise decided, are tobe repaid in ten semiannual installments between sixyears and ten years from the dates of the loan disburse-ments. The terms of repayment will be reviewed, onthe basis of uniform criteria, toward the end of fiveyears after the first interim disbursement.

As mentioned in the 1979 Annual Report, the Exec-utive Board decided in June 1978 that, in principle, theassets of the Trust, pending disbursements as loans,should be held in SDR-denominated assets with theBank for International Settlements (BIS), unless theManaging Director found the interest rate offered onsuch proposed deposits not to be sufficiently attractive.In December 1978 the Executive Board broadened theTrustee's authority to make investments, allowing it,under certain conditions, to make deposits with otherinstitutions including commercial banks. All SDR-denominated deposits in the period July 1978-July1980 were in fact made with the BIS, and on July 31,1980 totaled SDR 815 million with an average interestrate of 11 per cent per annum. Some deposits maturedand were either used for loan assistance or reinvestedwith the BIS. The remainder of the Trust's assets, heldfor the direct distribution of profits, continued to beinvested in U.S. Government obligations. The Trust'sresources are invested, as soon as they are available, ininvestments with maturities matching the expected tim-ing and amounts of Trust disbursements.

The Subsidy Account

The Subsidy Account, which is administered by theFund, was established by the Executive Board on Au-gust 1, 1975 to assist members most seriously affectedby oil price increases by reducing the cost of using the

1975 oil facility. The subsidy has been 5 percentagepoints per annum, so that the cost to the beneficiaries ofusing the 1975 oil facility has been reduced to an aver-age of 2.7 per cent per annum.

The 18 original beneficiaries, which had purchased atotal of SDR 551 million under the 1975 oil facility,received payments from the Subsidy Account thatamounted to SDR 99 million by June 1980. Membersthat were added to the list of beneficiaries in November1978 received subsidy payments for the first time inJune 1980 in amounts totaling SDR 14 million. Thesemembers had purchased a total of SDR 222 millionunder the 1975 oil facility (Table 26).

Table 26. Subsidy Account: Total Use of 1975 OilFacility by Beneficiaries, and Subsidy Payments in theFinancial Year Ended April 30,19801

(In millions of SDKs)

Total Use Subsidy at 5 Per Centof 1975 Cumulative

Oil Facility Amount to date

Original Beneficiaries:Subsidy for financial year

ended April 30, 1980

BangladeshCameroonCentral African RepublicEgyptHaiti

IndiaIvory CoastKenyaMaliMauritania

PakistanSenegalSierra LeoneSri LankaSudan

TanzaniaWestern SamoaYemen, People's

DemocraticRepublic of

Total

Additional Beneficiaries :Subsidy for financial years

40.4711.792.66

31.684.14

201.3410.3527.93

3.995.32

111.019.914.97

34.1318.30

20.610.42

12.02

551.03

1.680.500.111.400.17

—1.100.180.23

4.380.380.221.430.75

0.760.02

0.50

13.79

8.362.400.566.300.86

26.951.425.930.791.08

23.482.150.997.013.85

4.500.09

2.47

99.17

ended April 30, 1975/76and 1976/77

GrenadaMalawiMoroccoPapua New GuineaPhilippines

Zaire

Total

0.493.73

18.0014.80

152.03

32.53

221.58

0.030.240.890.80

10.44

1.59

13.98

0.030.240.890.80

10.44

1.59

13.981 Purchases began in July 1975 and continued until May 1976.

The subsidy amounts shown are calculated as a percentage perannum of the average daily balances, subject to charges, of theFund's holdings of each eligible member's currency outstandingunder the 1975 oil facility during the year. Since the averagecost of using the facility is about 7.7 per cent per annum, a rateof subsidy of 5 per cent would reduce the effective cost of usingthe facility to 2.7 per cent.

89


ANNUAL REPORT, 1980

The Subsidy Account is funded by contributions from24 members of the Fund and Switzerland (Table 27).

Table 27. Subsidy Account: Contributions(In millions of SDRs)

Contributors

AustraliaAustriaBelgiumBrazilCanada

DenmarkFinlandFranceGermany, Fed Rep. ofGreece

IranItalyJapanLuxembourgNetherlands

New ZealandNorwaySaudi ArabiaSouth AfricaSpain

SwedenSwitzerlandUnited KingdomVenezuelaYugoslavia

Total

AnticipatedTotal

Contributions *

5.7002.3005.6001.8509.500

2.2001.600

12.90013.7000.600

6.0008.600

10.3000.1106.000

1.7002.100

40.0001.3503.400

2.8003.285

12.0506.0000.900

160.545

ContributionsReceived as ofApril 30, 1980

5.7002.3004.2001.8509.500

1.2701.2009.773

13.7200.597

6.0008.6008.0540.1086.000

1.1872.100

40.0001.3502.450

2.8003.285

10.5736.0000.900

149.5171 In some cases where contributions are being made in install-

ments, budgetary approval will be required in each year that acontribution is to be made. SDR amounts may be subject tosmall adjustments owing to exchange rate changes.

The funds received are invested in U.S. Governmentobligations pending payment of subsidies to the benefi-ciaries. Promised contributions over the life of the Ac-count total SDR 160 million; actual contributions toApril 30, 1980 amounted to SDR 150 million.

The decision establishing the Subsidy Account wasamended in November 1978 to permit the use of anysurplus, after providing for payments to the originalbeneficiaries at the rate of 5 per cent per annum, tomake payments at a rate not exceeding 5 per cent perannum to 7 additional beneficiaries, namely, Grenada,Malawi, Morocco, Papua New Guinea, the Philippines,Zaire, and Zambia. With the addition of these mem-bers, the list of beneficiaries included all members eli-gible to receive assistance from the Trust Fund that hadalso used the 1975 oil facility. The Executive Boardalso decided that subsidy payments to Zambia shouldbe made in respect of 1975 oil facility purchases subjectto charges from July 1, 1978, since that member wasnot eligible for Trust Fund loans before that date.

At the end of the financial year 1979/80, the SubsidyAccount held a surplus (of about SDR 44 million) thatwas available to be disbursed for the first time to the

7 members that became beneficiaries in November1978. However, as the surplus together with anticipatedcontributions was insufficient to pay the additional ben-eficiaries at the full 5 per cent rate over the life of theSubsidy Account (1976-83), the Executive Board de-cided to retain the bulk of the surplus in the Accountto earn investment income, and to begin payments tothe additional beneficiaries by subsidizing the cost tothose members of using the 1975 oil facility for thefinancial years 1975/76 and 1976/77.

Subsidy payments totaling SDR 13.8 million weremade to 16 original beneficiaries for the financial year1979/80, and a total of SDR 14 million was paid to6 of the 7 (excluding Zambia) additional beneficiariesfor the financial years 1975/76 and 1976/77. All thesepayments were made in June 1980. Of the 18 originalbeneficiaries, India and Ivory Coast did not receive asubsidy in 1980 as they no longer had any 1975 oilfacility purchases outstanding.

Special Drawing Rights

The Fund has acted in a number of ways, over thepast two years or so, to enhance the yield and liquiditycharacteristics of the SDR and thereby to make theasset more comparable with reserve currencies. Theimprovements have been made in the light of the inten-tion of all members, as expressed in the Second Amend-ment of the Articles of Agreement that became effectivein April 1978, to make the SDR "the principal reserveasset in the international monetary system." The maindevelopments are as follows:

• Allocations—that is, the mechanism by whichSDRs are created by the Fund—have been resumedfrom January 1, 1979 for a period of three years duringwhich about SDR 12 billion will be allocated to Fundmembers that are participants in the Special DrawingRights Department. These allocations follow a periodof six years when no allocations were made.

• With the participation of Kuwait in April 1980,all 140 Fund members are now participants in the Spe-cial Drawing Rights Department.

• The valuation of the SDR and its interest rate aredetermined by reference to baskets of currencies andare thus related directly to developments in the foreignexchange and financial markets. The valuation basket,on the basis of which the value of the SDR is computeddaily, is composed of the currencies of the 16 Fundmember countries with the largest shares of world ex-ports of goods and services.22 The interest rate on the

22 The Australian dollar, Austrian schilling, Belgian franc,Canadian dollar, deutsche mark, French franc, Iranian rial, Ital-ian lira, Japanese yen, Netherlands guilder, Norwegian krone,pound sterling, Saudi Arabian riyal, Spanish peseta, Swedishkrona, and U.S. dollar.

90



SDR is fixed each quarter at 80 per cent (60 per centuntil January 1, 1979) of a weighted average of short-term domestic interest rates in the five member countrieswith the largest Fund quotas.23 (See Chart 16.) TheExecutive Board is considering the simplification of themethod of valuation, in particular, by reducing thenumber of currencies in the basket, and by making theSDR valuation and interest rate baskets identical inaccordance with the views expressed by the InterimCommittee at its meeting in Hamburg in April 1980.

• SDRs may now be freely transferred, by agreementbetween participants, in transactions and operationsthat include purchases and sales of SDRs, both spot andforward, loans, donations (grants), swaps, and pledgesof SDRs. The terms and conditions of individual opera-tions can be set by agreement between the parties con-cerned, although the official (spot) valuation of theSDR must be observed in most cases (see below).Participants having a balance of payments need con-tinue to be guaranteed that they can use SDRs to obtainforeign exchange from other participants designated bythe Fund, and SDRs may be used for payments to theFund, such as repurchases or the payment of chargeson indebtedness to the Fund.

• The "reconstitution" obligation, which requiresparticipants to maintain a minimum level of averageholdings of SDRs over time, has been reduced from30 per cent to 15 per cent of average allocations witheffect from January 1, 1979.

• The Fund has widened the circle of authorizedholders of SDRs beyond participants and the Fund'sGeneral Resources Account by prescribing certain offi-cial financial institutions as "other holders" of SDRs.These institutions have been authorized to deal inSDRs, by agreement with participants or other pre-scribed holders, with the same freedom as participantsamong themselves.

• The SDR has been adopted as a unit of account(or as the basis for a unit of account) for a number ofprivate contracts and international treaties, and by in-ternational and regional organizations. SDR-denom-inated currency deposits are being accepted in growingamounts by the Bank for International Settlementsand more than 30 commercial banks based in Europeancenters, North America, and Japan. In addition, therehave been eight SDR-denominated bond issues on theEurobond market for a total value of about SDR 263million over the period 1974-80, and recently the firstcertificates of deposit denominated in SDRs were issuedin London and Tokyo. One of the objectives of theFund's present review of the SDR valuation basket isto enhance the attractiveness of the SDR as a unit of

account for all such purposes, as well as to promotethe SDR as a reserve asset for official holders.

A summary of transfers of SDRs over the ten-yearperiod May 1, 1970-April 30, 1980 is presented inTable 28, which also contains memorandum itemsshowing the evolution in the numbers of Fund membersand participants in the Special Drawing Rights Depart-ment, the total of SDR allocations, and the Fund's hold-ings of SDRs in the General Resources Account. Alloca-tions and transfers of SDRs during the financial yearended April 30, 1980 are discussed below.

Allocations

On January 1, 1980, the Fund made an allocation ofSDR 4,033 million to the 139 members that were par-ticipants in the Fund's Special Drawing Rights Depart-ment on December 31, 1979, including two new partici-pants—St. Lucia, and St. Vincent and the Grenadines—that received allocations for the first time. The amountallocated to each participant was equal to 10.4 per centof the participant's quota in the Fund on December 31,1979. (See Appendix I, Table 1.15.)

The allocation in 1980 was made in accordance witha Board of Governors Resolution that provides for allo-cations of SDR 4 billion on January 1 each year in1979, 1980, and 1981.24 Taking into account the allo-cation of SDR 9.3 billion during the first three years(1970-72) and the subsequent allocations of SDR 8billion in 1979 and 1980, total allocations amount toSDR 17.3 billion at present and will exceed SDR 21billion after the allocation on January 1, 1981. As re-gards subsequent allocations, the Managing Director isrequired to make a proposal by June 30, 1981 (i.e., sixmonths before the end of the present period for alloca-tions), or report to the Board of Governors and theExecutive Board that there is no proposal for alloca-tions that he considers to be consistent with the Articlesof Agreement that has broad support among partici-pants.

Transactions and Operations in the SpecialDrawing Rights Department

Between Participants

Important changes have been made in recent yearsthat have progressively enlarged the scope for partici-pants to acquire and to use SDRs in voluntary, bilateraltransactions and operations by agreement with otherparticipants. Following the Second Amendment, with

23 France, the Federal Republic of Germany, Japan, theUnited Kingdom, and the United States.

24 Board of Governors Resolution No. 34-3, adopted Decem-ber 11, 1978. See Annual Report, 1979, pages 127-28.

91


ANNUAL REPORT, 1980

Table 28. Summary of Transfers of SDKs, May 1, 1970-April 30, 1980(In millions of SDKs)

Transfers by participants

To other participantsBy agreementWith designation

From holdingsFrom purchases of

SDKs from Fund

To the FundRepurchasesCharges (net)Quota paymentsAssessment and interest

on Fund's SDR holdings

Transfers by the Fund

To participantsPurchasesReconstitutionRemunerationFund borrowings

Interest and transfer chargesRepayments

Other

Total transfers

Memoranda1

SDR participantsFund membersTotal allocations of SDRsFund holdings of SDRs

Annual AverageMay 1, 1970-April 30, 1975

443

246

—689

19649—11

256

618512

——38

196

1,142


176

292

—468

440354—23

817

443404

10

8——

865

2,150

120128

9,315461

1977

317

116

3436

73709—24

806

25445

24

———

495

1,736

122130

9,315771

1978

927

54

3441,325

844801201

411,887

662474122

29—1

1,287

4,499

128134

9,3151,371

1979

1,533

74

1,0062,613

502715

19

591,295

1,10675

136

12388

1,375

5,283

137138

13,3471,290

1980

362

346

1,0251,733

994553

1

831,631

1,2835

140

2164

—1,513

4,877

140140

17,3811,407

1 Position at April 30 each year.

effect from April 1, 1978, SDRs can be freely trans-ferred by agreement in exchange for an equivalentamount of currency. Furthermore, under the amendedArticles, the Fund adopted a series of decisions25 dur-ing the period December 1978-March 1980 to permitadditional uses of SDRs, as follows:

(i) In swap arrangements, in which a participantwould transfer SDRs to another participant in exchangefor an equivalent amount of currency or another mone-tary asset, other than gold, with an agreement to reversethe exchange at a specified future date and at an ex-change rate agreed between the participants.

(ii) In forward operations, in which participants canbuy or sell SDRs for delivery at a future date against acurrency or another monetary asset, other than gold, atan exchange rate agreed by the participants.

25 Executive Board Decisions No. 6000-(79/l) S andNo. 6001-(79/l) S, adopted December 28, 1978, and No. 6053-(79/34) S and No. 6054-(79/34) S, adopted February 26,1979. See Annual Report, 1979, pages 130-34. Executive BoardDecision No. 6336-(79/178) S and No. 6337-(79/178) S,adopted November 28, 1979, and No. 6437-(80/37) S, adoptedMarch, 5, 1980 and reproduced in Appendix II.

(iii) In loans of SDRs at interest rates and maturitiesagreed between the parties. Repayment of loans andpayment of interest may be made with SDRs.

(iv) In the settlement of financial obligations.(v) As security for the performance of financial obli-

gations, in either of two ways: (a) participants maypledge SDRs, which can be earmarked for the durationof the pledge by being recorded in a special registerkept by the Fund; or (b) participants may agree thatSDRs will be transferred as security for the perform-ance of an obligation and that the SDRs will be re-turned to the transferor when its obligations under theagreement have been fulfilled.26

(vi) In donations (grants).The amounts used in these operations are left for the

parties to agree. However, in certain operations—thefirst part of a swap agreement, the use of SDRs for re-payment of a currency loan, or the settlement of a

26 SDRs pledged or transferred as security for the perform-ance of a financial obligation must be used to fulfill obligationsin SDRs to the Fund, if the pledger's SDR holdings would other-wise be insufficient.

92



financial obligation—the equal value principle must beobserved; that is, the exchange rates to be used must bethe same as the exchange rates that are calculated bythe Fund for spot transactions in SDKs.

All the decisions permitting additional uses of SDKsare to be reviewed by the Fund once each year. To date,there have been no transfers of SDRs in any of theoperations authorized by these decisions.

Transactions by Agreement

The amount of SDRs transferred by participants intransactions by agreement with other participantsamounted to SDR 362 million in the year endedApril 30, 1980. In the previous year such transferstotaled SDR 1,533 million, mainly as a result of thetransfer by the United States of SDR 1,100 million tothe Federal Republic of Germany and Japan in twotransactions to obtain deutsche mark and Japanese yenas part of a package of measures announced on No-vember 1, 1978 to strengthen the U.S. dollar.

Belgium transferred SDR 42.5 million to the FederalRepublic of Germany in May 1979 in exchange forBelgian francs, in a transaction to settle an obligationarising from intervention under the European Mone-tary System. The remaining transfers in 1979/80 weremade by Canada and the Federal Republic of Germanyunder arrangements with the Fund for sales of SDRsin bilateral transactions to other participants that wishedto acquire them. In all cases, these transactions werearranged at the initiative of the recipient, usually be-cause SDRs were needed to make payments to theFund, for example, in repurchases or charges, or be-cause SDRs needed to be acquired for reconstitution.Details of transactions by agreement in 1979/80 areshown in Table 29. Information concerning the curren-cies transferred in exchange for SDRs in transactions byagreement is presented in Appendix I, Table 1.18.

Transactions with Designation

Transactions with designation, in which participantswith a balance of payments need use SDRs to obtaincurrency from other participants designated by theFund, amounted to SDR 1,372 million in 1979/80,the largest amount in any financial year to date.

A total of 47 participants were designated to providecurrency; the largest amounts were provided by theUnited Kingdom (equivalent to SDR 355 million),Italy (SDR 154 million), France (SDR 144 million),Saudi Arabia (SDR 102 million), and India (SDR 101million). Details of transactions with designation in1979/80 are shown in Table 30.

Table 29. Use and Receipt of SDRs in Transactionsby Agreement, Financial Year Ended April 30, 1980(In millions of SDRs)

Participant Use Receipt

BelgiumBurmaCameroonCanadaEgypt

42.5

80.9

16.12.6

43

El SalvadorFijiGermany, Fed. Rep. ofGreeceGrenada

GuyanaIcelandIsraelJamaicaMadagascar

NicaraguaPanamaPapua New GuineaPeruPortugal

Sierra LeoneSudanTurkeyWestern SamoaZaire

Total

—238.4——

—

——

—

——

—361.8

0.80.5

42.514.80.4

0.65.0

88.03.11.1

1.92.05.0

124.63.0

0.214.528.00.32.6

361.8

As a participant designated by the Fund to providecurrency in such a transaction may also choose whichof the five freely usable currencies (the deutsche mark,French franc, Japanese yen, pound sterling, and U.S.dollar) it will provide, arrangements are in place forthe exchange of freely usable currencies when the cur-rency requested by the user of SDRs differs from thatprovided by the designated participant. Details of thecurrencies transferred against SDRs are presented inAppendix I, Table 1.18.

Transactions and Operations BetweenParticipants and the General ResourcesAccount

There are now several avenues by which SDRs flowinto the Fund's General Resources Account. Partici-pants may use SDRs freely to make repurchases; theyare required to use SDRs to pay charges on the useof the Fund's resources and may be required to doso in making subscription payments in connection withinitial quotas or quota increases. The Fund itself mayuse SDRs it receives to pay remuneration on creditorpositions, to make repayments of Fund borrowings,subject to the lender's agreement, or in transfers tomembers making purchases (see below).

The SDR holdings of the General Resources Ac-count have tended to increase over the past five years

93


ANNUAL REPORT, 1980

Table 30. Use and Receipt of SDRs in Transactions with Designation, Financial Year Ended April 30, 1980(In millions of SDRs)

Participant


BangladeshBeninBoliviaBrazilBurma

CanadaCentral African RepublicChileColombiaCongo

Costa RicaDenmarkDominicaDominican RepublicEcuador

El SalvadorEquatorial GuineaEthiopiaFinlandFrance

GabonGambia, TheGermany, Fed. Rep. ofGrenadaGuatemala

GuineaGuyanaHondurasIndiaIndonesia

IraqIrelandIsraelItalyIvory Coast

JamaicaJordanKoreaLiberiaLibyan Arab Jamahiriya

Use

130.0—

47.04.0

26.8

1LO

5.9

2.0

7.5

1.923.3

17.71.8

36.0

—7.51.6

0.6

3.06.1

—

—31.5

13.0

20.4

35.019.5

Receipt

2.72.0

36.0

7.0

—,

31.7

28.6

41.020.1

7.5u

L3

0.5

9.5143.8

8.5

1.3

0.5100 823.5

22.72.03.0

154.03.0

_1.62.0

18.0

Participant

LuxembourgMadagascarMalawiMalaysiaMalta

MauritiusMexicoNetherlandsNew ZealandNicaragua

NigeriaNorwayPakistanPapua New GuineaParaguay

PeruPhilippinesQatarSaudi ArabiaSenegal

Sierra LeoneSingaporeSpainSri LankaSudan

SwedenTanzaniaTrinidad and TobagoTunisiaTurkey

UgandaUnited Arab EmiratesUnited KingdomUruguayVenezuela

Western SamoaYemen Arab RepublicYugoslaviaZaireZambia

Total

Use

—11.319.0

——1.0

—25.148.5

10.0——

68.0149.0

—18.3

6.5

17.060.5

34.0

51.6

11.0

—

0.2

313.34.9

69.5

1,371.5

Receipt

0.6

——22.02.1

30.529.0

——4.07.3

1.80.3

L

—0.3101.9

—7.597.0

—14.0

7~!?1.0

—

33354.6

7.02.2

5.2

=1,371.5

because inflows, mainly from repurchases and charges,have exceeded outflows, even in those years when therewere substantial sales to members needing to acquireSDRs for reconstitution. (See Table 28.) As ofApril 30, 1980 these holdings amounted to SDR 1,407million, about 8 per cent of the total amount allocated.While it is necessary for the Fund to maintain adequateholdings of SDRs to be able to assist members to fulfilltheir obligations to the Fund and for certain other pur-poses, the need to hold SDRs for these purposes is notunlimited, and it has been considered preferable tochannel SDRs back to participants rather than to re-tain them in the General Resources Account. SinceMarch 1977, the Fund has transferred SDRs instead

of currencies to members using the Fund's resources,with the agreement of the transferees. Members receiv-ing SDRs in this way may retain them if they wish, butin most cases purchasing members use the SDRs im-mediately to obtain foreign exchange in a transactionwith designation.

Transfers of SDRs by the Fund in purchases haverisen in recent financial years to SDR 1,283 million inthe financial year just ended. (See Table 28.) Theamount of SDRs included in the quarterly operationalbudgets for use in purchases by members has varied upto 100 per cent of the total. Following a review of therole of SDRs in the General Resources Account duringthe financial year, it was agreed that the Fund's hold-

94



ings of SDRs should be maintained, if possible, withinthe range of SDR 750-1,000 million during the periodprior to the coming into effect of new quotas under theSeventh General Review.27 As 25 per cent of the in-creases in quota under the Seventh General Review ofQuotas is payable in SDRs, about SDR 5 billion is ex-pected to be received by the Fund when the quota in-creases become effective. At that time, the question ofthe use of SDRs by the General Resources Accountwill need to be re-examined.

Flows of SDRs through the General Resources Ac-count during the financial year 1979/80 are discussedbelow.

Inflows

Transfers to the General Resources Account totaledSDR 1,630 million in 1979/80, against SDR 1,295million in 1978/79. Repurchases, discharged at themember's option with SDRs rather than currenciesspecified by the Fund, amounted to SDR 994 million,including SDR 400 million used by the United King-dom. Other members using SDRs for repurchases in-cluded Peru (SDR 75 million), Mexico (SDR 71 mil-lion), Israel (SDR 69 million), Australia (SDR 62million), and India (SDR 60 million). More than 70per cent of the repurchases with SDRs were made dur-ing the last four months of the financial year after theallocation of SDRs on January 1, 1980.

Charges levied by the Fund on the use of its re-sources must be paid in SDRs, unless the member'sSDR holdings are insufficient. During 1979/80, allcharges that were due the Fund were paid in SDRs, al-though in a number of cases members found it neces-sary to acquire SDRs for this purpose because of thelow level of their holdings. The largest amounts ofcharges were paid by the United Kingdom (SDR 79million), Turkey (SDR 32 million), and Italy (SDR 27million).

In other payments to the Fund, Cape Verde, Djibouti,and Dominica used a total of SDR 0.7 million to paythe reserve asset portion of their initial subscriptions asnew members of the Fund. Interest received on theFund's holdings of SDRs in the General Resources Ac-count amounted to SDR 82 million, which was sub-stantially more than in previous years because of ahigher average rate of interest on SDR holdings. Theassessment, by which participants reimburse the Fund'sGeneral Resources Account for the expenses of con-ducting the Special Drawing Rights Department, wasSDR 1 million.

Outflows

As in the previous two years, the main avenue foroutflows of SDRs from the General Resources Accountwas in transfers to members making purchases. Thesetransfers amounted to SDR 1,283 million and ac-counted for 52.7 per cent of total purchases during theyear that were financed through the Fund's operationalbudgets.

In May 1979, the Fund paid remuneration on mem-bers' net creditor positions for the year 1978/79, in-cluding amounts in SDRs totaling SDR 140 million to50 members. The largest payments in SDRs were tothe Federal Republic of Germany (SDR 50 million),Japan (SDR 31 million), and the United States(SDR 23 million). Remuneration payments have beenhigher in the past three years because of greater net useof the Fund's resources and higher rates of remunera-tion.

The Fund used a total of SDR 65 million to pay in-terest and transfer charges on, or to discharge, its in-debtedness to lenders under the General Arrangementsto Borrow, the oil facility, and the supplementary fi-nancing facility. These payments, which are made inSDRs subject to the lender's agreement, have increasedin recent years as lenders have shown greater readinessto accept SDRs, as repurchasing members have usedmore SDRs (following the allocations in 1979 and1980), and as the Fund has sought to match thosereceipts by asking lenders if they will accept repaymentin SDRs.

Other Holders of SDRs

In April 1980, the Fund prescribed five institutionsas "other holders" of SDRs authorizing them to ac-quire, hold, and use SDRs on uniform terms and con-ditions. The five new holders are as follows: the An-dean Reserve Fund, Bogota; the East Caribbean Cur-rency Authority, St. Kitts; the International Fund forAgricultural Development, Rome; the Nordic Invest-ment Bank, Helsinki; and the Swiss National Bank,Zurich. The Bank for International Settlements, Basle,had earlier been prescribed as a holder.

The transactions and operations in which other hold-ers may deal in SDRs are regulated by a decision ofthe Fund taken in April 1980.28 "Other holders" arenot obligated to acquire or use SDRs, but the decisionpermits them to do so in bilateral transactions andoperations by agreement with any participant or otherprescribed holder, with the same degree of freedom as

"Executive Board Decision No. 6275-(79/158) G/S,adopted September 14, 1979 and reproduced in Appendix II.

28 Executive Board Decision No. 6467-(80/71) S, adoptedApril 14, 1980 and reproduced in Appendix II.

95


ANNUAL REPORT, 1980

participants have in such dealings among themselves.No general provision has been made for other holdersto deal in SDRs with the Fund's General ResourcesAccount, but the Swiss National Bank, which has bor-rowing agreements with the Fund, has been authorizedto accept SDRs in payment of interest on, or repay-ment of, the Fund's indebtedness to the Bank, in ac-cordance with the terms of the borrowing agreements.

Other holders do not receive allocations of SDRs, asthe Fund can make allocations only to particpants,and they are not required to assume those obligationsof participants that are based on allocations, such asthe reconstitution requirement. Assured use of SDRsthrough the designation process is also unavailable toother holders; by the same token, they are not re-quired to provide currency to participants using SDRsin this way. During the year 1979/80, there were notransfers of SDRs involving other holders.

Income, Expenses, and Reserves

For the year ended April 30, 1980 the Fund re-corded net income of SDR 3.1 million, compared withSDR 46.1 million in 1979. The income for the yearwas placed to the Special Reserve. On April 30, 1980the total of the General and Special Reserves of theFund was SDR 763.2 million.

The comparative details of the Fund's operationalincome and expenses are presented in Appendix VIIand administrative expenses in Appendix VI. A numberof factors affect the Fund's income position in any year,including the amounts and timing of purchases andrepurchases, the availability to the Fund of resourcesthat do not entail the payment of either interest or re-muneration, the amounts of its currency holdings onwhich the Fund receives income from charges or paysinterest and remuneration, and the, relationship be-tween the Fund's average cost of funds and its averagerate of charge actually received.

During the year, the Fund's schedules of charges re-mained unchanged. The average rate of charges (in-cluding charges for use of the oil facility and the sup-plementary financing facility) rose slightly, from 6.24per cent in the previous year to 6.34 per cent, mainlyas a result of the progression in the rates of chargeswith the time during which the balances on which theyare levied remained outstanding; it also partially re-flected the charges for use of the supplementary financ-ing facility, which are linked to market interest rates.The average rate of interest on the Fund's indebtednessincreased slightly in 1979/80 reflecting the higher costof borrowing under the supplementary financing facility.(See Table 31.) In contrast, the average SDR rate of

interest and the average rate of remuneration rose sig-nificantly in 1979/80, the former from 4.42 per cent to7.92 per cent and the latter, which was equal to 90 percent of the SDR interest rate, from 4.40 per cent to7.06 per cent. These increases were a result of highermarket rates of interest on which the SDR interest rateis based.

The relative movements in the rates of charges andin interest rates were a major factor affecting the finan-cial outcome for the financial year ended April 30,1980. The negative influence of the higher averagerate of remuneration on the Fund's income positionwas, however, moderated by a significantly larger re-duction in the amount of the average daily balances onwhich the Fund calculated remuneration and interestthan in the average daily balances of currency holdingsand SDRs on which the Fund earned income. Anotherpositive factor was the increased interest received onthe Fund's holdings of SDRs.

Consultations with Member Countries

Regular consultations with member countries havecontinued as a central part of the Fund's work. As dis-cussed in Chapter 2, regular Article IV consultationsare required for all members and constitute, inter alia,the centerpiece of the Fund's surveillance over the ex-change rate policies of individual member countries. Inaddition, these consultations enable the Fund to dealpromptly with requests for use of Fund resources andwith proposed changes in exchange practices subject toFund approval. There was no change, in the year underreview, in the basic procedure followed for regularconsultations. On the basis of the discussions with therepresentatives of the member country, the Fund staffprepares a report for consideration and discussion bythe Executive Board. Not later than three months afterthe termination of discussions between the member andthe staff, the Executive Board is to reach conclusionsand thereby complete the consultation under Article IV.In addition to any formal decision rendered by theBoard on any matters subject to Fund jurisdiction, anArticle IV consultation concludes with an informalsummation by the Managing Director expressing thesense of the meeting and indicating the conclusionsreached. These views are transmitted promptly to theauthorities of the member country by the Fund.

Article IV consultations are required, in principle, totake place annually. Similarly, members availing them-selves of the transitional arrangements under Arti-cle XIV are required to consult the Fund annually. Asin previous years, there was, in practice, some shortfallfrom the objective of annual consultations, owing partly

96



Table 31. Summary of Average Rates of Periodic Charges, Interest on SDR Holdings,Remuneration, and Interest on Borrowing, Financial Years Ended April 30, 1979 and 1980(Amounts in millions of SDKs)

1980 1979Including the oil facility and

supplementary financing facility

1980 1979Excluding the oil facility and

supplementary financing facility

Income from periodic chargesAverage daily balancesTotal charges for the periodAverage annual rate

Interest on SDR holdingsAverage daily balancesTotal interest for the periodAverage annual rate

Combined incomeAverage daily balancesTotal income for the periodAverage annual rate

Remuneration expenseAverage daily balancesTotal interest for the periodAverage annual rate

Interest on borrowingAverage daily balancesTotal interest for the periodAverage annual rate

Combined expenseAverage daily balancesTotal expense for the periodAverage annual rate

Excess of average daily income-earning balancesover average daily interest-costing balances

Margin between the combined average annual rate ofincome and the combined average rate of expense

Excess of periodic charges and interest onSDR holdings over remuneration and interest

8,192519.4

6.34

1,03381.8

7.92

9,225601.2

6.52

3,414241.0

7.06

4,163284.0

6.82

7,577525.0

6.93

+ 1,648

-0.41

+76.2

10,868678.1

6.24

1,29357.14.42

12,161735.2

6.05

3,903171.7

4.40

6,953458.1

6.59

10,856629.8

5.80

+ 1,305

+0.25

+ 105.4

4,804252.0

5.25

1,03381.87.92

5,837333.8

5.72

3,414241.0

7.06

11131.1

4.00

4,191272.1

6.49

+ 1,646

-0.77

+61.7

5,474275.9

5.04

1,29357.14.42

6,767333.0

4.92

3,903171.7

4.40

1,53970.74.59

5,442242.4

4.45

+ 1,325

+0.47

+90.6

to the constraints of staff resources and partly to thewish of some members to modify the scheduling of theconsultation. Thus, in 1979/80, the Fund completed94 regular Article IV consultations, of which 61 werewith countries availing themselves of the transitionalarrangements of Article XIV, and 33 with countriesthat had formally accepted the obligations of Arti-cle VIII. Of those consultations completed in 1979/80,33 had been initiated in the previous financial year,whereas 25 of those initiated in 1979/80 remainedoutstanding at the end of the year. During the financialyear, three member countries (Dominica, Finland, andSolomon Islands) formally accepted the obligations ofArticle VIII, Sections 2, 3, and 4. On April 30, 1980,the Fund had a total membership of 140 countries, ofwhich 50 had Article VIII status as listed in Appen-dix I, Table 1.14.

Regular consultations as described are supplementedby special consultations held in connection with theperiodic review of the World Economic Outlook bythe Executive Board. These special consultations areintended to provide up-to-date information on the eco-

nomic situation of countries whose external policies areregarded as being of major importance to the worldeconomy. In addition to regular consultations and spe-cial consultations, the Fund's practices include ad hocconsultations that the Managing Director may initiatein the circumstances set forth in the decision on pro-cedures relating to the Fund's surveillance over mem-bers' exchange rate policies.29

Training and Technical Assistance

The training and technical assistance provided bythe Fund during 1979/80 again took the form of train-ing at headquarters, staff missions, and the stationing ofstaff members and outside experts in member coun-tries—all complementary to the assistance made avail-able to members through the Fund's regular consulta-tion procedures under Article IV. In addition, theFund's area and functional departments have continued

29 Executive Board Decision No. 6026-(79/13), adoptedJanuary 22, 1979. See Annual Report, 1979, page 136.

97


ANNUAL REPORT, 1980

to provide, on request, technical assistance on a widerange of specific economic and financial problems con-fronting member countries. This assistance has con-tinued to be made available to member countries mainlyin the fields of fiscal, monetary, and balance of pay-ments policies, banking, exchange and trade systems,government finance, and statistics.

During the financial year, the IMF Institute con-ducted eight training courses, which were attended by233 officials of governments and central banks of mem-ber countries. Since its inception in 1964, Institutecourses have been attended by 2,613 officials from134 member countries.

The Institute's main course, on Financial Analysisand Policy, was conducted twice in English and onceeach in French and Spanish. The course, which runs for19 weeks in English and 21 weeks in French and Span-ish, presents an exposition of the Fund's proceduresand policies, examines the modern tools of economicanalysis and forecasting, and provides a thorough studyof the instruments of monetary, fiscal, and balance ofpayments policies that are used to achieve economic ob-jectives under changing national and international con-ditions.

The eight-week course on Balance of Payments Meth-odology was presented twice (in French and Spanish)in the financial year in collaboration with the Bureauof Statistics. It concentrates on the balance of paymentsconcepts and definitions used in the Fund and serves asa medium for assisting member countries in their effortsto improve their balance of payments statistics. Theten-week course on Public Finance was offered twice (inEnglish) in cooperation with the Fiscal Affairs Depart-ment. It covers the objectives, instruments, and pro-cedures of public finance with special emphasis on thefiscal problems of developing countries.

The IMF Institute also participated in the organiza-tion of three area department seminars for senior of-ficials from member countries, and continued to pro-vide teaching assistance to national and regional train-ing institutions.

The Central Banking Department continued to pro-vide, in response to requests by appropriate authorities,technical assistance related to the establishment, or-ganization, and operation of central banks and similarmonetary institutions both in the field—through theassignment of resident experts and staff missions—andfrom headquarters through advisory studies and rec-ommendations.

Experts, recruited mainly from outside the Fund,served, in executive or advisory positions in 55 centralmonetary institutions and provided about 74 man-years of technical assistance during the year. As inearlier years, most of these assignments were in special-

ized fields—research and statistics, bank supervision,banking and exchange operations and controls—but afew were at the top management level. In addition totheir specific duties, experts are generally required togive high priority to the training of their counterpartofficers and local staff.

Advisory assistance in the central banking field wasalso provided from headquarters through correspon-dence and through staff missions to requesting institu-tions. In addition to carrying out 27 advisory missionsduring the year, departmental staff participated in mis-sions by other Fund departments and other institutions,particularly the World Bank. Topics on which advicewas given during the past year include central bankingand financial system legislation (in cooperation withthe Legal Department), the organization and func-tioning of central monetary institutions, foreign ex-change policy and management, the structure of inter-est rates, and applications of computer technology tocentral banking operations.

The Fiscal Affairs Department has again providedtechnical assistance through staff missions, staff assign-ments in the field, and use of the services of members ofthe panel of fiscal experts. The principal fields in whichassistance was given were tax policy, tax and customsadministration, budget systems and procedures, ac-counting, auditing and financial reporting, and generalfinancial management. The number of countries utiliz-ing all forms of technical assistance was 40, comparedwith 35 in the previous financial year; 10 countries re-ceived assistance for the first time. Of the 58 individualfield assignments carried out in the financial year, 34were long-term assignments and 27 short-term assign-ments, while 292 man-months were spent in the field.Technical assistance work for the year was dividedamong 42 panel members and 21 staff members. Aspart of the ongoing review, members of the staff visiteda number of countries to inspect progress and to adviseon requests for further assistance. Another importantelement of technical assistance provided by the FiscalAffairs Department is the work of staff members atheadquarters in supporting and controlling the workof field experts.

Technical assistance in the statistical field has con-tinued to be provided by staff members of the Bureauof Statistics. Such assistance has included the improve-ment of existing central bank statistical bulletins, withan emphasis on financial and general statistics, and theestablishment of new bulletins, as well as assistance tomembers in the compilation of balance of payments andgovernment finance statistics in accordance with themethodologies of Fund manuals. The program of as-sistance has taken the form of lectures, discussions, andwork on data with national officials and technicians,

98



using concepts and classification standards for the as-sembly of data relevant to the analysis of monetary andpayments problems. The Bureau's assistance in thefields of balance of payments and government financestatistics has focused on applying to national sourcematerials the conceptual framework and classificationstandards given in the Fund's Balance of PaymentsManual and the Draft Manual on Government FinanceStatistics. This assistance has been supported by coursesin these areas of statistics given by the IMF Institute inWashington.

During the financial year, the Bureau's overall tech-nical assistance activities resulted in 40 visits to 34countries. In addition to cooperating in the presentationof the IMF Institute courses on the balance of payments,the Bureau responded to requests from 14 national andmultinational institutions for ad hoc training of officialsof central banks, ministries of finance, and other govern-ment agencies.

Relations with Other InternationalOrganizations

Cooperation with other international and regionalorganizations having related responsibilities or interestsis an essential part of the Fund's work. In addition tothe World Bank, with which it has a special relation-ship, the Fund has close ties with the United Nations(UN) and its relevant organs, the Organization forEconomic Cooperation and Development (OECD),the General Agreement on Tariffs and Trade (GATT),the Commission of the European Communities (CEC),the Bank for International Settlements (BIS), the Or-ganization of American States (OAS), especially itsInter-American Economic and Social Council and itsPermanent Executive Committee (CEPCIES), andregional financial institutions in Africa, Asia, LatinAmerica and the Caribbean, and the Middle East.

Continuous liaison with these organizations is pro-vided by exchange of information and pertinent docu-ments, direct contact by headquarters staff includingattendance at meetings, and the Fund's offices in Parisand Geneva. Most of the organizations were repre-sented at the Annual Meeting of the Fund's Board ofGovernors, held jointly with that of the World Bankand its affiliates, in Belgrade, Yugoslavia, in October1979. Several of them also were represented at meet-ings of the Interim Committee and of the DevelopmentCommittee, held in Belgrade just prior to the AnnualMeeting and in Hamburg, Germany, in April 1980.

The Managing Director made his annual address tothe UN Economic and Social Council (ECOSOC) onJuly 6, 1979 in Geneva. He also addressed the Fifth

Session of the UN Conference on Trade and Develop-ment (UNCTAD) held in Manila, Philippines. At theinvitation of the Chairman of the Preparatory Commit-tee of the UN General Assembly on the New Interna-tional Development Strategy, the Managing Directordelivered remarks to that body reviewing the status ofthe international economic environment and comment-ing on the dynamics of development relevant to the1980s. In addition, he spoke at the UN AdministrativeCommittee on Coordination (ACC) meeting on de-velopment strategy in the 1980s held in Vienna inApril 1980, and took part in other ACC meetings. Dur-ing the period under review the Managing Director alsoparticipated in the OECD Ministerial Meeting in Parison June 14, 1979, attended the monthly meeting of theBIS in July 1979, and addressed a Symposium onMonetary Theory and Policy in the African Contextorganized by the African Centre for Monetary Studieson January 21, 1980. He attended meetings of theMinisters of the UNCTAD Intergovernmental Group ofTwenty-Four on International Monetary Affairs andmeetings of the Group of Ten ministers and governorsof central banks occurring at the time of the Interimand Development Committee meetings, and was an ob-server at the meeting of the UNCTAD Group of 77 atthe level of Ministers held in Belgrade on September 29,1979.

The Fund's standing arrangements for collaborationwith the GATT with respect to its consultations withcommon members on trade restrictions imposed forbalance of payments reasons involved staff participa-tion in those consultations and the provision of perti-nent documents. Fund representatives also attended the35th session of the CONTRACTING PARTIES and meetingsof the Council of Representatives and subsidiary bodies.

Commodity problems are of particular interest to theFund in connection with its compensatory financing andbuffer stock facilities. Staff representatives participatedin meetings of the UNCTAD's Integrated Program forCommodities, including sessions of the Interim Com-mittee of the UN Negotiating Conference on a CommonFund and an interagency meeting for an informal ex-change of views on draft Articles of Agreement of theCommon Fund; meetings of the Food and AgricultureOrganization of the United Nations (FAO) Intergov-ernmental Groups on Meat and Grains, as well as apreparatory meeting for the Sixth Ministerial Meetingof the World Food Council; the UN Tin Conference tonegotiate a Sixth International Tin Agreement; theNinth (Special) Session of the Council of the Interna-tional Sugar Organization; and an International WheatCouncil meeting in preparation for the negotiating con-ference for a new Wheat Agreement.

99


ANNUAL REPORT, 1980

At the regional level the Fund was called upon dur-ing the year to provide technical assistance to the South-East Asian Central Bank's (SEACEN) Research andTraining Centre in the organization of a FinancialAnalysis and Policy Course and in the formulation andimplementation of a research project entitled "TheRelationship of Money and Credit to Economic Ac-tivity." In addition, the assignment of an expert to theCentral American Monetary Council as Advisor to theSpecial Program on National Accounts was extended.

Aid coordination and debt renegotiation are of vitalconcern to the Fund, as reflected in its continuing par-ticipation in meetings of consortia and consultative andaid groups sponsored by the World Bank, the OECD,and others. Fund staff participated in World Bank-sponsored meetings of the India and Pakistan Con-sortia, the Bangladesh, Nepal, and Sri Lanka AidGroups, and the Consultative Groups for Colombia,Egypt, Kenya, Korea, the Philippines, Sudan, andUganda, as well as the OECD-sponsored Turkey Con-sortium and the Netherlands-sponsored Inter-Govern-mental Group on Indonesia. Representatives of theFund also took part in meetings relating to the Carib-bean Group for Cooperation in Economic Develop-

ment, an aid group organized by the World Bank; theFifth Meeting of the OAS Joint Commission for theImplementation of External Cooperation with Haiti;and meetings on debt rescheduling for Sierra Leone,Sudan, Togo, and Zaire held under the aegis of theParis Club.

Executive Directors and Staff

A list of Executive Directors and their voting poweron April 30, 1980 is given in Appendix IV. The changesin membership of the Executive Board during 1979/80are shown in Appendix V.

In the year ended April 30, 1980, there were 122appointments to the Fund's regular staff and 84 separa-tions. At the end of the financial year, the staff num-bered 1,416 and was drawn from 90 countries.

Publications

The list of publications issued by the Fund during1979/80 is shown in Appendix I, Table 1.19.

100


Appendices

PageI. The Fund in 1979/80 105

List of Tables1.1. Exchange Rates and Exchange Arrangements, June 30, 1980 1061.2. Fund Stand-By Arrangements for Members, Financial Year

Ended April 30, 1980 1101.3. Summary of Members' Purchases and Repurchases, Financial

Years Ended April 30, 1948-80 Ill1.4. Summary of Stand-By Arrangements That Became Effective

During the Financial Years Ended April 30, 1953-80 Ill1.5. Purchases of Currencies and Special Drawing Rights from

the Fund, Financial Year Ended April 30, 1980 1121.6. Repurchases of Currencies from the Fund, Financial Year

Ended April 30, 1980 1141.7. Extended Fund Facility Arrangements for Members, July 7,

1975-April 30, 1980 1161.8. Status of General Arrangements to Borrow (GAB) on

April 30, 1980 1161.9. Borrowing in Connection with Purchases Under the Oil

Facility and Repayments to Lenders, September 4,1974-April 30, 1980 117

1.10. Borrowing in Connection with Purchases Under the Supple-mentary Financing Facility, May 29, 1979-April 30, 1980 117

1.11. Schedules of Fund Charges <f t18

1.12. Direct Distribution of Profits from Gold Sales, July 1,1976-July 31, 1980 119

1.13. Trust Fund Loan Disbursements, July 1, 1976-July 31, 1980 1211.14. Members That Have Accepted the Obligations of Article VIII,

April 30, 1980 1221.15. Allocation of Special Drawing Rights, January 1, 1980 1231.16. Transfers of Special Drawing Rights, January 1, 1970-April 30,

1980 1241.17. Summary of Transactions and Operations in Special Drawing

Rights, Financial Year Ended April 30, 1980 1251.18. Currencies Transferred for Special Drawing Rights,

January 1, 1970-April 30, 1980 1291.19. Publications Issued, Financial Year Ended April 30, 1980 130

101


APPENDICES

PageII. Principal Policy Decisions of the Executive Board 131A. Borrowing Arrangements in Connection with Supplementary

Financing Facility: Payment of Interest 131Procedure 131

B. Trust Fund: Second Period 132(a) Timing of Loan Disbursements 132(b) Extension of Period for Qualification 132(c) Extension of Second Period 132

C. Review of Rules for Designation and Method of CalculatingDesignation Amounts 132

Summary and Conclusions 133D. Use of Currencies and SDRs in the General Resources Account

and Principles and Procedures for Designation 134(a) Assessment of Strength of Member's Balance of Payments and

Gross Reserve Position for the Purposes of Designa-tion Plans, Operational Budgets and RepurchasesUnder Article V, Section l(b) 134

(b) Specification of Currencies by the Fund 135(c) Transfers of SDRs Under Article V, Section 3(/) 136

E. Compensatory Financing of Export Fluctuations: Revised Decision . . 136F. Guidelines on Performance Criteria with Respect to Foreign

Borrowing 138The Chairman's Summing up on External Debt Management Policies. . 138

G. General Arrangements to Borrow: Renewal and Modifications 139H. Guidelines on Payment of Reserve Assets in Connection with

Subscriptions 140Guidelines for Determining the Amount of Reserve Assets to Be

Paid in Connection with Subscriptions 140I. Special Drawing Rights: Additional Uses 141

(a) Use in Swap Operations 141(b) Use in Forward Operations 142(c) Use in Donations 143

J. Special Drawing Rights: Allocations to New Participants 143K. Special Drawing Rights: Other Holders 143L. Extended Fund Facility: Extension of Maximum Repurchase Period . . 145M. Procedures for the Sale of Currencies at the Request of Members

with Outstanding Purchases 145Procedures 145

N. Format of Stand-By and Extended Arrangements 148Annex B: Typical Stand-By Arrangement 148Annex C: Typical Extended Arrangement 150

III. Press Communiques of the Interim Committee and the DevelopmentCommittee 152

Interim Committee of the Board of Governors on the InternationalMonetary System 152

Press Communiques 152Thirteenth Meeting, Belgrade, October 1, 1979 152Fourteenth Meeting, Hamburg, April 25, 1980 154

Joint Ministerial Committee of the Boards of Governors of theBank and the Fund on the Transfer of Real Resourcesto Developing Countries (Development Committee) 158

Press Communiques 158

102


APPENDICES

PageTwelfth Meeting, Belgrade, September 30, 1979 158

Attachment: Outline for a Program of Action onInternational Monetary Reform 160

Thirteenth Meeting, Hamburg, April 24, 1980 165

IV. Executive Directors and Voting Power on April 30, 1980 168

V. Changes in Membership of Executive Board 171

VI. Administrative Budget 174

VII. Comparative Statement of Income and Expense 175

VIII. Financial Statements 176General Resources Account 176

Report of the External Audit Committee 176Balance Sheet 177Statement of Income and Expense 178Statement of Reserves 179Statement of Changes in Financial Position 180Notes to the Financial Statements 181

Special Drawing Rights Department 184Report of the External Audit Committee 184Balance Sheet 185Statement of Source and Use of Special Drawing Rights 186Notes to the Financial Statements 187

Subsidy Account 188Report of the External Audit Committee 188Statement of Financial Position 189Notes to the Financial Statement 190

Trust Fund 191Report of the External Audit Committee 191Balance Sheet 192Statement of Income and Expense 193Statement of Trust Resources 194Notes to the Financial Statements 195

Staff Retirement Fund 196Report of the External Audit Committee 196Balance Sheet 197Statement of Changes in Reserves 198Notes to the Financial Statements 199

103


Appendix IThe Fund in 1979/80

The tables in this appendix supplement the information given in Chapter 3 on theactivities of the Fund during the financial year ended April 30, 1980. In some tablesin this appendix, however, data covering longer periods are included, viz., Table I.Ion exchange rates and exchange arrangements, Table 1.11 setting out the charges onthe use of the Fund's resources, Table 1.12 on the distribution of profits from goldsales, and Table 1.13 on Trust Fund loan disbursements.

105


106 Table I.I. Exchange Rates and Exchange Arrangements, June 30,1980(Currency units per unit listed)

Exchange Rate Maintained Against

MemberAfghanistanAlgeria 5

ArgentinaAustraliaAustria

Bahamas 5

BahrainBangladesh 5

BarbadosBelgium 5

BeninBoliviaBotswanaBrazil 5Burma

BurundiCameroonCanadaCape VerdeCentral African Republic

ChadChileColombia 5

ComorosCongo

Costa RicaCyprusDenmarkDjiboutiDominica

Dominican Republic 5

Ecuador 5

Egypt 5

El SalvadorEquatorial Guinea 5

Ethiopia 5

FijiFinlandFranceGabon

Gambia, TheGermany, Federal

Republic ofGhana 5

CurrencyAfghanidinarpesodollarschilling

dollardinartakadollarfranc

francpesopulacruzeirokyat

francfrancdollarescudofranc

francpesopesofrancfranc

colonpoundkronefrancEast Caribbean

dollar

pesosucrepoundcolonekuele

birrdollarmarkkafrancfranc

dalasi

deutsche markcedi

U.S.dollar1

—————

1.00——2.00—

————

90.00————

39.00———

8.57——178.16

2.70

1.0025.000.702.50

—

2.07————

——

OtherPound French single

sterling 1 franc 1 currency l

— — —— — —— — —— . — —— — —

— —— — —— — —— — —— — —_ 50.00 —— — —— — —— — —— — —

— 50.00 —— — —— — —_ 50.00 —

__ 50.00 —

— — —— — —_ 50.00 —— 50.00 —

__

— __.

—— — —

— — —

—

— _ 2.00 7

, ,

— ____— 50.00 —

4.00 — —___

— ___ .

Other cur-Special Currency com- rencies in adrawing posite other cooperativeright l than SDR 2 arrangement *' 3

— — —— 3.7775 —— — —— — —— 12.493 —

— — —_ 14.6959 —— — —— — 28.12

— — —— 0.762887 —— — —8.50847 — —

—— 39.5257 —— — —_ _ _

— — —

— 0.346681 —— — 5.455

— — —

— — —— _ _— 0.806452 —— 3.63 —— — 4.087

— — 1.7582

ExchangeRates

OtherwiseDetermined 2> 4

44.50

—1,854.500.863856

—

0.377———

24.51—52.1156

6.42449_

1.151

—

47.32 6

—

—

—

—

2.75

>*0"0W2DHH

X

EWTl

zd

vo•̂ J\D\00o


Greece5

Grenada 5

GuatemalaGuineaGuinea-BissauGuyanaHaiti

HondurasIceland5

IndiaIndonesiaIran5

IraqIrelandIsraelItaly5

Ivory Coast

JamaicaJapanJordanKampuchea, Democratic 8

Kenya5

KoreaKuwaitLao People's Democratic

Republic5

LebanonLesotho 5

LiberiaLibyan Arab JamahiriyaLuxembourg 5

MadagascarMalawi

MalaysiaMaldives 5

MaliMaltaMauritania

Mauritius 5

MexicoMorocco 5

Nepal5

Netherlands

New ZealandNicaragua5

NigerNigeriaNorway

OmanPakistan 5

PanamaPapua New GuineaParaguay 5

drachmaEast Caribbean

dollar

quetzalsylipesodollargourde

lempirakronarupeerupiahrial

dinarpoundshekellirafranc

dollaryendinar

shilling

wondinar

new kippoundmaloti

dollardinarfrancfranckwacha

ringgitrupeefrancpoundouguiya

rupeepesodirhamrupeeguilder

dollarcordobafrancnairakrone

rial Omanirupeebalboakinaguarani

2.70

1.00

2.555.00

2.00

0.295314

1.78142

24.685344.00

92.3

50.00

0.469814

838.70

0.387

9.66

0.26701

10.00

1.000.29605

— 1.009

50.00

100.00

28.12

1.05407

10.00

12.00

10.00

0.34549.901.00

126.00

2.1438

0.33954745.87

3.7985

1.9275

50.00

4.8415

0.658848

43.21

18.639133.2231

476.557.76884

625.2569.693

49.68

217.600.292212

7.29398

603.00

3.408

0.795897

7.55

7.550722.9303

1.01122

0.569217

APPE

ND

IX I (continued).

TH

E FU

ND

IN

1979/80

107


108 Table I.I (concluded). Exchange Rates and Exchange Arrangements, June 30, 1980(Currency units per unit listed)

Exchange Rate Maintained Against

MemberPeru5

PhilippinesPortugalQatarRomania 5

RwandaSt. Lucia

St. Vincent

Sao Tome and PrincipeSaudi Arabia

SenegalSeychellesSierra LeoneSingaporeSolomon Islands

Somalia 5

South Africa6

SpainSri LankaSudan 5

SurinameSwaziland 6

SwedenSyrian Arab Republic *Tanzania

ThailandTogoTrinidad and TobagoTunisiaTurkey 5

UgandaUnited Arab EmiratesUnited KingdomUnited StatesUpper Volta

UruguayVenezuela 6

Viet Nam5

Western SamoaYemen Arab Republic

Yemen, People's Demo-cratic Republic of

Yugoslavia

Currencysolpesoescudoriyalleu

francEast Caribbean

dollarEast Caribbean

dollardobrariyal

francrupeeleonedollardollar

shillingrandpesetarupeepound

guilderlilangenikronapoundshilling

bahtfrancdollardinarlira

shillingdirhampounddollarfranc

new pesobolivardongtalarial

dinardinar

OtherU.S. Pound French single

dollar1 sterling1 franc1 currency1

___ L __

— — — —— — — —— — — __

12.00 — — ' —

92.84 — — —

2.70 — — —

2.70 — — —

— — — —— — — —— — 50.00 —— i . .

— —

— — — —6.2950 — — —

— — —— — — —— —0.50 — — —

1.785 — — —— — — LOO9

— — — —3.925 — — —

— — — —

_ __ 50.00 —2.40 — — —

— — — —— — ' — —

. -

— — — —— — — —— — — —— — 50.00 —

__ __ _ _

4.2925 — — —— — __— — — __

4.5625 — — —

0.345395 — — —

— — — —

Other cur-Special Currency com- rencies in adrawing posite other cooperativeright J than SDR 2 arrangement 2' 3

—— — —

— — —

45.25 — —

— — —

8.3197 — —1.36693 — —

— 2.117 —— 0.813424 —_ _ _

—— — —

—— — —

— 4.1503 —— — —— 8.18983 —

— 20.405 —— —

— 0.39838 —— — —

9.66 — ——

— —— — —— — —

-2.66358 — —

— — —

— — —

ExchangeRates

OtherwiseDetermined2'4

284.977.528

48.904 6

3.64—

34.16693.325

6.281961.00948

—_

0.76923170.06416.09

—

——

—

78.78

7.293983.7010.423371.00

—

9.003

2.011190.9042

—

27.4

>*0h3rnZoHH

X

Is*R

Ewhd

2D

vo-JVO


Zaire5

Zambiazairekwacha

3.809521.02426

2.876460.773391

1 Rates as notified to the Fund and in terms of currency units per unit listed.2 Market rates in currency units per U.S. dollar.3 Belgium, Denmark, France, the Federal Republic of Germany, Ireland, Italy,

Luxembourg, and the Netherlands are participating in the European Monetary Systemand maintain maximum margins of 2.25 per cent (in the case of the Italian lira,6 per cent) for exchange rates in transactions in the official markets between theircurrencies and those of the other countries in this group. No announced margins areobserved for other countries.

4 Under this heading are listed those members that describe their exchange ratearrangements variously as floating independently, adjusting according to a set of indi-cators (see footnote 6), and certain other members whose exchange arrangements are

not otherwise described in this table. In addition, U.S. dollar quotations are given forthe currencies that are pegged to the SDR. In this table, the data exclude the currencyof the People's Republic of China. No notification of exchange arrangements has yetbeen received from the Chinese authorities.

5 Member maintains multiple currency practices and/or dual exchange market. Adescription of the member's exchange system as of December 31, 1979 is given in theAnnual Report on Exchange Arrangements and Exchange Restrictions, 1980.

6 Exchange rates adjusted according to a set of indicators.7 Per Spanish peseta.8 Information not available.9 Per South African rand.

>TJ^3W

gX

aR

H

W*nZD

OVO

VO-Jvo\00O


APPENDIX I (continued). THE FUND IN 1979/80

Table 1.2. Fund Stand-By Arrangements for Members, Financial Year Ended April 30,1980(In millions of SDKs)

Member

BangladeshBoliviaBurmaCentral African

RepublicCongo

Costa RicaGabonGambia, TheGhanaGrenada

GuyanaKenya

KoreaLiberiaMalawi

MauritiusNicaraguaPanama

Peru

Philippines

PortugalRwandaSenegalSierra LeoneSomalia

ThailandTogoTurkey

UgandaUruguay

Western SamoaYugoslaviaZaireZambia

Total Numberof Stand-Bys

Approved Date offor Member Inception

3125

12

71253

112

13131

21113

19

15

15158

11

12

210

4643

JulyFeb.July

Feb.Apr.

Mar.MayNov.Jan.Nov.

Aug.Nov.Aug.Mar.Mar.Oct.

Oct.MayJuneMar.Apr.Nov.Sept.Aug.JuneFeb.

JuneOct.Mar.Nov.Feb.

JulyJuneApr.JulyJan.Mar.

Aug.MayAug.Apr.

30,1,

28,

15,25,

12,31,2,

10,6,

15,13,20,3,

21,31,

31,14,9,

23,18,18,15,10,11,27,

5,31,30,

2,27,

1,11,24,19,4,

16,

17,23,27,26,

197919801978

19801979

19801978197919791979

197819781979198019791979

1979197919781979198019771978197919791980

19781979197919791980

197819791978197919801979

1979197919791978

Date ofExpiration

JulyJan.July

Feb.Apr.

Mar.MayNov.Jan.Dec.

Aug.Nov.Aug.Mar.Mar.Dec.

Oct.Dec.JuneMar.Dec.Dec.Dec.Dec.Dec.Dec.

JuneOct.Mar.Nov.Feb.

JuneDec.Apr.JulyDec.Mar.

Aug.MayFeb.Apr.

29,31,27,

14,24,

11,30,

1,9,

31,

14,12,19,2,

20,31,

30,31,8,

22,31,31,31,31,31,31,

4,30,29,

1,26,

30,31,23,18,31,15,

16,22,26,25,

198019811979

19811980

19821979198019801980

1979 2

1979 3

1981198219801981

19811980 4

1979 5

198019811979 6

1980 8

198019791981

19791980198019801981

1979198019809

198019801980

1980198019811980

AmountApproved1978/79

30.00

4.00

15.00

53.00

6.2517.25

9.25

25.0030.00

(90.00) 7

184.00

57.35

10.50

45.25

(300.00) 7

21.00

( 250.00 ) 7

Amount NotPurchased atExpiration

—

2.00

7.50

21.00

6.25—

—

25.5025.0030.00

80.00120.00

13.75

57.35

210.00

21.00

—

AmountApproved1979/80

85.0066.38 1

4.00

60.50 l

1.60

0.65

122.48 l

640.00 *

26.34 1

73.03 J

34.00

66.38 l

285.00 1

105.00410.00 l

5.00

17.0011.50

15.00

250.00 l

12.50

0.7569.25

118.00

Amount NotPurchased

April 30, 1980

28.0040.00

—

45.12

——

122.48560.00

20.90

53.03

66.38

111.00

390.00

5.00

5.005.50

15.00

20.00

—

0.75

—98.00

Total 507.85 619.35 2,479.36 1,586.151 Amounts available under the supplementary financing facility are as follows: Bolivia, SDR 32.63 million; Costa Rica,

SDR 29.70 million; Kenya, SDR 70.73 million; Korea, SDR 480.00 million; Malawi, SDR 13.78 million; Mauritius, SDR 54.00 mil-lion; Panama, SDR 32.63 million; Peru, SDR 232.09 million; the Philippines, SDR 333.00 million; and Turkey, SDR 169.55 million.

2 Canceled as of June 24, 1979.3 Canceled as of August 19, 1979.4 Canceled as of August 20, 1979.5 Canceled as of March 22, 1979.6 Canceled as of September 14, 1978.7 Amounts approved in 1977/78; not included in total.8 Canceled as of August 9, 1979.9 Canceled as of July 18,1979.

110



Table 1.3. Summary of Members9 Purchases and Re-purchases, Financial Years Ended April 30, 1948-80(In millions of SDKs)

Year

19481949195019511952

19531954195519561957

19581959196019611962

19631964196519661967

19681969197019711972

19731974197519761977

197819791980

Total

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

1,175.431,057.725,102.456,591.424,910.33

2,503.013,719.582,433.26

51,119.201

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

540.30672.49518.08960.10868.19

4,485.014,859.183,775.83

32,335.71 2

Table 1.4. Summary of Stand-By Arrangements ThatBecame Effective During the Financial Years EndedApril 30,1953-80l


Year

Total

Number

454

Amount

19531954195519561957

19581959196019611962

19631964196519661967

19681969197019711972

19731974197519761977

197819791980

22229

1115141524

1919242425

3226231813

1315141819

181424

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

321.851,394.00389.75

1,188.024,679.64

1,285.09507.85

2,479.36

31,276.821 Includes renewals and extensions for one year or less, except

the renewals each six months of the stand-by arrangement forBelgium granted in June 1952 until that member purchased thefull amount of the equivalent of SDR 50 million in April 1957.

1 Includes purchases that are not subject to repurchase.2 Excludes sales of currency and adjustments that have the

effect of repurchase.

in


N>Table 1.5. Purchases of Currencies and Special Drawing Rights from the Fund, Financial Year Ended April 30,1980(In millions of SDKs)

Within Credit Tranches Under Decision onUnder stand-by arrangements Extended Fund facility

MemberPurchasing

AustraliaBangladeshBeninBoliviaBurma

BurundiCentral African

RepublicCongoCosta RicaDominica

Dominican RepublicEl SalvadorEthiopiaGabonGambia, The

GrenadaGuineaGuyanaHondurasIsrael

Ivory CoastJamaicaKenyaKoreaLiberia

MalawiMaliMauritaniaMauritiusNew Zealand

NicaraguaPakistanPanamaPeruPhilippines

SenegalSierra LeoneSomaliaSri LankaSudan

TanzaniaTurkeyUganda

WithinReserveTranche

—1.948.69

—

1.85—7.54

0.36

8.23———

——5.88

31.55

12.22——18.80—

—49.06

—6.00——

4.25—

——

——5.58

Ordinaryresources

57.00—15.57

7.50

4.002.00

10.25—

——7.50

1.60

0.65

————

——49.09—

3.07

—6.89

8.50

—51.5591.25

10.5012.006.00

—

71.3612.50

Supple- Supple-mentary mentaryfinancing Ordinary financingfacility Other l resources facility

—— — — —— — — —10.81 — — —— — — —

— — — —— — — —5.13 — — —— 0.95 — —

— 23.25 — —— — — —— — — —— — — —— — — —

— 2.97 — —— — 1.38 8.63_ _ 16.00 —— — — —

-— — 7.15 77.85— — —30.91 _ _ _ _ _— — — —

2.38 — — —

—13.11 _ _ _ _ __ _ _ _ _ _

— 21.22 — —— —142.45 — — —

20.00 — — —

— — —__ _ 40.00 —— 17.15 32.50 32.50

— 13.75 — —158.64 _ _ _ _ _

— — — —

Com-pensatoryfinancing

————

9.50

——20.50

0.95

27.50—36.00——

6.25——_

31.7569.00

—20.50

19.005.10

10.50

—

34.00

137.50

36.00

20.2571.6330.00

Bufferstock

23.76

————

————

—

——

0.73

—._

1.07

—__

—

0.58

—_

—

—

TotalPur-

chases

23.7657.00

1.9435.077.50

9.50

5.852.00

43.422.26

50.758.23

36.007.501.60

0.652.97

16.9821.8831.55

12.22117.8269.0098.8020.50

24.445.10

10.5020.0049.06

43.0821.226.00

194.00248.75

14.7512.006.00

40.00118.15

34.00301.6348.08

Purchases Financed withOrdinary resources

Curren-cies

23.766.001.94

15.57—

9.50

——30.75

0.36

27.508.233.00

—_

2.2521.88

12.2217.15

32.898.00

4.575.10

10.506.89

24.00

11.22

16.1559.75

4.504.10600

27.0017.00

77.3632.10

Specialdrawing

rights

51.00—8.69

7.50__

5.852.007.541.90

23.25

33.007.501.60

0.652.976.10

31.55

22.8269.0035.0012.50

17.50

25.06

43.0810.006.00

35.40169.00

10.257.90

13.0068.66

34.0065.6315.98

Supple-mentaryfinancingfacility

-

——10.81—_

——5.13—_

—_

8.63

—

77.85

30.91

2.38

13.11

142.4520.00

!~"32.50

158.64

>"dhfl

§ax

\o•^4VO


Yugoslavia 60.50 69.25 — — — — 277.00 — 406.75 68.50 338.25 —Zaire — 20.00 _ _ _ _ _ _ __ _ 20.00 12.00 8.00 —Zambia — 125.00 — — — -- — — 125.00 40.50 84.50 —

Total 222.46 643.04 383.42 79.29 97.03 118.98 862.93 26.14 2,433.26 648.23 1,282.63 502.391 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, Eighth Issue (Washington, 1976), pages 37-40.)

u>

>*Qh3tn

2x

o3

S"R

3.

EWhrj

ZD

^5vo\00o



Table 1.6. Repurchases of Currencies(In millions of SDKs)

from the Fund, Financial Year Ended April 30, 1980

Of WhichRepurchases in Respect of

MemberRepurchasing

AustraliaBangladeshBarbadosBurmaCameroon

Central African RepublicChadChileChina 1

Congo

Costa RicaCyprusDominican RepublicEgyptFinland

Gambia, TheGhanaGreeceGrenadaGuinea

GuyanaHaitiIcelandIndiaIsrael

ItalyIvory CoastJamaicaKenyaKorea

Lao People's Dem. Rep.LiberiaMadagascarMalawiMali

MauritaniaMexicoMoroccoNepalNew Zealand

NicaraguaPakistanPanamaPapua New GuineaPeru

PhilippinesPortugalRomaniaRwandaSenegal

SeychellesSierra LeoneSolomon IslandsSouth AfricaSpain

Sri LankaSudanTanzaniaTogoTurkey

UgandaUnited KingdomViet NamWestern SamoaYemen, People's Dem. Rep. of

Purchasesunder

oil facility

22.1——3.8

1.50.6

29.6

—2.83.9

—7.262.2

9.738.20.10.9

2.29.8

—35.8

642.7

—7.36.86.9

——0.80.92.2

1.4—3.4—59.7

59.06.2

13.2

34.626.1

——6.4

2.5

198.5

19.411.813.0

59.6

4.0250.0

0.15.5

Purchasesin the

tranches

47.0

—16.81.7

0.1

——30.02.0

, _

——16.0

—1.7

——0.61.8

5.6

—4.6

—20.1,

—7.0—9.0

—1.21.6——

71.921.00.5

13.0

2.026.03.02.5

37.2

—20.0

2.4

1.7

69.0—

4.13.5

.—

400.02.5

6.8

Other61.713.03.5

—8.8

0.91.6

79.094.1

1.0__

4.732.934.0

—2

—15.0

—__»

—4.678.725.0

__

2.3

—24.040.0

2.4

—__

—2.2_

123.70.8

50.5-

3.65.1

31.7

40.026.060.0

1.50.9

0.14.01.1

160.0

9.018.5

1.526.5

10.0

,

2.4

Total61.782.13.5

16.814.3

2.52.2

108.6124.1

3.0

2.88.6

32.957.262.2

1.89.7

53.20.72.6

5.62.2

19.078.780.9

642.72.3

14.330.855.9

2.41.22.40.94.5

1.4195.625.20.5

123.2

2.085.012.77.6

82.1

74.652.180.0

1.59.7

0.18.21.1

229.0198.5

32.433.713.0

1.586.1

14.0650.0

2.50.1

14.7

Advancerepurchases

————

——

—

———

—

—

—

—41.0

—

—

——

___

—_

—__

—

—

—

400.0

Repurchases inaccordance with

guidelines forearly repurchases

—- -—

—_

—._

—___

62.2__

,— _ _

—__

_^78.7

559.5

. ____

—_ _

__

—

r_ ___

—

______

—__.

—

198.5

—

__

114



Table 1.6 (concluded).(In millions of SDRs)

Repurchases of Currencies from the Fund, Financial Year Ended April 30, 1980

Repurchases in Respect of

MemberRepurchasing

YugoslaviaZaireZambia

Total

Purchasesunder

oil facility

50.217.36.8

1,746.5

Purchasesin the

tranches

30.27.6

891.7

Other

13.917.6

1,137.6

Total

50.261.432.0

3,775.8

Of Which

Advancerepurchases

—

441.0

Repurchases inaccordance with

guidelines forearly repurchases

—

898.91 Transactions were effected before April 17, 1980, when the Fund decided that the Government of the People's Republic of China

represents China in the Fund.2 Less than SDR 50,000.

115



Table 1.7. Extended Fund Facility Arrangements for Members, July 7, 1975-April 30,1980(In millions of SDRs)

Member

Approved in PreviousFinancial Years

EgyptHaitiJamaicaKenyaPhilippinesMexicoSri Lanka

Subtotal

Approved DuringFinancial Year 1979/80

GuyanaHondurasJamaicaSudan

Subtotal

Total

Date ofInception

7/28/7810/25/78

6/9/787/7/754/2/761/1/771/1/79

6/25/796/28/796/11/795/4/79

Date ofExpiration

7/27/8110/24/81

6/8/811

7/6/784/1/79

12/31/7912/31/82

6/24/826/27/816/10/815/3/82

TotalAmount of

Arrangement

600.0032.20

200.0067.20

217.00518.00260.30

1,894.70

62.75 3

47.60260.00 4

200.00 5

570.35

2,465.05

Amount NotPurchased atExpiration

130.00 l

59.50

51 8.00 2

707.50

707.50

Amount NotPurchased as of April 30, 1980

Subject tophasing

350.0021.40

90.00

461.40

15.00

45.00

60.00

521.40

Of totalamount approved

525.0032.20

180.30

737.50

52.7531.60

175.00135.00

394.35

1,131.851 Canceled as of June 10, 1979.2 Includes augmentation by repurchases equivalent to SDR 100 million.3 Of which, SDR 35 million is available under the supplementary financing facility.4 Of which, SDR 227.1 million is available under the supplementary financing facility.5 Of which, SDR 100.00 million is available under the supplementary financing facility.

Table 1.8. Status of General Arrangements to Borrow(GAB)1 on April 30,1980(In millions of SDR equivalents)

ParticipantsMaximum Amounts

of Credit ArrangementsFund

Indebtedness

BelgiumCanadaDeutsche BundesbankFranceItaly

JapanNetherlandsSveriges RiksbankUnited KingdomUnited States

Total

199.3140.6

1,714.9498.9313.3

1,098.7281.1

94.7625.1

1,544.7

6,511.3

L

—582.9

——

194.3

————

777.31 See the Balance Sheet of the General Department—General

Resources Account as at April 30, 1980, Note 5, reproduced inAppendix VIII.

116



Table 1.9. Borrowing in Connection with Purchases Under the Oil Facility and Repayments to Lenders,September 4,1974-April 30,1980


Lender

Abu DhabiAustrian National BankNational Bank of BelgiumCanadaDeutsche Bundesbank

Central Bank of IranCentral Bank of KuwaitNetherlandsNigeriaBank of Norway

Central Bank of OmanSaudi Arabian Monetary AgencySveriges RiksbankSwiss National BankSwitzerland

Central Bank of Trinidad and TobagoCentral Bank of Venezuela

AmountBorrowed

100.00100.00200.00246.93600.00

990.00685.00350.00300.00100.00

20.502,250.00

50.00100.00150.00

10.00650.00

Amount Repaid upto April 30, 1979

46.6828.5418.70

151.59223.16

465.93203.79151.9850.4525.29

10.24878.40

0.859.78

30.57

0.20349.60

Amount RepaidMay 1, 1979-April 30, 1980

18.778.45

49.5688.69

103.23

298.20202.73

85.4475.0513.07

3.00615.54

9.8323.2132.40

2.71152.99

Balance Outstandingon April 30, 1980

34.5763.01

131.746.64

273.60

225.87278.49112.59174.5061.64

7.26756.06

39.3167.0187.03

7.09147.42

Total 6,902.43 2,645.75 1,782.86 2,473.82

Table 1.10. Borrowing in Connection with Purchases Under the SupplementaryFinancing Facility, May 29,1979-April 30,1980(In millions of SDKs)

Lender

Abu DhabiAustrian National BankNational Bank of BelgiumCanadaDeutsche Bundesbank

Central Bank of GuatemalaJapanCentral Bank of KuwaitNetherlands BankCentral Bank of Nigeria

Saudi Arabian Monetary AgencySwiss National BankUnited StatesCentral Bank of Venezuela

Total

Total Amountof Agreement

150.0050.00

150.00200.00

1,050.00

30.00900.00400.00100.00220.00

1,934.00650.00

1,450.00500.00

7,784.00

AmountBorrowed

12.41

12.3412.6889.35

79.6323.135.81

13.28

163.7745.00

45.00

502.39 J

BalanceAvailable

on April 30, 1980

137.5950.00

137.66187.32960.65

30.00820.38376.8894.19

206.72

1,770.23605.00

1,450.00455.00

7,281.611 Out of total of SDR 1,810.21 million committed under stand-by (SDR 1,448.11 million) and

extended (SDR 362.10 million) arrangements in effect on April 30, 1980.

117



Table 1.11. Schedules of Fund Charges

CHARGES ON TRANSACTIONS EFFECTED FROM JULY 1, 1974Charges in per cent per annum 1 payable on holdings in ex-cess of quota and holdings representing transactions effectedunder compensatory financing and buffer stock financing, forperiod stated:

CHARGES ON TRANSACTIONS EFFECTED UNDER THE EX-TENDED FUND FACILITY

Charges in per cent per annum l payable on holdings inexcess of quota, for period stated:

Service charge

Up to 1 year1 to 2 years2 to 3 years3 to 4 years4 to 5 years

0.5

4.3754.8755.3755.8756.375

Service charge

Up to 1 year1 to 2 years2 to 3 years3 to 4 years4 to 5 years5 to 10 years

0.5

4.3754.8755.3755.8756.3756.875

CHARGES ON TRANSACTIONS EFFECTED UNDER THE OILFACILITY FOR 1974Charges in per cent per annum 1 payable on holdings forperiod stated:

CHARGES ON TRANSACTIONS EFFECTED UNDER THE OILFACILITY FOR 1975Charges in per cent per annum l payable on holdings forperiod stated:

Service charge 0.5 Service charge 0.5

Up to 1 year1 to 2 years2 to 3 years3 to 4 years4 to 5 years5 to 6 years6 to 7 years

6.8756.8756.8757.0007.1257.1257.125

Up to 1 year1 to 2 years2 to 3 years3 to 4 years4 to 5 years5 to 6 years6 to 7 years

7.6257.6257.6257.7507.8757.8757.875

CHARGES ON TRANSACTIONS EFFECTED FROM MAY 1, 1963 ANDUP TO JUNE 30, 1974

Charges in per cent per annum 1 for period stated and for portionof holdings in excess of quota by (per cent)

More thanBut not more than

050

50100

100

Service charge 0.5 0.5 0.5

0 to 3 months 0.03 to 6 months 2.0l/2 to 1 year 2.01 to ll/2 years 2.0ll/2 to 2 years 2.52 to 2l/2 years 3.02l/2 to 3 years 3.53 to 3 1/2 years 4.03l/2 to 4 years 4.54to4l/2 years 5.0

CHARGES ON TRANSACTIONS FINANCED WITH FUND BORROW-ING UNDER THE SUPPLEMENTARY FINANCING FACILITY

Charges in per cent per annum l payable on holdings forperiod stated:

Service charge 0.5

Up to 3l/2 years Rate of interest paidby the Fund plus 0.20per cent

3 1/2 to 7 years Rate of interest paidby the Fund plus 0.325per cent

0.0 0.02.0 2.02.0 2.52.5 3.03.0 3.53.5 4.04.0 4.54.5 5.05.0

CHARGES ON TRANSACTIONS EFFECTD IN EXCESS OF 200PER CENT OF MEMBERS' QUOTAS UNDER STAND-BY ARRANGE-MENTS OR IN EXCESS OF 140 PER CENT OF QUOTAS UNDERTHE EXTENDED FUND FACILITY

Charges in per cent per annum 1 payable on holdings forperiod stated:

Service charge 0.5

Each six months Average yield to constant five-yearmaturity of U.S. Government se-curities, rounded to next 0.25 percent, plus 0.25 per cent

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

118



Table 1.12. Direct Distribution of Profits from Gold Sales, July 1, 1976-JuIy 31,1980(In U.S. dollars)

Member

AfghanistanAlgeriaArgentinaBahamasBahrain

BangladeshBarbadosBeninBoliviaBotswana

BrazilBurmaBurundiCameroonCentral African Republic

ChadChileColombiaCongoCosta Rica

CyprusDominican RepublicEcuadorEgyptEl Salvador

Equatorial GuineaEthiopiaFijiGabonGambia, The

GhanaGrenadaGuatemalaGuineaGuyana

HaitiHondurasIndiaIndonesiaIran

IraqIvory CoastJamaicaJordanKampuchea, Democratic

KenyaKoreaKuwaitLao People's Democratic RepublicLebanon

LesothoLiberiaLibyan Arab JamahiriyaMadagascarMalawi

MalaysiaMaliMaltaMauritaniaMauritius

MexicoMoroccoNepalNicaraguaNiger

July 1, 1976-April 30, 1980

3,469,40512,156,57541,141,129

1,857,634928,817

11,692,1671,229,3171,229,3173,469,405

464,409

41,141,1295,600,2201,775,6803,278,1781,229,317

1,229,31714,779,11814,669,8451,229,3173,004,996

2,431,3154,015,7683,086,951

17,592,8873,278,178

737,5902,513,2701,229,3171,393,226

655,636

8,140,808191,227

3,360,1322,240,0881,857,634

1,775,6802,349,361

87,909,79724,313,15117,948,023

10,189,6694,862,6304,944,5852,158,1342,349,361

4,480,1767,485,1726,091,9471,229,317

846,863

464,4092,704,4972,240,0882,431,3151,393,226

17,401,6602,048,8611,502,4981,229,3172,048,861

34,612,09210,572,1231,147,3622,513,2701,229,317

July 31, 1980

2,423,9508,493,371

28,743,8571,297,863

648,932

8,168,905858,880858,880

2,423,950324,465

28,743,8573,912,6761,240,6042,290,347

858,880

858,88010,325,64810,249,303

858,8802,099,485

1,698,6742,805,6752,156,743

12,291,5292,290,347

515,3281,755,932

858,880973,397458,069

5,687,695133,604

2,347,6061,565,0711,297,863

1,240,6041,641,415

61,419,47516,986,74112,539,650

7,119,1623,397,3483,454,6071,507,8111,641,415

3,130,1415,229,6264,256,228

858,880591,673

324,4651,889,5361,565,0711,698,674

973,397

12,157,9261,431,4671,049,743

858,8801,431,467

24,182,2497,386,369

801,6221,755,932

858,880

Total

5,893,35520,649,94669,884,9863,155,4971,577,749

19,861,0722,088,1972,088,1975,893,355

788,874

69,884,9869,512,8963,016,2845,568,5252,088,197

2,088,19725,104,76624,919,1482,088,1975,104,481

4,129,9896,821,4435,243,694

29,884,4165,568,525

1,252,9184,269,2022,088,1972,366,6231,113,705

13,828,503324,831

5,707,7383,805,1593,155,497

3,016,2843,990,776

149,329,27241,299,89230,487,673

17,308,8318,259,9788,399,1923,665,9453,990,776

7,610,31712,714,79810,348,1752,088,1971,438,536

788,8744,594,0333,805,1594,129,9892,366,623

29,559,5863,480,3282,552,2412,088,1973,480,328

58,794,34117,958,4921,948,9844,269,2022,088,197

119



Table 1.12 (concluded). Direct Distribution of Profits from Gold Sales,July 1,1976-July 31,1980(In U.S. dollars)

Member

NigeriaOmanPakistanPanamaPapua New Guinea

ParaguayPeruPhilippinesPortugalQatar

RomaniaRwandaSaudi ArabiaSenegalSierra Leone

SingaporeSomaliaSri LankaSudanSwaziland

Syrian Arab RepublicTanzaniaThailandTogoTrinidad and Tobago

TunisiaTurkeyUgandaUnited Arab EmiratesUpper Volta

UruguayVenezuelaViet NamWestern SamoaYeman Arab Republic

Yemen, People's Dem. Rep. ofYugoslaviaZaireZambia

Total

July 1, 1976-April 30, 1980

12,620,984655,636

21,963,7903,360,1321,857,634

1,775,68011,500,94014,505,93610,954,5771,857,634

17,756,7961,775,680

12,539,0303,168,9052,349,361

3,469,4051,775,6809,151,5796,720,264

737,590

4,671,4033,933,813

12,539,0301,393,2265,900,720

4,480,17614,123,4823,742,5861,393,2261,229,317

6,447,08330,869,5065,791,447

191,227928,817

2,704,49719,368,56610,572,1237,102,718

758,652,277

July 31, 1980

8,817,836458,069

15,345,3262,347,6061,297,863

1,240,6048,035,301

10,134,7867,653,5771,297,863

12,406,0461,240,6048,760,5772,214,0021,641,415

2,423,9501,240,6046,393,8864,695,212

515,328

3,263,7452,748,4178,760,577

973,3974,122,625

3,130,1419,867,5792,614,813

973,397858,880

4,504,34921,567,4354,046,280

133,604648,932

1,889,53613,532,1347,386,3694,962,419

530,043,564

Total

21,438,8201,113,705

37,309,1165,707,7383,155,497

3,016,28419,536,24124,640,72218,608,1543,155,497

30,162,8423,016,284

21,299,6075,382,9073,990,776

5,893,3553,016,284

15,545,46511,415,4761,252,918

7,935,1486,682,230

21,299,6072,366,623

10,023,345

7,610,31723,991,061

6,357,3992,366,6232,088,197

10,951,43252,436,9419,837,727

324,8311,577,749

4,594,03332,900,70017,958,49212,065,137

1,288,695,841

120



Table 1.13. Trust Fund Loan Disbursements, July 1(In millions of SDKs)

Member

BangladeshBeninBoliviaBurmaBurundi

CameroonCentral African RepublicChadCongoEgypt

El SalvadorEquatorial GuineaEthiopiaGambia, TheGhana

GrenadaGuineaHaitiHondurasIvory Coast

KenyaLao People's Democratic RepublicLesothoLiberiaMadagascar

MalawiMaliMauritaniaMauritiusMorocco

NepalNigerPakistanPapua New GuineaPhilippines

RwandaSenegalSierra LeoneSomaliaSri Lanka

SudanSwazilandTanzaniaThailandTogo

UgandaUpper VoltaViet NamWestern SamoaYemen, People's Democratic Republic of

Zai'reZambia

Total

FirstPeriod 1

51.8095.388

15.33624.8687.875

14.5075.3885.3885.388

77.921.._

11.1912.901

—

0.8299.9477.875

,21.553

19.8955.3882.072

12.02010.776

6.2179.1185.3889.118

46.836

5.8035.388

97.4018.289

64.244

14.09210.362

40.618

29.842

17.40855.540

6.217

5.38825.697

0.82912.020

46.836—

840.968

., 1976-July 31, 1980

SecondPeriod 2

69.8757.267

20.68333.54010.621

19.5657.267

—7.267105.092

19.5654.472

15.0933.913

48.633

1.11813.41610.62113.97529.068

26.8327.2672.795

16.21114.534

8.38512.2987.267

63.167

7.8267.267

131.36511.18086.645

10.62119.00613.97510.62154.782

40.2484.472

23.47874.906

8.385

22.3607.267

1.11816.211

63.16742.484

1,257.191

Total

121.68412.65536.01958.40818.496

34.07212.6555.388

12.655183.013

19.5654.472

26.2846.814

48.633

1.94723.36318.49613.97550.621

46.72712.6554.867

28.23125.310

14.60221.41612.6559.118

110.003

13.62912.655

228.76619.469

150.889

10.62133.09824.33710.62195.400

70.0904.472

40.886130.44614.602

22.36012.65525.697

1.94728.231

110.00342.484

2,098.1591 Ended June 30, 1978.2 Ending December 31, 1980.

121



Table 1.14. Members That Have Accepted the Obliga-tions of Article VIII, April 30, 1980

MemberEffective Dateof Acceptance

ArgentinaAustraliaAustriaBahamasBahrain

BelgiumBoliviaCanadaChileCosta Rica

DenmarkDominicaDominican RepublicEcuadorEl Salvador

FijiFinlandFranceGermany, Fed. Rep. ofGuatemala

GuyanaHaitiHondurasIrelandItaly

JamaicalapanKuwaitLuxembourgMalaysia

MexicoNetherlandsNicaraguaNorwayOman

PanamaPapua New GuineaPeruQatar-Saudi Arabia

SeychellesSingaporeSolomon IslandsSouth AfricaSuriname

SwedenUnited Arab EmiratesUnited KingdomUnited StatesVenezuela

May 14, 1968July 1, 1965August 1, 1962December 5, 1973March 20, 1973

February 15, 1961June 5, 1967March 25, 1952July 27, 1977February 1, 1965

May 1, 1967December 13, 1979August 1, 1953August 31, 1970November 6, 1946

August 4, 1972September 25, 1979February 15, 1961February 15, 1961January 27, 1947

December 27, 1966December 22, 1953July 1, 1950February 15, 1961February 15, 1961

February 22, 1963April 1, 1964April 5, 1963February 15, 1961November 11, 1968

November 12, 1946February 15, 1961July 20, 1964May 11, 1967June 19, 1974

November 26, 1946December 4, 1975February 15, 1961June 4, 1973March 22, 1961

January 3, 1978November 9, 1968July 24, 1979September 15, 1973June 29, 1978

February 15, 1961February 13, 1974February 15, 1961December 10, 1946July 1, 1976

122



Table 1.15. Allocation of Special Drawing Rights, JanuaryParticipant

AfghanistanAlgeriaArgentinaAustraliaAustriaBahamasBahrainBangladeshBarbadosBelgiumBeninBoliviaBotswanaBrazilBurmaBurundiCameroonCanadaCape VerdeCentral African RepublicChadChileChina, People's Republic ofColombiaComorosCongoCosta RicaCyprusDenmarkDjiboutiDominicaDominican RepublicEcuadorEgyptEl SalvadorEquatorial GuineaEthiopiaFijiFinlandFranceGabonGambia, TheGermany, Fed. Rep. ofGhanaGreeceGrenadaGuatemalaGuineaGuinea-BissauGuyanaHaitiHondurasIcelandIndiaIndonesiaIranIraqIrelandIsraelItalyIvory CoastJamaicaJapanJordanKampuchea, Democratic

KenyaKoreaLao People's Democratic RepublicLebanonLesotho

SDRs

4,680,00029,640,00055,640,00082,160,00034,320,000

3,432,0002,080,000

15,808,0001,768,000

92,560,0001,664,0004,680,000

936,00069,160,0007,592,0002,392,0004,680,000

141,128,000208,000

1,664,0001,664,000

22,568,00057,200,00020,072,000

239,2001,768,0004,264,0003,536,000

32,240,000395,200197,600

5,720,0007,280,000

23,712,0004,472,0001,040,0003,744,0001,872,000

27,248,000199,576,000

3,120,000936,000

224,224,00011,024,00019,240,000

312,0005,304,0003,120,000

405,6002,600,0002,392,0003,536,0003,016,000

119,080,00049,920,000

68,640,00014,664,00016,120,00021,320,000

128,960,0007,904,0007,696,000

172,536,0003,120,0002,600,000

7,176,00016,640,000

1,664,0001,248,000

728,000

1, 1980Participant

LiberiaLibyan Arab JamahiriyaLuxembourgMadagascarMalawiMalaysiaMaldivesMaliMaltaMauritaniaMauritiusMexicoMoroccoNepalNetherlandsNew ZealandNicaraguaNigerNigeriaNorwayOmanPakistanPanamaPapua New GuineaParaguayPeruPhilippinesPortugalQatarRomaniaRwandaSt. LuciaSt. VincentSao Tome and PrincipeSaudi ArabiaSenegalSeychellesSierra LeoneSingaporeSolomon IslandsSomaliaSouth AfricaSpainSri LankaSudanSurinameSwazilandSwedenSyrian Arab RepublicTanzaniaThailandTogoTrinidad and TobagoTunisiaTurkeyUgandaUnited Arab EmiratesUnited KingdomUnited StatesUpper VoltaUruguayVenezuelaViet NamWestern SamoaYemen Arab RepublicYemen, People's Democratic Republic ofYugoslaviaZaireZambia

Total

SDRs

3,848,00019,240,0003,224,0003,536,0001,976,000

26,312,00093,600

2,808,0002,080,0001,768,0002,808,000

55,640,00015,600,0001,976,000

98,592,00024,128,0003,536,0001,664,000

37,440,00030,680,0002,080,000

29,640,0004,680,0003,120,0002,392,000

17,056,00021,840,00017,888,0004,160,000

25,480,0002,392,000

374,400176,800208,000

62,400,0004,368,000

135,2003,224,0005,096,000

218,4002,392,000

44,096,00057,928,00012,376,0009,152,0002,600,0001,248,000

46,800,0006,552,0005,720,000

18,824,0001,976,0008,528,0006,552,000

20,800,0005,200,000

12,480,000304,200,000874,120,000

1,664,0008,736,000

68,640,0009,360,000

312,0001,352,0004,264,000

28,808,00015,808,00014,664,000

4,033,276,000

123



Table 1.16. Transfers of Special Drawing Rights, January 1, 1970-April 30, 1980(In millions of SDKs)

Jan. 1, 1970-Apr. 30, 1970

Transfers betweenparticipants

Transactions byagreement 20

Transactions withdesignation

From holdings 155From purchases

of SDKs from Fund —175

General ResourcesAccount

Transfers fromparticipants

Repurchases (net) 183Charges (net) 29Quota payments —Assessments 1Interest received on

General ResourcesAccount holdings —

213

Transfers to participantsPurchases —Reconstitution l —Replenishment of

Fund's holdings ofcurrencies —

Remuneration —Distribution of

net income —Restoration of

participants'holdings of SDRs 2 —

Interest, transfercharges onFund borrowings —

Repayments of Fundborrowings —

Other —

—Total transfers 388General Resources

Account holdings atend of period 213


1971

286

348

—633

35766—1

4429

——

12318

9

—

I 3

1511,213

490

1972

380

267

—

647

50130

—1

7540

—46

2115

8

29

—120

1,307

910

1973

303

117

—420

6830

—1

10108

292107

—2

-___

—401929

617

1974

996

60

—

1,056

2929—

1

867

7157

—20

—

—

1851,308

499

1975

249

440

—

688

2492—1

21138

4117

—6

—

—

127953

510

1976

176

292

—

468

440354—2

21817

443404

—10

8

—

8652,150

461

1977

317

116

3436

73709—1

23805

25445

—24

—

4951,736

771

1978

927

54

3441,325

844801201

1

401,887

662474

122

29

—1,2874,499

1,371

1979

1,533

74

1,0062,613

502715

192

571,295

1,10675

136

12

3884

1,3755,283

1,290

1980

362

346

1,0251,733

994553

11

821,630

1,283

140

21

64

1,5134,877

1,407

TotalJan. 1, 1970-Apr. 30, 1980

5,549

2,283

2,36410,196

4,0153,407

22112

2747,928

3,8221,832

145494

17

29

71

1029

6,52124,644

1,4071 Including amounts acquired as part of purchases.2 To offset the effect of failure to fulfill the requirement of balance of payments need when using SDRs in transactions with

designation.3 To enable participants to pay assessments and net charges in the Special Drawing Rights Department.4 Transfers to enable participants to pay charges in the General Resources Account.

124


Table 1.17. Summary of Transactions and Operations in Special Drawing Rights, Financial Year Ended April 30,1980(In thousands of SDKs)

I—AtoLft

Transactions and Operations Positions at April 30, 1980With other participants

Received

Holders 1

PARTICIPANTS 2


BahamasBahrainBangladeshBarbadosBelgium

BeninBoliviaBotswanaBrazilBurma

BurundiCameroonCanadaCape VerdeCentral African Republic

ChadChileChina, People's Rep. ofColombiaComoros

CongoCosta RicaCyprusDenmarkDjibouti

DominicaDominican RepublicEcuadorEgyptEl Salvador

Equatorial GuineaEthiopiaFijiFinlandFrance

GabonGambia, TheGermany, Fed. Rep. of

Holdings onApril 30, 1979

10,72576,265

224,199171,867145,229

3,4322,165

13,1274,173

516,065

6,10718,6352,503

271,7157,237

5,3705,302

504,606208

2,370

2,09816,83057,19361,968

239

1,6435,908

14,342133,870

395

1989,402

17,85717,34312,706

2,4553,7653,088

88,748540,402

7,608927

1,640,953

Allocation asof Jan. 1, 1980

4,68029,64055,64082,16034,320

3,4322,080

15,8081,768

92,560

1,6644,680

93669,160

7,592

2,3924,680

141,128208

1,664

1,66422,56857,20020,072

239

1,7684,2643,536

32,240395

1985,7207,280

23,7124,472

1,0403,7441,872

27,248199,576

3,120936

224,224

Throughdesignation

2,6952,000

36,000—

7,000

—

——

——

——31,650

—

—28,557

——

40,950—20,050—

——7,500—

—1,300

—500

——9,467

143,785

8,500

By agreement

—————

—————

———

16,100

2,560———

————

————

——4,300

800

—500——

42,494

With the GeneralResources Account

Used

———130,000—

—47,000

—42,494

4,00026,813

——

11,000

—80,866—

5,854

——

——

2,0007,540

———

1,89023,250

——17,678

1,80036,000

—

——

7,5001,600

238,428

Received

1731

27,516

—51,143—

5,875

8,759—

1,4557,519

———

5,864

——1,412

—

2,0057,603

—196—

1,90023,250

1——

33,012——

4,268

7,5191,604

53,944

Used

——

75,071—

—10,6231,308

—

997

19,921

15110,770

—200

1,877

2,49835,190

———

6033,8308,840

—315

2158,692

—24,808

—

661323

7,430—

592315—

Interest,Charges, andAssessment

(Net)

-363530

2,685-19,697

3,554

6-466-76

13,879

-63-1,055

5,516-1,994

-287-1,277-2,492

-15-367

-393-4,391

-7-180

—

-391-864-1901,833-22

-13-1,083

34-6,961

-736

-241-230-10-41

-4,356

-52-201

66,149

Holdings

17,737108,436319,255

29,261197,620

6,8634,252

21,9894,557

585,885

3,7083,2093,439

379,4965,533

7,324495

590,933201

1,800

87140,768

114,386103,322

478

2,4225,5408,848

175,639454

1115,347

26,47213,586

64

1,4533,6305,127

117,994883,674

10,1031,352

1,797,836

Netcumulativeallocations

22,11399,570

263,800389,965145,385

6,8644,160

31,6166,305

394,466

7,77722,113

3,441290,84036,028

11,35119,873

640,876416

7,693

7,77799,790

114,40094,585

478

7,98519,54415,970

147,244790

39525,97525,789

112,66820,599

4,7927,4885,122

115,966884,132

11,0314,203

990,848

Holdings asper centof net

cumulativeallocations

80.2108.9121.0

7.5135.9

100.0102.269.572.3

148.5

47.714.599.9

130.515.4

64.52.5

92.248.323.4

11.240.9

100.0109.2100.0

30.328.355.4

119.357.4

44.720.6

102.612.10.3

30.348.5

100.1101.799.9

91.632.2

181.4

AP

PE

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IX I (continued).

TH

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UN

D IN

1979/80


toO\ Table 1.17 (continued).

(In thousands of SDKs)

Summary of Transactions and Operations in Special Drawing Rights, Financial Year Ended April 30,1980

Transactions and OperationsWith other participants

ReceivedHoldings on

Holders 1 April 30, 1979

PARTICIPANTS 2

GhanaGreece

GrenadaGuatemalaGuineaGuinea-BissauGuyana

HaitiHondurasIcelandIndiaIndonesia

IranIraqIrelandIsraelItaly

Ivory CoastJamaicaJapanJordanKampuchea, Democratic

KenyaKoreaLao People's Democratic RepublicLebanonLesotho

LiberiaLibyan Arab JamahiriyaLuxembourgMadagascarMalawi

MalaysiaMaldivesMaliMaltaMauritania

MauritiusMexicoMoroccoNepalNetherlands

18,72122,133

7116,892

1,109118

6,927

5,9227,2241,414

369,124112,483

166,19368,14267,62016,278

361,909

14,9261,959

1,245,88810,4581,904

16,98732,797

1,9851,2481,089

6,85119,23810,81610,5505,082

71,01494

1,7237,9342,030

1,462139,72224,619

2,017357,206

Allocation asof Jan. 1, 1980

11,02419,240

3125,3043,120

4062,600

2,3923,5363,016

119,08049,920

68,64014,66416,12021,320

128,960

7,9047,696

172,5363,1202,600

7,17616,640

1,6641,248

728

3,84819,2403,2243,5361,976

26,31294

2,8082,0801,768

2,80855,64015,600

1,97698,592

Throughdesignation

—

1,300———

500—

100,75023,500

22,6522,0003,000

154,002

3,000——1,625—

2,000———

18,000579——

22,000——2,100—

30,500——29,000

By agreement

14,764

392———550

——5,000

——

——88,000—

3,123

———

————,

——1,080

—

————

————

With the GeneralResources Account

Used

—

600—

2,967—

6,100

————

——

31,553—

13,00020,350

———

35,000———

19,500——11,250

19,000

———

1,000————

Received

—

653169

2,967

6,125

40——

202

1,07138

1,31331,553

—

23,03339,044

——

69,00035,320

———

12,5001

191—

17,519

325——

389—

91—

——26,213

Used

5,85948,474

585—

1,23237

7,817

541120

5,72759,900

—

—

—96,09926,619

13,121

——

8,66819,8822,546

——

544——

3,0641,083

—587—

1,093

1,30777,98613,586

900—

Interest,Charges, andAssessment

(Net)

-2,033-5,199

-2475

-889-24

-456

-268-349-805

-6,031-990

2,8783,5441,213

-4,990-1,057

-606-2,10157,499

20-726

3,231-1,456

-434—

-95

-552921

75-691-259

-107—-710

181-384

-765-2,501-3,005

-1924,458

Positions at April 30, 1980

Holdings

21,8532,464

21823,739

2,109463

1,829

7,50510,8312,899

523,023185,115

238,782109,04088,26527,508

617,196

12,224239

1,514,96615,2243,778

87,72630,419

6692,4961,722

2,60357,40014,886

1614,234

119,544187

3,23412,6852,321

1,289145,37523,6282,900

515,469

Holdings asper cent

Net of netcumulative cumulativeallocations allocations

52,17184,674

62422,47614,544

81111,980

11,35115,58913,451

564,380189,996

199,17652,54571,45385,450

575,920

30,07633,065

722,47213,82713,717

29,95255,510

7,7772,4963,025

17,23338,48013,79315,8029,037

113,242187

13,1589,2487,985

12,990235,45070,389

6,167433,644

41.92.9

34.9105.6

14.557.015.3

66.169.521.692.797.4

119.9207.5123.532.2

107.2

40.60.7

209.7110.127.5

292.954.8

8.6100.056.9

15.1149.2107.9

1.046.9

105.6100.024.6

137.229.1

9.961.733.647.0

118.9

vPE

ND

IX I

(con

tinue

d). T

HE

FU

ND

IN 1

979/

80


New ZealandNicaraguaNigerNigeriaNorway

OmanPakistanPanamaPapua New GuineaParaguay

PeruPhilippinesPortugalQatarRomania

RwandaSao Tome and PrincipeSaudi ArabiaSenegalSeychelles

Sierra LeoneSingaporeSolomon IslandsSomaliaSouth Africa

SpainSri LankaSt. LuciaSt. VincentSudan

SurinameSwazilandSwedenSyrian Arab RepublicTanzania

ThailandTogoTrinidad and TobagoTunisiaTurkey

UgandaUnited Arab EmiratesUnited KingdomUnited StatesUpper Volta

UruguayVenezuelaViet NamWestern SamoaYemen Arab Republic

Yemen, People's Dem. Rep. ofYugoslavia

38,1347,6276,041

105,204130,003

2,82151,121

5,5063,3059,034

8,26226,6017,2264,159

11,786

4,590208

62,39213,226

135

8905,095

666,373

36,144

158,75432,330

——70

2,6002,125

164,01612,0326,961

43,4996,334

28,18414,514

86

8,52112,478

753,4332,044,813

6,085

20,465254,981

14,27952

4,610

6,34437,909

24,1283,5361,664

37,44030,680

2,08029,6404,6803,1202,392

17,05621,84017,8884,160

25,480

2,392208

62,4004,368

135

3,2245,096

2182,392

44,096

57,92812,376

374177

9,152

2,6001,248

46,8006,5525,720

18,8241,9768,5286,552

20,800

5,20012,480

304,200874,120

1,664

8,73668,6409,360

3121,352

4,26428,808

———4,000

7,250

——1,800

300

——300—

101,943——

7,500

—

97,000——

—

—14,000——

—7,5001,000

—

3,485354,603

——

6,9702,200

5,200

—

—1,942———

—2,0005,000

—124,580

—3,000——

——

223

—

——

14,510

__

———_

27,970

—

—

—253

—

25,05748,500

———

10,000

——

68,000149,000

———

18,253—

6,485—

—

17,000—

60,517

_

—34,000

_

—

51,625

10,979

—_—

200—

313,252

25,05743,153

—7,5849,290

10,0006,000

—74

36,108169,206

———

22,98410,279

—

7,930145

15—

1,29813,100

—

68,776

_34

1,331—

34,000

——

166,819

16,010428

23,275—

13,914

159

338,837

33,9783,498

———

29,14412,2678,487

—

96,27736,29312,516

—14,792

13

—2,399

50

4,156—3065

12,229

18,23013,345

—10,351

——18

8,460

8,69538—1,188

33,577

15,785—

479,144——

—2,744

195—

3,16132,982

-6,290-970

-62,0982,605

-5,943-1,117

-17123

-391-4,227-1,361

6-1,837

-345—

5,830-462

-3

-887430-14

-205-8,330

1,385-1,847

—

-2,251

-1421,526-912

-1,358

-748-60155

-516-5,836

-983169

-37,444-86,783

-3

-6426,579

-1,309-45304

-816-4,221

21,9943,2907,699

156,326179,828

4,90145,6744,8014,566

11,823

21,33828,12814,2388,625

20,638

6,625416

255,5496,760

217

73918,266

2418,511

59,680

298,13525,614

374177

19,389

5,1993,265

227,67417,6542,863

52,8818,212

44,36720,36424,637

1,98329,041

895,6492,855,425

7,746

35,529346,314

19,586177

11,625

6,63155,099

117,65816,0157,777

120,435137,680

4,902140,91921,732

6,24011,351

74,59195,17535,776

8,32050,960

11,351416

124,80020,178

270

14,29310,192

43711,351

177,112

241,99158,730

374177

43,216

5,2005,208

200,62530,13825,762

66,1909,037

37,86727,81791,907

24,29624,960

1,614,7204,042,220

7,777

41,409249,570

38,478836

4,834

18,401126,907

18.720.599.0

129.8130.6

100.032.422.173.2

104.2

28.629.639.8

103.740.5

58.4100.0204.8

33.580.2

5.2179.255.275.033.7

123.243.6

100.0100.044.9

100.062.7

113.558.611.1

79.990.9

117.273.226.8

8.2116.455.570.699.6

85.8138.850.921.2

240.5

36.043.4

AP

PE

ND

IX I (continued). T

HE

FU

ND

IN

1979/80

i-̂to•̂ 3


1— ̂^ Table 1.17 (concluded). Summary of

(In thousands of SDRs)

PARTICIPANTS

ZaireZambia

3,4719,638

Total Participants 12,057,65 1

GENERAL RESOURCES ACCOUNT 1,289,909

Total 13,347,560

Transactions and Operations in Special Drawing Rights,

15,80814,664

4,033,276

4,033,276

—

1,371,515

1,371,515

2,647

361,788

361,788

4,90069,500

1,733,303

1,733,303

13,22684,813

1,517,184

1,551,459

3,068,643

Financial Year Ended April 30, 1980

21,14523,599

1,551,459

1,517,184

3,068,6431 Six official financial institutions have been prescribed by the Fund as "other holders" of SDRs, viz., the Andean Reserve

East Caribbean Currency Authority, the International Fund for Agricultural Development, the Nordic Investment Bank, andof these institutions held SDRs.

2 Kuwait became a participant on April 7, 1980, but held no SDRs at April 30, 1980.

-4,532-2,987

-82,813

82,813

—

Fund, thethe Swiss

4,57513,028

15,973,839

1,406,997

17,380,836

70,805 6.553,916 24.2

17,380,836

17,380,836

Bank for International Settlements, theNational Bank. At April 30, 1980 none

AP

PE

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IX I (continued).

TH

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UN

D IN

1979



Table 1.18. Currencies Transferred for Special Drawing Rights, January 1,(In millions of SDRs)

Jan,Apr

Transactions with designationBelgian francs

Provided directlyto participants

Deutsche markExchanged for U.S. dollars

French francsProvided directly

to participantsExchanged for deutche markExchanged for pounds sterlingExchanged for U.S. dollars

Italian lireProvided directly

to participants

Mexican pesosExchanged for U.S. dollars

Pounds sterlingProvided directly

to participantsExchanged for French francsExchanged for U.S. dollars

U.S. dollarsProvided directly

to participantsExchanged for deutsche markExchanged for French francsExchanged for Japanese yenExchanged for pounds sterling

Total

Transactions by agreementAustralian dollarsBelgian francsDanish kronerDeutsche markFrench francsJapanese yenNetherlands guildersPounds sterlingU.S. dollars

Total

, 1, 1970--. 30, 1970

1.0

—

———

—

—

—

————

148.9—5.1——

154.0

155.0

———

———20.0—

20.0

1970- April 30, 1980


1971

—

—

3.5—8.0

14.0

25.5

4.0

—

27.46.7

45.8

79.9

227.1—3.6—7.5

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

———

——11.7

291.8—

303.5

1974

—

3.0

———

—

—

—

——3.0

3.0

54.1————

54.1

60.1

—37.05.0

100.5588.5

—264.9——

995.9

1975

—

2.0

——

104.0

104.0

—

1.0

——1.0

1.0

321.1—

——11.5

332.6

440.6

—56.563.3

123.5——5.2——

248.5

1976

—

—

——

80.5

80.5

—

—

——4.0

4.0

207.2————

207.2

291.7

—67.9—30.4

78.3—

———

176.6

1977

—

2.0

19.0—

—16.0

35.0

—

—

1.5—

19.3

20.8

61.0

———

61.0

118.8

—165.9

—29.42.7—

—119.0

317.1

1978

—

10.0

——5.0

5.0

—

—

———

—

383.1————

383.1

398.1

1.0

110.5

—

815.9

927.4

1979

—

—

25.512.6

—75.0

113.2

—

—

41.2——

41.2

881.837.5

6.3—

925.6

1,079.9

740.5

500.0

292.5

1,533.0

1980

—

—

25.6

—121.1

146.8

—

—

2.6——

2.6

1,042.1155.025.0

—

1,222.1

1,371.5

42.5

55.1

264.2

361.8

TotalJan. 1, 1970-Apr.30,1980

1.0

17.0

96.012.68.0

436.5

553.1

4.0

1.0

188.98.0

131.9

328.8

3,490.1192.533.76.3

19.0

3,741.6

4,646.6

1.0369.9

68.21,189.8

669.6500.0281.8336.8

2,132.1

5,549.3

129


APPENDIX I (concluded). THE FUND IN 1979/80

Table 1.19. Publications Issued, Financial Year Ended April 30,1980

Reports and Other Documents

Annual Report of the Executive Board for the Financial YearEnded April 30, 1979(English, French, German, and Spanish). Free

Annual Report on Exchange Arrangements and Exchange Re-strictions, 1979One copy free; additional copies US$5.00 each (US$7.00 witheffect from June 1, 1980).

By-Laws, Rules and RegulationsThirty-Sixth Issue (English, French, and Spanish). Free

Summary Proceedings of the Thirty-Fourth Annual Meeting ofthe Board of Governors Free

Subscription Publications

Balance of Payments YearbookVol. 31. Annual, 11 monthly booklets, and supplement.US$20.00 a year (US$26.00 with effect from June 1, 1980).US$8.00 (US$10.00) to university libraries, faculty members,and students.

Direction of TradeMonthly, with Yearbook.US$16.00 a year (US$21.00 with effect from June 1, 1980).US$6.00 (US$8.00) to university libraries, faculty members,and students.

International Financial StatisticsMonthly, with Yearbook (English, French, and Spanish).U.S.$40.00 a year (US$52.00 with effect from June 1, 1980).US$16.00 (US$21.00) to university libraries, faculty members,and students.

Staff PapersFour times a year. US$7.00 a year (US$9.00 with effectfrom June 1, 1980). US$3.00 (US$4.00) to universitylibraries, faculty members, and students.

University libraries, faculty members, and students mayobtain the four publications listed above at the reduced rateof US$26.00 for all four publications (US$40.00 with effectfrom June 1, 1980).

Government Finance Statistics YearbookVol. Ill, 1979. (Introduction and titles of lines in English,French, and Spanish). US$10.00 a year (US$13.00 witheffect from June 1, 1980). US$4.00 (US$5.00) to universitylibraries, faculty members, and students.

For users of Fund publications that have access to a com-puter, tape subscriptions to the Balance of Payments Year-book, Direction of Trade, Government Finance StatisticsYearbook, and International Financial Statistics are availableat US$1,000.00 a year each. This price includes the bookversion. The price to universities is US$400.00 a year foreach publication.

Pamphlet Series

No. 21 International Capital Movements Under the Law of theInternational Monetary FundBy Joseph Gold (Spanish). Free

No. 22 Floating Currencies, SDRs, and Gold: Further LegalDevelopmentsBy Joseph Gold (French). Free

No. 23 Use, Conversion, and Exchange of Currency Under theSecond Amendment of the Fund's ArticlesBy Joseph Gold (French and Spanish). Free

No. 24 The Rise in ProtectionismBy Trade and Payments Division (French and Spanish). Free

No. 25 The Second Amendment of the Fund's Articles ofAgreementBy Joseph Gold (French and Spanish). Free

No. 26 SDRs, Gold, and Currencies: Third Survey of New LegalDevelopmentsBy Joseph Gold (French). Free

No. 27 Financial Assistance by the International MonetaryFund: Law and Practice (Second Edition)By Joseph Gold (English). Free

No. 28 Thoughts on an International Monetary Fund BasedFully on the SDRBy J. J. Polak (French and Spanish). Free

No. 29 Macroeconomic Accounts: An OverviewBy Poul H0st-Madsen (English). Free

No. 30 Technical Assistance Services of the International Mone-tary Fund(English, French, and Spanish). Free

No. 31 ConditionallyBy Joseph Gold (English). Free

Other

Finance and DevelopmentIssued jointly with IBRD; quarterly (English, Arabic, French,German, and Spanish. A selection of articles is published annu-ally in Portuguese). Free

IMF SurveyTwice monthly but only once in December (English, French,and Spanish). Private firms and individuals are charged fordelivery at the annual rate of US$10.00 (US$15.00 with effectfrom January 1, 1981).

130


Appendix IIPrincipal Policy Decisions ofthe Executive Board

A. Borrowing Arrangements in Connection with Supplementary Financing Facility:Payment of Interest

The Managing Director shall make arrangements for consultations with lendersin order to agree with them on the means of payment of interest under the borrow-ing agreements concluded in accordance with Executive Board Decision No. 5509-(77/127),1 adopted August 29, 1977. Payments of interest shall be made in accord-ance with the procedure set forth [below]. Executive Directors shall be informedpromptly of the interest paid and the assets used.

Decision No. 6163-(79/96)June 21,1979

Procedure

Paragraph 6 of each of the borrowing agreements in connection with the supple-mentary financing facility provides that the Fund shall consult the lender in order toagree on the means with which interest will be paid. If agreement is not reached theFund has the option to pay with the means indicated in the individual borrowingagreements. Interest payments shall be made promptly after June 30 and Decem-ber 31 of each year on the average daily balances which were outstanding duringthe preceding six months and which the Fund is obliged to repay; the first paymentswill be made at the beginning of July 1979.

This paper deals with the procedure that is to be followed when consulting withlenders regarding the means that would be offered by the Fund for the payment ofinterest.

The rate of interest on amounts of outstanding claims under the supplementaryfinancing facility for a period of six months is the average of the daily yields duringthese six months on actively traded U.S. Government securities, determined on thebasis of a constant maturity of five years, as published by the Federal ReserveBoard, Washington, D.C. This average rate is rounded up to the nearest Va of1 per cent.

In accordance with the policy guiding the selection of means for the payment ofinterest on borrowings for the financing of transactions under the oil facility, whichwas approved by the Executive Board, the lender has been offered its own currency,if the Fund's holdings of this currency were sufficient for this purpose, one or morecurrencies from the operational budget or SDKs, or a combination of these means.2

. . . the means most generally used in the payment of interest on borrowing by theFund has been the U.S. dollar. Although U.S. dollars were not included for use inpayments by the Fund in the last three operational budgets, the Executive Directorsagreed, for the convenience of lenders, to the use of this currency in the payment of

ASee Annual Report, 1978,page 115.

2 Executive Board DecisionNo. 4490-(74/140), adoptedNovember 6, 1974. See AnnualReport, 1975, page 92.

131


APPENDIX II (continued). PRINCIPAL POLICY DECISIONS

interest on borrowings. It seems reasonable to follow the same procedures regardingthe payment of interest under the supplementary financing facility.

It is proposed that the Managing Director be instructed to make arrangements,as necessary, for consultations with lenders in order to agree on the means for thepayment of interest and to effect these payments in accordance with this procedure.Executive Directors would be informed promptly of the interest payments madeand the means used.

B. Trust Fund: Second Period

(a) Timing of Loan Disbursements

The timing of the loan disbursements in the remainder of the Trust's secondtwo-year period (July 1, 1978-June 30, 1980) shall be in accordance with theschedule [below].

Decision No. 6201^(79/121) TRJuly 23,1979

[. . . the interim disbursements be made hereafter at quarterly intervals instead of half-yearly . ..The more frequent disbursements would add to the existing half-yearly schedule two otherinterim disbursements, one at the end of October 1979 and the other at the end of April 1980.]

(b) Extension of Period for Qualification

In Section II, Paragraph 3(c) (ii), of the Trust Fund Instrument, the word "pre-dominantly" is changed to "partly" and ". . . November 30, 1979" is changed to"...May 1,1980."

Decision No. 6202-(79/121) TRJuly 23,1979

(c) Extension of Second Period

1. The date "December 31, 1980" shall be substituted for the date "June 30,1980"in

(i) Decision No. 5069-(76/72),3 paragraph 2, May 5, 1976, and(ii) the Instrument to Establish the Trust Fund, annexed to Decision

No. 5069-(76/72), Section II, paragraph 1.2. The date "November 1, 1980" shall be substituted for the date "May 1, 1980"

in paragraph 3(c) (ii) of the Instrument referred to in l(ii) above, as amended byDecision No. 6202-(79/121) TR,4 July 23, 1979.

3. Loan disbursements in the remainder of the Trust's second period shall be madeas follows: interim disbursements at end-April and end-July 1980, and the finaldisbursement in January 1981.

Decision No. 6466-(80/68) TRApril 9,1980

C. Review of Rules for Designation and Method of Calculating DesignationAmounts

The Executive Directors approve the summary and conclusions set out [below]on the understanding that if during the first year after a participant receives anallocation for the first time, designation would bring the participant close to the

132

3 Selected Decisions of theInternational Monetary Fundand Selected Documents, EighthIssue (Washington, 1976),pages 185-86.

4 See above.



acceptance limit, the staff will take steps to moderate the rate at which the limit isapproached.

Decision No. 6209-(79/124) SJuly 24,1979

Summary and Conclusions

1. The designation system has a key role in guaranteeing the usability of the SDR.However, provided that the SDR is regarded as an attractive reserve asset, partici-pants may make less use of their SDR holdings in transactions with designation andmay rely more on transactions and operations by agreement between participants,as well as payments to the Fund. The volume of transactions with designation wouldthen depend mainly on the extent to which the Fund transfers SDRs to purchasingmembers that use the SDRs to obtain foreign exchange in transactions withdesignation.

2. The general structure of the more important provisions relating to designationis as follows:

(a) The major principles of designation are contained in Article XIX, Section 5.A participant whose balance of payments and gross reserve position is sufficientlystrong shall be subject to designation; and the Fund shall designate these participants"in such manner as will promote over time a balanced distribution of holdings ofspecial drawing rights among them." These principles can be supplemented by otherprinciples that the Fund may adopt at any time.

(b) To promote a balanced distribution of SDR holdings, the Fund implementsthe rules for designation in Schedule F. These rules embody the so-called "excessholdings" principle, which aims to promote over time equality in participants'"excess holdings ratios", i.e., their holdings of SDRs in excess of their net cumula-tive allocations as a proportion of their gold and foreign exchange holdings. Therules for designation can be reviewed at any time and changed, if necessary, by adecision of the Executive Board taken by a majority of votes cast.

3. The following conclusions are suggested as regards the principles on which thecalculation of the designation amounts is based.

(a) The choice of "excess holdings" rather than total holdings of SDRs tends toconcentrate designation on net users of SDRs to restore their holdings to the levelof their allocations. The alternative "holdings" principle would tend to shift theincidence of designation away from participants that have used SDRs to those thathave relatively large holdings of gold and foreign exchange. The latter approach maybecome more suitable as the attractiveness of the SDR increases, but it is notrecommended at this time.

(b) Participants' gold and foreign exchange holdings are used as a basis forharmonizing excess holdings of SDRs, consistent with the approach that the staffhas suggested for preparing the operational budgets. An alternative technique wouldbe to distribute amounts of designation on the basis of participants' unused accept-ance obligations in relation to their allocations. It would seem preferable, however,not to divorce the designation amounts from participants' reserve holdings as theseare considered to be the best available measure of the ability of participants toprovide currency when designated by the Fund.

(c) The speed at which the harmonization of ratios proceeds depends impor-tantly on the particular method adopted for calculating designation amounts forindividual participants. The present method has promoted harmonization at a mod-erate pace, striking a balance between the objective of restoring the holdings of netusers of SDRs and the desire to maintain a fairly broad list of participants fordesignation. The method has the advantage of flexibility and has been adjustedsuccessfully from time to time to meet changing circumstances.

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4. Under the Articles of Agreement, the amount of SDKs a participant can berequired to accept in designation is restricted to the point where its excess holdingsare twice its allocation, i.e., the acceptance limit. For certain participants, this limitis reached rather more rapidly than for others because their reserves are very largein relation to their SDR allocations. While it would be possible to conceive ofarrangements that would slow down the approach to the acceptance limit, the staff'sview is that such action is neither necessary nor desirable.

5. The method of executing designation plans is established for each quarterlyperiod at the time the plan is adopted by the Executive Board. It is proposed thatthis procedure be continued. The approach generally followed in the execution ofdesignation plans has been to designate participants in broad proportion to themaximum amounts for which they are included in the plan, while avoiding unduefragmentation of individual transactions. From time to time exceptions may be pro-posed, such as have been agreed by the Executive Board in the past when circum-stances warranted. If during the quarterly period covered by a designation plan aproposal is pending with the Executive Board for the exclusion of a participant fromdesignation, further designation of the participant concerned would be avoided tothe extent practicable.

6. Over more than nine years of actual experience, the designation mechanismhas functioned satisfactorily. Actual designations have borne out the general empha-sis that was expected to result from the "excess holdings" principle. About four fifthsof total designation has been directed to participants whose holdings of SDKs werebelow their allocations as a result of prior uses. At the same time, a wide range ofboth developed and less developed countries has been called upon to providecurrency in the designation process.

7. The major volume of transactions with designation over the last two and a halfyears has resulted from transfers of SDRs to participants making purchases from theGeneral Resources Account; these participants have generally used the SDRs intransactions with designation, although a not insignificant proportion has beenretained by the recipients, mainly to meet the reconstitution obligation or to makepayments to the Fund.

8. In the future, the attractiveness of the SDR, and the increasing scope for trans-actions and operations by agreement, may reduce the use of SDRs from participants'own holdings in transactions with designation. However, with the Fund receivingapproximately SDR 5 billion as a result of quota increases under the SeventhReview, there is likely to be a continuing volume of transactions with designation asa result of transfers of SDRs by the Fund to members making purchases, as a wayof channeling SDRs back into participants' reserves.

9. In the light of the generally satisfactory experience with the designation system,the staff does not feel it necessary to propose any changes in the present principlesand procedures for designation.

D. Use of Currencies and SDRs in the General Resources Account and Principlesand Procedures for Designation

(a) Assessment of Strength of Member's Balance of Payments and Gross ReservePosition for the Purposes of Designation Plans, Operational Budgets and

Repurchases Under Article V, Section 7(b)

This decision sets forth guidelines for the assessment of the strength of the balanceof payments and gross reserve position of a participant under Article XIX, Sec-tion 5 (a) (i) (designation plans), and of the balance of payments and reserve posi-tion of a member under Article V, Section 3(d) (operational budgets) and, inaccordance with Executive Board Decisions No. 5704-(78/39)5 and No. 6172-(79/101),6 under Article V, Section 7(6) (early repurchases).

5 See Annual Report, 1978,pages 125-26.

6 See Annual Report, 1979,pages 138-39.

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1. Assessments of strength for the purposes of Article V, Sections 3(d) andl(b) will be based on a member's balance of payments and gross reserve position,and shall take into account developments in the exchange markets.

2. A member's "balance of payments and gross reserve position" is a combinedconcept, under which strength in one element may compensate for moderateweakness in the other.

3. In the Fund's assessment whether a member's balance of payments and grossreserve position is sufficiently strong for the purposes of the designation plans,operational budgets, and early repurchases, all relevant factors and data on themember's position shall be considered, including the following: recent and pro-spective movements in gross reserves, balance of payments developments, the rela-tionship of gross reserves to a member's imports and Fund quota, and developmentsin exchange markets. To the extent that recent data on changes in a member's netreserves are available, these shall be taken into account as an indicator of themember's balance of payments position.

4. If a member has outstanding purchases in the General Resources Account,the assessment of its balance of payments and gross reserve position will includejudgments on whether the member's position shows an improvement in comparisonwith the position at the time it made its last purchase from the Fund, on the extentof the improvement, and on whether it is likely to be sustained in the foreseeablefuture. Special attention will be given to the recent and prospective evolution in thevarious components of the member's balance of payments, including developmentsin the member's net reserves to the extent that data are available.

Decision No. 6273-(79/158) G/SSeptember 14,1979

(b) Specification of Currencies by the Fund

This decision sets forth guidelines for the selection of currencies in purchasesunder Article V, Section 3(d), in repurchases under Article V, Section 7(0, andin transfers of SDKs by the Fund under Article V, Section 6(b) pursuant todecisions adopted prior to the date of this decision.

1. Normally, the Fund will select a member's currency for use in the operationsand transactions of the General Resources Account in amounts that result in anet reduction of the Fund's holdings of the currency only if the member's balanceof payments and gross reserve position is judged to be sufficiently strong. Accord-ingly this will not preclude the possibility that the Fund will make net reductionsin its holdings of the currency of a member with a strong reserve position eventhough it has a moderate balance of payments deficit.

2. Under procedures to be adopted, the currency of a member with outstandingpurchases subject to repurchase, whose balance of payments and gross reserveposition is judged sufficiently strong for the purposes of operational budgets anddesignation plans, normally will be sold by the Fund under Article V, Section 3(d)only if the member and the Fund agree.

3. The desirability of promoting over time balanced positions in the Fund(''harmonization") will be taken into account in the following way:

a. A member's "position in the Fund" shall be defined as its reserve trancheposition plus any outstanding loans to the Fund by the member or an institutionof a member under credit arrangements that are judged by the Fund to provide it,on a continuing basis, with the ability to finance uses of its resources by memberson terms comparable to those applicable to the Fund's use of its currency holdingsfor this purpose.

b. Subject to (c) and (d) below, currencies shall be selected for use in purchasesand repurchases, and in transfers of SDRs by the Fund under decisions adopted

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prior to the date of this decision, in such a way as to promote, over time, theequalization of the ratios of members' positions in the Fund, as defined under (a)above, to their gold and foreign exchange holdings.

c. The application of the principle in (b) above will not be carried beyond thepoint where the Fund's holdings of a member's currency are substantially belowthe average level, expressed as a percentage of quota, at which the Fund holds thecurrencies of members that do not have purchases outstanding and whose balanceof payments and gross reserve position is sufficiently strong in accordance withparagraph 1 above. In addition, the Fund will seek to maintain adequate workingbalances of a currency.

d. If the currency of a member whose balance of payments and gross reserveposition is not judged sufficiently strong in accordance with paragraph 1 above canbe accepted in repurchase under Article V, Section 7(0, the Fund, at the requestof the member, will give special emphasis to the use of that currency for repurchases.

4. The guidelines in this decision will be applied in a manner that will allow theFund to retain the flexibility necessary to ensure that (i) the use of currencies canbe adapted to the needs and circumstances of members and of the Fund, and (ii)the transactions and operations of the Fund can be executed expeditiously and ina manner that pays due regard to the convenience of members. Considerations thatare relevant under (i) may include the need for members to purchase certain cur-rencies in order to stabilize exchange markets, the effects of the use or receipt ofcurrencies on the Fund's financial position, the Fund's liquidity, and the fact thatin respect of the issuer of a reserve currency the ratio of its Fund position to itsgold and foreign exchange holdings may not provide an appropriate measure of theamounts of the currency that might be used by the Fund. Considerations under (ii)may include the need to avoid the use of an excessive number of currencies in singletransactions and operations.

Decision No. 6274^(79/158)September 14,1979

(c) Transfers of SDKs Under Article V, Section 3(f)

Pursuant to Article V, Section 3(/), the Fund shall provide SDKs instead of thecurrencies of other members to a participant making a purchase in accordance withdecisions on the operational budgets taken under Rule O-10. For this purpose, theExecutive Board shall keep under review the amount of the Fund's holdings of SDKsin the General Resources Account in the light of all relevant considerations, includ-ing the relationship of SDR holdings to its other assets, and will determine fromtime to time the approximate range within which the Fund will aim to maintainthese holdings.

Decision No. 6275-(79/158) G/SSeptember 14,1979

£. Compensatory Financing of Export Fluctuations: Revised Decision

Decision No. 4912-(75/207), adopted December 24, 1975, as amended by Deci-sion No. 5348-(77/33),7 adopted March 11, 1977, is amended to read as follows:

1. The financing of deficits arising out of export shortfalls, notably those ofprimary exporting member countries, has always been regarded as a legitimatereason for the use of Fund resources, which have been drawn on frequently for thispurpose. The Fund believes that such financing helps these members to continuetheir efforts to adopt adequate measures toward the solution of their financial prob-

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7 Selected Decisions of theInternational Monetary Fundand Selected Documents, Sup-plement to Eighth Issue (Wash-ington, 1978), pages 18-19.



lems and to avoid the use of trade and exchange restrictions to deal with balanceof payments problems, and that this enables these members to pursue their pro-grams of economic development with greater effectiveness.

2. The Fund has reviewed its policies to determine how it could more readilyassist members, particularly primary exporters, encountering payments difficultiesproduced by temporary export shortfalls, and has decided that such members cancontinue to expect that their requests for drawings will be met where the Fund issatisfied that

(a) the shortfall is of a short-term character and is largely attributable tocircumstances beyond the control of the member; and

(b) the member will cooperate with the Fund in an effort to find, where re-quired, appropriate solutions for its balance of payments difficulties.

3. Drawings outstanding under this decision may amount to 100 per cent of themember's quota, provided that requests for drawings which would increase thedrawings outstanding under this decision beyond 50 per cent of the member's quotawill be met only if the Fund is satisfied that the member has been cooperating withthe Fund in an effort to find, where required, appropriate solutions for its balanceof payments difficulties.

4. When a member makes a request under this decision and if, in the opinion ofthe Fund, adequate data on receipts from travel and workers' remittances are avail-able, the member shall specify whether the receipts shall be included or excluded inthe calculation of the shortfall. The choice by a member shall continue to apply fora period of five years, except in the case of a member that makes a request underthis decision prior to January 1, 1980 and elects to exclude these services at thetime of the request.

5. The existence and amount of an export shortfall for the purpose of any draw-ing under this decision shall be determined with respect to the latest 12-monthperiod preceding the drawing request for which the Fund has sufficient statisticaldata, provided that a member may request a drawing in respect of a shortfall yearfor which not more than 6 months of the data on merchandise exports, and 12months of the data on travel and workers' remittances, are estimated.

6. In order to identify more clearly what are to be regarded as export shortfallsof a short-term character, the Fund, in conjunction with the member concerned,will seek to establish reasonable estimates regarding the medium-term trend of themember's exports based partly on statistical calculation and partly on appraisal ofexports prospects. For the purposes of this decision, the shortfall shall be theamount by which the member's export earnings in the shortfall year are less thanthe geometric average of the member's export earnings for the five-year periodcentered on the shortfall year. In computing the five-year geometric average, theFund, in conjunction with the member, will use an estimate based on a judgmentalforecast for the two post-shortfall years. When the Fund allows a member to drawunder the proviso in paragraph 5 above, the Fund may use such methods of esti-mating exports during the period for which sufficient statistical data are not avail-able as it considers reasonable.

7. A member requesting a drawing under the proviso in paragraph 5 above willbe expected to represent that, if the amount drawn on the basis of estimated dataexceeds the amount that could have been drawn on the basis of actual data for thefull 12-month period under paragraph 6 above, the member will make a promptrepurchase in respect of the outstanding drawing, in an amount equivalent to theexcess.

8. Whenever the Fund's holdings of member's currency resulting from a drawingunder this decision are reduced by the member's repurchase or otherwise, the mem-ber's access to this facility, in accordance with its terms, will be restored pro tanto.

9. In order to implement the Fund's policies in connection with compensatoryfinancing of export shortfalls, the Fund will be prepared to waive the limit on the

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Fund's holdings of 200 per cent of quota, where appropriate. In particular, theFund will be prepared to waive this limit (i) where a waiver is necessary to permitcompensatory drawings to be made under this decision or (ii) to the extent thatdrawings in accordance with this decision are still outstanding.

Moreover, the Fund will apply its tranche policies to drawing requests by amember as if the Fund's holdings of the member's currency were less than its actualholdings of that currency by the amount of any drawings outstanding under thisdecision. When drawings are made under this decision, the Fund will so indicatein an appropriate manner.

Decision No. 6224-(79/135)August 2,1979

F. Guidelines on Performance Criteria with Respect to Foreign Borrowing

The Executive Board approves the Chairman's summing up on external debtmanagement policies as set forth [below].

Decision No. 6230-(79/140)August 3,1979

The Chairman's Summing up on External Debt Management Policies

In the context of a general discussion of the issues relating to external debt man-agement policies, the Executive Board considered the following guideline on theperformance criteria with respect to foreign borrowing:

When the size and the rate of growth of external indebtedness is a relevant factor in thedesign of an adjustment program, a performance criterion relating to official and officiallyguaranteed foreign borrowing will be included in upper credit tranche arrangements. Thecriterion will include foreign loans with maturities of over one year, with the upper limit beingdetermined by conditions in world capital markets; in present conditions, the upper limit willinclude loans with maturities in the range of 10 to 12 years. The criterion will usually beformulated in terms of loans contracted or authorized. However, in appropriate cases, it maybe formulated in terms of net disbursements or net changes in the stock of external officialand officially guaranteed debt. Normally, the performance criterion will also include a sub-ceiling on foreign loans with maturities of over one year and up to five years. Flexibility willbe exercised to ensure that the use of the performance criterion will not discourage capitalflows of a concessional nature by excluding from the coverage of performance criteria loansdefined as concessional under DAC criteria, where sufficient data are available.

Adoption of this guideline will be subject to the understanding that the staff willbe guided also by the following points:

1. The above guideline will be applied with a reasonable degree of flexibilitywhile safeguarding the principle of uniformity of treatment among members. Theexternal debt guideline should be interpreted in the light of the general guidelineson conditionality (Decision No. 6056-(79/38)),8 especially guideline No. 4, whichstates:

In helping members to devise adjustment programs, the Fund will pay due regard to thedomestic social and political objectives, the economic priorities, and the circumstances ofmembers, including the causes of their balance of payments problems.

Alsto, guideline No. 9 includes the following:

The number and content of performance criteria may vary because of the diversity ofproblems and institutional arrangements of members. Performance criteria will be limited tothose that are necessary to evaluate implementation of the program with a view to ensuring 8 See Annual Report, 1979,the achievement of its objectives. pages 136-38.

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Furthermore, guideline No. 8 states:

The Managing Director will ensure adequate coordination in the application of policiesrelating to the use of the Fund's general resources with a view to maintaining the nondis-criminatory treatment of members.

2. While uniformity of treatment indicates a need for a common upper-maturitylimit, this limit will be reviewed annually by the Executive Board at the time of itsconsideration of staff papers on conditions in international capital markets. Inanalyzing the amount and terms of new borrowing that would be appropriate—inthe member's circumstances—over the medium term, the staff will take into accountprospective developments in the member's external payments situation and theprofile of its external indebtedness.

3. In formulating external debt criteria, the staff will be mindful of the need toensure consistency between external debt management policies and domestic finan-cial policies. Where external debt per se is not a matter for concern, but adjustmentprograms have as a main objective to reduce excess demand pressures and restoreoverall balance to the public sector finances, the credit ceiling for the public sectorwould cover both domestic and foreign financing of the overall public sector deficit.

4. Normally the performance criterion will relate to official and officially guaran-teed foreign borrowing. The coverage will include official entities for which thegovernment is financially responsible as well as private borrowing for which officialguarantees have been extended and which, therefore, constitute a contingent liabilityof the government.

5. In cases where the member's external debt management policy covers privatesector borrowing without official guarantee and there is an established regulatorymachinery to control such borrowing, it will be proposed that the performancecriterion on foreign borrowing should be adapted accordingly.

6. Normally, loans of less than one-year maturity will be excluded from theborrowing limitations. In exceptional circumstances where nontrade-related loansof less than one year of maturity become a source of difficulty, such loans will beincluded in the limitations. The Managing Director will inform Executive Directorsin an appropriate manner of the reasons for including such loans in the limitation.

7. The last sentence of the guideline provides for excluding from the coverage ofperformance criteria those loans defined as concessional under DAC criteria. Avail-able information on loans by multilateral development institutions indicates that allof the recent loans of the IBRD and the Inter-American Development Bank havebeen outside the 10 to 12-year limit and that most of the loans by the Asian andAfrican regional development banks have also been outside the upper limit. In dis-cussing with member countries the total amounts of permissible borrowing of lessthan 10 to 12 years' maturity, the staff would take into account possible lending ofless than this maturity range by multilateral development institutions. In some cases,member countries utilize credits associated with concessional loans. The staff willtake into account these developments in discussing the appropriate amount ofborrowing.

G. General Arrangements to Borrow: Renewal and Modifications

A. Executive Board Decision No. 1289-(62/l),9 as amended, on the GeneralArrangements to Borrow, is hereby renewed for a period of five years from Octo-ber 24, 1980 subject to the following modification:

Paragraph 11 (b) shall be made to read as follows:

Before the date prescribed in Paragraph 11 (a), the Fund, after consultation with a par-ticipant, may make repayment to the participant in part or in full. The Fund shall have theoption to make repayment under this Paragraph l l (b) in the participant's currency, or in


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special drawing rights in an amount that does not increase the participant's holdings of specialdrawing rights above the limit under Article XIX, Section 4, of the Articles of Agreementunless the participant agrees to accept special drawing rights above that limit in such repay-ment, or, with the agreement of the participant, in other currencies that are actuallyconvertible.

B. Reference in Executive Board Decision No. 1289-(62/l), as amended, to"the period prescribed in Paragraph 19(a)" shall be understood to include theperiod of the renewal under this decision.

Decision No. 6241^(79/144)August 24,1979

H. Guidelines on Payment of Reserve Assets in Connection with Subscriptions

The Executive Board approves the draft "Guidelines for Determining the Amountof Reserve Assets to Be Paid in Connection with Subscriptions" set forth [below].

Decision No. 6266-(79/156)September 10,1979

Guidelines for Determining the Amount of Reserve Assetsto Be Paid in Connection with Subscriptions

The following are proposed for adoption by the Executive Board as guidelines forCommittees of the Executive Board when considering the amount of a subscriptionthat should be paid in reserve assets:

1. These guidelines shall be taken into account by a Committee of the ExecutiveBoard established to consider an application for membership in the Fund or to con-sider a request for an increase in quota that is made outside the framework of a gen-eral review of quotas. In applying the guidelines, a Committee shall pay due regardto present and prospective economic and financial circumstances of the countryconcerned.

2. In view of the requirement of Article II, Section 2, that the terms for member-ship, including the terms for subscriptions, shall be based on principles consistentwith those applied to other countries that are already members, new members willbe expected to pay a part of their initial subscription in reserve assets. The paymentof reserve assets in connection with the initial subscription of a new member is largelya matter of exchanging one form of reserves for another.

3. The amount of the subscription to be paid in reserve assets shall be determinedin the light of all the payments of reserve assets made by existing members and thecountry's external reserve position at the time of membership.

4. A reasonable approximation of the amount of the subscription that has beenpaid in reserve assets in the past is the average of all reserve assets actually paid interms of the quotas of all members, rather than the proportions paid in the past byindividual members. In making the calculation of the reserve assets to be paid,account will be taken of the repurchases made in the past by members, includingthose made in accordance with Schedule B of the amended Articles, and of sales ofthe currencies of members made to reduce to that level the amounts of the member'scurrency paid in excess of 75 per cent of quota by a member that had joined the Fundbefore the date of the Second Amendment.

Taking into account the asset payments made by all members in connection withthe Sixth General Review of Quotas and adding them to the sum of asset paymentstaken as the equivalent of 25 per cent of total quotas as of the date of the SecondAmendment, the reserve asset payments made by all members average 20 per centof present quotas. In the event that all eligible members consent to the full increases

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in their quotas approved under the Seventh General Review of Quotas and takinginto account that 25 per cent of any increase in quotas is to be paid in SDKs (oracceptable currency for nonparticipants), the reserve asset payment made by eligiblemembers will average 21.7 per cent of total quotas.

Consequently, for the period prior to the coming into effect of the quotas approvedunder the Seventh General Review of Quotas, the reserve asset payment for a coun-try applying for membership can normally be expected to be of the order of 20 percent of its initial quota; after the Seventh General Review is completed, the reserveasset payment for a country applying for membership would rise to the order of21.7 per cent of its initial quota.

5. Normally, countries joining the Fund would be expected to make a paymentof reserve assets in the amount, in terms of quota, calculated along the lines outlinedin paragraph 3 above. However, consideration may be given, at the request of aprospective new member, for a payment of reserve assets smaller than the averagesize of such payments in terms of all quotas. In exceptional circumstances, and inlight of the actual and prospective balance of payments and gross reserve positionof the prospective member (including its ability to acquire or mobilize externalfinancial assets and also any allocations of SDRs that might be in prospect) at thetime its application is being considered, the size of the reserve asset payment maybe reduced, provided that it is not less than the equivalent of 10 per cent of the mem-ber's gross reserves or 10 per cent of initial quota, whichever was the higher.

6. In determining the amount of the reserve asset payment, account should alsobe taken of the effect the size of such payment would have on the remuneration thatmight be payable to the new member. This factor would ameliorate a higher reserveasset payment in terms of quota because the acquisition of a remunerated reservetranche position would tend to ease the loss of interest income involved in the pay-ment of a reserve asset. However, there may be circumstances where the new mem-ber has a reserve level somewhat below the average level of all members or whenother features of its external financial position would seem to call for some mitiga-tion of the payment. In such circumstances, the norm for remuneration could beapplied for the new member rather than the average of reserve asset payments madein the past noted in paragraph 3 above. As the norm for remuneration is likely torise over time, the applicability of this approach would need to be kept under reviewand would be subject to the minimum payment in paragraph 5 above.

7. As regards the amount of reserve asset payments to be made in connectionwith ad hoc increases in quotas which occur outside a general review of quotas, andto the extent that such increases are effectively a "catching up" of the quota increasesalready granted to other members in past general reviews, the amount of the reserveassets to be paid shall be based on the amount of reserve assets required as a resultof such past general reviews. For other ad hoc increases, if any, the amount of thereserve asset payment shall be equivalent to 25 per cent of the increase in quota.

8. As regards the media of payment, payments of reserve assets shall be made inSDRs to the maximum extent practicable or in a currency that is acceptable to theFund and which is included in the operational budget as a currency that could besold on a net basis for the foreseeable future.

I. Special Drawing Rights: Additional Uses

(a) Use in Swap Operations

In accordance with Article XIX, Section 2(c) the Fund prescribes that:1. A participant, by agreement with another participant, may engage in an

operation by which (a) one of the parties transfers to the other party SDRs in

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exchange for an equivalent amount of currency or another monetary asset, otherthan gold, in respect of which arrangements have been completed for determinationby the Fund of equal value in terms of the SDR on the basis of Article XIX,Section l(a) and Rule O-2, and (b) the parties undertake to reverse the exchangewithin a period and at an exchange rate agreed by them.

2. Calculations for the purpose of 1 (a) above shall be made at the exchange rateof the third business day preceding the date of the transfer or of the second businessday preceding the date of the transfer if agreed by the parties.

3. The parties may agree on the terms of the operation, and may modify thoseterms, provided that the terms and any modification of them would be consistentwith this prescription.

4. The parties may agree on the payment of compensation in the event that, forany reason, the reversal of the transfer in accordance with 1 (b) above is not carriedout.

5. Participants intending to use or receive SDRs pursuant to this prescriptionshall inform the Fund of

(a) the amount of SDRs and the period of the operation;(b) the monetary asset, the exchange rate and the value date for the exchange

under l(a) above;(c) the monetary asset, the exchange rate and the value date for the reversal of

the exchange;(d) any agreement for the payment of interest, or compensation in accordance

with 4 above; and(e) any modification of these terms.6. As required by Rule P-7 the parties to an operation pursuant to this prescrip-

tion shall declare that the intended use of SDRs will be in accordance with thisprescription.

7. Transfers of SDRs pursuant to this prescription shall be made only upon thereceipt by the Fund of instructions from the transferor and the transferee.

8. If the Fund decides to change any of the terms and conditions of this prescrip-tion, any outstanding operation that is inconsistent with the new terms and condi-tions shall be completed within 12 months from the date of the Fund's decision.

9. The Fund shall record operations pursuant to this prescription in accordancewith Rule P-9.

Decision No. 6336-(79/178) SNovember 28,1979

(b) Use in Forward Operations

In accordance with Article XIX, Section 2(c) the Fund prescribes that:1. A participant, in agreement with another participant, may engage in an opera-

tion by which the participant undertakes to transfer to the other participant SDRs ata specified future date more than three business days after the date of the agreement,in exchange for an agreed amount of currency or another monetary asset, other thangold.

2. The parties may agree on the terms of the operation, and may modify thoseterms, provided that the terms and any modification of them would be consistentwith this prescription.

3. Participants intending to use or receive SDRs pursuant to this prescriptionshall inform the Fund of

(a) the amount of SDRs and the period of the operation;(b) the monetary asset, the exchange rate and the value date for the exchange;

and(c) any modification of these terms.

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4. As required by Rule P-7 the parties to an operation pursuant to this prescrip-tion shall declare that the intended use of SDKs will be in accordance with thisprescription.

5. Transfers of SDKs pursuant to this prescription shall be made only upon thereceipt by the Fund of instructions from the transferor and the transferee.

6. If the Fund decides to change any of the terms and conditions of this prescrip-tion, any outstanding operation that is inconsistent with the new terms and condi-tions shall be completed within 12 months from the date of the Fund's decision.


Decision No. 6337-(79/178) SNovember 28,1979

(c) Use in Donations

In accordance with Article XIX, Section 2(c) the Fund prescribes that:1. A participant, by agreement with another participant, may donate SDRs to

the other participant.2. Participants intending to donate or receive SDRs pursuant to this prescription

shall inform the Fund of the amount of SDRs and the value date for the transfer.3. As required by Rule P-7 the parties to an operation pursuant to this prescrip-

tion shall declare that the intended use of SDRs will be in accordance with thisprescription.

4. Transfers of SDRs pursuant to this prescription shall be made only upon thereceipt by the Fund of instructions from the transferor and the transferee.


Decision No. 6437-(80/37) SMarch 5,1980

J. Special Drawing Rights: Allocations to New Participants

Pursuant to Article XVIII, Section 2(d) members that have, or will, becomeparticipants in the Special Drawing Rights Department by December 31, 1979 andhave informed the Fund that they are willing to receive allocations of special draw-ing rights during the third basic period shall receive allocations in accordance withBoard of Governors Resolution No. 34-3,10 adopted December 11, 1978.

Decision No. 6368^(79/191) SDecember 26,1979

K. Special Drawing Rights: Other Holders

The terms and conditions on which other holders prescribed by the Fund mayaccept, hold or use SDRs are as follows:

1. Acceptance, Holding, and Use by Prescribed Holders

(a) Acceptance and use

A prescribed holder may accept or use special drawing rights (i) in exchange 10See Annuai Report) 7979,for an equivalent amount of a monetary asset other than gold in a transaction pages 127-28.

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entered into by agreement with a participant, or another prescribed holder, or (ii) inan operation entered into by agreement with a participant or another prescribedholder in accordance with and on the same terms and conditions established at thattime for participants by decisions of the Fund under Article XIX, Section 2(c).

(b) Holding

A prescribed holder may hold special drawing rights, subject to the provisionsof this decision, accepted in accordance with (a) above or received as interest paidon its holdings of special drawing rights in accordance with Article XX, Section 1.

2. Acceptance and Use by Participants in Transactions and Operations with Pre-scribed Holders

Participants may enter into transactions and operations by agreement with a pre-scribed holder in accordance with the prescriptions in paragraph l(a) of thisdecision.

3. Application of General Provisions

The holding of special drawing rights and the acceptance and use of them intransactions and operations by a prescribed holder shall be governed by the provi-sions of the Articles, By-Laws, Rules and Regulations, and decisions of the Fundthat apply from time to time to all holders of special drawing rights.

4. Exchange Rates

The Rules and Regulations and decisions of the Fund that determine the exchangerates applicable at the time of each use or acceptance of special drawing rights by aparticipant shall apply to each use or acceptance of them by a prescribed holder.A prescribed holder shall not levy any charge or commission in respect of a trans-action involving special drawing rights.

5. Information and Recording

The Fund shall inform prescribed holders of matters relevant to the acceptance,holding, and use of special drawing rights by them. A prescribed holder shall informthe Fund promptly of the facts necessary to record any transactions or operationsin which a prescribed holder accepts or uses special drawing rights.

6. Consultation and Review

(a) Consultation between the Fund and a prescribed holder shall be held at therequest of the Fund or the prescribed holder with respect to the application of thisdecision or the decision prescribing the holder or with respect to transactions oroperations entered into involving special drawing rights.

(b) The Executive Board shall review periodically this decision and decisionsprescribing holders.

7. General Undertaking

Each prescribed holder shall collaborate with the Fund, participants, and otherprescribed holders with respect to its acceptance, holding, and use of special drawingrights in order to facilitate the effective functioning of the Special Drawing RightsDepartment and the proper use of special drawing rights in accordance with theArticles and the terms and conditions prescribed by the Fund now or in the futurefor the acceptance, holding, and use of special drawing rights by prescribed holders.

8. Suspension

During any period in which a suspension is in effect under Article XXIII, Section 1with respect to participants, the suspension shall apply to the same extent to pre-scribed holders.

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9. Termination

(a) The prescription of a holder of special drawing rights may be terminated bythe Fund by a decision of the Executive Board or by a notice from the prescribedholder in writing to the Fund at its principal office. Termination shall become effec-tive on the date specified in the decision of the Executive Board but not earlier thanthe date of the decision, or when notice from the prescribed holder is received bythe Fund at its principal office.

(b) A prescribed holder whose status as such has been terminated may continueto hold the special drawing rights it held on termination and to receive special draw-ing rights as interest on its holdings and may continue to use special drawing rightsto dispose of them in transactions or operations in accordance with paragraph l(a)above. A prescribed holder whose status has been terminated shall make arrange-ments, with the concurrence of the Fund, to dispose of its holdings of special draw-ing rights as expeditiously as possible, and shall exchange special drawing rights fora freely usable currency selected by the prescribed holder when requested by theFund.

Decision No. 6467-(80/71) SApril 14,1980

L. Extended Fund Facility: Extension of Maximum Repurchase Period

1. Paragraph 5 of Decision No. 4377-(74/114),n adopted September 13, 1974,is amended to read:

A member that has obtained an extended arrangement under this decision will make repur-chases corresponding to purchases under the extended arrangement to the extent that suchpurchases are still outstanding, as soon as its balance of payments problems have been over-come and, in any event, within an outside range of four to ten years after each purchase. Notlater than four years after the first purchase under the extended arrangement the member willpropose to the Fund a schedule of repurchases for all purchases outstanding under the extendedarrangement. Normally, schedules under this paragraph will provide for repurchases in respectof each purchase in 12 equal six-monthly installments.

2. Paragraph 5 as amended above shall apply also to repurchases to be made inrespect of purchases under extended arrangements approved prior to the date ofthis decision.

Decision No. 6339-(79/179)Decembers, 1979

M. Procedures for the Sale of Currencies at the Request of Members withOutstanding Purchases

Pursuant to paragraph 2 of Executive Board Decision No. 6274-(79/158),12 theExecutive Board approves the procedures set out [below].

Decision No. 6352-(79/183)December 1211979

Procedures

1. Executive Board Decision No. 6274-(79/158) on the selection of currenciesby the Fund contains the following paragraph:


12 See pages 135-36.

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2. Under procedures to be adopted, the currency of a member with outstanding purchasessubject to repurchase, whose balance of payments and gross reserve position is judged suffi-ciently strong for the purposes of operational budgets and designation plans, normally will besold by the Fund under Article V, Section 3(d) only if the member and the Fund agree.

This present memorandum discusses the circumstances in which the Fund could beexpected to agree to the sales of currencies pursuant to this decision and proposesthe adoption of certain procedures in connection with such sales.

2. It is envisaged that repurchases in accordance with the Fund's policy on earlyrepurchases under Article V, Section 7(6) would be the principal means by whichreductions are made in the Fund's holdings of the currency of a member with out-standing purchases whose balance of payments and gross reserve position is judgedsufficiently strong. Thus, the Fund would not normally take the initiative to sell thecurrency of such a member; a proposal for sales of the currency would be expectedto come from the member. Of course, a member has the right to make a repurchaseat any time, and—in the staff's view—a repurchase would normally be the most ex-peditious and convenient way for a member to reduce its indebtedness to the Fund.This is because the timing and the amount of any repurchase undertaken at the ini-tiative of the member concerned can be chosen by the member making the repur-chase. By contrast, the timing and the amounts of sales of a currency are not certain;they depend on the decisions of other members and the Fund itself. For this reason,it can be generally expected that few members will prefer sales of their currency torepurchases as a means of reducing their outstanding purchases.

3. There are four main aspects of the sale of the currencies of members with out-standing purchases:

a. Effects on "harmonization." If the Fund sells the currency of a member withoutstanding purchases as an alternative to the member making a repurchase, theFund's ability to "harmonize" the Fund positions of creditor members is diminishedin two ways.13 First, it will sell less of the currencies of those creditor memberswhose positions the Fund is aiming to increase. Second, because the volume ofrepurchases will be less, the Fund will receive in repurchases less of the currenciesof those members whose positions it is aiming to reduce. Thus, the larger theamounts of sales of currencies of members with outstanding purchases, the more theharmonization of members' positions is likely to be slowed down. Particularly if suchsales constituted a large proportion of the operational budget, they would runcounter to the aim of harmonization, which was incorporated in the recent decisionon the selection of currencies by the Fund.

b. Use of SDKs in purchases. The Fund is likely to be selling SDKs under theoperational budgets, and in some future budgets it may sell SDKs exclusively, espe-cially after the substantial rise in the Fund's SDR holdings that will occur followingthe payments for quota increases under the Seventh Review. Sales of the currenciesof members with outstanding purchases may make it more difficult to maintain theSDR holdings in the General Resources Account within a particular range.14 Thissuggests that any sales of the currencies of members with outstanding purchasesshould take into account the aim that is being pursued at the time as regards theFund's holdings of SDRs.

c. Repayment of borrowing. In connection with the oil facility and the supple-mentary financing facility, the Fund has adopted decisions under which it is requiredto make "best efforts" to achieve a so-called "pass through" of repurchases by mem-bers and repayments of borrowing under these facilities. The aim is—and it has beenachieved in the overwhelming majority of repurchases under the oil facility—for therepurchase and the repayment to be made on the same day and in the same medium.The purpose of this procedure was to leave undisturbed the reserve tranche posi-tions in the Fund of the members whose currencies were used or the Fund's SDRholdings if SDRs were used.15

13 Under Executive Board De-cision No. 6274-(79/158), theFund aims to promote over timethe equalization of the ratios ofmembers' positions in the Fundto their gold and foreign ex-change holdings.

14 Under Executive Board De-cision No. 6275-(79/158) G/S,adopted September 14, 1979[page 136], "the ExecutiveBoard . . . will determine fromtime to time the approximaterange within which the Fundwill aim to maintain these [SDR]holdings."

15 There are certain circum-stances in which the principle ofthe "pass through" cannot bemaintained: for example, if amember repurchases with SDRsand the lender does not wish toreceive SDRs in repayment.

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If a debtor member's currency is sold as an alternative to the member making arepurchase, and if the member decides to attribute the sale to a purchase under theoil facility or the supplementary financing facility, as it is entitled to do, the Fundis required under the decisions mentioned above to repay the lenders that maderesources available to finance the purchase.16 In these circumstances, as there wouldbe no actual repurchase, the principle of the "pass through" could not be maintained.

In addition to the question of principle, there may also be a problem as regardsthe convenience of the lenders under the oil facility. It may be less convenient forthe lenders to receive repayments in a series of smaller amounts on dates that cannotreadily be predicted rather than in a single repayment on a date that could be setin advance.

Thus, both as a question of principle and on grounds of operational convenience,these considerations suggest that the Fund should not normally sell the currency ofa member with outstanding purchases if such sales would involve the repaymentof borrowing.

d. Settlement of obligations. There seems to be very little advantage to the Fundin selling the currency of a member if the sale will be attributed to the settlementof a repurchase obligation falling due during the quarterly period covered by theoperational budget. While such sales of currency would advance the repurchase, itwould not be advanced by a particularly significant period as the obligation wouldhave to be met anyway in the course of the quarter. In the staff's view, it wouldprobably be preferable if such obligations were met by repurchases, but this is anaspect of the sales of the currencies of members with outstanding purchases on whichthe Fund can be flexible.17

4. The procedural guidelines proposed for the sale by the Fund of the currenciesof members with outstanding purchases are set out in paragraph 5, below. Two pointsshould be stressed as regards their applicability. First, Executive Board DecisionNo. 6274-(79/158) on the selection of currencies by the Fund makes it clear thatthe Fund will normally sell the currency of a member under Article V, Section 3(d)only if its balance of payments and reserve position is judged sufficiently strong.Second, as a consequence of this, the members concerned are likely to be those towhich the guidelines for early repurchases apply.18 However, if there is is an expecta-tion of an early repurchase, and the proposed procedures do not result in sales ofthe currency of the member concerned, or result in sales of less than the amount ofrepurchase expected under the guidelines, the member will be expected to make arepurchase, either for the full amount or for any balance. . . .

5. In order to take account of the considerations discussed in paragraph 3, thefollowing procedural guidelines are suggested. They place stress on consultationsbetween the Managing Director and the member concerned prior to the submissionby the Managing Director to the Executive Board of a proposal agreed with themember on a maximum amount of sales of its currency and on the way in whichthese sales would be integrated in the operational budget. The guidelines are intendedto provide a reasonable degree of flexibility for the Managing Director to makeproposals that would be acceptable both to the member that wished its currency tobe sold and to the Executive Board.

a. As far as practicable, a member with outstanding purchases that wishes itscurrency to be sold by the Fund would be expected to consult with the ManagingDirector before the end of the second month of the quarterly period prior to thebeginning of the period in which the currency would be sold. This will enable aproposal for the sale of the currency to be incorporated in the next operationalbudget. However, the Managing Director might also propose an amendment to anexisting budget. The qualification "as far as practicable" is included in order toprovide some flexibility; one reason for this is that a member may not know thatits balance of payments and reserve position is judged "sufficiently strong" for the

16 If the Fund did not repaythe lender, it would continue tohave to pay interest on the out-standing borrowing while itwould no longer receive chargesat the rates payable under theoil facility or the supplementaryfinancing facility; this wouldnormally involve a financial lossfor the Fund.

17 It will be noted that para-graph 6 of the guidelines onearly repurchases does not en-visage sales of a currency as ameans of settling obligationsfalling due during a quarterlyperiod. . . .

18 It will be recalled that, un-der the guidelines, the basiccondition for an expectation ofa repurchase under Article V,Section 7(&) is that the mem-ber's balance of payments andreserve position is judged suffi-ciently strong. It is, however,possible that the calculationsunder the guidelines would notyield an amount that the mem-ber was expected to repurchase;for example, the member mayhave "credit" for voluntary earlyrepurchases. Nevertheless, itshould be stressed that it is notthe intention of the proceduresproposed in paragraph 5 to limitsales of the currency of a mem-ber with outstanding purchasesto the amount calculated underthe guidelines for early repur-chases. On the contrary, if amember whose position is judgedsufficiently strong is willing toreduce its outstanding purchasesat a faster rate than under theguidelines, the Fund should nor-mally welcome the willingnessof the member to do so.

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purposes of the next designation plan and operational budget until the relevantdocuments are circulated to the Executive Board.

b. Following the consultation, and with the agreement of the member concerned,the Managing Director will make a proposal to the Executive Board in accordancewith paragraph (c) below that the currency be included in the operational budget.The Managing Director's proposal will cover the way in which the sales of the cur-rency will be integrated with the sales of other currencies and SDKs in the executionof the operational budget. While in each case the decision on sales of a currencywould rest with the Executive Board, there would be a reasonable presumption thata proposal made in accordance with these guidelines would be accepted.

c. Proposals by the Managing Director for sales of a currency of a member withpurchases outstanding would be guided by the following considerations:

(i) Proposals would not normally be made for sales of currencies if such saleswould give rise to repayments of borrowing by the Fund, or if they would be attrib-uted by the member to repurchase obligations falling due within the quarterly periodof the budget.

(ii) The amounts of currency involved should not be such as to detract signifi-cantly from the promotion of balanced positions in the Fund or the aim of maintain-ing the SDR holdings of the General Resources Account within a particular range.

N. Format of Stand-By and Extended Arrangements

Stand-by arrangements and extended arrangements shall normally follow theforms in Annexes B and C [below].

Decision No. 6506-(80/82)May 20,1980

Annex B

Typical Stand-By Arrangement

Attached hereto is a letter [, with annexed memorandum,] dated .from (Minister of Finance and/or Governor of Central

Bank) requesting a stand-by arrangement and setting forth the objectives and poli-cies which the (government) (authorities) of (member) intend to pursue. To sup-port these objectives and policies the International Monetary Fund grants thisstand-by arrangement in accordance with the following provisions:

1. For a period [of one year] [from to ] (member)will have the right, after making full use of any reserve tranche that it may have atthe time of making a request for a purchase under this arrangement, to make pur-chases from the Fund in an amount equivalent to SDR , subject to para-graphs 2, 3, and 4 below, without further review by the Fund.

2. Purchases under this arrangement shall not, without the consent of the Fund,exceed the equivalent of SDR until and the equiv-alent of SDR until , but none of these limits shallapply to a purchase under the stand-by arrangement that would not increase theFund's holdings of (member's) currency beyond the first credit tranche.19' 20

3. (Member) will not make purchases under this arrangement that would in-crease the Fund's holdings of its currency beyond the first credit tranche:19

(a) during any period in which [the data at the end of the preceding period in-cates that]21

19 In arrangements providingfor supplementary financing, thephrase "plus 12.5 per cent ofquota" will be added.

20 In arrangements providingfor supplementary financing anadditional paragraph would beadded for the apportionment ofpurchases between ordinary andsupplementary resources:

"Purchases under this arrange-ment shall be made from . . ."The text to be added will de-pend on the situation of themember at the time.. . .

21 The performance criteriaenumerated here are indicativeonly; there may be more, orfewer, performance criteria ac-cording to the requirements ofthe particular situation.

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(i) [the limits on domestic credit described in paragraph ofthe attached letter], or

(ii) [the limits on credit to the public sector described in paragraphof the attached letter], or

(iii) . . . [These provisions would incorporate other quantitative perform-ance criteria of the program]

are not observed; or(b) if (member)

(i) imposes or intensifies restrictions on payments and transfers for cur-rent international transactions, or

(ii) introduces or modifies multiple currency practices, or(iii) concludes bilateral payments agreements which are inconsistent with

Article VIII, or(iv) imposes or intensifies import restrictions for balance of payments rea-

sons, or[(v) fails to observe the limits on authorizations of new public and publicly

guaranteed foreign indebtedness described in paragraphof the attached letter].

When (member) is prevented from purchasing under this arrangement becauseof this paragraph 3, purchases will be resumed only after consultation has takenplace between the Fund and (member) and understandings have been reached re-garding the circumstances in which such purchases can be resumed.

4. (Member's) right to engage in the transactions covered by this arrangementcan be suspended only with respect to requests received by the Fund after (a) a for-mal ineligibility, or (b) a decision of the Executive Board to suspend transactions,either generally or in order to consider a proposal, made by an Executive Directoror the Managing Director, formally to suppress or to limit the eligibility of (mem-ber). When notice of a decision of formal ineligibility or of a decision to consider aproposal is given pursuant to this paragraph 4, purchases under this arrangementwill be resumed only after consultation has taken place between the Fund and(member) and understandings have been reached regarding the circumstances inwhich such purchases can be resumed.

5. Purchases under this arrangement shall be made in the currencies of othermembers selected in accordance with the policies and procedures of the Fund, andmay be made in SDKs if, on the request of (member), the Fund agrees to providethem at the time of the purchase.

6. (Member) shall pay a charge for this arrangement in accordance with thedecisions of the Fund.

7. (a) (Member) shall repurchase the outstanding amount of its currency thatresults from a purchase under this arrangement, and is subject to charges underArticle V, Section 8(ft), in accordance with the provisions of the Articles of Agree-ment and decisions of the Fund, including those relating to repurchase as (mem-ber's) balance of payments and reserve position improves.

(b) Any reductions in (member's) currency held by the Fund shall reducethe amounts subject to repurchase under (a) above in accordance with the prin-ciples applied by the Fund for this purpose at the time of the reduction.

8. During the period of the arrangement (member) shall remain in close con-sultation with the Fund. These consultations may include correspondence and visitsof officials of the Fund to (member) or of representatives of (member) to the Fund.(Member) shall provide the Fund, through reports at intervals or dates requestedby the Fund, with such information as the Fund requests in connection with theprpgress of (member) in achieving the objectives and policies set forth in theattached letter [and annexed memorandum].

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9. In accordance with paragraph of the attached letter (member) will consultthe Fund on the adoption of any measures that may be appropriate at the initiativeof the government or whenever the Managing Director requests consultation

Version A[because any of the criteria in paragraph 3 above have not been observed or be-

cause he considers that consultation on the program is desirable. In addition, afterthe period of the arrangement and while (member) has outstanding purchases in theupper credit tranches, the government will consult with the Fund from time to time,at the initiative of the government or at the request of the Managing Director, con-cerning (member's) balance of payments policies.]

Version B[because he considers that consultation on the program is desirable.]

Annex C

Typical Extended Arrangement

Attached hereto is a letter [, with annexed memorandum,] dated .from (Minister of Finance and/or Governor of Central Bank)

requesting an extended arrangement and setting forth:(a) the objectives and policies that the authorities of (member) intend to pur-

sue for the period of the extended arrangement;(b) the policies and measures that the authorities of (member) intend to pur-

sue for the first year of the extended arrangement; and(c) understandings of (member) with the Fund regarding reviews that will be

made of progress in realizing the objectives of the program and of the policies andmeasures that the authorities of (member) will pursue for the second and third yearsof the extended arrangement.

To support these objectives and policies the International Monetary Fund grantsthis extended arrangement in accordance with the following provisions:

1. For a period of [three years] from (member)will have the right, after making full use of any reserve tranche that it may have atthe time of making a request for a purchase under this arrangement, to make pur-chases from the Fund in an amount equivalent to SDR , subject toparagraphs 2, 3, and 4 below, without further review by the Fund.

2. (a) Until (end of first year) purchases under this arrangement shall not,without the consent of the Fund, exceed the equivalent of SDR , pro-vided that purchases shall not exceed the equivalent of SDRuntil , and the equivalent of SDR until

(b) Until (end of second year) purchases under this arrangement shall not,without the consent of the Fund, exceed the equivalent of SDR

(c) The right of (member) to make purchases during the second and thirdyears shall be subject to such phasing as shall be determined.22

3. (Member) will not make purchases under this arrangement:(a) throughout the first year, during any period in which [the data at the end

of the preceding period indicates that](i) the limits on , or(ii) ,or

(iii)are not observed; or

(b) throughout the second and third years, if before the beginning of the sec-ond year and the beginning of the third year of the arrangement suitable perform-ance clauses have not been established in consultation with the Fund as contem-

22 In arrangements providingfor supplementary financing anadditional paragraph would beadded for the apportionment ofpurchases between ordinary andsupplementary resources:

"(d) Purchases under thisarrangement shall be madefrom . . ."The text to be added will dependon the situation of the memberat the time. . . .

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APPENDIX II (concluded). PRINCIPAL POLICY DECISIONS

plated in paragraph of the attached letter or such clauses, havingbeen established, are not being observed; or

(c) throughout the duration of the arrangement, if (member)(i) imposes or intensifies restrictions on payments and transfers for current

international transactions, or(ii) introduces or modifies multiple currency practices, or

(iii) concludes bilateral payments agreements which are inconsistent withArticle VIII, or

(iv) imposes or intensifies import restrictions for balance of payments rea-sons.

When (member) is prevented from purchasing under this arrangement be-cause of this paragraph 3, purchases will be resumed only after consultation hastaken place between the Fund and (member) and understandings have been reachedregarding the circumstances in which such purchases can be resumed.

4. (Member's) right to engage in the transactions covered by this arrangementcan be suspended only with respect to requests received by the Fund after (a) aformal ineligibility, or (b) a decision of the Executive Board to suspend transactions,either generally or in order to consider a proposal, made by an Executive Directoror the Managing Director, formally to suppress or to limit the eligibility of (mem-ber) . When notice of a decision of formal ineligibility or of a decision to consider aproposal is given pursuant to this paragraph 4, purchases under this arrangementwill be resumed only after consultation has taken place between the Fund and(member) and understandings have been reached regarding the circumstances inwhich such purchases can be resumed.

5. Purchases under this arrangement shall be made in the currencies of othermembers selected in accordance with the policies and procedures of the Fund, andmay be made in SDKs if, on the request of (member), the Fund agrees to providethem at the time of the purchase.

6. (Member) shall pay a charge for this arrangement in accordance with thedecisions of the Fund.

7. (a) (Member) shall repurchase the amount of its currency that results froma purchase under this arrangement, and is subject to charges under Article V, Sec-tion 8(6), in accordance with the provisions of the Articles of Agreement and deci-sions of the Fund including those relating to repurchase as (member's) balance ofpayments and reserve position improves.

(b) Any reductions in (member's) currency held by the Fund shall reducethe amounts subject to repurchase under (a) above in accordance with the principlesapplied by the Fund for this purpose at the time of the reduction.

8. During the period of the arrangement (member) shall remain in close con-sultation with the Fund. These consultations may include correspondence and visitsof officials of the Fund to (member) or of representatives of (member) to theFund. (Member) shall provide the Fund, through reports at intervals or dates re-quested by the Fund, with such information as the Fund requests in connection withthe progress of (member) in achieving the objectives and policies set forth in theattached letter [and annexed memorandum].

9. In accordance with paragraph of the attached letter (member) willconsult the Fund on the adoption of any measures that may be appropriate at theinitiative of the government or whenever the Managing Director requests consulta-tion because any of the criteria under paragraph 3 above have not been observed orbecause he considers that consultation on the program is desirable. In addition, afterthe period of the arrangement and while (member) has outstanding purchases in theupper credit tranches, the government will consult with the Fund from time to time,at the initiative of the government or at the request of the Managing Director, con-cerning (member's) balance of payments policies.

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Appendix IIIPress Communiquesof the Interim Committeeand the Development Committee

Interim Committee of the Board of Governorson the International Monetary System

PRESS COMMUNIQUES

Thirteenth Meeting, Belgrade, October 1,1979

1. The Interim Committee of the Board of Governors of the InternationalMonetary Fund held its thirteenth meeting in Belgrade, Yugoslavia, on October 1,1979 under the chairmanship of Mr. Filippo Maria Pandolfi, Minister of theTreasury of Italy, who was selected by the Committee to succeed Mr. Denis Healey,formerly Chancellor of the Exchequer of the United Kingdom. Mr. Jacquesde Larosiere, Managing Director of the International Monetary Fund, participated inthe meeting. The following observers attended during the Committee's discussions:Mr. Gamani Corea, Secretary-General, UNCTAD; Mr. Rene Larre, General Man-ager, BIS; Mr. Emile van Lennep, Secretary-General, OECD; Mr. Fritz Leutwiler,President, Swiss National Bank; Mr. Olivier Long, Director-General, GATT;Mr. Robert S. McNamara, President, IBRD; Mr. Rene G. Ortiz, Secretary-General,OPEC; Mr. Tommaso Padoa-Schioppa, Director General for Economic and Finan-cial Affairs, CEC; Mr. Jean Ripert, Under-Secretary-General for International Eco-nomic and Social Affairs, UN; Mr. Cesar E.A. Virata, Chairman, DevelopmentCommittee.

2. The Committee discussed the world economic outlook and the policies appro-priate in the current situation.

The Committee noted that events in recent months pointed to a period of reducedeconomic growth in the industrial countries. Signs of a recession in the United Stateshad become stronger, and some slowing of economic expansion in other industrialcountries was in prospect. However, the continuation of a positive growth rate inthese other countries should serve to limit the degree of the expected internationalslowdown.

The Committee observed with great concern that inflation throughout the indus-trial world had intensified. In view of this grave threat to economic and financialstability, the Committee emphasized that the main task of economic policy was tocontain inflationary pressures and to reduce inflationary expectations. One of theimmediate problems was to prevent the recent surge of price increases for oil andother primary products from adding to the strength of inflationary expectations andthus being built into underlying rates of increase in wages and prices. Accordingly,the Committee noted with satisfaction that reduction of inflation was being givenpriority in the economic policies of industrial countries, and it reiterated its viewthat in many countries progress in reducing inflation was an essential preconditionfor the resumption of vigorous economic growth.

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APPENDIX III (continued). PRESS COMMUNIQUES OF THE COMMITTEES

On the external side, the Committee noted the very large shifts in current accountbalances that were occurring both among and within groups of countries. With thecurrent account surplus of the major oil exporting countries expected to rise sharply,a corresponding deterioration in the combined current account balance of the oilimporting countries as a group was obviously in prospect.

Although the industrial countries were expected to account for most of thisdeterioration in 1979, the problem of the distribution of current account surplusesand deficits among the major industrial countries—a matter of concern over thepast few years—now appeared to be receding. This improvement in the pattern ofpayments imbalances was attributable in large part to offsetting changes in demandconditions in the largest countries and to effects of past exchange rate changes,and was seen by the Committee as important evidence of a better working of theinternational adjustment process. In this connection, the Committee welcomed thecloser cooperation in intervention policies in the exchange markets.

Noting that the combined current account deficit of the non-oil developing coun-tries was expected to increase from about $32 billion in 1978 to $45 billion in 1979and to well over $50 billion in 1980, the Committee expressed concern that thisdevelopment would lead to an increase in external financial difficulties among thesecountries. Particularly disturbing was the prospect of a further rise in debt servicecharges, which in a number of developing countries were already rising faster thanthe rate of increase in the debt itself.

The Committee also noted with concern the fact that the worsening of the exter-nal position of the non-oil developing countries was occurring at a time of growinginternal strains. While economic growth in the developing world was in generalbeing fairly well maintained, it remained modest in relation to population growthand developmental needs. Moreover, the problem of inflation, already quite seriousin many developing countries, had intensified in 1979.

The situation of the non-oil developing countries, the Committee observed, calledin many cases for an improvement in domestic financial policies. It also underlinedthe need for a larger flow of external resources. It was especially important, in theCommittee's view, that the industrial countries, in the design of their economicpolicies, pay particular attention to the economic needs of developing countries. Inthis connection, a wide range of policies was seen to be relevant, including thereduction of protectionist measures; the opening of import markets to exports ofmanufactures and commodities from developing countries and of capital markets tooutflows of funds to such countries; and measures to give new impetus to the flowof official development assistance, which had stagnated in recent years.

3. The Committee reiterated its view on the necessity of an active exercise bythe Fund of its surveillance authority as a means of strengthening the adjustmentprocess.

4. The Committee noted with satisfaction that since its last meeting there hadbeen a number of developments that enhanced the Fund's ability to provide balanceof payments assistance to its members. It welcomed the adoption by the ExecutiveBoard of a new set of guidelines on the conditionality applicable to the use of theFund's general resources in the upper credit tranches and the improvements in theFund's compensatory financing facility, including the increase in the maximumamount of compensation that could be obtained under that facility.

The Committee also noted with satisfaction that, since the supplementary financ-ing facility became operational in February, the Fund has begun to use the addi-tional financial resources which have been put at its disposal to provide membersexperiencing difficult adjustment problems with assistance in larger amounts andfor a longer period than could be made available under the regular credit tranches.In this connection, the Committee, like the Development Committee, asked theExecutive Board to give attention to developing ways and means of lowering theinterest costs of the supplementary financing facility.

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The Committee also agreed with the request of the Development Committee tothe Executive Board to give further consideration to increasing the maximum repur-chase period in respect of purchases under the extended Fund facility from eight toten years.

The Committee agreed to keep the adequacy of these measures under review.5. The Committee recognized that there was a clear need for broad multilateral

efforts to assist member countries in coping with the very difficult situation ahead.In this context the Program of Immediate Action outlined by the Group of 24 andendorsed by the Group of 77 would be kept in view.

6. The Committee noted the slow progress in the implementation of the increasesin quotas approved under the Resolution of the Fund's Board of Governors on theSeventh General Review of Quotas. In view of the importance of an early imple-mentation of these increases in quotas, the Committee urged those members, espe-cially those with the larger quotas, that have not yet taken action that would enablethem to consent to the increases in their quotas, to do so as promptly as possible.

7. The Committee considered the report submitted by the Executive Board onthe question of a substitution account in accordance with Paragraph 6 of the Com-mittee's communique of March 7, 1979. Such an account, administered by theFund, would accept deposits of U.S. dollars from members of the Fund and certainother official holders in exchange for an equivalent amount of SDR-denominatedclaims. In the light of the report submitted by the Executive Board, the Committeeconcluded that such an account, if properly designed, could contribute to animprovement of the international monetary system and could constitute a steptoward making the SDR the principal reserve asset in the system.

Ip order for the account to achieve widespread participation on a voluntary basisand on a large scale, among other things, it should satisfy the needs of depositingmembers, both developed and developing, its costs and benefits should be fairlyshared among all parties concerned, and it should contain satisfactory provisionswith respect to the liquidity of the claims, their rate of interest, and the preservationof their capital value.

The Committee, noting the progress that has been made and recognizing that anumber of issues remain to be resolved, asked the Executive Board to continue todirect priority attention to designing a substitution account plan in accordance withthe preceding paragraphs and in light of the views expressed by the members of theCommittee, and to report progress to the next meeting of the Interim Committee.

8. The Committee agreed to hold its next meeting in Hamburg, Germany, onApril 25, 1980.

9. The Committee expressed their warm appreciation for the hospitality of theGovernment of Yugoslavia and for the excellent arrangements provided for themeeting.

Fourteenth Meeting, Hamburg, April 25, 1980

1. The Interim Committee of the Board of Governors of the International Mone-tary Fund held its fourteenth meeting in Hamburg, Germany, on April 25, 1980under the chairmanship of Mr. Filippo Maria Pandolfi, Minister of the Treasury ofItaly. Mr. Jacques de Larosiere, Managing Director of the International MonetaryFund, participated in the meeting. The following observers attended during theCommittee's discussions: Mr. G.D. Arsenis, Director of Money, Finance and Devel-opment Division, UNCTAD; Mr. Alexandre Lamfalussy, Economic Adviser andHead of the Monetary and Economic Department, BIS; Mr. Pierre Languetin,Member of the Governing Board, Swiss National Bank; Mr. Emile van Lennep,Secretary-General, OECD; Mr. Olivier Long, Director-General, GATT; Mr. ReneG. Ortiz, Secretary-General, OPEC; Mr. Fran^ois-Xavier Ortoli, Vice-President,CEC; Mr. Jean Ripert, Under-Secretary-General for International Economic and

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Social Affairs, UN; Mr. Ernest Stern, Vice President, Operational Staff, IBRD;Mr. Cesar E.A. Virata, Chairman, Development Committee.

2. The Committee discussed the world economic outlook and the policies appro-priate in the current situation. Two aspects particularly concerned the Committee:worldwide inflation and the payments imbalances of the non-oil developing coun-tries.

Expressing great concern at the dramatic and widespread rise in rates of inflationsince its meeting in Belgrade, the Committee agreed that the top priority being givenin many countries to the fight against inflation must not be relaxed.

The Committee recognized that short-term prospects for growth of the worldeconomy, and particularly of economic activity in the industrial countries, are notgood. Success in reducing inflation was considered a condition for better investmentperformance and resumption of satisfactory growth over the longer term.

It was recognized that efforts to contain inflation require an appropriate balancebetween monetary and fiscal policies. In that light the Committee stressed that moreeffective use of fiscal policy, with better control of government spending, is essential.

The Committee continued to attach great importance to avoiding secondaryrepercussions of the recent oil price increases on wages, other incomes, and pricesof non-oil goods and services. The Committee noted the desirability of doing every-thing feasible to ensure that incomes grow at a rate which is consistent with anti-inflationary policies.

The Committee also emphasized the need to supplement fiscal and monetarypolicies with measures designed to improve supply conditions and promote higherlevels of saving and investment. In this general context, the Committee recognizedthe pervasive impact of the energy situation on all aspects of economic performanceand stressed the importance of measures to conserve energy and to develop newsources of energy.

With respect to the international payments situation, the Committee noted thatshifts in current account balances among major groups of countries are provingeven larger than was visualized at its previous meeting last October. According tothe estimates of the IMF staff, the current account surplus of the oil exporting coun-tries is now expected to reach $115 billion in 1980 and to remain very large in1981, while the combined current account deficit of the non-oil developing countriesis likely to approach $70 billion in 1980—compared with $55 billion in 1979—and to rise still further in 1981, and the deficit of the industrial countries on currentaccount (excluding official transfers) will probably rise from $10 billion in 1979 tothe range of $45-50 billion in 1980 before subsiding in 1981.

What the Committee found most disturbing about the payments imbalances nowin prospect was the sharp increase in the current account deficit of the non-oildeveloping countries. It was feared that this adverse swing would generate externalfinancial difficulties for many of these countries, and that a number of low-incomecountries in the group would face severe problems in maintaining an adequate flowof imports. To avert hardships for these latter countries, the Committee urgedprovision of sufficiently large amounts of aid and concessional loans.

The Committee noted that a number of developing countries, and especially thosewhose own manufacturing industry is most advanced, have relatively good access tointernational financial markets, and may be expected to cope with the sharp rise intheir import bills partly through expanded international borrowing. While recogniz-ing the need for prudential supervision, the Committee expressed concern that suchsupervision should not impede recycling. The Committee was concerned, never-theless, about the medium-term implications of such heavier borrowing. With theescalation of outstanding debt, amortization payments and interest costs—especiallythose incurred on fixed terms involving high rates of interest—will make sizableclaims on debtors' export earnings and other available funds over the next few years.To minimize these burdens, the Committee urged that developing countries seek a

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judicious blend of adjustment and financing to meet the payments problems imme-diately ahead.

Recognizing that the ability of non-oil developing countries to achieve the desiredobjectives would depend importantly on their access to foreign markets, the Com-mittee urged the industrial countries to keep their markets open to exports fromdeveloping countries. Avoidance of protectionist trading policies was considered ofvital importance at a time of sluggish growth in world economic activity.

3. In view of the outlook for the world economy and, in particular, the prospectof large and widespread payments imbalances, the Committee agreed that the Fundshould stand ready to play a growing role in the adjustment and financing of theseimbalances. In this connection, the Committee endorsed the views set forth in theManaging Director's statement on the subject and agreed with him that any suchfinancing by the Fund should be made available in conjunction with adjustmentpolicies appropriate to the needs and problems of members in the present economicsituation.

The Committee recognized that, in view of the availability of funds under thesupplementary financing facility and the expected increase in quotas under theSeventh General Review, the Fund is, under present circumstances, in a relativelyliquid position. Nevertheless, in the light of the size and the distribution of paymentsimbalances, the necessity to phase adjustment over a reasonable period of time,and the time needed for the completion of any borrowing arrangements, the Com-mittee encouraged the Managing Director to start discussions with potential lenderson the terms and conditions under which the Fund could borrow funds to increaseits resources, if and when the need arises.

The Committee believed that, in addition to any action by the Fund, additionaldevelopment assistance would need to be provided to the low-income countries thatare most severely affected by the present situation and, in this connection, it en-dorsed the view expressed by the Development Committee on the need for such as-sistance. The Committee requested the Managing Director and the Executive Boardto start examining in depth the relevant recommendations of the program of imme-diate action of the Group of 24, in light of the press communique of the Ministersof the Group of 24, with a view toward a substantive discussion next September.

4. The Committee expressed concern at the fact that, although the Resolution ofthe Board of Governors on the Seventh General Review of Quotas had beenapproved nearly one and a half years ago, the quota increases of SDR 19.6 billionapproved under it had not yet come into effect. The implementation of these in-creases would enhance the ability of the Fund to serve the needs of its members inthe difficult payments situation ahead. The Committee stressed again the importanceof an early implementation of these increases and urged those members that hadnot yet consented to the increases in their quotas to do so as soon as possible, sothat the increases could become effective in the course of 1980.

5. The Committee noted that the present gold sales program, which is nearingcompletion, has yielded a very large amount of resources for the benefit of thedeveloping countries—about SDR 3.9 billion—the greater part of which was usedfor balance of payments assistance on concessionary terms to the low-incomedeveloping countries. The Committee asked the Executive Board to study the futureof the Trust Fund. This study should encompass, inter alia, the possibility of usinga part of the Trust Fund repayments for ameliorating the conditions of loans tolow-income developing countries.

The Fund should also explore the possibility of obtaining other resources to sub-sidize its lending to low-income developing countries.

6. The Committee commended the Executive Board for the progress it had madein designing a plan for a substitution account along the lines requested by the Com-mittee in its communique issued in Belgrade. The Committee noted that the Boardhad reached, in Part II of its report, provisional agreement on a wide range of

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features of such an account. The Committee also noted that some issues remainedto be solved, including arrangements for the maintenance of financial balance inthe account. The Committee, after a discussion of these issues, expressed its inten-tion to continue its work on this subject.

7. The Committee noted with satisfaction the steps taken to widen the uses ofSDKs and welcomed the decisions taken by the Executive Board under which SDKscan now also be used in swaps, forward operations, and in making donations. TheCommittee also welcomed the recent decisions under which an increased number ofofficial institutions can hold and deal in SDKs.

The Committee noted that the Executive Board had conducted an examinationof the SDR valuation and interest rate baskets with a view to simplifying and en-hancing further the attractiveness of the SDR. The Committee endorsed theseobjectives and generally expressed the view that it would be desirable for the interestand valuation baskets to be identical. The Committee asked the Executive Boardto examine the matter further and to take the necessary action.

8. The Committee agreed to hold its next meeting in Washington, D.C. on Sun-day, September 28, 1980. The Committee also agreed to hold a meeting in Libre-ville, Gabon, in the spring of 1981.

9. The Committee expressed its warm appreciation to the Government of theFederal Republic of Germany and to the Free and Hanseatic City and the peopleof Hamburg for their hospitality and for the excellent arrangements provided forthe meeting.

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Joint Ministerial Committee of the Boards of Governorsof the Bank and the Fund on the Transfer of Real Resourcesto Developing Countries (Development Committee)

PRESS COMMUNIQUES

Twelfth Meeting, Belgrade, September 30,1979

1. The Development Committee held its twelfth meeting in Belgrade, Yugoslavia,on September 30, 1979 under the chairmanship of Mr. Cesar E.A. Virata, Ministerof Finance of the Philippines, and with the participation of Mr. Robert S. Mc-Namara, President of the World Bank, and Mr. J. de Larosiere, Managing Directorof the International Monetary Fund. Sir Richard King, Executive Secretary, tookpart in the meeting which was also attended by representatives from a number ofinternational and regional organizations and Switzerland as observers.

2. The Committee considered papers prepared by the World Bank and IMF onthe flow of financial resources to developing countries and the stabilization of exportearnings. They also took note of the proposals contained in the Outline for a Pro-gram of Action approved by the Group of 24 and unanimously endorsed by theGroup of 77.1

3. The Committee discussed current economic trends and agreed that manydeveloping countries will face a particularly difficult situation over the next fewyears. The non-oil primary producers are likely to experience a slowdown in thegrowth of demand for their exports and adverse shifts in their terms of trade. TheCommittee expressed serious concern that in the context of high rates of inflationthis would lead to relatively slow rates of economic growth, a further substantialdeterioration in their aggregate current account deficit, and an increase in the num-ber of developing countries encountering debt servicing problems.

4. Recognizing the increased interdependence of national economies and in par-ticular the impact on developing countries of developments in industrialized coun-tries, the Committee emphasized the importance of sound economic and financialpolicies in all countries; it reiterated the need to avoid protectionist trade measuresthat would adversely affect the exports of developing countries. The Committee alsostressed the urgency of implementing effective policies for energy conservation anddevelopment.

5. The Committee recognized that there was a clear need for broad multilateralefforts, including an increasing role for the Bank and the Fund, to assist membercountries in coping with the very difficult situation ahead. In this context the Pro-gram of Immediate Action outlined by the Group of 24 and endorsed by the Groupof 77 would be kept in view. The Committee noted with satisfaction a number ofrecent developments that had enhanced the Fund's capacity to assist its members,including: the Resolution of the Fund's Board of Governors on the Seventh GeneralReview of Quotas under which quotas in the Fund could be increased to SDR 58.6billion; the coming into force of the supplementary financing facility; the adoptionof new guidelines on conditionality; and the improvements in the compensatoryfinancing facility, including the increase from 75 per cent to 100 per cent of quotasin the maximum amount that could be purchased under that facility. The Com-mittee stressed the importance of an early implementation of the quota increasesunder the Resolution on the Seventh General Review of Quotas.

6. The Committee noted with satisfaction that over the past year agreement hadbeen reached in the Executive Board of the World Bank to recommend to its Gov-ernors a $40 billion General Capital Increase; the Committee urged that all neces-sary steps be taken to make this increase effective as early as possible. The Com- , c A** u . 1™.' i -, Al_ T—r.i n * • * r i -r^ « , See Attachment, pages 160-

mittee welcomed the Fifth Replenishment of the Resources of the Inter-American 65.

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Development Bank, the decision by the Governors of the African DevelopmentBank for a substantial increase in the capital of that institution, and the decision ofOPEC's Ministerial Committee on Financial and Monetary Matters to approve thesecond replenishment of the resources of the OPEC Special Fund.

7. In considering the longer-term economic outlook, the Committee noted thatlow-income developing countries will continue to depend on official developmentassistance (ODA) for the bulk of their net capital inflows; in view of this, theCommittee regretted that only a modest growth in total ODA flows is projectedover the next few years. For many middle-income countries, which depend mostlyon private sources for capital flows, as well as certain low-income countries, theanticipated increase in total debt and debt service over the medium term werematters for careful attention.

8. The Committee, while recognizing the difficulties facing some donor countries,stressed the importance of increasing the quantity of ODA flows, particularly fromthose countries which are now at relatively low levels in relation to gross nationalproduct. The Committee also called for improvements in the quality of ODA suchas quick disbursing assistance, untying of aid, finance for local costs, and for greaterconcentration of ODA on the countries most in need. The Committee stressed theurgency of bringing the Sixth Replenishment of IDA to a prompt conclusion at alevel which would enable a significant increase in commitments in real terms tocontinue.

9. In discussing longer-term structural adjustment problems, the Committee wel-comed the willingness of the Bank to consider increasing substantially the relativeimportance of program lending in its overall operations. The Committee requestedthe Executive Directors of the Bank to explore the criteria which could govern pro-gram and sector loans in situations where external disequilibria had not yet becomesevere, and to consider whether in individual cases such lending should be addi-tional to that now planned. The regional institutions were invited to review theirpolicies and practices in light of the current prospects for developing countries. TheCommittee endorsed expanded collaboration between the Fund and the Bank insupport of economic programs of developing countries facing severe balance ofpayments problems.

10. The Committee discussed the problem of medium-term financing for balanceof payments adjustment. In this connection, the Committee noted that the Fund'sextended facility had proved a useful mechanism and that it had considerable poten-tial in the future. Recognizing the difficult situation facing member countries, theCommittee requested that the Executive Board of the Fund give further considera-tion to increasing the maximum repurchase period under the extended facility fromeight to ten years.

11. In view of the heavy needs for balance of payments financing facing manycountries in the years ahead, the Committee requested the Executive Board of theFund to give attention to developing ways and means of lowering the interest costsof the supplementary financing facility.

12. The Committee recognized that in the difficult years ahead there would be amajor need for recycling of funds to assist developing countries facing large balanceof payments deficits and recognized that this need could not be met by officialfinancial flows only. In this connection, the Committee stressed the important roleof additional private capital flows in financing the increasing capital requirementsof developing countries; such flows would be facilitated by the promotion of policiesin these countries conducive to sustaining their credit worthiness. The Committeewelcomed the expansion in cofinancing with the private banking sector that hadbeen achieved by the World Bank and regional institutions to date, and suggestedthat capital-exporting countries should explore what actions could be taken toencourage greater use of this mechanism by their banks. The Committee also

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requested the World Bank and the regional institutions to explore steps that couldbe taken further to expand cofinancing.

13. In discussing possible new approaches relating to capital flows, the Com-mittee reaffirmed that priority should be given to exploiting the full capacity ofexisting institutions, including possible acceleration in the use of their resources, tomeet the urgent problems of the developing countries over the next few years. TheCommittee considered however that the matter should be kept actively under review.

14. The Committee reviewed the question of stabilization of export earnings onthe basis of a staff study. The Committee emphasized the importance of appropriatemechanisms to mitigate the effects of fluctuations in export earnings of developingcountries, in particular those countries heavily dependent upon primary commodityexports, and to assist them in diversifying their exports. It recognized that, throughcoordinated action, the Fund and Bank had developed the capacity to meet theneeds of countries suffering from shortfalls and noted in particular the progress thatthe two institutions had made in providing finance for medium-term commodityshortfalls and in reducing dependence on primary commodities. It requested theExecutive Boards of the two institutions to keep this matter under review.

15. The Committee welcomed the recent decision of the Executive Board of theFund to liberalize the Fund's compensatory financing facility, in particular the in-crease in the limit on the amount of drawings outstanding under the facility. Thechanges constitute a substantial improvement in the Fund's compensatory financingfacility, making it a more effective mechanism to assist members in dealing withproblems of fluctuations of export earnings. The Committee noted that in the longerrun vulnerability to fluctuating export earnings would be reduced by diversifyingexports, for which purpose Bank and IDA resources should continue to be madeavailable. The Committee also welcomed the new convention replacing the LomeConvention and the new features of the STABEX incorporated in the new convention.They also noted with satisfaction the progress made in negotiations for the settingup of a Common Fund for commodities.

16. It was agreed that the subject of export earnings stabilization would be re-viewed by the Committee in a year's time in the light of experience in operation ofthe recently improved compensatory financing facility, the ongoing negotiations onthe Common Fund, and the further study of the matter being undertaken inUNCTAD in cooperation with Fund staff.

17. The Committee will meet again on April 24 in Hamburg.18. The Committee expressed their sincere appreciation to the Government of

Yugoslavia for their hospitality and for the excellent arrangements provided fortheir meeting.

Attachment: Outline for a Program of Action on International Monetary Reform

Prepared by the Group of Twenty-Four and endorsed by the Group of Seventy-Seven. Belgrade,Yugoslavia, September 29, 1979.

I. ASSESSMENT OF INITIAL OBJECTIVES AND DEVELOPMENTS IN INTERNATIONAL MONETARYREFORM

Following the monetary crisis that began during the 1960s and became acute in 1971, theinternational community was confronted with the urgent need to reform the international mone-tary system. In this connection, the Group of 77 emphasized that unless there were an effectiveparticipation of the developing countries in designing the new system, particularly in view of thepreponderant influence hitherto exercised by the developed countries, common objectives couldnot be achieved. Consequently, the Intergovernmental Group of Twenty-Four on InternationalMonetary Affairs (Group of 24) was established for the purpose of coordinating and unifyingthe position of the developing countries in international monetary and financial matters. Inparticular, it was agreed that the Group of 24 was to:

(a) keep the international monetary situation under review;(b) evaluate events in the monetary field, as well as any decisions which might be taken by

a single country or group of countries within the framework of the International MonetaryFund, relating to the interests of the developing countries;

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(c) recommend to the governments of the Group of 77 coordinated positions for use invarious fora, and to consider any other action that might be necessary, including the conveningof a world monetary conference within the framework of the United Nations.

The initial basic discussions and negotiations with the developed countries on the reform ofthe monetary system were undertaken in the forum of the Committee of the Board of Governorson Reform of the International Monetary System and Related Issues (Committee of Twenty).It was agreed that this reform had to be of a tripartite nature requiring mutually supportingarrangements in the fields of money, trade and the transfer of resources to developing countries.

Major structural changes in the world economy towards the end of 1973 and the absence ofpolitical will on the part of developed countries made it impossible to agree on an overallpackage of monetary reform. Agreement was, however, reached by the Committee of Twenty onthe need to alter some aspects of the monetary system, particularly the exchange rate regime.Measures were proposed to deal with the most urgent aspects of monetary relations amongdeveloped countries. However, they did not deal with those aspects of the system that were ofparticular interest to developing countries.

Although overall reform was not considered possible, it was felt that an evolutionary processof reform, with a gradual adaptation of the legal structure, was called for. Towards this objec-tive, two bodies were established. These were: the Interim Committee of the Board of Governorson the International Monetary System; and the Joint Ministerial Committee of the Boards ofGovernors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries.

The Interim Committee was to advise on the adaptation of the system, while the DevelopmentCommittee was to pursue the means for promoting and improving the transfer of real resourcesto developing countries. Work within these two bodies along with the ongoing negotiations inUNCTAD and the multilateral trade negotiations under the auspices of GATT were expected tobring about the desired changes in the fields of money, finance and trade. However, the resultsso far have not met the requirements of developing countries.

In practice, no comprehensive and coherent program was agreed for bringing about a deliber-ate process of evolution in the system. The lamaica Agreement and the subsequent amendmentof the Articles of Agreement eliminated some features of the Bretton Woods system, and leftopen a future range of options, but failed to convey a sense of direction and did not incorporatecertain features of basic interest to developing countries, such as: measures to control, in aneffective manner, the creation of international liquidity; dispositions on asset settlement; rules toensure symmetry in the adjustment process and promote a stable system of exchange rates; thefinancing by the IMF of short-term capital movements; and, particularly, arrangements topromote the transfer of real resources.

In the absence of a firm collective commitment to comprehensive reform, reliance was placedin the new Articles of Agreement on the collaboration of members with the International Mone-tary Fund and on IMF surveillance in the effort to ensure the proper functioning of the system,with particular emphasis on achieving orderly exchange arrangements and promoting a stablesystem of exchange rates. The nature of the collaboration with the Fund to be undertaken bymembers was, however, not precisely defined. So far as exchange rates were concerned, the Fundwas not in a position to exercise significant influence except where members sought access to itsresources. The effectiveness of exchange rate policies was overestimated, and it was in any caseundermined by the excessive volatility of rates which itself became a powerful force adding toinstability and uncertainty.

The creation of international liquidity continued to be determined largely by national policies,and inadequate progress was made towards collective management of international reserve crea-tion or towards establishing the SDR as the principal international reserve asset, despite previousagreement on the desirability of both these objectives.

Failure to establish a new basis for the international monetary system was accompanied by adeterioration in the climate of world trade. Expectations that the introduction of flexibility intothe exchange rate system would make it possible to move towards more open trading relation-ships failed to materialize. Indeed, in the face of business recession and inadequate industrialadjustment in the developed countries, international trade was further impaired by increasingrecourse to protectionist measures.

The discussions in the Committee of Twenty resulted in a wide measure of agreement that aproperly functioning international monetary system would require a considerable expansion inthe transfer of resources to developing countries. However, the subsequent shelving of compre-hensive reform efforts was accompanied by a decline in such transfers in real terms.

Thus the international community has failed to achieve its goals in the fields of money, tradeand transfer of real resources to developing countries.

II. THE CHANGING WORLD ECONOMIC ENVIRONMENT AND THE REFORM PROCESS

Expectations for improvements in the world economy and in the working of the internationalmonetary system following the Jamaica Agreement seem to have rested in the main on thefollowing assumptions:

—rthe low growth rates and inflation in developed countries, as well as the payments imbal-ances among them, would be temporary and of a cyclical nature;

—flexibility in exchange rates would ensure that they reflect underlying economic conditionsand would enable countries to manage with smaller reserves, thus providing greater freedomto countries in the pursuit of their own objectives, while at the same time permitting theachievement of equilibrium;

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—deficits would be financed largely from capital markets and through the IMF oil facility,although the temporarily expanded credit tranches in the regular IMF facilities, the newextended facility and the liberalization of the compensatory financing facility, would beexpected to play a complementary role;

—concessional flows to the countries with limited access to capital markets would increasesubstantially;

—repayments would be effected through the expansion of export earnings that would accom-pany the recovery of the world economy and further liberalization of international trade.

The above-mentioned assumptions were invalidated by events. In the first place, the problemof stagflation in developed countries proved to be much more intractable than anticipated. Thepolicy responses of major industrial countries to stagflation varied widely. Some of them per-sisted in following growth policies below their potential and experienced low inflation rates andsizable current account surpluses, while others continued expansionary domestic policies thatresulted in significant deficits on current account and higher inflation rates. In particular, themain reserve center followed expansionary policies and achieved higher growth rates than mostother industrial countries, but this was accompanied by increasing inflation and widening deficitson current account.

The above-mentioned differential economic performance of industrial countries and the lackof economic policy coordination among them gave rise to serious problems in several areas andlimited the effectiveness of exchange rate changes. Firstly, sizable speculative capital movements,as well as violent swings in exchange rates, created worldwide conditions of uncertainty, dis-couraged investment, and complicated the implementation of economic policies. Secondly, pres-sures upon the main reserve currency center to defend the value of the dollar eventually inducedthe U.S. Government to pursue more restrictive economic policies. Furthermore, the reluctanceof the surplus developed countries to reflate their economies sufficiently may well have deepenedthe deflationary trends in the world economy, fostered protectionism, and inhibited more basicadjustment.

Continuation of recession and inflation in developed countries resulted in a slower growth ofexports of developing countries and a further deterioration in the terms of trade. In addition,the rising wave of protectionism in developed countries severely affected the export volume ofdeveloping countries and denied them a more efficient use of resources.

The effective functioning of the financial system requires the maintenance of an open anddynamic trading system. Developing countries, however, cannot—and should not—continue tobear the costs of inadequate adjustments in developed countries. Continuation of the develop-ment process requires that full employment and growth conditions be restored in the worldeconomy; that world markets be open to the exports of developing countries; and that, in thelong run, a greater proportion of the import requirements of these countries be financed throughexport earnings.

The current account deficits that developing countries have been experiencing and are likelyto face in future are not sustainable in the light of the existing trade framework or of the termsand conditions of current financial flows.

In the case of some developing countries private capital markets did provide the necessaryvolume of finance to sustain activity while effecting the required structural adjustments. How-ever, inadequacy of the terms relating to maturities and interest rates would give rise to laterproblems.

Contrary to expectations and, indeed, accepted objectives, the volume of ODA declined inreal terms in the period 1975-78. Flows from multilateral sources through the soft loan windowsof the development finance institutions, the IMF compensatory financing facility, the oil facilityand the Trust Fund, made valuable contributions to the financing of deficits of the poorerdeveloping countries, but fell far short of requirements. In the face of inadequate external financ-ing, these countries had no choice but to cut back their development process.

Recent analyses carried out by multilateral institutions regarding the economic outlook for thecoming years suggest that the international environment has deteriorated substantially for devel-oping countries and that in many respects they will face more critical situations than after the1974/75 crisis. The reduced growth prospects of industrialized countries will exert a furtherdeflationary impact on economic activity in developing countries; there are prospects for an evenslower growth of world trade and deteriorating terms of trade, as well as a substantial wideningof current account deficits for most developing countries. The external debt situation will becomemore strained, and the debt service payments from accumulating debt will significantly reducethe transfer of real resources.

For developing countries that have access to private capital markets, notwithstanding certaintrends in the direction of larger resources within the international commercial banking system,there is the possibility that commercial bank financing may not be forthcoming in the neededquantities or on suitable terms, so that the recycling mechanism will not operate as efficientlyas in the past. For those countries that do not have effective access to capital markets, the highlyinadequate flows of ODA, which have been well below the internationally agreed targets, havealready meant that there is not sufficient finance to cover essential import requirements.

Consequently, developing countries are faced by a further reduction of the already highlyunsatisfactory growth rates, with serious social and political effects.

It is clear from the above that, unless policies change, the world economy will continue to finditself trapped in a vicious circle of slow growth, unemployment, protectionism and instability inmonetary and financial fields. In order to break this vicious circle, the international communitymust address itself to the question of structural adjustments in order to accommodate the grow-

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ing productive potential of developing countries in the context of a growing world economy.Such adjustments are, however, difficult to implement under conditions of stagnation in devel-oped countries and of inadequate resources for developing countries. The resumption of vigorouseconomic activity, investment, and trade would therefore contribute significantly towards achiev-ing such adjustments.

The foregoing analysis underlines the vital need to take fully into account the interrelationshipthat exists between trade, development finance, and monetary arrangements, and the need toestablish a mutually supporting action program in these three areas.

III. TOWARDS A FUNDAMENTAL INTERNATIONAL MONETARY REFORM

1. It will be apparent from the foregoing considerations that the basic tasks of internationalmonetary reform have yet to be accomplished. Developing and developed countries alike have acommon interest in a viable international monetary system. Such a system should foster develop-ment, employment and trade, and, in particular, support the development of developing countriesin the overall context of the establishment of the New International Economic Order.

2. The principal features of a viable system should include:(a) An effective, symmetrical and equitable adjustment process that would be consistent with

the maintenance of high levels of employment and rates of growth and the dynamic expansionof world trade. This would require access to official credit facilities on terms and conditionsresponsive to the nature of balance of payments problems, as well as to the level of developmentof the countries concerned. It would also require the maintenance of free and secure access fordeveloping countries to the goods and financial markets of developed nations.

(b) An exchange rate regime which, while flexible, is capable of promoting adequate stability.(c) In exercising its surveillance over exchange rate and balance of payments policies, the

IMF should give equitable and symmetrical treatment to surplus and deficit countries with aview to ensuring that surplus developed countries and reserve currency countries accept anequitable share of the burden of adjustment at high levels of economic growth.

(d) Arrangements should be made for the creation of international liquidity through trulycollective international action in line with the requirements of an expanding world economy, andthe special needs of developing countries, and with such safeguards as would ensure that thetotal supply and distribution of international liquidity is not unduly influenced by the balanceof payments position of any country or group of countries. The SDR should become the principalreserve asset of the system.

(e) The promotion of the net flow of real resources to developing countries should be viewedas an integral element of an effectively functioning system. In this context, a link should beestablished between the allocation of SDRs and development assistance.

(f) Developing countries should have a greater role than presently in the decision-makingprocess, including all phases of the studies, consultations and negotiations linked to decisions onthe international monetary system.

3. Specific or interim proposals for improvements in current international monetary arrange-ments should be carefully examined from the standpoint of their consistency with the frameworkfor a reformed system set forth above.

4. The Intergovernmental Group on International Monetary Affairs will continue to studyand initiate the measures required in moving towards a fundamental reform of the internationalmonetary and financial system.

5. The Group of 24 should continuously develop and strengthen its work in order to be ofmaximum assistance to developing countries, coordinating their positions on internationalmonetary and financial matters in all relevant fora.

IV. THE PROGRAM OF IMMEDIATE ACTION

The developing countries require the formulation of a program of action with specific itemsin which solutions may be found within the framework of a general program of reform. TheMinisters of the Group of 77 at the meeting in Arusha, Tanzania, decided upon a substantialnumber of proposals. These give a sense of direction to our efforts to achieve a New Inter-national Economic Order.

The Group of 24 has reassessed and elaborated upon these proposals within the context ofthe reform of the international monetary and financial system, and considers that the followingshould be given priority for immediate action.

A. Measures Related to the Transfer of Real Resources

1. There is an urgent need to accelerate the flow of concessional aid to developing countries.Each developed donor country, particularly those falling behind in meeting the internationallyagreed target, should establish its program and make binding commitments for the annualgrowth rate of ODA disbursement for each of the next three years. This should result in ageneral increase in real terms and an improvement in the quality of ODA flows to the developingcountries; in the context of this general increase, the quantum in real terms of ODA flows toleast developed countries, most seriously affected countries, and landlocked and island developingcountries, should double.

2. The Group of 24 urges the early establishment of a link between SDR allocation andadditional development assistance. The creation of such a link is long overdue and a positivedecision to establish it should be arrived at without further delay.

163



3. The Group of 24 calls for an increase in program lending of the multilateral financialinstitutions to make it equal to at least 25 per cent of total loans, and stresses in this context thatthe lending programs of the multilateral financial institutions should become increasinglyresponsive to the overall priorities, and in particular to sectoral priorities, of the recipientdeveloping countries. It also calls for the provision of adequate local cost financing.

4. There is a need for an effective strategy to deal with the official external indebtedness ofsome developing countries, designed to avert debt servicing difficulties and sustain the develop-ment process of these countries. The Group urges early conclusion of the negotiations regardinginternationally agreed guidelines for debt reorganization of interested developing countries, inthe light of the general principles adopted in UNCTAD Resolution 165 (S-IX). The Group alsostresses the need for immediate and full implementation of part A of the same resolution regard-ing the retroactive adjustment of terms on past ODA in favor of the low-income countries,particularly of the least developed and the most seriously affected countries.

5. The Sixth Replenishment of IDA should be effected without delay so as to result in asignificant increase in real terms. The contributions to IDA should come from a wider group ofcountries, provided that the additional contributions from new donors do not prejudice theincrease in real terms of the contributions of the traditional donors.

6. All member countries should provide a substantial and effective increase in the capital baseof the multilateral financial institutions so as to ensure that their commitments in favor ofdeveloping countries increase in real terms at a satisfactory rate consistent with the needs ofthese countries. In this connection, the Group of 24 urges early approval and acceptance by allmember countries of the capital increase of the World Bank of the equivalent of $40 billion andthe prompt payment of subscriptions when due.

B. Measures Related to the Increase in Total Resources

7. Taking into account the long-term global liquidity needs, the Group supports:(a) an increase in the present agreed SDR allocations to meet the current difficult economic

conditions;(b) regular annual allocations of SDRs, in amounts adequate to members' needs for reserve

increases.8. The Group urges early completion of legislative action by the member countries concerned,

to make effective the Seventh General Review of Quotas. It also urges the revision of the criteria,both in terms of the variables used and the weights attached to them, for determining the quotasof the membership in the International Monetary Fund, and the advancement of the date forthe Eighth General Review of Quotas. In this review, the quota share of no developing countryshould be reduced. Due regard should be paid to increasing the representation of developingcountries in the Executive Boards of both the Fund and the World Bank. In any event, thepresent geographical representation by developing country regions should be preserved.

C. Measures Related to Balance of Payments Support

9. The Group of 24 attaches importance to the establishment of a medium-term balance ofpayments facility to respond to the adjustment needs of the developing countries. The newbalance of payments financing facility should add a substantial level of additional resources andmust be able to provide support that is significant in relation to present levels of deficits, shouldcarry minimum conditionality, since it is responding to an externally induced balance of pay-ments deficit, and should provide support on longer-term maturity. This facility should have asone of its basic characteristics an interest subsidy account for the low-income developingcountries.

10. The existing IMF facilities should be reviewed to enable them to cope more adequatelywith the deteriorating world economic environment.

In particular, it is necessary to consider:(a) lengthening repayment periods;(b) modifying the quantitative restrictions on the availability of such facilities;(c) setting conditionality with due regard to causes of deficits;(d) reviewing the Fund's compensatory financing facility, including a significant increase and

the liberalization of access in order to compensate adequately for shortfalls in export earnings,import fluctuations and deterioration in the terms of trade of developing countries.

11. The support of the developing countries for the proposed substitution account will be con-sidered in the light of the studies that are being carried out to analyze fully its impact and effecton the developing countries, as well as of the discussions in the IMF Board. Furthermore, theimplementation of a substitution account would have to be seen within the framework of abalanced package for immediate action.

D. Measures Related to Trade

12. The establishment in the World Bank of a long-term facility to finance purchases ofcapital goods should be considered as quickly as possible with a view to taking a positive decisionat the earliest possible date, provided it ensures additionality of resources for all developingcountries and incorporates provision for a Subsidy Account to ensure broadest access by low-income developing countries. All relevant aspects of the proposal would be studied with thesupport of multilateral institutions.

13. The Group of 24 calls for full and strict adherence to the standstill provisions pledged bydeveloped countries, in particular concerning imports from developing countries. Moreover, the

164



developed countries should facilitate the development of new policies and strengthen existingpolicies that would encourage domestic factors of production to move progressively from thelines of production that are less competitive internationally, especially where the long-termcomparative advantage favors the developing countries. Additionally, there is a need for fullimplementation of the commitment of developed countries undertaken in the Tokyo Declaration,which provides for special, differential and more favorable treatment for developing countries inremoving protectionist barriers against the exports of these countries.

The developing countries regard the adoption of these proposals as an important step towardsthe reform of international monetary and financial relations. All other initiatives for changes inthe system will be assessed in the light of progress towards the achievement of the above-mentioned objectives and the implementation of facilities of special interest to developingcountries.

V. SOME ELEMENTS OF THE FUTURE WORK PROGRAM OF THE GROUP OF TWENTY-FOUR

1. The Group of 24 will at its subsequent meetings review the progress made in the imple-mentation of the action program adopted by the Ministers of the Group of 24.

2. The Group of 24 will elaborate a plan of analytical work to be requested from the IMF,IBRD, UNDP/UNCTAD, and other international organizations on fundamental reform of theinternational monetary system and on various alternatives open for action by developing coun-tries. The Group of 24 will also undertake, with the support of independent or governmentalexperts, analytical research on problems identified as timely and relevant.

3. The Group of 24 will recommend that the representatives of developing countries in theIMF/IBRD, as well as in the executive organs of GATT, ECOSOC, UNCTAD and other inter-national fora, shall support the agreed views adopted in this document and promote the adoptionof the necessary measures in accordance with the objectives underlying these views.

4. The Group of 24 reaffirms the importance of monetary and financial cooperation amongdeveloping countries as an integral part of the process of changes in the world monetary andfinancial order, and will seek ways and means to contribute to the elaboration of specific mecha-nisms through which monetary and financial cooperation among developing countries could beimplemented in the light of the ECDC programs adopted by developing countries and on thebasis of its own initiatives.

Thirteenth Meeting, Hamburg, April 24,1980

1. The Development Committee held its thirteenth meeting in Hamburg, FederalRepublic of Germany, on April 24, 1980 under the chairmanship of Mr. Cesar E.A.Virata, Minister of Finance of the Philippines, and with the participation of Mr. J.de Larosiere, Managing Director of the International Monetary Fund, andMr. Ernest Stern, Vice President, Operations, of the World Bank. Sir Richard King,Executive Secretary, took part in the meeting which was also attended by represent-atives from a number of international and regional organizations and Switzerlandas observers.

2. The Committee considered papers submitted by the World Bank on lendingfor structural adjustment and on cofinancing, and a progress report by the IMF onrecent developments relating to IMF facilities. They also received preliminary re-ports from the chairmen of the two Task Forces on Nonconcessional Flows and onPrivate Foreign Investment. On the basis of a staff study by the Bank and the Fund,the Committee reviewed recent developments relating to the proposals of the Groupof 24 for a Program of Immediate Action, which the Committee at its meeting inBelgrade had agreed to keep in view. The Committee had a preliminary discussionon the report of the Brandt Commission.

3. The Committee noted with concern that the general impact of the high level ofworld inflation, including the increase in energy and other prices, and the weakeningof demand for LDC exports due to the slowdown of economic activity in the indus-trial countries, are leading to large current account deficits and placing an increasingburden of adjustment on many non-oil developing countries. Recent developmentsin international financial markets have made it more difficult and expensive for de-veloping countries to secure appropriate long-term financing for their developmentprograms. Their debt service burden could only be expected to grow further giventhe large dependence of the middle-income countries on nonconcessional public andprivate financial flows. The Committee also noted that the present flows of conces-

165



sional official development assistance were inadequate to meet the essential require-ments of the poorer developing countries and unless urgent action is taken theircondition will further deteriorate. The Committee therefore emphasized the pressingneed for an increase in ODA directed toward achieving the target of 0.7 per cent ofGNP. It reaffirmed its intention to consider at its next meeting the issue of ODAflows, both present and prospective, on the basis of a staff paper. Against the back-ground of a generally deteriorating international economic environment, the Com-mittee re-emphasized its earlier call for a reduction of protectionist trade measureswhich adversely affect the exports of developing countries, and stressed the need toavoid restrictions on access to capital markets.

4. The Committee welcomed the initiative taken by the Bank to provide assist-ance through structural adjustment lending on appropriate terms and conditions fordeveloping countries which face difficult medium-term prospects in their balance ofpayments. Members recognized the contribution that could be made through thistype of nonproject and program lending both to the rapid transfer of adequateresources and to the active pursuit of appropriate structural policies in the develop-ing countries. Governments and the Bank were urged to give prompt attention tothis subject, and members agreed to review progress in this respect at their Septem-ber meeting.

5. The Committee recognized that it was important to expand net private capitalflows in the period ahead. It noted that while there had been substantial growth inrecent years in cofinancing by the Bank with official aid agencies, export credit insti-tutions and private lenders, the volume was still insufficient compared with theneeds. Noting that the Bank was already exploring several new approaches to attractfunds for cofinancing from a wider range of private sources, members urged thatefforts be continued to improve the effectiveness and the volume of these financialflows in ways that would meet the objectives of the borrowing countries.

6. The Committee welcomed the recent decision by the Executive Board of theFund to increase the maximum repurchase period under the extended facility fromeight to ten years, and to reduce the number and frequency of repurchase install-ments; the combined effect of these measures will increase the average life of a draw-ing outstanding under the extended facility by almost one fifth. This action willspread the adjustment effort over a longer period and lessen the financial burden ofusing the extended facility. The Committee recognized that the Fund should con-tinue to follow a flexible approach as regards the volume of drawings under thesupplementary financing facility in cases where additional amounts are justified bythe magnitude and nature of a member's need for financing. The Committee ex-pressed the hope that at an early date measures would be taken to reduce the cost ofusing the supplementary financing facility and in this way ease access to the facility.

7. The Committee welcomed the steps being taken by both the Bank and theFund to adapt and expand their activities to meet the needs of countries affectedby the increasingly difficult economic situation. While recognizing that each institu-tion has its own character and function which should remain distinct, they empha-sized the importance of close collaboration between the two institutions.

8. The Committee welcomed the progress that had bsen made toward providingadditional capital resources for the World Bank and the regional developmentbanks, and the agreements reached on the replenishment of IDA under the SixthReplenishment. However, Committee members expressed concern that legislative dif-ficulties now threatened a hiatus in the commitment authority of the multilateraldevelopment institutions, and urged that member governments take all necessaryactions to ensure continuity in their operations. Action was particularly urgent inregard to IDA-VI, since resources available from IDA-V will be exhausted byJune 30. Equally urgent are actions concerning the replenishment of the Inter-American Development Bank and the increase of the concessional funds of theAsian Development Bank. The Committee further noted that additional resources

166


APPENDIX III (concluded). PRESS COMMUNIQUES OF THE COMMITTEES

had been pledged to the OPEC Fund, and that aid commitments under the Lome IIconvention had been increased.

9. The Committee noted that at the time of its next meeting there would beavailable a final report of the Task Force on Private Foreign Investment, and aprogress report of the Task Force on Nonconcessional Flows. Members stressed theextreme importance of the review of private financial flows to determine whatmeasures could be taken to facilitate additional flows on appropriate terms and toimprove access of a wider range of developing countries to private capital markets.

10. The Committee welcomed the publication of the Brandt Commission Reportand viewed its recommendations as a useful basis for consideration by the interna-tional community. The Committee noted that a number of the recommendationsrelated to the Bank, the Fund, and the regional banks and that these institutions arecurrently examining these recommendations. They requested that specific papersshould be prepared on those recommendations of the Commission's report thatwere of particular relevance to the Committee's work.

11. The Committee reviewed the current state of discussions relating to theGroup of 24 Program of Immediate Action for International Monetary Reform.While recognizing that international agreement had been reached on some of theseproposals and that some others were under discussion, they nevertheless stressedthe importance of reaching early agreement on other items of a developmentalcharacter, an increase in the volume of official development assistance, completionof the processes for the Sixth Replenishment of the IDA and a significant increasein the amount of program lending.

12. The next meeting of the Committee will be held in Washington, D.C. at thetime of the Annual Meetings of the Boards of Governors of the Bank and Fund inSeptember 1980.

13. The Committee expressed their warm appreciation to the Government of theFederal Republic of Germany for their hospitality and for the excellent arrange-ments provided for their meeting.

167


Appendix IVExecutive Directors and Voting Poweron April 30,1980

General Special DrawingDepartment Rights Department

DirectorAlternate

APPOINTED

Sam Y. CrossDonald E. Syvrud

John AnsonLionel D.D. Price

Gerhard LaskeGuenter Winkelmann

Paul Mentre de LoyeThierry Aulagnon

Teruo HiraoAkira Nagashima

Mahsoun B. JalalYusuf A. Nimatallah

ELECTED

Joaquin Muns (Spain)Ariel Buira (Mexico)

H.O. Ruding (Netherlands)Tom de Vries (Netherlands)

Bernard J. Drabble (Canada)Michael Casey (Ireland)

Lamberto Dini (Italy)Costa P. Caranicas (Greece)

CastingVotes of

United States

United Kingdom

Germany, Fed. Rep. of

France

Japan

Saudi Arabia

Costa RicaEl SalvadorGuatemalaHondurasMexicoNicaraguaSpainVenezuela

CyprusIsraelNetherlandsRomaniaYugoslavia

BahamasBarbadosCanadaGrenadaIrelandJamaica

GreeceItalyMaltaPortugal

Votesby

Country

84,300

29,500

21,810

19,440

16,840

6,250

660680760590

5,600590

5,8206,850

5902,3009,7302,7003,020

580420

13,820280

1,800990

2,10012,650

4501,970

Percent of

Total Fund Totalvotes * total 2 votes 1

84,300 19.83 84,300

29,500 6.94 29,500

21,810 5.13 21,810

19,440 4.57 19,440

16,840 3.96 16,840

6,250 1.47 6,250

21,550 5.07 21,550

18,340 4.31 18,340

17,890 4.21 17,890

17,170 4.04 17,170

Percent ofFundtotal*

19.83

6.94

5.13

4.57

3.96

1.47

5.07

4.31

4.21

4.04

168


APPENDIX IV (continued). EXECUTIVE DIRECTORS AND VOTING POWER

GeneralDepartment

DirectorAlternate

CastingVotes of

Votesby

CountryTotalvotes 1

Percent ofFundtotal2

Special DrawingRights Department

Percent of

Total Fundvotes * total 2

ELECTED (continued)

Robert J. Whitelaw(Australia)

Richard J. Lang (New Zealand)

Mohamed Finaish (Libya)Kadhim A. Al-Eyd (Iraq)

Jacques de Groote (Belgium)Heinrich G. Schneider

(Austria)

Jahangir Amuzegar (Iran)Mohammed Yeganeh (Iran)

Alexandre Kafka (Brazil)Jose Gabriel-Pena

(Dominican Republic)

S.D. Deshmukh (India)Edmund Eramudugolla

(Sri Lanka)

Matti Vanhala (Finland)Gisli Blondal (Iceland)

Byanti Kharmawan (Indonesia)Savenaca Siwatibau (Fiji)

AustraliaKoreaNew ZealandPapua New GuineaPhilippinesSeychellesSolomon IslandsWestern Samoa

BahrainIraqJordanKuwaitLebanonLibyaMaldivesPakistanQatajSomaliaSyrian Arab RepublicUnited Arab EmiratesYemen Arab RepublicYemen, People's

Dem. Rep. of

AustriaBelgiumLuxembourgTurkey

AfghanistanAlgeriaGhanaIranMoroccoOmanTunisia

BrazilColombiaDominican RepublicGuyanaHaitiPanamaPeruSurinameTrinidad and Tobago

BangladeshIndiaSri Lanka

DenmarkFinlandIcelandNorwaySweden

BurmaFijiIndonesiaLao People's Dem. Rep.MalaysiaNepalSingaporeThailandViet Nam

8,1501,8502,570

5502,350

263271280

4501,660

5502,600

3702,100

2593,100

650480880

1,450380

660

3,5509,150

5602,250

7003,1001,3106,8501,750

450880

6,9002,180

800500480700

1,890500

1,070

1,77011,700

1,440

3,3502,870

5403,2004,750

980430

5,050410

2,780440740

2,0601,150

16,284 3.83 16,284 3.83

15,589 3.67

15,510 3.65

15,589 3.67

15,510 3.65

15,040 3.54 15,040 3.54

15,020 3.53

14,910 3.51

14,710 3.46

15,020 3.53

14,910 3.51

14,710 3.46

14,040 3.30 14,040 3.30

169


APPENDIX IV (concluded). EXECUTIVE DIRECTORS AND VOTING POWER

DirectorAlternate

ELECTED (concluded)

Festus G. Mogae (Botswana)Semyano Kiingi (Uganda)

Samuel Nana-Sinkam (Cameroon)Abderrahmane Alfidja (Niger)

Francisco Garces (Chile)Julio C. Gutierrez

(Paraguay)

CastingVotes of

BotswanaBurundiEthiopiaGambia, TheGuineaKenyaLesothoLiberiaMalawiNigeriaSierra LeoneSudanSwazilandTanzaniaUgandaZambia

Benin

Votes^ b yCountry

340480610340550940320620440

3,850560

1,130370800750

1,660

410

General Special DrawingDepartment Rights Department

Per Percent of cent of

Total Fund Total Fundvotes1 total2 votes1 total2

13,760 3.24 13,760 3.24

Cameroon 700Central African Republic 410ChadComorosCongoEquatorial GuineaGabonGuinea-BissauIvory CoastMadagascarMaliMauritaniaMauritiusNigerRwandaSao Tome and PrincipeSenegalTogoUpper VoltaZaire

ArgentinaBoliviaChileEcuadorParaguayUruguay

410273420350550289

1,010590520420520410480270670440410

1,770

5,600700

2,420950480

1,090

11,322 2.66 11,322 2.66

11,240 2.64 11,240 2.64

410,515 3 96.55 2 410,515 3 96.55 2

1 Voting power varies on certain matters pertaining to the Gen-eral Department with use of the Fund's resources in that Depart-ment. In voting on matters relating exclusively to the SpecialDrawing Rights Department, only the number of votes allottedto members which are participants may be cast.

2 The sum of the individual percentages may differ from thepercentages of the totals because of rounding.

3 This total does not include the votes of China, Egypt, Demo-cratic Kampuchea, and South Africa, which did not participatein the 1978 Regular Election of Executive Directors, and ofCape Verde, Djibouti, Dominica, St. Lucia, and St. Vincent,which became members after that election. The combined votesof those members total 14,650—3.45 per cent of the total votingpower.

170


Appendix VChanges in Membershipof Executive Board

Changes in membership of the Executive Board between May 1, 1979 andApril 30, 1980 were as follows:

Edmund Eramudugolla (Sri Lanka) was appointed Alternate Executive Directorto S.D. Deshmukh (India), effective May 1, 1979.

Donald E. Syvrud (United States) was appointed Alternate Executive Director toSam Y. Cross (United States), effective May 1, 1979.

Rei Masunaga (Japan) resigned as Alternate Executive Director to MasanaoMatsunaga (Japan), effective June 11, 1979.

Akira Nagashima (Japan) was appointed Alternate Executive Director to MasanaoMatsunaga (Japan), effective June 12, 1979.

Pendarell Kent (United Kingdom) resigned as Alternate Executive Director toWilliam S. Ryrie (United Kingdom), effective June 22, 1979.

Lionel D.D. Price (United Kingdom) was appointed Alternate Executive Direc-tor to William S. Ryrie (United Kingdom), effective June 23, 1979.

Eckard Pieske (Germany, Fed. Rep. of) resigned as Executive Director for theFederal Republic of Germany, effective June 30, 1979.

Gerhard Laske (Germany, Fed. Rep. of), formerly Alternate Executive Directorto Eckard Pieske (Germany, Fed. Rep. of), was appointed Executive Director by theFederal Republic of Germany, effective July 1, 1979.

Guenter Winkelmann (Germany, Fed. Rep. of) was appointed Alternate Execu-tive Director to Gerhard Laske (Germany, Fed. Rep. of), effective August 1, 1979.

Denis Samuel-Lajeunesse (France) resigned as Alternate Executive Director toPaul Mentre de Loye (France), effective August 31, 1979.

Thierry Aulagnon (France) was appointed Alternate Executive Director to PaulMentre de Loye (France), effective September 1, 1979.

Masanao Matsunaga (Japan) resigned as Executive Director for Japan, effectiveNovember 9,1979.

Teruo Hirao (Japan) was appointed Executive Director by Japan, effective Novem-ber 10, 1979.

Akira Nagashima (Japan), formerly Alternate Executive Director to MasanaoMatsunaga (Japan), was appointed Alternate Executive Director to Teruo Hirao(Japan), effective November 10, 1979.

William S. Ryrie (United Kingdom) resigned as Executive Director for the UnitedKingdom, effective January 2, 1980.

171


APPENDIX V (continued). CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

John Anson (United Kingdom) was appointed Executive Director by the UnitedKingdom, effective January 3, 1980.

Lionel D.D. Price (United Kingdom), formerly Alternate Executive Director toWilliam S. Ryrie (United Kingdom), was appointed Alternate Executive Directorto John Anson (United Kingdom), effective January 3, 1980.

Thomas Ainsworth Harewood (Trinidad and Tobago) resigned as Alternate Exec-utive Director to Alexandre Kafka (Brazil), effective March 14, 1980.

Jose Gabriel-Pena (Dominican Republic) was appointed Alternate Executive Di-rector to Alexandre Kafka (Brazil), effective March 15, 1980.

Donal Lynch (Ireland) resigned as Alternate Executive Director to Bernard J.Drabble (Canada), effective March 31, 1980.

Michael Casey (Ireland) was appointed Alternate Executive Director to BernardJ. Drabble (Canada), effective April 1, 1980.

Edmund Eramudugolla (Sri Lanka) resigned as Alternate Executive Director toS.D. Deshmukh (India), effective April 30,1980.

172


APPENDIX V (concluded). CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

The following served at certain times during 1979/80 as Temporary AlternateExecutive Directors to the Executive Directors indicated:

Temporary AlternateExecutive Director

Samir Ramez Abiad (Lebanon)Tengku Khatijah Ahmad (Malaysia)Jose Roberto Novaes de Almeida (Brazil)Hossein G. Askari (United States)Christopher J. Bailey (United Kingdom)Chandi J. Batliwalla (India)Christian Bouchard (Gabon)Chinyamata Chipeta (Malawi)Luc Coene (Belgium)Silvio E. Conrado (Nicaragua)Roger De Beckker (Belgium)Aliou B. Diao (Senegal)Luis Eduardo Escobar (Chile)Omer Esener (Turkey)Jose Fajgenbaum (Argentina)Miguel A. Fernandez-Ordonez (Spain)Edward P. Fine (Canada)Hans Flinch (Denmark)John A. Fraser (Australia)Jean Guill (Luxembourg)Bruno Guiot (Belgium)Juergen Hoist (Germany, Fed. Rep. of)Ashraf Janjua (Pakistan)Joseph Mills Jones (Liberia)Wadea A. Kabli (Saudi Arabia)Ahmad Karimi (Iran)Robin D. Kibuka (Uganda)Tomoko Kitamura (Japan)Motoo Kusakabe (Japan)Seung-Woo Kwon (Korea)Bengt Goran Lind (Sweden)Eduardo Mayobre (Venezuela)Stefano Micossi (Italy)Alain L. Morales (Venezuela)Andrew K. Mullei (Kenya)V.K.S. Nair (India)Saleh Mounir Nsouli (United States)Patrick Peroz (France)Peter Edward Ramell (United Kingdom)Antonio V. Romualdez (Philippines)Mohammad Shadman (Iran)German Suarez (Peru)Okan X)$er (Turkey)Avraham van der Hal (Israel)Anne van 't Veer (Netherlands)Kenny Kay Kee Wee (Singapore)Peter Wichert (Germany, Fed. Rep. of)

Executive Director for whomTemporary Alternate Served

Mohamed Finaish (Libya)Byanti Kharmawan (Indonesia)Alexandre Kafka (Brazil)Mahsoun B. Jalal (Saudi Arabia)John Anson (United Kingdom)S.D. Deshmukh (India)Samuel Nana-Sinkam (Cameroon)Festus G. Mogae (Botswana)Jacques de Groote (Belgium)Joaquin Muns (Spain)Jacques de Groote (Belgium)Samuel Nana-Sinkam (Cameroon)Francisco Garces (Chile)Jacques de Groote (Belgium)Francisco Garces (Chile)Joaquin Muns (Spain)Bernard J. Drabble (Canada)Matti Vanhala (Finland)Robert J. Whitelaw (Australia)Jacques de Groote (Belgium)Jacques de Groote (Belgium)Gerhard Laske (Germany, Fed. Rep. of)Mohamed Finaish (Libya)Festus G. Mogae (Botswana)Mahsoun B. Jalal (Saudi Arabia)Jahangir Amuzegar (Iran)Festus G. Mogae (Botswana)Teruo Hirao (Japan)Teruo Hirao (Japan)Robert J. Whitelaw (Australia)Matti Vanhala (Finland)Joaquin Muns (Spain)Lamberto Dini (Italy)Joaquin Muns (Spain)Festus G. Mogae (Botswana)S.D. Deshmukh (India)Mohamed Finaish (Libya)Paul Mentre de Loye (France)John Anson (United Kingdom)Robert J. Whitelaw (Australia)Jahangir Amuzegar (Iran)Alexandre Kafka (Brazil)Jacques de Groote (Belgium)H.O. Ruding (Netherlands)H.O. Ruding (Netherlands)Byanti Kharmawan (Indonesia)Gerhard Laske (Germany, Fed. Rep. of)

173


Appendix VIAdministrative Budget

Administrative Budget as Approved by the ExecutiveCompared with Actual Expenses for the Financial Years(Values expressed in special drawing rights)1

Board for the Financial Year Ending April 30, 1981Ended April 30, 1979 and 1980

I.

II.

III.

Object of Expense

PERSONNEL EXPENSESSalariesOther personnel expenses

TotalTRAVEL EXPENSES

Business travelOther travel

TotalOTHER ADMINISTRATIVE EXPENSES

CommunicationsBuilding occupancyBooks and printingSupplies and equipmentData processing servicesMiscellaneous

TotalTOTAL 2

Financial YearEnded

April 30, 1979

ActualExpenses

33,414,85220,439,73453,854586

4,247,5863,523,7747,771,360

1,988,6812,587,661

971,2501,273,3051,189,4851,580,9289,591,310

71,217,256

Financial ^April 3<

RevisedBudget

38,330,47623,592,40861,922 884

6,200,5914,464,437

10,665,028

2,315,2222,446,8991,096,9501,287,0061,736,5841,535,348

10,418,00983,005,921

'ear Ended0, 1980

ActualExpenses

38,319,91723,573,57661 893 493

6,199,5434,464,055

10,663,598

2,314,4492,442,0921,096,3351,282,5841,735,4631,533,490

10,404,41382,961,504

Financial YearEnding

April 30, 1981

Budget

42,363,61729,905,54772 269 164

6,464,6035,151,601

11,616,204

2,270,7213,699,5761,316,8641,760,9671,888,4051,876,820

12,813,35396,698/721

1 The administrative budget is expressed in terms of U.S.dollars and converted to SDR equivalents.

2 Net administrative expenses for the financial year endedApril 30, 1979 totaled SDR 68,616,776 after deduction of theamounts reimbursed to the General Resources Account by assess-ments levied on the net cumulative allocations of participants in

the Special Drawing Rights Department (SDR 1,700,480) andfor the estimated expenses of conducting the business of theTrust Fund (SDR 900,000). For the year ended April 30, 1980,net administrative expenses amounted to SDR 81,261,500 aftersimilar deductions of SDR 1,000,004 and SDR 700,000,respectively.

174


Appendix VII

Comparative Statement of Income and Expense(Values expressed in special drawing rights)

Financial Year Ended April 301978 1979 1980

OPERATIONAL INCOMEPeriodic charges

Received in special drawing rightsReceived in members' currencies .Amounts receivable

TotalInterest on holdings of

special drawing rightsOther operational charges

Received in special drawing rightsReceived in members' currencies .

TotalTotal Operational Income . . .

Deduct: Operational expenseRemuneration

Paid in special drawing rightsPaid in members' currencies .

782,196,0603,709,728

703,745786,609,533

39,800,980

12,568,098596,213

13,164,311839,574,824

136,279,72564,579,373

670,718,1807,383,406

678,101,586

57,121,423

16,064,6832,004,567

18,069,250753,292,259

139,726,70532,016,137

501,191,132

18,159,439519,350,571

81,813,361

13,000,853

13,000,853614,164,785

219,497,37121,488,295

Total 200,859,098 171,742,842 240,985,666Transfer charges and interest on

borrowingPaid in special drawing rightsPaid in members' currencies .Amounts payable

TotalOther

Total Operational Expense . ..NET OPERATIONAL INCOME .

EXPENSE *Administrative budget expenseFixed property expenseAmortization of past service liabilitiesNet valuation adjustment loss

TOTAL EXPENSE 1

NET INCOME

35,484,744505,241,877

540,726,6211,215

741,586,93497,987,890

65,898,2622

12,8224,392,696

207,43670,511,21627,476,674

6,877,979455,080,416

461,958,3955,556

633,706,793119,585,466

68,616,7762

21,4684,711,155

87,69973,437,09846,148,368

24,739,526244,086,919

15,183,502284,009,947

7,705525,003,318

89,161,467

81,261,5002

349,5324,392,708

65,15986,068,8993,092,568

1 Excludes operational expense which has been deducted from operational income.2 After deduction of SDR 900,003 for financial year 1978, SDR 1,700,480 for financial year

1979, and SDR 1,000,004 for financial year 1980 reimbursed to the General Resources Accountby assessments levied on the net cumulative allocations of participants in the Special DrawingRights Department; and SDR 800,000 for financial year 1978, SDR 900,000 for financial year1979, and SDR 700,000 for financial year 1980 reimbursed to the General Resources Accountfor the estimated expenses of conducting the business of the Trust Fund.

175


Appendix VIIIFinancial Statements of the General Resources Account,Special Drawing Rights Department, Subsidy Account,Trust Fund, and Staff Retirement Fund

REPORT OF THE EXTERNAL AUDIT COMMITTEE

GENERAL DEPARTMENT

GENERAL RESOURCES ACCOUNT

Washington, D.C.June 27, 1980

AUTHORITY FOR THE AUDIT

The audit for the year ended April 30, 1980 was carried out pursuant to Sec-tion 20(b) of the By-Laws of the International Monetary Fund.

SCOPE OF THE AUDIT

We have examined the balance sheet of the International Monetary Fund, GeneralDepartment—General Resources Account, as at April 30, 1980, and the relatedstatements of income and expense, reserves and changes in financial position for theyear then ended.

Our examination was made in accordance with generally accepted auditing stand-ards and accordingly included such tests of the accounting records, after evaluatingthe extent and results of the tests which we observed to have been carried out by theInternal Auditor, and such other auditing procedures as we deemed necessary in thecircumstances.

AUDIT OPINION

In our opinion, the financial statements referred to above give a true and fair viewof the financial position of the International Monetary Fund, General Department—General Resources Account, as at April 30, 1980, and the results of its operationsand transactions and changes in reserves and financial position for the year thenended, in conformity with generally accepted accounting principles applied on abasis consistent with that of the preceding year.

EXTERNAL AUDIT COMMITTEE:

/s/ Robert Toulemon, Chairman (France)/s/ Pedro Osvaldo Montdrfano (Paraguay)/s/ Gamini C.B. Wijeyesinghe (Sri Lanka)

176


APPENDIX VIII (continued)


GENERAL DEPARTMENT(Notel)

GENERAL RESOURCES ACCOUNTBALANCE SHEET

as at April 30, 1980

Amounts expressed in special drawing rights

(Note 2)

ASSETS1980 1979

CURRENCIES AND SECURITIES (Notes 3 and 4) 38,670,821,737 39,566,726,681

SPECIAL DRAWING RIGHTS 1,406,997,417 1,289,908,976

GOLD WITH DEPOSITORIES (Note 2) 3,635,906,915 4,054,521,924

SUBSCRIPTIONS TO CAPITAL—RECEIVABLE 2,370,053 7,700,000

CHARGES RECEIVABLE (Note 4) 116,251,529 152,298,213

ACCRUED CHARGES (Note 4) 18,159,439 —

OTHER ASSETS (Note 2) 6,748,324 9,917,387

TOTAL ASSETS 43,857,255,414 45,081,073,181

CAPITAL, RESERVES, AND LIABILITIES

CAPITALSubscriptions of Members 39,016,500,000 39,011,200,000

RESERVES (Note 6) 763,202,027 760,109,459

LIABILITIESBorrowing (Note 5) 3,753,464,712 5,033,930,805Remuneration Payable to Members (Note 4) 240,985,666 171,742,842Interest Payable 53,636,544 93,745,621Accrued Interest 15,183,502 —Other Liabilities 14,282,963 10,344,454

TOTAL CAPITAL, RESERVES, AND LIABILITIES 43,857,255,414 45,081,073,181

The accompanying notes are an integral part of the financial statements.

/s/ W.O. HABERMEIERTreasurer

/s/ J. DE LAROSIEREManaging Director

in





GENERAL RESOURCES ACCOUNTSTATEMENT OF INCOME AND EXPENSE

for the year ended April 30, 1980


(Note 2)

1980OPERATIONAL INCOME

Periodic charges (Note 4)Interest on holdings of special drawing rightsService chargesOther

OPERATIONAL EXPENSERemuneration (Note 4)Interest on borrowingOther

NET OPERATIONAL INCOME

ADMINISTRATIVE EXPENSEAdministrative budget

Personnel (Note 7)TravelOther (Note 2)

Total administrative budget

Less recovery of expenses of conducting the business of the SpecialDrawing Rights Department and the Trust Fund

Net administrative budgetFixed property (Note 2)Amortization of past service liabilities (Note 7)Net valuation adjustment

TOTAL ADMINISTRATIVE EXPENSENET INCOME

519,350,57181,813,36111,054,0111,946,842

614,164,785

240,985,666284,009,947

7,705525,003,318

89,161,467

61,893,49310,663,59810,404,41382,961,504

1,700,00481,261,500

349,5324,392,708

65,15986,068,8993,092,568

1979

678,101,58657,121,4236,195,93011,873,320753,292,259

171,742,842458,072,1243,891,827

633,706,793119,585,466

53,854,5867,771,3609,591,31071,217,256

2,600,48068,616,776

21,4684,711,155

87,69973,437,09846,148,368


178





GENERAL RESOURCES ACCOUNTSTATEMENT OF RESERVES


(Note 6)


(Note 2)

1980 1979SPECIAL RESERVE

Balance at beginning of year 394,529,756 348,381,388

Add net income for year 3,092,568 46,148,368

Balance at end of year 397,622,324 394,529,756

GENERAL RESERVEBalance at beginning and end of year 365,579,703 365,579,703

TOTAL RESERVES 763,202,027 760,109,459


179





GENERAL RESOURCES ACCOUNTSTATEMENT OF CHANGES IN FINANCIAL POSITION



(Note 2)

Resources were applied to:

Repayments of borrowing:

Oil facilityGeneral Arrangements to Borrow

and Swiss National Bank

Increase in holdings ofspecial drawing rights

Resources were provided by:

Decrease in currency holdings:

Changes in holdings which did notaffect amounts on which the Fundlevies charges or pays remuneration

Changes in holdings which reducedcreditor positions on which theFund pays remuneration

Changes in holdings which decreasedamounts on which the Fund leviescharges

Subscriptions:Increases in quotasSubscriptions of new members

Borrowing:

General Arrangements to Borrow . . . .Supplementary financing facility

Sales of gold

Increase in the excess of otherliabilities over other assets

Net income

1980

1,782,859,156

1,782,859,156

117,088,4411,899,947,597

438,428,909

(379,892,087)

837,368,122895,904,944

5,300,0005,300,000

502,393,063

418,615,009

74,642,013

3,092,5681,899,947,597

1979

2,072,049,579

1,730,000,0003,802,049,579

(81,171,160)3,720,878,419

(7,160,793,064)

(243,247,148)

3,192,822,309(4,211,217,903)

6,655,000,0009,800,000

6,664,800,000

777,254,000

452,534,536

(8,640,582)

46,148,3683,720,878,419


180




GENERAL DEPARTMENTNOTES TO THE FINANCIAL STATEMENTS

1. General Department

Under the Articles of Agreement, the General Departmentconsists of the General Resources Account, the Special Disburse-ment Account, and the Investment Account. The Special Dis-bursement Account and the Investment Account are not opera-tive. All operations and transactions on the account of the Fundare conducted through the General Resources Account.

General Resources Account

Assets held in the General Resources Account comprise gold,currencies of the Fund's member countries, and special drawingrights (SDRs). The Fund's resources in the General ResourcesAccount are made available to members in accordance with theFund's policies either in the form of currencies or SDRs whichmembers purchase against the payment of their own currencies.The amount of such use is related to a member's quota in theFund.

In addition to purchases under the Fund's regular facilities,members may use the Fund's resources under decisions on com-pensatory financing (to assist members, particularly primaryexporters, encountering payments difficulties produced by tempo-rary shortfalls attributable to circumstances beyond their con-trol) and buffer stock financing (to assist members in connectionwith the financing of international buffer stocks of primaryproducts), the extended Fund facility (to provide medium-termassistance to members to make structural adjustments in theireconomies), and the supplementary financing facility (to assistmembers facing serious payments imbalances that are large inrelation to their quotas). Members were also able to use the oilfacility (for balance of payments problems caused by increasesin the cost of petroleum and petroleum products). Use of theFund's resources is dependent on members having a balance ofpayments need.

Gold transactions, receipt of SDRs in payment of charges andrepurchases by members, and use of SDRs by the Fund, takeplace through the General Resources Account.

2. Accounting Practices

Unit of Account

The accounts of the General Resources Account are expressedin terms of the SDR, the currency value of which is determinedby a standard basket of the currencies of sixteen members.Members' currencies and securities are converted into equivalentamounts of SDRs on the basis of representative rates of exchangedetermined in accordance with decisions of the Executive Board.Gold with depositories is valued on the basis that one unit ofspecial drawing rights is equivalent to 0.888671 gram of finegold.

Property, Furniture, and Equipment

The established policy of the Fund is to charge as an expenseof each accounting period the total costs incurred for fixedproperty, furniture, and equipment. For the year ended April 30,1980, the cost of property, furniture, and equipment charged asan expense amounted to SDR 952,633 (SDR 300,095 in 1979).

Income and Expense

The Fund maintains its books of accounts on an accrual basisand accordingly follows a policy of recognizing income as it is

earned and of recording expenses as they are incurred. It is thepractice of the Fund to make all calculations on the basis of theexact number of days in the accounting period.

3. Currencies and Securities

Each member has the option to substitute nonnegotiable andnoninterest-bearing securities for that amount of the member'scurrency held by the Fund which is in excess of 1A of 1 per centof the member's quota.

On April 17, 1980, the Fund decided that the Government ofthe People's Republic of China shall represent China in theFund and shall exercise all the rights and meet all of the obli-gations of China as the member in the Fund. On that datethe Fund's accounts maintained in new Taiwan dollars totalingSDR 442,364,513 were closed. Currency equivalent to thisamount, reported as a part of the Fund's currency holdings, is tobe paid to the Fund by the People's Republic of China followingthe designation of an agreed depository and the determinationof a representative rate of exchange.

A currency held by the Fund is revalued whenever that cur-rency is used by the Fund in a transaction with another member,or for such other purposes as the Fund may decide. All currencyholdings are revalued as at April 30 each year. Whenever theFund revalues its holdings of a member's currency, an accountreceivable or an account payable is established for the amountof currency payable by or to the member in order to maintainthe value of the currency in terms of the SDR. The balances ofthe accounts receivable or payable are reflected in the Fund'scurrency holdings. At April 30, 1980, accounts receivableamounted to SDR 1,981,984,272 and accounts payable amountedto SDR 429,168,363.

4. Operational Transactions

During the year ended April 30, 1980, members' purchasesamounted to SDR 2,433 million of which SDR 222 million wasin the reserve tranche, SDR 1,106 million was under the Fund'sregular policies, SDR 863 million was under compensatoryfinancing, SDR 26 million was under buffer stock financing, andSDR 216 million was under the extended Fund facility. Of thetotal purchases, SDR 502 million was financed under the supple-mentary financing facility. Over the same period, repurchasesby members totaled SDR 3,776 million. Purchases in the reservetranche made after April 1, 1978 are not subject to repurchase.

Outstanding purchases of members were as follows (in mil-lions of SDRs):

April 30

Reserve trancheRegular facilitiesCompensatory financingBuffer stock financingExtended Fund facilityOil facilitySupplementary financing facility

Under stand-by arrangementsUnder extended arrangements

Total

1980

1442,2932,87374504

2,494

383119

8,884

1979

3142,3162,945

48407

4,240

—10,270

181



The Fund levies charges on its holdings of a member's cur-rency to the extent that the holdings (i) have been acquiredunder a policy that has been the subject of an exclusion, or(ii) exceed the member's quota after deducting holdings thatare the subject of an exclusion. Remuneration is paid on theamounts by which 75 per cent of a member's quota on April 1,1978, adjusted for increases or decreases in the member's quotaafter that date, exceeds the Fund's holdings of the member'scurrency after deducting amounts that are the subject of anexclusion. At April 30, 1980, the total holdings on which theFund levies charges amounted to SDR 8,035 million and totalcreditor positions on which the Fund pays remunerationamounted to SDR 3,393 million.

Members incur certain obligations to the Fund with the use ofFund resources from the General Resources Account. One mem-ber, Democratic Kampuchea, has not fulfilled its financial obli-gations to repurchase a part of the Fund's holdings of themember's currency, to pay charges on currency balances heldby the Fund, and to submit information on monetary reserves.At April 30, 1980, unpaid charges receivable from DemocraticKampuchea amounted to SDR 3,383,707 and are included inthe balance sheet as charges receivable and as a deferred credit.On December 19, 1978 the Executive Board decided that Demo-cratic Kampuchea may not make use of the general resources ofthe Fund until such time as Democratic Kampuchea is fulfillingits obligations under the Articles of Agreement to whichArticle XXVI, Section 2 ( a ) applies.

5. Borrowing

Outstanding borrowing by the Fund at April 30, 1980 and1979 was as follows:

1980 1979

Oil facility SDR 2,473,817,649 SDR 4,256,676,805

Supplementaryfinancing facility 502,393,063

General Arrange-ments to Borrow 777,254,000 777,254,000

SDR 3,753,464,712 SDR 5,033,930,805

under the SFF borrowing agreements during the year endedApril 30,1980.

General Arrangements to Borrow (GAB)

Ten members, or institutions within their territories, haveadhered to the General Arrangements to Borrow under whichthe Fund may borrow their currencies up to specified amountswhen supplementary resources are needed to forestall or copewith an impairment of the international monetary system. Thesearrangements first became effective from October 24, 1962 andwere renewed until October 23, 1985. The Swiss Confederationhas been associated with the GAB since June 1964. The presentarrangement with the Swiss Confederation expires on Octo-ber 23, 1980. The Fund pays a transfer charge of one-half ofone per cent on amounts borrowed under these arrangementsand, in addition, pays interest at the rates at which the Fundlevies charges on the holdings of currencies resulting from pur-chases for which it incurred the indebtedness, provided that therate of interest shall be not less than 4 per cent per annum onany part of the indebtedness. Any calls made by the Fund underthe GAB are repayable within five years.

At April 30, 1980, the interest rate being paid by the Fundon indebtedness under the General Arrangements to Borrowwas 4 per cent per annum.

6. Reserves

The Fund determines annually what part of its net incomeshall be placed to the General Reserve or to the Special Reserve,and what part, if any, shall be distributed. The Fund may usethe Special Reserve for any purpose for which it may use theGeneral Reserve, except distribution.

Income from investments in U.S. Government securities wasplaced to the Special Reserve from November 1, 1957 untilFebruary 15, 1972 when the investment program was termi-nated. A decision by the Executive Board provides that anyadministrative deficit for any financial year must be written offfirst against this Reserve.

Net income for the year ended April 30, 1980 was placed tothe Special Reserve by decision of the Executive Board.

Oil Facility

The Fund has entered into borrowing agreements with vari-ous members and Switzerland, or institutions within their terri-tories, under which these lenders agreed to provide the Fundwith specified currencies to finance purchases of currencies fromthe Fund by other members under the oil facility. The outstand-ing borrowings carry interest rates of 7 per cent for amountscalled under the 1974 borrowing agreements and 11A per centfor amounts called under the 1975 borrowing agreements. Anycalls made by the Fund under these agreements are repayablein installments beginning not later than 3l/2 years, to be com-pleted not later than 7 years, after the date of the calls, exceptthat the calls under the borrowing agreements with Canada andthe Deutsche Bundesbank are repayable at the end of five years.

Supplementary Financing Facility (SFF)

The supplementary financing facility entered into force onFebruary 23, 1979. The Fund has entered into borrowingagreements with 14 members, or institutions within their terri-tories, and with the Swiss National Bank under which the lend-ers have agreed to make resources available to the Fund, atcall, up to SDR 7.784 billion over the next four years to financepurchases by members under this facility. Interest paid by theFund on amounts borrowed under the borrowing agreements isbased on the average yield on U.S. Government securities witha constant maturity of five years. The first calls were made

7. Other Compensations and Benefits

The Fund pays various allowances to or on behalf of Execu-tive Directors and staff including the employer's contribution tothe Staff Retirement Plan. All contributions to the Plan and allother assets, liabilities, and income of the Plan are held sepa-rately and can be used or incurred only for the benefit of theparticipants in the Plan and their beneficiaries. The funding ofthe Plan is based upon a percentage of a notional gross salary,and the employer contributes that part of the costs and expensesof the Plan not provided by the contributions of the participants.

A past service liability amounting to SDR 17,570,796, result-ing from certain improvements in the benefits provisions of thePlan and changes in the rates of contribution and fundingarrangements which were approved in August 1976, was dis-charged on September 1, 1976 by a payment from the GeneralResources Account to the Staff Retirement Plan. This amountwas charged against the income of the General Resources Ac-count over a period of four years. Accordingly, SDR 4,392,696was charged against income in 1977, 1978, and 1979, and theremaining balance amounting to SDR 4,392,708 was chargedagainst income in 1980. A past service liability amounting toSDR 318,459 resulting from plan amendments approved inJune 1978 was paid and charged against income in the yearended April 30, 1979.

Experience gains and losses of the Plan, as determined by theactuary engaged by the Pension Committee, are amortized overa period of 15 years. The unamortized experience losses at

182



April 30, 1980 amounted to SDR 39.6 million (calculated at Contributions by the employer to the Staff Retirement Fundthe SDR value of the U.S. dollar on that date). Payments over for the year ended April 30, 1980 amounted to SDR 11,964,939,the next 15 years to amortize the actuarial experience losses including SDR 2,845,570 for the amortization of actuarial expe-are estimated to be approximately SDR 55.2 million (at the rience losses (SDR 2,609,567 in 1979) and SDR 1,778,217 toApril 30, 1980 SDR/US$ rate), of which SDR 4.2 million was fund cost of living supplements to beneficiaries (SDR 1,515,758paid after April 30, 1980. in 1979).

183



REPORT OF THE EXTERNAL AUDIT COMMITTEESPECIAL DRAWING RIGHTS DEPARTMENT

Washington, D.C.June 27,1980



SCOPE OF THE AUDIT

We have examined the balance sheet of the International Monetary Fund,Special Drawing Rights Department as at April 30, 1980, and the related statementof source and use of special drawing rights for the year then ended.

Our examination was made in accordance with generally accepted auditingstandards and accordingly included such tests of the accounting records, afterevaluating the extent and results of the tests which we observed to have been carriedout by the Internal Auditor, and such other auditing procedures as we deemednecessary in the circumstances.

AUDIT OPINION

In our opinion, the financial statements referred to above give a true and fairview of the allocations and holdings of special drawing rights of the InternationalMonetary Fund, Special Drawing Rights Department as at April 30, 1980 and thesource and use of special drawing rights for the year then ended on a basis consistentwith that of the preceding year.



184




SPECIAL DRAWING RIGHTS DEPARTMENT(Note 1)

BALANCE SHEETas at April 30, 1980


ALLOCATIONSNet cumulative allocations of special drawing

rights to participants

1980

17,380,836,200

1979

13,347,560,200

HOLDINGSParticipants

Holdings above allocations, comprising

Allocations

Net receipt of SDKs

6,047,044,000

2,777,200,395

8,824,244,395

4,085,312,000

2,150,197,637

6,235,509,637

Holdings below allocations, comprising

Allocations

Net use of SDKs

Total holdings by participants

General Resources Account

11,333,792,200

4,184,197,812

7,149,594,388

15,973,838,783

1,406,997,417

17,380,836,200

9,262,248,200

3,440,106,613

5,822,141,587

12,057,651,224

1,289,908,976

13,347,560,200




185




SPECIAL DRAWING RIGHTS DEPARTMENT(Note 1)

STATEMENT OF SOURCE AND USE OF SPECIAL DRAWING RIGHTSfor the year ended April 30,1980


Total Holdings at beginning of yearSource of Special Drawing Rights

Allocations ,Transactions with DesignationTransactions by AgreementNet InterestTransfers Between Participants and the General

Resources AccountPurchasesRepurchasesChargesReimbursement of Special Drawing Rights

Department Expenses (Assessment)RemunerationReconstitutionInterest on Fund Borrowing

Under Oil FacilityUnder General Arrangements to Borrow . .Under Supplementary Financing Facility . .

Quota PaymentsOther

Repayments of Fund BorrowingAcquisitions to Pay ChargesTransfer Charges

Participants12,057,651,224

4,033,276,0001,371,514,932

361,787,753189,688,531

1,282,629,970

4,101,499

139,726,7055,054,091

13,435,4296,050,8031,695,724

64,392,37597,515

GeneralResourcesAccount

1,289,908,976

81,813,361

993,915,153556,831,459

1,000,004

712,575

Total

1980

13,347,560,200

4,033,276,0001,371,514,932

361,787,753271,501,892

1,282,629,970993,915,153560,932,958

1,000,004139,726,705

5,054,091

13,435,4296,050,8031,695,724

712,575

64,392,37597,515

1979

9,315,125,544

4,032,724,8001,079,948,6111,533,025,735

128,172,711

1,105,921,875501,870,191719,605,758

1,700,480136,279,72575,145,184

8,954,109

18,715,000

37,662,7148,379,6202,914,703

7,473,451,327 1,634,272,552 9,107,723,879 9,391,021,216

Use of Special Drawing RightsTransactions with DesignationTransactions by AgreementNet ChargesTransfers Between Participants and the General

Resources AccountPurchasesRepurchasesChargesReimbursement of Special Drawing Rights

Department Expenses (Assessment)RemunerationReconstitutionInterest on Fund Borrowing

Under Oil FacilityUnder General Arrangements to BorrowUnder Supplementary Financing Facility

Quota PaymentsOther

Repayments of Fund BorrowingAcquisitions to Pay ChargesTransfer Charges

Settlement of Unpaid Charges

Total Holdings at end of year

1 371 514,932361,787,753271 501 892

993 915 153556 831 459

1 000 004

712 575

3,557,263,76815,973,838,783

1 282 629 970

4 101 499

139 726 7055 054 091

13 435 4296,050,8031,695,724

64 392 37597 515

1,517,184,1111,406,997,417

1 371 514 932361 787 753271 501 892

1 282 629 970993 915 153560 9^7 Q58

1 000 00417Q 776 705

5 054 091

11 47 c 4706,050,8031,695,724

71? 575

64 392 37597 515

5,074,447,87917,380,836,200

1 079 948 6111 533 025 735

178 177 71 1

1 105 Q91 875501 870 1Q1710 605 758

1 700 480H6 77Q 7757< i x < 1JM

8,954,109

18715 onn

17 6*7 7148 "*7Q 6902 Q1 A TH1,yi4,/Uj

290,1445,358,586,560

13,347,560,200


186




SPECIAL DRAWING RIGHTS DEPARTMENTNOTES TO THE FINANCIAL STATEMENTS

1. Special Drawing Rights Department

All transactions and operations involving special drawingrights are conducted through the Special Drawing Rights De-partment. Special drawing rights are allocated by the Fund tomembers that are participants in the Special Drawing RightsDepartment in proportion to their quotas in the Fund. Threeallocations were made, in 1970, 1971, and 1972, aggregatingSDR 9.3 billion. In accordance with Board of Governors Reso-lution No. 34-3, SDR 4 billion each were allocated to partici-pants as of January 1, 1979 and 1980; a further allocation ofSDR 4 billion is to be made as of January 1, 1981. Specialdrawing rights do not constitute claims by holders against theFund to provide currency, except in connection with the termi-nation of participation or liquidation.

2. Uses of Special Drawing Rights

A participant can use its special drawing rights in transactionsand certain operations by agreement with another participant,and in certain operations involving the General Resources Ac-count, such as the payment of charges and the discharge of re-purchase obligations. In addition, the Fund ensures, by designat-ing participants to provide freely usable currency in exchangefor special drawing rights, that a participant can use its specialdrawing rights to obtain such currency if it has a need becauseof its balance of payments or its reserve position or develop-ments in its reserves. A participant is not obliged to providecurrency for special drawing rights beyond the point at whichits holdings of special .drawing rights in excess of its net cumula-tive allocation are equal to twice its net cumulative allocationor such higher limit as may be agreed between a participant andthe Fund. A participant may, however, provide currency in ex-cess of the obligatory limit or any agreed higher limit.

3. Reconstitution Requirement

A participant is required to maintain, over five-year periodsending in successive calendar quarters, a minimum level ofaverage daily holdings of special drawing rights of 15 per centof its average daily net cumulative allocation.

4. Interest, Charges, and Assessment

Interest is paid to each holder on its holdings of special draw-ing rights and charges are levied at the same rate by the Fundon each participant's net cumulative allocation plus any negativebalance of the participant or unpaid charges. Interest andcharges are settled by crediting and debiting individual holdingsaccounts on April 30 each year. The Fund is required to payinterest to each holder, whether or not sufficient charges arereceived. The expenses of conducting the business of the SpecialDrawing Rights Department are paid by the Fund from theGeneral Resources Account which is reimbursed in specialdrawing rights at the end of each financial year. For this pur-pose, the Fund levies an assessment, at the same rate for allparticipants, on their net cumulative allocations.

5. Suspension of Right to Use Special Drawing Rights

On December 19, 1978 the Executive Board decided to sus-pend the right of Democratic Kampuchea to use special draw-ing rights acquired after the date of the suspension because theFund found that Democratic Kampuchea had failed to meet cer-tain obligations in the Special Drawing Rights Department.

187




SUBSIDY ACCOUNT




SCOPE OF THE AUDIT

We have examined the statement of financial position of the Subsidy Accountadministered by the International Monetary Fund, showing the changes in theAccount for the year ended April 30, 1980, and the financial position as at that date.

Our examination was made in accordance with generally accepted auditingstandards and accordingly included such tests of the accounting records, after evalu-ating the extent and results of the tests which we observed to have been carried outby the Internal Auditor, and such other auditing procedures as we deemed necessaryin the circumstances.

AUDIT OPINION

In our opinion, the financial statement referred to above gives a true and fairview of the operations of the Subsidy Account for the year ended April 30, 1980,and its financial position as at that date, in conformity with generally accepted ac-counting principles applied on a basis consistent with that of the preceding year.


/s/ Robert Toulemon, Chairman (France)/s/ Pedro Osvaldo Montorfano (Paraguay)/s/ Gamini C.B. Wijeyesinghe (Sri Lanka)

188




SUBSIDY ACCOUNT(Notel)

STATEMENT OF FINANCIAL POSITIONChanges during year and Position as at April 30, 1980


(Note 2)

Balance at beginning of year . . .Contributions received (Note 2)Interest earned on investments . .

Valuation loss

Less: Subsidy payments (Note 3)Balance at end of year

198059,735,39928,597,9635,621,859

34,219,822(921,021)

33,298,80193,034,20019,099,58573,934,615

197958,746,35223,668,0923,259,513

26,927,605(988,127)

25,939,47884,685,83024,950,43159,735,399

Balance represented by:

Currency on depositInvestments in United States Government obligations, at cost

(market value SDR 70,936,491—1980, SDR 55,473,545—1979)Accrued interest receivable

Total assets

72,300

71,246,2042,616,111

73,934,615

2,297,338

55,829,8931,608,168

59,735,399

The accompanying notes are an integral part of the financial statement.



189




SUBSIDY ACCOUNTNOTES TO THE FINANCIAL STATEMENT

1. Purpose

The Subsidy Account, which is administered by the Fund,was established to assist the most seriously affected members tomeet the interest cost of using resources made available throughthe Fund's oil facility for 1975. The assets of the Subsidy Ac-count are separate from the assets of all other accounts of theFund and are not used to discharge liabilities or to meet lossesincurred in the administration of other accounts.


The accounts of the Subsidy Account are expressed in termsof the SDR, the currency value of which is determined by astandard basket of currencies of sixteen members.

Currency contributions to the Subsidy Account are convertedto equivalent amounts of SDKs on the basis of exchange ratesagainst the SDR at the time of receipt. Cumulative contribu-

tions to the Subsidy Account at April 30, 1980 amounted toSDR 149,536,274.

It is the practice of the Fund to make all calculations on thebasis of the exact number of days in the financial year.

3. Subsidy Payments

The rate of subsidy for the financial years ended April 30,1976 through 1980 was set by the Fund at five per cent perannum of the average daily balances in each year of the Fund'sholdings of recipient members' currencies subject to the sched-ule of charges applicable to the 1975 oil facility. Subsidy pay-ments are made after the end of each financial year in U.S.dollars at the SDR/US$ rate determined for the date of pay-ment. Subsidy payments for the financial year ended April 30,1980 amounted to SDR 27.8 million and were made onJune 2, 1980.

190




TRUST FUND




SCOPE OF THE AUDIT

We have examined the balance sheet of the Trust Fund administered by theInternational Monetary Fund as at April 30, 1980, and the related statements ofincome and expense and trust resources for the year then ended.


AUDIT OPINION

In our opinion, the financial statements referred to above give a true and fairview of the financial position of the Trust Fund as at April 30, 1980, and of theresults of its operations for the year then ended, in conformity with generally ac-cepted accounting principles applied on a basis consistent with that of the precedingyear.



191




TRUST FUND(Notel)



(Note 2)

1980

ASSETSSight deposits 23,702Term deposits 824,286,202Investments, at cost (market value SDR 348,419,267—1980, SDR 235,576,501—1979) 347,840,818Loans (Note 3) 1,931,442,424Accrued interest on investments and term deposits 36,600,937Accrued interest on loans 2,600,669

Total

1979

40,561534,534,618232,464,576969,864,42421,449,855

1,536,0033,142,794,752 1,759,890,037

TRUST RESOURCES AND LIABILITIESTrust resources (Note 4) 3,124,497,410 1,751,394,949Liabilities—

Undistributed profits from sale of gold 18,297,342 8,495,088Total 3,142,794,752 1,759,890,037




192




TRUST FUND(Notel)

STATEMENT OF INCOME AND EXPENSEfor the year ended April 30, 1980


(Note 2)

1980Income:

Net proceeds realized from the sale of gold

Investment income

Interest income on loans

1,552,631,381

95,809,509

6,467,855

Expense:

Administrative expense (Note 2):

Staff salaries and benefits, and other services

Gold weighing and handling charges

Data processing services

Other

Total administrative expense

Exchange valuation loss

Net income


1979

928,701,768

43,458,376

3,704,8181,654,908,745 975,864,962

635,131

58,730

5,972

167

700,000

6,281,593

6,981,593

834,746

58,570

5,682

1,002

900,000

20,634,242

21,534,242

1,647,927,152 954,330,720

193




TRUST FUND(Notel)

STATEMENT OF TRUST RESOURCESfor the year ended April 30, 1980


(Note 2)

1980 1979Balance at beginning of year 1,751,394,949 864,216,576

Net income for year 1,647,927,152 954,330,720

Total resources before distribution of profits to developing countries 3,399,322,101 1,818,547,296

Distribution of profits to developing countries (Note 4)

Amount disbursed 292,681,719 62,057,738

Amount pending disbursement 9,802,254 8,495,088

302,483,973 70,552,826

Contributions received 27,659,282 3,400,479

Balance at end of year 3,124,497,410 1,751,394,949


194




TRUST FUNDNOTES TO THE FINANCIAL STATEMENTS

1. Purpose

The Trust, which is administered by the Fund as Trustee, wasestablished in 1976 to provide balance of payments assistanceon concessional terms to eligible members that qualify for as-sistance. The resources of the Trust are separate from the assetsof all other accounts of the Fund and are not used to dischargeliabilities or to meet losses incurred in the administration ofother accounts.


Unit of Account

The accounts of the Trust Fund are expressed in terms of thespecial drawing right (SDR), the currency value of which isdetermined by a standard basket of currencies of sixteenmembers.

Calculations

It is the practice of the Fund to make all calculations on thebasis of the exact number of days in the accounting year.

Administrative Expense

The expenses of conducting the business of the Trust Fundthat are paid from the General Resources Account of the IMF

are reimbursed by the Trust on the basis of a reasonable esti-mate of these expenses by the IMF.

3. Loans

Loans are made from the Trust Fund to those eligible mem-bers that qualify for assistance in accordance with the provi-sions of the Trust Instrument. Each loan disbursement is repay-able in ten semiannual installments which shall begin not laterthan the end of the first six months of the sixth year, and becompleted at the end of the tenth year, after the date of dis-bursement. Interest on the outstanding loan balances is chargedat the rate of one-half of one per cent per annum.

4. Trust Resources

The International Monetary Fund decided that the Trusteemake, through the Trust Fund, the direct distribution of part ofthe profits from the sale of gold for the benefit of developingmembers. The share of each developing member in this directdistribution of profits is calculated on the basis of its share intotal IMF quotas as of August 31, 1975 and on the basis of theactual profits realized in the gold auctions. At April 30, 1980the Trust resources include the equivalent of SDR 365.7 millionfor direct distribution of profits to certain developing members,subject to decisions by the Fund as Trustee.

195




STAFF RETIREMENT FUND




SCOPE OF THE AUDIT

We have examined the balance sheet of the Staff Retirement Fund administeredby the International Monetary Fund as at April 30, 1980, and the related statementof changes in reserves for the year then ended.


AUDIT OPINION

In our opinion, the financial statements referred to above give a true and fairview of the financial position of the Staff Retirement Fund as at April 30, 1980, andof the changes in reserves for the year then ended, in conformity with generally ac-cepted accounting principles applied on a basis consistent with that of the precedingyear.


/s/ Robert Toulemon, Chairman (France)/s/ Pedro Osvaldo Montorfano (Paraguay)/s/ Gamini C.B. Wijeyesinghe (Sri Lanka)

196




STAFF RETIREMENT FUND(Notel)


Amounts expressed in U.S. dollars

ASSETSCash at banks

Investments (Note 3)

Bonds (market value $72,520,971—1980, $53,674,073—1979)

Stocks (market value $81,563,954—1980, $74,703,015—1979)

Total

Accrued interest on bonds, accrued contributions receivable,and miscellaneous accounts receivable

1980

Total Assets

177,994

80,406,015

76,127,302

156,533,317

1,131,363

157,842,674

1979(Note 2)

63,628

58,120,307

74,916,076

133,036,383

759,280

133,859,291

RESERVES AND LIABILITIESReserves

Participants' Account

Accumulation Account

Retirement Reserve Account

Total Reserves

Accounts Payable

Total Reserves and Liabilities

29,402,778

69,329,128

59,107,045

157,838,951

3,723

157,842,674

25,616,368

61,799,018

46,441,420

133,856,806

2,485

133,859,291




197




STAFF RETIREMENT FUND(Notel)

STATEMENT OF CHANGES IN RESERVESfor the year ended April 30, 1980

Amounts expressed in U.S. dollars

1980 1979(Note 2)

Contributions:

Participants 4,681,022 3,950,821

International Monetary Fund 15,264,162 13,406,295

Participants restored to service 15,850 105,698

Transfers (net) from retirement plans of other international organizations 15,684 (113,125)

Total Contributions 19,976,718 17,349,689

Investment Income:

Interest and dividends 10,496,279 7,197,272

Amortization of accumulated discounts 40,419 38,738

Amortization of net realized losses on bonds (242,057) (239,721)

Recognized market depreciation on equity investments (662,000) (1,483,100)

Net Investment Income 9,632,641 5,513,189

Payments:

Pensions and other benefits 4,781,594 3,801,233

Contributions, benefits, and interest paid to participants upon withdrawal 687,218 606,617

Commuted benefits 158,402

Death benefits 223,813

Total Payments 5,627,214 4,631,663

Increase in Reserves during year 23,982,145 18,231,215

Reserves at beginning of year 133,856,806 115,625,591

Reserves at end of year 157,838,951 133,856,806


198




STAFF RETIREMENT FUNDNOTES TO THE FINANCIAL STATEMENTS

1. Purpose

In accordance with the provisions of the Staff RetirementPlan, all assets and income of the Staff Retirement Fund arethe property of the International Monetary Fund and are heldand administered by it separately from all its other propertyand assets and are to be used solely for the benefit of partici-pants and retired participants or their beneficiaries. The Inter-national Monetary Fund, as employer, meets the administrativecosts of the Plan, such as actuarial, management, and custodialfees, and is to contribute any additional amounts not providedby the contributions of participants required to pay costs andexpenses of the Plan not otherwise covered.

2. Prior Period Adjustment

The financial statements of the Staff Retirement Fund for theyear ended April 30, 1979 included an amount of recognizedappreciation on stocks of $229,700. This amount was incorrectbecause of an error in computations and a recognized deprecia-tion of $1,483,100 should have been recorded. The comparativefinancial statements for the year ended April 30, 1979 have beenrestated, with the effect that the adjusted book value of stocksand the increase in reserves through the Accumulation Accountare $1,712,800 less than originally reported.

In consequence, the payment by the International MonetaryFund to the Staff Retirement Fund on May 1, 1980 to amortizeaccumulated experience losses was $176,355 less than it other-wise would have been. This amount, plus interest at the as-sumed actuarial rate of 6 per cent per annum, was paid onJune 3, 1980.

3. Investments

Valuation

All investments are recorded in the accounts at cost or amor-tized cost. The basis of valuation of the investment portfolio isintended to focus on the prospective long-run average yield ofthe existing portfolio. Therefore, not only interest and dividends,but also realized gains and losses on bonds and the effect ofunrealized changes in the value of equity investments, are takeninto account. The realized net loss (or gain) on bonds is amor-tized through the Accumulation Account over a ten-year period;unrealized market appreciation or depreciation on bonds isignored. The amount of appreciation (or depreciation) on stocksto be recognized through the Accumulation Account each yearis based on a ten-year moving average of the annual rate ofchanges in the market value of the equity portfolio. "Fundsoriginally invested," as referred to below, is the cumulativeamount of contributions from the employer and from the par-ticipants made available for investment plus investment income.The investment base for determining the yield on investmentsis the "adjusted book value" in the balance sheet.

Investment Portfolio

The investments at April 30, 1980(in U.S. dollars):

and 1979 were as follows

1980 1979

BondsAmortized cost:

Notes insured byU.S. Government

International developmentbanks

CorporateCommercial paperCertificates of depositRepurchase agreement

(Note 2)

8,787,479 2,495,457

Total amortized costAdd: Net realized losses ..

Funds originally invested ..Deduct: Amortized net

realized losses

5,083,98321,606,08214,429,39629,140,000

773,000

79,819,9402,420,529

82,240,469

1,834,454

5,063,18513,943,7315,745,000

28,700,0001,368,000

57,315,3732,397,330

59,712,703

1,592,396

Adjusted bookvalue of bonds 80,406,015 58,120,307

StocksCost:

CommonDeduct: Net realized gains .Funds originally invested

84,495,5455,759,143

77,477,922614,746

78,736,402 76,863,176Recognized depreciation (2,609,100) (1,947,100)

Adjusted bookvalue of stocks 76,127,302 74,916,076

Total investments atadjusted book value .... 156,533,317 133,036,383

Funds originally invested and market value

The changes in funds originally invested are summarized asfollows:

Bonds Stocks TotalFunds originally invested:

April 30, 1979 59,712,703 76,863,176 136,575,879Net new investment 22,527,766 1,873,226 24,400,992

April 30, 1980 82,240,469 78,736,402 160,976,871

Market value of portfolioApril 30, 1980 72,520,971 81,563,954 154,084,925

199


APPENDIX VIII (concluded)

4. Actuarial Valuation

The most recent valuation of the Plan by the actuary engaged The actuarial assumptions were based on the presumption thatby the Pension Committee was made as at April 30, 1979. Ac- the Plan will continue.tuarial assumptions used in the valuation were (a) life expec- The valuation made at April 30, 1979 showed an experiencetancy of participants as based on the 1960 United Nations Serv- loss for the year then ended of $18.1 million. Experience lossesice Tables, (b) certain percentages of staff, differing by sex, are amortized by contributions from the employer over fifteen-would retire at each age between 55 and 65, and (c) an assumed year periods. At April 30, 1980 the unamortized experienceaverage rate of return on investments of six per cent per annum. losses amounted to $51.3 million (SDR 39.6 million).

200


Index

An asterisk (*) denotes a table; a dagger (t) denotes a chart; fn. denotes a footnote.

ABU DHABIOil facility financing, 117*Supplementary financing facility, lend-

ing for, 82, 117*AFGHANISTAN

Exchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDKs, 94*, 123*, 125*

AFRICABalance of payments, 17*, 31Economic activity and policies, 15Output, 12*, 15Prices, 12*Trust Fund disbursements, 88*

ALGERIAExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDKs, 94*, 123*, 125*

ARGENTINAExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*International reserves, 59Output, 15Prices, 12* (fn.)SDKs, 66, 94*, 123*, 125*

ARTICLES OF AGREEMENTArticle IV, 40, 52, 53, 57, 73, 96, 97Article V, 80, 81Article VIII, members accepting obliga-

tions of, 97, 122*Article XIV, 96, 97Second Amendment, 52, 53, 73,

77* (fn.), 85, 90, 91ASIA

Balance of payments, 17*, 31, 33Debt and debt service, 33Economic activity and policies, 15Output, 12*, 14, 15Prices, 12*SDKs, 66Trust Fund disbursements, 88*

AUSTRALIABalance of payments, 24Buffer stock facility, use of, 78Exchange rate, 106*Gold purchased from Fund, 87*Purchases and repurchases from Fund,

95, 112*, 114*SDKs, 94*, 95, 123*, 125*

AUSTRIAExchange rate, 106*Gold purchased from Fund, 87*Oil facility financing, 117*SDKs, 94*, 123*, 125*

Subsidy Account, contribution to, 90*Supplementary financing facility, lend-

ing for, 82, 117*

BAHAMASExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDKs, 123*, 125*

BAHRAINExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDKs, 123*, 125*

BALANCE OF PAYMENTSAdjustment, 3, 4, 24, 35, 38, 40, 50, 51,

57,70,71,75,78,85Current account balances, distribution

of, 1, 3, 4, 17, 18, 20*, 21, 23, 25,27,28,29,30-31,32,36

Domestic economic policies, effect on,49

Effect of: exchange rate changes on,22, 50, 52, 57; oil price changes on, 4

Financing, 1, 3, 4, 18, 30, 32, 33, 38,40,51,52,58,70,75

Global pattern, 18, 20*, 61, 81Petrodollar recycling, role of Fund in,

18See also individual countries

BANGLADESHExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,

112*, 114*SDKs, 94*, 123*, 125*Stand-by arrangement with Fund, 110*Subsidy Account, use of, 89*Trust Fund disbursements, 121*

BANK FOR INTERNATIONAL SETTLEMENTS(BIS)

Holder of SDKs, 91,95Trust Fund investments, 89

BARBADOSExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Repurchases from Fund, 114*SDRs, 123*, 125*

BELGIUMEuropean Monetary System, participa-

tion in, 41 (fn.), 109* (fn.)Exchange rate, 47, 106*General Arrangements to Borrow, 116*Gold purchased from Fund, 87*Oil facility financing, 117*

SDRs, 93, 123*, 125*Subsidy Account, contribution to, 90*Supplementary financing facility, lend-

ing for, 82, 117*BENIN

Exchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases from Fund, 112*SDRs, 94*, 123*, 125*Trust Fund disbursements, 121*

BOARD OF GOVERNORSSDR allocation, decision on, 75, 91See also DEVELOPMENT COMMITTEE

and INTERIM COMMITTEEBOLIVIA

Exchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases from Fund, 112*SDRs, 94*, 123*, 125*Stand-by arrangement with Fund, 79*,

110*Supplementary financing facility, use

of, 79*Trust Fund disbursements, 121*

BOTSWANAExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDRs, 123*, 125*

BRAZILExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Output, 15SDRs, 66,94*, 123*, 125*Subsidy Account, contribution to, 90*

BUDGET OF FUND, 174*BUFFER STOCK FINANCING BY FUND, 76,

77*, 78, 112*-13*BURMA

Exchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,

112*, 114*SDRs, 93*, 94*, 123*, 125*Stand-by arrangement with Fund, 110*Trust Fund disbursements, 121*

BURUNDIExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases from Fund, 112*SDRs, 123*, 125*Trust Fund disbursements, 121*

201


INDEX

CAMEROONExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Repurchases from Fund, 114*SDKs, 93*, 123*, 125*Subsidy Account, use of, 89*Trust Fund disbursements, 121*

CANADABalance of payments, 22*, 23Economic activity and policies, 2, 8, 9,

43, 46tExchange rate, 24, 25, 41, 42t, 43, 44t,

47, 48*, 106*General Arrangements to Borrow, 116*Gold purchased from Fund, 87*International reserves, 45*Manufactures, relative costs and prices,

26tManufacturing, labor costs in, 261Oil facility financing, 117*Output, 2t, 8, 9Prices, 5, 8*, 9, 26tSDKs, 93, 94*, 123*, 125*Subsidy Account, contribution to, 90*Supplementary financing facility, lend-

ing for, 82, 117*Trade, 23, 25

CAPE VERDEExchange rate, 106*Quota increase, 83SDRs, 95, 123*, 125*Subscription payment to Fund, 95

CAPITAL MARKETSBorrowing in, 27, 31, 38, 70Rates of return on money market in-

struments, 65Recycling of petrodollars, role in, 38,

69-70CENTRAL AFRICAN REPUBLIC


112*, 114*SDRs, 94*, 123*, 125*Stand-by arrangement with Fund, 110*Subsidy Account, use of, 89*Trust Fund disbursements, 121*

CHADExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Repurchases from Fund, 114*SDRs, 123*, 125*Trust Fund disbursements, 121*

CHILEExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Prices, 12* (fn.)Repurchases from Fund, 114*SDRs, 94*, 123*, 125*

CHINAExchange arrangements, 109* (fn.)Executive Board decision on represen-

tation, 83Gold purchased from Fund, 87*Membership in Fund, 115* (fn.)Repurchases from Fund, 114*SDRs, 123*, 125*

COLOMBIAExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDRs, 94*, 123*, 125*

COMOROSExchange rate, 106*SDRs, 123*, 125*

COMPENSATORY FINANCING BY FUND, 31,112*-13*; liberalization, 73, 74, 76, 78;purchases by members, 76t, 77*, 78,81; repurchases by members, 76t, 80;revised decision, 136-38

CONDITIONALITY OF FUND RESOURCES, 73CONGO


112*, 114*SDRs, 94*, 123*, 125*Stand-by arrangement with Fund, 110*Trust Fund disbursements, 121*

CONSULTATIONS WITH FUND MEMBERS,53, 57, 96

COSTA RICAExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,

112*, 114*SDRs, 94*, 123*, 125*Stand-by arrangement with Fund, 77,

79*,110*Supplementary financing facility, use

of, 79*CYPRUS

Exchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Repurchases from Fund, 114*SDRs, 123*, 125*

DENMARKEconomic activity and policies, 41European Monetary System, participa-

tion in, 41 (fn.),109* (fn.)Exchange rate, 41, 47, 106*Gold purchased from Fund, 87*SDRs, 94*, 123*, 125*Subsidy Account, contribution to, 90*

DEVELOPING COUNTRIESEconomic activity and policies, 12-15,

35, 36, 37, 38Energy problems, economic impact of,

36,37Exchange arrangements, 54*-56*Exchange rates, 47, 48*Incomes policies, use of, 37Output, 12, 36, 37Prices, 12, 36, 37Purchases from Fund, 76Stand-by arrangements with Fund, 76See also individual countriesNon-Oil Developing Countries

Balance of payments, 1, 3, 4, 17, 20*,28,29,30,31,32,38,51,70-71

Borrowing from private banks, 3, 18,19,31,33,70

Capital flows, 17-18Debt and debt service, 3, 32, 33, 34Economic activity and policies, 3, 4,

13, 14, 15, 29, 30, 31, 32, 38, 51, 70Effect of: economic slowdown in in-

dustrial countries on, 14; oil priceincreases on, 14, 15

Energy production and consumption,4,38

Exchange rates, 51Foreign exchange reserves, 59*Gold holdings, 59*International reserves, 29, 30, 31,

59-60Official financing, use of, 3, 15, 18,

30, 33, 71Output, 12*, 13, 14Prices, 4, 12*, 13, 14, 15

Reserve positions in Fund, 59*, 68SDRs, 59*,>66Subgroups, 28-34Supplementary financing facility, use

of, 79-80Trade, 3, 14, 15, 16*, 17*, 28, 29,

30,31,34,51,70Oil Exporting Countries

Balance of payments, 1, 3, 13, 17, 18,19, 20*, 21, 24, 25, 27, 50, 51, 52,57, 60, 70

Capital flows, 3, 18,31,38Debt and debt service, 13Deposits in private banks, 3, 18, 21,

28Economic activity and policies, 13,

25,27,51,52Eurocurrency deposits, 69Exchange rates, 51, 52Foreign exchange reserves, 13, 59*Gold holdings, 59*International investments of, 3, 21,

28International reserves, 59-60, 69Oil pricing, 1, 3, 4, 13, 27, 29, 36, 69Oil revenues, 4, 13, 25, 27, 51, 60, 70Output, 12*, 13Prices, 12*, 13ReserVe positions in Fund, 59*, 68SDRs, 59*, 66Trade, 4, 13, 16, 17*, 25, 27, 50, 51,

52See also Organization of Petroleum

Exporting Countries (OPEC)DEVELOPMENT COMMITTEE

Communiques, 158-67Program of Immediate Action of Group

of Twenty-Four, examination of, JXDJIBOUTI ^7 V

Exchange rate, 106*SDRs, 95, 123*, 125*Subscription payment to Fund, 95

DOMINICAArticle VIII obligations, acceptance of,

97Exchange rate, 106*Gold purchased from Fund, 87*Purchases from Fund, 76, 112*Quota increase, 83SDRs, 94*, 95, 123*, 125*Subscription payment to Fund, 95

DOMINICAN REPUBLICCompensatory financing facility, use of,

80Exchange rate, 106*Gold sales, profits received, 119*Purchases and repurchases from Fund,

80, 112*, 114*SDRs, 94*, 123*, 125*

ECUADORExchange rate, 106Gold purchased from Fund, 87*Gold sales, profits received, 119*SDRs, 94*, 123*, 125*

EGYPTExchange rate, 106*Extended arrangement with Fund, 77,

116*Gold purchased from Fund, 87*Gold sales, profits received, 119*Repurchases from Fund, 114*SDRs, 93*, 123*, 125*Subsidy Account, use of, 89*Trust Fund disbursements, 121*

EL SALVADORExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*

202


INDEX

Purchases from Fund, 112*SDKs, 93*, 94*, 123*, 125*Trust Fund disbursements, 121*

EQUATORIAL GUINEAExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDKs, 94*, 123*, 125*Trust Fund disbursements, 121*

ETHIOPIAExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases from Fund, 112*SDKs, 94*, 123*, 125*Trust Fund disbursements, 121*

EUROMARKETSBorrowings, 69; U.S. reserve require-

ments on, 41, 43Eurocurrency deposits, 65 (fn.), 68-69,

70Group of Ten agreement of 1971, 69Recycling petrodollars, role in, 69, 70

EUROPEBalance of payments, 17*, 31Economic activity and policies, 6,15,16Indexation, 6Output, 8*, 12*, 15Prices, 8*, 12*SDKs, 66Trade, 16Trust Fund disbursements, 88*Wages, 6

EUROPEAN CURRENCY UNIT (ECU), 45,47, 58, 60, 61, 63, 68*, 69

EUROPEAN MONETARY SYSTEM (EMS)Establishment, 25, 41, 45, 53European Monetary Cooperation Fund,

58,59* (fn.),60, 61Exchange rates, 25, 41, 45Gold holdings of participants, 59* (fn.)Intervention policy, 47Participants, 41 (fn.), 109* (fn.)Participants' deposits of gold and dol-

lars, 58Policy coordination within, 45

EXCHANGE MARKETSBehavior of, 40Conditions in, 24, 41, 47Forward markets, 48, 69Official intervention in, 36, 40, 41, 43,

45, 47, 48, 49, 52, 53, 56, 63, 64, 69Restrictions, 49, 51, 53, 56, 57

EXCHANGE RATESArrangements, 35, 49, 52, 53, 106*-

109*; of member countries, 54*-56*Balance of payments, effect on, 50, 52Currency blocs, formation of, 56Effect of: balance of payments on, 35,

36; capital movements on, 53; ex-change and trade restrictions on, 53;inflation rate on, 49

Effective rates, 22, 24, 25, 41, 42t, 47,48*, 50, 53

European common margins agreement("snake"), 41, 45, 47

European Monetary System, 41, 45, 47,53, 106*-109*

Inflationary expectations, effect on, 49Investment, effect on, 48-49List as of June 30, 1980, 106*-109*Monthly changes in, January 1978-May

1980, 44tMultilateral exchange rate model

(MERM), 42t (fn.)Policies, 35, 40, 41Prices, effect on, 49, 51Trade, effect on, 48-49

Variability, 35, 40, 41, 45, 47, 48, 56,57

Wages, effect on, 49See also individual countries

EXCHANGE RESTRICTIONS, 49, 51, 53, 56,57

EXECUTIVE BOARDArticle IV consultations, role in, 53, 96Broadened investment authority for

Trust Fund, decision on, 89Changes in membership, 171-73China, decision on representation of, 83Compensatory financing facility, amend-

ed decision on, 78Conditionality guidelines, review of, 73Early repurchase, guidelines for, 80Economic policy, discussions with na-

tional authorities about, 56Extended Fund facility, review of, 78Fund surveillance of exchange rates,

discussion of, 52, 56, 57, 58Further uses of Fund gold holdings,

consideration of, 85Guidelines for allocating currencies to

be sold, 81List of Executive Directors and voting

power, 168-70"Other holders" of SDRs, decision on

permitted uses, 95-96SDRs, decisions on additional uses for,

92SDR valuation and interest rate bas-

kets, examination of, 75, 91Subsidy Account, decision establishing,

89Subsidy Account surplus, decision on

disposition of, 90Substitution Account, work on proposal

for, 72, 75Supplementary financing facility, review

of, 80Trust Fund, discussion of, 75; estab-

lishment of, 85Trust Fund assets, decision to place

them with BIS, 89Trust Fund decisions in 1979/80, 88World economic situation and outlook,

discussion of, 53, 58, 73, 97EXECUTIVE BOARD DECISIONS

Compensatory financing facility, reviseddecision, 136-38

Extended Fund facility, extension ofmaximum repurchase period, 145

General Arrangements to Borrow, re-newal and modification, 139-40

Repurchases, procedures for sale ofcurrencies at the request of members,145-48

Special drawing rights: additional uses,141-43; allocation to new partici-pants, 143; designation, review ofrules and method of calculatingamounts, 132-34; "other holders,"143-45

Stand-by and extended arrangements,format, 148-51

Stand-by arrangements, guidelines onperformance criteria with respect toforeign borrowing, 138-39

Subscriptions of Fund members, guide-lines on payment of reserve assets,140-41

Supplementary financing facility, 131-32

Trust Fund, second period, 132Use of currencies and SDRs in General

Resources Account and principles andprocedures for designation, 134-36

EXTENDED FUND FACILITY, 71, 73, 74, 76,81, m*-^*, 116*; extended arrange-

ment, format, 150-51; purchases bymembers, 761, 11-IS', repurchases bymembers, 761, 78, 80, 145; supplemen-tary financing facility, use of, 77, 78,79*

FIJIExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDRs, 93*, 123*, 125*

FINANCIAL MARKETSSee CAPITAL MARKETS and EXCHANGE

MARKETSFINANCIAL PROGRAMS AGREED WITH FUND,

3,70FINANCIAL STATEMENTS OF FUND, 176-

200FINLAND

Article VIII obligations, acceptance of,97

Exchange rate, 106*Gold purchased from Fund, 87*Repurchases from Fund, 114*SDRs, 94*, 123*, 125*Subsidy Account, contribution to, 90*

FOREIGN EXCHANGE MARKETSSee EXCHANGE MARKETS

FOREIGN EXCHANGE RESERVESSee INTERNATIONAL RESERVES

FOREIGN INVESTMENTSee INTERNATIONAL INVESTMENT

FOREIGN TRADESee INTERNATIONAL TRADE

FRANCEBalance of payments, 22*, 23Economic activity and policies, 2t, 9,

43, 45, 46t, 67t, 84tEuropean Monetary System, participa-

tion in, 41 (fn.), 109* (fn.)Exchange rate, 24, 25, 41, 42t, 43, 44t,

47, 48*, 106*General Arrangements to Borrow, 116*Gold purchased from Fund, 87*International reserves, 45*Manufactures, relative costs and prices,

26tManufacturing, labor costs in, 26tOutput, 2t, 8*, 9tPrices, 5, 8*, 26tRates of return on domestic money

market instruments, 65SDRs, 93, 94*, 123*, 125*Subsidy Account, contribution to, 90*Trade, 23, 25

GABONExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases from Fund, 112*SDRs, 94*, 123*, 125*Stand-by arrangements with Fund, 110*

GAMBIA, THEExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,


GENERAL ARRANGEMENTS TO BORROW(GAB), 75, 116*, 139-40; borrowingby Fund, 77*, 82; renewal, 82; repay-ment by Fund, 95

203


INDEX

GENERAL RESOURCES ACCOUNTTRANSACTIONS

Borrowing by Fund, 92*, 97*, 116*Charges, 73, 83, 96, 97*, 118*; pay-

ment in SDKs, 92*, 93, 95Currencies, use of, 81, 134-36, 145-48Holdings of: gold, 77*; SDKs, 77*, 81,

92*, 93-95, 96, 124*; usable cur-rencies, 77*, 81, 85

Net drawings by members, 74*Purchases by members, 73, 76, 77*,

92*, 95, 111*,112*-13*Receipt of SDRs, 124*, 125*-28*Reimbursement for Trust Fund ex-

penses, 88Remuneration paid to members, 83,

84t, 92*, 96, 97*; in SDRs, 93, 95Repurchases by members, 76, 77*, 80,

111*, 114*-15*, 145-48; in SDRs,92, 93, 94, 95

SDRs: inclusion in operational budget,94; use of, 92*, 124*, 125*-28*,134-36, 140^1

GERMANY, FEDERAL REPUBLIC OFBalance of payments, 3, 21, 22*, 23,

24, 41, 50Economic activity, 2t, 8, 9, 10, 22, 41,

43, 45, 46t, 47, 67t, 84tEuropean Monetary System, participa-

tion in, 41 (fn.), 109* (fn.)Exchange rate, 24, 25, 41, 42t, 43, 44t,

47, 48*, 50, 63, 106*, 109*General Arrangements to Borrow,

116*; lending under, 82Gold purchased from Fund, 87*International reserves, 45*Manufactures, relative costs and prices,

26tManufacturing, labor costs in, 261Oil facility financing, 117*Output, 2t, 8, 9Prices, 5, 8*, 26tRates of return on domestic money

market instruments, 65, 66SDRs, 66, 93, 94*, 95, 123*, 125*Subsidy Account, contribution to, 90*Supplementary financing facility, lend-

ing for, 82, 117*Trade, 23, 25

GHANAExchange rate, 106*Gold purchased from Fund, 87*Gold sales, profits received, 119*Prices, 12* (fn.)Repurchases from Fund, 114*SDRs, 123*, 126*Stand-by arrangement with Fund, 110*Trust Fund disbursements, 121*

GOLDCollateral, use as, 71ECUs issued against, 58, 60, 61Holdings, 58, 59*, 60, 66, 81, 85Price, 48, 58, 60, 85Sales by Fund: distribution of profits,

73, 74*, 75, 85, 86, 88, 119*; fordistribution, 66, 73, 74*, 75, 76, 77*,85, 87*; in auctions, 66, 73, 75, 77*,85, 88*

GREECEExchange rate, 107*Gold purchased from Fund, 87*Repurchases from Fund, 114*SDRs, 93*, 123*, 126*Subsidy Account, contribution to, 90*

GRENADAExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,

112*, 114*

SDRs, 93*, 94*, 123*, 126*Stand-by arrangement with Fund, 110*Subsidy Account, use of, 89*, 90Trust Fund disbursements, 121*

GROUP OF TEN, 69GROUP OF TWENTY-FOUR, 73GUATEMALA

Exchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDRs, 94*, 123*, 126*Supplementary financing facility, lend-

ing for, 82, 117*GUINEA


112*, 114*SDRs, 94*, 123*, 126*Trust Fund disbursements, 121*

GUINEA-BISSAUExchange rate, 107*SDRs, 123*, 126*

GUYANABuffer stock facility, use of, 78Exchange rate, 107*Extended arrangement with Fund, 77,

79*, 116*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,

112*, 114*SDRs, 93*, 94*, 123*, 126*Stand-by arrangement with Fund, 110*Supplementary financing facility, use

of, 79*

HAITIExchange rate, 107*Extended arrangement with Fund, 77,

116*Gold purchased from Fund, 87*Gold sales, profits received, 119*Repurchases from Fund, 114*SDRs, 123*, 126*Subsidy Account, use of, 89*Trust Fund disbursements, 121*

HONDURASExchange rate, 107*Extended arrangement with Fund, 77,

116*Gold purchased from Fund, 87*, 119*Purchases from Fund, 112*SDRs, 94*, 123*, 126*Trust Fund disbursements, 121*

ICELANDExchange rate, 107*Gold purchased from Fund, 87*Repurchases from Fund, 114*SDRs, 93*, 123*, 126*

INCOME AND EXPENSES OF FUND, 96, 175*INDIA

Balance of payments, 30Economic activity and policies, 14, 15Exchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Output, 14, 15Repurchases from Fund, 95, 114*SDRs, 93, 94*, 95, 123*, 126*Subsidy Account, use of, 89*, 90Trade, 30

INDONESIAExchange rate, 107*Gold purchased from Fund, 87*

Gold sales, profits received, 119*SDRs, 94*, 123*, 126*

INDUSTRIAL COUNTRIESBalance of payments, 1, 3, 4, 17, 18,

19, 20*, 21, 22*, 23, 24, 38, 50Capital flows, 18-19Economic activity and policies, 1, 2, 3,

4, 5, 7, 8, 9, 10, 11, 16, 21, 25, 28,29, 34, 35-36, 37, 38, 41, 43, 45, 46t,48, 49, 50, 53, 57, 70

Effect of oil price increases on domesticexpenditure, 7

Energy prices, 36, 38Energy problems, economic impact of,

37Energy production and consumption, 4,

36,38Exchange arrangements, 54*Exchange rates, 21, 25, 41, 42t, 43,

44t, 47, 48*, 49, 50, 64Foreign exchange reserves, 59*Gasoline taxation, rate of, 36tGold holdings, 59*Incomes policies, use of, 37Indexation, 10Interest rates, 46t, 84tInternational reserves, 45*, 59, 60, 61Manufactures, relative costs and prices,

26tManufacturing, labor costs in, 5, 6, 7t,

26tMonetary growth, 46tOutput, 1, 2, 3, 7, 8, 9, 10, 11, 34, 35,

36, 37Petrodollar recycling, role in, 3, 18, 21Prices, 1, 4, 5, 6t, 7, 8*, 10, 11, 25,

26t, 34, 35, 36, 37, 49Private banks, 18-19Repurchases from Fund, 80Reserve positions in Fund, 59*, 68SDRs, 59*, 66Trade, 1,16, 17*, 23, 28, 29, 51Wages, 5, 6See also individual countries

INTERIM COMMITTEE, 21, 38, 71, 81Communiques, 10, 72, 152-57Economic policy, discussions with au-

thorities about, 56Fund gold sales program, agreement

on, 75Gold distribution agreement, 85Gold sales program, agreement on, 84Simplification of SDR valuation, agree-

ment on, 91SDR valuation and interest rate bas-

.. kets, examination of, 75Substitution Account, work on proposal

for, 75World economic situation and outlook,

discussion of, 53INTERNATIONAL ADJUSTMENT PROCESS,

36, 38, 50, 53, 56; speed of, 40INTERNATIONAL BANKS

Global sources and uses of funds,1976-79, 19*

INTERNATIONAL COORDINATION OF DO-MESTIC ECONOMIC POLICIES, 57

INTERNATIONAL INVESTMENTDirect investment, 31Effect of exchange rate variability on,

48-49Energy production, 4Non-oil developing countries, invest-

ment in, 31Oil exporting countries, investments of,

21INTERNATIONAL ORGANIZATIONS

Fund relations with, 99-100

204


INDEX

INTERNATIONAL RESERVESAdequacy, 71Borrowed from capital markets, 70Changes in countries' holdings of, 43,

44t, 45Composition of, 40, 43, 58, 60-61, 63,

64, 66, 68-69, 72Composition of reserve change, 68*Distribution, 29, 30, 31, 58-59ECU holdings, 60Foreign exchange holdings, 59*, 61,

62*, 63, 64*, 66, 68-69, 70, 72, 81Global stock, 58Gold holdings, 58, 59*, 60, 71, 81Growth, 58, 60-61,63Official holdings, 19, 43, 44t, 59*, 60,

61, 62*, 63, 64*, 68*Reserve positions in Fund, 59*, 61, 66,

68, 70, 81SDRs, 59*, 61, 66See also individual countries

INTERNATIONAL SUGAR AGREEMENT (1977),78, 80

INTERNATIONAL TRADEDeveloping countries, trade among, 51Effect of: exchange rate variability on,

48_49; oil price increases on, 1; re-duced lending by private banks tonon-oil developing countries on, 3

Growth, 1Import substitution, 51Manufactured goods, 16, 22, 51, 71Oil, 5, 16, 27, 50, 51Prices, 17*Primary commodities, 5, 16, 31, 71Protectionism, 28, 29, 36, 51, 78Restrictions, 27, 51, 53, 56, 57Summary, 1962-79, 16*Terms of trade, 15, 22, 23, 25, 27, 28-

29, 52; developments 1962-79, 17*Value, 15-16Volume, 16, 61See also individual countries

IRANEconomic activity, 13, 27Exchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 88 (fn.),

119*Oil facility financing, 117*SDRs, 123*, 126*Subsidy Account, contribution to, 90*

IRAQExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDRs, 94*, 123*, 126*Trust Fund, contribution to, 88

IRELANDEuropean Monetary System, participa-

tion in, 41 (fn.), 109* (fn.)Exchange rate, 107*Gold purchased from Fund, 87*SDRs, 94*, 123*, 126*

ISRAELExchange rate, 107*Gold purchased from Fund, 87*Prices, 12* (fn.)Purchases and repurchases from Fund,

95, 112*, 114*SDRs, 93*, 94*, 95, 123*, 126*

ITALYBalance of payments, 3, 21, 22*, 23Economic activity, 2t, 8, 9, 461European Monetary System, participa-

tion in, 41 (fn.), 109* (fn.)Exchange rate, 24, 25, 41, 421, 44t, 47,

48*, 107*

General Arrangements to Borrow, 116*Gold purchased from Fund, 87*International reserves, 45*Manufactures, relative costs and prices,

26tManufacturing, labor costs in, 261Output, 2t, 8, 9Prices, 5, 8*, 26tPurchases and repurchases from Fund,

80, 82, 114*SDRs, 93, 94*, 95, 123*, 126*Stand-by arrangement with Fund, 81Subsidy Account, contribution to, 90*Trade, 23, 25

IVORY COASTExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,

112*, 114*SDRs, 94*, 123*, 126*Subsidy Account, use of, 89*, 90Trust Fund disbursements, 121*

JAMAICABuffer stock facility, use of, 78Exchange rate, 107*Extended arrangement with Fund, 77,


112*, 114*SDRs, 93*, 94*, 123*, 126*Stand-by arrangement with Fund, 76Supplementary financing facility, use

of, 79, 80*JAPAN

Balance of payments, 3, 21, 22, 23, 24,41, 50

Economic activity and policies, 2t, 8,9t, 22, 43, 45, 46t, 67t, 84t

Exchange rate, 22, 24, 25, 41, 42t, 43,44t,47, 48*, 50, 63, 107*

General Arrangements to Borrow,116*; lending under, 82

Gold purchased from Fund, 87*International reserves, 45*Manufactures, relative costs and prices,

26tManufacturing, labor costs in, 261Output, 2t, 8, 9tPrices, 5, 8*, 26tfRates of return on domestic money

market instruments, 65Role of yen as reserve currency, 61SDRs, 66, 93, 95, 123*, 126*Subsidy Account, contribution to, 90*Supplementary financing facility, lend-

ing for, 82, 117*Trade, 16, 22, 25

JORDANExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDRs, 94*, 123*, 126*

KAMPUCHEA, DEMOCRATICExchange rate, 107*Gold sales, profits received, 119*Proposed gold purchase from Fund,

85 (fn.), 87* (fn.)SDRs, 123*, 126*

KENYAExchange rate, 107*Extended arrangement with Fund, 116*Gold purchased from Fund, 87*Gold sales, profits received, 119*

Purchases and repurchases from Fund,112*,114*

SDRs, 123*, 126*Stand-by arrangement with Fund, 77,

79*,110*Subsidy Account, use of, 89*Supplementary financing facility, use


KOREAExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,

112*, 114*SDRs, 94*, 123*, 126*Stand-by arrangement with Fund, 77,

79*, 110*Supplementary financing facility, use

of, 79, 80*KUWAIT

Exchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Oil facility financing, 117*Special Drawing Rights Department,

participation in, 90, 128* (fn)Supplementary financing facility,

lending for, 82, 117*Trust Fund, contribution to, 88

LAO PEOPLE'S DEMOCRATIC REPUBLICExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Repurchases from Fund, 114*SDRs, 123*, 126*Trust Fund disbursements, 121*

LATIN AMERICA AND CARIBBEANBalance of payments, 17*, 31, 33Debt and debt service, 33Output, 12*, 15Prices, 12*, 15SDRs, 66Trust Fund disbursements, 88*

LEBANONExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDRs, 123*, 126*

LESOTHOExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDRs, 123*, 126*Trust Fund disbursements, 121*

LESS DEVELOPED COUNTRIESSee DEVELOPING COUNTRIES

LIBERIAExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,


LIBYAN ARAB JAMAHIRIYAExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDRs, 94*, 123*, 126*Trust Fund, contribution to, 88 (fn.)

LUXEMBOURGEuropean Monetary System, participa-

tion in, 41 (fn.), 109* (fn.)Exchange rate, 107*Gold purchased from Fund, 87*SDRs, 94*, 123*, 126*Subsidy Account, contribution to, 90*

205


INDEX

MADAGASCARExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Repurchases from Fund, 114*SDKs, 93*, 94*, 123*, 126*Trust Fund disbursements, 121*

MALAWIExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,

112*, 114*SDKs, 94*, 123*, 126*Stand-by arrangement with Fund, 77,

79*, 110*Subsidy Account, use of, 89*, 90Supplementary financing facility, use


MALAYSIAExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDKs, 94*, 123*, 126*

MALDIVESExchange rate, 107*SDKs, 123*, 126*

MALIExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,

112*, 114*SDRs, 123*, 126*Subsidy Account, use of, 89*Trust Fund disbursements, 121*

MALTAExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDRs, 94*, 123*, 126*

MAURITANIAExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,

112*, 114*SDRs, 123*, 126*Subsidy Account, use of, 89*Trust Fund disbursements, 121*

MAURITIUSExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases from Fund, 112*SDRs, 94*, 123*, 126*Stand-by arrangement with Fund, 77,

79*,110*Supplementary financing facility, use

of, 79, 80*Trust Fund disbursements, 121*

MEXICOExchange rate, 107*Extended arrangement with Fund, 77,

116*Gold purchased from Fund, 87*Gold sales, profits received, 119*Repurchases from Fund, 95, 114*SDRs, 94*, 95, 123*, 126*

MIDDLE EASTBalance of payments, 17*Output, 12*, 15Prices, 12*, 15SDRs, 66Trust Fund disbursements, 88*

MOROCCOExchange rate, 107*Gold purchased from Fund, 87*

Gold sales, profits received, 119*Repurchases from Fund, 114*SDRs, 123*, 126*Subsidy Account, use of, 89*, 90Trust Fund disbursements, 121*

NEPALExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Repurchases from Fund, 114*SDRs, 123*, 126*Trust Fund disbursements, 121*

NETHERLANDSBalance of payments, 24European Monetary System, participa-

tion in, 41 (fn.), 109* (fn.)Exchange rate, 107*General Arrangements to Borrow,

116*Gold purchased from Fund, 87*Oil facility financing, 117*SDRs, 94*, 123*, 126*Subsidy Account, contribution to, 90*Supplementary financing facility, lend-

ing for, 82, 117*NEW ZEALAND

Exchange rate, 107*Gold purchased from Fund, 87*Purchases and repurchases from Fund,

76, 112*, 114*SDRs, 94*, 123*, 127*Subsidy Account, contribution to, 90*

NICARAGUABuffer stock facility, use of, 78Exchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*Purchases and repurchases from Fund,

112*, 114*SDRs, 93*, 94*, 123*, 127*Stand-by arrangement with Fund, 110*

NIGERExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 119*SDRs, 123*, 127*Trust Fund disbursements, 121*

NIGERIAExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 120*Oil facility financing, 116*SDRs, 94*, 123*, 127*Supplementary financing facility, lend-

ing for, 82, 117*NORWAY

Balance of payments, 24Economic activity, 24Exchange rate, 107*Gold purchased from Fund, 87*Oil facility financing, 117*SDRs, 94*, 123*, 127*Subsidy Account, contribution to, 90*

OFFICIAL DEVELOPMENT ASSISTANCE(ODA), 3, 15, 18, 28, 31-32, 33, 35-36

OIL FACILITY IN FUNDBorrowing by Fund, 68, 70, 77*, 82,

117*Charges, 89, 96, 118*Purchases by members, 76t, 77, 81, 89Repayment by Fund, 58, 60, 68, 82, 95,

117*Repurchases by members, 76, 80, 82,

114*-15*See also SUBSIDY ACCOUNT

OMANExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 120*Oil facility financing, 117*SDRs, 123*, 127*

ORGANIZATION OF PETROLEUM EXPORTINGCOUNTRIES (OPEC)

Contributions of members to TrustFund, 88; oil price increases, 5, 27

PAKISTANExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 120*Purchases and repurchases from Fund,

112*, 114*SDRs, 94*, 123*, 127*Subsidy Account, use of, 89*Trust Fund disbursements, 121*

PANAMAExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 120*Purchases and repurchases from Fund,

112*, 114*SDRs, 93*, 107*, 123*, 127*Stand-by arrangement with Fund, 79*,


of, 79*PAPUA NEW GUINEA

Exchange rate, 107*Gold purchased from Fund, 85, 87*Gold sales, profits received, 120*Repurchases from Fund, 114*SDRs, 93*, 94*, 123*, 127*Subsidy Account, use of, 89*, 90Trust Fund disbursements, 121*

PARAGUAYExchange rate, 107*Gold purchased from Fund, 87*Gold sales, profits received, 120*SDRs, 94*, 123*, 127*

PERUExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Purchases and repurchases from Fund,

77,95, 112*, 114*SDRs, 93*, 94*, 95, 123*, 127*Stand-by arrangement with Fund, 77,

79*, 110*Supplementary financing facility, use

of, 79, 80*PHILIPPINES

Exchange rate, 108*Extended arrangement with Fund, 116*Gold purchased from Fund, 87*Gold sales, profits received, 120*Purchases and repurchases from Fund,

77, 112*, 114*SDRs, 94*, 123*, 127*Stand-by arrangement with Fund, 77,

110*Subsidy Account, use of, 89*, 90Supplementary financing facility, use

of, 79, 80*Trust Fund disbursements, 121*

PORTUGALExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Repurchases from Fund, 114*SDRs, 93*, 123*, 127*Stand-by arrangement with Fund, 110*

PRIMARY PRODUCING COUNTRIESSee DEVELOPING COUNTRIES

PUBLICATIONS OF FUND, 130*

206


INDEX

QATARExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*SDKs, 94*, 123*, 127*Trust Fund, contribution to, 88

QUOTAS OF FUND MEMBERSIncreases in, 68, 70, 83, 95Seventh General Review, 68, 70, 75,

81,83,95Sixth General Review, 81Subscription payments, 68, 92*, 140-41

ROMANIAExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Repurchases from Fund, 114*SDRs, 123*, 127*Trust Fund, contribution to, 88

RWANDAExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Repurchases from Fund, 114*SDRs, 123*, 127*Stand-by arrangement with Fund, 110*Trust Fund disbursements, 121*

ST. LUCIAExchange rate, 108*Membership in Fund, 83Quota established, 83Quota increase, 83SDRs, 123*, 127*Special Drawing Rights Department,

participation in, 83, 91ST. VINCENT AND THE GRENADINES

Exchange rate, 108*Membership in Fund, 83Quota established, 83SDRs, 123*, 127*Special Drawing Rights Department,

participation in, 83, 91SAO TOME AND PRINCIPE

Exchange rate, 108*SDRs, 123*, 127*

SAUDIA ARABIAExchange rate, 108*Foreign exchange holdings, 68* (fn.)Gold purchased from Fund, 87*Gold sales, profits received, 120*Oil facility financing, 117*SDRs, 93, 94*, 123*, 127*Subsidy Account, contribution to, 90*Supplementary financing facility, lend-

ing for, 82, 117*Trust Fund, contribution to, 88

SENEGALExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Purchases and repurchases from Fund,

112*, 114*SDRs, 94*, 123*, 127*Stand-by arrangement with Fund, 110*Subsidy Account, use of, 89*Trust Fund disbursements, 121 *

SEYCHELLESExchange rate, 108*Repurchases from Fund, 114*SDRs, 123*, 127*

SIERRA LEONEExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Purchases and repurchases from Fund,

112*, 114*

SDRs, 93*, 94*, 123*, 127*Stand-by arrangement with Fund, 110*Subsidy Account, use of, 89*Trust Fund disbursements, 121*

SINGAPOREExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*SDRs, 94*, 123*, 127*

SOLOMON ISLANDSArticle VIII obligations, acceptance of,

97Exchange rate, 108*Repurchases from Fund, 114*SDRs, 123*, 127*

SOMALIAExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Purchases from Fund, 112*SDRs, 123*, 127*Stand-by arrangement with Fund, 110*Trust Fund disbursements, 121*

SOUTH AFRICAExchange rate, 108*Gold purchased from Fund, 87*Repurchases from Fund, 114*SDRs, 123*, 127*Subsidy Account, contribution to, 90*

SPAINExchange rate, 108*Gold purchased from Fund, 87*Repurchases from Fund, 114*SDRs, 94*, 123*, 127*Subsidy Account, contribution to, 90*

SPECIAL DRAWING RIGHTSAcceptance of, 92, 143-45Allocations, 31, 58, 73, 75, 90, 91, 92*,

123*, 125*-28*; for first basicperiod, 66; for third basic period,66, 143

Characteristics, 72, 90Charges, payment in, 92*, 93, 95Currencies transferred for, 93, 129*Holdings: by General Resources Ac-

count, 66, 92*, 93-95, 96, 97*, 124;by "other holders," 94, 143-45; byparticipants, 59*, 60, 66, 125*-28*

Inclusion in operational budget, 94Interest and assessments on Fund hold-

ings, 92*,97*,124*,125*-28*Interest rate on, 61, 65 (fn.), 67t, 72,

75, 84,90-91,96"Other holders" prescribed by Fund,

72, 75, 91, 95, 128* (fn.), 143-45Purchases and repurchases by members,

92*, 94, 95, 112*-13*, 124*Reconstitution of participants' holdings,

91, 92*, 124*Remuneration paid to members, 92*,

~~~ 93,124*Replenishment of participants' curren-

cies, use in, 124*Reserve asset, role as, 72, 75, 90, 91Subscription payments in, 92*, 93Transactions and operations, summary

of, 125*-28*Transfers: by agreement, 91, 92, 93,

124*, 125*-28*, 129*; to and fromGeneral Resources Account, 92*,93-95, 124*, 125*-28*; total, 124*;with designation, 91, 92*, 93, 94*,124*, 125*-28*, 129*, 132-36

Unit of account, use as, 91Uses, 72, 75, 91, 92, 141-45Valuation, 63, 65 (fn.), 72, 75, 90-91See also individual countries

SPECIAL DRAWING RIGHTS DEPARTMENTParticipants, 75, 83, 90, 91, 92*, 125*-

28*, 143

Transactions and operations, 91-93,125*-28*

See also SPECIAL DRAWING RIGHTSSRI LANKA

Exchange rate, 108*Extended arrangement with Fund, 116*Gold purchased from Fund, 87*Gold sales, profits received, 120*Purchases and repurchases from Fund,


STAFF OF FUND, 100STAND-BY ARRANGEMENTS FOR FUND

MEMBERS, 70, 73, 74, 79*, 81, 110*,111*; format, 148-50; performancecriteria, 138-39; purchases and re-purchases by members, 76-77, 80;use of supplementary financing facil-ity under, 76, 77, 78, 110*

SUBSCRIPTIONS OF FUND MEMBERSSee QUOTAS OF FUND MEMBERS

SUBSIDY ACCOUNT, 73, 89, 90; bene-ficiaries, 89-90; contributors, 89-90

SUBSTITUTION ACCOUNT, 72SUDAN

Exchange rate, 108*Extended arrangement with Fund, 77,


112*, 114*SDRs, 93*, 94*, 123*, 127*Subsidy Account, use of, 89*Supplementary financing facility, use


SUPPLEMENTARY FINANCING FACILITYBorrowing by Fund, 68, 70, 75, 77*,

82, 117*, 131-32Charges, 83-84, 96, 118*Commitments to members, 79*Establishment, 78Extended arrangements, use with, 76,

77, 78, 79*Interest rate payable by Fund, 82, 131-

32Main features, 78-79, 82Purchases by members, 77, 79, 80*,

112*-13*Repayment by Fund, 95Repurchases by members, 79Special circumstances clause, use under,

80*Stand-by arrangements, use with, 76,

77,79*, 110*SURINAME

Exchange rate, 108*SDRs, 123*, 127*

SURVEILLANCE OVER EXCHANGE RATEPOLICIES

Article IV authority for, 52, 57Article IV consultations, 53, 57, 73, 96"Asymmetry" of, 57, 58Establishment, 57Fund's approach to, 35, 40, 52, 56, 57,

58Fund's experience with, 52, 53, 56, 57Global surveillance, 53Supplemental surveillance procedure,

53,58SWAZILAND

Exchange rate, 108*Gold sales, profits received, 120*SDRs, 123*, 127*Trust Fund disbursements, 121*

207


INDEX

SWEDENExchange rate, 108*General Arrangements to Borrow, 116*Gold purchased from Fund, 87*Oil facility financing, 117*SDKs, 94*, 123*, 127*Subsidy Account, contribution to, 90*

SWITZERLANDBalance of payments, 24Borrowing by Fund, 77*, 82Economic activity and policies, 41, 45,

46tExchange rate, 41, 42t, 44t, 47, 48*,

63General Arrangements to Borrow, as-

sociation with, 82International reserves, 45*Oil facility financing, 117*Role of Swiss franc as reserve currency,

61Subsidy Account, contribution to, 90Supplementary financing facility, lend-

ing for, 82, 117*SYRIAN ARAB REPUBLIC

Exchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*SDRs, 123*, 127*

TANZANIAExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Purchases and repurchases from Fund,


TECHNICAL ASSISTANCE AND TRAINING BYFUND, 75-76, 97-99

THAILANDExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*SDRs, 123*, 127*Stand-by arrangement with Fund, 110*Trust Fund disbursements, 121*

TOGOExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Repurchases from Fund, 114*SDRs, 123*, 127*Stand-by arrangement with Fund, 110*Trust Fund disbursements, 121*

TRINIDAD AND TOBAGOExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Oil facility financing, 117*SDRs, 94*, 123*, 127*

TRUST FUNDDisbursements, 73, 74*, 86, 88, 89,

121*,132Establishment, 85Gold auctions, 66, 75, 85, 86, 88*Investments, 86, 88, 89Members eligible for assistance, 75, 88,

89Reimbursement of General Resources

Account, 88Terms and conditions of loans, 89

TUNISIAExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*SDRs, 94*, 123*, 127*

TURKEYExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Prices, 12* (fn.)Purchases and repurchases from Fund,

77 112* 114*SDRs, 93*,'94*, 95, 123*, 127*Stand-by arrangement with Fund, 79*,


of, 79*

UGANDAExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Purchases and repurchases from Fund,


UNITED ARAB EMIRATESExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*SDRs, 94*, 123*, 127*Trust Fund, contribution to, 88

UNITED KINGDOMBalance of payments, 21, 22*, 23, 50Economic activity, 2, 3, 7, 8, 9t, 10, 23,

43, 45, 46t, 67t, 84tEuropean Monetary System, participa-

tion in, 41 (fn.), 60Exchange rate, 23, 24, 25, 41, 42t, 43,

44t, 48*, 50, 63, 108*General Arrangements to Borrow, 116*Gold purchased from Fund, 87*International reserves, 45*Manufactures, relative costs and prices,

26tManufacturing, labor costs, 261Output, 2t, 7, 8, 9tPrices, 5,7, 8*, 26tPurchases and repurchases from Fund,

58,60,80,82,95, 114*Rates of return on domestic money

market instruments, 65, 66Role of pound as reserve currency, 61SDRs, 66, 93, 94*, 95, 123*, 127*Stand-by arrangement with Fund, 81Subsidy Account, contribution to, 90*Trade, 23, 25

UNITED STATESBalance of payments, 21, 22, 23, 25, 41,

50, 60, 69Economic activity and policies, 2, 3, 5,

6,7, 8, 9t, 10, 11, 16,21,24,25,41,43, 46t, 67t, 70, 84t

Exchange rate, 22, 24, 25, 41, 42t, 43,44t, 47, 48*, 50, 60, 63, 69, 108*

General Arrangements to Borrow,116*; borrowing under, 82

Gold purchased from Fund, 87*International reserves, 45*, 63, 71Manufactures, relative costs and prices,

26tManufacturing, labor costs in, 6t, 7t,

26tOfficial claims on, 61, 68*Oil prices in, 6Output, 2, 3, 8, 9Prices, 5, 6t, 8*, 9, 10, 26tPurchases from Fund, 68, 76Rates of return on domestic money

market instruments, 65, 66Reserve position in Fund, 68Role of dollar as reserve currency, 61,

63,71

SDRs, 66, 93, 95, 123*, 127*Subsidy Account investments in, 90Supplementary financing facility, lend-

ing for, 82, 117*Trade, 8, 16, 22, 25Trust Fund investments, 89Wages, 5, 6

UPPER VOLTAExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*SDRs, 123*, 127*Trust Fund disbursements, 121*

URUGUAYExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*SDRs, 94*, 123*, 127*Stand-by arrangement with Fund, 110*

VENEZUELAExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Oil facility financing, 116*SDRs, 94*, 123*, 127*Subsidy Account, contribution to, 90*Supplementary financing facility, lend-

ing for, 82, 117*Trust Fund, contribution to, 88

VIET NAMExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Repurchases from Fund, 114*SDRs, 123*, 127*Trust Fund disbursements, 121*

WESTERN SAMOAExchange rate, 108*Compensatory financing facility, use

of, 80Gold purchased from Fund, 87*Gold sales, profits received, 120*Repurchases from Fund, 80, 114*SDRs, 93*, 94*, 123*, 127*Stand-by arrangement with Fund, 110*Subsidy Account, use of, 89*Trust Fund disbursements, 121*

WORLD BANKCooperation with Fund, 38

WORLD TRADESee INTERNATIONAL TRADE

YEMEN ARAB REPUBLICExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*SDRs, 94*, 123*, 127*

YEMEN, PEOPLE'S DEMOCRATIC REPUBLICOF

Exchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Repurchases from Fund, 114*SDRs, 123*, 127*Subsidy Account, use of, 89*Trust Fund disbursements, 121 *

YUGOSLAVIAExchange rate, 108*Gold purchased from Fund, 87*Gold sales, profits received, 120*Purchases and repurchases from Fund,

76, 113*, 115*

208


INDEX

SDKs, 94*, 123*, 127* Purchases and repurchases from Fund, Gold sales, profits received, 120*Stand-by arrangement with Fund, 110* 113*, 115* Purchases and repurchases from Fund,Subsidy Account, contribution to, 90* SDKs, 93*, 94*, 123*, 128* 113*, 115*Trust Fund, contribution to, 88 Stand-by arrangement with Fund, 110* SDKs, 94*, 123*, 128*

ZAIRE Subsidy Account, use of, 89*, 90 Stand-by arrangement with Fund, 110*Exchange rate 109* Trust Fund disbursements, 121* Subsidy Account, use of, 90Gold purchased fromJFund, 87* ZAMBIA Trust Fund disbursements, 121*Gold sales, profits received, 120* Exchange rate, 109* ZIMBABWEPrices, 12* (fn.) Gold purchased from Fund, 87* Application for Fund membership, 83

209
