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B~ Amr F. Moustarba
The Use of CUrrencies and Special Drawine Rights (SDRs)
In Official Balance of Payments Assistance
By Amr F. Moustanha*
.,. The views expressed in this publication are those of the author and not the International Monetary Fund (IMF).
First Paper: The Fund's Operational budget: Principles and Applications ii
Second Paper: The Market for SDRs iii
Third Paper: The Guidelines for Early Repurchases iv
In the face of the heavy demand on the use of the IMF's financial resources (mainly useable currencies and Special Drawing Rights (SDRs», the policies on the selection and use of currencies and SDRs under the IMF operational budget have played a role of paramount importance in the finance of the IMF's operations and transactions with member countries, especially those that needed external financial assistance during the last two decades of the Twentieth century.
The first paper focuses on useable currencies, i.e., the currencies of member countries that are deemed by the IMF to have sufficiently strong balance of payments and reserve positions to be included for net sales in the IMF operational budget. It deals with policies, principles and the methodology underlying the IMF's operational-budget. The paper also gives insights into the workings of the operational budget, including the application of these policies, the experience with the use of members' currencies and SDRs in financing transactions and operations with member countries. 1
The second paper concentrates on SDRs, i.e., the international reserve asset created by the IMF to supplement member countries' external reserves in 1969, and voluntary transactions. These transactions of SDRs are undertaken in a managed market for SDRs, which operates without the benefit of a market-clearing price, as the SDR is a currency basket whose value and interest rate are determined by the constituents of the basket rather than the demand for SDRs. Twelve member countries that have agreed to make a market in SDRs provided that their SDR holdings and size of each transaction remain within certain limits underpin these transactions. The paper also discusses the role of the IMF and the market makers in the circulation of SDRs; identifies operational shortcomings and proposes a number of measures to improve the functioning of the SDR market.
The third paper introduces the guidelines for early repurchase under which a member country, after making a purchase (or using IMF credit) from the IMF will be expected normally, as its balance of payments and reserve position improves, to repurchase (or repay outstanding loans) the IMF's holdings of its currency ahead of the normal schedule of repurchase ( or repayment). The paper presents the criteria for the selection of member countries considered to have "sufficiently strong" balance of payments and reserve positions, and the relationship between early repurchase, designation plan and operational budget. Also examined in the paper, are the operation of the guidelines and certain issues
1 With the introduction of the Euro in January 1999, the allocation and use of currencies under the operational budget were changed from a reserves based to a quota based system. The policies and procedures discussed in this paper were those in effect before the Euro became a useable currency.
that arose in the course of implementing the guidelines during a period extending from the early 1980s to the late 1990s.
The above three papers complement each other but can be viewed separately. They are intended to provide the reader with some understanding from a historical perspective of complex policy issues related to the way the IMF used its resources to finance its operations and transactions with its member countries in the 1980s and most of the 1990s.
First Paper: The Fund's Operational budget: Principles and Applications
The Fund's Operational Budget: Principles and Applications
Il, Principles, Concepts, and Methodology Underlying the Operational Budget
1. The mechanism of the Fund's financial assistance
2. Methodological aspects
a. Size of the operational budget
b. Determination of the amounts of SDRs and currencies
c. Criteria for the selection of members judged "sufficiently strong" for the operational budget
d. Harmonization of members' Fund positions
3. Position of the U. S. dollar
a. Allocation of U.S. dollars in the budget
b. Mitigation of U.S. dollars in burden sharing
c. Proportion of U.S. dollars allocated for transfers
m. Application of Operational Budget Principles
1. Harmonization of members' Fund positions
a. Traditional system
b. The present "mixed" system
2. Use of Currencies and SDRs
1. Summary of Operations and Transactions Covered by the Fund's Operational Budget
2. Fund Holdings of Selected Members' Currencies Relative to Quotas, June 1990 - December 1994
3. Selected Members' Net Use of Currencies, September 1979 - February 1995
1. Total Purchases, 1980 - 1994
2. Harmonization of Members' RTP/GFE Ratios Under the Fund's Operational Budgets (Traditional System: September 1979- June 1990)
3. The Fund's Holdings of Usable Currencies in Relation to Members' Quotas as of December 1989
4. Ratios of Fund Holdings of Selected Currencies to Quotas
5. Selected Members' Net Use of Currencies, September 1979 - February 1995
Major Currencies Percentage Use of Transfers and Receipts, September 1979 - February 1995
1. The Calculation Methods Used in the Fund's Operational Budget
2. Use of Currencies and SDRs in transfers and Receipts, September 1979 - February 1995
3. Changing Pattern of the Fund's Net Use of Members' Currencies, September 1979 - February 1995
4. Distribution of Transfers by Currencies and SDRs, September 1979 - February 1995
5. Flows of SDRs in the General Resources Account, 1980 - 1994
Annex: Hypothetical Operational Budget
Harmonization of Members' RTP/GFE ratios, September 1979 - February 1997 Attachments
1. "Assessment of Strength of Member's Balance of Payments and Gross Reserve Position for the Purposes of Designation Plans, Operational Budgets and repurchases Under Article V,
Section 7(b)", Decision No. 6273-(79/158) GIS (Washington:
International Monetary Fund, 1979)
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2. "Guidelines Regarding the Use of Currencies in the General Resources Account" Executive Board Decision, No. 10279- (93/19), February 10, 1993
1. From 1980 through 1994, the Fund encouraged many of its member countries to
undertake comprehensive adjustment programs, which it supported with substantial transfers
of financial resources, with the primary objective of achieving balance of payments viability.
The resources transferred by the Fund amounted to about SDR 81.3 billion by the end of
1994. The bulk of these resources, about SDR 58 billion (or 71 percent of the total) was
financed from the Fund's ordinary resources, and the rest of SDR 23.3 billion (29 percent of
the total) was financed from borrowed resources. 1 (See Chart 1). Because the Fund is a
universal, cooperative institution with revolving resources, it provides financial assistance to
its members through the use of SDRs and the currencies of a wide range of members, large
and small, industrial and developing. Members with "strong" reserves and balance of
payments positions make resources available to "weak" members that are experiencing
reserve losses andlor persistent deficits. Under Rule 0-10 of the Fund's rules and regulations,
IThe Fund's sources offinance consist of its ordinary resources and of borrowed resources. Ordinary resources are obtained from quota subscriptions by members. Each member is assigned a quota, expressed in terms of SDRs, which is designed broadly to reflect the member's strength in the world economy. The amounts of assets, SDRs and currencies (specified by the Fund) that have been paid to the Fund in quota subscriptions are the ordinary resources available for financing balance of payments assistance through the General Resources Account. The Fund also supplemented its own resources with borrowed resources that have been obtained from certain Fund members and their central banks, first under the two oil facilities of 1974 and 1975 and subsequently, under the Supplementary Financing Facility (SFF) in 1979 and the policy on enlarged access to Fund resources (EAR) that was initiated in May 1981. For the financing of enlarged access a medium-term borrowing agreement of SDR 8.0 billion was concluded with the Saudi Arabian Monetary
Agency (SAMA) and short-term borrowing agreements for SDR 1.3 billion were concluded with central banks and the Bank for International Settlements (BIS). On April 24, 1984 further borrowing agreements were concluded for a total of SDR 6 billion with SAMA, BIS, Japan, and the National Bank of Belgium. Finally, Japan agreed to lend the Fund
SDR 3.0 billion to finance enlarged access and the loan became effective in December 1986. The enlarged access policy was terminated in November 1992 as members' quota increases under the Ninth General Review became effective and borrowing under the EAR policy was, therefore, discontinued. No commercial bank borrowings have been undertaken to date.
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the operational budget provides a plan for the sale, repurchase, and other uses, such as
payments of interest and principal on Fund borrowings, of SDRs and members' currencies to
finance operations and transactions' of the Fund. The operational budget does not cover the
Fund's operations for which planning is either not possible or not necessary (e.g., a larger
purchase transaction involving replenishment by borrowing), the Fund's administrative
operations and the operations and transactions of the Fund conducted through the Special
Disbursement Account (SDA), the Borrowed Resources Suspense Account (BRSA), the
Administrated Accounts (including SAF and ESAF operations), and the operations of the
2. At quarterly intervals, the Executive Board authorizes the use of SDRs and members'
currencies to finance operations and transactions conducted through the General Resources
Account (GRA) through the adoption of the operational budget.' The Executive Board may
also decide at any time to adopt a special budget.
3. The purpose of this paper is to review the functioning of the operational budget from
the 1980s through the end of 1994. The paper is organized as follows: Section IT introduces
2Operations refer to the use or receipt of monetary assets by the Fund (e.g., the payment of remuneration or receipt of charges). Transactions involve an exchange of monetary assets by the Fund for other monetary assets (e.g., a purchase or a repurchase).
3The quarterly budget periods do not correspond to calendar quarters. The budget year begins in March and ends in February, (e.g., in this paper a budget year for 1980 covers the period March 1980 to Feb 1981). Except as noted, the data and reference to years mentioned in this paper correspond to budget years.
general principles and procedures of the Fund's financial assistance, in particular those for determining the amounts of SDRs and the selection currencies. Section ill discusses the application of principles and procedures.
(J) c o
Chart 1: Total Purchases 1980-1994 (In SOR Billions)
Total Purchases Ordinary Resources Borrowed Resources
Source: . .!ME Jreasure['sDeoar:tment
II. PRINCIPLES, CONCEPTS, AND METHODOLOGY UNDERLYING THE OPERATIONAL BUDGET
A. The Mechanism of the Fund's Financial Assistance
4. One of the Fund's basic functions is to act as a financial intermediary between member
countries with balance of payments surpluses and those with deficits. To fulfill this role, the Fund uses its resources to assist its member countries in dealing with their balance of payments deficits under adequate safeguards, providing them with an opportunity to correct payments imbalances in an orderly manner. The financial operations and transactions ofthe Fund are carried out primarily through its General Resources Account (GRA).
5. The Fund provides financial assistance to a member by allowing it to use its own
currency to purchase either SDRs and/or usable currencies held in the GRA (i.e., the currencies of members considered by the Fund to have strong balance of payments and reserve positions). Thus, the Fund's holdings of the purchasing member's currency increase while its holdings of usable currencies or SDRs decrease. In total, the aggregate Fund holdings of SDRs and currencies remain the same, but there is a substitution of SDRs and/or usable currencies for holdings of the currency of the purchasing member. Within a specified maximum time, the purchasing member must repurchase its own currency with SDRs or with currencies specified by the Fund.
6. From an economic point of view, the Fund's temporary assistance to member
countries has all the characteristics of a loan or a credit. 4 Members pay charges on their use of
the Fund's ordinary resources at a rate based on the Fund's estimated income and expenses for
the fiscal year and the target amount of the Fund's net income. The Fund also remunerates the
members whose currencies it uses when its holdings of a member's currency are below a level
that is known as the "norm for remuneration. ,,5
7. The inclusion of a member's currency for use in purchases (or transfers by the Fund) is
decided by the Executive Board each quarter in the operational budget. The decisions are
made without any qualification about use in specific transactions, and the Fund must have
assured use of members' currencies. The Fund, under Article V, Section 3(d), is empowered
to select the currencies to be sold to members making purchases from the Fund. If a currency
4The original Articles referred to sales, purchases, and repurchases of currencies rather than loans, credits, and repayments, to reduce the embarrassment that might deter a government from approaching the Fund. See Gold, 1., "Transformations of the International Monetary Fund," in Columbia Journal of Transnational Law, Vol. 20 (1981), pp. 227-41.
SA member receives remuneration from the Fund on that portion of its reserve tranche position by which the Fund's holdings of its currency, other than excluded holdings (those arising from the use of Fund credit, plus holdings in the Fund's number 2 account which exceed 1110 of one percent of quota) are less than the member's "norm." The norm for remuneration is calculated for each member as 75 percent of its quota on the date of the Second Amendment (i.e., April 1, 1978) plus the total amount of increases in the member's quota since that date. Since early 1987 the basic rate of remuneration has been set to equal the full SDR interest rate, but it has been adjusted downward to reflect the burden sharing arrangements under which the cost of overdue obligations to the Fund is met by creditors and debtors sharing the costs of financing the Fund for unpaid charges (deferred income) and also adding to the Fund's precautionary balances. Contributions under the burden sharing arrangements are temporary, and are returned to members when overdue obligations are settled. The portion of a member's reserve tranche position corresponding to the difference between the member's norm for remuneration and its quota, is not remunerated.
is sold by the Fund (and if the currency is not a "freely usable," or reserve, currency)," the
member issuing the currency is obligated to convert or exchange the balances of its currency
purchased by another member, at the option of the purchasing member, for a freely usable
currency of its choice (most likely u.s. dollars) at the equal value exchange rate (Article V,
Section 3(e)). The option to convert into a freely usable currency is usually exercised by the
purchasing members. Therefore, the use of a non-freely usable currency to finance purchases
(or transfers by the Fund) normally changes the composition, but not the level of that
member's reserves, The issuer of the currency purchased and converted receives a liquid claim
on the Fund (a reserve tranche position) in exchange for providing foreign exchange to the
purchasing member. However, a member may choose not to convert into a freely usable
currency the currency it has received in a purchase. In that case, the issuer's total gross
reserves' would increase and its liabilities to foreigners would also increase. This is frequently
the case when the currency assigned in a purchase is a freely usable currency, and particularly
when such a currency is the U. S. dollar.
6The Fund has determined that at present the deutsche mark, the French franc, the Japanese yen, the pound sterling, and the U. S. dollar are the freely usable currencies. These currencies are widely used to make payments for international transactions and widely traded in the principal exchange markets.
7 A member's total gross reserves are the aggregate of its gold and foreign exchange (with gold valued at SDR 35 per ounce), its reserve tranche position and its SDR holdings. In this case an increase in the members' liabilities to foreigners is matched by an increase in its reserve tranche position.
8. A member is entitled at its option to repurchase in SDRs, but otherwise must
repurchase in another member's currency. If the repurchasing member already holds the
currency advised by the Fund for repurchase in its foreign exchange reserves, it may use those
currency holdings to make the repurchase. If the repurchasing member needs to obtain the
currency in an exchange, and the currency to be obtained is not a freely usable currency, the
exchange is to be made by an official agency representing the member issuing the currency,
unless the two members exchanging the currency agree otherwise (Rule 0-8 ofthe Fund's
Rules and Regulations). The exchange of currency is to be made in accordance with
procedures agreed by the Fund with the member whose currency is used in the repurchase
(Rule 0-4(a». The exchange occurs most usually against U.S. dollars, and is made at "equal
value" (Rule 0-6), so that the member whose currency is used in a repurchase receives the
foreign exchange counterpart of the SDR amount of the repurchase at the SDR rate on the
date the repurchase transaction is initiated.
9. Thus, unless the repurchasing member already holds the currency advised for
repurchase, the use of a member's currency in repurchase by other members results in a rise in
that member's foreign exchange reserves and an equal reduction in its reserve tranche position
in the Fund=i.e., it results in a change of composition of the member's reserves and not of the
level of its reserves. 8
8F or a discussion on the effects of Fund transactions on members' external reserves, see Fawzi, Samir (1992), "Fund Transactions and Reserve Creations" (IMF Working Paper, WP/92/107, December 1992).
10. A member can establish (or enlarge) its reserve tranche position by (1) paying the
reserve asset portion of its quota (or quota increase) in SDRs and/or currencies acceptable to
the Fund; (2) accepting payment of remuneration in its own currency; (3) receiving payment
on Fund borrowing in its own currency;" and, (4) the Fund selling its currency through the
11. When a member establishes a reserve tranche position, it diversifies its reserves. A
member can draw its reserve tranche position at any time it has a balance of payments need.
Otherwise, a member included in the operational budget has limited control over its reserve
tranche position because the level of the position is affected when the Fund uses its currency.
Moreover, a member is not allowed to transfer its reserve tranche position to another
member. However, if a member draws its reserve tranche position by purchasing with its
currency that of another member, the reserve tranche position of the member whose currency
is used increases by the same amount, implying a transfer of reserve tranche position between
members. Members' use of their reserve tranche positions has tended to be infrequent; non-oil
developing countries have used these positions more than industrial countries. 10
"Ihis is applicable to members who lent to the Fund (e.g., under the oil and SFF facilities, as well as the EAR policy), and if these members agreed to receive payments in their own currencies,
10See Fawzi, Samir (1988), "An Analysis of Reserve Tranche Positions and Their Use" (IMF Working Paper, WP/88/107, December 16, 1988).
B. Methodological Aspects
12. Issues to be addressed in drawing an operational budget are (a) the size of the budget
in question; (b) the global amounts to be assigned in SDRs and in currencies; (c) the particular currencies to be selected or the criteria for the selection of members judged "sufficiently strong" for the purpose of the operational budget; and, (d) the amounts to be allocated in each currency selected. These issues are discussed below.
Size of the operational budget
13. As mentioned in the introduction, the operational budget relates primarily to
transactions and operations involving the use of the Fund's ordinary resources held in the GRA, which constitute the bulk of the Fund's financial transactions with its member countries. The main transfers and receipts that are covered by the operational budget are presented in Table 1.
14. Transfers cover purchases under stand-by and extended arrangements, purchases
under the compensatory and contingency financing decision (CCFF),11 the buffer stock facility (BS), and the new Systemic Transformation Facility (STF). Transfers also include certain payments of principal not matched by repurchases and interest in connection with the Fund's outstanding borrowings. In addition, a margin for reserve
"Before August 23, 1988, the Compensatory Financing Facility (CFF).
Table 1. Summary of Operations and Transactions Covered by the Fund's Operational Budget
Type of Transaction
-Purchases 1/ 2/ (Including reserve tranche purchases)
(Including early repurchases)
-Operational payments 3/
-Acquisitions of SDRs from the GRA
-Reserve Asset payments of quotas (or quota increases) in currencies specified by the Fund
llPurchases under existing and prospective arrangements (i.e., stand-by and extended arrangements) and special Fund facilities (e.g., the CCFF, BS and STF facilities).
2IUntil December 1991, purchases financed from borrowed resources and matched repurchase/repayment transactions (i.e., those involving the use of same media in repurchase as well as repayment) were treated outside the operational budget. The use of currencies in these transactions did not affect the Fund positions of those members whose currencies were used.
3/Operational payments mainly include interest and repayments ofprincipal on Fund borrowing that do not involve corresponding repurchases (under SFF and EAR).
4/In the 1980s the budget included provisions for some mismatched transactions. For example, under the Supplementary Financing Facility (SFF) a mismatched transaction occurred when the Fund needed to repay a lender in currencies but the corresponding repurchase was made in SDRs (i.e., a media mismatch). SFF final repayment was made in January 1991. Similar mismatch transactions also occurred under the oil facility in the 1970s and early 1980s.
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tranche purchases is also included on the transfer side. Receipts cover mainly repurchases by members (that the Fund does not simultaneously repay to lenders), acquisitions of SDRs from the Fund against payments of currency (in order for members to meet payments of charges set by the Fund in connection with the use of its resources), and reserve asset payments in currencies specified by the Fund for members completing their quota subscriptions and! or increases. In addition, a margin for payment of arrears to the Fund and early or advance repurchases is also included on the receipts side.
15. The size of the budget is mainly determined by the volume of anticipated purchases and repurchases over the quarterly budget period. The amount of expected purchases over the budget period is based on forecasts provided by the Fund's Area Departments. These forecasts take into account performance under existing Fund arrangements with members and arrangements expected to become effective during the budget period. The estimate for receipts for the most part is based on the schedules of maximum repurchase periods during the quarter.
16. In addition to the operations and transactions that are included in the budget (i.e., that are "inside" the budget), there are other operations and transactions for which, as a result of a specific provision of the Articles or an existing decision, the Fund does not have the option of specifying the medium of payment in the operational budget. These operations and transactions are handled II outside II the budget; that is, they are not counted against the maximum amounts of currencies and SDRs included in the budget. Charges must be paid in
SDRs, as stipulated in the Articles, and are therefore not included in the budget. Moreover, a member has the right to use SDRs in repurchases, to purchase a particular currency from the Fund in order to "buy back" a balance of its own currency from another member, and to be paid remuneration in its own currency. Finally, under the borrowings agreements, lenders to the Fund may choose to be paid in their own currencies. When members (and/or lenders) exercise these rights and options, the corresponding transactions or operations are usually handled outside the operational budget.
Determination of the amounts of SDRs and currencies
17. The GRA receives and disburses SDRs in a variety of ways. Although the Fund cannot control all of those receipts and disbursements, as already discussed, it can regulate the level of its SDR holdings mainly by determining the amount of SDRs to be transferred in purchases and operational payments under the operational budget.
18. The amount of SDRs that is included for transfers to members in a particular budget depends on the Fund's actual holdings of SDRs, the inflows and outflows of SDRs anticipated over the quarterly budget period, and the target level (or range) of the Fund's SDRholdings at the end of a certain period, as determined by the Executive Board. Inflows of SDRs arise mainly through repurchases, payments of charges levied by the Fund, payments of the reserve
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asset portion of quota (or quota increases), 12 and interest on the Fund's SDR holdings. Outflows
of SDRs arise mainly out of remuneration payments and the acquisition of SDRs (against
payment of currencies) by members that need SDRs to pay charges. As explained above, SDRs
are not included for receipts under the budget because members have the right to use SDRs to
make repurchases and such an option is not at the discretion ofthe Fund. For a further
discussion on the scope of using SDRs through the operational budgets and the other flows of
SDRs13 from the GRA, see Section ill, 2b.
19. The total amount of currencies to be allocated for transfers is determined primarily by
the difference between total transfers and the amount of SDRs to be included in the budget (as
discussed above). However, the staff has traditionally aimed, to the extent possible, at
maintaining a broad balance between the amounts of SDRs and currencies included in the
budgets. In this respect, following the last review of the appropriate level of SDR holdings in
the GRA in February 1993, and as agreed in EBM/93/19, 2/10193, the financing of total
transfers would be split evenly between SDRs and currencies starting with the March -
May 1993 Operational Budget. The total amount of currencies to be allocated for receipts is
derived mainly from the estimated total receipts less the amount of repurchases expected to be
12The operational budget does not cover inflows and outflows of SDR, corresponding to quota subscriptions (or quota increases) and the simultaneous reserve tranche purchases by members involving SDR loans.
13These other flows of SDRs are handled outside the budget.
made by some members in SDRs during the quarterly budget period. An example of the
calculations made for a hypothetical operational budget is presented in the attached annex.
Criteria for the selection of members judged "sufficiently strong" for the operational
20. For the selection of members to be included in Fund operational budgets and designation
plans, Article IV, Section 3( d) prescribes that the Fund shall establish policies and procedures
that take into account, in consultation with members, their balance of payments and reserve
positions, and developments in the exchange markets, as well as the desirability of promoting
over time balanced positions in the Fund.
21. Executive Board Decision No. 6273-(79/158)0/S, adopted September 14, 1979, deals
with the assessment of the strength of a member's balance of payments and gross reserve
position for the purpose of the operational budgets, designation plans, 14 and repurchases under
Article V, Section 7 (b). The text of this decision is reproduced in Attachment 1.
14The Fund designates certain participants, according to specific criteria, to receive specific amounts of SDRs from other participants and, in exchange, to provide the later with equivalent amounts of freely usable currencies. The designation process is executed through quarterly designation plans, approved by the Executive Board which list participants subject to designation and set the maximum limits to the amount of SDRs they can be designated to receive within the quarterly period. There has been no transaction with designation since 1987 as all such use of SDRs has been conducted through transactions by agreement and, therefore, the designation plans have been of a precautionary character.
22. A member is proposed for inclusion in a budget for transfers or sales of its currency if the staff judges the member's balance of payments and gross reserve position to be "sufficiently strong." Although certain indicators of strength are used to maintain a reasonable degree of consistency and equity among members, the assessment of a member's combined balance of payments and gross reserve position does involve elements of judgment. Moreover, the circumstances of members as well as their need to hold reserves differ considerably. Thus, it has not been considered desirable to have a set of objective indicators or standard definitions of what constitutes "sufficiently strong" balance of payments and gross reserves position.
23. Nevertheless, a member's balance of payment and gross reserve position is evaluated according to (a) recent and prospective movements in gross reserves; (b) balance ofpayments developments; (c) the relationship of gross reserves to a member's imports and to its Fund quota; and (d) developments in exchange markets. To the extent that recent data are available, changes in a member's net reserves are taken into account as an indicator of its balance of payments position.
24. A basic question is the weight to be placed on anyone of the elements relevant to the assessment of the member's external position. In this connection, the following considerations have been found to be relevant in guiding the recommendations put forward by the staff:
particularly stringent criterion of "sufficient strength." In fact, members may be included in the
list of members considered sufficiently strong even if there are elements of weakness in some
aspects of their balance of payments.
b. Moreover, a member's balance of payments is not the only element on which the
Fund's judgement is to be based. The concept used in the Articles is the "balance of payments
and gross reserve position", and Executive Board Decision No. 6273-(79/158) GIS states that a
member's balance of payments and gross reserve position is a combined concept, under which
the strength in one element may compensate for a moderate weakness in the other. In assessing
the "strength" of a member's gross reserves, the staff examines the absolute level and recent and
prospective movements of those reserves; the relationship of gross reserves to imports and
historical developments of this ratio; and gross reserves in relation to Fund quotas, with a low
ratio usually indicating a weakness in the member's external position.
c. In assessing a member's balance of payments, the focus is on the overall balance as
measured by changes in gross reserves," because members' finance deficits in different ways
and because recent data on liabilities are not always available. Moreover, it has not generally
15 An increase of over 10 percent in gross reserves in two consecutive quarters would typically draw attention to a member and would trigger a further investigation of current and prospective developments in its external position and the extent to which external borrowing is a factor affecting the rise in reserves. Developments in exchange markets also play a role especially when assessing members with flexible exchange rate arrangements. In such cases, developments in a member's balance of payments would be reflected to some extent in movements in the value of its currency and not only in movements in its reserves.
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been regarded as particularly important how the individual components of the balance of payments contribute to the achievement of the overall position. The aim is to have a broad list of members to the extent possible, thus stressing the cooperative nature of the Fund and maximizing the Fund's liquidity. Any attempt to restrict these members to those for example with surpluses in their external current accounts would be likely to reduce the list considerably and, therefore, weaken the Fund's liquidity position.
d. Developments in exchange markets also influence the assessment of members with
flexible exchange rate arrangements, because they can signal an improving or deteriorating payments position earlier than can other quantitative indicators (such as changes in reserves). A weakening of a member's balance ofpayments may also be reflected wholly in a depreciating exchange rate rather than in reductions in its reserves. In practice, however, exchange rate developments alone have seldom provided justification for the staff proposals on the use of currencies through the operational budgets. Nevertheless, exchange rate developments played an important role among other factors in determining the inclusion/exclusion of certain members in the budget in the aftermath of the European currency crisis in the fall of 1992.
25. It would appear--in line with what is said above--difficult to assign in advance the particular importance or weight to be given to any individual element. The staff has, therefore, not proposed formulas and the Executive Board has not wished to develop weights for the
various indicators of "strength." In practice, there have been no problems in maintaining a
reasonable degree of consistency and equity among members in spite of the lack of formulas.
26. If a member is indebted to the Fund, the assessment of its external position also takes
account of whether or not its position has improved since it last made a purchase from the
Fund, the extent of that improvement, and whether it is likely to be sustained in the foreseeable
future. If such a member's external position is judged to be sufficiently strong, it is expected to
make early repurchases to reduce its indebtedness to the Fund ahead of the normal schedule of
Harmonization of members' Fund positions
27. The Fund's Articles, and the By-Laws, Rules, and Regulations provide the general and
specific guidelines for currency allocation under the operational budget. Article V, Section 3( d)
The Fund shall adopt policies and procedures on the selection of currencies to be sold that take into account, in consultation with members, the balance of payments and reserve position of members and developments in exchange markets, as well as the desirability of promoting over time balanced positions in the Fund.
16The guidelines for early repurchases are contained in Decision No. 6172-(79/101), adopted June 28, 1979.
28. A member's position in the Fund is defined in Executive Board Decision No. 6772-
(81/35) GIS, adopted March 5, 1981. Section (d) of this Decision reads:
A member's "position in the Fund" shall be defined as its reserve tranche position plus any outstanding loans to the Fund by the member, or an institution of 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 members on terms comparable to those applicable to the Fund's use of its currency holdings for this purpose.
29. The outstanding loans referred to in the above mentioned Decision have been
subsequently interpreted by the Executive Board to include only loans under the General
Agreements to Borrow (GAB) because they represent a permanent borrowing agreement.
The traditional system (1962 - mid 1990)
30. Harmonization of members' positions in the Fund represents an attempt to balance
members' positions in relation to their gross holdings of gold and foreign exchange (as reported
to IFS with gold valued at SDR 35 per ounce). The traditional system of allocating currencies
under the operational budget in relation to members' gold and foreign exchange reserves is
based on the view that contributions by members to the financing of the Fund should be in
relation to the resources relevant for this purpose. This system of allocating currencies
facilitates the provision of foreign exchange reserves through the Fund and therefore maximizes
the Fund liquidity.
31. Under the traditional method for allocation of currencies, which was used throughout most of the Fund's history (Decisions to this effect were adopted by the Executive Board
in 1962 and following the Second Amendment of the Articles in 1978; see Appendix, Table 1) and until June 1990, the currencies of members considered sufficiently strong are included on both the transfer and receipt sides of the budget. The above-mentioned Decision also establishes that, for members with no purchases outstanding, lithe amounts of members' currencies on the transfer side of the budgets will be calculated on the basis of members' holdings of gold and foreign exchange, and the amounts on the receipt side will be calculated in proportion to their reserve tranche positions in the Fund. II (For a discussion of the treatment of the U.S. dollar, see below). In addition, the currencies of members not considered sufficiently strong with no purchases outstanding but whose reserve tranche positions in relation to their holdings of gold and foreign exchange reserves are relatively high are included on the receipt side only. Special emphasis is given to using the currencies of this latter group of members in receipts in order to increase their holdings of foreign exchange reserves, especially at a time of balance of payments need.
32. Certain limitations are applied to the amounts of currencies allocated in the operational budget. For example, the Fund will not use a member's currency in transfers ifits holdings of the currency will drop to less than 10 percent of the member's quota. This level has generally been regarded as providing the Fund with adequate working balances to pay remuneration to a member in its own currency, should the member so require, and for special operational
- 25 -
purposes. On the receipt side, it has been the practice in recent years not to accept currencies if this would raise the Fund's holdings of a member's currency above its norm for remuneration.
The present "mixed" system (June 1990 - )
33. By the end of the 1980s, some members felt that while the traditional method of allocating currencies had been useful and worked reasonably well given the objectives, it was necessary to examine the contributions by members in relation to their quotas (which are a measure of members' rights and obligations in the Fund and broadly reflect members' relative size). It was noted that under the traditional currency allocation method, members with high and rising reserves increased their Fund positions relatively quickly (compared with other members included in the budget for net transfers of their currencies), especially during periods of rapid expansion in the use of Fund resources. In this connection, it was observed that members' positions in the Fund in relation to their quotas ranged generally between 15 percent and 40 percent throughout most of the 1980s, except for a few members, particularly those with high and rising reserves. Moreover, the Fund's holdings of currencies in relation to quotas for some members were substantially below the average for members included in the budget by late 1989.
34. In response to these concerns, the staff subsequently examined a number of special issues (including the role and function of international reserves, the cost to members of financing the
Fund and the role of the unremunerated reserve tranche position, and quota versus reserves in the allocations of currencies). In this regard, it was noted that:
a. Official holdings of reserves are a good and readily available indicator of a
member's ability to finance the Fund. The staff examined in January 1992 the continued relevance of this view in light of the expansion and integration of international financial markets, which has resulted in members' international liquidity positions that comprise a broad spectrum of assets and credit lines. It was concluded that available evidence does not appear to suggest that the signillcance of primary reserves has fundamentally declined in relation to international payments, and reserves continue to have characteristics-more certain availability and usability--that distinguish them from other forms of international liquidity. Movements in reserves are indicative of changes in a member's overall balance of payments position. Bearing in mind that the Fund's use of a member's currency generally means a change in the composition of its gross reserves, rather than a change in the overall level of its external reserves, the system of currency allocation under the operational budget reflects a member's ability to hold a reserve tranche position in the Fund.
b. The traditional method has been seen to have some drawbacks, namely that foreign
exchange holdings are not perfect substitutes; the authorities may not desire to hold reserve assets in the SDR denomination of reserve tranche positions; and the system does not necessarily take into account practices and choices of countries to hold different levels of
reserves vis-a-vis other aggregates. An additional important drawback is seen as the cost of holding reserve tranche positions relative to other assets, in that the actual rate of remuneration is temporarily reduced from 100 percent of the SDR interest rate as a result of the agreements reached at the Executive Board in 1986, and later that cost of overdue obligations in the General Resources Account is borne jointly by debtor and creditor members under the burden sharing arrangements. An extensive analysis of ways in which the allocation of currencies under the operational budget might take into account the cost of financing the Fund--in particular the role of unremunerated reserve tranche, which provides interest-free resources to the Fund was considered in connection with the review of the guidelines for the allocation of currencies in January 1992. The staff pointed out that a redistribution of the cost of financing the Fund through the operational budget raises complex legal difficulties, and it was concluded that it would not be feasible to take into account the unremunerated reserve tranche in determining the allocation of currencies under the operational budget. The issue was further discussed on several occasions in the broader context of reforming the financial structure of the Fund. It became clear in these discussions that the issues raised were of a broader nature, going beyond the operational budget, and their resolution could require an amendment of the Articles.
c. Some members have also questioned whether emphasis should not be placed on the
relationship between the amount of financing made available by a member and the size of its quota, both because of the current burden sharing arrangements and because they believe that there is considerable doubt as to whether official gold and foreign exchange holdings truly
reflect a member's external financial position. The staffhas considered the practical issues that arise with the use of quotas as a basis for allocating currencies under the operational budget. In essence, while a member's quota is a measure of its rights and obligations in the Fund and can be regarded as a reasonable indicator of a members's relative size in the international economy, quotas change only infrequently and are not responsive to short-term changes in member's external positions. As the ratios of quotas to reserves vary greatly among the Fund's members, a quota based allocation system would lead to large variances in reserve positions in the Fund relative to reserves. Some members would hold large Fund positions relative to reserves, which would affect their ability to hold those positions to the detriment of Fund liquidity. Moreover, the use of quotas alone would not take account of different absolute contributions that members are making to Fund income by holding unremunerated reserve tranche positions in the Fund.
35. The Executive Board reviewed the guidelines for the allocation of currencies under the operational budget in June 1990, January 1992, February 1993 and more recently, in
February 1995. In June 1990, it was agreed that while the allocation of currencies would continue to take reserves into account, greater weight than under the traditional method would be given to the role of quotas. This was to be achieved by incorporating a formal limit (or floor) to the use of currencies in transfers as determined by the level of the average holdings
expressed in terms of quota (which was part of the guidelines agreed in September 1979 and
used in the Fund's operational budgets in the period between September 1979 and May 1981,
see Appendix, Table 1).
Position of the U.S. dollar
Allocation of u.s. dollars in the budget
36. As mentioned earlier, the selection of currencies to be sold (or transferred) by the Fund
under the operational budgets are to take into account, in consultation with members, the
balance of payments and reserve positions of members and developments in the exchange
markets. In the case of the United States, this assessment also takes into account the role of the
U.S. dollar as the major reserve currency.
37. The Executive Board decided in 1981 that the U.S. dollar would be included on the
transfer side of the operational budget on the basis of ad-hoc proposals," mainly because the
gold and foreign exchange reserves of the United States do not reflect fully the ability of the
United States to finance the liquidity ofthe Fund. The U. S. dollar is, however, treated similar
to other currencies included on the receipt side of the budget, i.e., in proportion to the U.S.
reserve tranche position in the Fund relation to the total of reserve tranche positions of
members included for receipts which are considered sufficiently strong, provided that the
17Decision No.6772-(81/35) GIS, adopted March 5, 1981. The practice before 1981 was also to include the U. S. dollar in the budget on the basis of ad-hoc proposals.
amount so calculated would not raise the Fund's holdings of US. dollars above its norm for
Mitigation of U S. dollars for burden sharing
38. Since December 1986, adjustments have been made to the US. dollar amounts included for receipts in connection with the mitigation of the share of the United States in burden sharing. Given the prominent role of the US. dollar in the financing of the Fund's operations and transactions, the aim of these adjustments in effect has been to reduce the share of the United States in the total of remunerated reserve tranche positions, so that the contribution of the United States to burden sharing (arising from the temporary reduction in remuneration paid to it) is not out of line in relative terms (including quotas) with the contribution of most of the creditor members.
39. The issue of mitigating the use of US. dollars in net transfers was considered in late 1986 in view of the fact that the US. share in the total remunerated reserve tranche positions was large and was considerably in excess of its share in Fund quotas, especially the share in the total quotas of the creditor members. In this regard, the amount of mitigation has been determined by a measure of the income forgone, which was calculated as the difference between the reduction in remuneration calculated on the basis of shares in remunerated reserve tranche positions and the amount calculated on the basis of shares in the quotas of creditor members. Income forgone
- 31 -
calculated in this way was to be made up by a temporary reduction in the u.s. remunerated reserve tranche position. Once the U. S. was compensated for the income forgone with respect to a period, the amount of the reduction in the remunerated reserve tranche position and the related increase in receipts of US. dollars in the budget would be reversed, and later taken into account in the calculations for subsequent periods. Following the first quarter (December 1986 - February 1987), mitigation has also taken into account net new deferred income during subsequent budget periods, less refunds made with respect to previous periods.
Proportion of U S. dollars allocated for transfers
40. Throughout most of 1980s, the US. dollar was proposed to be used for a specific proportion of total transfers of currencies (mostly one fourth) in recent years. In proposing such amounts of US. dollars for transfer under the budget, the staffhas taken into account various factors, including the relative strength of the US. dollar in the exchange markets, the level of the US. dollar holdings in relation to the total of the Fund's holdings of usable currencies, as well as the average ratio of the Fund's usable currency holdings to quota. For example, in the course of 1982 and 1983, net financing provided by the Fund under the budgets was at a high level, and the share of the United States was relatively large (i. e., about 51 percent of net transfers). This reflected several factors, including (i) the renewed inclusion of U.S. dollars in the list of usable currencies (after a period of exclusion following the reserve tranche drawing in 1978) at a time when the amounts of other usable currencies held by the Fund were at low
levels; (ii) the strength of the US. dollar in the exchange markets; and (iii) the overall heavy demand on the Fund's resources at that time. There was a sharp slowdown of use of dollars in 1984 and a substantial reversal in 1985, with the result that no financing was provided by the United States on a net basis over those two years.
41. Under the present guidelines which were first introduced in mid-1990, it was decided to continue to use US. dollars on the transfer side of the budget on an ad-hoc basis, but it was agreed that, to the extent possible, the Fund would aim to maintain the ratio of the Fund's holdings of U S. dollars to the US. quota close to the average ratio of all other members included on the transfer side of the budget. Since mid-1990, the amount of U.S. dollar transfers in the budget has been one fourth of total currency transfer, except in the March-May 1991 budget when it was one-sixth of the total in order to bring the Fund's holdings of U.S. dollars in relation to quota more closely in line with the average, as agreed in the 1990 guidelines.
- 33 -
m. APPLIcATION OF OPERATIONAL BUDGET PRINCIPLES
A. Harmonization of Members' Fund Positions
42. Under the traditional system (which as mentioned earlier, was in effect throughout most
of the Fund's history and until mid-1990), the Fund pursued the aim of harmonizing members'
Fund positions (including reserve tranche positions plus any GAB borrowing) relative to their
official holdings of gold and foreign exchange reserves" by implementing several methods of
allocating currency over the past decade, depending on considerations related to the Fund's
liquidity," the level of the Fund's holdings of currencies in relation to quotas, and the speed
with which balance was to be achieved in the members' Fund positions. For example, when the
net use of Fund credit expanded significantly in the early 1980s, it was concluded that the
Fund's liquidity would be strengthened if transfers of currencies would be spread among all
strong members in proportion to their holdings of gold and foreign exchange (instead of
concentrating transfers on a smaller group of members with low reserve tranche positions
"Harmonization of members' positions in the Fund is a guiding principle; because of continuous movements in members' gold and foreign exchange reserves and reserve tranche positions, and changes in the list of members considered sufficiently strong, full harmonization cannot be achieved.
1ge.g., its holdings of usable assets--currencies and SDRs--in relation to its liabilities, such as members' reserve tranche po sitions
relative to their holdings of gold and foreign exchange, as was done under the method of calculation that was implemented from September 1979 to May 1981). This method, which was in effect from June 1981 to March 1986, would stress the use of currencies of those members with high (and rising) reserves in absolute terms and who were likely to keep their increased positions in the Fund and not to purchase them for some time.
43. When application of the harmonization principle caused the Fund's holdings of some members' currencies to decline too rapidly, the staff introduced limitations to moderate the speed at which their reserve tranche positions increased. Under the method of calculation that was in effect between September 1979 and May 1981, for example, it was agreed that the Fund would not use the currency of a member it: as a result, the Fund's holdings of that member's currency would fall substantially below the average, expressed as a percentage of quota. Moreover, to slow down the rapid depletion of currencies of certain members with small quotas in absolute terms and whose gold and foreign exchange reserves in relation to their quotas were very high, the staff introduced additional ad hoc limitations in the nine quarterly budgets during June 1982 - August 1984.
44. When the ratios of members' reserve tranche positions to their official holdings of gold and foreign exchange reserves became too dispersed owing to substantial movements in the reserves of some members, as during September 1979 - May 1981, and in March 1986 - June
- 35 -
1990, the staff introduced modifications so as to speed up the harmonization of members' positions.
45. As a consequence of the operation of the traditional system, and various methods within
the traditional system as described above, members positions in the Fund were established or
increased when their external positions were strong and they had high and rising reserves. A
relatively significant portion of Fund financing through the end of 1989 was provided by such
members (e.g., Italy, Japan, Korea, and Spain, among others; see section 2a below). By
late 1980s and early 1990s, members' positions relative to their gold and foreign exchange
reserves were fairly harmonized (as the standard deviation of members' RTP/GFE ratios had
declined to about 1.3-1.4 percent. The evolution of the ratios of members' reserve tranche
positions to their official holdings of gold and foreign exchange reserves (RTP/GFE)20 during
the 1980s is shown in Chart 2, further details are presented in Appendix Table 1).
Nevertheless, the ratios of Fund holdings of a few members' currencies to quotas were
substantially below the average by the end of the decade. (See Chart 3).
The present "mixed" system
46. The present guidelines agreed in February 1993, call for (1) allocation of transfers of currencies in proportion to members' official holdings of
20The significance of these ratios is that they measure the cumulative extent to which members included for net sales of their currencies have provided reserves through the Fund financing mechanism, as percentage of their reserve holdings. In the absence of such influences as changes in the composition of the list of members considered sufficiently strong, and in foreign exchange flows that reflect balance of payments developments, the ratios of RTP/GFE would tend to a large extent to be equalized for all members whose currencies were used.
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gold and foreign exchange reserves (as reported to IFS), but subject to a floor of two thirds of
the average level, expressed as percent of quota, below which the Fund's holdings of a
member's currency shall not fall;" and, (2) allocation of receipts of currencies in proportion to
reserve tranche positions of members included on the receipt side of the budget, up to the norm
for remuneration. (The amounts of receipts calculated for the U. S. dollars are also adjusted to
reflect the agreements reached on mitigation ofU.S. share in burden sharing as explained
earlier.) As mentioned earlier, transfers of U. S. dollars are to be made on the basis of ad hoc
proposals, with the aim of maintaining, to the extent feasible the Fund's holdings ofU.S. dollars
close to the average level of the Fund's holdings of currencies of other members that are
sufficiently strong to be included in the operational budget. In effect, these guidelines use a mix
of reserves and quotas for the allocation of currencies. (The text of the present guidelines
contained in Decision No. 10279-(93/19), adopted on February 10, 1993 is reproduced in
Attachment 2 for reference. )
47. The operations of these guidelines have been effective in bringing about a more even
distribution of members' reserve tranche positions in the Fund in terms of both their holdings of
gold and foreign exchange reserves and quotas, without distorting the distribution of these
positions, notwithstanding the rapid expansion in the use of Fund resources.
21This floor is set at two thirds of the expected average level of the Fund's holdings of usable currencies relative to quotas at the end of the budget period, excluding the United States.
48. By late 1992 and before the quota increase under the Ninth General Review, progress was made in harmonizing members' ratios of reserve tranche positions (RTP) to their gold and foreign exchange holdings (GFE) and to quotas of members considered sufficiently strong. As shown in Table 2, the average RTP/GFE ratio of members considered sufficiently strong to be included in the budget for transfers (excluding the United States) declined from 3.3 percent in June 1990 to 2.8 percent in December 1992, with the standard deviation falling from
1.9 percent to 1.8 percent. The average of the ratios ofRTP to quotas of members considered sufficiently strong (including the United States) decreased from 34.2 percent in June 1990 to 33.5 percent in December 1992 with the standard deviation falling from 21.3 percent to
17.4 percent during the same period (Table 2).
49. Nevertheless in 1993, and as a result of the payment of quota increases under the Ninth Review, the average RTP/GFE ratio of members increased again to about 3.7 percent in December 1993, and the standard deviation also rose somewhat to 2.2 percent. This increase in the dispersion of members' RTP/GFE ratios is attributable not only to the quota payments, but also to changes in the composition of the list of members considered sufficiently strong, and, more important, to the large shifts in foreign exchange holdings of some members associated with alignments of some European currencies in late 1992 and mid-1993. Continued progress, however, was made in narrowing the dispersion of members' ratios ofRTP to quota, with the average ratio falling further to 28 percent and the standard deviation declining to 10.9 percent by December 1993. The dispersion of members'
Table 2. Fund Holdings of Selected Members' Currencies Relative to Quotas June 1990 - December 1994 *
June 1990 December 1992 3/ December 1993
Austria 67.1 61.2 67.7 68.7
Belgium 84.4 83.3 81.9 81.9
Botswana 19.4 45.2 54.7 54.6
Canada 86.8 85.7 84.1 85.5
Denmark 67.6 64.0 70.9 72.4
France 77.5 73.3 77.3 78.1
Germany 60.4 54.5 65.4 66.5
Japan 43.0 46.8 63.8 64.2
Malaysia 69.7 69.2 72.5 66.3
Malta 51.9 53.2 62.6 62.3
Netherlands 77.8 74.2 76.7 76.7
New Zealand 90.8 85.6 84.1 84.1
Norway 41.0 43.3 59.2 60.2
Portugal 69.4 47.5 60.6 58.6
Qatar 84.3 83.6 81.7 83.6
Singapore 14.0 42.2 56.0 51.7
Spain 31.4 47.7 61.2 60.3
ThaHand 92.5 46.3 55.4 50.3
United Arab Emirates 36.7 43.9 59.7 61.4
United Kingdom 81.3 80.7 81.4 82.2
United States 63.4 64.0 67.9 69.0
Weighted Average 1/ 70.1 69.2 73.7 73.9
Floor 34.4 49.1 49.0 49.0
Standard Deviation 2/ 23.5 16.0 10.1 11.1
Average 2/ 62.4 61.6 68.8 68.5
Coefficient of Variation 2/ 0.376 0.259 0.147 0.162
Maximum 2/ 92.5 85.7 84.1 85.5
Minimt.m 2/ 14.0 42.2 54.7 50.3
Ratio of Members' Reserve Tranche Positions
Relative to GFE 4/
Average 3.3 2.8 3.7 3.5
Standard Deviation 1.9 1.8 2.2 2.0
Relative to Quotas 5/
Average 34.2 33.5 28.4 29.3
Standard Deviation 21.3 17.4 10.9 11.3 * Source: IMF Treasurer's Department
1/ For all members considered sufficiently Slrong to be Included in the budget, excluding the U.S. 2/ For members shown above, excluding the U.S.
3/ Before the new quota increase under the Ninth Review. 4/ For all sufficientiy Slrong members, excluding the U.S. 5/ For all sufficientiy Slrong members.
RTP/GFE ratios was narrowed further, with average declining to 3.5 percent and the standard
deviation to under 2 percent in 1994. The dispersion of members' RTP/Quota ratios remained
broadly unchanged in 1994. The standard deviation of the RTP/Quota ratios fell significantly
largely because of the operation of the floor on the Fund's holdings of usable currencies to
quotas in relation to the average (excluding the United States) and the fact that this floor was
raised from one half to two thirds with the start ofthe March - May 1991 quarter.f
50. Mirroring the narrowing in the dispersion of members' ratios ofRTP to quota, the range
of the Fund's holdings of usable currencies in relation to quotas has narrowed since the
introduction of the floor on the Fund's holdings of usable currencies. In June 1990, the average
of the Fund's holdings of usable currencies (excluding the United States) was about
70 percent--the distribution of the ratios of the Fund holdings of usable currencies to quotas
ranged generally between 60 percent and 85 percent, but for a few members the ratios had
dropped below 30 percent. By the close of 1992 (before the quota increases), the average had
fallen to 69 percent; most ratios still ranged from 60 percent to 85 percent, but at the lower end
all ratios of members' usable currency holdings to quotas had been raised to between 42 percent
and 50 percent. [The Fund's holdings of U.S. dollars has risen since June 1990 and was equal to
64 percent before the quota increase in December 1992 and to about 74 percent in December
1994.] As a consequence, the dispersion of the Fund's holdings of usable currencies in terms of
22It was recognized that if Fund credit expanded significantly, the floor would decline as a percent of quota and become less meaningful in reducing the dispersion in the Fund's holdings of the currencies of members included for transfers.
- 43 -
quotas narrowed substantially, with the standard deviation declining from about 23 percent in June 1990 when the guidelines were first introduced to under one half that level by December 1994.
51. In conclusion, the new guidelines have effectively addressed some members' concerns that the use of their currencies under the traditional method caused the Fund's holdings of their currencies in relation to quotas to drop to levels substantially below the average for members included in the budget in the late 1980s and early 1990. Developments in the Fund's holdings of some members' currencies relative to their quotas when the guidelines were first introduced in June 1990, before the latest quota increase in December 1992, and over the past two years illustrate this trend. (See Chart 4 and Table 2.) When the guidelines under the present mixed system were introduced in June 1990, the Fund's holdings for a number of members relative to their quotas were substantially below the average, and a few members' ratios were significantly below the floor chosen at that time. By December 1992 and before the payments of the latest quota increase, the distribution had improved, although the ratios of several members were marginally below the floor. Finally, during December 1993-94 (reflecting among other factors, the payments of the quota increase), all members' ratios of Fund holdings to quotas were above the floor, and their range was relatively narrow.
RATIOS OF FUND HOLDINGS OF SELECTED CURRENCIES TO QUOTAS
A. As of June 1990
B. As of December 1992
C. As of December 1993
D. As of December 1994
Moth .. lands Norw.y
Walta N .. ZeCiland Portugal
Source: IMF Treasurer's Department.
B. U se of Currencies and SDRs
52. The discussion on the use of currencies and SDRs under the operational budget focuses
on the period September 1979 - February 1995.23
53. The data available on the use of currencies allow the following observations to be made.
(Details are shown in Appendix, Tables 2 - 4).
a. During the period under consideration, the Fund's gross transfers of currencies
totaled SDR 48.3 billion, while receipts were about SDR 46.98 billion, mainly from
repurchases. Thus, the total net use of currencies (i.e., transfers less receipts) through the
operational budgets was about SDR 1.4 billion, of which net transfers amounted to SDR 4.5
billion and net receipts amounted to SDR 3.1 billion. The six currencies most used in net
transfers were Japanese yen (SDR 0.6 billion), U.S. dollars (SDR 0.5 billion), Spanish pesetas
(SDR 0.4 billion), and Danish kroner, Italian lire and Korean won (SDR 0.3 billion each). The
remaining balance of about SDR 2.2 billion of currencies used in net transfers was spread over
33 other currencies. With respect to net receipts of currencies, the Fund received significant
amounts of Saudi Arabian riyals (SDR 0.9 billion); Belgian francs and pounds sterling (about
23The data used in this section coincide with the introduction of guidelines on the use of currencies in September 1979.
SDR 0.4 billion each}; Canadian dollars, deutsche mark and French francs (about
SDR 0.3 billion each). The remaining balance of net receipts of SDR 0.6 billion was distributed among 21 members. (Reference Table 3, Chart 5).
b. The currencies of 66 members were used during the period and, of this total,
49 currencies were used in both transfers and receipts, 9 currencies were used only in transfers, and 8 currencies were used only in receipts. The 5 freely usable currencies (i. e., deutsche mark, French francs, Japanese yen, pounds sterling, and U.S. dollars) accounted for about 67 percent of total transfers in currencies and about 69 percent of total receipts in currencies (see chart 6). The net transfer of industrial members' currencies amounted to about SDR 1.1 billion or about 81 percent of the total net use of currencies. This total represented about 1.2 percent of the industrial members' quotas and 0.3 percent of their gold and foreign exchange reserves." The net transfer of developing members' currencies came to about SDR 0.3 billion or about
19 percent of the total net use of currencies, which was equivalent to 0.8 percent of developing members' quotas and 0.1 percent of their gold and foreign exchange reserves. Net transfers relative to quotas and reserves for both groups of members averaged 1.1 percent and
0.2 percent, respectively. Full details are presented in Appendix, Table 2.
24Based on latest data on gold and foreign exchange available in IFS at end-March 1995.
Table 3. Selected Members' Net Use of Currencies II September 1979 - February 1995
(In millions of SDRs)
As Percent of
Amount Total Net Use
2,183.1 160.9 Denmark Italy Japan Korea Spain
United States Other
Net use in Transfers 21
Saudi Arabia United Kingdom Other
-561.9 -41.4 B. Subtotal:
Net use in Receipts 31
Total Net Use (A+B)
I/Totals may not add up due to rounding. Full details are shown in Appendix, Table 1.
21 A total of 39 members' currencies was used in net transfers (i. e., use of currencies in transfers exceeded use in receipts).
3/A total of27 members' currencies was used in net receipts (ie., use of currencies in receipts exceeded use in transfers).
Chart 5. Selected Members' Net Use of Currencies September 1979 - February 1995
6.4~ 286.5 Italy
6.0'J, 268.5 DeIllD81'k
Net Use In Transfers Percent
Millions of SDRs
6.ot. 269.9 Kocea
48.5~ 2183.1 Other
Subtotal - 4498.2
28.6~ 899.5 Saudi Arabia
17.K 561.9 Other
Net Use In Receipts Percent
Millions of SDRs (Absolute Values)
11.9~ 374.6 United Kingdom
39 member's currencies used In net transfers 27 member's currencies used In net receipts Full details are shown In Appendix, table 1
Chart 6. Major Currencies Percentage Use of Transfers and Receipts September 1979 - February 1995
36.0'" United States
36.0% United States
c. The net use of members' currencies exhibited a clear cyclical pattern during
1981-89 with an estimated length of four years, reflecting the revolving nature and mediumterm maturity of the Fund's financial assistance. There was a large net expansion in the use of members' currencies during 1981-84. Net transfers peaked at SDR 6.1 billion in 1982, followed by a sizable net contraction despite continuing large purchases during 1985-88, with the highest use of currencies for net receipts in 1986 at SDR 2.6 billion. However, reflecting mainly a heavy use of SDRs in transfers and a large use of currencies in receipts, there was a moderate net cumulative expansion in the use of currencies (SDR 0.4 billion) during 1989-91, followed by contractions of about SDR 1.5 billion in both 1992 and 1993. With the expansion in the use of Fund credit, net use of currencies in transfers amounted to SDR 0.5 billion in 1994. (Reference Appendix, Table 3.)
d. Among the factors that influenced the net use of members' currencies were the
timing of Fund purchases and repurchases, developments in members' external positions, and the calculation method used. Appendix Table 3, shows that the Fund used the equivalent of SDR 0.8 billion in the currencies of industrial members in net receipts and SDR 0.7 billion in the currencies of developing members in net transfers during the period spanning the second half of 1979 and 1980. In line withthe expanded use of Fund credit during 1981-84, the currencies of both groups were used in net transfers amounting to SDR 9 billion in the currencies of industrial members and SDR 1.8 billion in the currencies of developing members. With the large reflow of currencies in repurchases during 1985-94, the currencies of the industrial countries were used mainly in net receipts amounting to SDR 7.1 billion and those of
- 51 -
the developing countries in net receipts amounting to SDR 2.2 billion. Also, reflecting the stronger external positions of some non-oil developing members, the currencies of some of these members (especially Asian) were used in net transfers totalling about SDR 0.6 billion during 1988-94.
54. The Fund's holdings of SDRs are its most liquid asset because they can be readily used to finance members' purchases, whereas the usability of a currency depends on whether the Fund judges the issuing member's external position to be strong during a particular quarter. The
SDR played a major role in financing the Fund's operations and transactions, representing close to half the total transfers of SDR 95.6 billion under the budget during
September 1979 - F ebruary 1995. The peak sale of SDR 6.8 billion, or about 61 percent of total transfers that year, was recorded in 1994. (See Appendix, Table 4. )
55. As to the flows of SDRs from the GRA during the past fifteen years, total inflows amounted to about SDR 75.5 billion and outflows about SDR 70.9 billion. Thus, net inflows of SDRs were SDR 4.6 billion, with the level of SDR holdings in the GRA rising from
SDR 0.9 billion at the beginning of 1980 to SDR 5.5 billion at the end of 1994. The Fund's holdings of SDRs almost doubled to SDR 7 billion in 1983 due to the use of SDRs by members for the payment of their quota increases under the Eighth Review and declined thereafter to less
than one billion through late 1992 as SDRs were used more in transfers by the Fund than in receipts. The Fund's SDR holdings rose sharply again by end-1992 in connection with payments of quota increases under the Ninth Review, and have been decreasing since then.
56. In the fifteen years through 1994, members used large amounts of SDRs for payments of charges (SDR 25.9 billion), repurchases (SDR 19.1 billion), and quota payments
(SDR 27.2 billion). The Fund used a significant amount of SDRs to finance purchase transactions (SDR 33.4 billion), in payment to lenders of interest and principal on Fund borrowing (ofSDR 15.0 billion) and in payment of remuneration (about SDR 15.2 billion). Full details are provided in Appendix, Table 5.
57. As mentioned earlier, the amount of SDRs to be transferred under the quarterly operational budget period (to finance purchases and operational payments) is determined in accordance with the guidelines of the Fund's policy on the sales of SDRs from the GRA and takes into account the flows ofSDRs to the GRA. Starting April 1987 until February 1993, the aim was to maintain the level of the Fund's SDR holdings within the range of SDR 0.75 billion to SDR l.25 billion." In February 1993, following payments of quota increases under the Ninth Review, it was agreed that the Fund would transfer SDRs under the operational budget with the
2SSee Decision No. 8574-(87/64)S, adopted April 27, 1987.
- 53 -
aim of reducing the Fund's SDR holdings to within the range of SDR 1.0 billion to SDR 1.5 billion by end-1995.26
26See Decision No. 10278 - (93/19)S, adopted February 10, 1993.
- 54 - APPENDIX
~ ~ N Q) ~ S cO
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§ '0 Q) '0 cO ..--I P. :>,.j...l ,..c: til .j...l '0
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o til cO til .r-! ..--I N ..--I bJ) l-l .r-! r.r..
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til Q) P. Q) l-l o l-l ..--I '0 ~ cO cO ,..c: Q) ,..c:
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0 til • ..-1 '0 r-I • ..-1 § .c til r-I til til ,...._ ~ ~ til Q) bOtIl r-I til
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.j.J til .j.J til 0 0 Q) ~ Q) 0 til ...c: til til .j.J til Q) 0 l-l til • ..-1 til til til
til l-l ::l Q) • ..-1 ...c: • ..-1 Q)'O @ Q) C) til ::l til • ..-1 • ..-1 , bO...c: .j.J til til
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r-I .j.J C) p..'O l-l 4-l til C) ::l .j.J ::l l-l §"~ '..-1 p...j.J ::l ::l
til til l-l o ~ l-l4-l '0 0 l-l .j.J 0 p.. til p.. l-l l-l ,.c c, 0 p..
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- 56 -
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Table 2 : Use of Currencies and SDRs in Transfers and Receipts Page 1
September 1979 - February 1995
(in millions of SDRs)
Net Use as percent of
Member Transfers t
Receipts Net Use All Member's Quota GFE
(1) (2) (3) Total Net
Industrial 42,959.4 41,862.9 1,096.5 80.8 l.2 0.3
Australia 180.9 126.2 54.7 4.0 2.3 0.7
Austria 623.3 637.7 -14.4 -l.1 -l. 2 -0.1
Belgium 539.7 925.2 -385.5 -28.4 -12.4 -4.2
Canada 701.8 979.7 -277.9 -20.5 -6.4 -3.6
Denmark 632.6 364.6 268.0 19.8 25.0 4.8
Finland 284.6 255.5 29.1 2.1 3.4 0.4
France 1,836.7 2,136.9 -300.2 -22.1 -4.0 -l. 6
Germany 5,938.7 6,280.5 -34l. 8 -25.2 -4.1 -0.7
Greece 38.6 54.3 -15.7 -l. 2 -2.7 -0.2
Ireland 184.6 201.5 -16.9 -l. 2 -3.2 -0.4
Italy 2,258.2 1,971.7 286.5 2l.1 6.2 l.5
Japan 5,025.4 4,399.0 626.4 46.2 7.6 0.8
Luxembourg 4.1 8.6 -4.5 -0.3 -3.3 NA
Netherlands 1,403.8 1,304.0 99.8 7.4 2.9 0.4
New Zealand 109.7 53.2 56.5 4.2 8.7 2.3
Norway 995.0 779.3 215.7 15.9 19.5 l.5
Portugal 32l.0 155.6 165.4 12.2 29.7 l.5
Spain 1,368.9 996.5 372.4 27.4 19.2 l.7
Sweden 459.0 456.8 2.2 0.2 0.1 0.0
Switzerland 327.4 168.0 159.4 11.7 6.5 0.7
United Kingdom 2,339.2 2,713.8 -374.6 -27.6 -5.1 -l.4
United States 17,386.2 16,894.3 491.9 36.3 l.9 l.2
Developing 5,378.7 5,118.4 260.3 19.2 0.8 0.1
Oil exporting 3,067.2 3,856.9 -789.7 -58.2 -5.7 -2.6
Algeria 70.3 111.4 -41.1 -3.0 -4.5 -2.4
Indonesia 166.8 50.8 116.0 8.5 7.7 l.5
Iraq 6l. 8 0.0 6l. 8 4.6 12.3 NA
Kuwait 286.2 394.3 -108.1 -8.0 -10.9 -5.2
Libya 155.1 0.9 154.2 ll.4 18.9 3.8
Nigeria 203.8 13.0 190.8 14.1 14.9 54.9
Oman 43.6 32.3 ll.3 0.8 9.5 l.8
Qatar 24.4 47.9 -23.5 -l. 7 -12.3 -5.5
Saudi Arabia 1,614.8 2,514.3 -899.5 -66.3 -17.5 -20.5
United Arab Emirates 154.4 19l. 9 -37.5 -2.8 -9.6 -0.9
Venezuela 286.0 500.1 -214.1 -15.8 -ll.O -4.4
Other Non-Oil 2,311.5 1,26l.5 1,050.0 77 .4 5.4 0.5
Africa 32.3 56.5 -24.2 -l. 8 -l. 3 -0.4
Botswana 30.0 20.2 9.8 0.7 26.8 0.3
Burkina Faso 0.0 l.2 -l. 2 -0.1 -2.7 -0.8
Burundi 0.0 2.2 -2.2 -0.2 -3.8 -l. 6
Mauritius 2.3 0.0 2.3 0.2 3.1 0.5
Niger 0.0 l.0 -1.0 -0.1 -2.1 -l. 3 Table 2: Use of Currencies and SDRs in Transfers and Receipts September 1979 - February 1995
(in millions of SDRs)
Appendix Page 2
Net Use as percent of
All Member's Total Net Use
Net Use (3) «1)-(2»
Rwanda 0.0 4.9 -4.9 -0.4 -8.2 -21. 6
South Africa 0.0 21.1 -21.1 -1. 6 -1. 5 -1. 6
Tunisia 0.0 5.9 -5.9 -0.4 -2.9 -0.6
Asia 1,636.3 821. 2 815.1 60.1 8.8 0.6
Afghanistan 0.7 0.0 0.7 0.1 0.6 NA
China. Peoples Rep. 286.1 165.1 121.0 8.9 3.6 0.3
Fij i 0.0 1.7 -1. 7 -0.1 -3.3 -1.1
India 36.4 0.0 36.4 2.7 1.2 0.3
Korea 456.2 186.3 269.9 19.9 33.8 1.6
Malaysia 307.3 216.9 90.4 6.7 10.9 0.5
Papua New Guinea 1.5 0.0 1.5 0.1 l.6 2.2
Singapore 214.7 130.2 84.5 6.2 23.6 0.2
Thailand 333.4 12l.0 212.4 15.7 37.0 l.2
Europe 57.1 44.3 12.8 0.9 7.6 0.6
Cyprus 18.9 5.8 13.1 l.0 13 .1 l.3
Malta 38.2 38.5 -0.3 -0.0 -0.4 -0.0
Middle East 16.3 4.5 11.8 0.9 3.1 0.5
Bahrain 5.9 4.5 l.4 0.1 l.7 0.2
Jordan 7.4 0.0 7.4 0.5 6.1 0.7
Yemen, Republic Of. 3.0 0.0 3.0 0.2 l.7 l.4
Western Hemisphere 569.5 335.0 234.5 17.3 3.1 0.4
Argentina 72.0 4l. 8 30.2 2.2 2.0 0.4
Bahamas. The 0.0 6.8 -6.8 -0.5 -7.2 -5.9
Brazil 132.5 95.0 37.5 2.8 l.7 0.2
Chile 6.3 0.0 6.3 0.5 l.0 0.1
Colombia 241.3 43.6 197.7 14.6 35.2 3.9
Ecuador 8.0 0.0· 8.0 0.6 3.6 0.8
Guatemala 3.7 l.6 2.1 0.2 l.4 0.5
Mexico 6.5 6.0 0.5 0.0 0.0 0.0
Paraguay 2l. 5 25.3 -3.8 -0.3 -5.3 -0.7
Trinidad & Tobago 76.4 111.4 -35.0 -2.6 -14.2 -14.5
Uruguay l.3 3.5 -2.2 -0.2 -l. 0 -0.3 Table 2: Use of Currencies and SDRs in Transfers and Receipts September 1979 - February 1995
(in millions of SDRs)
Appendix Page 3
Net Use as percent of
Net Use (3) «1) - (2»
All Member's Total Net Use
Source: IMF Treasurer's Department.
GFE data from March 31, 1995 or latest available.
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Harmonization of Members' Reserve Tranche Positions to Gold and Foreign Reserves RTP/GFE ratios, September 1979 - February 1997
The following chart and table presents an update of harmonization results under the operational budgets through September 1997.
~r:rJ. o,__, . ....,
. __ __.
Table. Harmonization of Members' RTP/GFE Ratios Under the Fund's Operational Budgets
September 1979 - February 1997
Start of Budget
Average 1./ RTP/GFE
September - November 1979 December 1979 - February 1980
March - May 1980
June - August 1980
September - November 1980 December 1980 - February 1981
March - May 1981
II. June - August 1981
September - November 1981 December 1981 - February 1982
March - May 1982
June - August 1982
September - November 1982 December 1982 - February 1983
March - May 1983
June - August 1983
September - November 1983 December 1983 - February 1984
March - May 1984
June - August 1984
September - November 1984 December 1984 - February 1985
March - May 1985
June - August 1985
September - November 1985 December 1985 - February 1986
III. March - May 1986
June - August 1986 September - November 1986
IV. December 1986 - February 1987
3.8 3.5 3.2 3.1
2.16 1. 75 1.17 1.12
4.2 4.0 4.1 4.4
2.45 2.00 2.40 2.30
4.7 5.4 5.7 5.6
1. 70 2.50 2.60 2.30
7.3 7.5 6.4 5.8
3.60 3.50 3.20 3.70
7.2 7.4 7.1 7.1
4.40 5.00 5.20 5.20
7.0 7.0 6.6 7.1
4.80 4.40 4.20 3.80
7~3 7.1 6.6 6.2
4.30 4.00 4.00 3.20
Source: IMF Treasurer's Department
1./ Weighted average for all members included in the operational budget excluding the United States.
Table. Harmonization of Members' RTP/GFE Ratios Under the Fund's Operational Budgets
September 1979 - February 1997
Start of Budget
Average .1/ RTP/GFE
March - May 1987
June - August 1987
September - November 1987 December 1987 - February 1988
March - May 1988
June - August 1988
September - November 1988 December 1988 - February 1989
March - May 1989
June - August 1989
September - November 1989 December 1989 - February 1990
March - May 1990
June - August 1990
September - November 1990 December 1990 - February 1991
March - May 1991
June - August 1991
September - November 1991 December 1991 - February 1992
March - May 1992
June - August 1992
September - November 1992 December 1992 - February 1993
March - May 1993
June - August 1993
September - November 1993 December 1993 - February 1994
March - May 1994
June - August 1994
September - November 1994 December 1994 - February 1995
4.2 1. 50
4.2 1. 50
4.1 1. 50
4.0 1. 50
3.7 1. 60
3.8 1. 50
3.8 1. 30
3.6 1. 64
3.6 1. 70
3.7 1. 81
3.6 1. 83
3.2 1. 91
3.6 2.00 Source: IMF Treasurer's Department
.1/ Weighted average for all members included in the operational budget excluding the United States.
Table. Harmonization of Members' RTP/GFE Ratios Under the Fund's Operational Budgets
September 1979 - February 1997
Average 1./ RTP/GFE
Start of Budget
March - May 1995
June - August 1995
September - November 1995 December 1995 - February 1996
3.6 2.36 March - May 1996
June - August 1996
September - November 1996 December 1996 - February 1997
Source: IMF Treasurer's Department
1./ Weighted average for all members included in the operational budget excluding the United States.
- 57 -
ARTICLE V, SECTION 3(d) AND (j)
USE OF CUIUtENCIES AND SDRs IN THE GENERAL RESOURCES ACCOUNT AND PRINCIPLES AND PROCEDURES FOR DESIGNATION.
(II) AssessmnJI 01 SlrlfJglh 01 M.mber's BIIltm,. 01 PllJmenlS and Gross R.s.",. Posilitm lor Ih. Pwposes 01 Designation Plans, OperllliatJ4l Blllig,'s and Rep.,.,hill.J UfIIler Af1i&I, V, S.aitm 7(11)
This decision sets forth guidelines for the assessment of the strength of the balance of payments and gross reserve position of a participant under Article XIX, Section 5 (II) (i) (designation plans), and of the balance of payments and reserve position of a member under Article V, Section 3 (J) (operational budgets) and, in accordance with Executive Board Decisions No. 5704- (78/39) and No. 6172-(79/101), under Article V, Section 7 ( b) (early repwchases).
1. Assessments of strength for the purposes of Article V, Sections 3(J) and 7(b) will be buecl on • member's balance of payments and gross reserve positio~, and shall take into account developments in the exchange markets.
2. A member's "balance of payments and gross reserve position" is a combined concept, under which strength in one element may compensate for moderate weakness in the other.
3. In the Fund's assessment whether a member's balance of payments and gross reserve position is sufficiently mong for the purposes of the designation plans, operational budgets, and early repurchases. all relevant factors and data on the member's position shall be considered, including the following: recent and prospective movements in ~ reserves, balance of payments developments, the relationship of gross reserves to a member's imports and Fund quota, and developments in exchange markets. To the extent that recent data on changes in a member's net reserves are available, these shall be taken into account as an indicator of the member'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 include judgments on whether the member's position shows an improvement in comparison with the position at the time it made its last purchase from the Fund, on the extent of the improvement, and on whether it is likely to be sustained in the foreseeable future. Special attention will be given to the recent and prospective evolution in the various components of the member's balance of payments, including developments in the member's net reserves to the extent that data are available.
Decision No. 6273-(79/158) G/S
- 58 -
INTERNATIONAL MONETARY FUND
Guidelines Regarding the Use of Currencies in the General Resources Account
a. On the transfer side of the operational budget, currencies will be allocated in proportion to members' gold and foreign exchange reserves, as reported in InternatioDll Financial Statistics, provided that the Fund's holdings of a member's currency in teras of quota shall not be reduced as a result of transfer allocations below a f~.oor of two-thirds of the average level. expressed as a percent of quota, at which the Fund would hold by the end of a budget period the currencies of members that are sufficiently strong to be included in the operational budget (excluding the United States dollar);
b. The use of the U. S. dollar in transfers shall be included in the operational budgets on the basis of ad boc proposals and, to the extent feasible, the Fund will aim to maintain the Fund's holdings of U.S. dollars, in relation to quota, close to the average level of the Fund's holdings of currencies of other members in relation to quotas that are sufficiently strong to be included in the operational budget;
c. On the receipts side of the operational budget, tbe currencies.to be used in receipts will be allocated in proportion to the reserve tranche positions of those members included in tbe operational budget, provided that such use sball not raise the Fund's boldings of such a member's currency above its norm for remuneration;
d. The currencies of members with no outstanding purcbases and with relatively large reserve tranche positions tbat were not considered sufficiently strong for inclusion in the operational budget would be used in receipts only, witb their agreement;
e. The Fund will seek to maintain adequate working balances of currencies of not less than 10 percent of quotas;
f. The operation of the guidelines will be periodically reported to the Executive Board in the context of the quarterly operational budget; any proposals for modification of the guidelines will be presented to the Executive Board for its consideration. The guidelines will be reviewed by the Executive Board not later than February 10, 1995.
Decision No. 10279-(93/19), adopted February 10, 1993
Second Paper: The Market for SDRs
The Market for SDRs
1. Executive Summary - _ _.- - _ - - ..
IT. Introduction ------- - ----- - .. - ..
TIl. The circulation of SDRs " .
A. The Flows of SDRs and the Role of the Fund · · · .
B. System of Two-Way Arrangements · · · .. · · · · """"''''''''''''''''''
IV. Operations of the Two-Way Arrangements - ..
V. Measures to Enhance the Functioning of the Two-Way Arrangements ..
A. Before the Fourth Amendment -.--- .. ---.- - .. ---- --- .
B. After the Fourth Amendment - ..
Annex. Proposal to liberalize the Sales of SDRs from the GRA .
Text Boxes 1. 2. 3.
4. 5. 6.
Text Tables 1.
Conditions Prior to the Introduction of the SDR .
Designation Mechanism _ - .
Borrowing of SDRs for Payment of the Reserve Asset Portion of Quota
Increase .. ···· .. ······ .. · .. ······ ·· .. · .. · ······ ·· .. · · .
Review of the level of Fund's SDR Holdings ..
The Recirculation of SDRs .. · · · · ·· .. · · · · · · .
Monetization of SDRs .
Selected SDR Transactions 1986-1999 - - _-.- _- - - - - -.- ..
Fund's Holdings of SDRs January 1984-December 1999 · · · · ..
Change in SDR Valuation Basket Main flows of SDRs in the GRA, 1999
Concentration of SDR Holdings by Main Country Groups, 1983-99 Potential Increase in the Capacity of Two-Way Arrangements after the Fourth Amendment
1. Summary of Selected SDR Transactions 1986-99 .
2. Details of Current Two-Way Arrangements for SDR Transactions,
June 1999 .
3. Arrangements to Sell and Buy SDRs 1986-99········································ .. ······ .
4. Capacity Under Current Two-Way Arrangements for SDR Transactions
April 2000·········"""",---"""-,,,-,,,--,,,,,,,,---,, _-_ _ --_ _ _ _--
5. Capacity of Two-Way Arrangements for SDR Transactions Under the
Fourth Amendment (Simulation 1) ······ .. ··· .. · .. ·· .. · · ······················ .. ····· .
6. Capacity of Two-Way Arrangements for SDR Transactions Under the
Fourth Amendment (Simulation 2} .. ·············· .. · .. ········· .. ··· .. ·· .. ···· ·· ···· .
7. Possible New Members and Capacity of Two-Way Arrangements for SDR
Transactions under the Fourth Amendment+ .. ······ .. · .. ··········· · ·············· .
Appendix Table 1. Proposed Special Allocation of SDRs··· .. _ ...... ···· .. ···· __ ···_-_ .. _·_ .. ········_· .... ······· .. ·-
THE MARKET FOR SDRs I. EXECUTIVE SUMMARY
1. This paper reviews the functioning of the market for the Special Drawing Rights
(SDRs), and in particular the workings of the two-way (buying and selling) arrangements through which most SDR transactions are made. It discusses the role of the Th1F and the market makers in the circulation of SDRs; identifies operational shortcomings, and proposes measures to enhance the capacity of the two-way arrangements to ensure the liquidity of SDRs, particularly in preparation for the pending ratification of the Fourth Amendment of the Articles of Agreement.
2. SDRs may be used by participants in two categories of transactions: transactions with
designation and transactions by agreement. The designation mechanism has not been used since September 1987 because the Il\1F has developed a more market-oriented approach in the form of the two-way arrangements. Under these arrangements, transactions in SDRs are made with 12 member countries that have agreed within certain limits to make a market in SDRs. These two-way arrangements provide considerable flexibility to members that wish to acquire SDRs to settle their financial obligations, mainly to the Th1F; to replenish their SDR holdings; or to sell SDRs for useable currencies.
3. While the current two-way arrangements have functioned reasonably well and have proven to be resilient in recent years, the supply of SDRs has not kept pace with members' demands for them in transactions by agreement. Moreover, a few members have tended to hold a large share of the outstanding stock of SDRs, thereby limiting the availability of SDRs
O:\Mous\WP\SDRREVIE\TWOWAY.Final 0607.DOC June 8, 2000 (5:01 PM)
for transactions. Consequently, the two-way arrangements have at times been operated near minimum holding limits, and the Th1F has not always been able to meet all requests by members to acquire SDRs.
4. With the ratification of the Fourth Amendment of the IMF's Articles of Agreement,
current SDR stock of SDR 21.4 billion will double, necessitating a number of measures to strengthen the system of two-way arrangements.
5. Measures to strengthen the current system of two-way arrangements in the context of
the Fourth Amendment include
• Widening the range of SDR holdings limit on transaction size under existing arrangements. Doing so could also help revive the inactive two-way arrangements with Belgium and France whose SDR holdings have fallen below the specified floor. • Increasing the maximum transaction size under existing two-way arrangements to facilitate the execution of large resales by members purchasing from the Th1F;
• Converting Germany's sell-only arrangement to a buy-and-sell arrangement;
• Enlisting additional members (Australia, Canada, China, Ireland, Italy, Portugal, Singapore, and Spain) to initiate two-way arrangements;
• Establishing a two-way arrangement with the United States, the largest holder of SDRs, with 36 percent of the total stock of SDRs; and
• Liberalizing SDR sales by the General Resources Account (GRA).
6. The purpose of this paper is to shed light on the functioning of the market for SDRs,
to identify operational shortcomings, including those that may be encountered in the
doubling of SDRs under the Fourth Amendment of the Articles, and examine ways to
increase the liquidity of the SDR market. This section (II) provides background information
on the valuation of the SDR and its interest rate, and introduces the main features of the ways
in which SDRs may be transacted. Section III discusses the flows of the SDR and the role of
the IMF and of the members that have agreed to make a limited market in SDRs. Section IV
explores the operations of the two-way arrangements, while Section V presents a number of
proposals to enhance their effectiveness, particularly in the context of the adoption of the
Fourth Amendment to the Articles of Agreement. The attached annex details a proposal to
liberalize the sales of SDRs from the GRA.
7. The SDR is an international reserve asset created by the IMF in 1969 and used to
supplement existing reserve assets (e.g., gold, foreign exchange, and reserve positions in the
IMF), see Box 1. The SDR also serves as the unit of account for the IMF and a number of
other international and regional organizations. 1
1 The reference here is made to official SDRs. Private SDRs have been used to a very limited extent to denominate financial instruments created by private agents.
Box 1. Conditions Prior to the Introduction ofthe SDR
• The International Monetary System that emerged from the Bretton Woods Conference in 1944 rested on two sources of supply of the needed increases in World reserve pool, essential to sustain desirable and feasible rates of expansion in World trade and production: gold, and gold convertible foreign exchange. This system was named the Gold Exchange System.
• Gold initially provided more than three-fourths of global reserve increases but dropped to one-fourth in 1960-64 and subsequently became negative. Gold-convertible foreign exchange provided 64 percent of new reserve increases in 1960-64. Increases in U.S. dollar holdings served as the major source of additions to reserves.
• This led to two major sources of difficulties that characterized the operations of the International Monetary System in the 1960s: (1) increases in liquidity were closely connected with the size of the U.S. balance of payments deficits, (2) as the quantity of U.S. dollar holdings increased, the quality decreased. Consequently, U.S. dollars were no longer considered "as good as gold", and many countries (especially European countries with balance of payments surpluses) became increasingly reluctant to raise their holdings of U.S. dollars.
• Against this background, concerns were raised about the adequacy of gold or gold convertible foreign exchange to sustain the world reserve requirements of expanding levels of world trade and production.
• A blue-print for the deliberate creation of a truly international reserve asset, the SDR, in amounts necessary to supplement supplies of gold and foreign exchange reserves was agreed at the Rio de Janeiro meetings of the ll\1F Board of Governors in September 1967. SDRs were first allocated in 1969.
8. The IMF creates SDRs by means of periodic allocations to meet the long-term need
for global liquidity, and the stock can be reduced through a "cancellation" by the Th1F. 2 Once created, these assets may be used only in specific transactions involving the Th1F, its member countries, and a small number of other designated holders. Decisions to allocate (or cancel) SDRs require an 85 percent majority vote of the Board of Governors and are made for "basic periods" that, unless otherwise specified, run for five consecutive years. Decisions to allocate have been reached only on two occasions (during the first and third basic period), each time leading to allocations in three installments (1970-72 and 1979-81), and resulting in cumulative allocations to date of SDR 21.4 billion. These allocations are distributed, in proportion to IMF quota shares, to members participating in the SDR department at the time of allocation. Due to the considerable expansion in the IMF's membership since SDRs were last allocated and in order to enable participants in the SDR Department to receive an equitable share of cumulative SDR allocations, the IMF's Board of Governors adopted a resolution in September 1997 proposing a Fourth Amendment of the Th1F' s Articles of Agreement. The proposed amendment, when approved, will authorize a special one time allocation of SDR 21.4 billion, which would double cumulative allocations to about SDR 42.8 billion. With this allocation each Th1F member will have been allocated SDRs equivalent to about 29.3 percent of its quota under the Ninth General Review of Quotas.
2 International Monetary Fund, Articles of Agreement, Article XVIII, Section 2.
9. The Articles of Agreement authorize the IMP Executive Board to determine the value
of the SDR. Initially, the SDR was valued in terms of a fixed quantity of gold (equivalent to
one U.S. dollar) and was redefined in June 1974 as a basket of 16 currencies. Since 1981, the
SDR basket has consisted offixed quantities of the currencies of the five IMP members that
are the largest exporters of goods and services (France, Germany, Japan, the United Kingdom
and the United States). The basket is revised every five years, most recently on January 1,
1996. The currency weights in the basket reflect both the relative shares of the countries'
exports of goods and services and the relative shares of the five currencies inofficial reserve
holdings. With the introduction of the euro on January 1, 1999, the currency amounts of the
deutsche mark and French franc in the SDR basket were replaced with equivalent amounts of
the euro, based on the fixed conversion rates between the euro and these two currencies as
announced by the European Council on December 31, 1998. The initial percentage weights
and the corresponding amounts of each currency established on January 1, 1996 and amounts
calculated on January 1, 1999, are presented in Table 1 shown below.
Table 1. Change in SDR Valuation Basket*
Initial Amount of Amount of
Weight Currency Units Currency Units
Currency (in percent) January 1, 1996 Currency January 1, 1999
U.S. dollar 39 0.5820 U.S. dollar 0.5821
Deutsche mark 21 0.4460 euro (Germany) 0.2280
Japanese yen 18 27.2000 Japanese yen 27.2000
French franc 11 0.8130 euro (France) 0.1239
Pound sterling 11 0.1050 Pound sterling 0.1050
* Source IMF Treasurer's Department. 10. Each participant in the SDR system pays a rate of charge on the entire amount of its
cumulative allocation and receives a rate of interest on its holdings of SDRs. Countries with
SDR holdings equal to their cumulative allocations experience no net interest flows on their
SDR positions. Interest on SDR holdings is paid and charges on net cumulative allocations
are collected on a quarterly basis. Since 1981, the interest rate for the SDR has been set equal
to the average of interest rates on prime domestic money market instruments in the five
countries whose currencies make up the SDRs valuation basket, weighted according to their
current shares in the basket as derived from market exchange rates. With effect from January
1, 1999, the interest rates and instruments reflect the market yield on three-month treasury
bills in France, the United Kingdom and the United States, the three-month interbank deposit
rate in Germany, and the three-month rate on certificates of deposits in Japan.
11. SDRs may be used by participants in spot transactions to acquire other monetary
assets in two categories of transactions: transactions with designation and transactions with
agreement. The SDR's liquidity is assured for those participants having a balance of
payments need to use reserves by the designation mechanism (see box 2). Both participants
and prescribed holders of SDRs may also use them to obtain foreign exchange from other
participants or from prescribed holders willing to accept SDRs in transactions by agreement.
In addition, SDRs may be used in swap transactions/arrangements, in forward arrangements,
in loans, in the settlement of financial obligations, as security for the performance of
financial obligations, and in donations. SDRs are also used in a wide range of transactions
and operations between members and the IMP. 3
3 The IMP prescribed, in a series of decisions during 1979-80, that participants and other holders were free to use SDRs among themselves in certain transactions that were not otherwise expressly authorized by the Articles of Agreement.
Box 2. Designation Mechanism
Article XIX of the Fund's Articles of Agreement provides for a designation mechanism that underpins the usability of the SDR. Participation in the SDR Department entails the obligation to provide useable currencies in exchange for SDRs when designated, and accords the right to use SDRs in case of a balance of payments need.
Under the designation mechanism, the Fund designates certain participants, whose external positions are deemed sufficiently strong, to receive specified amounts of SDRs from other participants and, in exchange, to provide the latter with equivalent amounts of freely usable currencies (i.e., U.S. dollars, euros, Japanese yen, and pound sterling). The designation mechanism ensures that in case of need participants can use SDRs to obtain foreign currency reserves at short notice. 1
Quarterly designation plans, approved by the Executive Board, list participants subject to designation and set the maximum limits to the amounts of SDRs that can be designated to each. There are three basic criteria for designation:
• Participants are subj ect to designation only if their balance of payments and gross reserve positions are considered "sufficiently strong".
• The Executive Board determines the amounts of designation for individual participants in such a manner as to promote, over time, harmonization (or equalization) of the "excess holdings ratios" of participants. 2
• A participant's obligation to provide currency against SDRs in designation is limited to the point at which its SDR holdings are twice its net cumulative allocation of SDRs, unless the designee and the Fund agree on a higher limit.
1 A participant wishing to sell its SDRs in transactions with designation is required to make a representation to the Fund that it has a need to use its SDRs because of its balance of payments position or developments in its reserves, and not for the sole purpose of changing the composition of its reserves (Article XIX, Section 3 (a)).
2 The excess holdings ratio is calculated as the member's actual SDR holdings minus its net cumulative allocation as a percent of its quota.
12. In the past 14 years, the volume of voluntary dealings between participants and
prescribed holders has increased significantly, while the volume of transactions with
designation has declined (see chart 1 and Table 1, attached). Indeed, since September 1987,
there have been no transactions with designation because exchanges of SDRs for currencies
have been accommodated through voluntary transactions by agreement with other
participants, mainly the 12 participants" who have established with the IMP standing
arrangements to buy or sell SDRs for one or more freely usable currencies. ' These
arrangements typically specify minimum/maximum SDR holdings, minimum/maximum
transaction size, acceptable currencies, and exchange rate determination (2/3 business days).
They have significantly improved the SDR's liquidity and, therefore, its attractiveness as a
4 These participants are Austria, Belgium, Denmark, Finland, France, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and Venezuela. In addition, there is a one sell only arrangement with Germany.
5 Useable currencies are the currencies of those members that the IMF has determined are widely used to make payments and widely traded in the principal exchange markets. At present, only the euro, Japanese yen, pound sterling, and U.S. dollar are freely usable currencies.
Chart 1. Selected SDR Transactions 1986-1999 (In billions of SDRs)
Transactions among Participants and Prescribed Holders
16.0 ,- ~ IIByDesignation-
14.0 BBy Agreement - i 12.0
~ 8.0 +------
.§ 6.0 +---~ ::::
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
__________________________ ~ m GRA and SDR Charges _
~ 7.0 +-~--------------------
o 6.0 +------------------------~
~ 5.0 +------==,.----,.,..".,."--....,,.....,..,---
o S 3.0 +-~I--
~ 2.0 1.0 0.0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
D Payments Related to Fund Borrowing
16.0,----- III Acquisition of SDRs for Charges
Source: IMP Treasurer's Department
ill. The Circulation of SDRs
A. The Flows ofSDRs and the Role oftheIMF
13. The Th1F receives and disburses SDRs through the General Resources Account
(GRA).6 Inflows include payments of charges owed to the GRA (members are required by
the Th1F' s Articles of Agreement to pay all charges due to the GRA in SDRs), interest earned
on GRA SDR holdings and assessments for the cost of conducting business with the SDR
Department. In addition, members may effect repurchases in either SDRs or currencies at
their option and must pay 25 percent of their quota increases in SDRs, unless the IMP
decides otherwise. 7
14. Outflows of SDRs from the GRA include mainly transfers of SDRs (in purchases and
payments on Th1F borrowing), remuneration payments, and acquisition of SDRs from the
GRA. Members are not obliged to accept SDRs in any transaction or operation except
replenishment. 8 However, the IMP generally offers SDRs as an alternative to currencies in
6 The financial operations and transactions of the Th1F are carried out through the General Department and the SDR Department. The General Department consists offour accounts, including the GRA through which most of the Th1F's operations and transactions are conducted, while operations and transactions involving SDRs are normally carried out through the SDR Department.
7 Box 3 presents the procedures for members with low reserves and SDR holdings who are using the same-day SDR loan/repayment facility to pay the reserve asset portion of their quota increases.
8 The Th1F may decide to use its SDR holdings to replenish its holdings of the currency of a participant in the SDR Department.
Borrowing of SDRs for Payment of the Reserve Asset Portion of the Quota Increase
Under the Resolution for the Eleventh Quota Review (No. 53-2 on January 30, 1998), members are required to pay 25 percent of their quota increases in SDRs or currencies specified by the Th1F, or in a combination of SDRs and currencies. The balances of the increases are payable in their own currencies.
In cases where the gross reserves and SDR holdings of Fund members are low, the Fund, if requested, makes arrangements to assist members in making the payment of the reserve asset portion of their quota increases. This is done via a same-day loan, free of any interest, fee or commission. Under the Eleventh General Review, five members with relatively large SDR holdings agreed to lend SDRs for a total of SDR 2.8 billion to other members that represented the need to borrow SDRs to pay the reserve asset portion of their quota increases. Similar arrangements existed under the Eighth and Ninth Quota Reviews.
The mechanism functions as follows:
The Fund arranges for the member to borrow SDRs from other members that have sufficient SDRs and are willing to lend to members who need SDRs for reserve asset payments. The proceeds of the loan are used by the member to make its reserve asset payment. This creates a reserve tranche position for the member. The member then immediately makes a reserve tranche purchase, as it is entitled, and uses the proceeds of that purchase to repay the loan, on the same day.
Thus, the sequence of transactions, all occurring on the same value date, is as follows:
1. The member borrows SDRs from a willing lending member.
2. The member uses the borrowed SDRs to pay the reserve asset portion of its quota subscription.
3. The member makes a reserve tranche drawing, in the same amount (i.e., it pays in domestic currency equal to 25 percent of the increase in its own quota) and receives SDRs.
4. The member uses the SDRs in (3) to repay the SDR loan to the lending member in (1) above.
all payments it makes to its members. Virtually all members holding IMF-remunerated
reserve tranche positions choose to receive SDRs in quarterly remuneration payments," and
SDRs have been accepted in the repayment of loans and the payment of interest on
outstanding loans. Members may acquire SDRs from the GRA for the payment of charges to
the GRA and SDR Department and to pay assessments. The main flows of SDRs in theGRA
in 1999 are presented in Table 2.
GRA SDR Holdings (end 1998)
Table 2. Main Flows of SDRs in the GRA, 1999 (in millions of SDRs)
Interest on SDRs Repurchases Quota payments 11
3 2,660 117 4,253 9,170
Payment of Interest & Principal on IMF Borrowing Remuneration
Acquisition of SDRs
Other (Adjustments & refunds)
GRA SDRHoldings (end 1999)
10,405 8,927 1,478 2,124 1,328
II Reserve asset portion
9 Only one member is opting to receive remuneration payment in its own currency at present.
Members may accept SDRs in purchase transactions, and they may request to convert these to a usable currency in transactions with designation or transactions by agreement with other members (see below).
15. The IMF recycles the stock of SDRs held in the GRA by:
(i) channeling SDRs directly to debtor members who are making purchases from theIMF;
(ii) channeling SDRs indirectly to other members who also need SDRs to make payments to the IMF (i.e., charges and repurchases). The IMF may also assist members to receive SDRs for reserve management purposes. Such transactions are usually carried out under the two-way arrangements to the extent that SDRs received in purchases from the GRA under (i) are converted into freely usable currencies. The GRA is thus the primary force behind the circulation of SDRs-both to debtor members in connection with their purchases from the IMF, and to creditor members in the payment ofIMF borrowing and remuneration (see Box 4).
16. The GRA's holdings of SDRs are subject to sharp spikes in the wake of reserve asset
payments of quota increases (chart 2). The GRA's SDR holdings are returned to within a desired range mainly through transfers of SDRs for purchases and payments on Fund borrowing under its quarterly Financial Transactions Plan (formerly the Fund's Operational Budget). The Executive Board has periodically reviewed the level of the IMF's SDR holdings, particularly when circumstances warranted changes in the IMF's target range of SDR holdings. On the occasion of the last review following the completion of the quota
Box 4. The Recirculation of SDRs
• The GRA transfers SDRs mainly to members under Fund arrangements and makes remuneration payments to creditor members.
• The GRA receives SDRs from members meeting obligations and making reserve asset payments associated with periodic quota increases.
• All members receive SDRs at the time of general SDR allocations.
• Most transactions intermediated through the two-way arrangements stem from the resale of SDRs received under Fund arrangements, or the purchase of SDRs to meet obligations to the Fund.
I Reserve Asset Payment of Quota Increases L
, .. Creditor
10 .. Members ~
Transfers of ~ ~ "Market Makers"
SDRs from the Members with
General ~ Debtor Two-way
Resources Members Sales ofSDRs .. Arrangements
Account (GRA) Acquisition ojSDRs
y Payment of Fund Obligations ~ A = Payments of remuneration, net SDR interest, and principal and interest on borrowing by the Fund.
B = Purchase transactions, and the sale of SDRs to members for payment of charges.
1 Ad hoc sales.
2 Same-day SDR loan facility for reserve asset payment of quota increases.
3 Other members may also acquire SDRs in T As or from the GRA for payment of charges.
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increases under the Ninth Review, the Executive Board agreed in February 1993 that the Th1F's SDR holdings should be maintained within a range of SDR 1-1.5 billion (Box 5).
B. System of Two- Way Arrangements
17. The two-way (buying and selling) arrangements are another important mechanism for
circulating SDRs. Each two-way arrangement specifies a range of SDR holdings within which transactions may be initiated; the specific currencies to be exchanged; the date of settlement (same day, or in one, two, or three business days); the minimum and maximum amounts of individual transactions; and any notice that may be required before initiating a particular transaction (Table 2, attached). The first two-way arrangement was established in February 1986, and, by the end of 1987, nine two-way arrangements had been established. At present, there are 12 market makers with two-way arrangements and one sell-only arrangement. The twelve members have agreed to make a market in SDRs provided that their SDR holdings and the size of each transaction remain within certain limits. The combined holdings ranges of these arrangements sum to totaling about SDR 3 billion (Table 3, attached). The one sell-only arrangement stipulates a floor (about SDR 1.3 billion). Any holdings in excess of that minimum are available for sale.
18. The members with two-way or one-way arrangements effectively make a market in
SDRs and increase its usability. The two-way arrangements enable members to acquire SDRs in exchange for freely usable currencies and to obtain desired currencies in exchange for SDRs in the management of their reserve portfolios. Since the main attraction of the SDR as
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