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International Monetary Fund (Meetings)

Volume 884: debated on Tuesday 21 January 1975

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With permission, I should like to make a statement about the recent international monetary meetings.

In Washington last week I attended meetings of the Interim Committee of the International Monetary Fund and of the Group of Ten, and had some valuable private conversations with colleagues in the United States and with finance ministers of other countries attending the same meetings. In the two main meetings I acted, following the earlier EEC discussions under my chairmanship in London, as spokesman for the agreed views of EEC Governments. Communiqués were issued recording the outcome of the IMF Interim Committee meeting and the decisions taken in the Group of Ten on a separate subject. With permission, I will circulate the full texts of both in the Official Report.

The meetings were held in an atmosphere of widespread concern about the risks of serious recession during 1975—a concern which I have voiced for many months. But there was also a gratifying determination to accept the reality of these dangers, to urge and to take appropriate domestic and international measures to mitigate them, and to reach immediate decisions on the major proposals under consideration at our meetings. The economic measures announced by the United States during the week were welcomed in this context. Details of the decisions are set out clearly in the communiqué, but I should like to underline the main features.

First, there was unanimous agreement to extend and enlarge the IMF oil facility for 1975, to authorise new borrowing up to SDR 5 billion, and to keep the operation under constant review; it was also unanimously agreed that, while the facility will broadly operate at market-related interest rates, arrangements will be made for borrowers from among the most severely affected developing countries to pay much lower rates.

Second, the Group of Ten agreed that a solidarity fund should be established in the OECD as a safety net for its members in case other international measures proved inadequate. Each participant would have a quota which would serve to determine both its obligations and its borrowing rights. Total quotas would be about $25 billion, available for two years. Some important features still have to be worked out, but the target is approval by OECD Ministers within a few weeks.

Third, there was agreement on the main features of the current review of IMF quotas. The total size, which indirectly determines the level of normal IMF resources, should be increased by 32·5 per cent., from SDR 29·2 billion to SDR 39 billion. Within this total increase, the combined share of OPEC countries should be doubled and the combined share of other developing countries should remain unchanged. This will, of course, involve some reduction in the relative share of the industrial countries. Country by country changes are to be worked out in the IMF within this framework.

Finally, agreement in principle was achieved—with some details settled—on a range of amendments to the IMF Articles. Many of the amendments, full details of which are to be worked out by the IMF Executive Board, will be designed to improve the usability of the SDR and IMF general resources in the context of present and prospective monetary conditions. But the most interesting features are the progress towards agreement to recognise the legality of the floating of currencies and towards new arrangements concerning gold, designed to abolish the official price for gold, eliminate obligatory payments of gold by members to the IMF, and allow freedom for central banks to enter into gold transactions under conditions which will ensure that the rôle of gold in the international monetary system will be gradually reduced.

Some strenuous bargaining was involved in the achievement of these results. That they were in the end achieved, and through concessions on particular points from every participant, underlines the determination of all to make progress without further delay.

I believe that the two major results of the meetings are the additional measures of recycling and financial support which have been agreed and the important moves towards resolving long-standing arguments about gold, legality of floating, and so on, which will help us to rebuild a more effective International Monetary Fund.

Overall, with the oil facility, the OECD solidarity fund and the prospective increases in quotas, we now have a greatly improved battery of weapons to meet the financing difficulties which many countries are bound to face in the coming months. This means that those countries can face their difficulties with much greater assurance of support. The whole world in turn can be more confident of avoiding further reductions in trade and economic activity which might otherwise have been unavoidable.

It is clearly of the greatest importance that there should be good international arrangements to deal with the petrodollar recycling problem and to reduce the risk of individual countries being driven to take "beggar my neighbour" policies and push the world into a general slump. Therefore, we welcome the real progress which was clearly made at Washington last week and we assure the right hon. Gentleman of our general support in these matters. Perhaps I could ask him a few questions.

First, the size of the IMF facility, I understand, is SDR5 billion or $6 billion but this compares with the $12 billion to $14 billion that the EEC agreed at its meeting the previous week was required. Has the right hon. Gentleman anything to say about the size and what the chances are of increasing it above 5 billion if necessary?

Second, would the right hon. Gentleman make a further statement in due course about the solidarity fund when the important features to which he refers have been worked out—hopefully, over the next few weeks? Third, in relation to the OPEC countries' quotas to the IMF and their projected increase—doubling, I think the right hon. Gentleman said—have those countries been consulted and have they agreed to that?

Finally, would the right hon. Gentleman agree that the unanimity with which the EEC approached the Washington conference helped in its success? Is it not a fact that our membership of the EEC strengthened our position in getting the benefits which he is claiming?

First, let me express my gratitude for the welcome that the right hon. Gentleman has given and for his assurance of support from the Opposition.

On the question of the size of the IMF facility, every country represented at these meetings except the United States would have preferred a much larger sum, but it was agreed that the needs of the situation would be kept under constant review and it is open to the Interim Committee to reconsider the matter later in the year if the requirement appears larger. Apart from the possibility of increasing the amount of borrowing from the OPEC countries, it may be possible to make use of the IMF's own resources, and the IMF has resolved to investigate that possibility. So I think that we have some assurance there.

On the question of the OECD solidarity fund, I shall certainly make a statement to the House as soon as an agreement is reached in detail on this matter. It may be desirable for the House to consider and to vote on the question before final decisions are taken. It will certainly be so desirable, I think, in the Congress of the United States. This is one reason why it may be many months before this OECD solidarity fund is possibly able to operate.

On the question of consultation with the OPEC countries, I had, as I think I told the House some weeks ago, the opportunity of discussing these ideas before they were agreed with the Government of Saudi Arabia when I was there in December, and I was assured of their general support. But the OPEC countries were directly represented at the Washington meeting and all voted for this proposal, although there will undoubtedly be a strenuous negotiation about the precise rate of interest which is offered to these countries in the light of the exceptional security which a borrowing by the IMF entails.

On the last question, regarding the Common Market, it was undoubtedly of immense value that the European countries were completely united on this matter from a week before the meeting took place. This illustrates for me the advantage of European countries concentrating on co-operation on issues where there is a clear common interest to be pursued rather than pursuing the theological intricacies of the Treaty of Rome. In this particular respect I am reminded very much of the advantage I found as Secretary of State for Defence some years ago, when Britain's entry to the Common Market had been vetoed by the French Government, in setting up a Eurogroup inside NATO which was able to exercise a very powerful European influence.

I congratulate my right hon. Friend the Chancellor on his leadership and success at the world-level negotiations last week. Does he not now think it urgent that this country's economic strength begins to correspond to the prestige and place that we still enjoy in world councils? Is he satisfied that the second IMF oil facility is adequate? If not, does he think that it can be topped up, and, if so, from where?

I am grateful to my hon. Friend for his earlier remarks. I think that the success of the negotiations last week showed that Britain could command immense influence in the world if, as I said earlier, she concentrates on trying to organise support from like-minded countries on issues on which a clear common interest is to be achieved.

With respect to my hon. Friend, I think that I very largely answered his second question when answering the right hon. Member for Carshalton (Mr. Carr). However, if I may repeat what I said, although I and all the other members of the IMF except the United States were disappointed at the final size agreed for the expanded IMF facility, we have agreed to keep this under review. The possibility of increasing borrowing from OPEC countries is there, and it may be possible to make use of the existing resources of the IMF.

What inference is to be drawn from the fact that the only reference to interest rates was the exceptional treatment to be afforded to developing countries? Does the right hon. Gentleman have anything to report as to international discussion or corporate thinking in regard to interest rates as a factor in capital investment and thereby in combating recession?

The right hon. and learned Gentleman has very ingeniously sought to move the discussion rather some distance from the matters on which I made the statement. But in answer to what he has said may I say, first, concerning the IMF facility, that the money will be borrowed from the OPEC countries at market-related rates taking account of the special security offered to lenders by the fact that the IMF is a guarantor of their loans. On the wider question which I thought the right hon. and learned Gentleman sought to introduce, it is the Government's aim to secure a fall in interest rates world-wide. No doubt he will have noticed that it has been possible in the last few days for the United Kingdom to reduce both minimum lending rate and base rate. I hope that he welcomes this.

I congratulate my right hon. Friend the Chancellor on the very important progress that has been made, and I recognise the important rôle played by the IMF in these negotiations. Does not the Chancellor agree, however, that if we are to give the OPEC countries the real security they require in recycling their funds, some form of international bank and international currency is becoming essential? Does he regard his meetings as a first step to that end?

I certainly do not regard the agreements reached last week as in any sense solving the oil problem or even solving the problem of the gigantic petrodollar surplus. While I was in Washington I said that I hoped that, in addition to further moves in the direction we laid down last week, it may be possible for us shortly to discuss some means of setting up an international intermediary body which would make it possible for the OPEC countries to invest some of their money in increasing productive capacity in the consumer countries so that the transfer of resources which will take place when the OPEC countries are capable of absorbing imports to the value of the oil they now export may take place without any fall in the standard of living in the consumer countries.

Is the right hon. Gentleman aware that we welcome almost any international measures in this situation? However, is he also aware that his remarks about the reduction in the rôle of gold are likely to raise a hollow laugh throughout the world? Will he be a little more forthcoming about his promises of action on the domestic front in his statement? Will he accept that our ability to borrow and, therefore, our chances of averting a sterling crisis have so far been entirely due to the promise of North Sea oil and that confidence in that is now ebbing? Is it not a fact that if we are to avoid a sterling crisis within the next four months, we must choose between a statutory incomes policy or massive and unacceptable unemployment?

The hon. Gentleman is an expert in hollow laughter, but I did not find this to be the reaction of my colleagues at the IMF. When the hon. Gentleman has had an opportunity to study what I have said more carefully, I think he will take a more balanced and less frivolous view. On the second part of his remarks, I do not find his crocodile tears any more helpful than his hollow laughter.

In the context of the right hon. Gentleman's reference to IMF oil quotas for 1975, did he discuss IMF quotas for succeeding years? Did he take into account the fact that Scottish oil will be flowing in the succeeding years, and the fact that that oil will very shortly belong to Scotland?

On the question of the increases in quotas, we agreed that the increases will stand for some years. I am not in a position to tell the House at this moment the number of years after which we propose to consider a further change in the quota system. On the second part of the question, I assure the hon. Gentleman that we took into account all relevant considerations.

Does my right hon. Friend agree that this will not be the last international discussion on these matters and that good understanding between European countries will continue to be important? If this country were of its own choice, and not of someone else's choice, to vote to come out of the Community, does he think that this would make it easier for him to get on with his European colleagues or more difficult?

I am afraid that some hon. Members are consistently trying to draw me some distance away from the subject of my statement. I commented on the point that my right hon. Friend has made that the type of co-operation we achieved on this matter a fortnight ago, which contributed so greatly to the success in Washington, was very analogous to that which we achieved in the Eurogroup of NATO in the later years of the 1960s when Britain was not a member of the Common Market and France, though not a member of the Eurogroup, was.

Does the Chancellor not agree that, after this impressive start on recycling, it is now essential for the consumer countries to reach agreement with the OPEC countries on the terms of reference by which the price of oil itself will be governed? Will he tell the House something about his ideas on the appropriate forum for this kind of discussion? There have been differences of opinion between France and the Americans. Will he expand a little on his ideas on the kind of framework—the rules and restraints—governing the encouragement of direct investment by OPEC countries in the West?

I know that the hon. Member is a close student of these methods. However, some of the questions raised by him would require a lengthy speech rather than a rapid comment.

I have always believed that the right point of entry to a dialogue with the oil producers on the whole range of problems raised by the recent increase in prices is an issue on which a common interest can be recognised from the start. We have that in the IMF facility. I believe that the discussions we have had with the producers on finding a stable and reliable location for part of their funds may open the way to wider discussions.

The President of France and the President of the United States reached an agreement at Martinique to begin discussions with the oil producers in which the less-developed countries would also take part. It is envisaged that the initial discussions on this matter probably at official level, will take place in the spring. The Americans attach great importance to the fact that we have reached agreement on a solidarity fund inside the OECD and that ministerial agreement on the details will be completed before the negotiations with the oil producers take place.

Beyond that I think I should be trespassing on the patience of the House if I attempted to describe my ideas in more detail.

Is there any quid pro quo for the apparent French aquiescence of the Minister's action with regard to the financial rôle of gold?

The most difficult issue within the fund is the difference of view between France and all the other member countries on the rôle of gold. Great progress was made in the meeting in Washington last week in narowing the area of difference on this matter. We hope that we shall finally close the gap in the coming months so that it will be possible to present Parliaments all over the world with an agreed package of amendments to the articles of the IMF which can be put to the various Parliaments at the same time.

Put into simple English, does not the Chancellor's statement mean that he has succeeded in borrowing a great deal more money to finance a higher rate of inflation for the future? Is he sure that that is wise and prudent?

Put into simple English, the answer is "No, Sir". The world recognises that for several years, perhaps for many years, it will not be possible for the oil producers to absorb imports of goods and services to the present value of the oil they export. Unless there is a collapse of the international monetary system, or unless the consuming countries are compelled to reduce the level of their industrial activity to a point which would require widespread unemployment, some means of recycling those funds must be found. I am glad to tell the hon. Member, in the simplest English, that the agreements we made last week remove one of the major factors which could otherwise have produced a gigantic international crisis on the scale of the 1930s.

Following are the communiqués:

Press Communiqué of the Interim Committee of the Board of Governors on the International Monetary System

1. The Interim Committee of the International Monetary Fund held its second meeting in Washington, D.C. on January 15 and 16, 1975. Mr. John N. Turner, Minister of Finance of Canada, was in the chair. Mr. H. Johannes Witteveen, Managing Director of the International Monetary Fund, participated in the meeting. The following observers attended during the Committee's discussions of the matters referred to in paragraphs 2, 3, and 4 below: Mr. Henry Konan Bedié, Chairman, Bank-Fund Development Committee; Mr. Gamani Corea, Secretary General, UNCTAD; Mr. Wilhelm Haferkamp, Vice President, EC Commission; Mr. Mahjoob A. Hassanain, Chief, Economics Department, OPEC; Mr. René Larre, General Manager, BIS; Mr. Emile van Lennep, Secretary General, OECD; Mr. Olivier Long, Director General, GATT; Mr. Robert S. McNamara, President, IBRD.

2. The Committee discussed the world economic outlook and against this background the international adjustment process. Great concern was expressed about the depth and duration of the present recessionary conditions. It was urged that anti-recessionary policies should be pursued while continuing to combat inflation, particularly by countries in a relatively strong balance of payments position. It was observed that very large disequilibria persist not only between major oil exporting countries as a group and all other countries, but also among countries in the latter group, particularly between industrial and primary producing countries. Anxiety was also voiced that adequate financing might not become available to cover the very large aggregate current account deficits, of the order of US$30 billion, in prospect for the developing countries other than major oil exporters in 1975.

3. The Committee agreed that the Oil Facility should be continued for 1975 on an enlarged basis. They urged the Managing Director to undertake as soon as possible discussions with major oil exporting members of the Fund, and with other members in strong reserve and payments positions, on loans by them for the purpose of financing the Facility. The Committee agreed on a figure of SDR 5 billion as the total of loans to be sought for this purpose. It was also agreed that any unused portion of the loans negotiated in 1974 should be available in 1975. The Committee agreed that in view of the uncertainties inherent in present world economic conditions, it was necessary to keep the operation of the Oil Facility under constant review so as to be able to take whatever further action might be necessary in the best interests of the international community. It was also understood that during the coming months it would be useful to review the policies, practices, and resources of the Fund since it would he appropriate to make increased use of the Fund's ordinary holdings of currency to meet the needs of members that were encountering difficulties.

4. The Committee emphasised the need for decisive action to help the most seriously affected developing countries. In connection with the Oil Facility, the Committee fully endorsed the recommendation of the Managing Director that a special account should be established with appropriate contributions by oil exporting and industrial countries, and possibly by other members capable of contributing, and that the Fund should administer this account in order to reduce for the most seriously affected members the burden of interest payable by them under the Oil Facility.

5. The Committee considered questions relating to the sixth general review of the quotas of members, which is now under way, and agreed, subject to the satisfactory amendment of the Articles, that the total of present quotas should be increased by 32·5 per cent. and rounded up to SDR 39 billion. It was understood that the period for the next general review of quotas would be reduced from five years to three years. The Committee also agreed that the quotas of the major oil exporters should be substantially increased by doubling their share as a group in the enlarged Fund, and that the collective share of all other developing countries should not be allowed to fall below its present level. There was a consensus that because an important purpose of increases in quotas was strengthening the Fund's liquidity, arrangements should be made under which all the Fund's holdings of currency would be usable in accordance with its policies. The Committee invited the Executive Directors to examine quotas on the basis of the foregoing understandings, and to make specific recommendations as promptly as possible on increases in the quotas of individual member countries.

6. I. The Committee considered the question of amendment of the Articles of Agreement of the Fund. It was agreed that the Executive Directors should be asked to continue their work on this subject and, as soon as possible, submit for consideration by the Committee draft amendments on the following subjects:

  • (a) The transformation of the Interim Committee into a permanent Council at an appropriate time, in which each member would be able to cast the votes of the countries in his constituency separately. The Council would have decision-making authority under powers delegated to it by the Board of Governors.
  • (b) Improvements in the General Account, which would include (i) elimination of the obligation of member countries to use gold to make such payments to the Fund as quota subscriptions and repurchases and the determination of the media of payment, which the Executive Directors would study, and (ii) arrangements to ensure that the Fund's holdings of all currencies would be usable in its operations under satisfactory safeguards for all members.
  • (c) Improvements in the characteristics of the SDR designed to promote the objective of making it the principal reserve asset of the international monetary system.
  • (d) Provision for stable but adjustable par values and the floating of currencies in particular situations, subject to appropriate rules and surveillance of the Fund, in accordance with the Outline of Reform.
  • II. The Committee also discussed a possible amendment that would establish a link between allocations of SDRs and development finance, but there continues to be a diversity of views on this matter. It was agreed to keep the matter under active study, but at the same time to consider other ways for increasing the transfer of real resources to developing countries.

    7. The Committee also agreed that the Executive Directors should be asked to consider possible improvements in the Fund's facilities on the compensatory financing of export fluctuations and the stabilisation of prices of primary products and to study the possibility of an amendment of the Articles of Agreement that would permit the Fund to provide assistance directly to international buffer stocks of primary products.

    8. There was an intensive discussion of future arrangements for gold. The Committee reaffirmed that steps should be taken as soon as possible to give the special drawing right the central place in the international monetary system. It was generally agreed that the official price for gold should be abolished and obligatory payments of gold by member countries to the Fund should be eliminated. Much progress was made in moving toward a complete set of agreed amendments on gold, including the abolition of the official price and freedom for national monetary authorities to enter into gold transactions under certain specific arrangements, outside the Articles of the Fund, entered into between national monetary authorities in order to ensure that the rôle of gold in the international monetary system would be gradually reduced. It is expected that after further study by the Executive Directors, in which the interests of all member countries would be taken into account, full agreement can be reached in the near future so that it would be possible to combine these amendments with the package of amendments as described in paragraphs 6 and 7 above.

    9. The Committee agreed to meet again in the early part of June 1975 in Paris, France.

    COMMUNIQUE OF THE MINISTERIAL MEETINGS OF THE GROUP OF TEN in Washington on 14th and 16th January 1975.

    1. The Ministers and Central Bank Governors of the ten countries participating in the General Arrangements to Borrow met in Washington on the 14th and 16th of January 1975, under the Chairmanship of Mr. Masayoshi Ohira, Minister of Finance of Japan.

    The Managing Director of the International Monetary Fund, Mr. H. J. Witteveen, took part in the meetings, which were also attended by the President of the Swiss National Bank, Mr. F. Leutwiler, the Secretary-General of the OECD, Mr. E. van Lennep, the General Manager of the Bank for International Settlements, Mr. R. Larre, and the Vice-President of the Commission of the EEC, Mr. W. Haferkamp.

    2. After hearing a report from the Chairman of their Deputies, Mr. Rinaldo Ossola, the Ministers and Governors agreed that a solidarity fund, a new financial support arrangement, open to all members of the OECD, should be established at the earliest possible date, to be available for a period of two years. Each participant will have a quota which will serve to determine its obligations and borrowing rights and its relative weight for voting purposes. The distribution of quotas will be based mainly on GNP and foreign trade. The total of all participants quotas will be approximately $25 billion.

    3. The aim of this arrangement is to support the determination of participating countries to pursue appropriate domestic and international economic policies, including co-operative policies to encourage the increased production and conservation of energy. It was agreed that this arrangement will be a safety net, to be used as a last resort. Participants requesting loans under the new arrangement will be required to show that they are encountering serious balance-of-payments difficulties and are making the fullest appropriate use of their own reserves and of resources available to them through other channels. All loans made through this arrangement will be subject to appropriate economic policy conditions. It was also agreed that all participants will jointly share the default risks on loans under the arrangements in proportion to, and up to the limits of, their quotas.

    4. In response to a request by a participant for a loan, the other participants will take a decision, by a two-thirds majority, on the granting of the loan and its terms and conditions, in the case of loans up to the quota, and as to whether, for balance-of-payments reasons, any country should not be required to make a direct contribution in the case of any loan. The granting of a loan in excess of the quota and up to 200 per cent. of the quota will require a very strong majority and beyond that will require a unanimous decision. If one or more participants are not required to contribute to the financing of a loan, the requirements for approval of the loan must also be met with respect to the contributing participants.

    5. Further work is needed to determine financing methods. These might include direct contributions and/or joint borrowing in capital markets. Until the full establishment of the new arrangement, there might also be temporary financing through credit arrangements between central banks.

    6. Ministers and Governors agreed to recommend the immediate establishment of an ad hoc OECD Working Group, with representatives from all interested OECD countries, to prepare a draft agreement in line with the above principles. In their view this work should be concluded in time to permit approval by the OECD Council by the end of February 1975.