World Liquidity LARGER ROLE FOR I.M.F. DISCOUNTED

Press, Volume CII, Issue 30269, 23 October 1963, Page 10

World Liquidity LARGER ROLE FOR I.M.F. DISCOUNTED

[By

“LYNCEUS"

" of the "Economist”]

(From the “Economist” Intelligence Unit)

London. September 17.—1 n international financial circles the month of September is dominated every year by the preparaidons for the annual meeting of the International Monetary Fund. But in one way this year there has been a break with tradition. The LM.F.’s own annual report has been circulated and published in advance, instead of being presented, as in the past, as the annual meeting opens.

The change is undoubtedly for the better. Too often the report has passed largely unregarded in the flurry of opening statements by prominent Finance Ministers. This time it can be digested in tranquillity. Attracting most attention is the section or the money available to finance world trade. This was inevitable in view of the speculation which has developed over the prospects for an extension of the role of the Fund to compensate for the inadequacy of national currency reserves. The I.M.F.’s staff is not yet convinced that there is a case for enlarging the role of the Fund. On the contrary, it estimates that existing world liquidity arrangements are adequate for the foreseeable future. It points out that member countlies’ “quotas" with the Fund—the amounts which they can call upon by way of virtually automatic support when in balance-of-payments difficulties—are now worth a global total of 15,000 million dollars, or just about the equivalent of the whole of the United States reserves. It recalls that over and above these “quotas” there are the so-called “Paris Club” arrangements, by which 10 prominent I.M.F. member countries, in Western Europe and North America, are committed to supporting each others’ currencies in times of strain. “Losing Face" The report acknowledges that these facilities could indeed prove inadequate. But it suggests that this danger | is likely to arise only if they are not properly used. “The ' industrial countries should feel as free to look to the Fund as to other readily available short-term facilities.” What the authors evidently have in mind is the reluctance sometimes displayed by the developed countries about calling on their quotas. The poorer member countries regard their I.M.F. quotas as first lines of defence; but Governments—and still, more, central bankers—in the developed industrial countries often seem tc think that they will somehow lose financial face if they have to draw on their quotas. It looks as though the management of the Fund would now be by no means upset if member countries went further and included their national quotas as part of their gold and currency reserves.

These are sensible suggestions. For countries to deflate their economies for fear lest continued expansion might force them to draw on their I M F. quotas is just about as logical as for an individual to curtail the development of hia business in order to leave his deposit account intact at the bank. And while the addition of available quotas to national currency reserves would be no more than a simple book-keeping transaction, it could have a valuable psychological effect. Speculation against a currency is always liable to be provoked by evidence that the reserve backing for it is declining but it is far more likely to occur when published reserves look small than when they still appear to be substantial.

Yet the I.M.F. report does recognise somewhat grudgingly, that even if the existing facilities are properly used they may eventually prove to be inadequate and it commits the Fund to the study and preparation of further improvements just in case. This was probably as much as could have been expected this year, and the report already foreshadows the mo« probable outcome of the Washington meeting—the establishment of an inter-

governmental working party to examine the working of the international monetary svstem.

But we all know what tends to happen to inter-

government working parties They are bound by their nature to settle for the lowest common denominator of agreement (and of this case, given the reserved attitude of Continental European bankers and Governments and of the United States Treasury, that could be very low indeed). I Yet the IMF. report itself ’ highlights the dangers ahead, i It warns that President; Kennedy’s proposals for tax, cuts, if they get through I Congress, could lead to a i further temporary deteriora-! tion in the United States balance-of-payments position, j In this case the United States ■ Government would no doubt I call on its European partners! to increase sstill further their holdings of dollars. But some of the European central bankers have already made it clear that the limits of their ability to absorb dollars are aproaching. "Temporary” Problems?

The Fund authorities go on to suggest that once the American balance-of-payments position does begin to mend, then the European countries may experience "substantial declines’’ in their reserves. If these declines were confined to the Continental countries, this would no doubt represent a healthy redistribution of liquidity, which is at present disproportionately concentrated in countries without major trade-financing responsibilities or adequate capital markets for other people to draw on. Even so, he would be a brave man who would forecast with confidence that European Governments would not start applying the brakes to their economies if they saw their reserves declining sharply. If, on the other hand, the "substantial decline” were also to affect the pound, the British Government would soon have to choose between curtailing industrial activity and devaluation.

But the fundamental doubt | about the thesis advanced in i the IMF. report concerns its use of the word “temporary.” ' No one would dispute that I the present system of quotas and currency “swaps” is adequate to cope with temporary balance-of-payments problems. But can anything which ' has already lasted as long as the drain on the United States balance of payments. ’ or proved so recurrent as the; crises in the sterling area ! really be described as "temporary”?