Since 1970, a new instrument of reserve has been created, namely SDR (Special Drawing
Right). The value of SDR represents a weighted average of 5 currencies, that is, the US
dollar (40 per cent), German Deutschmark (21 per cent), the UK pound sterling (11 per
cent), the French franc (11 per cent), and the Japanese yen (17 per cent). These weights
reflect the relative strength of economies of these countries.
The quotas of different countries are paid to the IMF in the ratio of 25 per cent as SDRs
and 75 per cent in national currency.
Besides the quotas of member countries as explained above, the IMF can also have
recourse to loans from member states to augment its resources. These loans are drawn in
SDRs.
Also, under the General Agreement to Borrow (GAB) signed by the Group of Ten, (Paris
club) the IMF can borrow in order to have supplementary resources in convertible
currencies. This agreement allows the IMF to finance from this borrowing even those
countries which are not members of the Group of Ten. The agreement is renewed every
5 years; the last one was in 1993.
Good functioning of the international monetary system requires:
- appropriate adjustment mechanisms ;
- an attentive surveillance of the policies adopted by the member states
relating to the exchange rate.
Member countries have an absolute claim on the IMF up to the amount of gold
subscriptions they have made. In operational terms, they can draw this amount (equal to
25 per cent of their quota) from the IMF any time. This is called reserve tranche (or gold
tranche) and is treated as the reserve of the country concerned. However, this sum is to
be reimbursed to the IMF within a specified period varying between 3 months to 5 years.
Beyond 25 per cent, a country can draw upon its credit tranche: the additional credit the
IMF can grant. The credit tranche consist of the amount of drawings beyond the reserve
or gold tranche that would raise the Fund’s total holdings of that country to 200 per cent
of the quota. Temporary increases of the credit tranche to 400 per cent of the quota have
been allowed in the past. Approval from the IMF is necessary for a country to draw on
its credit tranche. This approval usually comes with restrictions that become increasingly
tight as the drawings on this credit rise. Thus, this additional credit is used more often to
finance temporary disequilibrium in balance of payments than to provide temporary
liquidity.
Besides the reserve (or gold) and credit tranches, the IMF has three permanent credit
facilities : (i) the compensatory financing facility (established in 1963 and liberalized in
1975); (ii) the buffer stock financing facility (established in 1969); and (iii) the extended
facility (established in 1974 and expanded in 1983). There are other temporary facilities