Speech

Luncheon Remarks by Michel Camdessus

March 18, 1996

Ladies and gentlemen,

It is a great pleasure for me to welcome you here now--even if I was not able, after attending the APEC finance ministers' meeting in Kyoto this weekend, to be with you this morning for the opening of the Seminar. Although most of you come to the IMF from time to time, rarely do we have the opportunity to reflect upon some of the longer-term issues concerning the international monetary system-especially the directions in which the system might evolve and the possible implications for the SDR. Although the purpose of this seminar--and indeed of our lunch--is more than just celebration, what could be a more fitting way to commemorate the fifty years since the inaugural meetings of the IMF's Board of Governors than to gather together such a distinguished group to consider these issues so close to the heart of this institution's purposes?

If it is 50 years since the first meeting of the Board of Governors, then it is also about a quarter century since the first SDR allocation of 1970-72, and fifteen years since the last SDR allocation in 1981. A good time--or perhaps I should say, "high time"--for a fresh look at the issues surrounding the SDR, for a frank exchange of ideas, and I hope, for a consensus to emerge on how to move the SDR debate forward. Indeed, this is what the Interim Committee had in mind when, at our suggestion, it requested "a broad review, with the involvement of outside experts, on the role and functions of the SDR in light of changes in the world financial system."

Where does the policy debate stand and how might we move it forward?

From my vantage point, I see broad agreement on several important issues. First, the membership agrees on the need to maintain some role for the SDR in the international monetary system and on its usefulness in the Fund's financial operations and structure. Second, there is broad agreement that all member countries should be included in the SDR system--a view that was voiced at the Naples Summit and again at the Halifax Summit last summer. Let us hope that, thanks to your creative suggestions, we will not have to hear that for a third time from the Lyon Summit next June. Third, there is also a very strong consensus that an SDR allocation is warranted--and, indeed, overdue--for the 38 member countries that have never received an SDR allocation, although views differ on the form that such an allocation should take.

Clearly, a large part of the controversy over SDR allocations in today's global economy stems from the allocation criterion of "long-term global need." Indeed, some members have questioned the existence of a long-term global need on several occasions, and since 1981, no SDRs have been allocated. Yet since then, the global stock of nongold reserves-acquired in many cases at significant cost to Fund members--has risen at an average annual rate in excess of 7 1/2 percent, significantly more than even the largest allocations ever discussed by the membership. This cost to our members of acquiring reserves is a permanent reminder of the necessity of reaching a better common understanding of the potential contribution that the SDR could make in the supplementing of reserves.

In my view, there is, in fact, a growing global need for reserve assets in today's expanding world economy. The controversy centers partly on how "long-term global need" should be measured, but more on how it should be met. The criterion of "global need" is, of course, essential because without it, there could be a temptation to create more liquidity than is prudent and desirable. But with the global stock of nongold reserves standing at SDR 923 billion at end-1995, it is hard to make a convincing case that the modest amounts proposed for allocation to date would have a perceptible effect on global inflation. As long as there is a growing global need for reserve assets, some fraction of that need for additional reserves could be met by SDR allocations rather than by other reserve assets that countries must otherwise acquire. As noted at the time of the allocation during the third basic period, "the decision to allocate special drawing rights does not depend on the finding that the long-term global need cannot be met except by allocation." On the question of how the long-term global need should be met, the point has been made that for most members of the Fund, the cost of acquiring and holding international reserves is higher than the economic opportunity cost of providing such reserves through an SDR allocation, especially given the volatile nature of borrowed reserves.

I hope that this seminar will help clarify first some of the other pros and cons of allocating SDRs to meet a small share of the global need for reserves. In particular, I have in mind the situation of the roughly one-third of developing countries and countries in transition that have reserves equivalent to less than eight weeks of imports--well below the three months of import coverage often considered reasonable as a rule of thumb. Indeed, many of these countries' reserve holdings are below that level. Many of these countries are pursuing strong reform programs supported by the Fund. However, to increase their reserve holdings beyond their current levels would require either expensive borrowing in the market--to which many countries do not have access--or a compression in domestic demand and imports that would be detrimental to their adjustment efforts. In this context, could a general allocation of SDRs help reduce the risk of setbacks in countries' adjustment efforts and prevent the adverse spillover effects of a compression of imports on the world economy?

In looking for a way forward on the allocation question, perhaps we should take the opportunity of the debate on the Eleventh Quota Increase-which will, in any case, require parliamentary approval in a number of countries-to revive the debate on an amendment of the Articles. A general allocation would go a long way to alleviate the inequity I referred to earlier--the fact that a large number of Fund members have not received an SDR allocation. To achieve greater equity, an amendment could provide for harmonization of countries' net cumulative SDR allocations to quota. For example, this ratio could be set at the average ratio of cumulative net SDR allocations to quota for members that have participated in all previous allocations (17.4 percent) or at the same ratio of cumulative net SDR allocations to quota that the most favored Fund member presently enjoys (25.8 percent).

When looking to the best way of keeping the amount of SDRs allocated to a reasonable minimal proportion of world reserves, we could also examine the pros and cons of a more far-reaching amendment of the Articles to seek a more thorough rationalization of the basis for allocating SDRs to member countries in the future-by establishing the principle that, henceforth, each member's cumulative net SDR allocations must bear some uniform minimum in relation to its quota.

As important as these current SDR issues are, we must also keep the larger picture in mind. It is frequently pointed out that the role of the SDR today is largely the result of the major changes that have occurred in the international financial system since the SDR was first introduced. Should we be surprised, then, if the many changes currently underway in the global economy also turn out to affect the SDR's future role? Indeed, perhaps we should put aside--however briefly--the political and institutional constraints of the moment and consider how, in light of these changes, the SDR might help improve the functioning of the international financial system of the future.

Although the globalization of the international capital markets is already quite advanced, surely markets will continue to evolve in ways that we cannot fully foresee. Some have argued that the globalization of the international capital markets reduces the need for reserves. For the few countries with virtually unlimited market access, this is probably true. But what of other countries whose access is less assured? In the aftermath of the developments in Mexico last year, the private capital markets were significantly less accessible to a number of countries-both in terms of the availability of resources to meet their reserve needs and borrowing cost. Moreover, many countries have become vulnerable or are potentially vulnerable to sudden shifts in market sentiment regarding their creditworthiness for reasons largely beyond their own control. Their need for reserves has increased, at a time when the willingness of private markets to supply those needs has diminished. If these trends continue, could the case for the SDR as a source of additional liquidity become all the more compelling--particularly at times of tension in the system, when the role of the SDR as a safety net could become quite useful?

Second, the establishment of the "euro" is on the horizon now, although we have not yet seen how it will affect the international financial system or our monetary arrangements. With the eventual emergence of the euro as the major European currency, perhaps one day we will have a system dominated by the dollar, the euro, and the yen (or perhaps, who knows, a composite Asian currency). Under these circumstances, could the SDR play a useful role as a central monetary asset? This development would have the merit of being consistent with the common undertaking of our membership--I quote the Articles of Agreement--"of making the SDR the principal reserve asset in the international monetary system." Not less importantly, it could, in some circumstances, provide the system with an anchor which could be of some utility at times of systemic crisis. If that is a possibility--however distant the prospect may seem today-shouldn't we at the very least keep the door open for the role of the SDR to evolve, along with the evolution of the monetary system?

Among the ways to keep that option alive would be to develop a more important role for the SDR now. How might this be done? One means might be to expand its use beyond official holders, leading in time to the development of a private market and possibly the determination of the SDR's value in that market, and helping to prepare for the day when it could serve an anchor for the system. An additional means might be through regular SDR allocations of modest size to help meet a small proportion of the increasing global demand for reserves and by encouraging its use among other entities.

Finally, who can tell what new developments lie just over the horizon? Whatever their nature, I would venture they too will have important implications for the international monetary system and the future role of the SDR. The international financial system has evolved considerably since the birth of the Bretton Woods institutions, and even since the introduction of the SDR. As the world continues to change in new and unforeseen ways, let us hope that we will have had the foresight to maintain a full range of instruments at our disposal--so that we will be able to deal effectively with whatever comes next!

On this note, let me thank you once again for your participation in this seminar. After so many debates of a more political nature, we did need these refreshing exchanges with experienced officials and eminent scholars who devote their attention and research both to the international monetary system and to the monetary instruments that could be needed in view of the risks of globalization.

Our ambitions for the Seminar go beyond striking a political compromise on pending issues. The SDR has been conceived as a building block of a better monetary order. It has failed so far to deliver that. But it remains as a building block and our membership will certainly not want to abandon--modest as they may be--the chances it represents for all those who believe that markets are not always right and are frequently slow in providing acceptable solutions to problems-particularly for those who do not have access, or for whom access is too costly. So let me tell you that we fervently look forward for your views. Don't hesitate to be bold. And if your preference goes to the deep reform or even to the cancellation of the existing system, then be only equally bold and imaginative in suggesting something more credible and efficient to replace it. Let us hope that, thanks to the insights and ideas that emerge from this seminar, Executive Directors will be able to report back to the Interim Committee with some new, pragmatic ideas that will attract the broad support of our membership and suggest a way forward on the issue of SDRs.