The Bill approves the Government's acceptance of the amendment to the Articles of Agreement of the International Monetary Fund which is set out in the Schedule and authorises participation in due course in the special drawing rights scheme. It also transfers certain functions and assets relating to the International Monetary Fund from the Minister for Finance to the Central Bank of Ireland.
The special drawing rights scheme is designed to supplement international reserves. There have been growing fears that the usual sources of international reserves are not adequate to meet the requirements of expanding world trade and payments. Existing means of increasing international liquidity are limited and haphazard. Gold, which holds the key position because of its general acceptability, cannot be depended upon as a source of new liquidity. In 1966 and 1967 demand for industrial use and for hoarding absorbed all newly mined gold and none went into international reserves. World gold reserves increased slightly last year but, for the present at least, no substantial overall addition to the amount of gold available to finance trade can be expected.
For several years the main sources of supply of increased international liquidity have been the deficits in the balance of payments of Great Britain and the United States, chiefly the latter. As Senators know, both these countries are taking determined measures to reduce their deficits. It is strange but true that the achievement of a sound balance of payments position by the United States and Britain could lead to a crisis in international trade and finance through its effect in reducing the volume of international reserves.
The International Monetary Fund has for a number of years past been carrying out an intensive examination of the international monetary mechanism to find an acceptable way of creating additional reserve units. The special drawing rights scheme is the result. The detailed scheme has been prepared in the form of an amendment to the Fund's Articles of Agreement, which is now open for acceptance by member countries.
Under the new scheme, each country wishing to participate will be allocated special drawing rights by the Fund in proportion to its present quota irrespective of its external payments position. These drawing rights will be additional to the Fund's existing arrangements for assisting member countries. The underlying concept is also different. At present, members in balance of payments difficulties may draw temporarily on the resources of the Fund. These consist of the total of members' subscriptions or quotas. A drawing is made by purchasing foreign exchange from the Fund in exchange for the member's own currency. There is a limit on outstanding drawings of 125 per cent of the quota. The first 25 per cent, which represents the portion of the subscription paid in gold, can be drawn automatically. The Fund, however, exercises closer supervision over all further drawings. It must be satisfied that the member country is taking effective measures to correct the balance of payments deficit.
Special drawing rights will not replace any portion of these existing rights. They will be created without any prior deposit of gold or currency by participating countries and will be used, not by making an actual drawing on the Fund, but by direct transfer between the participating countries.
If a country gets into balance of payments difficulties and wishes to use these rights, it will exchange them for an equivalent amount of another country's currency. The Fund will designate the participating country which will provide the currency but it will also be possible to arrange the transactions directly between two countries. The borrowing country will use the foreign currency obtained towards financing its balance of payments deficit. The scheme, in effect, is based on the obligation of participants to accept drawing rights from other members in exchange for an equal amount of convertible currency. Special drawing rights, therefore, will have the character of reserve assets. They will have a fixed value in terms of gold and countries participating in the scheme will accept them on the understanding that they are exchangeable for their own currency on this basis. In practice, the rights will represent a supplement to the world's gold stocks available for monetary purposes.
It has been suggested unofficially that, in the first five years, the total amount of special drawing rights to be created would not exceed $10,000 million, that is the equivalent of 50 per cent of the total of members' quotas in the International Monetary Fund. This would be a relatively small increase in liquidity compared with total world reserves of around $73,000 million. On this basis we would become entitled to receive drawing rights amounting to rather less than £17 million, or under £3½ million a year, over the first five years. Our liability to provide convertible currency in the same period in exchange for drawing rights of other countries would be limited to $80 million or £33 million—that is twice the allocation of drawing rights to us.
It will not be clear until the scheme has been in operation for some time to what extent we might be asked to provide convertible currency in exchange for other countries' drawing rights, but it is not expected that we would have any difficulty in meeting any requests made to us. The Fund in designating countries to provide currency will take into account the strength of their balance of payments and reserve positions. The aim will be to achieve a balanced distribution of drawing rights among participants. We would have the same entitlement as other countries to use our own special drawing rights to obtain convertible currency in case of need.
In my capacity as Governor of the Fund for Ireland, I have given my support to the special drawing rights scheme. Member countries agreeing to the scheme are expected to make any necessary legislative and other provision to enable them to fulfil their obligations under it. We are dependent to an exceptionally large extent on external trade for our prosperity and can only lose from a contraction in the rate of growth of world trade. The tendency of the international monetary system to drift into a situation of recurrent crisis must, therefore, be a particular source of concern to us. It follows that the efforts of the International Monetary Fund to provide for the deliberate, planned creation of reserves are welcome. The Fund's approach has been cautious but, nevertheless, it is a beginning and is worthy of our support.
The proposed facilities will not relieve this or any other country from the necessity of containing inflation. On the basis which has been suggested for the scheme, participating countries would receive only a modest addition to their reserves. In our case, as I have already mentioned, we would become entitled to drawing rights amounting to less than £3½ million a year over the first five years. This would be quite small compared with our existing reserves of £283 million.
In addition to providing for the introduction of the special drawing rights scheme the amendment to the Fund's Articles of Agreement as set out in the Schedule to the Bill proposes certain other changes in the Fund's rules and practices. These are largely procedural, relating for example, to voting arrangements and the interpretation of the rules.
The Bill provides that special drawing rights allocated to Ireland will be held by the Central Bank of Ireland and that the bank will be responsible for all transactions and operations relating to drawing rights. Since drawing rights will have the characteristics of reserve assets, it is appropriate that they should be held by the Central Bank.
It is also proposed in the Bill to take power to transfer to the Central Bank certain functions under the 1957 Bretton Woods Agreements Act which are now exercised by the Minister for Finance. These functions relate to the making of payments to and the receipt of moneys from the International Monetary Fund. Transactions of this kind arise in connection with the payment of subscription moneys, the purchase of other currencies from the Fund in exchange for Irish currency and repurchases of Irish currency. It would be more appropriate for the Central Bank to carry out these transactions than the Exchequer. This is the position in various other countries. The change will also simplify administration to some extent. Under the present arrangements all payments to the International Monetary Fund must be made out of the Central Fund and all receipts must be credited to it. In practice the money for payments is provided by the Central Bank against certificates of indebtedness issued by the Minister for Finance.
The Bill further provides for the vesting in the Central Bank of the assets represented by our gold subscription to the Fund and foreign currency made available to other countries under our obligations to the Fund. These assets will be credited by the Bank against an equal amount of Exchequer indebtedness to the bank for advances made for payments to the Fund.
The effect of these arrangements will be that the Central Bank will hold more of the country's external reserves. In the context of the sterling holdings of the commercial banks, I may recall that as a result of the agreement with Britain on the application of the Basle arrangements to our sterling holdings a substantial amount of the Associated Banks' sterling assets—£40 million in all—was deposited with the Central Bank in November last. The Central Bank's custody of our external reserves is, therefore, becoming much more complete than it was in the past.
It is provided in the Bill that the order transferring functions or vesting the assets in the Central Bank will come into operation on a day to be fixed with the agreement of the Central Bank. This will ensure that the transfer will take place at a mutually convenient time.
I commend the Bill to the House.