US stand against more SDR's draws fire of third world
The United States has decided against creating another batch of special drawing rights (SDRs), the bookkeeping money created by the International Monetary Fund. This annoys Cesar Virata.
Mr. Virata is chairman of the Group of 24, the body that speaks for third-world countries at the annual meetings of the fund and the World Bank.
If the major industrial countries continue to block creation of new SDRs, he said in an interview, it would be better for the world to hold a new monetary conference to deal with the situation.
The suggestion was an indication of Mr. Virata's annoyance with the results of this year's get-together of most of the world's top economic ministers, finance ministers, and central bankers.
"Frankly speaking," he said, "this meeting is somewhat disappointing for the developing countries."
In an earlier off-the-cuff remark to a newsman, he had spoken of third-world countries withdrawing from the session. Now he was talking of another unlikely event -- the calling of a massive international monetary conference outside the "establishment" to consider world monetary affairs.
Such a conference seems unlikely because the mood among the world's poor countries seems to be one of resignation rather than anger at the stagnation in foreign assistance.
Mr. Virata, who is prime minister and finance minister of the Philippines, was bothered by the decision not to create any new SDRs "at this time" for two basic reasons:
* About one-quarter of any new issue of this "paper gold," as it has been called, would go to developing countries for addition to their monetary reserves or for purchase of goods and services. It is "free" money.
For the last three years, the IMF has issued about $4.5 billion worth of SDRs each year. There had been some talk of this being continued for two more years -- giving the developing nations another $2 billion or so. The third-world nations had suggested an issue three times larger.
However, the Group of Ten industrial countries, which have control of the IMF , "expressed doubts that a convincing case could be made at this time for an allocation on grounds of international liquidity needs." In other words, no new issue now.
* Special drawing rights, to many developing countries especially, are a symbol of the internationalization of the international monetary system. Most reserves of central banks around the world consist of US dollars -- a national currency.SRDs are more neutral and were intended when first approved by the IMF in 1965 to gradually replace dollars and other national currencies as central bank reserve assets. Such assets are used to cover international payments deficits when needed.
"What was to be the centerpiece is becoming the tailpiece," complained Mr. Virata.
Since 1972, Mr. Virata noted, the proportion of international monetary reserves represented by SDRs has declined from 7.8 percent to 3.5 percent.
The increase in reserves has been accounted for primarily by the rise in the price of gold and the addition of US dollars to reserves.
US Treasury Secretary Donald T. Regan argues that a new issue of SDRs is unnecessary. "In our judgment," he told the IMF governors, "world inflationary conditions mirror an excess of world liquidity. A decision to allocate SDRs would contrast sharply with the efforts to restrain money growth in our respective countries and would serve to weaken public confidence in the commitment of governments to achieve price stability.'
In the scale of world finances, an extra $4 billion per year of SDRs is a minor addition to reserves. It would make almost no difference to inflation. But the US regards it as a matter of principle and symbolism.
From Mr. Virata's standpoint, it's also a matter of principal -- of moving SDRs to the center of the system.
In addition, he said, developing countries have been building up their reserves through borrowing money in commercial markets at today's high interest rates. "That is expensive," he said.
When much of the world went to a floating exchange system -- where exchange rates between two currencies are set by demand and supply in the market rather than pegged by government intervention -- it was argued that nations would need smaller reserves because they would need to intervene less.
"Considering the world as it is," Mr. Virata continued, "you need as much reserves as before." In the last few years, currency exchange rates have shot up and down rapidly and some central banks have felt it necessary to intervene heavily to stabilize the price of their currencies.
Mr. Virata has other complaints. He maintained that the stagnation in foreign aid levels would slow growth in the developing countries. His main hope is that the world bank can step up its loan activity by extra "leverage" -- such as co-financing loans with private enterprise.
He disapproved of President Reagan's call to the developing nations to put their "own financial and economic house in order." An economic squeeze, he said, is easier in a country where per capita income is some $10,000 per year than in a nation where it is only $500.
"Consumption levels are so low already," he noted "you would have more unemployment, more poverty, no per capita improvement in incomes. This is what you might regard as graveyard stability."
Mr. Virata, like many other officials from poor countries, spoke of the "interest shock" as being as bad as the last "oil shock." Today's high interest rates, he quickly calculated, are costing the Philippines some $490 million a year -- about as much as it gets from its burgeoning exports of electronic goods.
For the developing countries as a whole, it is said that each rise of 1 percent in interest rates cost them some $2 billion on charges on their massive debts to industrial countries.
"If you don't get it with the right punch, you get it with the left punch," he concluded.