The twelve months under review in this Report have shown no general trend toward the relaxation of exchange restrictions. No member of the Fund which originally availed itself of the provisions of Article XIV, Section 2, of the Fund Agreement, permitting exchange restrictions in the transitional period, has subsequently felt itself able to renounce the rights provided in this Section. El Salvador, Guatemala, Mexico, Panama, and the United States are still the only members who have accepted in full the general obligation to avoid restrictions on current payments and discriminatory currency practices. In a few other countries, such as Cuba and Venezuela, the retention of transitional period rights has little significant effect upon the flow of trade. The Fund has not yet deemed that circumstances justified a suggestion to any member that these rights should be renounced. Other countries have, however, relaxed certain restrictions. For example, the United Kingdom extended the scope of “administrative transferability” of sterling held in nonresident accounts; several countries increased the amounts of foreign exchange granted to residents for tourist expenditure; and exchange restrictions in connection with bank notes were relaxed in Belgium, the Netherlands, and France. Furthermore, Belgium allowed increased utilization of certain restricted accounts held by residents of the United States and Switzerland. Balances in these accounts outstanding as of March 1, 1949 were made available for all payments to Belgian residents, including payments for exports. These rights were later extended to accounts held by residents of other countries. In Italy, facilities were introduced to provide for the free transfer abroad, within certain limits, of amortization payments and earnings in respect of foreign investments made with convertible exchange. In French Somaliland, restrictions were eliminated as part of the institution of a new monetary system mentioned in Appendix II. These changes, however, are not significant enough to indicate any general trend.
In a number of countries, new exchange restrictions have been imposed or existing restrictions expanded. The Union of South Africa, for example, on November 5, 1948, introduced new legislation entitled “Exchange Quota Regulations.” As the incidence of restriction on current payments in the existing Exchange Control was in practice negligible, the Fund took the view that the new legislation represented the introduction of new restrictions. Having regard to the circumstances of the case, the Fund approved the introduction of the Exchange Quota Regulations. These had the effect of rationing exchange for payments for goods from outside the sterling area for the twelve months ending June 30, 1949. Individual importers are allowed a global amount of non-sterling area exchange equal to 50 per cent of the value for customs duty purposes of goods imported by them from outside the sterling area during 1947, and their total imports from the non-sterling area are restricted to this amount. Importation for use of machinery, plant, or equipment lies outside the terms of this arrangement, and foreign exchange needs for these purposes are matters for special application to the exchange control authorities. The Exchange Quota Regulations were, however, a temporary measure, and it has been announced that they would be replaced after June 30, 1949 by an import-licensing scheme applicable to nearly all imports. At the end of the period covered by this Report, the Fund was in consultation with the Contracting Parties to the General Agreement on Tariffs and Trade concerning the South African import restrictions.
Many of the exchange and other restrictions upon trade have been enforced as a means of preventing serious disorders in the international payments position of the countries which use them. Any significant relaxation will be difficult unless there is at the same time a strengthening of the payments position of these countries. Their indefinite retention would be contrary to the principles of the Fund; even their temporary maintenance presents a problem because, almost inevitably, they tend to encourage the creation of a pattern of trade widely different from that which ought to be established if the best use is to be made of the world’s productive resources and the maximum benefits derived from international trade.
A Fund communication on the Unenforceability of Certain Exchange Contracts is referred to in Appendix XIV.
Convertibility of Currencies
The imposition of exchange controls means a limitation upon the convertibility of the controlled currencies. Convertibility involves the right in fact to obtain, directly or indirectly, gold or a currency of unrestricted use in exchange for holdings of the convertible currency. This right need not be without limit and may even be restricted to payments for current transactions.
When a country accepts inconvertible currencies in payment for exports, it must use the proceeds for imports for which payment can be made in such currencies. Otherwise it will be extending credit even though this may be contrary to its general economic interests. Countries holding or earning inconvertible currencies are, therefore, likely to be more generous in admitting imports that can be paid for with inconvertible currency. Where earnings of dollars and other convertible currencies are inadequate, restrictions will often be imposed on imports for which payment has to be made in convertible currencies, even when similar imports are admitted from other sources. Many of these restrictions and the trade discriminations which are their consequence are an inevitable concomitant of the inconvertibility of currencies.
The assumption of the obligations of convertibility by a major trading country presupposes that under such conditions it could achieve an approximate over-all balance in its payments position. A country would have to be assured that the settlement of any net payment surpluses it might have with other major trading countries would be made in convertible currencies. While it would be helpful for a country undertaking convertibility to have a very strong reserve position to take care of temporary fluctuations in its receipts, a country whose prospects for a strong payments position under widespread convertibility were good might assume the risks of convertibility even with a moderate reserve.
To secure a satisfactory over-all balance in its payments under a system of general convertibility, a country must be prepared to provide export goods at prices sufficiently attractive to enable it to meet the competition of other countries and to cover its import requirements. Furthermore, it is essential that other countries should have sufficiently restored their own capacity to earn dollars directly to ensure that they will not be tempted to restrict their imports from the country establishing convertibility and to convert into dollars the proceeds from their exports to that country. Both a country’s own competitive position and the capacity of other countries to earn dollars directly can be assured only if there is an appropriate pattern of exchange rates and satisfactory trade connections based on such exchange rates have been established.
The adoption of convertibility before sufficient progress has been made toward establishing the necessary conditions carries a risk that the economic pressures thereby generated would compel the abandonment of the system with serious consequences. On the other hand, there is no reason why the extension of convertibility should be postponed until it can be established in its completest form; countries should at all times consider carefully what steps, however small, might gradually be taken to increase the extent to which their currencies are made convertible. At the same time, countries may usefully extend the area or extent of transferability of inconvertible currencies, pending the resumption of convertibility. If the effect is temporarily to increase the discrimination suffered by other countries, all feasible measures should be taken to reduce to a minimum the necessity for discrimination.
Transitional Period Restrictions
The members of the Fund have the obligation to put into effect as soon as possible such measures as are likely at the same time to improve their payments position and make possible the gradual reduction and ultimate elimination of restrictions on payments and transfers for current international transactions. There are evident risks of various kinds in accepting the more competitive conditions that must follow such a policy; but unless these risks are accepted, the improvement in the world economic situation made thus far may be replaced by deterioration.
If the earliest reasonable opportunity is not seized to modify restrictive policies, the difficulty of resuming trade on an economic basis under more normal conditions will be greatly increased and world trade will tend more and more to be conducted with inconvertible currencies on the basis of bilateral bargains. It would in these circumstances be increasingly difficult to maintain the uniform pattern of exchange rates which is an essential element in Fund policy. The revival of the flow of private international capital, which is essential if the best use is to be made of the world’s productive resources, is moreover scarcely to be expected if more elaborate exchange restrictions increasingly limit the uses to which earnings from foreign investments can be put.
The Fund is required by the Articles of Agreement to report to members not later than three years after the date on which it began operations, i.e., by March 1, 1950, on the restrictions still in force at that time under the transitional period provisions in the Articles of Agreement.
Payments Arrangements between OEEC Countries
In last year’s Annual Report, it was pointed out that, unless the credit margins in the payments agreements under which a large part of intra-European trade was carried on could be increased or additional gold and dollars became available for settling balances, many Western European countries would have to resort to a stricter bilateral balancing of their transactions with each other. It was feared that this trend would result in a decline of trade, involving the elimination even of some imports regarded as essential by the deficit countries. At the beginning of 1948, European recovery was thus faced with the threat of a substantial setback in intra-European trade.
A partial and temporary remedy for this difficulty was found in the second half of 1948 for the countries which were recipients of aid under the European Recovery Program. An Agreement for Intra-European Payments and Compensations, signed on October 16, 1948 by the OEEC countries, was designed, with the help of American funds, to facilitate the financing of trade between these countries during the period July 1, 1948—June 30, 1949. It was provided in the Agreement that certain balances outstanding between the Central Banks or monetary authorities of the participating countries were to be automatically offset each month by the so-called “first category” compensations, and that the deficits remaining after compensation would be financed by the use of “drawing rights” opened to the prospective deficit countries by each surplus country. In association with these grants of drawing rights, each surplus country was to receive as procurement authorizations from ECA equivalent sums of “conditional aid” in dollars as part of its basic dollar allocation the rest of which was independent of grants to other participating countries. In this manner the equivalent in European currencies of $810.4 million was put at the disposal of the participating countries to cover their prospective deficits with each other during the period July 1, 1948-June 30, 1949.
These measures undoubtedly served to maintain Western European trade at a level higher than would otherwise have been the case, even though the actual volume of offsets has been a very small fraction of total transactions and the pattern of trade and payments has not become appreciably more multilateral than before. In some individual cases, the drawing rights have proved inadequate to cover the actual deficits with certain countries, whereas other drawing rights have been used only in part or not at all. Such discrepancies were to be expected, but it has proved very difficult to correct them by reallocating drawing rights or in other ways, and in some cases stringent bilateral trade restrictions could not be avoided. The essentially bilateral character of the financing agreement and its dependence upon funds provided by the United States have limited its effectiveness in putting European trade upon a permanently satisfactory basis. Changes embodied in the plan for 1949-50 are intended to introduce a more satisfactory degree of multilateralism into the payments scheme.