Changes in Par Values
During the fiscal year ended April 30, 1955, one change in a member’s par value was made in agreement with the Fund. On August 18, 1954, the Fund concurred in a proposal by the Government of Paraguay for a change in the par value of the Paraguayan guaraní from 15 guaraníes to 21 guaraníes per U. S. dollar. About the same time, significant modifications, which reflected the change of par value, were made in Paraguay’s system of multiple exchange rates. The main effect of these modifications was an upward revision of the effective selling rates amounting to 6 guaraníes per dollar for the most important import categories. This move was designed to overcome the inflationary effects which the operations of the exchange system had increasingly produced as effective export rates had been subjected to upward adjustments. Inflationary conditions, the effects of which had been accumulating for some time, led to substantial increases in minimum prices for agricultural products and in minimum wages early in 1954. All these factors had contributed to a monetary expansion which the exchange rate adjustments were intended to correct. The decline of foreign exchange reserves had also had a contractionary effect throughout the period under review, and the increase in prices and money supply proceeded at a slower rate in 1954 than in previous years. More recently, however, there have been further readjustments of minimum wages and of minimum prices for agricultural products which may tend to offset to some extent the contractionary effects anticipated from the exchange budget for the year 1955.
Other Developments in Exchange Rates and Exchange Policies
There are still seven Fund members, China, Greece, Indonesia, Israel, Italy, Thailand, and Uruguay, with which initial par values have not yet been agreed with the Fund. In 1948, France changed the agreed par value of its currency, and it has not yet agreed with the Fund on an authorized par value. Two other members, Canada and Peru, have decided that temporarily their exchange rates cannot be maintained within the specified margins of the par value agreed with the Fund. For several other members the proportion of their total international transactions that is carried on at exchange rates governed by the established par value is small.
The Sixth Annual Report on Exchange Restrictions gives details of the changes in 1954 in the exchange policies and practices of these and of other countries. In the countries which are noted below, developments during the past year have been of sufficient general interest to be recorded also in this Annual Report. (Developments in the transferable sterling market are noted in Chapter II.)
In Canada, the dollar exchange rate during 1954 averaged Can$1.00 = US$1.027, the highest rate quoted during the year exceeding the lowest by about 2.5 per cent. The payments structure observed in earlier years was maintained in 1954, a current account deficit of $431 million, which was almost the same as the deficit of the previous year, being financed by a continuing net inflow of capital. Receipts of long-term development capital in 1954 as a whole were less than in 1953, but the short-term capital outflows which had characterized most of 1953 very nearly ceased in 1954, so that the effects of these two movements upon the balance of payments more or less offset each other.
An important factor in the decline of the Canadian exchange rate from US$1.0275 in December 1953 to US$1.016 in May 1954 was a seasonal deterioration in the current account position; the deficit increased to $355 million in the first half of 1954, from $63 million in the second half of 1953. Long-term capital receipts declined sharply during the second quarter of 1954, with the virtual cessation of Canadian flotations in New York following a narrowing of the spread between Canadian and U. S. interest rates. By December, however, the exchange rate had recovered to US$1.033, as the current account deficit was reduced to $66 million in the second half of the year. Long-term capital receipts declined further during the third quarter, but heavier direct investment and purchases of Canadian stocks were responsible for an increased inflow in the fourth quarter, despite net redemptions of Canadian securities held abroad. For 1954 as a whole, there was a small outflow of short-term capital, although there were substantial inflows during the second quarter which moderated the effects of other pressures on the exchange rate at that time. There were continued net sales of Canadian bonds to Canadians by nonresident holders, probably as a result of the relative decline in Canadian yields compared with U. S. yields, but nonresident holdings of Canadian dollars increased.
During the first four months of 1955 the exchange rate declined, as a result partly of current account developments and partly of a further decline in Canadian interest rates relative to U. S. rates. The decline in Canadian rates included a reduction of the bank rate on February 14, from 2 per cent to 1½ per cent. On April 30, 1955 the exchange rate was quoted at US$1.012.
The Canadian Minister of Finance stated in Parliament on April 5, 1955 that there had been no change in the policy of the Canadian Government to allow the rate of exchange to be determined by the sum total of the forces operating in the exchange market, including the influence of fiscal and monetary conditions. The resources of the Canadian exchange fund, he said, were not used to reverse persistent trends, but only to contribute to orderly conditions by limiting excessive short-run movements in either direction which might otherwise occur. Canadian official holdings of gold and U. S. dollars rose by US$124 million during 1954, and at the end of December amounted to US$1,943 million. Most of the increase occurred during the second half of the year when the Canadian dollar rate was rising. In February 1955 the Canadian Government repurchased US$50 million of its bonds in New York. On April 30, 1955 reserves were US$1,871 million.
In Peru, the implementation of the stabilization program, described in last year’s Annual Report, was one of the factors underlying the tendency throughout the period under review toward a stronger exchange rate for the sol. During the second and third quarters of 1954 the prevalent tendency was in favor of stability, rate fluctuations in any given short period being moderate. Thus, in the certificate market, which covers most trade transactions, the monthly average rates up to September 1954 ranged between 19.50 soles and 19.25 soles per U. S. dollar. Thereafter a tendency toward appreciation was more evident, and since the latter part of October the rate has been stable at 19.00 soles. The rate in the “free” or “draft” market, in which capital transactions and most payments for invisibles take place, followed rather closely the movements of the certificate rate, with a monthly range from 19.95 soles to 19.72 soles through August. The spread between the two rates subsequently narrowed further, the free market rate averaging 19.43 soles in September 1954 and 19.06 soles in April 1955. The Central Reserve Bank has continued limited stabilization operations in the exchange market in line with the objectives previously formulated. The strengthening of the rate was associated with an improvement in Peru’s domestic and external finances, brought about partly by the measures of stabilization taken by the authorities in the exchange, monetary, and fiscal fields and partly by favorable developments in prices and world demand for some of Peru’s major export products. The increase in exports and contraction in imports in 1954 were almost sufficient to eliminate the large import surplus of previous years; the trade improvement continued in the first quarter of 1955, particularly with a further increase in exports. The decline in import demand in 1954 was associated with the depreciation of the sol that had taken place during 1953. Import demand was also affected by the reduced rate of monetary and income expansion resulting from the budgetary improvement attained by postponing public investments and increasing tax revenues, and from the moderate credit policies of the banking system. The Central Reserve Bank’s rediscounts and credit facilities extended to the commercial and development banks were curtailed, and credits to the Government expanded less than in previous years. The commercial banks also reduced their lending operations, and the comparative tightening of the money market may have discouraged inventory accumulation.
It was against this background of progress and stabilization that the stand-by facilities made available to Peru by the Fund, the U. S. Government, and a U. S. commercial bank were extended for another year, as recorded elsewhere in this Report.
No basic changes were made during the year in the exchange rate structure of Uruguay. Monetary expansion was more moderate than in 1953, but wage increases and higher domestic costs of imported goods contributed toward sustaining the inflationary pressures. The cost of living rose at a somewhat accelerated rate. Considerable use was still made of ad hoc exchange measures, in the form of rate “mixing” and compensation and similar arrangements, to strengthen the position of certain exports in the face of rising domestic costs of production. For example, in July 1954 the exchange rate applied to rice exports was raised from 1.90 pesos to 2.35 pesos per U. S. dollar, in addition to a subsidy of 5.25 pesos per 100 kilograms granted to these exports; and in February 1955 the effective rate for wool tops was raised from 1.967 pesos to 2.026 pesos per dollar. Various exchange surcharges on import goods considered nonessential have been used extensively as a source of revenue in order to finance subsidy payments on exports of high-cost products, such as rice, linseed oil, woolen textiles, and leather goods. These surcharges raised the effective exchange rates on some nonessential and luxury imports from 2.45 pesos to 3.50 pesos per dollar. The rate for essential imports is 1.90 pesos, and an exchange tax of 6 per cent is payable on all but a few such imports.
In the free market, which is confined to capital and invisible transactions but is otherwise unrestricted, the exchange rate fluctuated between 3.12 pesos per dollar (at the end of April 1954) and 3.36 pesos (in July); it was about 3.14 pesos in April 1955. The Bank of the Republic frequently entered the market as a seller of exchange in order to support the free market rate, which on the whole tended to decline. This may be attributed mainly to the inflationary forces in the Uruguayan economy, to a balance of payments position somewhat weaker than that of the previous year, and to speculation arising from the establishment of higher effective exchange rates for nonessential and luxury imports.
Throughout the year reviewed, France and Italy again maintained the same official exchange rates that had been established shortly after the devaluation of September 1949. The rate for the French franc was 349.50-350.00 per U. S. dollar, and the rate for the Italian lira, 625 per dollar. The official exchange rate in Greece was maintained at 30 drachmas per dollar, the rate established in May 1954 when all Greek prices and claims were simultaneously reduced in the proportion of 1,000 to 1. Supplementary exchange measures that are still in effect—relating to most exports of olive oil and to exports or imports of cotton—produce, for a very small part of Greek foreign transactions, effective rates of 27-28 drachmas per dollar.
In Thailand in 1954, the average free market exchange rate in relation to the dollar moved from 20.97 baht to 21.24 baht, and in relation to sterling from 57.92 baht to 58.02 baht. The increase in world rice supplies lowered Thai rice exports in 1954 to a level some 30 per cent below the 1950-53 average. The balance of payments position in 1954 thus continued weak, as it had been in 1953. Since the outlook for rice exports in 1955 did not appear much better, the Thai authorities introduced, effective January 1, 1955, far-reaching changes in their rice export arrangements, which included a broad shift of rice marketing from government control to private channels. The officially established “standard prices” of rice, i.e., the amount of foreign exchange per ton exported that had to be surrendered to the Bank of Thailand at the official rate, had previously been very close to the world market price so that practically no exchange was left to exporters for disposal in the free market and the official exchange rate remained the effective rate for rice exports. Under the new arrangements these standard prices were reduced to a level considerably below current market prices so that, in effect, a mixed exchange rate became applicable to rice exports. Beginning in March 1954 the Bank of Thailand’s sales of exchange at preferential rates (16.07 baht per U. S. dollar and 45 baht per pound sterling) for imports of essential goods had been progressively reduced, and the scope of the free exchange market had thus been widened; these sales ceased altogether when the reduction in the standard prices of rice reduced the volume of foreign exchange that became available to the Bank at low rates. All exchange for imports except government imports, and all exchange for invisible payments except approved student remittances, now have to be acquired in the free market. Reserves ceased to fall in mid-1954, and increased a little in the last quarter of 1954 and early 1955. The dollar-sterling cross rate, which in April 1954 was approximately at parity, thereafter declined, and in March 1955 was £1 = $2.76. The official exchange rate remains unchanged at 12.50 baht per dollar, but on March 18, 1955 the Bank of Thailand revalued its monetary reserves at the rate of 20 baht per dollar.
In China (Taiwan) a new exchange certificate system was introduced on March 1, 1955. In 1954 exporters of certain commodities, such as cotton piece goods, had been permitted to retain for specific purposes 72 per cent of the exchange arising from their exports, but this arrangement was abolished with the introduction of the exchange certificate system. In June 1954 the 20 per cent defense tax on private imports introduced in September 1953 was extended to most other exchange purchases. Under the new certificate system, the Bank of Taiwan’s exchange rate of NT$15.60 per U. S. dollar continues to be applied to government exports and imports in connection with approved industrial and development projects; to specified exports such as sugar, rice, and salt, and essential consumer imports; and to inward and outward remittances connected with these imports and exports or with government expenditures. For all other exchange transactions, exchange certificates are issued or required in addition to the exchange settlement at the Bank of Taiwan rates. For invisibles and for imports other than those mentioned above, the amount of exchange certificates issued or required is equivalent to the value of the transaction. The amount of exchange certificates issued to exporters is calculated as a percentage of export proceeds varying according to the category of the goods exported. The Bank of Taiwan is authorized to buy and sell exchange certificates at fixed prices to be announced. The price announced on March 10, 1955 was NT$6.00 per dollar.
In Iran, there were larger foreign exchange receipts from U. S. aid and from the oil industry, and the exchange certificate rates applied to commercial transactions and to invisibles were appreciated by stages. The commercial selling rate, which was R1s 90.50 per U. S. dollar in December 1953, moved to Rls 84.50 in August 1954 and to Rls 79.50 in February 1955 (to be lowered to Rls 76.50 later in the year). The rate applying to most noncommercial transactions was also appreciated by stages, and the changes introduced in February 1955 involve a unification of this rate with the commercial rate. The certificate rates for Category II imports are, as previously, determined in the free market, and the other principal features of Iran’s exchange system have been maintained.
Since the beginning of 1954, the authorities in Lebanon have adopted the policy of preventing the free market dollar exchange rate from falling below LL 3.20. There has been no interference with movements in the other direction, which have sometimes brought the rate to LL 3.26. The number of commodities subject to restrictive import license was greatly reduced in 1954 and early 1955, import duties on goods exempted from restrictive licensing being increased at the same time.
In Syria fluctuations in the free market rate were insignificant, the rate remaining fairly steady at LS 3.56-3.57 per U. S. dollar.
Effective July 16, 1954, Belgium-Luxembourg and the Netherlands took important measures to free capital movements between their countries. In order to prevent such transactions from affecting the positions of these countries in the European Payments Union, they were to be effected in free markets outside the EPU clearing mechanism; certain current payments not connected with trade were also permitted to be made through the free markets. Prior to the introduction of the free markets, the Benelux countries informed the Fund of their intention, and no objection was raised by the Fund to the proposed system as a temporary measure. The deviations of the free market rates from the official rates have in fact been small. In the Netherlands, the new measures applied only to capital movements to and from Belgium-Luxembourg.
In Belgium-Luxembourg, on the other hand, it was made possible for residents not only of the Netherlands but of all other EPU countries to invest in Belgium-Luxembourg or to acquire securities (including dollar securities) traded in the BLEU via special financial accounts that were freely transferable between residents of EPU countries. On April 1, 1955, Belgium-Luxembourg extended these facilities to all nonresidents, including residents of dollar area countries. On May 1, residents of Belgium or Luxembourg, who could already deal in non-dollar currencies and in dollar securities in a free market, were allowed to engage also in free market operations in dollars for certain capital and current transactions, and nonresidents were enabled to convert their financial accounts into dollars via this free market in Belgium-Luxembourg. These measures in practice established resident and nonresident convertibility of Belgian and Luxembourg francs for capital transactions at free market rates. The Fund, informed of the various measures prior to their introduction, raised no objection to their temporary use.
Sweden introduced in October 1954 an arrangement under which import licenses are granted freely for certain goods originating in the dollar area. Imports under this arrangement may be made via a non-dollar country provided that payment is made in conformity with the regulations governing payments to such countries, or directly from the dollar area against payment in “transit dollars” purchased at a premium from Swedish commercial banks. These transit dollars have been acquired in both member and nonmember countries.
In Brazil, as related elsewhere in this Report, inflationary influences became stronger during the year. Its international payments position was affected by a marked deterioration in the dollar sector of the balance of payments. Imports continued high. The value of coffee exports to the dollar area fell sharply, in spite of higher coffee prices, and as a result there was a serious dollar deficit. The deficit was met largely by the use of short-term credits, and by a one-year financing operation arranged with the Federal Reserve Bank of New York in October 1954. Mainly for the purpose of gradual refunding of this special credit, Brazil subsequently obtained a five-year loan of US$200 million from a group of U. S. commercial banks. Early in 1955 Brazil also obtained an additional US$75 million loan from the Export-Import Bank of Washington.
The payments position in other currencies was more favorable as trade with Europe expanded in both directions, partly as a result of a significant increase in cotton and cocoa exports. Of the two principal short-term debts, the sterling arrears were reduced by the annual payment under the Anglo-Brazilian Arrears Agreement, and the West German payments agreement debt was to a large extent repaid.
The Brazilian exchange system underwent a number of modifications in the past year, but the basic mechanism, with the system of exchange auctions for imports and bonuses for exports, was not changed. The fixed bonuses granted to exports were temporarily replaced by a system of export premiums fluctuating in response to movements of the free market rate, but after a few months fixed bonuses were restored for coffee. These measures involved a substantial devaluation of the effective export rate structure. In January 1955 there was a further increase in cruzeiro export premiums, when exports were classified into four categories, with fixed bonuses applying to each class. (Subsequently, identical bonuses were granted to Categories I and II.) Under this system the bonuses for exports in convertible currencies or in sterling, Cr$18.70, Cr$24.70, and Cr$31.70 per U. S. dollar, differ from those set for exports in other currencies, Cr$17.19, Cr$22.95, and Cr$29.67. The resulting effective rates for export exchange were, depending on the currency, Cr$37.06 or Cr$35.55 for exports of coffee, raw cotton, pine lumber, cocoa, and a few other products; Cr$43.06 or Cr$41.31 for exports of hides, piassava, castor seed, etc.; and Cr$50.06 or Cr$48.03 for all other exports.
With the progressive reduction of the amounts of dollars offered at auction, the price of “dollar certificates” for the five categories of imports rose sharply during the year. Average quotations for 120-day delivery U. S. dollar certificates in Rio de Janeiro at the end of April 1955 were as follows (with comparative figures for April 1954 shown in parentheses): Category I, Cr$69.59 (Cr$28.07); Category II, Cr$80.05 (Cr$24.21); Category III, Cr$175.23 (Cr$50.59); Category IV, Cr$171.50 (Cr$80.20); and Category V, Cr$290.90 (Cr$120.25). In general, the prices of dollar certificates were considerably above those of certificates in other currencies.
As a result of the factors mentioned above, the cruzeiro also showed continued weakness in the free market. The free market rate rose from Cr$51.25 per dollar at the end of April 1954 to Cr$80.64 at the end of April 1955.
In Chile there had been some progress in the last quarter of 1953 and early 1954 toward the unification of its multiple exchange rate structure. In the period under review, however, the Chilean authorities resorted to ad hoc measures, such as exchange rate mixing, exchange retention, and other devices, which by a selective de facto devaluation of the peso gave relief to a number of minor exports. Some nonessential imports were similarly subject to special arrangements, which were equivalent to more depreciated exchange rates.
Inflationary forces arising largely in the public sector of the economy increased in strength, and rising domestic costs of production impaired the competitive position of certain exports, especially minor exports. Throughout the year, Chile’s payments position was under severe strain, the effects of the inflationary forces being aggravated by an exchange rate structure which neither restrained import demand sufficiently nor permitted a normal flow of exports. There was a considerable accumulation of short-term obligations to foreign suppliers, though an improvement in the U. S. price of copper in early 1955 promised some relief from balance of payments pressures.
Exchange rates were significantly adjusted in November 1954, when the principal rate for the U. S. dollar, the so-called “banking free market rate,” which applies to the major exports and imports, was raised from 110 pesos to 200 pesos per dollar. The par value of 110 pesos continued to apply to a limited number of the most essential imports, such as raw sugar, cotton, petroleum products, medicines, and to government services. At the same time, the Government instructed the commercial banks to operate in currencies other than the U. S. dollar at rates not higher than the equivalent of 200 pesos per dollar. Previously, the rates for inconvertible currencies, including sterling, deutsche marks, and cruzeiros, had been substantially free from control and some of them had at times been quoted at higher levels. Under the new arrangement they are permitted to fluctuate only up to the established ceiling, and the disparity between the dollar rate and the rates for other currencies will thus be considerably narrowed. The fluctuating rate in the brokers’ free market, which is used primarily for invisibles, also depreciated.
In May 1955, legislation to regulate the position of the large copper companies, generally along the lines mentioned in last year’s Report, became effective. The special buying rate of 19.37 pesos per dollar, which had applied to the local currency purchases of these companies, was eliminated and the companies henceforth will obtain their local currency requirements at the banking rate, presently 200 pesos per dollar. The abandonment of this special buying rate, which had largely constituted a form of taxation, was linked with a broadening of direct taxes applicable to the copper producers. The new law provides for a graduated profits tax, which is so arranged as to provide an incentive for increased production of copper.
Exchange receipts and international reserves of Colombia rose rapidly during the first eight months of 1954, largely as a result of favorable coffee prices. National income, economic activity, and imports expanded at the same time. After a sharp drop in coffee prices in August, coffee exports declined severely, while import demand continued high, and the subsequent decline of reserves largely offset the accumulation of the earlier part of the year. Measures were taken in October to restrict imports; these measures included the doubling of the stamp tax applicable to some imports and an increase in prior deposit requirements. There was a substantial accumulation of commercial arrears, and the granting of exchange for imports already ordered was temporarily suspended. Toward the end of the year, while further measures were being prepared, Colombia drew on the resources of the Fund, as reported elsewhere in this Report, in an effort to put its exchange payments on a current basis.
By the end of February 1955 Colombia’s commercial arrears had been largely paid off. However, a further drop in coffee prices in the same month, and the fact that import demand did not decline sufficiently, necessitated more severe measures. Imports were classified into five categories to which stamp taxes ranging from 3 per cent to 100 per cent were applied, and a list of prohibited imports also was announced. In addition, in order to support coffee exports, the effective exchange rate applicable to such exports was raised from 2.385 pesos to 2.50 pesos per dollar, the official rate previously applied to most other transactions. This was also the rate which it had been intended ultimately to establish through the monthly devaluation of the coffee rate initiated in October 1951 and temporarily suspended in January 1954. Moreover, a minimum price was established for domestic coffee sales, and the National Federation of Coffee Growers undertook to purchase coffee at a price slightly above this minimum. Reserve requirements on demand and time deposits were increased for a time, and an additional reserve requirement of 40 per cent was imposed on new deposits. During the early part of 1955 coffee exports were somewhat smaller than during the same period of 1954 and, as the measures for restraining imports had not yet had time to produce appreciable effects, reserves continued to decline. A slackening of import demand was reported in April 1955, apparently in response to tighter monetary conditions.
In the Philippine Republic, the 17 per cent tax on sales of foreign exchange, which was first imposed in March 1951, was extended to June 30, 1955, in order to avert a sizable budget deficit. This, the third extension of the exchange tax, was approved by the Fund in June 1954.
Toward the end of 1954, the 80 per cent import surcharge and export premium in Israel were extended to cover all commercial transactions, and at the same time subsidies ranging from 1£0.50 to 1E1.55 per U. S. dollar were introduced on payments for certain essential imports.
In Japan the percentage quota of their export proceeds which exporters are permitted to use for specific purposes under the retention quota system, which in August 1953 had been extended to all exports, was reduced, as from March 1, 1955, from 10 per cent to 5 per cent.
Improvements in the foreign exchange position of Egypt led to some relaxations of exchange restrictions. Arrangements for imports involving payments in “export pounds” were terminated, and outstanding balances under the “export pound system” are being liquidated. Sterling was made available at the official exchange rate for certain essential industrial items imported from countries accepting sterling, except payments agreement countries. Procedures governing specified payments to the dollar area countries, Switzerland, and Western Germany were liberalized susbtantially. Imports from the dollar area are no longer restricted to essential commodities. U. S. dollar proceeds from certain exports were exempted from the surrender requirements previously applied. The lists of prohibited exports and of exports subject to quota restrictions were reduced. On the other hand, more commodities were added to the list of goods giving exporters against sterling or dollars or to Western Germany “entitlement” to 100 per cent of their proceeds under the “import entitlement account system.” Quotations in the free market for these entitlements represent premiums that have recently increased.
Among the changes made in the exchange system of Yugoslavia during 1954 was the increase from 50 per cent to 90 per cent of the exchange surrender requirements for proceeds from exports. Since most of the exchange surrendered to the National Bank is allocated for essential imports at administratively established exchange rates, the previous broad scope of the exchange transactions taking place in the free market has been reduced considerably.
Despite continued inflation, the Republic of Korea has maintained the official exchange rate of 180 hwan per U. S. dollar which was formally adopted in December 1953. However, certain free market rates have depreciated. In October 1954, the Government began selling foreign exchange to the public at auction through the Bank of Korea. The average rate of the auction bids on December 31, 1954 was 379 hwan per dollar. An agreement of November 17, 1954 between the U. S. and Korean Governments established 254 hwan per dollar as the exchange rate for repayments of hwan debts due in June, July, and August 1954, and 310 hwan per dollar for repayments due in September, October, and November 1954. It was further agreed that the U. S. Forces in Korea would be allowed to auction dollars to the public through the Bank of Korea to meet hwan requirements. The weighted average rate bid at these auctions has varied from time to time. It was 256 hwan per dollar on November 29, 1954, 427 hwan on December 13, 1954, and 521 hwan on January 10, 1955.