III Payments Developments in Selected Countries and Groups of Countries
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International Monetary Fund
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English
Print Publication Date:
02 Sep 1957
Keywords:
AR; AREA; dollar; OEEC country; price; country; export receipt; sterling area; last quarter; cotton export; IMF position; Exports; Imports; Trade balance; Agricultural commodities; International reserves; Western Europe; Europe; North America; Western Hemisphere
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Abstract

The current surplus on private account in the U.S. balance of payments increased markedly from 1955 to 1956 as exports expanded much more than imports. For imports, the increase was slightly greater than in 1955; but for exports the increase was much greater as a result of high income abroad, an increased outflow of capital from the United States, active disposal of agricultural surpluses, and, in the last quarter of 1956, requirements arising out of developments in the Middle East. U.S. Government expenditure abroad rose moderately. While foreign capital continued to move to the United States in increasing amounts, the increase was not nearly so great as the increase in the outflow of U.S. private capital; capital outflow exceeded that in any other year in the postwar period. Nevertheless, the increase in the net outflow of private capital, together with the increase in government expenditure abroad, was less than the rise in the surplus on goods and services, and the gold and dollars accruing to official holders abroad through transactions with the United States fell from about $1 billion in 1955 to some $550 million in 1956 (Table 7), the reduction being due mainly to trade developments in the last quarter of the year. As has been explained above, the great increase in drawings from the Fund in the latter part of 1956 made it possible, despite the falling off in transfers of gold and dollars from the United States, for the gold and dollar reserves of countries other than the United States, taken as a whole, to continue to increase by about the same amount as in the previous year.

United States

The current surplus on private account in the U.S. balance of payments increased markedly from 1955 to 1956 as exports expanded much more than imports. For imports, the increase was slightly greater than in 1955; but for exports the increase was much greater as a result of high income abroad, an increased outflow of capital from the United States, active disposal of agricultural surpluses, and, in the last quarter of 1956, requirements arising out of developments in the Middle East. U.S. Government expenditure abroad rose moderately. While foreign capital continued to move to the United States in increasing amounts, the increase was not nearly so great as the increase in the outflow of U.S. private capital; capital outflow exceeded that in any other year in the postwar period. Nevertheless, the increase in the net outflow of private capital, together with the increase in government expenditure abroad, was less than the rise in the surplus on goods and services, and the gold and dollars accruing to official holders abroad through transactions with the United States fell from about $1 billion in 1955 to some $550 million in 1956 (Table 7), the reduction being due mainly to trade developments in the last quarter of the year. As has been explained above, the great increase in drawings from the Fund in the latter part of 1956 made it possible, despite the falling off in transfers of gold and dollars from the United States, for the gold and dollar reserves of countries other than the United States, taken as a whole, to continue to increase by about the same amount as in the previous year.

Table 7.

United States: Summary of Balance of Payments, 1954-561

(In millions of U. S. dollars)

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Sources: U.S. Department of Commerce, Survey of Current Business; Board of Governors of the Federal Reserve System, Federal Reserve Bulletin; International Monetary Fund, International Financial Statistics.

Excluding military aid and commodity transfers financed by it.

Including private donations.

Including estimated private holdings of U.S. Government securities and change in U.S. short-term liabilities to private foreign holders, including international organizations other than the International Monetary Fund, the European Payments Union, and the Bank for International Settlements.

U.S. military expenditures (including offshore purchases), grant aid other than military, net U. S. Government foreign lending, net income from U. S. Government investments abroad, miscellaneous government services, and pension transfers.

Including official holdings of gold and short-term dollar balances and estimated official foreign holdings of U. S. Government securities. Official holders include the International Monetary Fund, the European Payments Union, and the Bank for International Settlements.

The volume of U.S. imports rose by 8 per cent from 1955 to 1956, compared with 11 per cent from 1954 to 1955. The growth in imports was thus better maintained than the growth in production and in aggregate demand, and the proportion of domestic expenditure devoted to imports increased. Imports of finished manufactures showed the sharpest increase, 21 per cent in volume, the competitive strength of European and Japanese exporters making possible their continuing penetration into the U.S. market for a wide range of goods. For the entire year 1956, the volume of foodstuffs imported increased by some 4 per cent; the increase was greater than this in the first three quarters of the year, owing mainly to the replenishment of coffee stocks drawn down during the 1954 price boom, but there was a considerable decline in the fourth quarter.

The demand for nonmilitary U.S. exports, whose volume increased by 17 per cent from 1955 to 1956, was one of the factors helping to increase the general demand for U.S. products. When both military exports and exports out of U.S. Government stocks of agricultural surpluses are excluded, the increase in the volume of U.S. exports amounted to some 18 per cent of the increase in real gross national product.

The rise in exports extended to all classes of commodities. The most substantial increase, amounting to 35 per cent, was in foodstuffs, for which foreign demand, particularly for grains, was swollen because of reduced crops in Europe and in some Far Eastern countries. Moreover, exports of foodstuffs, as of other agricultural products, were greatly facilitated by the intensification of the surplus disposal programs providing for sales from government stocks on favorable terms. The increase in sales under these programs accounted for some 60 per cent of the total expansion of agricultural exports. The decision to sell cotton for export at prices below the domestic level did much to revive cotton exports, which had fallen off in 1955; their volume in 1956 was about 80 per cent greater than in the preceding year.

Exports of coal, mainly to Western Europe, continued to expand rapidly both in volume and, still more, in value. Shipments of petroleum and its products increased sharply after the closing of the Suez Canal, and in the five months November 1956–March 1957 their value amounted to over $580 million, or more than twice that in the corresponding 1955–56 period.

Exports of finished manufactures, which had increased only moderately from 1954 to 1955, rose by some 12 per cent from 1955 to 1956. In the conditions of investment boom prevailing in most countries and with a large increase in U.S. direct investment, the expansion of U.S. exports was concentrated heavily on capital goods, while exports of certain categories of consumer goods either remained unchanged (e.g., textile manufactures) or declined (e.g., automobiles).

U.S. export prices rose by 4 per cent, while import prices (f.o.b.) rose by only 2 per cent. Prices for certain imported materials, particularly nonferrous metals, were much higher than in 1955, but lower prices were paid for imported foodstuffs.

Net payments by the U.S. Government, consisting mainly of expenditure for troops and military installations abroad, grants, and loans, rose slightly. A small decline in grants was more than offset by increased military and other expenditure and loans. Government loans expanded as local currencies received from the sale of surplus agricultural commodities were reloaned to the countries in which these sales had been made.

Foreigners, particularly in Europe and Canada, continued to add to their holdings of long-term assets in the United States in 1956, and there seems to have been a substantial increase in the influx of short-term funds, particularly in the last quarter of the year.

The outstanding feature of the capital account in 1956, however, was the massive increase in U.S. private investment abroad, which reached $3 billion, more than twice that in 1955 and by far the highest annual figure in the postwar period.

The recorded net outflow of U.S. short-term funds, which had fallen off in 1955, more than doubled in 1956 (Table 8), most of the increase occurring in the last quarter of the year. Short-term credits went to Japan and continental Western Europe, mainly the Federal Republic of Germany. In the Western Hemisphere, Mexico, Venezuela, Brazil, and Canada were the main recipients. U.S. portfolio investment abroad, which had leveled off in 1955, more than doubled in 1956, mainly on account of an increase in new issues. More than 80 per cent of the new issues on foreign account consisted of Canadian stocks and bonds. The larger part of the remainder took the form of Israeli securities, and there was also an Australian bond issue. U.S. purchases of outstanding securities, particularly in Canada and continental Europe, continued at the high level of 1955. As the deterioration in portfolio investment and short-term lending from 1954 to 1955 had been partly attributable to the combination of a tighter credit position in the United States with some slackening in foreign markets, so the revival of these forms of capital export in 1956 was probably influenced by the fact that in other countries interest rates rose more, and shortage of capital funds became more acute, than in the United States.

Table 8.

United States: Private Capital Movements, 1954-56

(In millions of U. S. dollars)

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Source: U. S. Department of Commerce, Survey of Current Business.

No sign indicates inflow; minus sign indicates outflow.

By far the most important element contributing to the steep rise in U.S. capital outflow was the steady increase of direct investment throughout the year until a total was reached that was nearly two and a half times the 1955 total. Direct investment in the last quarter of 1956 amounted to almost $700 million. Nearly two thirds of the year’s total went to the Western Hemisphere, Latin America receiving some $600 million and Canada about $550 million. Countries in the sterling area received nearly 20 per cent of the total. By far the greater part of the investment was in the oil industry for such purposes as oilfield development and the laying of pipelines in Canada, the construction of refineries in continental Europe, and the purchase of a U.K. oil company.

Canada accounted for roughly one third of the increase in the U.S. current surplus on private account, but there was also an increase of almost equal magnitude in the recorded net outflow of U.S. private capital to Canada. The increased current surplus on private account with non-sterling Asian and African countries was offset by increased U.S. Government expenditure, mainly in the form of grants and loans; private capital movements to these areas were also larger than in 1955. A deficit in direct transactions with Latin America reappeared in 1956, owing to an increase in net private capital outflow to the area, mainly in the form of direct investment—an increase heavily concentrated in Venezuela, Peru, Chile, Brazil, and the Caribbean area.

The changes in the payments balances of the United Kingdom and of continental Western Europe from direct transactions with the United States were much more far-reaching. The former balance, which had deteriorated sharply for the United Kingdom from 1954 to 1955, showed a substantial U.K. surplus in the first three quarters of 1956. In the last quarter of the year, the U.K. current account deteriorated, 1 but the export of private capital from the United States to the United Kingdom continued. On all transactions, therefore, the United Kingdom was only slightly in deficit in the last quarter, and for the year as a whole its surplus with the United States amounted to more than $500 million.

The surplus of continental Western Europe in its transactions with the United States fell from nearly $900 million in 1955 to about $170 million in 1956, the deterioration being particularly marked in the last quarter of the year. The deterioration was accounted for largely by a sharp rise in Europe’s deficit on private current transactions, which increased by nearly $650 million, mainly in the fourth quarter. But there was also a decline of nearly $250 million in U.S. Government expenditure, which was partly offset by a larger capital flow. Most of the accrual of gold and dollars to continental Western Europe appears to have resulted from transactions with countries other than the United States.

The payments deficit of the rest of the world in transactions with the United States, which had already appeared in the last quarter of 1956, continued at an accelerated rate in the first quarter of 1957. Preliminary data indicate that net payments to the United States from official gold and dollar holdings outside that country amounted during the six months October 1956–March 1957 to well over $1 billion, or somewhat more than had been earned from transactions with the United States during the first three quarters of 1956. This change was due to the persistent rise in U.S. exports, which reached $5 billion in the first quarter of 1957, compared with $3.9 billion in the same period of 1956. Imports continued at about the same level as in early 1956. The rates of U.S. private capital export and U.S. government expenditure during these six months were above those in each of the preceding quarters of 1956.

The high level of U.S. exports during the period beginning October 1956 is to some extent attributable to increased oil shipments to relieve shortages after the closing of the Suez Canal. More important, however, was the sharp rise in agricultural exports, particularly of cotton, partly for stock replenishment, and of wheat, influenced by poor crops in some importing areas. Exports of other categories of goods also continued to increase.

The drain upon dollar reserves was heaviest in Western Europe and the Far East. In Western Europe the most marked advances in imports from the United States went to France, the United Kingdom, and Italy, all heavy importers of crude oil and cotton. The sharp rise in exports to Japan is largely explained by the acceleration in Japan’s economic activity.

Other Industrial Countries

In the industrial countries other than the United States, taken as a group, production and foreign trade continued to expand fairly strongly from 1955 to 1956 (Table 9). As a result of developments in the last quarter of the year, however, their total payments surplus declined considerably in 1956. The growth of output in all these countries except Japan and France was less than it had been from 1954 to 1955.

Table 9.

Industrial Continental OEEC Countries, United Kingdom, and Japan: Percentage Increase or Decrease (—) from Previous Year in Volume of Industrial Production, Imports, and Exports, 1955 and 1956

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Source: Based on data from International Monetary Fund, International Financial Statistics.

Production data refer to Belgium only

Volume of trade data have been estimated on the basis of value and price data.

Production covers manufacturing production only.

Change in weighted averages for all the countries shown.

Except in Switzerland, where export prices declined, and in Sweden, there was a general tendency for the terms of trade of the industrial countries to be more favorable in the first three quarters of 1956—with export prices rising more than import prices—than they had been in the corresponding period of 1955. The sharp rise in freight rates following the Suez crisis caused a deterioration in the terms of trade in the last quarter, which for some countries offset the earlier gain.

For the group as a whole, both imports and exports expanded less rapidly from 1955 to 1956 than from 1954 to 1955; since the slackening was less for imports than for exports, the trade balance deteriorated by some $900 million. Despite some rise in invisible earnings, the aggregate payments balance declined even more severely, by $1,200 million, and the surplus in 1956 was very small (Table 10).

Table 10.

Industrial Continental OEEC Countries, United Kingdom, and Japan: Trade and Payments Balances and Official Reserves, 1955 and 1956

(Value figures in millions of U. S. dollars)

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Source: Based on data from International Monetary Fund, International Financial Statistics.

Measured by changes in reserves of gold and foreign exchange, in the net EPU position (i.e., including credits granted to, and deducting credits received from, EPU), and in the net IMF position (i.e., quotas less holdings of members’ own currencies).

Reserves of gold and foreign exchange, including EPU credit balances.

Trade balance with foreign and overseas areas. The ratio of reserves to imports relates to total imports of Metropolitan France and not to imports of the franc area; the ratio of reserves to imports of the franc area was 24 per cent.

In this ratio, imports are total imports of the United Kingdom and not those of the sterling area. The ratio of reserves to sterling area imports from non-sterling area countries was 17 per cent.

The deterioration in the payments balance was confined to the last quarter of the year; the surplus in the first three quarters was slightly greater than that in the corresponding period of 1955. About half of the deterioration between the fourth quarters of the two years was in the trade balance—the remainder presumably being on capital account.

Germany’s payments surplus, which had been declining since 1953 because of rising domestic demand, increased outflow of capital, and import liberalization, increased in 1956 to $1.2 billion. The increase in the surplus in 1956 was due mainly to a further sharp expansion in the value of exports, reflecting the pressing world-wide demand for capital goods, while imports did not increase quite as much as in the two preceding years. A minor factor in the development of the payments surplus was the virtual disappearance of net capital exports under the influence mainly of the disinflationary measures taken in the first half of the year.

The rise of German exports by 20 per cent above their value in 1955 was facilitated by a slowing down in the expansion of internal demand, particularly in the investment goods sector. Despite a continuing influx of refugees, which made possible an increase of about 5 per cent in the labor force from 1955 to 1956, some slowing down of the growth of output was probably inevitable in view of the attainment by 1955 of a high level of employment; also, there were some shortages of skilled labor. The decline in overtime work, the rather sharp decrease in the rate of productivity growth, and the slackening of new domestic orders, however, indicate that demand also was a factor that limited activity in 1956. The decrease in the rate of growth of domestic demand for investment goods was particularly sharp; the main restraining factor was probably the increasing scarcity of investment funds brought about by the disinflationary policy of the German authorities.

Export demand, on the other hand, continued to rise; export orders for industrial goods were some 20 per cent higher than in 1955. The continued expansion of exports (Table 9) was facilitated by the concentration upon the investment goods sector of the effects of both domestic disinflation and foreign demand. The fact that imports again increased faster than output or domestic demand, though somewhat more slowly than in 1955, is probably attributable to increased import liberalization, to the full utilization of some domestic capacities, to increased dependence on outside supplies of fuel, and to a certain extent to a poor harvest. The same factors also helped to change the geographical distribution of imports; the share of German imports from North America rose from 17 per cent in 1955 to 20 per cent in 1956, while that from the OEEC countries of Europe declined from 65 per cent to 60 per cent.

The net outflow of capital from Germany in 1956 was very small, in contrast to 1955 when it amounted to over $130 million (Table 11). There was, indeed, an increase in German long-term investment abroad, mostly in the form of direct investment; and other causes of increased capital outflow were official advances to the Saar and prepayments for defense materials to be shipped from the United States. The movement of foreign capital as a whole, which had been in approximate balance in 1955, showed a net inflow in 1956. As far as direct imports of foreign funds are concerned, foreign long-term investment in the Federal Republic of Germany is subject to some restrictions as to the channels of payments; but net foreign investment in Germany via liberalized capital accounts increased from 1955 to 1956. Finally, there was a substantial increase in short-term inflows in the form of trade credits and the accumulation of deutsche mark balances. In addition to these recorded capital movements, an increased influx of short-term funds, e.g., prepayments for German export deliveries, is probably reflected in the increased “errors and omissions” item. The main factors responsible for the influx of foreign capital were the tightening of credit conditions, which led to a relatively steep rise of interest rates in Germany compared with those in other countries, and speculation relating to various European exchange rates, including the rate of the deutsche mark.

Table 11.

Federal Republic of Germany: Summary of Balance of Payments, 1955 and 1956

(In millions of U. S. dollars)

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Sources: Balance of payments reports from the Federal Republic of Germany to the International Monetary Fund; changes in official gold and foreign exchange holdings, from International Monetary Fund, International Financial Statistics.

Mainly indemnification under agreement with Israel and other indemnification payments.

While the German payments surplus was in part due to nonrecurrent or reversible factors, i.e., an influx of funds which was either speculative or motivated by interest rate considerations, a substantial part of it was the result of more durable factors. A very large part of the surplus was with other EPU countries, and in accordance with the current practice for all EPU settlements, 25 per cent of it is financed by credit and 75 per cent by payment of gold. The measures taken by the German authorities to mitigate Germany’s balance of payments problems, and the influences that might be expected to ease the position in the future, are examined elsewhere in this Report.

In the first four months of 1957 the payments balance of Germany continued to develop in much the same way as in 1956. Both exports and imports expanded further and the monthly trade surplus was slightly higher than that in 1956. The same applies to earnings on services, mainly on account of increased income from U.S. troops stationed in Germany. Gold and foreign exchange gross reserves rose by another $360 million between the end of 1956 and April 1957. Industrial production continued to expand, and there was a revival of domestic orders for capital goods, which had slackened in the second half of 1956.

The sharp change from surplus to deficit in the payments balance of France, which was accentuated in the fourth quarter of the year, was due to a combination of adverse factors, of which the principal was intensified pressure of aggregate demand. The substantial deterioration from 1955 to 1956 on account of invisibles (which can be roughly estimated by comparing the first four columns of Table 10) is attributable to a reduction in U.S. grants formerly received on account of operations in Indo-China, a decline in net earnings from services (notably in foreign military expenditures on French territory), and an increase in the outflow of French short-term capital. During the first six months of 1956, grants received were some $50 million, against $315 million in the same period of 1955; earnings on services declined by about $100 million; and the net outflow of French short-term private funds increased from $60 million to over $130 million.

A substantial trade deficit in 1956, involving a 17 per cent rise in the value of imports and a decline of some 7 per cent in the value of exports, was due, to some degree, to a poor wheat harvest. Exports of grain in 1956 were lower by over $70 million and imports higher by nearly $150 million; these changes accounted for one fifth of the deterioration in the trade balance. The main factor in this deterioration, however, was the increased import demand for raw materials, fuel, and equipment, which arose from the continued rapid expansion of industrial output. In contrast to all the other industrial countries of Western Europe, industrial production in France was not slowed down either through physical limitations to the expansion of supply or through the imposition of restraints on the expansion of demand, but continued to grow at an even higher rate than in 1955. Any shortages of domestic material and equipment were made good by rapidly increasing imports. Although real national product appears to have risen by 4–5 per cent, real expenditure rose even faster, partly on account of military commitments and partly because of the rapid growth of private investment, sustained by credit expansion.

At the end of 1955, French reserves were sufficient to make it possible for the external deficit to play, to some extent, a useful role in absorbing inflationary pressure and in holding down the cost of living; at first no attempt was made to check the deficit either by applying disinflation or by the intensification of import restrictions. Indeed some import duties were reduced. Later, however, the continued decline in reserves led France to conclude in October 1956 a stand-by arrangement with the Fund for $262.5 million. The Suez crisis added to the drain, partly through raising the cost of imported fuel and through a speculative rise in imports of materials, and $160 million was drawn from the Fund during the first four months of 1957. The tax on liberalized imports was raised to a uniform rate of 15 per cent, advance deposits were required for imports, and there was also some intensification of restrictions in the early months of 1957 in the form of less liberal licensing of imports of equipment goods and a reduction of the tourist allowance.

In the first half of 1957, the payments balance of France deteriorated rapidly, mainly as a result of a considerable rise in imports while the rate of exports was only slightly higher than in 1956. The stand-by credit arranged with the Fund was fully utilized and there was a further increase in the French EPU debt.2

The sizable deficit in the Netherlands balance of payments in 1956 is accounted for by a sharp deterioration in the trade balance, some decline in net earnings on services, and an outflow of capital. In contrast to the capital movement in 1955, which consisted largely of an accelerated redemption of government debt, offset to some extent by foreign purchases of Netherlands securities, the outflow in 1956 took the form of short-term private credits while foreign purchases of Netherlands securities declined. The sharp rise in imports, extending to both consumer and capital goods, is explained largely by the continued expansion of investment and consumption, sustained by a reduction in taxes in the fall of 1955 and by wage increases early in 1956. The high level of domestic demand also put a brake on the expansion of exports. The minor reduction in the rate of industrial expansion was not the result of a slowdown in demand but is attributable rather to an increasing shortage of skilled labor. Steps were taken early in 1957 to lessen demand for both consumption and investment purposes.

In Belgium-Luxembourg, exports rose much less from 1955 to 1956 than from 1954 to 1955. Labor shortages in various fields and the approach to full capacity operation in the steel industry appear to have been the main factors behind the leveling off of exports. The rise of incomes, together with shortages of fuel and materials, contributed to an expansion of imports which became particularly marked in the last quarter of 1956. The reserve position was adversely affected, in particular toward the end of the year, by the deterioration in the trade balance and by net capital outflow, which was largely the result of repayment of short-term treasury bills issued abroad.

The payments surplus of Italy was smaller in 1956 than in 1955 (Table 10). There was some acceleration in the expansion of imports, mainly of fuel and materials for the metals and engineering industries, where the rapid growth in 1955 may have reduced inventories. Imports of foodstuffs continued to rise, partly on account of two consecutive poor olive crops. A sharp rise in food prices early in 1956 raised the cost of living; partly for this reason, wage rates for the year averaged some 6 per cent more than in 1955, despite the persistence of serious unemployment. The effect of these wage increases on the cost of production and on the competitive position in export markets was offset, however, by rising productivity. Exports continued to increase at a high rate. Apart from a revival in agricultural exports, which had changed little for several years, there were sharp advances in exports of steel and of industrial products, mainly machinery, vehicles, and durable consumer goods. Earnings from services, largely tourism, were also higher, but the net inflow of capital, estimated at $130 million in 1956, fell short of the previous year’s figure of $172 million.

Although the policy of monetary restraint which has been in operation in Sweden since the end of 1954 was helpful in reducing domestic demand and strengthening the balance of payments in 1956, its effects were limited by a number of counteracting influences. Owing to increases in rents and excise duties and associated increases in money wage rates, domestic prices were higher than in 1955 by 5 per cent. Nevertheless, the slackening of real demand made more resources available for exports and, despite a decline in timber exports for which world market conditions were adverse, the volume of exports rose by some 12 per cent. Gross national product was about 2.5 per cent greater than in 1955, a rate of growth slightly below that of the previous year.

Largely because of greatly increased demand for machinery and fuel oil, the volume of imports rose by 6 per cent, although there was less inventory accumulation than in 1955. As Sweden’s terms of trade also deteriorated somewhat, the trade balance improved very little between 1955 and 1956. With an improvement on shipping account, however, the current account deficit fell by about $50 million. On the other hand, while general credit scarcity continued to attract funds from abroad, money market rates were not high enough to deter commercial banks from investing liquid funds abroad, and there was a net outflow of private and commercial bank capital. The net reserve position of the Riksbank was about the same as in 1955.

In the United Kingdom, a deficit of £79 million on current account in 1955 was followed in 1956 by a current account surplus of £.233 million (excluding £37 million of interest on U.S. and Canadian loans, payment of which was later postponed). This improvement resulted from the application in 1955 and 1956 of a number of restrictive financial measures which reduced the pressure of domestic demand. Real domestic expenditure in 1956 remained about the same as in 1955, but despite greater credit stringency, fixed investment by business continued to rise, though less rapidly than from 1954 to 1955. The reduced pressure of demand brought about an improvement in the balance of trade by checking the increase of imports and promoting exports. Imports remained stable, partly as a result of the leveling off of production and partly from a decline in the rate of inventory accumulation, which was particularly marked for raw materials.

Although U.K. wage costs appear to have risen somewhat faster than those of its principal competitors, this was not fully reflected in export prices, and the volume of exports increased by 6 per cent in 1956, compared with about 4½ per cent in 1955.3 Exports took an increasing share of industrial production, although they did not keep pace fully with the rapid growth of demand in the world as a whole, so that there was a further slight fall in the share of the United Kingdom in world trade in manufactures. The important expansion in exports actually achieved consisted mainly of capital goods for which home demand was also strong. Furthermore, during 1956, U.K. exports were particularly affected by import restrictions in certain sterling area markets, as well as by some loss of exports to Egypt. Between 1955 and 1956 the U.K. share of the exports of industrial countries to the overseas sterling area declined from 51 per cent to 49 per cent; on the other hand, its share of the exports of non-American industrial countries to North America rose from 28 per cent to 31 per cent.

There was little change in net receipts on account of invisibles. An increase in net government expenditure and a decline in net receipts on shipping account were offset by changes in other items. Net receipts from oil rose slightly, despite a falling off in the second half of the year. Interest charges on the North American loan of 1945 were paid into special accounts; after amendments of the Loan Agreements were agreed with the U.S. and Canadian Governments, the amounts were retransferred to U.K. reserves in April 1957.

The U.K. deficit on current account with non-sterling area countries fell from £304 million in 1955 to £.51 million in 1956, while the surplus with the sterling area increased from £225 million to £284 million. While imports from sterling area countries fell, exports to them fared much less well than those to other countries, partly because of the relatively small expansion of imports in the overseas sterling area as a whole. There was also a decline in the share of sterling area imports supplied by the United Kingdom.

There was a surplus on current account in both the first and the second half of the year. Instead of showing the usual seasonal increase, the trade deficit in the second half was about the same as in the first; the immediate effect of the Suez crisis was a temporary reduction in both exports and imports at the year-end. However, a falling off in net invisibles caused some decline in the current surplus in the second half of the year.

Although the net outflow of private long-term capital from the United Kingdom was somewhat larger in 1956 than in 1955, despite the sale of the Trinidad Oil Company to a U.S. firm for £63 million, the balance of current and long-term capital transactions in 1956 showed a surplus (excluding interest on the U.S. and Canadian loans) of £42 million, against a deficit of £242 million in 1955.

In the second half, and particularly in the fourth quarter, of 1956, however, severe pressure was placed upon the U.K. gold and dollar reserves by a substantial outflow of short-term capital, which was largely the result of a decline in confidence in sterling associated with the Suez crisis. Short-term capital movements and unidentified transactions,4 which had brought an influx of £146 million in 1955 and of £33 million in the first half of 1956, resulted in the second half of the year in an outflow of £85 million. Virtually all of this deterioration took place vis-à-vis non-sterling countries. In addition, the non-sterling countries continued the process, evident since the middle of 1954, of reducing their sterling holdings; after falling by £82 million in 1955, these holdings declined by £48 million in the first half, and by £84 million in the second half, of 1956. A major part of this decline appears to have been in the holdings of non-sterling countries in the Far East, including Japan, whose balance of payments with the sterling area shifted from surplus to deficit.

The over-all payments deficit of the independent countries of the overseas sterling area (after account is taken of their gold production) appears to have been slightly smaller in 1956 than in 1955; the substantial deterioration in India’s payments position was more than outweighed by the improvement in that of Australia and some other countries. At the same time, the surplus of the colonies fell sharply, as their imports, especially those from the United Kingdom, substantially increased. Therefore, the payments deficit of the overseas sterling area as a whole showed a net deterioration between the two years. Its deficit with non-sterling countries increased from £36 million in 1955 to £117 million in 1956. Most of this, however, was offset by a continued increase in gold production and by the countries ceasing to accumulate gold and dollar reserves or to make net repayments to the Fund as they had done in 1955 (Table 12).

Table 12.

International Transactions of the United Kingdom and the Overseas Sterling Area, 1955 and 1956 1

(In millions of pounds sterling)

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Sources: United Kingdom Balance of Payments, 1946 to 1956, No. 2 (Cmnd. 122), and Fund estimates.

The data for 1956 are preliminary.

Including defense aid of £44 million in 1955 and £23 million in 1956.

Payments of interest on U.S. Government loan into Special Account.

Excluding change in IMF sterling holdings.

Overseas sterling area (OSA) gold production less nonmonetary consumption of gold in OSA gold producing countries.

Changes in official gold and foreign exchange reserves, change in EPU debit balance, and change in net IMF position (drawing in 1956 of £201 million).

Consequently, net transfers of gold and foreign exchange from the overseas sterling area to the United Kingdom declined by only £10 million over the year as a whole. As in 1955, however, the deterioration between the first and second halves of the year was much larger than can be accounted for by seasonal factors. Transfers in the second half amounted to only £9 million (first half, £113 million) and, as the United Kingdom’s own deficit in direct transactions with the non-sterling countries increased from £ 17 million to £303 million, strong pressure on the reserves was built up in the second half of the year, especially in the fourth quarter.

In view of this pressure, arrangements were made with the Fund under which the U.K. authorities were able to reinforce their reserves by drawing $561.5 million from the Fund. In addition, a stand-by credit of $738.5 million was arranged with the Fund and a line of credit of $500 million with the Export-Import Bank of Washington. In view of this massive mobilization of reserves and reserve potential, testifying to the determination of the U.K. authorities to maintain the value of sterling, adverse speculation was practically halted by the end of the year. U.K. gold and dollar reserves were about the same at the end of the year as at the beginning. If it had not been for the drawing on the Fund, they would have fallen in 1956 by nearly the same amount as in 1955.

Despite the pressure on reserves, no steps were taken by the United Kingdom to restore or intensify restrictions of any kind. The disinflationary policy was continued but, in view of the fact that the payments weakness was of a capital rather than a current nature, it was not intensified.

The drain on U.K. reserves stopped in the early part of 1957. A small reduction of gold and dollar holdings during January was followed by a moderate but steady rise in subsequent months. Excluding the retransfer to reserves of the $104 million previously paid into special accounts, there was a net addition to gold and dollar reserves, between the end of January and April, of some $130 million. Moreover, the United Kingdom’s EPU debt declined during the same period by about $20 million. There was no drawing on either the stand-by credit arranged with the Fund or the line of credit opened by the Export-Import Bank.

The trade deficit of some $700 million in the first four months of 1957 was greater by $78 million than the deficit in the same period of 1956; both imports and exports were higher. The rise in the value of imports was due partly to higher prices and partly to the effects of the rerouting of import deliveries after the closure of the Suez Canal. The volume of exports was some 4–5 per cent larger than in the first four months of 1956, expanding at a rate slightly less than the 1956 average of 6 per cent.

Japan’s payments surplus, which had risen to a high level in 1955, showed a decline from 1955 “to 1956 (Table 10). Despite the fact that its export prices ceased to fall relative to those of competing countries, Japan’s share in world export markets increased only a little less rapidly than in preceding years. The biggest increase was in the export of ships. As world demand rose and shipyards elsewhere faced rising costs and lengthening delivery periods, Japan became the world’s largest shipbuilder, output in 1956 being three times that in 1955. Most other exports also increased substantially, but there was some falling off in exports of metals, owing to the pressure of domestic requirements. In certain cases, Japan has found it necessary to limit its exports, either to prevent the accumulation of illiquid credit balances or to forestall protective action by the importing country.

While imports of food declined in response to favorable harvests, imports in general increased more than exports (Table 9). This was attributable to a sharp increase in domestic demand, based not only on the expansion of exports but also on a very substantial rise in home investment and bank credit expansion. The expansion of demand from 1955 to 1956 affected production and employment more than prices, since there had been considerable surplus capacity in the Japanese economy in 1955. Manufacturing production rose by some 18 per cent between the two years, necessitating substantially increased imports of raw materials and fuels. In order to help counteract inflationary tendencies, exchange controls were liberalized, and the total value of imports rose by 30 per cent, compared with a rise of only 3 per cent from 1954 to 1955.

There were considerable shifts from 1955 to 1956 in the geographical pattern of Japanese trade. Imports from the United States and Canada, which had declined between 1954 and 1955, increased sharply between 1955 and 1956. Exports to these countries also increased substantially. Exports to Latin America declined, especially those to Argentina. There was a large increase in imports from sterling area countries, but exports to these countries increased only slightly. Consequently, Japan’s balance of payments with the sterling area deteriorated markedly, and official sterling holdings declined sharply in 1956, following a rise in 1955. Dollar holdings, however, rose more than in 1955. Partly because of a widening trade deficit, reserves declined by about $300 million in the first four months of 1957, compared with an addition of $170 million during the whole year 1956.

Countries Exporting Tropical Foods, Oilseeds, and Vegetable Oils

Changes between 1955 and 1956 in the trade and reserve positions of exporters of tropical foods, oilseeds, and vegetable oils are summarized in Tables 13 and 14. Brazil’s trade and payments balances continued to improve in 1956. Some $129 million was added to its reserves, and cruzeiros equivalent to US$28 million were repurchased from the Fund, while at the same time other foreign medium-term obligations were reduced. The improvement in the trade balance from 1954 to 1955 had been achieved entirely by a sharp cut in imports; that from 1955 to 1956 resulted from a rise in exports accompanied by a further, though much more moderate, import cut. Higher receipts from coffee, resulting partly from restocking in the United States, were responsible for the expansion of export earnings; earnings from exports of cotton and cocoa were less than in the previous year. Domestic inflation continued, but imports, which had been reduced by some 20 per cent between 1954 and 1955, continued to decline at nearly the same rate during the first half of 1956, when they were 17 per cent less than in the first half of 1955. The intensification of import restrictions was made effective primarily by reducing the amounts of foreign exchange offered on the import certificate market. This led to a sharp rise in the certificate rates between the first half of 1955 and of 1956; effective import exchange rates, including the premium on certificates, increased by some 35–40 per cent. The rates reached their maximum and imports their minimum in May 1956; thereafter, the rates declined as increasing amounts of foreign exchange were auctioned and bank credit was subjected to increased restraints. By December 1956 the average rate was some 20 per cent below its peak, and imports in the last quarter of the year were some 15 per cent above those in the corresponding quarter of 1955.

Table 13.

Trade of Exporters of Tropical Foods, Oilseeds, and Vegetable Oils, 1955 and 1956

(Value figures in millions of U. S. dollars)

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Source: International Monetary Fund, International Financial Statistics.

Costa Rica, El Salvador, Ethiopia, Guatemala, Haiti, and Nicaragua.

Sugar (cane), cocoa, tea, bananas.

Honduras, Jamaica, and Panama.

The total export receipts of Colombia were greater in 1956 than in 1955, mainly because of increased earnings from petroleum and some minor exports. Although the export price for coffee was higher, a decline in the recorded export volume kept receipts from coffee exports lower than they had been in 1955. Growing domestic expenditure, supported by credit expansion, and an over valued currency promoted a continual increase in import demand, a deterioration of the reserve position, and further accumulation of commercial arrears. To counteract this tendency, the Government introduced a number of modifications into the Colombian exchange system.

Table 14.

Trade and Payments Balances and Official Reserves of Exporters of Tropical Foods, Oilseeds, and Vegetable Oils, 1955 and 1956

(Value figures in millions of U. S. dollars)

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Source: International Monetary Fund, International Financial Statistics.

Measured by changes in gross official reserves and net IMF position.

Costa Rica, El Salvador, Guatemala, and Nicaragua.

Honduras and Panama.

Cuba’s receipts from both sugar exports and minor exports increased substantially between 1955 and 1956. But preliminary estimates indicate that imports, including those admitted duty free in connection with the Government Social and Economic Development Program, rose somewhat more than exports, and the trade deficit therefore widened. In 1955, loans amounting to $92 million had made it possible to avoid drawing on reserves. In 1956, reserves declined slightly, and $12.5 million was drawn from the Fund in December of that year.

Ecuador, by means of a small increase in exports and a considerable cut in imports, increased its trade surplus and slightly improved its payments balance. Increased earnings from coffee offset the decline in receipts from bananas, cocoa, and rice. Imports were reduced partly by shifting certain import commodities from the official to the “free” rate category and partly by extending import prohibitions. These prohibitions were relaxed to some extent in the second half of the year, when export earnings showed a seasonal rise.

Export receipts in Ceylon were less in 1956 than in 1955, mainly because of lower prices for tea. Imports, however, exceeded those of the previous year, largely because of increased demand for consumer goods, particularly rice and textiles, and higher prices for imported capital goods. There was therefore a considerable decline in the trade surplus. The payments balance, however, declined only slightly, in part because commercial banks’ short-term balances that had been built up in 1955 were drawn down in 1956.

The Philippine Republic reduced its trade deficit in 1956 and had a small payments surplus. The improvement was achieved mainly by a substantial expansion of exports (roughly 16 per cent for both value and volume), chiefly copra and coconut oil but also timber and abaca. Sugar exports declined by a small amount. Imports were reduced in part by intensified restrictions, but also because import requirements diminished as domestic food production expanded.

Countries Exporting Textile Fibers, Livestock Products, Grain, and Tobacco

The trade and payments balances of the four main exporters of wool and livestock products—Australia, New Zealand, Argentina, and Uruguay—after having deteriorated seriously from 1954 to 1955 improved from 1955 to 1956 (Tables 15 and 16). In each of these countries, exports increased and imports fell. The sharp advance in wool prices at the beginning of the 1956–57 season was most pronounced for merinos, and particularly benefited Australia, whose receipts were considerably higher in 1956 than in the preceding year. Australia’s export receipts were further enhanced by a greatly increased volume of wheat exports and by a continued advance in exports of manufactured goods. The rise in domestic prices was more pronounced in 1956 than in the preceding two years, but toward the end of the year there were indications of a better balance between over-all demand and supply. The great improvement in Australia’s trade and payments balance in the latter part of 1956 continued through the first quarter of 1957 and permitted several relaxations of import restrictions early in the year. The rise in New Zealand’s export receipts was due mainly to larger receipts for livestock products; earnings from wool were slightly less than in 1955.

Table 15.

Trade of Exporters of Textile Fibers, Livestock Products, Grain, and Tobacco, 1955 and 1956

(Value figures in millions of U. S. dollars)

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Source: International Monetary Fund, International Financial Statistics.
Table 16.

Trade and Payments Balances and Official Reserves of Exporters of Textile Fibers, Livestock Products, Grain, and Tobacco, 1955 and 1956

(Value figures in millions of U. S. dollars)

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Source: Based on data from International Monetary Fund, International Financial Statistics.

Measured by changes in gross official reserves, net IMF position, and net EPU position.

Official reserves are net and exclude holdings of Spanish pesetas. Payments balances shown are based on changes in net reserves, excluding Spanish pesetas.

Payments balance and official reserves for 1956 are as of November.

The smallness of the increase in Argentina’s exports was due principally to adverse price movements. Meat exports more than doubled in volume, but the increase in value was only 20 per cent. Exports of agricultural products did not increase significantly, largely owing to a short wheat crop, and their value fell by 10 per cent with lower prices for cereals. The effects of the substantial devaluation of the peso in October 1955 were not fully reflected in the trade balance in 1956, as it came too late to affect the planting of many of the 1955–56 crops. Rising exports in the first quarter of 1957 were due, however, in part to increased exportable supplies from expanded production in 1956–57. Despite a substantial reduction of quantitative restrictions, imports were less in 1956 than in 1955. As a result of the Paris Club arrangements some discriminatory features in the organization of Argentina’s export trade were eliminated, and this was one factor that helped to expand exports in late 1956 and early 1957. The institution of a free market for capital transactions and the re-establishment of normal credit relations with the United States and Europe stimulated a substantial net inflow of capital. The over-all payments position thus showed a considerable improvement over 1955.

There was, however, a substantial dollar deficit, which was in part the result of increased imports of dollar oil.

In Uruguay, where the introduction of exchange bonuses in the fall of 1955 had revived wool exports, the disposal of accumulated stocks in the first part of 1956 raised earnings from wool, though average prices were lower than in 1955. Greatly reduced stocks and a smaller 1956–57 clip, however, prevented Uruguay from taking full advantage of the price advance that occurred in the last quarter. Meat exports showed some recovery from their severe 1955 decline, but exports of wheat decreased on account of smaller crops. Total export receipts, though greater than in 1955, remained considerably below those in earlier years. To improve its payments position, Uruguay revised its exchange system and depreciated its effective import and export exchange rates. At the same time, imports were liberalized and importers required to make advance payments. The contractionary effect of these advance payments was offset, however, by expansion of bank credits. Actual imports in the second half of 1956, as well as in the entire year, remained below the corresponding 1955 levels, but tended to recover in early 1957.

There was a slight improvement in Denmark’s balance of payments from 1955 to 1956; there was no decline in the country’s slender reserves during the year, and liberal treatment of imports was continued. The volume of exports was only slightly greater in 1956 than in 1955. Output of meat and dairy products was reduced because of unfavorable prices, but there was a fairly rapid growth in the output of industrial and of other agricultural export goods. Although real consumption and investment did not rise, the volume of imports increased by some 7 per cent; this included a substantial increase in imports of petroleum products and fertilizers. The consequent increase in the trade deficit was compensated by higher shipping earnings, tourist income, and capital imports.

Denmark has sought to meet its balance of payments difficulties, which arise in part from its inability to find expanding markets for staple agricultural exports, mainly by applying a policy of monetary restraint, although at some cost to the progress of the domestic economy. The curtailment of demand in 1956 kept production, both industrial and agricultural, slightly below that in 1954 and 1955. Unemployment rose from an annual average of 8 per cent in 1954 to 10 per cent in 1956. This degree of deficiency in demand would presumably have had a more powerful effect in rectifying the current balance had it not been for the persistent upward pressure of wages and costs. From 1955 to 1956, wages rose by more than 6 per cent. Danish wage contracts provide for adjustments based on an annual cost of living assessment which takes into account both direct and indirect taxation. Thus, not merely increases in rents or food prices but also any attempts at disinflation by fiscal means are likely to generate wage increases. This may make it difficult to raise investment to the level required to achieve the necessary adjustment in the pattern of exportable production. In early 1957 there was a recurrence of balance of payments difficulties.

There was little change from 1955 to 1956 in Egypt’s trade and payments balances. Exports, which had been running high in the first half of 1956, mainly on account of large cotton shipments to the Soviet area and Mainland China, declined markedly in the second half. For the year as a whole, export receipts were slightly less than in 1955, increases in minor exports partly offsetting reduced earnings from cotton. The decline in cotton exports appears to have been related to higher prices and a decline in demand in some European countries for Egyptian cotton. The considerable import surplus resulted largely from government purchases abroad, mainly for development purposes. While a large government deficit was the main expansionary force, credit expansion to the private sector also contributed to the inflationary pressure, which was reflected in considerable advances of domestic wholesale prices. The blocking of Egyptian assets which followed the nationalization of the Suez Canal and the decline in foreign exchange earnings—canal fees as well as merchandise exports—prompted the Government to curb imports by imposing strict direct controls, reducing expenditure for development, and licensing construction. As a result, imports in the last quarter of 1956 were kept at the level of exchange earnings. Reserves were strengthened by drawing from the Fund and by financial assistance from Mainland China and Saudi Arabia.

The trade and payments balances of Pakistan deteriorated in 1956. With a decline in exports and an increase in imports, there was a change from a substantial trade surplus in 1955 to a small deficit in 1956. A considerable increase in total imports in the second half of 1956 was due entirely to an increase in government imports, largely of staple foods, which proved necessary as flood damage led to a sharp rise in domestic prices of rice and wheat. Since these food imports were derived largely from U.S. surplus stocks, financed under grants or long-term loans, the worsening in the trade balance was reflected only to a minor degree in the payments balance. Exports recovered and there was a trade surplus in the first quarter of 1957.

Burma increased its export receipts from rice by selling not only its current crop but also large quantities of inferior rice from stocks accumulated earlier. Though demand and prices advanced in the latter part of 1956, average values received for the year as a whole were less than in 1955. The increase in Burma’s imports, facilitated by liberalization, partly reflected rising requirements of materials and equipment for development purposes. Reserves increased until August 1956 but subsequently declined, mainly because of the fall in inconvertible balances arising from payments agreements with Eastern European countries and Mainland China. The pressure of development expenditure on internal prices and on reserves is likely to be mitigated by recent long-term loans, including a loan of Rs 200 million from India and one of $25 million from the U.S. International Cooperation Administration. In Thailand, on the other hand, with no stocks on hand, earnings from rice exports were less in 1956 than in 1955; receipts from rubber also declined, and total export receipts were barely maintained at the 1955 level. Imports, however, rose considerably and, instead of a small export surplus, as in 1955, there was a deficit, covered in part by grants from the United States. Large rice crops in both Burma and Thailand and the continued high demand for rice in importing countries are likely to maintain export earnings in 1957 at, or somewhat above, the 1956 level. In the first quarter of 1957, Thailand’s exports were greater than in any quarter in 1956.

Countries Exporting Metals, Rubber, and Petroleum

The higher average prices for metals in 1956, compared with 1955, were reflected in the export values of countries whose export trade consists mainly or largely of metals (Table 17). The greatest increases in export receipts were in the Belgian Congo and Chile. Increased receipts for copper were responsible for the rise in Rhodesian export earnings; and higher receipts for tin helped to maintain the value of Malaya’s exports despite much lower prices for rubber.

Table 17.

Trade of Exporters of Rubber, Metals, and Petroleum, 1955 and 1956

(Value figures in millions of U. S. dollars)

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Source: International Monetary Fund, International Financial Statistics.

Federation of Rhodesia and Nyasaland.

Including estimate for 1956 of imports by air.

Imports for 1956 are estimated on the basis of data for the first three quarters.

The foreign exchange position of Bolivia, however, deteriorated further from 1955 to 1956 (Table 18). Total export receipts rose only slightly, although world prices increased for tin and most of Bolivia’s other exports. Earnings from tin declined because of a sustained decline in output; earnings from other metals rose somewhat, on account of higher prices. Although petroleum production continued to rise, lack of transportation facilities limited the expansion of exports. Acute inflation continued at an accelerated rate. Imports were kept at their 1955 level only by means of strict controls. With exchange holdings nearly exhausted, the goods and services deficit was met by U.S. aid and by borrowing from private sources. In December 1956 a comprehensive stabilization program was adopted to cope with internal inflation and to correct the foreign balance.

Table 18.

Trade and Payments Balances and Official Reserves of Exporters of Rubber, Metals, and Petroleum, 1955 and 1956

(Value figures in millions of U. S. dollars)

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Source: International Monetary Fund, International Financial Statistics.

Measured by changes in gross official reserves and net IMF position.

Chile’s trade balance improved in 1956, mainly as a result of a considerable expansion in the value of exports resulting from higher receipts for copper. Imports, after having reached a peak in the first quarter of the year, declined temporarily, following the introduction in April of a comprehensive stabilization program and exchange reform, including replacement of a complex multiple rate structure by a single free rate for trade and a second free rate for tourist and most capital transactions. Inflationary pressure continued, though at a reduced pace. Subsequently, imports increased again, and in the last quarter of 1956 they were almost as high as they had been twelve months earlier. Reserves, which had been rising up to September, declined thereafter, and the free exchange rate, which had remained fairly stable through the first five months after its introduction, gradually depreciated.

Indonesia’s trade and payments position deteriorated considerably between 1955 and 1956, much larger imports being accompanied by some decline in export earnings. The export decline resulted mainly from a slackening of demand and falling prices for rubber after the short-lived boom in 1955. Some advances in other exports, including petroleum, were insufficient to offset the loss from rubber. The expansion of imports, which started late in 1955, was in part the result of additional requirements for imported food, mainly rice, arising out of two consecutive poor crops. These requirements were met in part by imports from U.S. surplus stocks; much of the rupiah proceeds from the sale of these imports was reloaned to Indonesia for development purposes. Imports of manufactures—capital as well as consumer goods—were also larger in 1956 than in 1955. The heavy drain on reserves was temporarily checked by drawing $55 million from the Fund in August 1956; this was followed by a series of changes in the exchange system, which are described in detail elsewhere in this Report. With a steadily expanding note circulation and declining exchange reserves, the monetary cover ratio fell continuously from December 1956, and the legal requirements for monetary cover were suspended for six months from May 1, 1957.

The value of exports of countries depending largely on petroleum continued to increase steadily through the first three quarters of 1956. In Venezuela there was also an even steeper increase in receipts from other exports, though their share in the total is still small. The considerable rise in Venezuela’s payments surplus resulted, in part, from increased U.S. investment, mainly in oil concessions. Petroleum production in Iran rose by almost 65 per cent between 1955 and 1956, and during the second half of 1956 approached the rate of output before the nationalization of the oil refinery in 1951. Other exports, which had accounted for somewhat less than one third of the total in the year ended March 1956, subsequently declined somewhat. The payments balance continued to improve.

Other Countries, Including Countries with Diversified Exports

The current account deficit and capital inflow which have characterized Canada’s international accounts in recent years were further increased in 1956. The investment boom, which gathered strength during the year, had a dual effect on the balance of payments. The effects of the boom on real expenditure included an increase in merchandise imports which far exceeded the continuing rise in exports, thus doubling the deficit on current account. At the same time, the attractiveness of investment opportunities in Canada led to a doubling of the foreign capital inflow. The net result was a slight appreciation of the Canadian dollar in 1956, while reserves were allowed to increase a little, in contrast to the slight depreciation of the exchange rate and a decline in reserves in 1955.

Fiscal and monetary restraints slowed down the growth of the money supply, but increased velocity of circulation made it possible for money expenditure to rise substantially. Residential construction grew less than in other postwar years, but the value of business investment rose some 35 per cent above the 1955 level, the biggest increases occurring in the utilities, manufacturing, and extractive industries. In 1956 both real gross national product and industrial production were greater than in 1955 by about 7 per cent.

Owing, for the most part, to the high import-intensity of investment demand in Canada and to an active consumer demand for automobiles, the value of imports was greater than in 1955 by 21 per cent (Table 19). The value of exports rose by about 10 per cent, with an increase of one third in the volume of wheat shipments. The trade deficit (imports c.i.f.) of $1 billion was more than double that of 1955 (Table 20), and net expenditures on account of services were also higher, resulting in a current account deficit of $1.4 billion, some $700 million more than in 1955.

Table 19.

Trade of Countries with Diversified Exports, 1955 and 1956

(Value figures in millions of U. S. dollars)

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Source: International Monetary Fund, International Financial Statistics.

Preliminary; includes only part of government imports, which for 1956 are estimated at $438 million.

Exports are adjusted for undervaluation of customs figures.

Table 20.

Trade and Payments Balances and Official Reserves of Countries with Diversified Exports, 1955 and 1956

(Value figures in millions of U. S. dollars)

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Source: International Monetary Fund, International Financial Statistics.

Measured by changes in gross official reserves and net IMF position.

This deterioration on current account, however, was more than offset by an increase of $780 million in net capital imports. Less than 15 per cent of this increase consisted of an increase in direct investments in Canada by foreigners. For short-term capital movements, which are affected by such varied considerations as the financing of foreign trade, the accumulation of proceeds of new issues abroad, and exchange rate anticipations, the inflow was about $100 million less than in the preceding year. The largest increase in net inflow, amounting to almost $820 million, was in portfolio capital. This movement, which was found in both government and corporation securities, seems to have been attributable partly to the widening of the spread between U.S. and Canadian interest rates, following the abnormally narrow spread observed in 1955. About 75 per cent of the additional long-term net capital inflow in 1956 came from the United States, but there was also a substantially increased inflow from the United Kingdom and other countries.

The short-term capital inflow in 1956 was exceptionally heavy during the first half of the year, following several months when the exchange rate for the Canadian dollar was relatively low; as the exchange rate rose, the capital movement dwindled and turned outward. These events again illustrated the tendency for a comparatively low exchange rate to evoke stabilizing inflows of short-term capital to supplement the basic credits associated with the movement of trade. Much of this supplementary inflow, however, typically occurs in the form of accelerated trade receipts or delayed payments, so that its impact upon the payments position is limited both as to quantity and as to duration. The experience of the last year has again illustrated the significance of comparative interest rates as a key factor affecting important elements in the capital flow. These indications reinforce the conclusion which might also be drawn from the experience of other countries that, whether a country adopts a fixed par value or a free exchange rate policy, reasonable balance cannot be maintained in its payments position unless its monetary and fiscal policies take account of external developments as well as internal business conditions.

The payments balance of the Union of South Africa, which had deteriorated in 1955, improved in 1956, mainly as a result of an improvement in the trade balance. Steadily rising exports of uranium, which has become its second largest export, and larger earnings from wool, owing mainly to higher prices in the second half of the year, raised export receipts by 12 per cent. Imports, on the other hand, advanced only slightly as the pace of internal expansion declined. A rise of 9 per cent in gold production also contributed to the improvement. Net capital inflow, which had been large prior to 1955, mainly for investment in gold and uranium mines, appears to have ceased in 1956. The movement of South African private capital to London, which had occurred in 1955 under the stimulus of interest rate differentials, was checked early in 1956 by the imposition of restrictions on certain movements of resident capital to other sterling area countries. With the fall in U.K. short-term rates, the controls became unnecessary and were abandoned early in 1957.

After three years in which reserves had been accumulated steadily, India’s trade and payments balances deteriorated sharply in 1956, chiefly because of a steep rise in imports associated with the intensified pressure of its development program. There was a small decline in exports and some worsening of the terms of trade, the prices of India’s main export goods being lower than in 1955 and those of imports higher, partly on account of rising freight rates. Tea exports increased both in volume and in value, despite a fall in price. Exports of jute goods decreased, however, owing to a decline in foreign demand that affected both volume and price. The volume of cotton textile exports declined, influenced by both increasing competition from Japan and growing demand in the domestic market. In order to curb domestic demand, the excise tax on cotton cloth was raised, effective September 1, 1956. The main cause of the worsening of the trade balance and of the drain on reserves was the sharp advance in imports, particularly of material and equipment purchased in connection with the Second Five Year Plan that came into operation early in 1956. Advance payments for some of these imports that were expected to arrive later added to the pressure on reserves. Moreover, somewhat smaller crops and rapidly rising food prices prompted the Government to increase staple food imports. The increase in imports and the resulting drain on reserves continued through the first quarter of 1957. The latter was relieved through drawings on the Fund in February and March 1957, totaling $127.5 million. In addition, a stand-by arrangement was agreed with the Fund, under which India might draw an additional $72.5 million during a twelve-month period commencing March 11, 1957.5 The more fundamental measures adopted by the Indian authorities are described in a later chapter.

Mexico had a sizable payments surplus in 1956, though it was not as large as the 1955 surplus. The value of exports increased, partly on account of higher earnings from coffee and metals but mainly as a result of a sharp rise in the volume of cotton exports, which raised earnings by well over 20 per cent in spite of lower world prices. The effect upon producers and exporters of the reduced cotton prices was offset in mid-1956 by a 30 per cent reduction of the export duty. In addition to increased receipts from merchandise exports, there was a rise in net earnings from travel and border transactions. The sharp rise in imports, consisting largely of materials and capital equipment, was closely connected with the continuance of the growth in production and with development activity; in view of the steady rise in domestic output of food, imports of foodstuffs have been gradually declining. In spite of substantial amortization payments, there was a net inflow of investment funds, largely private capital in the form of direct investment, supplemented by drawing on IBRD and Export-Import Bank credits.

Peru’s payments balance improved in 1956. There was some increase in the trade deficit, and a substantial change in the movement of private short-term balances held in the United States—an outflow of $8 million in 1955 being followed by an inflow of $14 million in 1956. A rise in exports was due mainly to a larger volume of metal and cotton exports, but higher prices for metals as well as for sugar also contributed to the rise. The sharp increase in imports was largely in materials and capital goods, financed by foreign companies operating in Peru and by loans from the IBRD and other sources. While increased food imports also were made necessary by drought conditions, much of these imports were provided under grants or loans from U.S. surplus stocks. Increased demand for other consumer goods, stemming in part from considerable wage increases in the first part of the year, also contributed to the expansion. Some slowing down in the pace of government investment outlay combined with monetary restraints imposed in the summer of 1956 reduced inflationary pressure in the latter part of the year. This may have contributed to the inflow of short-term funds, mainly through the repatriation of Peruvian deposits in U.S. banks. The strength of Peru’s payments position was shown by the movement of the free market exchange rate, which rose from approximately 19.50 soles per U.S. dollar at the beginning of the year to 19.00 soles at the end. This development may have been in part responsible for the repatriation of short-term Peruvian capital.

After several years of export surpluses and rising reserves, both the trade balance and the payments balance of Finland showed deficits in 1956, as exports declined slightly while imports continued to rise. The sharp rise in imports was related to a cost-induced increase in prices and incomes, which emerged after the settlement of a prolonged general strike in March 1956. The reduction in export receipts was accounted for mainly by a substantial fall in sawn timber and plywood exports. This decline was in part the result of weakening foreign demand and lower prices and partly of rising domestic costs which reduced the competitive power of exporters. Exports of other products increased as new production facilities came into use. Toward the end of 1956 the authorities found it necessary, in view of increasing pressure on the balance of payments, to intensify import restrictions.

1

Excluding interest of $81 million on the intergovernmental loan of 1945, which was paid into a special account.

2

In mid-June all measures of import liberalization were temporarily suspended in France.

3

These percentages have been calculated after excluding exports in 1956 of £22 million worth of silver bullion sent to the United States in repayment of lend-lease borrowing, and shipments in 1955 delayed by the dock strike of October 1954.

4

These transactions reflect the discrepancy between the current balance and the total of identified investment and financing items. They should not be assumed to consist entirely or even mainly of unidentified capital transactions.

5

India drew the entire amount permitted by this arrangement on June 12, 1957.

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Cover International Monetary Fund Annual Report 1957
International Monetary Fund Annual Report 1957
ISBN:
9781616351694
ISSN:
2227-8915
Publication Date:
02 Sep 1957
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781616351694.011
Pages:
224