III. EXCHANGE RESTRICTIONS
- International Monetary Fund
- Published Date:
- September 1951
Restrictions under Existing Conditions
In its Second Annual Report on Exchange Restrictions, transmitted to its members and to the Governors in April 1951, the Fund reviewed the role of restrictions under existing world conditions and reached the conclusion: “… it is recognized that some of the essential characteristics of the problem of exchange restrictions are being drastically altered. For many countries, the problem is becoming increasingly one of shortages of supplies and availabilities of future supplies, and less and less one of inability to finance foreign expenditures. Export controls, based on national and international decisions, are becoming increasingly important in determining the pattern of world trade and payments. Uncertainties and anxieties resulting from the strained international situation and rearmament programs have posed the question as to whether the Fund should continue its ‘task of assisting in the establishment of a multilateral system of payments … and in the elimination of foreign exchange restrictions’.
“Even in these new circumstances it is the view of the Fund that, if countries have favorable balance of payments conditions and are experiencing increases in their reserves providing a reasonable basis of exchange stability, it is in their interest, and in that of the international community, to relax or remove restrictions unless such action would produce conditions justifying the intensification or reintroduction of those restrictions. The Fund is keenly aware of the difficulties of a new character which confront a number of its member countries, but nevertheless it believes that the very general improvement in balance of payments positions and prospects of its members justifies a relaxation or removal of restrictions and, particularly, of discrimination. Such a relaxation would have short-run benefits in increasing the quantity of goods available for domestic consumption, thus restraining inflation, and would have benefits outlasting the present emergency by permitting a more economic use of the world’s resources. At the same time, the Fund recognizes that the new difficulties mentioned above are leading some countries to divert a higher proportion of their productive efforts to rearmament, to give greater attention to strategic and security necessities, to place emphasis on obtaining adequate supplies of raw materials or other essential goods, and to maintain reserves adequate to cover deficits in balances of payments which may arise from relatively higher prices for imports or from a prospective shortage of exportable goods.” Essentially the same basic trends as were described in that Report were still evident at the time the present Report was being written and the Fund considers that the conclusion quoted continues to be sound. Because of the proximity in time between the Second Annual Report on Exchange Restrictions and the present Report, emphasis is given herein to the most recent trends.
The first chapter of this Report has already noted the improvement in the balance of payments position of many countries and the continuation of the increase in gold and dollar exchange reserves held outside the United States, which began before the outbreak of hostilities in Korea and was accelerated in the second half of 1950. Partially as a consequence, while gold and dollar reserves are still relatively low for some countries, the distinction between “hard” and “soft” currencies has become much less sharp, and sterling in particular has become a much “harder” currency. U.K. sterling liabilities to other parts of the sterling area have increased, but on the other hand the discounts at which certain holders offer sterling for sale have decreased, and arrangements have been worked out to release or settle over a period of years a number of large holdings of sterling balances that had accumulated during the war. Important in accounting for these developments have been the rise in U.S. demand which greatly reduced the- difficulties of other countries in exporting to the United States, and the reestablishment of production throughout the world on a more normal basis which made it possible for many countries to increase their exports to and decrease their imports from the dollar area. This also facilitated a reduction of their dependence on extraordinary external economic assistance. Although rearmament has brought with it new distortions and shifts in the terms of trade, those price distortions which had existed in the years immediately after the war were to a considerable extent corrected by the 1949 devaluations. However, the net effect of these developments has been for many countries a reduction in what the 1950 Annual Report of the Fund described as the “many economic difficulties … that must be overcome before countries can, without facing serious risks, remove restrictions and assume obligations of convertibility.”
A noticeable tendency toward the relaxation of restrictions and the increase of imports by many countries was in evidence during 1950-51. In the first half of 1950, the outstanding development in restrictions was toward regional arrangements for their relaxation, which widened the area of freedom among certain countries, although maintaining or relatively intensifying discrimination against countries outside the region. This development was exemplified by the establishment of the European Payments Union (EPU) and the continuation of efforts toward the liberalization of intra-European trade and invisible transactions sponsored by the Organization for European Economic Cooperation (OEEC).
After the middle of 1950, there was evidence of increasing willingness to relax restrictions on a wider basis. While restrictions continued to be a major factor influencing international trade and payments and in some cases were even introduced or intensified, there was a tendency in many countries to increase the amount of their imports, including imports from the dollar area—e.g., the removal by sterling area countries of the “75 per cent limit” on purchases from the dollar area. In some cases, this relaxation took the form of formal removal or relaxation of restrictions. Much, however, was also done by administrative action within the framework of existing control mechanisms. To a considerable degree, the relaxation was made possible by improved balance of payments and reserve positions, with action frequently stimulated by the desire to acquire supplies before the full effects of rising prices, future shortages, and shipping difficulties were felt.
These trends have continued in more recent months. India, for example, in March 1951 doubled the value of import licenses issued for the first half of 1951 and extended the validity of licenses to the end of the year. In the same month, both India and the United Kingdom placed additional raw materials under “world open general license”, allowing their unrestricted import from any country, and, in considerable measure because of the rise in import prices, the value of their imports has recently shown a considerable increase. Early in April Australia announced that import licenses would be granted on application for selected classes of goods from the dollar area provided importers could obtain offers for reasonably early delivery and at reasonable prices. At about the same time it was announced that the value in 1951 of New Zealand’s imports from North America was expected to exceed their value in 1950 by 60 per cent. As noted earlier in this Report, Colombia in March 1951 introduced measures to reduce substantially its restrictions, removing all licensing restrictions on imports except for commodities on a prohibited list.
With regard to multiple currencies, for the world as a whole, there has not been a pronounced trend toward the decrease in such practices. Since the middle of 1950, however, there have been important modifications in the multiple currency practices of certain countries, some of which can be directly ascribed to changes in their balances of payments. The improvement in the export situation has led some countries to rely less on subsidy rates favoring particular commodities which in periods of less favorable prices had encountered difficulties in international markets. In certain Latin American countries the use of private compensation and barter transactions involving so-called “minor” or “marginal” exports has been terminated. In others, some export commodities have been shifted from the most preferred list (most depreciated rates) to the lists (or rates) at which the basic exports move. Such modifications in the rate structure have tended to narrow the spread between the different export rates. At the same time, some countries have also taken the opportunity to shift their entire rate structures toward more adequate levels.
Similarly, the policy of relaxing import restrictions has also led to changes and adaptations, some involving considerable simplification, in the multiple currency practices that affect imports. By and large, just as improvement in their export situation has led certain countries to rely less on preferential multiple rates as a stimulus for “minor” exports, so the relaxation of restrictions on imports receiving exchange at the most favorable rates has increased the coverage of these ‘‘preferential” rates. In some countries, the spread between the “preferential” and the “penalty” import rates has been reduced. Thus, while some of the changes in multiple currency structures represent devaluations, the extent of the devaluation is reduced, in many cases, by the elimination or reduction in the level and scope of the higher premium export rates and penalty import rates.
These changes, many of which are described in Chapter II of this Report, have been particularly apparent in countries where multiple currency practices have existed for a number of years. Among the most recent developments have been the measures ; taken by Colombia and Paraguay in March 1951. On the other hand, increased reliance on multiple rates has also been noted ; in some countries, as in the case of the Philippine Republic, in the early months of 1951. But, while the use of multiple currency practices has increased in some parts of the world, there has been a tendency to reduce their scope in those areas which ; relied most heavily on them in the past.
At the same time as there is noticeable a tendency toward relaxation of restrictions, new factors arising out of the international situation, e.g., scarcity of certain supplies and strategic necessities, have created pressures for certain restrictions or other governmental measures. For example, in some countries the eagerness to obtain goods is reported to have brought about an increasing tendency toward barter arrangements. Export controls are becoming more widely used and problems of allocation of scarce materials have been receiving attention in several organizations such as the International Materials Conference. In March 1951 the United States announced that: “In order to accomplish an effective export control program in the national interest of the United States, the Office of International Trade has adopted the policy of licensing certain commodities for export so that shipments to a particular country do not exceed normal commercial or civilian requirements of that country or normal shipments to that country from United States sources.” In addition to this “informal quota” system which had been used during the period of postwar shortages, formal quotas regulate U.S. exports of commodities where the supply situation is more critical. The total export allocations may be divided into quotas for individual countries, and for some commodities the end use criteria established for U.S. domestic uses of the commodity is applied in screening applications for export licenses. In other countries, import controls may be employed as devices to provide assurances of the normal end use of commodities subject to U.S. export control and, more generally, to facilitate allocation of scarce commodities. There are already some indications that controls are being used for this purpose.
Thus, export controls are becoming increasingly important determinants of the composition, volume and direction of international trade. These controls may introduce further trade and price distortions, as well as have some influence on the import control policies of other countries. Although certain countries undergoing inflationary pressures may tend to regard limitations on exports as an attractive means of coping with their problems, they must recognize that decisions to restrict exports in order to make more goods available domestically will affect the ability and willingness of other countries to provide them with imports.
The existence of export controls may require arrangements for the allocation of the affected commodities in the importing countries. However, such arrangements need not mean that existing restrictions on imports have to be increased or even maintained. Indeed, where circumstances permit, restrictions which have been maintained for financial or protectionist reasons might well be relaxed even though the countries previously maintaining them are taking measures to assure desired use of scarce imports or to implement agreements for the distribution of scarce materials. Short of full and general mobilization, in most countries what may roughly be called the civilian sector of the economy will still be important and much international trade will and should still take place on a price basis.
Thus, advantage should be taken of favorable circumstances to remove restrictions that have lost their balance of payments justification. If unnecessary restrictions are retained at the present time, it will be all the more difficult to remove them in the postemergency period. Further, in a world of scarcities induced by rearmament programs, more efficient use of economic resources would be possible as a result of the reduction of restrictions. Although the shift of resources involved might well mean some immediate decline in production, any such costs of transfer would be temporary while the benefits from the more economic use of resources are long-lived. Countries whose balance of payments and reserve positions permit relaxation of restrictions, and particularly the reduction of discrimination, cannot afford to overlook the advantages to be obtained by such action for maximizing efficiency, increasing the supply of goods available for domestic consumption and investment, and obtaining imports as cheaply as possible. Countries undergoing inflationary pressures and accumulating reserves may well have to reconsider the criteria by which they have judged the desirability of certain expenditures on imports and to weigh the relative advantages of obtaining available goods as against conserving reserves for future use.
The Fund recognizes that for many countries security considerations must weigh heavily in determining present international economic policies. It may well be that such considerations will make countries reluctant to relax or remove certain restrictions, and even may be used in certain cases as arguments for the introduction of new restrictions. It must be recognized, however, that most of the restrictions now in force have previously been maintained for balance of payments reasons. In some cases a member may consider such restrictions as still necessary on security grounds but in others the necessity for the restrictions will be found to have disappeared. Indeed, security considerations may make desirable further relaxation of restrictions on the importation of goods of strategic importance, while simultaneously requiring other governmental measures, such as internal allocation. These considerations are essentially independent of balance of payments requirements.
Where rearmament affects the balance of payments and reserves of countries, the implications for restrictions are encompassed in the Fund’s general attitude on the conditions under which it believes the relaxation and removal of restrictions would be feasible. Rearmament will undoubtedly affect the degree and pace of relaxation possible under present circumstances. Some countries undoubtedly feel the need for maintaining levels of exchange reserves or even increasing them further to guarantee the financial means to pay for essential imports. While military shipments may well be financed in such a way as not to result in dangerous losses of reserves, this consideration together with the desire to stockpile certain commodities may add to the impediments to the removal of restrictions. Some countries have regarded the rise in world prices as requiring the holding of larger exchange reserves; others have taken it as a reason for buying before further price increases occurred.
The ability and willingness of countries to undertake programs of relaxation of restrictions will also be influenced in many cases by both the content and the degree of success of measures taken to combat inflation. Inflationary pressures usually tend to create balance of payments difficulties which may lead to the use of restrictions, while the extensive use of direct controls to combat inflation may well require greater use of controls over external transactions than if inflation is combated through monetary and fiscal measures. Thus, the Fund attitude on exchange restrictions is closely allied to its attitude on inflation. Vigorous anti-inflationary policies will help create conditions under which countries can achieve the benefits of relaxation of restrictions and reduction of discrimination.
In addition to these problems, there remain other impediments to the removal of restrictions. Important among these are the facts that restrictions generally have protectionist aspects and may be used as bargaining weapons. All possible efforts should be made to effect the removal of restrictions which are unnecessary for financial reasons.
Although restrictions exercised through multiple currency practices have been relaxed in some countries, in a number of others special factors still impede their removal. The retention of multiple rates may be based, in part at least, on considerations other than balance of payments, such as the desire to protect domestic industries, to reduce administrative controls, to check inflationary rises in certain prices through the use of favorable rates, or to raise revenue through exchange taxes. It may be difficult to find alternative sources of government revenue or alternative price policies, but careful consideration must be devoted to their development. Also, there remains a number of countries that still have basic or structural balance of payments difficulties limiting their ability to relax restrictions. Plans for economic development may create special aspects of this Problem. Recognizing the difficulties faced by countries and the importance and necessity of developmental programs, the Fund I will cooperate and consult with members in working out policies for overcoming their basic difficulties and furthering the achievement of the Fund’s objectives.
Fund Activities in the Field of Restrictions
As is noted elsewhere in this Report, the Fund has continued to advise and consult with a number of its member countries on the policies to be pursued in the field of exchange practices. This has involved both Fund review and approval of specific measures, and general advice on a wide range of matters affecting the restrictive policies of member countries. The Fund has sought to encourage members to relax restrictions where this was financially possible and to simplify their restrictive systems. Some progress was achieved during the year, including the simplification of multiple rate structures. In some cases the steps taken were a part of programs involving the readjustment of the par values of countries’ currencies. As in past years, the Fund has worked directly with many countries with regard to their multiple currency practices and has sent missions to them for the study and discussion of their problems. Among the countries with which the Fund discussed changes in multiple currency practices have been: Austria, Bolivia, Chile, Colombia, Ecuador, Greece, Iceland, Iran, Nicaragua, Paraguay, the Philippine Republic, Thailand, and Uruguay. In addition, Honduras, effective July 1, 1950, reduced the spread of official exchange rates to within one per cent of parity in conformity with Article IV, Section 3 (i), of the Fund Agreement, and became the first country which ceased to avail itself of the “transitional arrangements” under Article XIV and accepted the obligations of Article VIII.
In December 1950, the United States advised the Fund that it intended to impose restrictions on the making of certain payments and financial transfers within the jurisdiction of the United States which involved China and North Korea and their nationals, with the exception of those portions of China and Korea under the control of Governments of China and Korea recognized by the United States. The United States indicated that the restrictions were not being imposed for economic or financial reasons but to assist the United Nations forces in their struggle against aggression. The Fund took note of the action which the United States intended to take for security purposes, but took no other decision pending study of the question of the jurisdiction of the Fund respecting such actions.
Associated with its work on exchange restrictions are the Fund’s relations with the Contracting Parties to the General Agreement on Tariffs and Trade. In the previous Annual Report, it was noted that the Fund was to participate in consultations concerning recent changes in the import policies of Australia, Ceylon, Chile, India, New Zealand, Pakistan, Southern Rhodesia, and the United Kingdom in connection with the Fifth (Torquay) Session of the Contracting Parties. These consultations took place in the autumn of 1950. The Fund submitted to the Contracting Parties a report and a more extensive background paper on each of the countries whose restrictions were under review. The background papers covered the restrictive systems and the balance of payments and presented analyses of the causes and effects of the import restrictions in the light of the existing situation. The reports contained the Fund’s conclusions with respect to the import restrictions. The Fund’s representatives at Torquay discussed this material with the contracting parties and took part in their deliberations.
In its reports, the Fund reached the conclusion that it would be feasible for Australia, Ceylon, New Zealand, Southern Rhodesia, and the United Kingdom to begin a progressive relaxation of their “hard currency” import restrictions, although this should be undertaken with due caution, having regard to the existing circumstances. Further relaxation of restrictions on dollar imports by Chile, India, and Pakistan did not seem feasible in the light of the then current conditions.
In 1950 the Fund continued to participate in consultations on the import policy of the Union of South Africa. In this connection, it was in contact with the South African officials and reviewed the new South African system which was to go into effect at the beginning of 1951. The changes in the South African system appeared to the Fund to represent a welcome and substantial relaxation of discrimination. However, in the opinion of the Fund, experience with the functioning of the new system in the conditions prevailing after it came into operation was necessary before Vinal judgment could be made. At the time of its review, the Fund also noted that it was in active consultation with South Africa with regard to its exchange restrictions. The Fund therefore felt that, in view of the forthcoming substantial alterations, the submission of a report as originally agreed with the Contracting Parties on the aspects of the South African restrictive system in 1950 would probably be of little interest or practical value to the Contracting Parties. The Fund expressed these views at the Fifth Session of the Contracting Parties, and the Contracting Parties decided to delete from their agenda the consultation on the import policy of the Union of South Africa.
The Fund has continued to cooperate with the Contracting Parties in the matter of special exchange agreements with contracting parties which are not members of the Fund. In February 1951 such agreements came into force with respect to Haiti and Indonesia. These countries have thus accepted obligations in respect of exchange rates and exchange restrictions similar to those contained in the Fund Agreement.
During the formative stages of the European Payments Union, the Fund took part in the formal and informal discussions held among the participating countries of the OEEC in Paris. The Council of the Organization for European Economic Cooperation at its meeting on July 6-7, 1950, approved a document agreeing to the establishment of a European Payments Union. Paragraph 82 of this document, entitled “Relations with the International Monetary Fund,” reads as follows:
The functioning of E.P.U. will be of great interest to the International Monetary Fund of which many participating countries are members, and these countries will be concerned to ensure that obligations incurred by them as Members of the E.P.U. should be consistent with obligations which they may have as members of the International Monetary Fund. Close co-operation and consultation with the International Monetary Fund are desirable, and it will be necessary for the Management Committee to examine and report to the Council what shall be the appropriate relationships.
The Fund and the Managing Board of the EPU have under consideration the nature of the relationship that should be established between them. The Fund is continuing to study the significance of EPU developments for its member countries, including the effects of such arrangements upon the trade and payments positions of Fund members not participating in the EPU.
For the future, the Fund expects that there will be considerable relaxation of restrictions, and looks forward to consultation with its members toward this end. The extent of relaxation possible will vary, with some countries able to remove restrictions completely and restore convertibility, with others able to make substantial progress in these directions, and with others able to do relatively little in the way of relaxation. In general, however, considerable progress should be possible in eliminating discrimination and, in certain cases, there could be substantial steps toward the achievement of convertibility.
Article XIV, Section 4, of the Fund Agreement provides that five years after the Fund began operations, that is, by March 1952, member countries still retaining any restrictions inconsistent with Article VIII, Sections 2, 3 or 4, shall consult the Fund as to their further retention. A new period of Fund activity in the field of restrictions will thus be opened. In the forthcoming consultations, the Fund will give full weight to the needs and problems of its members as well as to the effects of their actions on the international community and to the Fund’s objectives as set forth in the Articles of Agreement. These consultations will cover such matters as the adjustment of existing systems of restrictions on current payments to the changed conditions, the removal and relaxation of such restrictions, and, in suitable cases, the working out of measures necessary to overcome financial obstacles to relaxation.
The Fund retains the conviction that, despite strong postwar tendencies toward bilateralism and restrictionism, there is much to be gained from the pursuance of trade and payments liberalization and the reduction of discrimination. The Fund welcomes the increasing signs of widespread recognition of the advantages of such policies. The Fund’s hope is that the international approach embodied in the Articles of Agreement may help provide the mechanism through which constructive and enduring steps can be taken to strengthen the recent trends toward liberalization and the reduction of reliance on exchange restrictions.