V Par Values and Exchange Rates

International Monetary Fund
Published Date:
September 1952
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Par Values in 1951-52

During the fiscal year 1951-52, initial par values were agreed with three members of the Fund. A par value of 230 markkas per U.S. dollar was established for the Finnish markka on June 27, 1951, of 5.17321 kronor per U.S. dollar for the Swedish krona on November 5, 1951, and of 4.76190 rupees per U.S. dollar for the Ceylon rupee on January 16, 1952. Each of these par values was identical with the corresponding exchange rate in effect since the devaluations of September 1949.

On December 28, 1951, the Fund concurred in a proposal of the Yugoslav Government for a change in the par value of the Yugoslav dinar, effective January 1, 1952. The new rate is 300 dinars per U.S. dollar, and replaces the initial par value of 50 dinars per U.S. dollar. This change not only represented a drastic devaluation but also signified a far-reaching reform of the economic system in Yugoslavia. The economic model which had been adopted earlier in Yugoslavia was characterized by very detailed central planning and by administratively set prices which did not reflect the existing relative scarcities of goods. In its place a new system, which gives enterprises considerable freedom to make independent economic decisions, and which is essentially based on market prices and an economic calculus, was adopted in principle and is being introduced by gradual stages.

Under the old system, the Yugoslav exchange rate had not been one of the determinants in foreign trade transactions. Such transactions were carried out by the state foreign trade monopoly according to a plan and without due regard to the relations between prices in Yugoslavia and abroad. Under the new system, it is intended that the exchange rate shall represent a link between domestic and foreign prices. The devaluation was a first step in this direction, inasmuch as it put the exchange rate in line with the intended level at which prices were to be unified and stabilized. It is intended that in the present transition period a large but gradually decreasing part of foreign trade transactions should continue to pass through the Equalization Fund, in order to ensure the profitability of certain transactions and to avoid unjustifiably high profits in other transactions. Such an arrangement was considered necessary in view of the completely distorted pattern of prices at the time of the devaluation, and because of certain rigidities in the economy which can be only gradually overcome.

“Free” Exchange Rates

Among the countries that either have decided temporarily not to undertake the obligation to maintain their exchange rates within narrow margins of the par values agreed with the Fund, or have never agreed on a par value, France and Italy have again throughout the period under review kept their official dollar exchange rates stable. In Greece, too, there has been no change in the effective official exchange rate. On June 1, 1951, however, the Exchange Certificate System (introduced on October 19, 1947) was abolished by the inclusion in the exchange rate of the effectively stabilized prices of exchange certificates, which had previously been paid in addition to the fixed official exchange rate. The official exchange rate was thus increased from 5,000 drachmas to 15,000 drachmas per U.S. dollar and from 20,000 to 42,000 drachmas per pound sterling.

In Canada, whose exchange control system was eliminated on December 14, 1951, the exchange rate has been free to fluctuate since September 1950, although the Foreign Exchange Control Board has intervened in the market from time to time to maintain orderly conditions and to prevent violent fluctuations. The lowest rate for the year (Can$1.0731 = US$1) was recorded after a seasonal decline in mid-June, but thereafter the rate steadily strengthened. It was Can$1.0169 = US$1 at the end of 1951, and by the middle of January 1952, the Canadian dollar touched parity with the U.S. dollar. During most of March and April it remained relatively stable at a premium of about 2 per cent above the U.S. dollar, the rate on April 30 being Can$0.9803 = US$1. The strength of the Canadian dollar is to be attributed principally to a steadily improving trade position and a capital inflow from the United States. While the capital inflow of $563 million in 1951 was little more than half as much as in 1950, it consisted to a greater extent of long-term developmental investment. An abnormally heavy trade deficit in the first eight months of 1951 accounted mainly for a decline of gold and dollar reserves by US$180 million. The development of a trade surplus in the latter part of the year, together with the inflow, led to an increase of reserves of US$217 million in the last four months, and a further increase of US$8 million in the first quarter of 1952.

Since November 1949, when it was decided that the official rate of 6.5 soles per U.S. dollar would no longer govern any transactions, Peru has maintained two free exchange markets, one for exchange certificates and the other for drafts and currency. The rates in both markets fluctuate freely. The Central Bank’s stabilization policy of maintaining a rate for dollar certificates of 14.95 soles per dollar, which was initiated in October 1950, was suspended in September 1951. Since that time the rate for dollar certificates has ranged between 15.21 and 15.43 soles per dollar. During 1951 the spread between the certificate and free rates did not exceed 1.8 per cent, and since the beginning of 1952 the spread has not exceeded 1.6 per cent.

In Thailand the free market rate for sterling declined during the year, and the Bank of Thailand’s selling rate was adjusted accordingly. The continuous downward movements led importers of sterling area goods to delay payment, which in turn prevented the Bank of Thailand from selling its accumulated sterling. Subsequently the Bank of Thailand reduced its selling rate on February 28, 1952 to 45 baht per pound, an appreciation of 20.3 per cent compared with the rate of 54.11 baht per pound at the end of April 1951, and commercial rates were similarly adjusted. The free market dollar rates fluctuated more irregularly, but in general they also fell during the year under review. The rate of 19.84 baht per dollar recorded at the end of April 1952 represented an appreciation of 5.8 per cent compared with the rate of 21 baht at the end of April 1951.

The exchange rate structure of Uruguay remained basically unchanged during the year under review. There was some shifting of commodities from one rate to another, but as these shifts were of minor quantitative importance, they had little effect on the coverage of the different rates. The free rate which applies only to private invisibles fluctuated fairly widely.

Other Exchange Policy Developments

In several other member countries there were, during the year, events worthy of record which are relevant to exchange rate policy but have not affected par values.

In Austria the system of “retention quotas” under which exporters had been allowed to retain a percentage of their export proceeds, varying for different export commodity groups, was abolished as from January 1, 1952. Since that date exporters have had to deliver their total export proceeds to the National Bank. The Austrian National Bank has assured the export industries that they will receive preferential treatment in the allocation of foreign exchange for imports of raw materials, semifinished products, and machinery.

In Bolivia the monetary authorities have, since December 1951, permitted the Banco Minero to sell exchange to importers at a new rate of Bs 190 per U.S. dollar.

The basic rate structure of Chile, which was established by the reforms of 1950, was maintained in the 1952 exchange budget. On the payments side there has been an attempt to limit the use of preferential rates, so that a larger proportion of total payments is to be effected at the free market banking rate. Two new minor effective rates for agricultural exports have resulted from the mixing of existing rates. The degree of de facto depreciation implied in these changes will depend on the actual level of the free market banking rate during the year and on the volume of transactions actually permitted in the free market. The banking rate tended to depreciate during the first months of 1952, mainly as a result of export difficulties. At the same time, the exchange authorities were taking steps which may result in a substantial revision of the exchange budget.

Recent experience indicates that progress in the direction of simplifying the Chilean exchange system is dependent on some success in dealing with the problem of internal economic stabilization. The authorities had hoped that the measures taken at the end of 1950 with respect to the free market would pave the way toward a unitary system with a more realistic parity. Internal inflationary forces have, however, prevented the realization of these hopes.

The major efforts of the authorities in Colombia have been directed at the consolidation of the exchange reform of March 20, 1951. Considerable progress has been made toward the unification of the exchange rate structure and the relaxation of restrictions, which were the basic purposes of the reform. On September 14, 1951, the exchange tax, which had applied to certain nontrade payments of nonresidents, was abolished. With a view to redeeming the pledge to unify the buying rates for coffee export exchange and for all other exchange proceeds, the Colombian authorities began in October 1951 to narrow the spread between these rates, which at that time were 2.0875 pesos and 2.50 pesos, respectively, per U.S. dollar, and after consultation with the Fund it was decided gradually to depreciate the coffee rate. Effective October 29, 1951, it was depreciated from 2.0875 pesos to 2.17 pesos per U.S. dollar; on the fifteenth of every month thereafter it was to be further depreciated in progressive steps of 0.00825 pesos per U.S. dollar until the two buying rates were completely unified. As of the end of the period covered by this Report, the coffee rate was 2.2195 pesos per U.S. dollar which represents a cumulative depreciation of about 6 per cent from the 2.0875 peso rate that had applied until October 29, 1951.

After the establishment of the new exchange system in April 1950, the exchange position of Costa Rica began to improve, and by the end of 1951 it showed a surplus. An effective credit policy was pursued, and the coffee market position was also favorable. After the arrears on external commercial obligations had been completely paid off, and the Government’s banking debt had also been completely liquidated by use of the proceeds of the exchange surcharges on imports, the exchange surcharges which had been previously imposed were removed in two stages, and the exchange system was thereby considerably simplified. Two exchange markets were maintained, however. The official market supplies exchange for a list of “essential commodities,” covering approximately 54 per cent of all imports. The remaining imports are paid for with exchange purchased in the free market. These changes, which were approved by the Fund as a temporary measure, became effective at the end of September 1951. The Central Bank also adopted a policy for the stabilization of the free market rate at $7.50 per U.S. dollar. As a result of an inflow of dollars, this rate fell, however, to $7.00 per U.S. dollar at the end of December 1951. The Costa Rican exchange system therefore at the end of the fiscal year provided for a single buying rate of $5.60 per U.S. dollar for all export proceeds and two selling rates, the official rate of $5.67 per U.S. dollar and a free rate of $7.00 per U.S. dollar.

In Denmark the tax of 20 per cent on sales of foreign exchange for travel purposes, which had been accepted by the Fund as a temporary measure, and which was to have lapsed in March 1952, was repealed in October 1951.

In Egypt the scope for transactions in “export pounds,” which had widened in 1951 when the exchange rate for these pounds declined by about 12 per cent, was considerably reduced during the first four months of 1952. Special Egyptian transferable accounts had been created late in 1949 after the United Kingdom had decided to limit the use of transferable sterling account facilities to direct current transactions, except where specific authority was given to use them otherwise. Import licenses were issued for a specified list of commodities from hard currency countries, which were paid for in “Egyptian export pounds” to the credit of the recipient. These funds could then be used to pay for certain specified Egyptian exports to any soft currency country except those which have payments agreements with Egypt. They could also be transferred to the “export accounts” of other countries, or used for payments to residents in Egypt.

In Finland sales of foreign exchange for most travel purposes were subjected to a stamp duty of 30 per cent, effective June 11, 1951. The law which introduced this tax, however, expired on December 31, 1951, and was not renewed.

In Iran the rate of Rls 48.75 per U.S. dollar, which had been established in November 1950 for nonessential imports and for all exports, was lowered on June 25, 1951 to Rls 47 per U.S. dollar and at the same time the rate of Rls 40 per U.S. dollar for essential imports was raised to Rls 41.50 per U.S. dollar, the official rate of Rls 32.25 per U.S. dollar remaining unchanged. Certain imports were also transferred from the essential to the nonessential category.

In December 1951, the Foreign Exchange Commission was authorized to take all the steps necessary to ensure a balance between Iran’s foreign exchange receipts and expenditures. Except for 36 essential items for which the Bank Melli Iran might grant foreign exchange without the Commission’s license, all foreign exchange requirements were to be subject to individual licensing by the Commission, and foreign exchange for imports of any kind was to be furnished only to holders of exchange certificates purchasable from exporters at prices freely determined in the market. Subsequently two types of certificates were issued, one for essential imports and exports with an established market and the other for nonessential imports and marginal exports. The price of exchange certificates tended to rise until toward the end of April it reached a figure which made an effective exchange rate of Rls 83.50 per U.S. dollar. In order to prevent a further rise the Bank Melli Iran announced on May 5 that it had been authorized to buy and sell dollar certificates at the rate of Rls 42.50 per dollar for exports with established markets and esential imports. This meant an effective buying rate of Rls 74.50 and an effective selling rate of Rls 75.

In the Netherlands the scope of the “export bonus dollar” system, whereby 10 per cent of all dollar proceeds from exports to the United States and Canada are made freely available to exporters, was extended on February 11, 1952 to include exports to all countries with which the Netherlands has not concluded a monetary agreement and to American government institutions or international organizations, if payment is made in U.S. or Canadian dollars.

In the United Kingdom the London Foreign Exchange Market, which had been closed since 1939, was reopened from December 17, 1951. The changes effected were technical and did not affect the fundamental exchange control regulations or the system of export control and import licensing. The Bank of England, which had formerly quoted close official spot and forward rates for most of the important international currencies, ceased to quote forward rates entirely and widened its spot quotations to approximately ¾ either side of the official Fund parities. The Authorized Banks were permitted to deal freely between themselves and their customers for authorized spot transactions at or between the widened Bank of England rates, resorting to the Bank only at the extreme quotations, and were permitted to transact authorized forward business at rates determined by demand and supply. These changes were made at the same time that the remaining exchange restrictions in Canada were removed, and it was therefore decided to permit arbitrage in U.S. and Canadian dollars. No other triangular arbitrage is permitted; operations abroad in other currencies are limited to the covering of excess purchases or sales of currency against sterling in the appropriate market. The banks were granted a measure of freedom in the matter of carrying “open” positions and holding spot exchange against forward commitments, but both facilities are strictly limited to amounts agreed with the Bank of England.

There have also been some significant developments in exchange policy in several countries that are not members of the Fund. The Economic Plan for 1952 announced for Argentina on February 18, 1952, designed primarily to combat inflation, included provisions for more flexible exchange rates in order to favor, on the one hand, foreign purchasers of Argentine goods, and, on the other hand, the importation of agricultural machinery. Where the current exchange rates therefore impaired the flow of exports, the rate might be modified within the framework of the present exchange rate structure. Special rates might also be allowed for imports of agricultural machinery, implements, and spare parts. On February 20 a new mixed rate of about 10 pesos per U.S. dollar (60 per cent at 7.5 pesos and 40 per cent at the free market rate of about 14 pesos per dollar) was accordingly established for cheese, butter, and casein exports. This rate may be extended to other products. At various times during the year, export items have been shifted from one exchange rate to another. On February 28, for example, the preferential rate of 7.5 pesos per U.S. dollar, instead of the basic rate of 5 pesos, was applied to certain beef products.

In Indonesia the exchange certificate system which had been introduced on March 3, 1950 was abolished on February 4, 1952, when a new official rate of 11.40 rupiah replaced a former nominal rate of 3.80 rupiah per U.S. dollar. Under the old system, there had been three effective rates, viz., an exporters’ rate of 7.56 rupiah and importers’ rates of 11.43 rupiah and 19.05 rupiah. With the establishment of a new official rate, exchange certificates were abolished for nondollar trade and dollar certificates introduced for dollar trade. “Inducement certificates” were no longer granted without charge to exporters of certain products. They continued to be required for importers of certain luxury and semi-luxury goods and were sold by authorized banks at a fixed price.

The new official exchange rate applies to exports to and essential imports from nondollar countries, except that, for luxury and semiluxury goods from all sources, importers have to pay the official rate plus the “inducement certificate” rate, which is 70 per cent of the official rate, or 8.00 rupiah. The effective rate, therefore, for these imports is 19.43 rupiah. For dollar transactions, there are three effective rates. For dollar exports and incidental expenses, the rate is the official rate plus the price of a dollar certificate, which is issued for 70 per cent of the dollar export proceeds. Dollar certificates can be bought and sold at a price that is expected to equal the premium on the U.S. dollar in the open market (1.50 rupiah per U.S. dollar in February 1952). Essential imports from the United States, Canada, and Japan and incidental expenses are paid for at the official rate plus the market price for dollar certificates. Importers of such essential dollar goods must be in possession of dollar certificates for the full value of their imports. For luxury and semiluxury goods from the dollar area, there is an additional charge on account of the “inducement certificate” required for such imports. The effective rate for luxury imports from the dollar area is therefore 20.93 rupiah.

When US$2.80 per pound was adopted as the official exchange rate in Israel in September 1949, the free market rate showed a discount of around 25 to 30 per cent. This discount subsequently increased considerably, with some fairly wide fluctuations, and on February 13, 1952, when the free rate had fallen to about $0.50 per pound, the Government of Israel announced new exchange rates of $2.80, $1.40, and $1.00 for the Israeli pound. Exports and imports were classified in three groups to each of which one of the rates applies. The $2.80 rate was retained for foreign proceeds originating from certain government loans, grants, and similar sources and for proceeds from diamond exports; this rate was also retained for payments for highly essential imports, such as bread, flour, and sugar. The rate of $1.40 is applicable to exchange receipts from contributions by institutions, incoming remittances, appeals, currency transfers for approved investments, and from exports of fruits, mainly citrus. Payments for certain essential imports, such as meat, tea, and coffee, are effected at this rate. The $1 rate is applicable to foreign currency received from certain grants, loans, gifts, most investments, and all exports to which the other rates are not applicable, and to out-payments for purposes other than those to which the other two rates are applicable.

On January 28, 1952 Rumania appreciated her currency and introduced a monetary reform similar to the Soviet reform of December 1947 and the Polish reform of October 1950. The leu was defined in terms of gold and the ruble, instead of in terms of gold and the U.S. dollar, and the exchange rate set at 2.80 lei to the ruble. The cross rate is therefore 11.2 lei to the U.S. dollar, compared with the previous rate of 150 lei. The exchange rate in Rumania has, however, no relevance for foreign trade transactions. A new leu was put into circulation, the cash holdings of private individuals and firms being exchanged at the rate of 100 to 1 for the first 1,000 lei, of 200 to 1 for the next 1,000 lei, of 300 to 1 for the third 1,000, and of 400 to 1 for all sums exceeding 3,000 lei. Private bank deposits were exchanged at rates about twice as favorable as those applied to cash. Both wages and prices were reduced at the ratio of 1 new leu for 20 old lei. In addition, prices of many consumers’ goods were reduced by a further 5 to 20 per cent.

In Western Germany a system of “import rights” was introduced on April 1, 1952. These rights are granted to exporters for 40 per cent of their earnings from exports paid for in freely disposable U.S. dollars or free Swiss francs. They are transferable, but must be used for imports from dollar countries of a specified list of goods within three months from the date of payment for the exports in respect of which the claims have been issued. Ten per cent of the import rights may be transferred to the foreign exchange working funds of the original producer, who has been entitled since June 1951 to preferential importation of raw materials needed for the production of export goods.

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