Chapter

V: Exchange Practices and Payments Arrangements

Author(s):
International Monetary Fund
Published Date:
September 1956
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Exchange Stability and the System of Par Values

The Fund’s Articles of Agreement, recognizing that changes in exchange rates are matters of international concern, established a procedure by which international status is accorded to each member’s national exchange parity. Members are required to apply these par values in determining the range of exchange rates within which exchange transactions in their territories take place. Changes in par values may be made only on the initiative of the member and in order to correct a fundamental disequilibrium, and, with minor exceptions, only with the approval of the Fund. The Fund has always recognized that in some circumstances a new exchange rate is an indispensable condition for establishing the conditions necessary to enable a country to discharge its international obligations without undue pressure upon reserves, and has never sought to insist on the maintenance of an exchange rate that is unsuitable for the economy of a country. The Fund’s general position on the par value system, formulated in the light of experience gained since 1946, was stated in the Annual Report for 1951 (pp. 36–41). The Fund has concurred with the par values proposed by 49 of its members. In September 1949, 13 members made changes in their par values with the approval of the Fund, and there have since been similarly approved adjustments of par value by 9 other members.

Changes in Par Values

During the fiscal year ended April 30, 1956, three changes in members’ par values were made in agreement with the Fund. The Fund concurred in a proposal by the Government of Nicaragua for a change in the par value of the córdoba from 5 córdobas to 7 córdobas per U. S. dollar, effective July 1, 1955. At the same time, the Nicaraguan exchange system was considerably simplified by the elimination of surcharges of 1 córdoba and 3 córdobas per U. S. dollar, which had been applied to less essential imports and to most invisibles, of a preferential selling rate, equivalent to the old par value, which had been used for government payments, and of an exchange tax on payments for some invisibles. The new system temporarily retains a differential buying rate of 6.60 córdobas per U. S. dollar for export proceeds, while all imports and other transactions in the official market now take place at the new par value. A fluctuating free market, in which a somewhat more depreciated rate prevails, is used primarily for tourist and similar transactions.

The new par value had been the basic rate in the system established by the exchange reform of late 1950, which included the multiple rate practices mentioned above. Since 1950, production and exports, especially of cotton, have increased rapidly, with consequent improvement in the payments position of Nicaragua. In 1954 and 1955, some inflationary pressures appeared, as a result of liberal extension of bank credit and increased public investment, and the payments position tended to weaken somewhat, partly also as a consequence of a decline of export prices.

On July 31, 1955, with approval of the Fund, the Government of Pakistan changed the par value of the Pakistan rupee from 3.31 rupees to 4.76 rupees per U. S. dollar. The devaluation followed a period in which, under the impact of increased competition in agricultural raw material world markets, the prices of Pakistan’s exports had been declining, while the prices of home consumed goods moved upward because of the monetary expansion induced by the financing of large capital expenditures. Devaluation, therefore, had the effect of restoring in part the share of the export sector in national output and of reducing the windfall profits accruing to importers. At the same time, by bringing domestic costs into better alignment with external price movements, it facilitated the marketing abroad of surpluses of industrial goods that were developing as a consequence of the intensive industrial efforts of recent years. In order to damp down the inflationary effects of devaluation, the Government increased the taxes levied on the principal export commodities.

The Fund also concurred in a proposal by the Government of Paraguay for a change in the par value of the guaraní from 21 guaraníes to 60 guaraníes per U. S. dollar, effective March 1, 1956. At the same time, Paraguay carried out a simplification of its complex multiple rate system under which effective import and export rates had ranged from 21 guaraníes to 75 guaraníes per U. S. dollar. Under the new exchange system, the par value is the effective exchange rate for all transactions except payments for some less essential imports and related services, which are subject to a surcharge of 25 guaraníes per U. S. dollar, and capital transactions and certain invisibles, which are conducted in the free market. The immediate cause of the change in the par value of the guaraní was a sudden deterioration in the terms of trade and the payments position of Paraguay, after the removal in October 1955 of the arrangements whereby Argentina had given preferential treatment to Paraguayan exports. The fundamental cause, however, was related to the continued inflation and distortions in the Paraguayan price system, which resulted in a stagnation of production, made difficult the flow of exports, and created an excessive demand for imports. Changes in the exchange system were accompanied by the adoption of a broad stabilization program, the main features of which are quantitative restrictions on bank credit and the coordination of fiscal, investment, and exchange policies, with the objective of maintaining the money supply at appropriate levels conducive to economic stability.

Other Developments in Exchange Rates

In Canada, which decided in September 1950 that temporarily its exchange rate could not be maintained within the specified margins of the par value previously agreed with the Fund, the exchange rate weakened in 1955, from Can$1.00=US$1.0331 in December 1954 to Can$1.00=US$1.0005 in December 1955; for the year, it averaged about 1.3 per cent less than in 1954. The decline took place in two steps in February-March and in October, the rate during each of the other months being steady within a range of 1 per cent. For the first time since early 1952, the Canadian dollar was quoted below US$1.00 at certain dates in November and December. Subsequently, the rate was steady through March 1956, but by April 30 it had moved to US$1.0050.

The decline in the exchange value of the Canadian dollar during 1955 accompanied an increase over 1954 in the current account deficit and a slackening in the long-term capital inflow. The rate was supported, however, by a greatly increased inflow of short-term capital, and total capital receipts increased moderately over the year as a whole.

The initial decline in the exchange rate in February 1955, which was noted in last year’s Annual Report, occurred at a period of normal seasonal deficit on current account. The narrowing in 1955 of the differential between Canadian and U. S. interest rates, which was the result of differences between the monetary policies of the two countries reflecting in part differences in the timing of recession and recovery, discouraged Canadian bond flotations in New York and led U. S. residents to liquidate their Canadian bond holdings on a substantial scale. These effects were offset only in part by substantial nonresident purchases of Canadian stocks, to some extent attributable to tax advantages available to U. S. residents from particular forms of such investment. There was little change in direct investment between 1954 and 1955.

The fall in the exchange rate during the latter part of the year accompanied a rapid and counterseasonal increase in the current account deficit, resulting from rising imports brought about by the expansion of domestic activity. Long-term capital receipts also fell off, mainly as a result of reduced nonresident purchases of Canadian stocks. There were, however, substantial receipts of short-term funds, arising from commercial borrowing, and a decline in private Canadian holdings of foreign exchange, especially during the fourth quarter, when the exchange rate was declining. Credit conditions in Canada tightened during the second half of the year, and, instead of net sales of outstanding Canadian bonds by nonresidents, there were small net purchases during the fourth quarter, and toward the end of the year a resumption of new issues in New York, mainly by Canadian public borrowers.

Canadian official reserves of gold and U. S. dollars fell by $42 million during 1955, to US$1,901 million on December 31. Official intervention to maintain orderly market conditions led to some support for the rate during the periods of exchange weakness in February and October, and there were additional drafts on reserves in February in connection with the official repatriation of US$50 million of Government of Canada bonds payable in U. S. funds. However, there were net purchases of exchange in March and again around the middle of the year, as the rate steadied. In January 1956 the Government retired a US$48 million bond issue payable in U. S. funds, and by April 30 reserves had fallen to US$1,865 million.

Exchange stability has continued to be the objective of the basic exchange policy of Peru, which in November 1949 decided that temporarily its exchange rate could not be maintained within the specified margins of the par value agreed with the Fund. In the certificate market, with some regulatory intervention by the Central Reserve Bank, the exchange rate remained unchanged at 19 soles per U. S. dollar. In the subsidiary free exchange market, where invisible payments and capital transactions take place, and in which the Central Reserve Bank does not operate, the rate fluctuated within fairly narrow margins. The U. S. dollar rate moved from slightly over 19 soles in April 1955 to approximately 19.30 at the end of April 1956.

In France, which in 1948 changed the agreed par value of its currency, and has not yet agreed with the Fund on a new par value, the exchange rate established at the time of the devaluations of September 1949 has since been maintained. During the past year, it continued to be approximately 350 French francs per U. S. dollar.

During the year under review, three Fund members, Thailand, Chile, and Iran, effected a substantial unification of their exchange rates. In Chile and Iran, which have agreed par values, the effective rate applied to the great majority of transactions differs from the par value, and multiple rates are maintained for certain limited purposes.

The unification of the exchange system of Thailand was practically complete by the end of 1955. The flow of export proceeds to the free exchange market, which had been stimulated by the reform of the rice export policy on January 1, reported in last year’s Annual Report, was further widened on August 13, when all surrender requirements at the official rate for export proceeds of rice and tin were abolished. After the abolition on September 15 of surrender requirements at the official rate for rubber export proceeds, the free market rate was applicable to the whole of the exchange proceeds of Thailand’s exports.

Beginning January 1, 1956, government transactions and student remittances, which previously had been settled at the official rate, were transferred to the free market. At present, therefore, all Thailand’s foreign exchange transactions are effected at the fluctuating free market rate. An Exchange Equalization Fund, which was established in July 1955 from part of the profits of the revaluation of exchange reserves in order to prevent undue fluctuations in the U. S. dollar rate, started operations toward the end of August. The baht has since strengthened considerably, and at the end of April 1956 the rate was 20.87 baht per U. S. dollar, compared with 22.11 baht at the end of August 1955 and a low of 22.56 baht at the end of May 1955.

The baht also appreciated in terms of sterling in which the Equalization Fund does not operate at present; at the end of April 1956, the sterling exchange rate was 58.21 baht per pound, compared with a low of 62.59 baht at the end of May 1955. After falling during 1954, the dollar-sterling cross rate moved toward parity during 1955 and early 1956; at the end of April 1956, it was £1=$2.79.

Fundamental changes in the exchange system of Chile, which became effective in late April 1956, entailed a considerable simplification of its multiple rate structure and the abolition of its import licensing system. This was part of a general program intended to re-establish the stability of the Chilean economy. Prior to the change, most trade, registered capital, and some other invisible transactions took place at the rate of 300 pesos per U. S. dollar. Some essential imports were permitted at the rate of 200 pesos per U. S. dollar. For minor exports there was a mixing system based on the fluctuating free market rate and the 300 pesos rate. Some invisibles not directly related to trade, capital transactions, and some other minor transactions were also effected through the free market.

The new exchange system provides for two fluctuating free markets: a Banking Free Market for all permitted imports and exports and associated invisibles, certain registered capital items, and government and semigovernment transactions; and a Brokers’ Free Market for capital and invisible transactions not permitted in the Banking Free Market. The authorities will intervene in the Banking Free Market if necessary to maintain orderly conditions. Imports had previously been regulated by means of licenses granted to established importers in accordance with individual quotas. Under the new system, the importation of a large number of commodities is permitted without license, and other imports are prohibited. Imports are subject to advance deposits in local currency, varying from 5 per cent to 200 per cent of their value, depending on the commodity.

The par value which was established in October 1953 is no longer applicable to any exchange transaction. At the opening of operations in the new exchange market, the rate for the U. S. dollar was 490 pesos in the Banking Free Market, and 500 pesos in the Brokers’ Free Market.

In Iran, equality between the free market rate for Category II imports and the Category I rate was maintained by official intervention for several months until March 1956, when the Category II rate was formally eliminated, and a uniform effective rate of Rls 75 per U. S. dollar (buying) and Rls 76.50 per U. S. dollar (selling) was established for all commercial and most noncommercial transactions.

In Lebanon and Syria, the great majority of exchange transactions take place at rates that are not governed by the par values agreed with the Fund. In Lebanon, the exchange market continued to be stable during 1955 and early 1956; the U. S. dollar rate fluctuated between LL 3.22 and LL 3.26. In order to build up reserves, mainly of gold, there were some official purchases in the exchange market, mainly of U. S. dollars. In Syria, as a result of official intervention, the free market rate for U. S. dollars remained steady at LS 3.56–3.57. There were minor fluctuations in rates for other currencies. While broken cross rates still exist in both countries, the degree of disparity has diminished. The sterling-dollar cross rates, which were about $2.72 to the pound at the end of 1954, moved to $2.77 by the end of 1955.

There are nine members of the Fund, Afghanistan, China, Greece, Indonesia, Israel, Italy, Korea, Thailand, and Uruguay, with which initial par values have not yet been agreed with the Fund. In Italy, the official exchange rate of approximately 625 lire per U. S. dollar has been maintained since its establishment shortly after the devaluations of September 1949. Greece has maintained the official rate of 30 drachmas per U. S. dollar.

Current Position with Respect to Restrictions and Discrimination (including bilateralism)

Foreign exchange restrictions impose a less serious obstacle to international commerce today than at any time since the outbreak of World War II. Although there are still substantial exchange restrictions and discrimination, the trend toward convertibility which was noted in 1953 and 1954 has been maintained. Indeed, in 1955 and the early part of 1956, progress toward an international system of freer trade and payments was probably greater than in 1954. Throughout a large area, economic factors of price and quality are permitted to play a larger role than when last year’s Annual Report was written. There were no dramatic changes of policy during the year. The important fact, however, is that the changes have generally pointed in the direction of less and less exchange and trade restriction, and that there is a widespread and genuine conviction that this is the right direction. It was to be expected that, from time to time, individual countries would be confronted with a recrudescence of balance of payments difficulties. They have, however, shown little disposition to regard a return to exchange controls as the appropriate remedy, although some countries have felt obliged to reintroduce controls temporarily as a means of checking declines in their reserves.

The economic conditions of the previous year and the administrative actions that were then taken laid the foundations upon which this progress was in large part based. During 1955, there was further general improvement in balances of payments and reserves, particularly in Western Europe, though sterling area reserves declined during the year. Further use was also made of the facilities for the transfer of payments among members, particularly through the use of sterling and the deutsche mark.

The extension of transferability is illustrated by the facilities granted by several members of the European Payments Union (EPU) to certain other countries to convert holdings of their currencies into some or all other EPU currencies. Some of these countries made it possible for Finland to exchange part of the Finnish balances of their respective currencies into other EPU currencies, and France extended similar facilities to Argentina, Mainland China, and Hungary. Residents of most sterling area countries are allowed to accept payment in any of the so-called “specified” currencies (which include the major world currencies) for exports to countries in the transferable account area. In its transactions with some other countries, Egypt has, by using transferable sterling facilities, been able to reduce the volume of dealings in Egyptian pounds at depreciated rates. As new payments agreements have been concluded by the Federal Republic of Germany, and the number of countries with which Germany has maintained a bilateral payments basis has diminished, the use of partly convertible deutsche mark by foreign traders has risen sharply. The authorization by the U.K. authorities of official intervention in the foreign markets that deal in transferable sterling, and the reduction in the discount on transferable sterling in these markets, have also been important factors in the continued movement toward a freer international payments system. The transferable sterling-dollar rate, after weakening from about $2.77 in February 1955 to about $2.76 in September, had recovered to $2.78 7/16 by the end of April 1956, when the official market rate for sterling was $2.80 23/32, and the security sterling rate was $2.77 ¾.

As a result of all these developments, many member countries have been able to take both individual and concerted steps toward convertibility through the reduction of restrictions, discrimination, and bilateral practices. They have taken advantage of the opportunity provided by the generally favorable state of reserves to reduce restrictions, and thus discrimination, against dollar goods. In some of them, the discriminatory effect of exchange controls and restrictions has been eliminated, particularly with respect to imports. During the past year, dollar import lists were further enlarged by many countries, and the OEEC countries continued their efforts to extend dollar liberalization. Simultaneously, the establishment of conditions of wider transferability and the progressive elimination of bilateral agreements permitted the reduction of restrictions on non-dollar payments and thus reduced the extent of discrimination between non-dollar countries.

The question has sometimes been raised whether some countries have not been too slow in responding to favorable developments in their payments situation, and in particular whether discriminatory practices have not been maintained when they were no longer justified by the current balance of payments position. Governments often insist upon the necessity for caution; they are understandably anxious to avoid being compelled by unfavorable developments to reverse decisions already made. Since they have to take the responsibility for any errors made in estimating the short-run consequences of the relaxation of restrictions, their assessment of the likelihood of these consequences will be conservative. No external authority can claim to be in a better position to make this assessment. But the Fund’s consultations with its members serve to bring more clearly into focus the extent to which various exchange and trade controls, including bilateral arrangements and other forms of discrimination, are based upon considerations of commercial policy now that the importance of balance of payments pressures has diminished.

There has, indeed, been real progress in getting rid of discrimination, even if some countries may have been unduly cautious in this respect. In most, though not in all, cases where payments discrimination is applied on balance of payments grounds, it is directed against exports from the dollar area; but, generally speaking, dollar area exporters now have to face much less stringent discriminatory restrictions than they did a few years ago. The machinery of the Fund makes it possible for any members that believe themselves to be injured by discriminatory treatment to seek an examination by the Fund of the circumstances which have produced this situation, and in Fund consultations with its members this problem is kept continuously under review. In the light of recent balance of payments and external reserve developments and of the decreasing differences in the extent to which different currencies are acceptable in international financial settlements, the Fund believes that it is justified in continuing to urge its members, with appropriate consideration of their individual circumstances, to take advantage of the opportunities which exist for further reduction in discrimination. Its decisions in particular cases reflect the view that it is more important to deal with the fundamental causes of the situations from which restrictions spring than to attempt to impose rigid conformity with rules which may be beyond the power of some of its members to observe in present circumstances.

Consideration has been given during the past year to what Fund policy might be with regard to the use of restrictions by underdeveloped countries when convertibility has been established for the major currencies. The use of restrictions by underdeveloped countries to alleviate their balance of payments difficulties stems in part from balance of payments uncertainties to which countries that export only a few primary products are particularly liable, or from their efforts to speed up economic development. In this connection, it may be noted that the proposed revision of the General Agreement on Tariffs and Trade contemplates more lenient treatment of restrictions imposed for economic development purposes by “countries which can only support low standards of living and are in the early stages of development.” No such distinction is made in the Fund’s Articles of Agreement, which contemplate the use of generally applicable criteria. However, when the Fund is asked for approval of payments restrictions, it takes into consideration the particular problems of the country concerned, including problems related to programs for economic development. The reasons for applying payments restrictions on a basis which discriminates among currencies will diminish as progress is made toward the convertibility of major currencies.

Bilateral arrangements involving the use of exchange restrictions have always been of concern to the Fund, because of the adverse effects they may have on the economies of countries which do not participate in them. In the light of the general improvement in recent years in the economic and payments positions of its members, the Fund has found it possible to take more positive action aimed at the reduction and ultimate elimination of such arrangements by its members. In 1955, a thorough examination of bilateral arrangements was undertaken in connection with the Article XIV consultations. The Fund discussed with its members how far they needed to retain their existing bilateral arrangements and the possibility of taking action that would make it easier for other members to dispense with them. A wide variety of reasons has been adduced for the maintenance of bilateral arrangements. General balance of payments pressures are still regarded by some countries as an important part of their justification, though these difficulties have, in general, diminished. Some countries with relatively strong balance of payments positions have maintained bilateral agreements for fear of discrimination or to prevent a deterioration of their foreign exchange reserves. Bilateral arrangements to which swing credits are attached are attractive to some countries whose reserves are usually low, or inadequate to cover seasonal variations in export earnings. Bilateral arrangements have also been found convenient in dealing with countries with controlled economies, or for the collection of commercial arrears and other forms of indebtedness. The part played in international trade by bilateral arrangements, however, has diminished considerably, and some of the obstacles to trade both between non-dollar countries and between non-dollar and dollar countries have thus been reduced. Although several countries entered into new bilateral arrangements during 1955, some bilateral payments agreements were allowed to lapse, and others were made less rigid. Import lists in these agreements became, increasingly, merely expressions of the partner countries’ intentions to facilitate trade in certain commodities. There was little change in the total number of bilateral agreements, but their terms were liberalized, their rigidity reduced by making use of the broader transferability accorded by some important trading countries to their currencies, and their significance as a restriction on trade diminished.

In Western Europe, Belgium-Luxembourg, the Netherlands, the Federal Republic of Germany, France, and the United Kingdom terminated some of their bilateral agreements or liberalized their payments arrangements. The machinery of the Hague Club, which is described below, has replaced the bilateral arrangements that had regulated the trade of its European members with Brazil. Finland continued its policy of negotiating agreements providing for transferability of some export earnings into EPU currencies. Japan abolished its open account agreements with several countries, replacing them with cash settlement agreements in convertible and transferable currencies. Colombia abolished the regulations under which almost all of its trade had been handled bilaterally, although some bilateral agreements have been retained.

In the light of the experience that had been gained, it was decided to continue during 1956–57 the Fund’s efforts for the reduction or elimination of bilateral practices. Many of the exchange restrictions practiced by Fund members still have a bilateral character. In many countries, bilateral payments agreements are associated with bilateral trade agreements, and the two together, with varying degrees of effectiveness, divert international trade into channels not consistent with the full benefits to be derived from a multilateral system of trade and payments. The Fund indicated certain practical steps which might be taken by members, in the light of their individual circumstances, for the more effective implementation of its policy decision of June 1955 on bilateralism, which is reported in last year’s Annual Report (pp. 123–24). For example, there is room for the elimination of inconsistencies between the payments arrangements maintained by certain members. It was also suggested that partially multilateral payments techniques should be used more extensively, bearing in mind the possibility that some currencies for which transferability facilities are already available might be used more extensively and that additional currencies might be made transferable. Attention was directed to the risk that the advantages derived from the use of convertible or transferable currencies might be nullified by discriminatory trade arrangements, and the Fund recommended that, with any reduction of the scope of bilateral payments arrangements, there should be a corresponding reduction in the use of bilateral trade practices. While recognizing the difficulties presented by the accumulation of commercial arrears and other debts, it was suggested that the possibility should be explored of solving these problems by other means. Since the elimination of bilateral payments agreements sometimes involves the disappearance of swing margins, other forms of credit, including recourse to the Fund’s resources, might be considered to facilitate the transition to a more fully multilateral system. It was also pointed out that, unless countries in stronger payments and trading positions take the lead in dismantling bilateral arrangements even at some cost to themselves, it will be difficult to continue the progress already made in the removal of restrictions. Attention was directed to the desirability of coordinated action, and it was agreed that, in appropriate cases, the Fund might make a simultaneous approach to two or more countries with a view to a further reduction in their use of bilateral arrangements. Finally it was agreed that the Fund should give special attention to the termination clauses in members’ bilateral arrangements, and that members should review at regular intervals all their outstanding bilateral agreements and determine whether they continued to serve any useful purpose.

Although in recent years Fund members have come much closer to the attainment of the Fund’s objective of the elimination of exchange restrictions, restrictive and discriminatory practices are still used by most of them, including some which do not apply transitional arrangements. Although the effects of these practices are less restrictive than at any time in the recent past, the practices persist in the forms of discrimination against the dollar area, regional discrimination, multiple exchange rates, and bilateral arrangements. Forty-seven Fund members continue to apply restrictive measures under Article XIV of the Fund Agreement. Most countries retain some element of exchange discrimination against the dollar area, and regional arrangements and some multiple currency practices make possible discrimination which may affect either dollar or non-dollar countries. Almost two thirds of the Fund’s members retain bilateral payments arrangements of some kind, though many of these arrangements have little more than a marginal significance. Finally, the administrative machinery of restrictive systems is maintained by four fifths of its members, even though the improvements of the immediate past suggest for many countries the possibility of dismantling or at least simplifying it. Some countries have not yet decreased the bilateral impact of their arrangements with other countries, or otherwise diminished their use of restrictive and discriminatory practices to the full extent justified by recent improvements in the world payments position. When there has been time for the anti-inflationary measures taken by some important countries to strengthen their balance of payments and thus to permit further progress toward convertibility to produce their full effects, the general position should become still more favorable. Barring unforeseen developments, the immediate future should therefore prove propitious for further progress in many countries in reducing, or eliminating, exchange restrictions in whatever form they may be practiced.

Article VIII and Article XIV

It is to be expected that, in the course of time, the number of Fund members with an obligation to consult regularly with the Fund on the retention of restrictions on payments and transfers for current international transactions qualifying under Article XIV, Section 2, during “the postwar transitional period” will diminish, and that eventually, as contemplated in Article VIII, Sections 2(a) and 3, any restrictions imposed on the making of payments and transfers for current international transactions and any discriminatory currency arrangements or multiple currency practices will be maintained by members only with the approval of the Fund. The issues that may arise in connection with the termination of the transitional period and of the transitional arrangements which have been maintained during this period continue to be under study by the Fund.

European Payments Union

On July 29, 1955 the OEEC Council of Ministers decided to renew the EPU Agreement until June 30, 1956 and to raise further the gold-credit settlement ratio, from 50:50 to 75 per cent gold and 25 per cent credit, the amount of available credit remaining unchanged. In order to introduce a greater measure of flexibility in the conditions under which the EPU might be terminated, a new clause was inserted in the Agreement providing that the EPU might be brought to an end at any time before June 30, 1956 at the request of countries whose quotas represent at least 50 per cent of total EPU quotas, provided that, at the same time, the new European Monetary Agreement (EMA) comes into force. This Agreement, which provides for the establishment of a European Fund and a Multilateral System of Settlements, is designed to ensure that, in connection with the return by some members to convertibility, the EPU would be replaced by a credit and settlement system more appropriate to the conditions of convertibility; its entry into force is dependent upon countries responsible for 50 per cent of the contributions to the European Fund indicating their intention to apply the Agreement.

The European Fund is intended to have a capital of $600 million, of which $272 million originating from the U. S. contribution to the EPU capital is to be transferred from the EPU, and the remainder is to be contributed by member countries. It is to make short-term credits (up to two years) available to members in order to aid them to withstand temporary over-all difficulties where such difficulties endanger the maintenance of their intra-European trade. The Multilateral System of Settlements is intended to embody machinery for settling outstanding balances at regular intervals on terms specified in advance and for ensuring the availability of short-term intercentral bank finance; however, the system is such that most balances will probably be settled through normal market channels.

The termination clause has not yet been invoked. In June 1956, the OEEC Council decided to renew the EPU for a further year with the gold-credit settlement ratio and the termination provisions unchanged; certain members concluded further bilateral amortization agreements for claims and debts to EPU not yet covered by such agreements, and Italy effected a voluntary repayment of $12 million to the EPU. During the past year, Italy joined the multilateral arbitrage scheme. The bilateral balances compensated through the EPU multilateral clearing operations have gradually declined. Several member countries have chosen to settle their monthly deficits wholly in gold rather than to take advantage of EPU credits; there is also evidence that certain member countries have reduced their net deficits offered for EPU clearing through purchases of EPU currencies for gold or convertible currencies shortly before the monthly settlements. In this respect, there has been a movement toward observing the conditions of settlement which would rule when the EPU is replaced by the EMA.

During the year under review, Germany, Belgium-Luxembourg, and the Netherlands continued to run surpluses and remained the main creditors of the EPU. The United Kingdom and Italy incurred the largest deficits. In July 1955, Italy was granted a special credit of $50 million for settlement of deficits in case of exhaustion of its regular credit facilities; this credit, which has not yet been utilized, was prolonged in June 1956 for a further period of one year. France had a surplus during most of 1955, and during the year made two voluntary repayments totaling $130 million to the EPU. It had deficits in the latter part of the year, which it chose to settle fully in gold.

Organization for European Economic Cooperation

The Organization for European Economic Cooperation (OEEC) during the past year continued its efforts toward greater freedom in intra-European trade and payments. In January 1955, the Council of the OEEC asked member countries to abolish 10 per cent of the quantitative restrictions still in force on June 30, 1954, and, during a probationary period of 18 months, to raise their liberalization percentages to at least 90 per cent over-all and 75 per cent for each of the three categories (raw materials, foodstuffs, and manufactured products). The first undertaking has been discharged, but in some countries the program of liberalization has not been completed. At the same time, the Council decided that during the same probationary period member countries should not increase further the amount of their artificial aids to exporters and should abolish them by December 31, 1955; however, because of special circumstances, certain members were exempt from the obligation to abolish these aids. The OEEC Council decided on February 29, 1956 to promote further liberalization of invisibles and capital movements.

The OEEC also continued to work toward a larger degree of freedom in dollar imports, and an OEEC Working Group periodically reviews the dollar liberalization measures of member countries as well as the trade policies of the United States and Canada. As of January 1, 1956, 54 per cent of all private imports (calculated on the basis of 1953 imports) by member countries other than Norway and Turkey-where all dollar imports remain subject to restrictions-had been freed from quantitative restrictions.

During the year under review, the OEEC has increasingly concerned itself with the problem of bilateral agreements. In February 1956, the OEEC Council decided to “carry forward the study of the problem of reducing bilateralism and discrimination in trade and payments with third countries as a step toward obtaining a convertible system of trade and payments.”

The Hague Club

A revision in the summer of 1955 of the bilateral agreements which previously had governed the trade and payments relations of a number of OEEC countries with Brazil resulted in the formation of what has come to be known as the Hague Club. This arrangement, which is made effective through separate agreements or understandings between Brazil on the one side and Belgium-Luxembourg, Germany, Italy, the Netherlands, and the United Kingdom on the other, is designed to widen the degree of multilateralization of trade and payments between Brazil and the monetary areas of the European participants.

The arrangements provide that Brazilian exports to the monetary areas of the participants will receive the same exchange rate treatment as exports settled in convertible currencies and that they may be paid for in any of the participants’ currencies without regard to the particular country of destination. Brazil has agreed not to discriminate between the European currencies in respect of Brazilian import payments, and orderly cross rates among these five currencies are maintained. Furthermore, since Brazil may use its earnings of these currencies for payments to any of the participants, it is able to pool these earnings, and offer them conjointly for auction in the form of “ACL (i.e., area of limited convertibility) dollar certificates.” Successful bidders for such certificates are able to obtain imports from any of the European participants (including their monetary areas) payable in any of their currencies.

In addition, Brazil is able to transfer its earnings of the currencies of Belgium-Luxembourg, Germany, Italy, the Netherlands, and the United Kingdom, directly or indirectly, to other non-dollar countries. Previously, only Brazil’s holdings of sterling had been thus transferable. It is understood that the Brazilian authorities intend to avoid the use of these currencies for payments to the dollar area.

The European participants have not instituted a common policy in regard to imports of Brazilian products; in fact, however, their policies have been generally liberal, both before and after the institution of the Hague Club.

These agreements, which members have indicated their willingness to extend by adding new members,1 represent an important step in expanding the use of the techniques of multilateral payments, and of doing away with the distortions of trade and payments patterns that had been produced by bilateral relationships. The wider area of competition and the fact that there is no provision for swing margins mean, for both the European participants and for Brazil, that internal measures must play a greater part in solving their balance of payments problems. The Fund welcomed the contribution made by these arrangements as a transitional step toward a fully multilateral and nondiscriminatory system of trade and payments, and stated that it would maintain its interest in their future operation.

Other Developments in Exchange Policy and Practice

Details of other changes in exchange policy and practice in 1955 are reported in the Seventh Annual Report on Exchange Restrictions. However, developments in the countries noted below are of sufficient general interest to be recorded also in this Annual Report.

The use of the free exchange market in Belgium-Luxembourg was extended on July 18, 1955 to all capital transactions by both residents and nonresidents. As a result, capital transactions between Belgium-Luxembourg and all other countries can now be made freely, provided they are made through the free exchange market. The volume of transactions in this market is reported not to have been large and, with the exception of the rates for certain blocked currencies, the free market rates have generally been within 1 per cent of parity.

As of August 1, 1955, residents of the United States and of Canada, and as of January 1, 1956, residents of other dollar countries, were permitted to repatriate capital balances in the Netherlands through the purchase of so-called “security dollars” originating from the sale of dollar securities by Netherlands residents.

No basic changes in the exchange system of Brazil were made during the year. Exchange auctions for imports and fixed bonuses for exports were maintained, with some adjustments involving primarily the shifting of commodities from one export or import category to another, and generally in the direction of more depreciated rates. With the establishment of multilateral trade and payments arrangements involving the United Kingdom, Germany, Italy, the Netherlands, and Belgium-Luxembourg, referred to above, the bonuses for exports in deutsche mark, lire, guilders, and Belgian francs were raised to the level of those applicable to exports in convertible currencies or sterling.

The prices of “dollar certificates” for the five categories of private imports fluctuated considerably, and for the period as a whole showed a substantial rise. Average quotations for 120-day delivery, U. S. dollar certificates in Rio de Janeiro toward the end of April 1956 were as follows (with comparative figures for April 1955 shown in parentheses): Category I, Cr$93.35 (Cr$69); Category II, Cr$126.65 (Cr$80); Category III, Cr$202.75 (Cr$175); Category IV, Cr$242.60 (Cr$171); and Category V, Cr$300.50 (Cr$291).

From a low of about Cr$84 in March 1955, the free market rate for the U. S. dollar applicable to certain invisible transactions appreciated continuously until late November, when it averaged Cr$66.96; it then began to weaken, averaging Cr$79.85 in the latter part of April 1956.

The exchange rate structure of Uruguay was modified on September 15, 1955 by the establishment of a temporary premium on exports of wool and the devaluation of the exchange rates for imports. A premium of Ur$0.21 per U. S. dollar over and above the rates of Ur$1.519 per U. S. dollar for greasy wool and of Ur$1.60 for scoured wool was granted to exports made in the period September 15-December 31, 1955. It was intended to reduce this premium in two successive steps in the following half year, but the period during which it was granted was subsequently extended to March 31, 1956. Import rates were raised from Ur$1.90 to Ur$2.10 per U. S. dollar for essential goods, and from Ur$2.45 to Ur$2.80 for other imports, representing a devaluation of 9.5 per cent and 12.5 per cent, respectively. Later in the year, a temporary premium of Ur$0.14 per U. S. dollar over the exchange rate of Ur$2.026 was given to exports of wool tops, and the export rate for dry cattle hides was also temporarily increased from Ur$1.519 per U. S. dollar to Ur$2.25.

In the free financial market, the exchange rate applicable to invisibles not associated with trade and to capital transactions was fairly stable during the early part of the period, but subsequently tended to depreciate. The free market rate which in April 1955 had been about Ur$3.14 per U. S. dollar had moved to Ur$3.95 by April 1956. The weakening of the rate can be attributed in part to the decline in the purchasing power of the peso produced by inflation. Moreover, with the falling off of exports, the leakage of export proceeds to the free market was presumably reduced.

In an effort to cope with its exchange difficulties, a series of measures was taken in Colombia, primarily in order to raise the cost of imports. In May 1955, a new free exchange market was created by the consolidation of the former “export voucher,” gold exchange, and curb markets. Proceeds from minor exports and payments for many less essential imports were transferred from the official market to this new free market. At the same time, the imports so shifted were exempted from the requirement that payments with certain countries be made on a bilateral basis. As the pressure on official exchange resources persisted, additional payments, including imports of capital goods, were shifted to the free market later in the year. To meet part of this additional demand for exchange, export proceeds from bananas and certain invisibles were similarly shifted. In order to restrict imports further, many commodities, primarily raw materials, were shifted to the free market in April 1956. Other measures taken at the same time included an increase in advance deposits on imports and the imposition of supplementary reserve requirements for increases in bank deposits. Moreover, the system of controlling exchange payments on the basis of bilateral balances was abandoned. The free market rate, which in May 1955 was Ps$4 per U. S. dollar, had moved by the end of April 1956 to Ps$4.75.

To cope with the growing pressure of import demand, Ecuador made a number of adjustments within the framework of the existing exchange system. A reclassification of imports in mid-1955 was tantamount to a selective devaluation of the import rate, and imports were subjected to additional taxes and differential advance deposit requirements. Moreover, the Central Bank began to limit the types of payment that could be effected through it at the free market rate and required the surrender of export proceeds eligible for the free market. As a result, the free market was, in effect, divided into two segments, and the rate in the dealers’ market began to diverge from the free market rate applied by the Central Bank, which was confined to certain trade and related transactions. After having been maintained at about S/ 17.30–17.40 per U. S. dollar for several years, the rate in the dealers’ market tended to weaken around mid-1955, and reached a low of S/ 19.15 per U. S. dollar in July. It subsequently recovered to below S/ 18, but at the end of April 1956 was about S/ 18.50.

Continued severe inflation in Bolivia caused the authorities to resort to a number of ad hoc measures, designed primarily to maintain the flow of exports, and there was a further depreciation of the boliviano in the free market from Bs 2,667 per U. S. dollar at the end of April 1955 to Bs 5,800 at the end of April 1956. In November 1955, a new system for dealing with exports of certain agricultural and forest products was introduced, granting such exporters preferential use of their exchange proceeds for specified imports or for sale at the free market rate. The exchange retention privileges of small and medium-sized mining enterprises were extended.

The fourth extension, until the end of June 1956, of the 17 per cent exchange tax, which had been first imposed in the Philippine Republic in March 1951, was approved by the Fund in June 1955. However, following the revision of the Philippine-U. S. trade agreement in September 1955, this exchange tax was abolished, effective January 1, 1956, and instead a 17 per cent import levy was imposed. The import levy is intended to be successively reduced and finally eliminated within ten years. All trade transactions which were exempt from the exchange tax are also exempt from the import levy.

The rate applied in Israel to incoming remittances from fund-raising institutions was raised on October 2, 1955 from I£1.30 per U. S. dollar to I£1.50, the principal exchange rate being l£1.80 per U. S. dollar.

The premiums on the import certificates introduced in Iceland in 1951 in order to increase the local currency receipts from certain exports of fish were increased on November 4, 1955 from 61 per cent to 71 per cent for imports from the dollar area, the EPU area, and the U.S.S.R., and from 26 per cent to 36 per cent for imports from most other countries with which Iceland has bilateral clearing arrangements.

In Finland in December 1955, the surcharge on foreign exchange for travel purposes was reduced from about 51 per cent to about 42 per cent of the par value. At the same time, transfers were permitted between inland markka accounts held by foreign banks and tourist markka accounts, so that the discount on the former decreased to that on the latter.

Modifications introduced by Turkey in November 1955 into its exchange subsidy arrangements amended the list of commodities subject to export subsidy, and unified the subsidies paid on exports against dollars and EPU currencies; separate subsidies are maintained for exports paid in bilateral account currencies.

In Egypt, the import entitlement account system, under which U. S. dollars, sterling, and deutsche mark had been quoted at premiums up to 15 per cent, was abolished in September 1955. At the same time, export taxes on raw cotton were substantially reduced, and a 7 per cent import tax was imposed on a wide range of imports. The “B account” arrangements with Switzerland, Belgium-Luxembourg, and the Netherlands, under which the Egyptian pound had been quoted at discounts up to 14 per cent, were also abolished, but were subsequently revived, with safeguards intended to prevent the re-export of Egyptian raw cotton from these countries. In March 1956, a general restrictive import licensing system was adopted, with a view to limiting imports by reference to the value of exports in specified periods.

Changes in the exchange system of Yugoslavia during 1955 had the effect of reducing, and, as from January 1, 1956, of virtually eliminating, the importance of the free market for foreign currencies. Under the present system, almost all foreign exchange is channeled into the Central Exchange Fund and, with minor exceptions, payments are made with exchange administratively allocated from this Fund. There are still numerous rates, but the scope of fluctuating rates has been greatly reduced. As from January 1, 1956, a premium of 33⅓ per cent was introduced for exchange receipts from tourism and from diplomatic and other foreign missions, so that the effective rate for these transactions became 400 dinars per U. S. dollar.

Indonesia made several changes in its exchange system in 1955, and in particular overhauled its import system on September 1. Imports were reclassified into four categories: (I) essentials, (II) semiessentials, (III) luxuries, and (IV) extreme luxuries. The surcharges previously levied were replaced by new consolidated surcharges of 50 per cent of the cost and freight value, at the official exchange rate of Rp 11.36 per U. S. dollar, for Category I imports, 100 per cent for Category II imports, and, from October 15, 200 per cent for Category III and 400 per cent for Category IV imports. However, several imports, including rice, raw cotton, and cotton weaving yarns were exempted from all surcharges.

Export-import linked transactions, barter transactions, and the so-called “exchange free” imports (i.e., luxury imports for which no official exchange was made available) were also abolished in September, quantitative restrictions were considerably reduced, and the import licensing procedure was reformed and simplified. The re-registration of all importers was ordered, and the rules for prepayment were amended to require from national importers an advance deposit of the countervalue of foreign exchange requested, plus all surcharges, at the time of filing an application, instead of, as previously, at the time when licenses were granted. Foreign importing firms were required to deposit with an authorized bank, at the time of registration, a minimum of Rp 5 million, against which they could draw for making advance payments on imports, including surcharges. From February 1, 1956, national importers were required to make similar deposits of Rp 500,000. Foreign importers of industrial and horticultural goods solely for their own use were exempted from the Rp 5 million deposit requirement, but remained subject to the regular advance deposit requirements.

As from June 1, 1955, the Export Inducement Certificate system, from which smallholder rubber had been withdrawn in February, was entirely abolished. However, effective October 24, there was introduced a system of premiums of 5 per cent on the f.o.b. proceeds from exports of pepper, and 10 per cent on the proceeds from all other exports of Indonesian products, except copra, coffee, palm products, crude oil and its products, tin, leaf tobacco, sugar, and certain types of rubber. At the same time, all additional export duties and a number of ordinary export duties were abolished, and some other ordinary export duties were lowered. The export premium on kapok was raised from 10 per cent to 15 per cent, effective March 10, 1956, and that on all other types of fiber from 10 per cent to 25 per cent, effective March 1, 1956.

Beginning February 19, 1955, the importation of foreign securities was subjected to a levy of 33⅓ per cent of the current domestic market value of the security. In May 1955, allocations for outward private remittances by foreign residents in Indonesia were set at 20 per cent of the remitter’s gross taxable salary with an over-all ceiling of Rp 36,000 per year for the independent professions and Rp 48,000 for employed persons; and for life insurance, annuity, and similar payments, they were set at Rp 300 per month. For other remittances, the limits that had been set previously were maintained.

In China (Taiwan) the application of the exchange certificate rates introduced on March 1, 1955 was extended later in the year to some additional major commodities. In September the system was further revised, different percentages, depending on the kind of payment or receipt, of the value (fixed or fluctuating) of the exchange certificate being added to the Bank of Taiwan rate of NT$15.60 per U. S. dollar. The fixed price for exchange certificates on which the percentages are calculated is NT$6 per U. S. dollar. The exchange certificates are also negotiated in a market, and quotations have been between NT$7 and NT$15 per U. S. dollar. The quotation at the end of March 1956 was NT$12.40 per dollar. A defense tax of 20 per cent continues to be imposed on sales of foreign exchange. A preferential exchange rate is set monthly for diplomats, members of the U. S. Armed Services, etc.; in December 1955, this rate was changed from NT$34 to NT$36 per U. S. dollar.

In the Republic of Korea, the official rate of 180 hwan per U. S. dollar, which had been in effect since December 1953, was changed to 500 hwan on August 15, 1955. The official rate applies to all transactions except certain imports received under the U. S. aid program. A rate of not less than 200 hwan applies to coal of U. S. origin during the fiscal year ending June 30, 1956, and differential rates, depending on the commodity, apply to relief supplies and investment type commodities for nonrevenueproducing projects. The present exchange control system, effective since August 25, 1955, represents a move from restrictions based on import licensing to restrictions through allocation of exchange. Exchange may be obtained from government sales of exchange or from the proceeds of exports. Exporters are required to collect their export proceeds in specified currencies to be held in foreign exchange accounts maintained at the Bank of Korea. Government approval is required for all remittances abroad except those of certain diplomatic agents.

The most far-reaching change in the exchange policies of countries which are not members of the Fund was announced in Argentina on October 27, 1955. A basic exchange rate of M$N 18 per U. S. dollar was established to replace the rates of M$N 5, M$N 7.5, and M$N 13.95 (“controlled free” rate), and numerous mixing rates that had existed previously.

The new system comprises two exchange markets: the official market, with a fixed rate of M$N 18 per U. S. dollar, and the free market, with a fluctuating rate determined by market forces. In the latter, the peso has tended to depreciate from about M$N 30 per U. S. dollar at the time the new system took effect to about M$N 38.85 at the end of April 1956. The official market applies to all major exports, to imports of fuel, essential foodstuffs, and raw materials, and to government payments. The official market export rates are modified, however, by taxes ranging up to 25 per cent, which are intended as a temporary measure to minimize the undesirable effects of the devaluation. Transactions in the free exchange market include minor exports, imports not authorized in the official market, and invisible and capital transactions. Some imports through this market are subject to an exchange surcharge of M$N 20 or M$N 40 per U. S. dollar, varying with the degree of their essentiality.

Restrictions affecting financial remittances and capital movements were abolished, and such transfers may now be made freely through the free exchange market, without authorization. However, income from foreign investments accruing before June 30, 1955 and the principal of such foreign investments existing on October 28, 1955 continue to be subject to the control of the Central Bank.

Austria became a member of the Hague Club on June 13, 1956.

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