Chapter

V External Payments and Domestic Financial Developments in Selected Countries

Author(s):
International Monetary Fund
Published Date:
September 1958
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United States

Internal Developments

Business activity in the United States leveled off early in 1957 and turned down after the third quarter of the year. Real gross national product for 1957 as a whole was only 1 per cent above that of 1956, compared with increases of 2.8 per cent in 1956 over 1955 and 7.3 per cent in 1955 over 1954. Prices continued to rise because of both demand and cost pressures. Wholesale prices averaged about 2 per cent above 1956, and consumer prices rose by about 3½ per cent. Prices of industrial raw materials were declining, but prices of agricultural and manufactured finished products rose.

As in most recessions, a combination of factors was responsible for the downturn in economic activity and the subsequent continued fall. Investment in producers’ durable equipment and exports began to decline after the first quarter of 1957. On the other hand, personal consumption expenditures, especially for services, expanded, and there were increased government purchases of goods and services. In the third quarter of 1957, there was a sharp reduction in new defense orders. In the fourth quarter there was, for the first time since 1954, a decumulation of inventories, which was the principal cause of the fall in national income. Construction activity remained approximately constant throughout the year. Under the pressure of decreasing demand in other sectors, personal disposable income and personal consumption expenditures also began to fall slightly in the last quarter of 1957.

By March 1958, industrial production (seasonally adjusted) had declined by 12 per cent from the peak; thus the decrease at that time already exceeded the total declines in the recessions of 1948-49 and 1953-54, each of which was approximately 10 per cent. Unemployment (seasonally adjusted) at 7.5 per cent of the labor force in April 1958 was also more severe than in the earlier recessions. This was due in part to the fact that the 1957-58 recession began with a higher rate of unemployment than at the beginning of the earlier recessions. There were other differences too. In 1948-49 there was still a large backlog of wartime pent-up demand being worked off; and in 1953-54 activity in Western Europe was booming. In the present recession, for the first time since the war, considerable excess capacity emerged in many branches of production, and industrial production in Western Europe began to level off.

The large demand for funds, combined with the policy of credit restraint, caused interest rates to rise during most of 1957. The internal financial resources of business firms were the main source from which new investment funds were drawn, and for the second successive year businesses liquidated some of their government securities. Net funds raised through flotations of new corporate bonds and other securities rose from $8 billion in 1956 to $11 billion in 1957. Bank loans to business increased by $1.8 billion during the year, compared with an increase of $5.5 billion in 1956.

The policy of credit restraint was continued through August 1957 when the discount rate was raised from 3 per cent to 3.5 per cent. As it became evident, toward the end of the year and in early 1958, that the immediate danger was no longer inflation, but recession, the Federal Reserve Board modified its policy and took steps to ease the money market. Countercyclical open market operations started in October, and beginning in November, the discount rate was lowered in four stages from 3.50 per cent to 1.75 per cent in April. The reserve requirements of all member banks were also reduced in a number of steps. The banks used most of the increase in reserves to reduce their indebtedness to the Federal Reserve Banks and to rebuild their holdings of government securities, which had been reduced by $3 billion in the first half of 1957. With easier credit conditions, interest rates on government bonds, commercial paper, and treasury bills fell sharply. The treasury bill yield fell from 3.58 per cent in October 1957 to less than 1 per cent in May 1958. The yield on long-term government and corporate bonds also fell, but less than the treasury bill rate. Interest rates on bank loans typically lagged in their reaction to this movement, but by April 1958 the prime lending rate of many of the larger banks had fallen by 1 per cent.

The income velocity of money (seasonally adjusted) had increased every quarter since early 1955 because of boom conditions and rising interest rates. But in the last quarter of 1957, it fell for the first time in three years.

For the calendar year 1957 as a whole, the effects of fiscal developments upon the U.S. economy were, for the most part, neutral. The federal cash budget showed a small surplus, but the higher level of government spending, even though covered by tax receipts, may have had some expansionary influence. Although “built-in stabilizers,” such as unemployment compensation benefits, began to operate to sustain income as output and employment fell, the scope of fiscal policy was initially limited by the legal ceiling on the federal debt. In early 1958, this ceiling was raised by $5 billion, and action was taken to accelerate expenditures. It was expected that, as a result of these measures, federal expenditures in the fiscal year 1957-58 would be well over $73 billion, while revenue receipts would be about $70 billion. The programs already instituted are expected to increase federal expenditures in the fiscal year 1958-59 to $78 billion. Even without a reduction in tax rates, revenues are likely to fall as a result of the recession, and in 1958-59 there may be a deficit of $8 billion or more.

Payments Developments

After five years during which gold and dollars were continuously transferred from the United States to official reserves elsewhere, the flow was reversed in 1957 and the payments balance of the rest of the world in transactions with the United States showed a deficit of nearly $1.4 billion, against a small surplus in 1956. This change occurred in spite of a further increase in the supply of dollars, which, however, was greatly exceeded by the steep rise in other countries’ disbursements in the United States, mainly to pay for increased purchases of U.S. goods and services, but also to finance a substantial inflow of short-term funds, recorded and unrecorded, to the United States (Table 16). The turn in the world’s dollar balance took place in the last quarter of 1956, when increased demand for U.S. fuel following the closing of the Suez Canal precipitated a steady rise in U.S. exports which continued through the first half of 1957. Massive movements of capital into the United States added to the drain on official dollar holdings. Thus, in the 12 months ended September 30, 1957, the payments balance of the rest of the world with the United States showed a deficit of almost $2 billion (Table 16).

Table 16.Untied States: Summary of Balance of Paykbots, 1956—First Quarter 19581(In millions of U.S. dollars)
195619571958
19561957Jan.-Oct.-Jan.-Oct.-Jan.-
Sept.Dec.Sept.Bec.Mar.
Government transactions2-5,312-5,658-4,027-1,285-4,308-1,350-1,421
Private current transactions
Exports: Merchandise17,29619,30112,4384,85814.6654,6364,045
Services5,7266,4394,1701,5564,7921,6471,379
Imports: Merchaudise-12,791-13,291-9,580-3,211-9,906-3,385-3,176
Services3-4,194-4,318-3,220-974-3.307-1,031-884
Balance6,0378,1313,8082,2296,2441,8871,364
Private capital transactions
U.S. capital, net outflow-2,980-3,211-1,901-1,079-2,613-598-715
Foreign capital, net inflow
Long-term5423614291133115037
Short-term4900899772128901-2228
Balance-1,538-1,951-700-838-1,401-550-450
Errors and omissions692876369323984-108182
Gold and dollar transfers to official holders5121-1,398550-429-1,519121325
Sources: U.S. Department Of Commerce, Survey of Current Business: Board of Governors of the Federal Reserve System, Federal Reserve Bulletin: International Monetary Fund, International Financial Statistics.

Excluding military aid and commodity transfers financed by it,

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

Including private donations.

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

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

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

Excluding military aid and commodity transfers financed by it,

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

Including private donations.

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

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

In the last quarter of 1957 the general payments situation again changed, the rest of the world showing a small surplus with the United States, and this trend was accelerated into 1958. During the seven months ended April 30, 1958, other countries added some $800 million to their reserves as a result of transactions with the United States.

The increase of some $2.4 billion in the U.S. surplus on current private transactions between January-September 1956 and January-September 1957 was almost entirely due to a temporary sharp expansion in U.S. exports. In the latter period their volume was some 15 per cent, and their value some 18 per cent, greater than in the first three quarters of 1956. There was a substantial expansion in capital goods exports, with smaller increases in those of consumer goods other than automobiles. To a large extent, however, the expansion resulted from abnormal increased demands for U.S. fuel, as a result of the events of Suez, for wheat, because of crop failures in importing countries, and for cotton, owing to restocking demand at reduced prices. Exports of fuel rose by some 50 per cent and those of agricultural produce by nearly 20 per cent. The disappearance of special demands for U.S. fuel and reduced sales of agricultural products were largely responsible for the decline in U.S. exports in the last quarter of 1957, which, however, also extended to other products, such as industrial supplies and equipment, reflecting the slowing down of economic activity in Canada and the effects of measures taken by a number of countries to curb imports. Thus, in the six months ended March 1958, the volume of U.S. exports was 12 per cent, and the value 11 per cent, less than in the corresponding period of 1956–57.

These sharp movements in exports were accompanied by remarkable stability of imports. The decline in U.S. economic activity had led to expectations that U.S. imports would decline. They were, however, well maintained through the first quarter of 1958. For 1957 as a whole, U.S. imports were greater than in 1956 by roughly 2 per cent in volume, and 3 per cent in value, both volume and value being greatest in the last quarter of the year. Preliminary data indicate a continued high level of imports in the first quarter of 1958 and, during the six months ended March 1958, imports were slightly higher than in the same period of 1956-57. The decline in industrial production was reflected in a reduction of imports of crude and semimanufactured materials (other than petroleum and fuel oil) by some 8-9 per cent in volume and 12 per cent in value. At the same time, however, there was a continued upward trend in other imports which outweighed any recession effects. Imports of petroleum and products, which have risen steadily during the last ten years, advanced from 1956 to 1957 by 9 per cent in volume and by more than 20 per cent in value. The import volume of finished manufactures (excluding newsprint), which had risen by 26 per cent from 1954 to 1955, and by 18 per cent in 1956, increased by a further 11 per cent in 1957. The increase occurred largely in automobiles, the number of imported passenger cars in 1957 being more than four times as great as in 1955. The rise in imports of petroleum, as well as in those of manufactures, continued through the first quarter of 1958. Increased imports of foodstuffs further helped to maintain a high level of total imports.

As in every other year since the end of World War II, U.S. Government transactions (including grants and government foreign lending) accounted for an important part of the dollars which became available to other countries. In 1957 the proportion was about 27 per cent and the total, including $250 million drawn by the United Kingdom from the Export-Import Bank, was some $350 million greater than in 1956. In the first quarter of 1958, government expenditure continued at the high level of 1957.

Agricultural exports, which comprise about one fifth of U.S. merchandise exports, were again greatly stimulated by U.S. surplus disposal measures, viz., sales on special terms, including exports under grants and loans and, since 1956, exports of cotton at competitive world prices. The persistence of these sales is an indication of the great difficulty of finding a satisfactory solution for the problems of agricultural surpluses. It is the policy of the U.S. authorities to endeavor to ensure that surpluses disposed of on these terms constitute a net addition to the volume of world trade; in other words, that they represent imports which the recipient countries would not otherwise be in a position to purchase. Clearly, to the extent that surplus disposal prevents other exporters from selling part of their output on ordinary competitive terms in the markets to which the surpluses are exported, such surplus disposal programs would affect adversely the current and prospective foreign exchange earnings of other countries.

Exports of U. S. capital in 1957 were nearly $250 million above the high level of 1956, some decline in short-term lending being more than offset by increased long-term direct and portfolio investment. By far the larger part of the capital outflow took place in the first half of the year, partly in continuation of purchases of oil concessions in Venezuela, which resulted in payments of over $400 million to that country during the first three quarters of the year. In comparison with 1956, there was a marked shift in the area distribution of U.S. investment: well over 40 per cent—against less than 30 per cent in 1956—went to Latin America, largely for the development of oil resources, but also for the development of other industries. Venezuela was the main single recipient, but there was also an outflow to Cuba, Colombia, Brazil, Mexico, and other countries. Investment in Canada was slightly less than in 1956. The flow of capital to all areas other than the Western Hemisphere was less than in 1956, partly because in that year the total included a substantial nonrecurring item arising from the sale of the Trinidad Oil Company to a U.S. firm, but also to some extent because of less buoyant business conditions abroad in 1957. Some $200 million went to international organizations, mainly in the form of bond issues by the International Bank for Reconstruction and Development, whose loans were greatly expanded during the year. Preliminary data for the first quarter of 1958 indicate a continued substantial capital outflow, mostly in the form of long-term investment.

In estimating changes in the flow of foreign funds into the United States, the Errors and Omissions item in the balance of payments may be added to the recorded movements of foreign capital, since the most volatile element in the former is probably a capital item and much the same influences produce fluctuations in Errors and Omissions and fluctuations in the movement of foreign short-term funds. Measured on this basis, the inflow of short-term funds in 1957 was some $200 million greater than in 1956. If the two years ended September 1956 and September 1957 are compared, there was a much larger increase of more than $1.1 billion. Most of the increase consisted of funds attracted as a result of apprehensions aroused by the Suez events and, later in 1957, about the stability of sterling and other European currencies; it also included increased Canadian holdings of U.S. dollars representing the unspent proceeds from Canadian issues floated in the United States.

In the last quarter of 1957, there was a certain reflux of foreign funds from the United States. The Errors and Omissions item was negative to the extent of over $100 million, and since such current items as are included in Errors and Omissions are probably, on balance, positive, the unrecorded withdrawal of funds, mostly on commercial account, may have been somewhat more than $100 million. This, however, represented only a partial reversal of the inflow of the preceding 12 months. There appears to have been no significant movement of unrecorded capital in the first quarter of 1958.

The surplus of the rest of the world with the United States, which in the 6 months ended March 1958 amounted to about $450 million, continued into the second quarter of the year. In April it amounted to some $350 million, and preliminary data indicate a surplus of similar magnitude in May.

United Kingdom

Production in the United Kingdom was slightly greater in 1957 than in 1956. Government economic and financial policy was directed primarily toward the objectives of elimination of inflation at home and the attainment of a more satisfactory balance of international payments.

The increases over the previous year of about 1½ per cent in real gross national product and nearly 4 per cent in the volume of imports were absorbed by larger investment and consumer expenditure; exports rose very little, and the current expenditure of the public authorities declined.

Two years of big increases in industrial capacity and small increases in industrial production reduced the degree of utilization of capacity. Steel ceased to be a limiting factor in the production of most engineering and allied industries. The number of unemployed increased, while the number of unfilled vacancies fell. By March 1958 unemployment reached 2 per cent of the labor force, the highest in five years.

Although the pressure of demand was reduced, prices and wages continued to rise, until by October 1957 wage rates were 5½ per cent higher than a year earlier and prices of industrial goods had risen by nearly 4 per cent, although prices of materials used by industry had been falling since the beginning of the year.

This upward movement of prices and wages, which continued a trend that had been observed for a number of years, was among the factors underlying the outflow of short-term funds during the exchange crisis of August-September 1957. To meet this crisis, a number of measures designed to eliminate domestic inflationary pressures and to rectify the position of the short-term capital account were announced on September 19. The bank rate was raised from 5 per cent to 7 per cent; clearing bank advances for the next 12 months were limited to the average level of the preceding 12 months (apart from those connected with certain export credits); and it was announced that the upward trend in public investment was not to continue, the total in 1958-59 and in 1959-60 being kept approximately the same as in 1957-58. Arrangements were also made to mobilize credit from abroad, e.g., by drawing $250 million in October 1957 on the line of credit authorized in December 1956 by the Export-Import Bank of Washington, and by the renewal in December 1957 of the standby arrangement with the Fund.

By the end of 1957, and in early 1958, the pressure on the banking system and on the exchanges had clearly subsided. Bank advances to the private sector fell in every month between June 1957 and January 1958. Wages and prices leveled off during the last quarter of 1957 and, though wages rose very slightly, the prices of industrial goods were declining in the first five months of 1958. There was some inflow of short-term funds, the movements of which had helped to place pressure on the reserves during the exchange crisis, and foreign exchange reserves increased very substantially. These developments were followed by the reduction of the bank rate in three stages until in June 1958 it was again 5 per cent, the rate from which it had been raised in September 1957, and in July measures were also taken to modify the existing controls of credit.

The net surplus on current account in 1957, £200 million, was not very different from that of 1956. The composition of the capital side of the balance of payments was, however, markedly different from what it had been in 1956. During 1957, overseas sterling holdings were reduced by nearly £250 million, compared with a reduction of about £150 million in 1956, while the net outflow on other capital transactions was smaller than in 1956. Thus, even although the over-all balance of payments deficit of about £200 million was much the same as in 1956 (Table 17),1 there was a considerable improvement in the overseas liquidity position, sterling holdings falling and gold and foreign exchange reserves rising, although partly at the expense of an increase in medium-term and long-term indebtedness.

Table 17.International Transactions of the United Kingdom and the Overseas Sterling Area, 1955, 1956, and 1957(In millions of pounds sterling)
U.K. Transactions with
Total U.K. TransactionsOverseas sterling areaNon-sterling area
195519561957119551956195711955195619571
Current account
Visible trade–366–61–97–88346–358–144–143
Invisibles22972902972262242977166
Total–69229200218307343–287–78–143
Investment account
Long-term3–203–231–304–149–190–278–54–41–26
Short-term70–702040–10–3030–6050
Total–133–301–284–109–200–308–24–10124
Errors and omissions10629134837719423–48–60
Overseas sterling area transfers–147–161–7214716172
Equal
Payments balance of overseas sterling area with non-sterling countries, including gold production1861522
Minus
Changes in overseas sterling area gold and dollar reserves and net IMF position39–9–70
Changes in overseas sterling balances4–134–156–246–45–23–157–89–133–89
U.K. payments balance–230–199–196–230–199–196
Sources: United Kingdom Balance of Payments, 1955 to 1957 (Cmnd. 399), and Fund estimates.

Preliminary.

Includes interest payments due in 1956 and 1957 on North American loans but not actually paid (1956, –37; 1957, –37).

Includes repayment of principal due in 1957 but not actually paid (–26); excludes drawing on Export-Import Bank line of credit (1957, 89).

Excludes changes in IMF sterling holdings (1956, 201) and German advance deposit (1957, 68).

Sources: United Kingdom Balance of Payments, 1955 to 1957 (Cmnd. 399), and Fund estimates.

Preliminary.

Includes interest payments due in 1956 and 1957 on North American loans but not actually paid (1956, –37; 1957, –37).

Includes repayment of principal due in 1957 but not actually paid (–26); excludes drawing on Export-Import Bank line of credit (1957, 89).

Excludes changes in IMF sterling holdings (1956, 201) and German advance deposit (1957, 68).

The downward trend of overseas sterling holdings, when reserves were rising, which contrasted with the upward trend in such holdings which had been characteristic of earlier periods of increasing reserves, was accentuated in early 1958. During the first quarter of the year, there was a payments surplus of nearly £200 million, and overseas sterling holdings fell by £30 million. In April and May, there was a further payments surplus of more than £100 million.

The decline in sterling holdings during the first quarter of 1958 reflected, on the one hand, the drawing down, by £70 million in all, of the holdings of sterling countries, many of whose payments balances were strained by falling export prices, and, on the other hand, an increase of £40 million in the sterling holdings of countries outside the sterling area, which in many cases had been drawn down during the exchange crisis of the previous year.

By the end of June 1958, U.K. gold and dollar reserves had risen to more than £1,100 million, nearly £450 million more than the end-September figure of £ 660 million to which they had fallen during the exchange crisis of the previous year. During 1957, however, the United Kingdom drew £89 million from the Export-Import Bank, after having previously drawn £200 million from the Fund.

The balance of payments record within each of the two years 1956 and 1957 showed some significant fluctuations. In the first half of 1956 there was a surplus of £100 million, which was followed in the second half of the year by a deficit of £300 million, much the greater part of which occurred in the fourth quarter as a result of the Suez events. In the first half of 1957 there was a surplus of £60 million, followed in the second half of the year by a deficit of £255 million, all of which was incurred during the exchange crisis in the summer.

These fluctuations were attributable mainly to changes in capital flows of different kinds. Between 1956 and 1957 there was little change in earnings on invisibles; the decline in oil earnings resulting from the interruption of Suez Canal traffic affected both the second half of 1956 and the first half of 1957. Despite a slight improvement in the terms of trade, the deficit on visible trade was somewhat greater in 1957 than in 1956. In the first half of 1958 it was considerably smaller than in the year before. The failure of exports to rise markedly (Table 7), which was somewhat disappointing in view of the long disinflationary effort which the United Kingdom had undertaken, may be explained in part by the upward trend of wages and costs; in Continental Europe in particular, the United Kingdom appeared to have lost some ground to German competition.

The net outflow on account of long-term investment transactions increased by some £75 million between 1956 and 1957, when it exceeded £300 million. This increase was largely attributable to the marked rise in the first half of 1957 in the flow of private capital into non-sterling securities through free markets in outlying parts of the sterling area, for example, Kuwait. This outflow, which was associated with a weakening of confidence in sterling, was stopped by new exchange control regulations in July. Recorded short-term capital movements and unrecorded transactions were considerably more favorable to the United Kingdom in 1957 than in 1956. A complete explanation for these variations is not easy to find. In the second half of 1956, on the occasion of the loss of confidence associated with the events of Suez, these items showed an outflow of over £100 million to the non-sterling area; this outflow continued to a lesser extent in the first half of 1957, but in the second half of the year there appeared to be a net inflow of funds from the non-sterling area, despite the confidence crisis in the third quarter.

The payments surplus of £61 million in the first half of 1957 was accompanied by a rise of £64 million in overseas sterling holdings, and the deficit of £257 million in the second half of the year with a running down of £310 million. In relation to the non-sterling area, the causal connection between sterling holdings and U.K. reserves is fairly direct. The decline of more than £80 million (excluding the German advance deposit of £68 million) in the sterling holdings of these countries in the second half of 1957 presumably involved the United Kingdom in a decline in reserves of roughly similar amount. In the case of the sterling area countries it is only the use of their sterling holdings to settle any deficit they may have with countries outside the sterling area which affects the U.K. central reserves.

The over-all payments deficit of the overseas sterling area increased from about £30 million in 1956 to about £225 million in 1957, almost all of the increase occurring in the second half of the year. The deterioration was fully accounted for by a decline in the trade balance which affected all areas; while exports rose in value by less than 4 per cent from 1956 to 1957, imports rose by almost 9 per cent. Declining commodity prices tended to reduce the value of exports in the second half of 1957, but the effect of these price movements was not large until near the end of the year. The payments balance with the non-sterling area deteriorated more markedly than that with the United Kingdom, partly because the proportion of the overseas sterling area’s total imports that was purchased in the United Kingdom fell, and partly because the overseas sterling area was used in the first half of 1957 as a channel for the export of U.K. capital to the dollar area.

The contribution of the overseas sterling area to the central reserves held by the United Kingdom consists of the payments balance of the area in transactions with the non-sterling area, together with domestic gold production less any change in domestic reserves of gold or of currencies other than sterling. Fluctuations in this contribution helped to accentuate the swings in the U.K. payments balance. It amounted to £120 million in the first half and to £41 million in the second half of 1956. The net contribution of £137 million in the first half of 1957 was in part the result of India’s drawing of $200 million from the Fund. In the second half of 1957, on the other hand, the overseas sterling area, for the first time since the second half of 1951, made a net drawing, £ 65 million, on the central reserves.

The U.K. payments deficit in 1956 was covered entirely by the use of £200 million of Fund resources; and the postponement of payment of interest on the North American loans made it possible for reserves (including the sums segregated in the waiver account) to be £43 million higher at the end of the year than at the beginning. In 1957 the deficit of £ 196 million was financed by a wide variety of measures, including a drawing of £89 million from the Export-Import Bank line of credit, an increase of £ 11 million in EPU indebtedness, the accumulation by the German authorities of sterling funds amounting to £68 million against future debt repayments, and the postponement of debt service of £63 million on the North American loans. The net result of all these transactions was that reserves rose by some £35 million.

France

In 1957, as in 1956, there was a rapid rise in output in France, supported in part by inflationary financing, which led to a large balance of payments deficit. Since the inflationary effect on the economy was not fully offset by the balance of payments deficit, prices also rose.

After having risen by 12 per cent from 1955 to 1956, industrial production increased by 9 per cent in 1957. The rise was continuous throughout the year: in the last quarter industrial production was 9 per cent above that in the last quarter of 1956. The high level of demand was supported by a high rate of credit expansion, primarily for the private sector in 1956 and for the government sector in 1957. In spite of various measures, inflationary pressures threatened both the internal and the external stability of the currency throughout most of 1957. Measures of credit restraint, together with a large decline in exchange reserves, prevented the money supply from expanding much faster than the increase in real output. Inflationary pressures nevertheless made themselves felt, because of a marked increase in the velocity of circulation of money. The total wage bill increased by at least 12 per cent in 1957 (against 11 per cent in 1956 and 10 per cent in 1955), as a consequence of an increase of about 11 per cent in hourly wage rates.

The French balance of payments, which had shown a surplus of about $900 million in 1955, swung in 1956 to a deficit of about $800 million, which was followed by a deficit of over $1 billion in 1957 (Table 18). Of the 1957 deficit, some $262 million was financed by drawing on the International Monetary Fund, and $176 million by credit from the European Payments Union. The deficit would have been still larger if some $250 million of the foreign currency working balances of the private banks had not been called in by the exchange stabilization fund to supplement official reserves.

Table 18.Industrial Continental OEEC Countries, United Kingdom, and Japan: Trade and Payments Balances and Official Reserves, 1955, 1956, and 1957(Value figures in millions of U.S. dollars)
Trade BalancePayments Balance1Official

Reserves

End of

19572
Official

Reserves,

as Per Cent

of Imports,

1957
195519561957195519561957
Austria–188–125–149–514510451045
Belgium-Luxembourg–54–110–2469516–611,13233
France3172–1,015–1,059921–772–1,01977513
Germany, Federal Republic of3427411,0764411,2151,3535,64475
Italy–855–1,029–1,086132912671,53242
Netherlands–520–862–1,0071–205–851,05626
Norway–457139–45210361918414
Portugal–113–143–2141622–6687137
Sweden–271–264–281–83–1745619
Switzerland–182–324–404947251,91898
United Kingdom4–2,399–1,591–1,728–645–557–5492,374215
Japan–460–729–1,426379168–67861,01924
Total–4,985–5,890–6,9761,300109–64717,28736
Source: Based on data from International Monetary Fund, International Financial Statistics.

Measured by changes in gross official reserves of gold and foreign exchange (with adjustments for the United Kingdom and Japan indicated in footnote, page 87, and in footnote 6, below), in net EPU positions, and in net IMF positions.

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

Trade balance with foreign countries and overseas franc area. The ratio of reserves to imports relates to total imports of Metropolitan France; the ratio of reserves to imports of the franc area was about the same.

See footnote, page 87.

Ratio of reserves to total imports of the United Kingdom. The ratio of reserves to sterling area imports from non-sterling countries was 16 per cent, according to preliminary estimates.

Measured by changes in gross official reserves (in 1957 net of drawing on credit from Export-Import Bank of Washington) and in net IMF position.

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

Measured by changes in gross official reserves of gold and foreign exchange (with adjustments for the United Kingdom and Japan indicated in footnote, page 87, and in footnote 6, below), in net EPU positions, and in net IMF positions.

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

Trade balance with foreign countries and overseas franc area. The ratio of reserves to imports relates to total imports of Metropolitan France; the ratio of reserves to imports of the franc area was about the same.

See footnote, page 87.

Ratio of reserves to total imports of the United Kingdom. The ratio of reserves to sterling area imports from non-sterling countries was 16 per cent, according to preliminary estimates.

Measured by changes in gross official reserves (in 1957 net of drawing on credit from Export-Import Bank of Washington) and in net IMF position.

In both 1956 and 1957 the deterioration in the payments balance was attributable partly to a decline in U.S. aid and military expenditure in the franc area, which together were at least $700 million less in 1957 than in 1955. But the main reason for the growing payments deficit was a rapid expansion of industrial output under conditions of excessive demand pressure. These developments caused a sharp deterioration in the trade balance with countries outside the franc area, despite the application of import restrictions. The trade balance as a whole showed little deterioration in 1957 (Table 18), but the significance of this fact was diminished by the increased drain imposed by “unrequited exports” to the franc area.

During 1956, the French authorities had concentrated their efforts on preventing internal demand pressures from affecting prices, and the expanding import surplus played a useful role in keeping prices down. In 1957, with reserves dwindling and imports still increasing, the policy had to be changed. In March measures were imposed requiring advance deposits against imports, stricter import licensing, and an increase in the rate and coverage of the compensatory import tax. In June import liberalization was suspended, and the Government took steps to reduce the inflationary budgetary gap by cutting investment expenditure and subsidies and raising taxes. The attempt to peg the price level by budgetary means was progressively abandoned, and the cost of living began to rise markedly with the threat of wage increases to follow. In two steps, taken in August and in October, a system was established whereby a 20 per cent surcharge was imposed on all outgoing payments and a 20 per cent premium was paid on all incoming payments. This was equivalent to a devaluation of the franc. At the same time, the existing export subsidies in the form of tax and social security rebates and the compensatory import tax were eliminated. Finally, in December 1957, a law was passed which set quantitative limits both to aggregate treasury expenditure and to the treasury deficit in 1958. This deficit was fixed at 600 billion francs, against about 1,000 billion in both 1956 and 1957. Measures were also taken to limit credit for housing and other medium-term credits and to reduce short-term credit.

The sharp reduction in imports substantially reduced the drain on foreign exchange reserves in the last quarter of 1957, and the anti-inflationary measures taken in December resulted in an immediate improvement in the free gold and dollar markets. However, reserves were still low, and in January 1958 substantial foreign credits were arranged to buttress them. A second stand-by credit of $131 million was provided by the Fund, following one of twice that amount which had been granted in October 1956 and subsequently fully used. In addition, $250 million was obtained from the EPU, and $274 million from the United States, the latter credit largely in the form of deferment of debt service.

In the early months of 1958 industrial production continued to rise, but at a somewhat slower rate than in the three preceding years. Credit to the private sector showed a decline and the Treasury’s position improved. Prices rose only moderately. However, imports were higher and exports lower than had been expected, and the persistence of a balance of payments deficit showed that there was still excessive demand. Evidence of increasing confidence was given by the success of a government loan, the repayment of which is tied to the price of the napoleon, and the increased supplies of gold in the market which allowed substantial purchases by the Bank of France in June.

Federal Republic of Germany

The real gross national product of the Federal Republic of Germany increased by 4½ per cent in 1957, which was slightly smaller than the rate of increase in 1956. The growth of domestic investment slowed down and construction fell a little, but the export demand for capital goods helped to raise the average level of production in investment goods during 1957 to 4 per cent above 1956. In early 1958, when export demand began to fall, the policy of encouraging credit expansion and of lower interest rates helped to stimulate domestic business investment. Hourly industrial wage earnings rose by more than 8 per cent in 1957, and during the first two months of 1958 standard wages and salaries were raised by 5-6 per cent for some 4½ million persons.

Although there were signs during 1957 of the termination of the export boom, the value of exports in 1957 was 17 per cent greater than in 1956, an increase as large as that of the preceding year. Exports to the independent countries of the sterling area, especially India and the Union of South Africa, increased by more than 30 per cent, and to the dollar area and the Bekomark agreement countries2 by more than 20 per cent. The increase in exports to the continental OEEC countries was proportionately smaller.

Rising exports thus continued in 1957 as a strong expansionary factor. In previous years the effects of this factor had been offset in part by the contractionary effect of budget surpluses which had run as high as DM 2.9 billion in the fiscal year 1955. These surpluses ceased, however, in the last quarter of 1956, and in the calendar year 1957 there was a federal government deficit of about DM 2.5 billion. Since the change was due mainly to increased foreign payments by the Federal Government (arising chiefly from substantial prepayments to foreign manufacturers for future delivery of military equipment), the impact of the change in government finance was felt directly on the balance of payments; the domestic impact of the budget was approximately neutral.

As in earlier years, the rise in gross national product by about 7½ per cent was accompanied by a much larger proportional increase (13 per cent) in imports. Practically the whole of this was due to greater volume. The increase must in part be attributed to certain measures taken with the intention of increasing imports, notably a reduction in September of customs duties on industrial products. Imports of manufactures, which were already running considerably higher than in 1956, rose further until in the last quarter of the year their value was greater by 40 per cent than in the year before. However, semifinished and finished goods still accounted for little more than one fifth of the total value of German imports.

As exports increased more rapidly than imports and the balance on service transactions improved, Germany’s surplus on goods and services rose further from $1,300 million in 1956 to $1,835 million in 1957. However, this increase was offset by larger government payments. Advance payments for imports of military equipment increased from $57 million to $459 million, and unilateral transfers, arising mainly from restitution and indemnification claims, rose from $263 million to $393 million. The outflow of long-term capital also increased from $129 million to $168 million, the difference being due almost entirely to changes in private long-term investment, which showed a net outflow of $30 million, in contrast to a net inflow of $3 million in 1956. Thus the aggregate balance on all these items showed a surplus of about $800 million, slightly smaller than the 1956 surplus of about $860 million. However, with a further increased surplus from shortterm capital movements, due mainly to net changes in the “leads and lags,” of about $540 million, Germany’s gross official gold and foreign exchange holdings, which had increased by $1,215 million in 1956, increased further by $1,353 million in 1957 (Table 18). The speculative movement of capital into Germany occurred mainly in the third quarter of the year, when, as measured by the net change in the residual item of the balance of payments, it reached about $500 million. This was followed by an outflow in the last quarter both on unidentified transactions and on recorded short-term capital items.

The precautionary policy of preventing increases in foreign exchange reserves from having an inflationary effect was continued. Among the measures taken for this purpose were open market sales of government securities amounting to DM 2.6 billion (about $620 million) in 1957, increased reserve requirements, especially for foreign-owned deposits, and a reduction of the rediscount quotas granted to commercial banks.

Although the growth of exports slackened, a large trade surplus was maintained during the first four months of 1958, partly as a result of improved terms of trade. Much of the current surplus was again offset by outgoings on government account, and by a continued outflow of short-term capital and unidentified transactions. However, reserves, which had fallen by $230 million during the five months after the speculative activities provoked by expectations of exchange adjustments had died down at the end of September 1957, again increased by some $90 million in March and April 1958.

Italy

Despite a notable expansion of internal activity and a deterioration in the terms of trade, Italy’s payments surplus increased from 1956 to 1957. Total output (including agriculture) grew more markedly from 1956 to 1957 than in the previous year and, since the expansion was particularly marked in labor-intensive consumer goods industries, there was a considerable fall in the number of registered unemployed. The rise in exports exceeded the rapid growth achieved between 1955 and 1956, and tourist receipts, net shipping earnings, and emigrant remittances again rose substantially. While there was some decline in private capital imports, this was outweighed by certain extraordinary factors, such as imports of $70 million of U.S. surplus commodities on credit, and greater recourse to foreign credit for import financing.

In view of the continued strength of the Italian internal and external position, the speculative movements in European exchange markets in July-September 1957 had little or no effect upon the Italian balance of payments.

In the first quarter of 1958 the decrease in the rate of growth of industrial production, which had become apparent in the latter part of 1957, was further accentuated and imports fell. These developments appear to have been due primarily to a reduction in inventories caused by falling world prices for raw materials.

Netherlands

In the Netherlands, fiscal and monetary policies were the main instruments used both to bring excessive demand under control in the course of 1957 and to combat a sharp rise in unemployment in late 1957 and in early 1958. During the boom of 1956-57 the monetary authorities followed a policy of credit restraint, raising the discount rate in five steps from 2.5 per cent in February 1956 to 5 per cent in August 1957. A program of fiscal measures to restrict domestic expenditure was announced in February and put into operation beginning in April 1957. The corporate profits tax and turnover and excise taxes were increased, subsidies were reduced, and special tax facilities were suspended so that private investment might be discouraged. Further reductions in public expenditure and increases in certain taxes were included in the 1958 budget presented in September 1957, and measures were taken to curb short-term financing of house building.

Internal demand, particularly for fixed investment and inventories, remained buoyant in the first half of 1957, and led to a further deterioration of the trade balance during that period. In the second half of the year, the measures taken earlier and the less favorable business prospects abroad began to produce a closer balance between supply and demand, both internally and externally. Expenditure for private consumption and fixed investment (particularly building) tended to decline, and there was some reduction in inventories toward the end of the year. Imports tended downward and exports upward. In the third quarter, the improvement was masked by a large outflow of capital in response to which further specific measures were taken; this outflow was reversed later in the year, and there was a further inflow on capital account as the Netherlands Government placed one-year treasury bills to an amount of $53 million with a German bank. In September the reserve position of the Netherlands was protected by a drawing of $68,750,000 from the Fund, and by a stand-by arrangement for a similar amount. This arrangement was canceled in March 1958, six months before it was due to expire.

For 1957 as a whole, disinflationary policies led to an increase in real output over the preceding year that was somewhat less than in 1956 (about 2 per cent against 4½ per cent), but they brought about a pronounced change in international transactions: the volume of imports of goods and services, which had risen by 15 per cent from 1955 to 1956, increased by only 3 per cent from 1956 to 1957; and the volume of exports of goods and services, which had expanded by 6 per cent from 1955 to 1956, grew by 5 per cent from 1956 to 1957. Fixed investment for the year as a whole was still some 4 per cent higher in real terms than in 1956, against a rate of growth of 15 per cent between 1955 and 1956; consumption, which had grown by 8 per cent in the previous year, was substantially the same as in 1956.

The decline in foreign exchange reserves during the first nine months of 1957 tended to reduce the liquidity of the banks, though this was offset in part by a decrease in their reserve ratios. The net contractionary influence helped bring about a tightening of the money markets and a sharp increase in interest rates which, together with the restrictive fiscal measures, led to a slowing down of economic activity. In the last quarter of 1957 and the first quarter of 1958, industrial production was below that of the corresponding period a year earlier, and in the first quarter of 1958 unemployment had risen to more than 3 per cent of the labor force.

Japan

The investment boom in Japan, reflected in an increase of almost 60 per cent in private expenditure on durable equipment and inventory accumulation during 1956, continued unabated in the first half of 1957, and caused an even sharper deterioration in Japan’s balance of payments than in 1956. Manufacturing output rose at an accelerating rate, a 10 per cent increase between the two halves of 1956 being followed by one of 13 per cent from the second half of 1956 to the first half of 1957. Increasing strains on steel, transport, and generating capacity, and the liberalization of imports, particularly of raw materials, caused an even greater acceleration in the growth of imports. As a result of increased imports of metals and ores, fuels and machinery, and also of textile materials, the volume of imports rose almost three times as fast (by 28 per cent, compared with 10 per cent) between the second half of 1956 and the first half of 1957 as between the two halves of 1956. At the same time, the volume of exports declined slightly. The consequent increases in the trade deficit and in net expenditure on shipping services transformed the over-all payments picture; the payments surplus fell from $120 million to $48 million between the two halves of 1956, and in the first half of 1957 there was a deficit of $514 million.

Following a series of corrective measures, beginning with the raising of interest rates and restrictions on credit in May, the deficit in the second half of 1957 was reduced to $164 million. Japan drew $125 million from the Fund and $65 million from a credit of $115 million granted by the Export-Import Bank of Washington for the purchase of U.S. cotton and foodgrains, and official reserves actually rose during this period by about $25 million. By postponing investment and other expenditure, reducing food stocks, and reselling securities purchased earlier by the Finance Ministry, the Government sought to achieve a budget surplus of $300 million instead of the $100 million deficit originally contemplated for 1957-58. A sharp increase in advance deposit requirements and restriction of credit facilities for imports were followed by cuts in the exchange allocation for cotton and wool imports in the second and third quarters of 1957 and a smaller total allotment for the next two quarters. In the latter part of 1957 investment demand receded and the pace of credit expansion also slackened somewhat. In the fiscal year ended March 1958 the budget surplus which was the Government’s objective was actually surpassed, and in the first quarter of 1958 there was a payments surplus of $113 million. As demand receded, inventories of finished goods accumulated. Manufacturing output began to decline in June: whereas in May it had been 28 per cent higher than a year earlier, in December it was only 2 per cent above production in December 1956. In March 1958 it was scarcely higher than a year before. The volume of imports fell in the second half of 1957, when it was only 7 per cent higher than in the second half of 1956. The volume of exports was some 11½ per cent higher, so that the ratio of exports to output, which had fallen sharply in the first half of the year, was by the end of the year again about the same as it had been a year before. The fact that Japanese exports rose less from 1956 to 1957 than from 1955 to 1956 seems to have been due less to pressure of internal demand than to the quite exceptional increase in exports of ships from 1955 to 1956, which could not be repeated in 1957. Although the expansion of textile exports to the United States and certain other markets was still hampered by the restrictions imposed by the Japanese authorities to forestall protective action by those countries, total textile exports increased nearly as rapidly as from 1955 to 1956.

Countries Exporting Tropical Foods, Oilseeds, and Vegetable Oils

A decline in coffee prices and cautious buying by importers cut the export receipts of the major coffee producing countries in 1957 (Tables 19 and 20). In Brazil and Colombia, earnings from coffee exports declined by some 18 per cent from 1956 to 1957, in Brazil largely because of a smaller export volume, and in Colombia because of the much sharper decline in the prices of “mild” types of coffee. Both countries, in accordance with domestic support programs and the obligations of the Mexico Agreement of October 1957, engaged in heavy government stockpiling of coffee.

Table 19.Trade of Exporters of Tropical Foods, Oilseeds, and Vegetable Oils, 1956 and 1957(Value figures in millions of U.S. dollars)
Exports f.o.b.Imports c.i.f.
19561957Percentage

change
19561957Percentage

change
Exporters of coffee
Brazil1,4821,392–61,2341,48921
Colombia599520–13657477–27
Costa Rica6784259110313
El Salvador1131382210511510
Guatemala124114–81381498
Haiti4230–295037–26
Nicaragua586410698117
Ethiopia638535637824
Total2,5482,427–52,4072,5295
Exporters of other tropical foods
Cuba686809118714800112
Dominican Republic125161291261368
Jamaica1071362716318615
Panama3138239811618
Ecuador115132151081102
Ghana22222932492708
Ceylon364353–334237911
China (Taiwan)118148251942129
Honduras7372–1677511
Total1,8412,078132,0612,28411
Exporters of oilseeds and vegetable oils
French West Africa343335–23814097
Philippines437429–259772521
Nigeria377356–6428425–1
Total1,1571,120–31,4061,55911
Total5,5465,62515,8746,3728
Source: Based on data from International Monetary Fund, International Financial Statistics.

Exports are preliminary and are not adjusted for undervaluation, which amounted to some $20 million in 1956. Imports are preliminary and include estimate for government imports not recorded in custom data.

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

Exports are preliminary and are not adjusted for undervaluation, which amounted to some $20 million in 1956. Imports are preliminary and include estimate for government imports not recorded in custom data.

Table 20.Trade and Payments Balances and Official Reserves of Exporters of Tropical Foods, Oilseeds, and Vegetable Oils, 1956 and 1957(Value figures in millions of U.S. dollars)
Trade

Balance
Payments

Balance1
Official

Reserves,

End of

1957
Official

Reserves

as Per Cent

of Imports,

1957
1956195719561957
Exporters of coffee
Brazil248–97149–1764742
Colombia–5843–41414530
Costa Rica–24–19–81212
El Salvador823–354035
Guatemala–14–351647448
Haiti–8–7–1–2411
Nicaragua–11–17–721114
Ethiopia7276482
Exporters of other tropical foods
Cuba–289–27–5044155
Dominican Republic–125284633
Ecuador722–133935
Panama–67–78–133026
Ceylon22–2618–3618348
China (Taiwan)–76–64182910851
Honduras6–3–1–51520
Exporters of oilseeds and vegetable oils
Philippines–160–2981–907110
Source: Based on data from International Monetary Fund, International Financial Statistics.

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

Reserves include $200 million pledged as collateral.

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

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

Reserves include $200 million pledged as collateral.

The decline in Brazil’s receipts from coffee exports was partly offset by a substantial expansion of various “minor” exports, such as iron ore, which have gained importance in recent years, and by a slight increase in earnings from cocoa exports; earnings from cotton declined chiefly as a result of lower production. The total value of Brazil’s exports in 1957 was some $90 million, or 6 per cent, less than in 1956.

Government deficit financing, large-scale purchases of coffee for stockpiling, which by early 1958 amounted to one fifth of the 1957-58 crop, and credit expansion for other purposes, caused a rise in demand for imports. The increase in imports—which was further stimulated by a considerable appreciation of the certificate rate as foreign exchange reserves that had been accumulated earlier were fed into the auction market—amounted to more than $250 million for 1957 as a whole. Reforms of the exchange system introduced in August and September of 1957—which are described in detail in Chapter VI—had little effect on imports. In the last quarter of the year, however, a temporary recovery of exports together with a fall in imports resulted in a trade and payments surplus, and a drawing of $38 million from the Fund helped further to replenish reserves.

In the early months of 1958, coffee exports declined sharply as the expectation of a large crop in the 1958-59 season exerted a downward pressure on prices and led to restrained buying. Internal inflation increased, exchange reserves dwindled, and there was a sharp depreciation of the certificate rate.

In Colombia, because of the sharp decline in receipts from coffee exports, total exports in 1957 were some $80 million, or 13 per cent, less than in 1956. Nevertheless, instead of a trade and payments deficit such as had been recorded in the two previous years, Colombia had a surplus in 1957; there was a small increase in reserves, and the large arrears in commercial payments, which had increased in the two previous years, were settled partly in cash, partly with the aid of substantial new external credits, and partly in notes falling due over the next few years. In the first half of 1957, a sharp reduction in imports was achieved mainly by quantitative restrictions and prohibitions, which kept imports down to an annual rate of $400 million, in contrast to an annual rate of well over $700 million in the first half of 1956.

In June 1957 a stabilization program was adopted, the purpose of which was to bring inflation under control and to keep down demand for imports by means of monetary policy and the adoption of a reformed exchange system, based upon a fluctuating exchange rate, which is described in Chapter VI. The system of advance deposits on imports was maintained, and on a number of occasions the deposit requirements were increased.

Continued budget deficits and central bank financing of coffee stockpiling placed severe pressure upon the new system. These factors, and the existence of a pent-up demand for imports, which had hitherto been kept in check, led to depreciation of the exchange rate. Early in 1958 the depreciation of the rate accelerated and reserves declined. In response to these developments, the authorities adopted various measures in February 1958 to relieve the pressure. From the end of March most of the burden of stockpiling was placed upon the coffee sector of the economy by requiring exporters to surrender, without compensation, an amount of coffee equal to 15 per cent of their exports, while in order to restrict credit further, rediscount facilities were cut by 20 per cent. Further adjustments in the exchange system, which are also described in Chapter VI, were made in March.

Export receipts rose between 1956 and 1957 in most of the countries whose main exports are other tropical foods and oilseeds. However, in several of these countries—and notably in Cuba, Ceylon, and the Philippine Republic—imports, largely of capital goods for accelerated investment, rose sufficiently to cause a considerable deterioration in the trade and payments balance; in Ceylon imports of food, and in the Philippine Republic imports of other consumer goods, which were intended to soften the impact of excess demand on domestic prices, also contributed to this deterioration.

The steep rise in “world” prices for sugar in the course of the first half of the year, which is the peak season for Cuban sugar exports, together with a small rise in export volume, raised Cuba’s export receipts in 1957 by some $120 million over 1956. However, the payments deficit amounted to some $50 million. Short-term and medium-term government indebtedness at the end of 1957 amounted to $160 million, repayable within the next five years. As in previous years, balance of payments developments were largely determined by the government development program which is designed to reduce Cuba’s dependence on sugar exports. Further increases in imports and borrowing abroad were due mainly to rising purchases in connection with this program. Internal credit expansion, generated primarily by government deficit spending, continued in 1957 without, however, visibly affecting the price ievei, probably in part because imports continued to rise at the same time. Late in 1957, various steps were taken to curb credit expansion in the private sector, and, in order to discourage imports of durable consumer goods, banks were advised to raise the rate of interest on advances for these imports from 5 per cent to 7 per cent.

The prices of the main export products of the Philippine Republic were slightly higher in 1957 than in 1956, and they were not affected by the general weakening of prices in the latter part of the year. Export receipts were much the same as in 1956, but imports, which in 1956 had been checked by intensified restrictions, rose sharply, as internal inflation continued. Agricultural, mining, and manufacturing production was 6 per cent greater than in 1956, though the rate of growth was somewhat smaller. The domestic boom was encouraged by deficit-financed development expenditures, a policy of cheap money, and rapid expansion of bank credit. Bank credit to the private sector increased by 20 per cent between the end of 1956 and the end of 1957, compared with an increase of 13 per cent the previous year. The balance of payments deficit was financed by drawing on foreign exchange reserves, which fell during the year by more than half. This partly offset domestic inflationary pressures, and in 1957 the cost of living index, which had increased by 5 per cent in 1956, rose by only 1 per cent.

During the course of 1957, a series of internal measures were taken in order to curb inflation. The cheap money policy was reversed by a reduction of the amount of rediscounts and by successive increases in the discount rate. Advance deposit requirements for nonessential imports were raised to 100 per cent in October, and to 200 per cent in December. Import restrictions were also intensified. The Government postponed certain expenditures and reduced its estimate of the deficit in the 1957-58 budget. Provision is made in the 1958-59 budget for increases in expenditure (especially for development) which exceed the increases in taxation approved by the Congress.

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

Wool prices were high in the first half of 1957 and, in spite of a sharp decline in the last quarter, the average for the year as a whole was above the 1956 average. The export earnings of Australian producers increased considerably, but the stagnation of exports that in Argentina and Uruguay followed the price decline of the last quarter more than offset the gains which had accrued to these countries earlier in the year. With some exceptions—particularly meat, dairy products and long staple cotton—the prices of the main products exported by the countries in this group were well maintained in 1957; for most of these countries export receipts were higher than, or nearly the same as, in 1956. But only a few showed marked improvement in their trade and payments balances. In most of the other countries demand pressure, frequently connected with high and rising investment, caused a considerable increase of imports with a consequent deterioration in the trade and payments positions (Tables 21 and 22).

Table 21.Trade of Exporters of Textile Fibers, Livestock Products, Grain, and Tobacco, 1956 and 1957(Value figures in millions of U.S. dollars)
Exports f.o.b.Imports c.i.f.
19561957Percentage

change
19561957Percentage

change
Exporters of wool and livestock products
Australia1,8872,205171,9641,931–2
New Zealand777772–175183011
Argentina94497531,1281,31016
Uruguay211128–3920622610
Ireland303367225125171
Denmark1,1121,17461,3111,3594
Total5,2345,62175,8726,1735
Exporters of vegetable fibers, grain, and tobacco
Egypt409493215355241–2
Sudan192138–2813018139
Greece1902201646452513
Turkey30534513407397–2
Syria158153–3187171–9
Pakistan340337–14174406
Total1,5941,68652,1402,2385
Exporters of rice
Burma246215–1319829750
Thailand3343661036540411
Total58058156370125
Total7,4087,88868,5759,1126
Source: Based on data from International Monetary Fund, International Financial Statistics.

Not including certain government imports.

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

Not including certain government imports.

Table 22.Trade and Payments Balances and Official Reserves of Exporters of Textile Fibers, Livestock Products, Grain, and Tobacco, 1956 and 1957(Value figures in millions of U.S. dollars)
Trade

Balance
Payments

Balance1
Official

Reserves,

End of

1957
Official

Reserves

as Per Cent

of Imports,

1957
1956195719561957
Exporters of wool and livestock products
Australia–772741183681,32168
New Zealand26–5815–5613817
Argentina–184–335–38–14631124
Uruguay5–9827–51180281
Ireland–209–150–92925850
Denmark–199–185141217213
Exporters of vegetable fibers, grain, and tobacco
Egypt–126–313–90–116465893
Sudan62–4347–1311664
Greece–274–305–1419637
Turkey–102–5219783154
Syria–29–1814–85432
Pakistan–77–1033–8229166
Exporters of rice
Burma48–8214–289331
Thailand–31–38131832980
Source: Based on data from International Monetary Fund, International Financial Statistics.

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

Gold holdings at end of November 1957.

Based on trade data, not including certain government imports.

Much of the convertible part of these reserves is pledged as collateral.

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

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

Gold holdings at end of November 1957.

Based on trade data, not including certain government imports.

Much of the convertible part of these reserves is pledged as collateral.

Although severe drought reduced Australia’s exportable supplies of wheat, high earnings on wool and a considerable increase in the volume and range of exports raised export receipts in 1957 by some $320 million over the 1956 total. Most of the increase was in the first half of the year; exports in the second half were only slightly higher than in the corresponding period of 1956. In the early months of 1958 exports were adversely affected by reduced wool prices. Import restrictions, which had been intensified in the two preceding years, were relaxed by stages in early 1957; moreover, import duties on more than 800 items were reduced under the terms of a trade agreement with the United Kingdom. In response to these measures imports increased in the course of the year; but for the year as a whole they were slightly less than in 1956, and the trade balance showed a large surplus. Net capital inflow, including a further drawing on an IBRD loan, was somewhat smaller than in 1956, and the substantial addition to foreign reserves was due primarily to favorable trade developments.

Demand pressure, which in earlier years had led to excessive imports and caused payments difficulties, was not acute in 1957. The rise in farm incomes and subsequent increase in spending were tempered by drought conditions; any additional demand could be met, to an increasing extent, from domestic manufacturing output which had grown as a result of heavy investment in previous years. The relaxation of import controls, the reduction of stocks accumulated previously, and an increased budget surplus all helped to check inflationary tendencies; retail prices and wages increased only slightly in the first half of 1957, and were stable in the second half. The steady rise in imports throughout 1957 which continued in the early months of 1958 was thus attributable to relaxed restrictions and did not reflect inflationary pressure. Toward the end of 1957 and in early 1958, the Commonwealth Bank indicated its approval of some easing of credit. It was announced in March 1958 that there would be no further relaxation of import restrictions, and that the ceiling of £A 800 million per year which had previously been fixed for total imports would be maintained.

In Argentina, inflationary pressures increased during 1957, and the balance of payments position deteriorated. The main factors were large wage increases and credit expansion in both the public and the private sector, despite some measures of monetary control. The cost of living, which was fairly stable in late 1957 and fell a little in January 1958, then rose again. By April 1958 it was 24 per cent higher than a year before, and this movement gave rise to demands for further wage increases.

Industrial and agricultural production were somewhat greater than in the previous year. The slight increase in exports between 1956 and 1957 was due mainly to larger shipments of meat, edible oils, and a number of nonagricultural products. Exports of wheat and corn lagged on account of reduced crops. Wool exports, which had been high in the first part of the year, stagnated later as adjustments in the aforos failed to keep pace with the sharp fall in prices. The increase in other exports, despite rapid inflation, was made possible by a gradual depreciation of the effective export exchange rate. This was achieved by channeling an increasing amount of exports through the free market and by a gradual reduction of export taxes. The sharp rise in imports which accounted for the widening of the trade deficit was heavily concentrated in fuel and capital goods, encouraged by the ready availability of bank credit. Substantial use was made of foreign credit. Imports of machinery were admitted from May 1957 only on the condition that importers were able to secure foreign credit for a period of 4-8 years for at least 80 per cent of the import value. The effect of internal inflation on import demand for consumer goods was checked, however, by the maintenance of strict import controls, and the requirement of advance deposits for imports was substantially extended at the beginning of 1958 to cover most private imports.

The impact of the greatly increased trade deficit on reserves was mitigated by drawing $75 million from the Fund. The Government also obtained short-term credits from U.S. private banks to the amount of $27 million, as well as a credit from the Export-Import Bank for the importation of railway equipment.

The widening of Denmark’s trade deficit in the first five months of 1957, when its seasonally lower exports were accompanied by a sharp increase in imports, resulted in a recurrence of the drain on reserves and some increase in foreign short-term debt. In view of these developments, the Government introduced, in June 1957, a series of fiscal measures, including a forced saving scheme and increases in various indirect taxes, designed to reduce domestic demand and thus to contribute to closing the trade gap. To strengthen Denmark’s very small reserves, $34 million was drawn from the Fund.

The balance of payments improved in the second half of the year, when exports increased and imports were brought down. Correction of the imbalance was made more difficult, however, by adverse price movements; the prices of Denmark’s main export products were much lower in 1957 than in 1956 while import prices were higher for the year as a whole. Thus, the value of agricultural exports, in spite of some expansion of their volume, was less than in 1956; the rise in the total value of exports was due to increased receipts for manufactures, including processed foods. However, reserves increased steadily from mid-1957 through the first months of 1958, while foreign liabilities declined, and at the end of March Denmark repurchased kroner to the value of $10 million from the Fund.

The improvement of Denmark’s payments situation in the second half of the year was accompanied by a renewed slackening of the domestic economy. Manufacturing production, which had recovered and reached a peak during the first half of the year, declined again in the second half; for the year as a whole, production was greater than in 1956 by 4 per cent, but it was only 2 per cent higher than in 1955.

Exports of Egypt were considerably higher in 1957 than in 1956, partly because of a backlog of shipments deferred in late 1956. Large receipts from canal tolls during the second half of 1957 offset part of the loss in the first quarter and, for the year as a whole, these receipts were not much lower than the average of recent years. There was a further marked shift of Egypt’s export trade to the Soviet area and Mainland China; nearly half of its total exports was directed to these markets in 1957, compared with one third in the preceding year. Exports to other areas declined somewhat, though special incentives were offered to cotton exporters in the form of premiums for sales against the most needed currencies and of the authorization of barter deals in order to secure essential imports. These measures were replaced in February and March 1958 by a new system which, by means of an Egyptian “export pound,” resulted in a de facto depreciation of 21 per cent for most transactions other than those with the Soviet area, Mainland China, and certain Middle Eastern countries.

Egyptian balance of payments data, based on exchange records, indicate an increase of imports by some $60 million and a trade deficit of about $148 million. Roughly one third of the decline of some $100 million in official reserves is attributable to the current account deficit; some two thirds reflects financial settlements with the Sudan in connection with the withdrawal of Egyptian currency from circulation in that country.

The rise in wholesale prices was halted in the second quarter of 1957 by several coordinated monetary and fiscal measures. The budget deficit was reduced by a sharp decrease in development expenditure, increased receipts of the Suez Canal Authority toward the end of 1957, and improved tax collection. Government borrowing from the banking system was less in 1957 than in 1956, and although there was a considerable increase in bank credit to the private sector, the rate of increase in the money supply was reduced during the year.

The payments position of the Sudan deteriorated sharply in 1957, when there was a deficit of $13 million, compared with a surplus of $47 million in 1956. The payments deficit would have been considerably larger in 1957 had it not been for the financial settlement with Egypt mentioned above. Exports of cotton were hampered by the failure to adjust domestic prices to the decline in cotton prices in other markets and there was a sharp increase in imports. The payments position in 1958 was still difficult, for, although cotton prices have been made competitive, the 1957-58 cotton crop was only about one third the size of the crop of the previous year, and the Government found it necessary to intensify import restrictions and to reduce government expenditures, particularly on development. Despite the payments deficit, exchange reserves did not decline substantially in 1957, because of the financial settlement with Egypt.

Countries Exporting Metals, Rubber, and Petroleum

The decline in the prices of metals and rubber in 1957 adversely affected the export receipts and the terms of trade of countries that are largely dependent on these products; nevertheless, any serious payments difficulties that arose in these countries were as much due to high or rising imports (Tables 23 and 24).

Table 23.Trade of Exporters of Rubber, Metals, and Petroleum, 1956 and 1957(Value figures in millions of U.S. dollars)
Exports f.o.b.Imports c.i.f.
19561957Percentage

change
19561957Percentage

change
Exporters of rubber and metals
Bolivia8166–1984701–17
Chile542456–1635444125
Belgian Congo536472–124164366
Rhodesia509437–1449955712
Malaya1,3611,3631,3571,4315
Indonesia88296910856797–7
Viet-Nam45797621828933
Total3,9563,842–33,7844,0216
Exporters of petroleum2,1162,366121,2491,86850
Venezuela121,2491,86850
Netherlands Antilles84187141,0621,16310
Trinidad1932291917620818
Brunei and Sarawak2672753188186–1
Iraq477360–253213437
Kuwait28408754
Saudi Arabia28408501270
Iran335375l2
Total5,5745,82643,6014,420323
Total9,5309,66817,3858,44114
Source: Based on data from International Monetary Fund, International Financial Statistics.

Estimate based on less than 12 months’ data.

Export data based on petroleum production.

Includes estimate for Saudi Arabia.

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

Estimate based on less than 12 months’ data.

Export data based on petroleum production.

Includes estimate for Saudi Arabia.

Table 24.Trade and Payments Balances and Official Reserves of Exporters of Rubber, Metals, and Petroleum, 1956 and 1957(Value figures in millions of U.S. dollars)
Trade

Balance
Payments

Balance1
Official

Reserves,

End of

1957
Official

Reserves

as Per Cent

of Imports,

1957
1956195719561957
Exporters of rubber and
metals
Bolivia–3–42–5–12426
Chile18814–7–494610
Belgian Congo1203629–16018943
Malaya4–689432823
Indonesia26172–81–3022428
Viet-Nam–173–2109613747
Exporters of petroleum
Venezuela8674984135011,44077
Iraq15617599026176
Iran181524566
Source: Based on data from International Monetary Fund, International Financial Statistics.

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

Estimate.

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

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

Estimate.

The exports of Chile, which had been unusually large in 1956 when copper prices were at their peak, were some 16 per cent lower in 1957, but they were still well above the level reached prior to the copper boom. Imports, on the other hand, reached the unprecedented total of some $440 million in 1957, so that the customary trade surplus required to cover debt service and other invisible payments almost disappeared. Reserves were reduced by some $30 million, and $19 million was drawn from the Fund. In addition, $12.5 million was provided by the Export-Import Bank, $5 million was drawn from the Federal Reserve Bank of New York, and roughly $25 million was received in the form of agricultural surpluses under the U.S. disposal program.

The deterioration in Chile’s external balance was a result both of the continued pressure of internal inflation stemming from the large expansion (40 per cent) of domestic credit and of the decline in copper prices. The fall in copper prices significantly reduced government revenue in 1957, and at the same time government expenditures increased. To finance its deficit, the Government borrowed heavily from the banking system, and its short-term indebtedness to nonbank investors, both domestic and foreign, also increased. The expansion of Central Bank credit was a major factor in the continued inflation: in addition to lending to the Government, the Central Bank increased its rediscounts to banks by some 50 per cent, and its credits to others more than doubled.

The internal inflationary impact of the credit expansion was in part offset by the use of foreign resources, the total of which, including the credits listed above, exceeded $90 million. As a result, in spite of wage increases of 30 per cent, the cost of living index rose much less than in the previous year. In an effort to limit the decline in exchange reserves, the requirements for advance deposits on imports were substantially increased in November 1957 and again in February 1958.

Chile could not continue to finance such a large part of its external payments from foreign resources. Its ability to import was further reduced by a continued weakening of copper prices in the first part of 1958. The authorities are planning more effective action, with a view to checking internal inflation and keeping the current deficit in line with available foreign credits.

Bolivia’s comprehensive program of internal stabilization and the reform of its exchange system, which replaced a complex multiple rate structure by a single flexible rate, were successful in curbing internal inflation and restoring external balance in spite of a considerable decline in export receipts. This decline was due largely to lower world prices for metals, but also to a decrease in the volume of the Government Mining Corporation’s exportable supplies. Exports of tin were fairly well maintained; by drawing on stocks their volume was raised slightly above that in 1956, and this partly offset the effect of a moderate price decline. Bolivia’s contributions to the international tin buffer stock—$8 million in 1957 and $2 million early in 1958—though partly financed through borrowing from U.K. tin importers, added somewhat to the external burden. In the second part of the year, there was a considerable decline in exports of tungsten, as deliveries under favorable contract terms to the United States came to an end. Petroleum exports rose moderately, further expansion being to a large extent dependent upon the completion of the pipeline to the Pacific which is planned for late 1958. As in previous years export receipts were supplemented by U.S. grants of over $20 million, which to a greater extent than in previous years were in the form of cash rather than of surplus food supplies.

The effects of the internal anti-inflationary measures that were taken in Bolivia, and of the establishment of a free exchange rate, included a check in 1957 to the decline in its foreign exchange reserves. The deficit of the public sector was reduced to small proportions by a substantial increase in accruals of counterpart funds resulting from a more realistic exchange rate, rigid economies, better tax collections, and higher prices for the products of the Government Petroleum Corporation. However, bank credit to the private sector continued to expand, and the cost of living, which had fallen by over 20 per cent from December 1956 to August 1957, subsequently increased by some 10 per cent. At the end of the year credit expansion was checked, and the cost of living was stabilized. To offset such inflationary pressure as remained, and to take account of the weakening export position, the boliviano was allowed to depreciate by 10 per cent in the course of 1957.

Imports were some 17 per cent less in 1957 than in 1956, although all restrictions on them were removed at the end of 1956. The abatement of domestic inflation, increased food supplies from larger domestic crops, the fall in the exchange rate, and reductions of government imports all contributed to this result. In addition, imports against suppliers’ credits, which over the last few years had led to rapidly growing short-term indebtedness, were completely eliminated when the Central Bank ceased to guarantee new debt contracts of this type. Bolivia was able in 1957, in contrast to previous years, to reduce rather than to increase its foreign indebtedness.

In nearly all sectors of the Indonesian economy, there was a decline in activity in 1957, except for a few months after the introduction of a major reform of the exchange system in June, which was followed by a revival of exports and an improvement in the foreign exchange reserve position. The deterioration in the first half of the year was due partly to the overvaluation of the rupiah, which had depressing effects on production and also stimulated the smuggling of exports. Indonesia’s economic problems were seriously aggravated in the course of 1957 by growing internal tensions, which resulted in early 1958 in the outbreak of civil disturbances, and by the decline of international and inter-island shipping. The taking over of many Dutch-owned enterprises by placing them under managerial supervision and the mass exodus of Dutch technicians and entrepreneurs are affecting the economy of Indonesia. The full impact of these events cannot yet be determined. Although in the first quarter of 1958 total exports declined, production and exports of the main estate-produced crops, rubber, tea, and palm oil, were much the same as in the first quarter of 1957.

The exchange system introduced in mid-1957 was designed to ensure an automatic adjustment between supply and demand for foreign exchange by channeling all trade, as well as certain invisible and capital transactions, through a certificate market at a fluctuating rate. The exchange rate in the certificate market was at first 26.2 rupiah per U.S. dollar; after some depreciation the rate remained fairly stable in the last quarter of the year at about 28.4 rupiah per dollar. Imports were reduced from some $425 million in the first half of the year to some $370 million in the second half, and as the seasonal expansion of exports was greater than usual, there was some increase in reserves in the second half of 1957. In the first four months of 1958, however, reserves steadily declined.

Government revenues fell as a result of the decline in foreign trade, and in 1957 the government deficit was equal to more than two fifths of the total money supply at the beginning of the year; most of the deficit was financed by borrowing from the Bank Indonesia. The money supply expanded rapidly, and the cost of living index, which had been fairly stable for the preceding 18 months, rose by more than 50 per cent between June 1957 and the end of the year.

With increasing inflationary pressure toward the end of the year, the exchange rate fell sharply, despite an attempt by the Bank Indonesia to support it by supplementing the market supply of certificates by an issue of “administrative” certificates. On April 30, 1958 the rate was 37.8 rupiah per U.S. dollar. In an attempt to check the serious drain on reserves, the Government restored the 100 per cent advance deposit requirement for importers which had been sharply reduced in June 1957.

The payments position of other petroleum exporters in general continued strong in 1957 with increases in both their reserves and their imports. Reserves, however, declined in Iraq because the pipelines were not fully restored. The high level of public expenditure in Saudi Arabia also created payments problems, and a financial reform was undertaken in late 1957.

Other Countries, Including Countries with Diversified Exports

Canada’s balance of payments in 1957 and early 1958 was influenced both by the slower pace of development in that country and by the onset of recession in the United States. The Canadian economy, which expanded rapidly from 1955 to 1956, showed less strength in 1957, the increase of 4.2 per cent in gross national product in that year being largely accounted for by rising prices. Agricultural output and income declined as a result of generally poor harvests. Industrial production, which had risen steadily throughout 1956, declined from February 1957, and unemployment (seasonally adjusted) rose from 3 per cent of the labor force in the last quarter of 1956 to 6.4 per cent at the end of 1957, the rise reflecting in part unusually large increases in the labor force. There was some increase in industrial production in the first quarter of 1958, but the rate of unemployment in April was still more than 6 per cent. The output of services was greater in 1957 than in 1956. In 1957 the investment boom continued to absorb a substantial part of the national product, and business capital expenditures were 14 per cent above 1956, with concentration again in petroleum, mining, and other natural resources. A fall in business profits and the discouraging outlook for some important primary products led to a decline in investment, though housing construction revived after mid-1957, as a result of government intervention.

As signs of recession became evident, the authorities took several countercyclical measures. The monetary policy of encouraging credit expansion included open market operations in the second half of 1957, and this policy, together with the fall in business and consumer demand for credit, led to a decline in the treasury bill tender rate; this in turn brought about a corresponding fall in the discount rate, which is linked to the treasury bill rate. Fiscal measures included increases in the rates of such transfer payments as family allowances and old age pensions and reductions in the rates of personal and corporate income taxes; excise taxes on motorcars were also reduced from 10 per cent to per cent in December 1957. As a result of these and other policies and a decline in taxable corporate profits, the Federal Government’s revenues fell slightly below its expenditures in the fiscal year ended March 1958, following the substantial surplus of the previous year.

The demand for imports connected with the high level of investment was maintained into early 1957, but imports of both investment goods and industrial materials contracted sharply after the first quarter of the year. The volume of exports was slightly greater in 1957 than in 1956. There was some shift in the general pattern of trade in 1957. Exports to the United States rose, while imports from that country fell. At the same time Canada’s customary surplus with the United Kingdom declined by about $110 million with a decline in exports the predominant factor. (Except as otherwise indicated, all figures are in Canadian dollars.) Canadian exports to Western Europe and Latin America increased, and both imports from and exports to Japan were larger.

The deficit in Canada’s trade balance was considerably smaller in 1957 than in 1956, but the deficit on invisibles increased. The deterioration was most evident in the income account, where increased interest and dividend payments of about $83 million reflected the large volume of Canadian bonds sold externally in recent years and the growing share of Canadian industry owned abroad. In the first four months of 1958 imports continued to fall sharply, the decline being fully accounted for by imports from the United States, and with exports practically the same as in the previous year, the trade balance improved further.

The net capital inflow amounted to $1,251 million in 1957, $63 million less than in 1956. A large part of the decline was in direct investment from sources other than the United States, U.S. direct investment being practically the same as in the previous year; in the first months of 1958 the inflow of direct investment from all sources fell. From January through June 1957 securities transactions produced a net capital inflow of $550 million; in the second half of the year they amounted to only $180 million. The large demand for investment funds in the first six months of the year, combined with the wider interest differential between Canada and the United States, brought sales of new security issues abroad of $550 million in this period, of which 90 per cent were in the United States. In the first half of the year there was also a short-term capital inflow, exclusive of changes in official reserves, of about $160 million, owing mainly to changes in commercial accounts payable and receivable. Even in the face of a continuing current account deficit, the combined demands for Canadian dollars pushed up the exchange rate, expressed in U.S. currency, to a high of US$1.06 in August. Thereafter, the narrowing interest rate differential brought a decline in new issues floated abroad. The flow of short-term capital was reversed, the outflow in the second half of the year, mostly in September, amounting to $130 million; with the current account imbalance continuing, the Canadian exchange rate fell steadily to US$1.0091 in January 1958.

In early 1958 there was a renewed capital inflow from securities transactions. This inflow, together with the reduced need for funds to settle the trading deficit, helped to raise the value of the Canadian dollar by the end of April to US$1.0313.

Canada’s reserves increased by some US$40 million up to the end of July 1957. Subsequently, they fell by about US$145 million to the end of the year. For the year as a whole reserves thus declined by US$109 million, to US$1,836 million, against an increase of US$35 million in 1956. By the end of April 1958, reserves had risen to US$1,883 million.

In 1957 India faced increasing internal inflationary and external payments difficulties arising out of its second Five Year Plan. Since the Government could not finance all its expenditures from noninflationary sources, including borrowing from abroad, there were inflationary pressures which were aggravated by some bank credit expansion to the private sector. The Government’s net borrowings from the banking system amounted to 23 per cent of the money supply in 1957, in contrast to 14 per cent in 1956, 11 per cent in 1955, and 5 per cent in 1954. Deficit financing on such a large scale was inevitably accompanied by a large fall in reserves. The decline amounted to some $475 million, and in addition $200 million was purchased from the Fund. By these means, it was possible to finance a growing import surplus. The available trade data show a rise in imports of more than $300 million (Table 25). The increase consisted mainly of materials and equipment imported for the development program, foodgrains to meet increased demand and to add to the Government’s grain stock—part of which was obtained on special conditions from U.S. surpluses—and government purchases of military stores. When the lend-lease silver returned to the United States is left out of account, there was little change in India’s exports in 1957, and, in fact, there may have been some decline.

Table 25.Trade of Countries with Diversified Exports, 1956 and 1957(Value figures in millions of U.S. dollars)
Exports f.o.b.Imports c.i.f.
19561957Percentage

change
19561957Percentage

change
Canada5,2885,46736,2706,3461
Union of South Africa1,1851,300101,5241,69611
India1,2881,383171,6982,02219
Mexico880727–171,0721,1558
Peru308321436140011
Finland77483588859002
Yugoslavia3233952247466139
Israel1071403136740310
Spain442476876786212
Total10,59511,044413,41814,4458
Source: Based on data from International Monetary Fund, International Financial Statistics.

Including exports of lend-lease silver to the United States.

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

Including exports of lend-lease silver to the United States.

To counter the payments pressure, the Indian authorities took measures to reduce both private and government investment demand. Selective credit controls, higher interest rates, and direct requests to the banks to limit credits are designed to limit credit to the private sector. Instead of the outlay of Rs 48 billion originally envisaged for the Second Five Year Plan in the public sector, Rs 45 billion has been indicated as the probable total, which in view of the rise in prices means a still larger reduction in the size of the Plan in real terms. It is intended to execute what is known as the “core” of the Plan, i.e., steel, coal, transport, and ancillary power projects, as well as agricultural production programs, and to permit further outlay on other investments only if considerable expenditure has already occurred. Imports required for the “core” have been given high priority, but policies with respect to other imports became increasingly restrictive in the course of 1957. Some nonessential imports were completely banned, and the admission of other consumer goods was severely restricted. The licensing of raw material imports remained fairly liberal, but licenses for capital goods are granted, as a rule, only when deferred payment has been arranged. Restrictions were also intensified on certain invisibles and capital movements. Nevertheless, because of a large backlog of commitments, total imports were not expected to be substantially less in 1958 than in 1957. As a protection against further pressure on reserves, there are available in 1958 considerable undisbursed portions of loans contracted earlier (including $160 million from the IBRD) and new credits extended early in the year by the United States ($225 million), the Federal Republic of Germany ($157 million), and Japan ($50 million). Nevertheless in the first four months of 1958, the Reserve Bank’s foreign assets declined by about $63 million.

In Mexico the steady upward movement of export receipts of the previous three years was reversed and the rate of growth of real national product slowed down a little in 1957. Drought conditions reduced agricultural output by 3 per cent, and the consequent rapid increase in the prices of corn and pulses was partly responsible for an increase of 14 per cent in the cost of living. Earnings from cotton declined sharply, mainly on account of a 40 per cent reduction in volume; prices were only slightly below those of 1956. Receipts from coffee and metals, on the other hand, were affected primarily by sharp declines in prices. Mexico’s total export receipts (Table 25) were considerably less than in 1956; increased earnings from tourist traffic, which were greater than in 1956 by some $100 million, provided a partial offset. At the same time imports rose again, and expenditure on foreign travel increased. Thus the balance on current transactions, which had shown a small surplus in 1956, was in deficit in 1957 to the extent of about $160 million. The deficit was financed in part by increased borrowing abroad, including a $40 million loan from the Export-Import Bank for the purchase of cattle, the rehabilitation of the Mexican railways, and steel mill equipment. Reserves also fell by some $35 million, in sharp contrast to the rise of some $70 million in 1956.

After a period of rapid growth and comparative internal and external stability, Peru’s export receipts from cotton declined because of reduced volume and receipts from copper fell because of lower prices. Receipts from sugar exports, however, were increased by higher prices, and from petroleum exports by a steadily expanding volume. But though there was on balance an increase in Peru’s total exports, foreign exchange reserves fell, as a result of large bank credit expansion to both the government and the private sectors. Although direct investments continued to increase, net official borrowings from abroad were less than in 1956, and instead of a net inflow of short-term capital, as there had been in 1956, there was a net outflow in 1957. The total net inflow of capital was less than in 1956, and with credit expansion leading to an 11 per cent rise in imports, foreign exchange reserves fell by $33 million. By the end of the year, reserves amounted to only $34 million (Table 26), including $18 million of “untouchable” gold. In order to check the pressure on reserves, the Government in January 1958 unpegged the certificate rate, which up to that time had been held at 19 soles per U.S. dollar. The rate depreciated gradually and at the end of April it was 22.7 soles per dollar. In order to reduce imports and to increase government revenue many of the so-called basic (specific) import duties were raised by 50 or 100 per cent in May 1958. In addition, measures were taken earlier to reduce government spending and to curb bank credit to the private sector.

Table 26.Trade and Payments Balances and Official Reserves of Countries with Diversified Exports, 1956 and 1957(Value figures in millions of U.S. dollars)
Trade

Balance
Payments

Balance1
Official

Reserves,

End of

1957
Official

Reserves

as Per Cent

of Imports,

1957
1956195719561957
Canada–982–87950–1091,83629
Union of South Africa–339–3966–8428817
India–410–639–409–69494247
Mexico–192–42891–5945039
Peru–53–7915–33349
Finland–111–65–4217119
Yugoslavia–151–266145395
Israel–260–2631–88120
Spain–325–386–70–4910612
Source: Based on data from International Monetary Fund, International Financial Statistics.

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

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

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

The U.K. payments balance, as that term is here employed, includes changes in overseas sterling holdings other than the accumulation of sterling funds by the German authorities against future debt repayments, and excludes not only movements in gold and foreign exchange reserves and changes in net EPU and IMF positions but also such forms of official financing as the acquisition of sterling by the German authorities referred to above, the drawing from the Export-Import Bank, and the postponement of debt service on the North American loans.

Countries in Eastern Europe, non-dollar countries other than Chile in Latin America, Spain, Finland, Egypt, Iran, and Japan.

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