Chapter

IV Domestic Financial Developments and External Payments in Selected Groups of Countries

Author(s):
International Monetary Fund
Published Date:
September 1959
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Manufacturing Countries

United States

Internal Developments

THE recession in the United States in the second half of 1957 and the first quarter of 1958, though short, was somewhat deeper than any previous recession in that country over the last twenty years. For 1958 as a whole, real gross national product (GNP) was about 3 percent less than in 1957. In the second quarter of 1958, output began to recover, and this improvement became a renewed expansion in 1959; in the first quarter of 1959 the seasonally adjusted GNP in real terms was some 2 percent above the level attained in mid-1957.

After declining by 13 percent from August 1957 to April 1958, industrial production at first rebounded more sharply than in 1954-55. Subsequently, the rate of recovery was more moderate; by the end of May 1959, industrial production was 5 percent above the prerecession peak. Nonagricultural employment, which by April 1958 had declined by more than 5 percent, rose by 4 percent to mid-May 1959. Unemployment (seasonally adjusted), which for two years prior to the third quarter of 1957 had been fairly stable at about 4.2 percent of the civilian labor force, rose by April 1958 to 7.5 percent of the labor force. It remained at about that level until the last quarter of 1958; by May 1959 it had declined to 4.9 percent.

Prices continued to rise during the recession at almost the same rate as during the preceding period of gently rising output from the end of 1955; from the second quarter of 1958, when recovery began, prices leveled off. Thus, wholesale prices rose from August 1957 to March 1958 at an annual rate of more than 2 percent and then remained at practically the same level through May 1959. From August 1957 to March 1958, consumer prices rose more sharply, at an annual rate of almost 4 percent, and then rose very little through April 1959. These movements were the result of a combination of several factors: a fairly steady rise in rent, transportation prices, and medical service; inflexibility in the prices of most manufactured goods throughout recession and recovery; and the behavior of food prices, which on the whole was countercyclical, these prices rising during the latter part of the recession and falling from mid-1958 under the influence of supply factors.

During the recession, business expenditures on plant and equipment and on inventories declined. The upturn took place as the rate at which inventories were being reduced slowed down. Even after recovery had begun, expenditures on plant and equipment rose only moderately, and by the second quarter of 1959 they were still appreciably below the previous peak value. For 1958 as a whole, business investment in plant and equipment was about $6 billion less than in 1957 and the decline in inventory investment was almost as great. Exports of goods and services in 1958 were $3.6 billion less than in 1957, while imports remained virtually unchanged. Consumer expenditure was well sustained throughout the recession, despite the flagging demand for automobiles, and government expenditure on goods and services continued to rise. Each of these categories of expenditure increased from 1957 to 1958 by about $6 billion. A further factor aiding recovery was the rise in residential construction from the second quarter of 1958.

Developments in government finance helped considerably in ensuring the comparative resilience of the U.S. economy in 1958. Public expenditures were nearly $8 billion more than in 1957, while receipts were nearly $4 billion below the previous year. The aggregate government deficit, federal, state, and local, in 1958 amounted to more than $10 billion, in contrast to a surplus of nearly $2 billion in 1957. Three quarters of the increase in government expenditure was in purchases of goods and services; the remainder was in government transfer payments, such as unemployment compensation and other social security benefits. These fiscal developments were largely responsible for the maintenance of disposable personal income, which declined only slightly in the latter months of 1957 and the early months of 1958.

Money and credit policies contributed in various ways to mitigate the downswing and, in particular, to stimulate recovery. Federal Reserve discount rates, which had been raised to 3½ percent in the summer of 1957, were reduced by several steps to 1% percent in April 1958. In the closing months of 1957, Federal Reserve open market operations, together with other factors, produced a rapid reduction of member bank borrowing. Reserve requirements were reduced in the early part of 1958 and this, together with some decline in cash in circulation, led to a rise in the net free reserves of member banks.

Substantial open market purchases by the Federal Reserve Banks in the second quarter of 1958 exceeded the amount needed to offset the outflow of gold during that period. The commercial banks made heavy purchases of U.S. Government securities in the spring and summer of 1958, and in the fourth quarter increased substantially their loans to the private sector in response to the rising demand for credit. Owing to this expansion of commercial bank credit, there was an increase during 1958 of about 5 percent in demand deposits and of 4 percent in the money supply as a whole. The total increase in the domestic assets of the banking system during that year was about $17 billion. The monetary expansion, however, was held within limits. After mid-1958, open market operations supplied only a portion of the reserves needed to meet rising demands for credit and to offset the continued gold drain, and commercial bank reserves were maintained only by increased borrowing from the Reserve Banks. Market rates of interest rose by the end of 1958 almost to the prerecession level, and the official discount rate was raised by four steps, beginning in September 1958, until in May 1959 it reached 3½ percent.

During the recovery after mid-1958, there were some, expectations of a return of inflation in response to some of the forces that appeared to underlie the long-term upward trend of prices, and especially if during the period of cyclical recovery there was to be a continued budget deficit. These expectations were a factor in the steep rise in stock prices, which continued throughout 1958 and into 1959.

External Payments Developments

The balance of payments of the rest of the world with the United States improved during the recession of 1957-58; beginning with the last quarter of 1957 it showed a surplus, in contrast to deficits in the four preceding quarters. During the period of recovery, the surplus continued to grow until the last quarter of 1958, when it declined slightly. In the first quarter of 1959 the surplus declined still more sharply. As a result of these movements, monetary authorities abroad, who had transferred some $1.4 billion of gold and dollars to the United States in 1957, increased their holdings of gold and U.S. dollars in 1958 by $2.9 billion (Table 16). U.S. expenditures abroad for imports and other items showed unexpectedly little decrease during the recession and only a small increase in the second half of 1958. The behavior of the balance of payments in 1958 is therefore to be explained in terms of changes in foreign expenditure on U.S. exports and on the accumulation of long-term and short-term claims in the United States; this expenditure declined heavily from the first half of 1957 to the first half of 1958 and showed no recovery during the rest of the year.

Table 16.United States: Summary of Balance of Payments, 1956-581(In millions of U.S. dollars)
195719581959
195619571958Jan.-

June
July-

Dec.
Jan.-

June
July-

Dec.
Jan.-

Mar.
Government transactions2-5,395-5,694-5,874-3,123-2,571-2,960-2,914-1,325
Private current transactions
Exports: Merchandise17,35419,36416,20810,2539,1118,2327,9763,741
Services5,8516,6286,2273,2363;3922,8953,3321,456
23,20525,99222,43513,48912,50311,12711,3085,197
Imports: Merchandise-12,804-13,291-12,946-6,641-6,650-6,305-6,641-3,607
Services3-4,182-4,499-4,670-2,089-2,410-2,172-2,498-1,048
-16,986-17,790-17,616-8,730-9,060-8,477-9,139-4,655
Balance6,2198,2024,8194,7593,4432,6502,169542
Private capital transactions
U.S. capital, net outflow-2,990-3,175-2,844-2,177-998-1,667-1,177-394
Foreign capital, net inflow
Long-term5303612429368-22660
Short-term487295953459336647757640
Balance-1,588-1,855-2,286-1,291-564-1,192-1,094306
Errors and omissions643748441593155310131205
Gold and dollar transfers to official holders5121-1,4012,900-938-4631,1921,708272
Of which gold sales by the United States-281-7722,294-660-1121,458836144
Sources: U.S. Depatment 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 han the International Monetary Fund (IMF), the European Payments Union (EPU), and the Bank for International Settlements (BIS)

Including official holdings of gold and short-term dollar balances and estimated official foreign holdings of U.S. Government securities. Official holders include the IMF, the EPU, and the BIS. Minus sign indicates transfer to the United States.

Sources: U.S. Depatment 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 han the International Monetary Fund (IMF), the European Payments Union (EPU), and the Bank for International Settlements (BIS)

Including official holdings of gold and short-term dollar balances and estimated official foreign holdings of U.S. Government securities. Official holders include the IMF, the EPU, and the BIS. Minus sign indicates transfer to the United States.

Despite the recession, U.S. imports in 1958 were only about 1 percent lower in value, and their volume was actually 4 percent higher, than in 1957, the increase in volume contrasting sharply with the decline of 7 percent in the previous recession from 1953 to 1954. The main reasons for the increased volume of imports were the maintenance of consumer demand in the United States and the continued competitive success of foreign manufactures in the U.S. market. Imports of crude petroleum, restricted by voluntary quotas, remained the same in volume as in 1957, while imports of refined products rose sharply. Imports of other crude and semimanufactured materials declined by some 5 percent in volume and 13 percent in value. Imports of foodstuffs increased in volume, and imports of sugar and meat rose even in value, partly on account of the decline in sugar supplies from Hawaii and Puerto Rico and of a reduction in the number of cattle slaughtered in the United States. The upward trend in imports of manufactures actually became steeper from 1957 to 1958; payments for manufactures as a whole rose by 11 percent, those for automobiles alone by more than 60 percent. The greater availability of supplies from Europe and Japan and an increased preference for foreign automobile styles were important factors in these increases. As a result of the great diversity of the influences that affected the different import categories, payments for imports from manufacturing countries rose by some 8 percent, whereas those to primary producing areas fell by some 5 percent.

U.S. Government expenditure abroad rose slightly from 1957 to 1958, as a result of a minor increase in military outlays; the net outflow of loans and grants remained unchanged. There were some shifts, however, in both the area distribution and the type of lending: Loans to Western Europe fell, while those to Latin America rose by roughly $300 million. Government lending arising out of sales of agricultural surpluses was lower, and disbursements by the Export-Import Bank were greater, than in 1957.

After being exceptionally high in 1957, the net outflow of private capital from the United States declined in 1958 by 10 percent; this was the net result of a 50 percent decline in direct investment and considerable increases in other forms of long-term capital outflow. The reduction in direct investment, largely in the petroleum industry, was accounted for in part by the completion of pipelines in Canada and the nonrecurrent character of the large payments made in 1957 for oil concessions in Venezuela. However, direct investment in other industries and countries, mainly in Latin America, was also much lower in 1958 than in 1957.

For new issues of foreign securities, 1958 was a postwar record year, when, in addition to IBRD bonds and Canadian securities, there were also considerable flotations from other countries. In the second half of 1958 and the early months of 1959, the tightening of the capital market and the rise of interest rates in the United States at a time when interest rates were falling in most other world financial centers caused a reduction in the outflow of U.S. private capital through new issues of foreign securities and through medium- and short-term credits.

In contrast to the comparative stability of U.S. imports, U.S. Government expenditures abroad, and U.S. foreign investment, there was a decline of $3.6 billion in the value of U.S. exports of goods and services, and of more than $750 million in the inflow of foreign capital into the United States. U.S. merchandise exports, which had risen from 1955 to 1957 by some 27 percent in volume, fell from 1957 to 1958 by 16 percent in both volume and value, with practically no change in average export prices. The abnormally high demand for U.S. fuel, cotton, and wheat, which had stimulated exports in 1957, disappeared in 1958; U.S. exports were also influenced by the slackening of activity in the other main industrial areas of the world and by the detrimental effects on the payments positions of less industrialized countries of significant declines in the prices of their export commodities. U.S. exports to Europe, Japan, and Canada declined by nearly 20 percent, or $2 billion, the decline beginning in the first half of 1957 and continuing through the first half of 1958; in the second half of 1958, these exports were roughly the same as in the first half. Exports to primary producing areas, on the other hand, were well maintained throughout 1957 but declined steadily during 1958. The exports which declined most from 1957 to 1958 were those of crude and semimanufactured materials, which were strongly affected by European demand. The value of exports of cotton, petroleum, and coal fell by more than one third, and of iron and steel semimanufactures by more than one half. In the last six months of 1958, exports of manufactures also fell considerably as a result of declining demand from primary producing countries.

Both long-term and short-term investment in the United States from abroad was markedly less in 1958 than in 1957. The abrupt decline in the long-term capital inflow, primarily from Western Europe, which set in after mid-1957 was in part related to the decline on U.S. stock exchanges in the second half of that year, while the tighter conditions in the money markets of Western Europe also had an effect; the rising market in 1958 did not succeed in attracting foreign funds, possibly because yields were lower than in foreign markets. The reduction in 1958 of the net inflow of short-term funds from the high level of the preceding two years may be attributed, in large measure, to the cessation of speculative capital movements as sterling and other European currencies became stronger. The considerable decline in Errors and Omissions, the residual item in the balance of payments, furthermore suggests that, for much the same reason, an unrecorded net inflow of capital in 1957 may have been reversed in 1958.

For reasons relating both to current and to capital items, the improvement from 1957 to 1958 in the balance of payments of the rest of the world with the United States was confined largely to the industrial countries and to Canada. There was relatively little change between the two years in the balance on direct transactions of either the Western European dependencies or Latin America with the United States. For other primary producing countries the balance on such transactions may in the aggregate have improved slightly.

In the first quarter of 1959, the U.S. surplus on private current transactions continued to decline and was some $700 million lower than the quarterly average of 1958. The decline was attributable in roughly equal proportions to greater imports and smaller exports. The rise in imports, though largely reflecting the swift expansion of industrial activity, resulted in part from restocking of coffee and anticipatory purchases of petroleum prior to the entry into force of quota restrictions. The decline in exports to Latin American markets, where capital imports had fallen, was particularly severe.

The decline in the U.S. current balance was more than offset by a greatly increased inflow of foreign, and a reduced outflow of U.S., capital, both of which may have been influenced by the relative rise of U.S. interest rates. The inflow of foreign capital was swollen by an increase of $340 million in the dollar balances held by foreign banks, mainly German, and by German prepayments for military supplies. Advance repayments of $150 million of German debts were largely responsible for a reduction in net government spending. Transfers of gold and dollars to official holders in the first quarter of 1959 amounted to $270 million.

United Kingdom

From mid-1955, the U.K. Government imposed various restraints on the growth of domestic demand in an effort to achieve price stability and to strengthen the balance of payments. These disinflationary policies, which were intensified in 1957, made a significant contribution toward slowing down the rise of prices and costs and contributed to a radical improvement in the balance of payments, but the decline in the rate of growth of output started earlier in the United Kingdom than in other industrial countries. The Government took steps in the latter part of 1958 which were designed to revive home demand.

After rising slightly in the two previous years, aggregate production changed very little from 1957 to 1958, but real income increased as a result of improvement in the terms of trade. Personal consumption rose by more than 2 percent in real terms, but this increase was more than outweighed by a large decrease in inventory investment and smaller decreases in exports and in the current expenditure of public authorities on goods and services. Industrial production fell by about 1 percent from 1957 to 1958, while industrial capacity continued to expand. By 1958, there was considerable excess capacity in several major industries. Labor productivity changed very little. Unemployment rose until in mid-January it reached a seasonal peak of 3 percent, a rate low by comparison with many other countries but the highest for the United Kingdom since the fuel crisis of 1947. By April the unemployment rate had declined to about 2½ percent.

The rise in retail prices slowed down from more than 4 percent during 1957 to nearly 2 percent during 1958. Prices of industrial output, which had risen by 3 percent in 1957, were almost stable in 1958. There was a substantial fall in import prices after mid- 1957, but, because of the decline in output, the increase in labor costs per unit of output was virtually the same as in 1957, although the rate of increase in wages was considerably less than in earlier years.

Steps were taken, especially after the middle of 1958, to permit an increase in demand by removing the ceiling on commercial bank advances, suspending restrictions on hire purchase, and discontinuing the control of domestic capital issues. Initial tax allowances for investment were raised in the 1958 budget, and increases in public investment programs were authorized later in the year. The tax concessions in the 1959-60 budget, estimated to cost £370 million in a full year, and increased capital expenditure were estimated to produce an over-all deficit of £721 million. Between March and November the bank rate was reduced by five stages, from 7 percent to 4 percent. Until mid-August, this was no more than a gradual alleviation of the severity of a 7 percent rate, but the last two reductions formed part of the general easing of credit conditions. The money supply, which had remained approximately constant during the preceding three years, increased during 1958 by some 2½ percent.

The U.K. over-all balance of payments, as shown in Table 17, improved between 1957 and 1958 by £475 million, of which £230 million represented an improvement in the balance on current account. In both years, the payments balance was much more favorable in the first half of the year than in the second; this movement is to some extent seasonal, but whereas in 1957 it had been due mainly to an especially sharp reduction in the second half of the year in the sterling holdings of overseas sterling countries, in 1958 it was due primarily to a decline in the current account surplus, which was exceptionally large in the first half of the year.

Table 17.International Transactions of the United Kingdom, 1957 and 1958(In millions of pounds sterling)
195719581
Jan.-

June
July-

Dec.
Entire

Year
Jan.-

June
July-

Dec.
Entire

Year
Current account
Merchandise trade-25-33-58141-21120
Invisibles2139145284186149335
1141l2226327128455
Investment account
Long-term3-178-135-313-104-132-236
Short-term-202040-3010
-198-115-313-64-162-226
Errors and omissions815313430-42-12
Total35047293-76217
Changes in overseas sterling holdings
Overseas sterling area69-225-156-76-6-82
Other than sterling area4-6-83-896675141
Total63-308-245-106959
U.K. payments balance60-258-198283-7276
Sources: United Kingdom Balance of Payments, 1956 to 1958 (Cmnd. 700) and Fund estimates.

Preliminary.

Includes interest payments due in 1957 on North American loans but not actually paid (second half 1957, -£37 million).

Includes repayment of principal due in 1957 but not actually paid (second half,—£26 million); excludes drawing on line of credit from Export-Import Bank of Washington (second half 1957, £89 million).

Excludes changes in sterling holdings of the International Monetary Fund (1957, £2 million; 1958,—£5 million) and German advance deposit of £68 million in second half of 1957.

Sources: United Kingdom Balance of Payments, 1956 to 1958 (Cmnd. 700) and Fund estimates.

Preliminary.

Includes interest payments due in 1957 on North American loans but not actually paid (second half 1957, -£37 million).

Includes repayment of principal due in 1957 but not actually paid (second half,—£26 million); excludes drawing on line of credit from Export-Import Bank of Washington (second half 1957, £89 million).

Excludes changes in sterling holdings of the International Monetary Fund (1957, £2 million; 1958,—£5 million) and German advance deposit of £68 million in second half of 1957.

The improvement in the trade balance, which constituted much the greater part of the rise in the current account surplus between the two years, was due entirely to a decline in the cost of imports. Exports declined from 1957 to 1958 by about 3½ percent in both volume and value. On the other hand, U.K. import costs benefited markedly in 1958 from the 8 percent fall in import prices. The volume of imports remained practically constant between 1957 and 1958. While imports of raw materials and semimanufactures declined substantially, owing to destocking by manufacturers, imports of food increased by 5 percent and of finished manufactures by 8 percent.

Both the decline in the volume of exports and the reduction in the cost of imports were associated with the fall in the prices received by exporters in the sterling area and other primary producing countries—and hence in their importing power. But whereas the fall in the prices of primary products had already affected the cost of imports in the first half of 1958, its effect on export receipts was largely delayed until the second half of the year. Had it not been for the dock strikes in May and June, which postponed the shipment of exports from the second to the third quarter, there would have been rather more than the usual seasonal decline in the volume of exports from the first to the second half of the year. On the other hand, there was a substantial increase in imports of food, materials, and fuel in the last quarter of the year. For these reasons, the exceptional trade surplus that appeared in the first half of 1958 was followed in the second half by a return to the more usual deficit.

The surplus on invisibles rose by more than £50 million between 1957 and 1958,1 despite an increase of £73 million in the deficit on government transactions. Government receipts were reduced by lower defense aid and foreign military expenditures; and U.K. military expenditures increased by £20 million, mainly because of the reduction of German contributions to U.K. military expenditure in the Federal Republic. Net shipping earnings increased by about £60 million, the fall in freight rates having reduced expenditures more than earnings. An even larger improvement resulted from the recovery of net oil earnings, which had been cut back by the closure of the Suez Canal in the first half of 1957.

The balance of capital transactions was much more favorable to the United Kingdom in 1958 than in 1957. While there was little change in recorded net capital movements (other than changes in sterling holdings) vis-à-vis non-sterling countries, the United Kingdom’s residual deficit in transactions with these countries (Errors and Omissions), in which capital movements are probably the most volatile element, fell by some £75 million. This probably reflects the fact that U.K. purchases of dollar securities via certain free markets in the sterling area, which had occurred in the first half of 1957, ceased in 1958. Moreover, the decline in the sterling holdings of non-sterling-area countries, which had been going on for several years, was reversed in 1958. This is to be attributed primarily to a recovery of confidence in sterling, though the rise in U.K. interest rates relative to those of other countries may also have played a part.

The statistical record of capital movements vis-à-vis other sterling countries is complicated by the U.K. purchases of dollar securities in the free markets of the rest of the sterling area in the first half of 1957. When the effects of these transactions are eliminated, the main changes from 1957 to 1958 appear to be a slight increase in the outflow of official long-term capital, a reduction in recorded short-term lending, which may be associated with the relative credit stringency in the United Kingdom, and a decline of some £140 million in the U.K. residual surplus in transactions with the overseas sterling area.

The sterling holdings of other sterling area countries continued in 1958 the decline that had begun in the second half of 1957, but at a rapidly diminishing rate; and in the fourth quarter of 1958, there was even some increase. The movements in this item are best explained in terms of the over-all payments developments of the sterling area countries, which hold the greater part of their reserves in sterling. For these countries as a group, exports to non-sterling countries and to the United Kingdom fell from 1957 to 1958 by some £380 million, mainly as a consequence of the fall in the prices of primary products. Part of this decrease was recouped on invisibles and on imports, which in some countries were curtailed for balance of payments reasons; but their current account deficit—with gold production treated as an export—increased between the two years by £ 175 million. This deterioration was outweighed, however, by an improvement of £325 million on account of other items, presumably of a capital nature. Part of the capital inflow into the overseas sterling area in 1958 was official borrowing undertaken as reserves declined. The overall payments deficit of the overseas sterling area thus appears to have declined from 1957 to 1958 by some £150 million, of which a part, £74 million, was reflected in smaller drawings on sterling holdings, another part in a reduction of net drawings from the International Monetary Fund, and the rest in an increased accumulation of gold and dollar reserves held separately by sterling area countries.

In the first four months of 1959 the United Kingdom again had a payments surplus, amounting to £120 million compared with some £230 million in the corresponding period in 1958. Despite a repurchase of £71 million from the Fund in March, reserves of gold and convertible currency continued to rise and by April 1959 they amounted to £1,161 million, an increase of 70 percent above the lowest level in 1957. The balance of trade was rather less favorable than in the early months of 1958, imports being some 5 percent higher in volume and exports about the same as in the year before. The growth in sterling holdings of overseas countries, which had been rapid in the last quarter of 1958, was checked in the first quarter of 1959. The slight decline was mainly due to a fall of £63 million in the holdings of OEEC countries from a peak at the end of 1958.

France

The outstanding feature of the economic development of France in 1958 and the early part of 1959 was the considerable success of the disinflationary measures that had been applied in restoring both internal and external equilibrium.

The measures taken in the second half of 1957 to reduce the budget deficit and to limit the expansion of credit were strengthened early in 1958. In February, the banks were instructed to limit the amount of credit outstanding; in July, the Government imposed further tax increases and new taxes so that in 1958 the impasse—i.e., the difference between the sum of the Treasury’s firm commitments, whether for current expenditures or for investment, and the Treasury’s receipts, whether taxes or repayments of prior advances—should not exceed the established limit which could be financed by loans from the public.

The deficit was reduced from F 1,041 billion in 1957 to F 695 billion in 1958, being financed in 1958 largely by long-term borrowing. During that year, bank credit to the Government and to the private sector increased much less than during 1957, and the money supply rose by 6 percent, compared with 9 percent in the previous year. Both the wholesale price index and the cost of living index had risen by about 13 percent between June 1957 and January 1958 under the influence of the exchange rate adjustment of August 1957, the elimination of certain subsidies, and shortages of foodstuffs; during February-December 1958, the wholesale price index rose by less than 1 percent and the cost of living index by less than 6 percent. The fall in the prices of imported raw materials contributed to this stability. On the other hand, industrial production ceased to advance in the second quarter of 1958, and thereafter declined very slightly.

The payments deficit of the franc area, which had been about $1 billion in 1957, was reduced in 1958 to some $150 million (Table 18). Gold dishoarding by French residents was partly responsible for the sharp reduction in the deficit in the second half of the year. The special financial aid totaling $655 million,2 made available in January 1958, provided assistance in respect of 1958 to the amount of some $530 million. Most of this was used in the first part of the year, but during the course of the year the payments balance improved to such an extent that for 1958 as a whole official reserves increased by some $350 million.

Table 18.Countries (Other Than the United States) Exporting Manufactures: Trade and Payments Balances and Official Reserves, 1956, 1957, and 1958(Value figures in millions of U.S. dollars)
Trade Balance1Payments Balance2
195619571958195619571958Official

Reserves,

End of

19583
Official

Reserves

as Percent

of Annual

Average of

Imports,

1956-58
Austria-125-149-1564510415566563
Belgium-
Luxembourg-110-246-8319-584101,51146
Denmark-199-185-80141210423017
France4-1,017-1,064-482-772-1,019-15096517
Germany, Federal
Republic of7411,0761,4471,2151,3537426,32188
Italy-1,029-1,124-633912679452,32170
Netherlands-863-1,008-407-205-855061,49339
Norway-439-453-56635195024319
Portugal-143-214-19122-621708149
Sweden-264-291-2783-171747320
Switzerland-324-404-16736161652,063114
United Kingdom5-1,591-1,716-1,188-560-5547763,10528
Japan6-729-1,426-156168-67734586124
Total-6,092-7,204-2,940111-6454,08620,95945
Source: Based on data from International Monetary Fund, International Financial Statistics.

Exports f.o.b. minus imports c.i.f.

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

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

Payments balance for 1958 shows estimated change in gross official reserves of gold and total foreign exchange holdings (net of special U.S. aid received during the year) and in net EPU and IMF positions. Official reserves include gold and convertible currencies only.

Payments balance for 1957 measured by change in gold and foreign exchange reserves net of official financing, such as special German sterling deposit with Bank of England, postponement of interest and debt service on North American loans, and drawing on line of credit from Export-Import Bank of Washington.

Payments balance in 1957 net of drawing on agricultural surplus loan from Export-Import Bank of Washington, and in 1958 plus net repayments on this loan. Payments balance in 1958 based on staff estimate of change in gross official reserves, and in Ministry of Finance exchange holdings with commercial banks and open account balances, both of which have been excluded from the new series of figures for Japanese official holdings from which the figure for the end of 1958 given above is derived.

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

Exports f.o.b. minus imports c.i.f.

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

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

Payments balance for 1958 shows estimated change in gross official reserves of gold and total foreign exchange holdings (net of special U.S. aid received during the year) and in net EPU and IMF positions. Official reserves include gold and convertible currencies only.

Payments balance for 1957 measured by change in gold and foreign exchange reserves net of official financing, such as special German sterling deposit with Bank of England, postponement of interest and debt service on North American loans, and drawing on line of credit from Export-Import Bank of Washington.

Payments balance in 1957 net of drawing on agricultural surplus loan from Export-Import Bank of Washington, and in 1958 plus net repayments on this loan. Payments balance in 1958 based on staff estimate of change in gross official reserves, and in Ministry of Finance exchange holdings with commercial banks and open account balances, both of which have been excluded from the new series of figures for Japanese official holdings from which the figure for the end of 1958 given above is derived.

The reduction in the payments deficit in 1958 was the result of improvements of over $400 million in the trade balance of metropolitan France with foreign countries3 and of over $250 million in the balance on service items. The balance on goods and services of the rest of the franc area with foreign countries also improved. About $200 million appears to have been the result of changes in the timing of payments for imports into the franc area as a whole, the so-called “leads and lags,” and was therefore of a capital nature. Despite the fact that voluntary gold sales to the authorities exceeded somewhat the compulsory calling in during 1957 of foreign exchange balances from commercial banks (the ratissage), the positive balance on other items of a capital nature in 1958 was some $80 million smaller than in 1957, when these items had included a special loan of $100 million from U.S. banks for the purchase of petroleum.

The improvement in France’s trade balance with countries outside the franc area resulted entirely from a decline of 14 percent in the dollar value of imports. Largely because of a decline in agricultural exports resulting from poor harvests in 1957, the volume of French exports to foreign countries in 1958 was 1 percent, and their dollar value 4 percent, less than in 1957.

The decline in the dollar value of French imports from outside the franc area was a consequence of the fall in raw material prices, a substantial shift to the franc area in the origin of imports of food and raw materials, and the continuation of the quantitative restrictions that had been extended in 1957 to cover all imports from outside the franc area. The total volume of imports from all sources was only about 1 percent less than in 1957. The liberalization of trade in January 1959 had little immediate effect, the volume and dollar value of imports from outside the franc area being further reduced in the first quarter of 1959. The dollar value of exports declined, but their volume was considerably greater than in the first quarter of 1958.

A considerable volume of speculation against the franc, mostly vis-à-vis other European currencies, was stimulated for a brief period by rumors of the devaluation which was carried out on December 27, 1958, when a new par value of F 493.706 per U.S. dollar, corresponding to a devaluation of 14.9 percent, was agreed with the Fund. For technical reasons connected with the timing of EPU settlements, the effects of this European speculation do not appear in the 1958 balance of payments.

Further stabilization measures designed to strengthen confidence in the currency by reducing inflationary pressure were taken at the turn of the year. In accordance with the policy of keeping the deficit within the limit of the impasse set in the preceding year, it was planned that the effect upon the Treasury deficit of substantially increased expenditures on government salaries and public investment would be offset by further increases in both direct and indirect taxes, by the elimination of subsidies, and by increases in the charges of nationalized enterprises. To cushion the effects of these latter measures on real wages, the minimum legal wage rate was raised by 4.5 percent and salaries of government employees by 4 percent. At the same time, however, the virtual abolition of the escalator clauses in the wage contracts that regulate wage, rates other than the legal minimum introduced an important structural change into the mechanism of wage determination.

In the early months of 1959, credit stringency was relaxed somewhat, in view of the disinflationary effect of the measures taken earlier and in order to encourage investment. The penalty rate for bank borrowing from the Bank of France in excess of the rediscount ceilings, which had been reduced in October 1958, was further reduced in March and April 1959. The discount rate was cut in three steps, from 5 percent in October 1958 to 4 percent in April 1959, and the ceiling on bank credit was abolished in February 1959.

The improvement in the payments balance which began in 1958 continued in the early months of 1959. The effects upon reserves of leads and lags and of “hot money” movements are reduced if a comparison is made with the central holdings of gold and convertible currency at the end of October 1958, when they amounted to rather more than $1,000 million. By the end of June 1959 the total had increased to $1,634 million. Moreover, during the first four months of 1959, $340 million was paid back by the Stabilization Fund to the commercial banks through deratissage operations.

Federal Republic of Germany

Although the slowing down of the rate of economic growth from 1957 to 1958 was less marked in the Federal Republic of Germany than in most other countries, the trade balance continued to improve from 1957 to 1958. There was, however, an increased outward movement of capital, encouraged by German monetary policy, and the over-all payments surplus declined to a level which, though still high, was more moderate than in 1957.

German industrial production was greater in each quarter of 1958 than it had been 12 months earlier. From 1957 to 1958, real gross national product rose by less than 3 percent, compared with 5 percent in the previous year. Increases in public construction and in housing were stimulated by the substantial decrease in interest rates, but fixed business investment was no larger than in 1957. Income from wages and salaries rose more rapidly than total national income, and there was a significant rise in personal consumption despite a very rapid rise in private saving.

The slowing down of the growth of production during 1958 was less marked and shorter lived than in most industrial countries. Prices showed remarkable stability, which was a consequence of the continuance of a substantial rate of growth in productivity, a decline in profit margins, falling import prices, and increasing trade liberalization. In early 1959 production expanded again at a rising rate.

The rate of increase of exports was considerably less in 1958 than in 1957; however, the volume of exports continued to grow, by some 4 percent, in contrast to a decline in most of the other manufacturing countries. A slight contraction in exports to Europe was outweighed by increases in exports to other areas, particularly the United States.

The volume of Germany’s imports increased from 1957 to 1958 by 7 percent, against a 12 percent increase from 1956 to 1957. However, owing to a steep decline in prices and freight rates, the c.i.f. cost of imports fell by 2 percent, and there was an improvement of some 9 percent in Germany’s terms of trade.

Germany’s payments surplus on current account rose from $1,440 million in 1957 to $1,720 million in 1958, but the net capital outflow (including Errors and Omissions) increased much more, from $90 million to $980 million. Official capital exports as a whole fell from $657 million to $394 million, because of a decline in advance payments on military imports (included in the balance of short-term capital movements). The decline in over-all official capital exports was far outweighed, however, by a change in the estimated movement of private capital (including Errors and Omissions), from an inflow of $435 million to an outflow of $505 million. Of this very large outward shift of $940 million, some $600 million arose on unrecorded transactions and was due in part to the reversal in 1958 of the changes that had occurred in 1957 in the timing of current payments. The remainder was the result of a substantial recorded outflow in 1958 of banking and other private funds, stimulated by a decline in German interest rates relative to those prevailing elsewhere and influenced by increased liquidity in Germany.

The money supply increased during 1958 by some 13 percent, compared with 12 percent in 1957, though incomes had probably grown more rapidly in the earlier year. The greater increase in the money supply occurred in spite of the fact that there was a smaller reserve acquisition than in 1957. The expansion of bank credit to both the public and the private sectors was greater than in 1957, with medium- and long-term lending and investment accounting for almost the entire increase. The accumulation of government deposits with, and loans to, the banking system declined considerably from 1957 to 1958. The authorities continued to offset the effects of the influx of reserves by open market operations, though to a lesser extent than before. However, they may be said to have contributed to the lowering of interest rates and the outflow of capital by permitting the continued expansion of bank liquidity and by reducing the official discount rate by several steps, to 2% percent in January 1959.

German official reserves, which had changed very little in the first four months of 1958, declined by nearly $880 million in the first four months of 1959, largely as a result of certain temporary factors. While the surplus on goods and services in the first quarter of 1959 was $70 million larger than in the same quarter of 1958, the net outflow on account of private capital transactions rose by about $360 million and there was a similar increase in official capital exports, due to exceptionally large advance payments for military imports and debt settlements. Much of the change in private capital exports was a response to changes in relative interest rates, which were the decisive factor underlying the increase of $320 million in net foreign exchange holdings of German commercial banks. Long-term private investment abroad also increased, to about $120 million. In May, when the temporary factors referred to above had less influence, reserves again rose, by $110 million.

Italy

In Italy, as in Germany, internal demand and output in 1958 were less severely affected by the recession than in most industrial countries, and there too the balance of payments improved, by nearly $680 million (Table 18). However, the growth in output, which had been rapid, slowed down in 1957-58. Agricultural production rose much more from 1957 to 1958 than in other recent years, but the rate of increase of real national income, which had averaged a little more than 5 percent per annum in the three preceding years, fell to 4 percent. Industrial production flattened out from mid-1957 to mid-1958, and then gradually expanded again. A decline in private fixed investment and inventories was largely offset by higher public investment and exports of invisibles. Unemployment remained about the same as in 1957. Wholesale prices declined during 1958 because of lower import prices, but the cost of living still rose somewhat, and wages increased more than the cost of living.

While national income was well maintained, the value of imports fell by 14 percent and their volume by about 6 percent. The reduction in volume largely reflected a running down of stocks. The proceeds from exports remained virtually unchanged, and the resultant reduction in the trade deficit accounted for some two thirds of the improvement in Italy’s balance of payments. The large surplus on invisibles was again increased by a rise in emigrant remittances and by a continued increase in tourist receipts. Receipts from intergovernmental aid, however, were $100 million less than in 1957.

The inflow of foreign long-term private capital into Italy was nearly twice the inflow in 1957, and about $65 million was received under IBRD loans to the governmental agency responsible for development in Southern Italy. On the other hand, Italian investment abroad increased, partly because of the subscription, equivalent to $24 million, to the European Investment Bank. The balance of short-term capital movements remained roughly unchanged. The increase in the inflow of private capital took place despite a decline in Italian interest rates, which are, however, still higher than in most other industrial countries.

Other European Countries

In Belgium-Luxembourg recession began earlier and went deeper than in other European countries. Industrial production declined from the second quarter of 1957 to the second quarter of 1958 by some 10 percent. The fall in activity appears to have been set off by a decline in demand for Belgian products in European markets, and it was associated with a slight deterioration in the Belgian payments balance from 1956 to 1957 (Table 18). The decline in demand, however, spread to the domestic sector, and particularly affected inventory investment, industrial fixed investment, and residential construction. Signs of a revival of economic activity were increasingly apparent by the beginning of the second quarter of 1959. The volume of imports in 1958 was 3 percent less, and expenditure on imports 9 percent less, than in 1957. Export prices and export proceeds continued to decline, but as a result of the fall in imports the trade balance improved4 by $160 million between the two years. The improvement in the payments balance was even higher, amounting to some $470 million. Capital inflow increased substantially, in part because of increased public borrowing in foreign markets.

Belgium’s reserves increased during 1958 by some 30 percent, and, although credit to the private sector fell off, the money supply rose by nearly 6 percent. This, taken in conjunction with the decline in internal activity and prices, meant a considerable enhancement of the liquidity of the economy and was reflected in a fall in interest rates.

The policy of restraint adopted in mid-1957 to arrest the deterioration in Denmark’s balance of payments kept domestic demand from rising and made it possible to benefit fully from favorable external conditions. The balance of payments showed a substantial strengthening in 1958 (Table 18), with the volume of exports 9 percent greater than in 1957; the increase in exports of industrial goods was especially notable. Official reserves of gold and foreign exchange rose by nearly $60 million, and in 1958 and the first months of 1959 the equivalent of $42.5 million was repurchased from the Fund.

The inflow of foreign exchange caused a rapid increase in liquidity and the National Bank lowered the discount rate in two steps, from 5.5 percent to 4.5 percent. The introduction by the National Bank of a system of three-month deposit certificates was an important factor in stabilizing the capital market.

The expansion of production which began in the second half of 1958 continued into 1959. In these circumstances, imports increased more than exports, but foreign exchange reserves continued to rise, although at a slower rate than in 1958.

In Norway there was a substantial goods and services deficit in 1958, as a result of the decline in freight earnings which followed the recession in the ocean freight market and of continued large imports of ships which had been ordered during previous years. However, an inflow of foreign capital, related particularly to the import of ships, made possible a further accumulation of reserves; at the end of the year, foreign exchange holdings were twice the holdings five years before. All these trends were again evident in the first four months of 1959.

Japan

In Japan, the setback to exports and to economic activity during the recession was more severe than in most industrial countries other than the United States. The value of exports, which had risen at an average rate of 25 percent per annum from 1953 to 1956 and by 14 percent from 1956 to 1957, was practically the same in 1958 as in 1957. While the volume of exports rose by 7 percent, export prices fell by a similar percentage. The large share of textiles, which is normal in Japan’s export trade—textile exports in fact fell by 10 percent in value—and the high proportion of its export markets that lies in primary producing countries made Japan particularly vulnerable to the effects of the recession.

Japan’s manufacturing output, which had been increasing between 1955 and 1957 at an annual rate of more than 20 percent, fell by 5 percent from the second quarter of 1957 to the second quarter of 1958; the previous rapid rate of growth was then resumed and continued into the first quarter of 1959. The restrictive budgetary and credit measures taken in May 1957 to check the boom and remedy the deterioration in external payments were successful in achieving their aim. In the second and third quarters of 1958, there was a net accumulation of inventories; private fixed capital investment also declined, but private consumption continued to rise. From May 1957 through October 1958 wholesale prices fell by 9 percent. Import payments, which had been very high in 1957, fell in 1958 by some 29 percent, the volume of imports declining by 19 percent and import prices by 13 percent. However, the volume of imports in 1958 was still slightly greater than in 1956. The largest declines in volume from 1957 to 1958 were in textile materials, coal, and metallic ores.

As a result of the decline in import payments, Japan’s trade deficit declined from 1957 to 1958 by $1,270 million, and the payments balance improved by $1,020 million (Table 18).

The Japanese authorities were cautious in relaxing their monetary and credit policies. Later than the corresponding action in most industrial countries, the Bank of Japan’s discount rate was reduced in three steps, from 8.4 percent in June 1958 to just under 7 percent in February 1959. Moreover, the Treasury’s cash transactions, which yielded a surplus of $406 million in the fiscal year 1957-58, yielded a deficit of $156 million in the fiscal year 1958-59, which was financed by central bank credit and thus tended to ease the money market. With the improvement in the payments position, most of the measures designed specifically to tighten import financing in 1957 were withdrawn. To encourage exports, the tax exemption limits for incomes from exports were liberalized. An increase was also authorized in the low interest rate funds provided by the Export-Import Bank of Japan to the shipbuilding industry.

Countries Exporting Tropical Foods, Oilseeds, and Vegetable Oils

A sharp decline in coffee prices in 1958 resulted in a considerable deterioration in the terms of trade of countries for which coffee is the main export. This tended not only to create or intensify payments difficulties, but also caused increased budgetary deficits in some of these countries, where taxation on coffee provides a major source of government revenue.

In Brazil proceeds from exports declined, but domestic economic expansion continued at a rapid rate, and there was a persistent upward trend in domestic prices. The combination of all these factors further intensified Brazil’s payments problem (Tables 19 and 20). Both the price and the volume of coffee exports declined from 1957 to 1958 by some 10 percent. Although coffee production continued to expand, the volume of exports declined, as the price policy that was adopted was less flexible than that of competing suppliers; stockpiling of coffee in 1958 amounted to roughly one third of exportable production. Export proceeds from cocoa were greater than in 1957 largely because of a rise in export prices, but proceeds from cotton exports declined in response to a reduction in the crop and a rise in domestic consumption. Exports of minerals, which had been expanding steadily in recent years, declined owing to adverse demand conditions.

Table 19.Trade of Countries Exporting Tropical Foods, Oilseeds, and Vegetable Oils, 1957 and 1958(Value figures in millions of U.S. dollars)
Exports f.o.b.Imports c.i.f.
19571958Percentage

change
19571958Percentage

change
Exporters of coffee
Brazil1,3921,243-111,4881,353-9
Colombia511453-11483367-24
Costa Rica839717103101-2
El Salvador138116-16115108-6
Guatemala114107-61471502
Haiti34391539415
Nicaragua64648178-4
Ethiopia80661-187281113
Total2,4162,185-102,5282,279-10
Exporters of other tropical foods
Cuba845734-138948271-8
Dominican Republic161137-1513615010
Jamaica141133-6187181-3
Panama3634-6117110-6
Ecuador1331373971003
Honduras65721179741-6
Ghana22926315270237-12
Ceylon3533592379360-5
China (Taiwan)14815652122267
Total2,1112,02542,3712,265-4
Exporters of oilseeds and vegetable oils
French West Africa3353525426419-2
Nigeria35438074274679
Philippines43249314725663-9
Total1,1211,22591,5781,549-2
Total5,6485,435-46,4776,093-6
Source: Based on data from International Monetary Fund, International Financial Statistics.

Partly estimated.

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

Partly estimated.

Table 20.Trade and Payments Balances and Official Reserves of Countries Exporting Tropical Foods, Oilseeds, and Vegetable Oils, 1957 and 1958(Value figures in millions of U.S. dollars)
Trade

Balance
Payments

Balance1
1957195819571958Official

Reserves,

End of

1958
Official

Reserves

as Percent

of Annual

Average

of Imports,

1956-58
Exporters of coffee
Brazil-96-110-182-23724653
Colombia2886141016032
Costa Rica-20-482020
El Salvador2385-23835
Guatemala-33-434-264833
Haiti-5-2-4-525
Nicaragua-17-142-2811
Ethiopia8-156-85678
Exporters of other tropical foods
Cuba-49-93-544-17343735
Dominican Republic25-138-14526
Panama-81-76-13194844
Ecuador3637313534
Honduras-14-2-4-4811
Ghana-4126-346306121
Ceylon-26-1-36-1117248
China (Taiwan)-64-7029311153
Exporters of oilseeds and
vegetable oils
Philippines-293-170-13061369214
Source: Based on data from International Monetary Fund, International Financial Statistics.

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

Including $116 million of special loans (net) received from the Export-Import Bank of Washington and U.S. commercial banks, utilization of $47 million of lines of credit, swap operations ($10 million), and increased bilateral debts ($17 million).

Including $200 million pledged as collateral.

Including increases of $4 million in 1957 and $105 million in 1958 in liabilities of official institutions other than those to the IMF.

Including $260 million pledged as collateral.

Including increases in central bank liabilities of $40 million in 1957 and $8 million in 1958, mainly through short-term borrowing from U.S. commercial banks.

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

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

Including $116 million of special loans (net) received from the Export-Import Bank of Washington and U.S. commercial banks, utilization of $47 million of lines of credit, swap operations ($10 million), and increased bilateral debts ($17 million).

Including $200 million pledged as collateral.

Including increases of $4 million in 1957 and $105 million in 1958 in liabilities of official institutions other than those to the IMF.

Including $260 million pledged as collateral.

Including increases in central bank liabilities of $40 million in 1957 and $8 million in 1958, mainly through short-term borrowing from U.S. commercial banks.

Demand for imports remained strong throughout 1958, and in these circumstances the Brazilian Government was compelled to respond to the decline in export earnings by curtailing imports. This was done by reducing the amount of foreign exchange offered to the auction market and thus depreciating the effective import exchange rates. For the same reason, in October 1958, the rates for preferential imports, consisting mainly of petroleum and certain capital goods, were devalued. In 1958 Brazil made a net drawing of $37.5 million from the Fund. Net loans of some $116 million from the Export-Import Bank of Washington and U.S. commercial banks, and lines of credit, which were used to the extent of $47 million, helped further to finance the 1958 payments deficit, but they also added to the already burdensome foreign debt.

Greater customs revenue under a new tariff law increased government receipts in 1958, and the intensification of import restrictions resulted in increased exchange profits from the widening of the differential between average import and export rates of exchange. Cruzeiro receipts from the sale of exchange obtained from foreign loans also increased. The potentially disinflationary effect of these factors was, however, largely offset by increased expenditure on the stockpiling of coffee. Bank credit to the private sector rose in 1958 at the same rate as in 1957. While the expansion in the money supply slowed down from 34 percent in 1957 to 21 percent in 1958, the rise in the cost of living accelerated from 14 percent in 1957 to 23 percent in 1958. The price increase continued through the first months of 1959, being further stimulated by wage increases in January and February.

In some of the coffee exporting countries, expansion of the volume of coffee shipments partly offset, and in Costa Rica and Haiti it even outweighed, the effect of reduced prices on export receipts. In Ethiopia, however, as the result of a small coffee crop, there was a payments deficit for the first time in several years.

The value of coffee exports in Colombia was only 10 percent lower in 1958 than in 1957, though average prices were lower by some 20 percent. Total export receipts, however, were also reduced by a substantial falling off in exports other than coffee. Nevertheless, a drastic cut in imports, achieved through restrictions and depreciation of the import exchange rate, raised the trade surplus by nearly $60 million and permitted a further, though modest, net redemption of arrears. This was accompanied by a depreciation of the export rates for coffee and other products, which, however, was more moderate than the depreciation of the import rate. Despite the measures introduced in April 1958 which placed a large part of the burden of stockpiling on individual exporters, the stockpiling expenditures of the National Federation of Coffee Growers were greater in 1958 than in the preceding year. While banking claims on the Government increased much less than in 1957—owing in part to increased exchange profits—the improvement in the balance of payments raised the rate of monetary expansion from less than 14 percent in 1957 to 21 percent in 1958. Nevertheless, the cost of living rose by only 8 percent in the course of 1958, compared with 23 percent in 1957.

Among the countries exporting mainly tropical foods other than coffee, export earnings tended to decline in those where sugar comprises a preponderant share of exports. The decline was most pronounced for the Dominican Republic and Cuba; reduced earnings on sugar in China (Taiwan) were more than offset by a large increase in rice exports. High cocoa prices increased Ghana’s export receipts in 1958 despite a much lower volume of exports.

Cuba’s export receipts, which had risen from 1956 to 1957 as the free world price of sugar sharply increased, declined from 1957 to 1958 as the world price moved some way back toward its former level. Political developments were the main reason for a decline in receipts from tourism, which up to 1957 had been increasing steadily. On private long-term capital account, on which there was a net inflow of some $50 million in 1957, there was an estimated outflow of about the same magnitude in 1958. Although the reduction in external receipts was associated with a decline in expenditures on imports, the payments balance of Cuba, which had worsened steadily in recent years, showed a further sharp deterioration (Table 20). Foreign liabilities of the National Bank and other government banks rose from some $200 million at the end of 1957 to some $300 million at the end of 1958, with more than half of this amount falling due in 1959. Domestic credit expansion, which had been a principal cause of the deterioration in the payments situation in recent years, continued in 1958.

For the third successive year Ecuador’s exchange reserves increased in 1958, the increase amounting to $2 million, and the free market exchange rate remained practically stable. The monetary authorities were under considerable pressure to extend more liberal credit to compensate for a contraction of income from exports in the first half of the year and to relieve regional pockets of unemployment, and legal reserve requirements for commercial banks were temporarily lowered. Although the commercial banks tended to build up some excess reserves while lower reserve requirements were in effect, this measure helped to some extent in keeping the private sector supplied with a substantial volume of bank credit. Although credit expansion for the private sector of the economy was about 10 percent less than in 1957, the rate of expansion for the year as a whole was considerably in excess of the rate of growth of the economy. These additional credit facilities, however, produced no inflationary effects, as net bank financing of the public sector was reduced substantially.

Export proceeds of the Philippines in 1958 benefited from the higher copra prices which resulted from a reduction in Indonesian supplies. A good crop permitted a sizable expansion of sugar exports. Moreover, a large increase in lumber shipments far outweighed the effect of lower prices. Imports, which had increased sharply from 1956 to 1957, were reduced from 1957 to 1958 by roughly half the increase in the previous year, and the trade deficit declined considerably (Table 20). The improvement in the payments position was brought about partly by budgetary and credit restraints and-partly by an intensification of import restrictions. The budget deficit was reduced by postponing expenditure, and private credit was curbed by raising the rediscount rate, limiting the use of government bonds as collateral for rediscount, and almost entirely banning credit for real estate and construction. As a result, bank credit to the private sector expanded in 1958 by little more than one fourth as much as in the previous year, and there was also some reduction in the rate of credit expansion to the public sector. Early in 1959 additional steps were taken to curb domestic inflation and to deal with the still precarious payments situation by curtailing bank credit.

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

The deterioration in Australia’s payments position from 1957 to 1958 was due largely to uncontrollable factors affecting export earnings, rather than to the pressure of monetary demand which has sometimes created payments difficulties in the past. Exports declined by 25 percent in value and by almost 17 percent in volume (Tables 21 and 22). Drought affected the output of wheat, wool, and butter, and flagging demand in industrial countries brought about considerable declines in the prices of wool and butter and reduced exports of lead and zinc. There was a substantial deterioration in Australia’s terms of trade. Expansionary budgetary and fiscal policies were adopted in order to offset the effects on internal demand of the fall in exports and farm incomes and to prevent a significant rise in unemployment, and the Commonwealth Bank increased the liquidity of the commercial banks during the first half of 1958. The resultant expansion of bank credit to the private sector was insufficient, however, to offset fully the decline in reserves and the increase in time deposits, and the money supply declined a little during 1958 as a whole, though it increased during the second half of the year as the Government borrowed from the Commonwealth Bank to meet its cash deficit.

Table 21.Trade of Countries Exporting Livestock Products, Textile Fibers, Grain, and Tobacco, 1957 and 1958(Value figures in millions of U.S. dollars)
Exports f.o.b.Imports c.i.f.
19571958Percentage

change
19571958Percentage

change
Exporters of wool and livestock products
Australia2,2031,653-251,9452,0586
New Zealand774699-10827796-4
Argentina97599421,3101,233-6
Uruguay1281399226135-40
Ireland368366-15165568
Total4,4483,851-134,8244,778-1
Exporters of vegetable fibers, grain,
and tobacco
United Arab Republic1
Egypt489470-451468433
Syria151116-2316719114
Sudan148133-10194182-6
Pakistan358298-17440396-10
Turkey345264-23397315-21
Greece22023255245658
Total1,7111,513-122,2362,3334
Exporters of rice
Burma230194-16296203-31
Thailand365309-15406383-6
Total595503-15702586-17
Total6,7545,867-137,7627,697-1
Source: Based on data from International Monetary Fund, International Financial Statistics.

Excluding trade between Egypt and Syria.

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

Excluding trade between Egypt and Syria.

As a result of the Government’s success in maintaining home demand and of the maintenance of the import ceiling at the level to which it had been raised in the course of 1957, the value of imports rose by 6 percent from 1957 to 1958. The resulting trade deficit was financed in part by official borrowing from London and New York to the amount of $95 million, but mainly by a reversal in the movement of reserves from an increase of $368 million in 1957 to a decrease of some $200 million in 1958. The payments position improved in the first quarter of 1959, when exports were greater, and imports less, than in the first quarter of 1958.

Table 22.Trade and Payments Balances and Official Reserves of Countries Exporting Livestock Products, Textile Fibers, Grain, and Tobacco, 1957 and 1958(Value figures in millions of U.S. dollars)
Trade BalancePayments Balance1
1957195819571958Official

Reserves,

End of

1958
Official

Reserves as

Percent of

Annual

Average

of Imports,

1956-58
Exporters of wool and
livestock products
Australia258-405368-2011,12056
New Zealand2-53-97-69-7418724
Argentina3-335-239-154-112..
Uruguay4-984-51-24180
Ireland-148-190231026250
Exporters of vegetable fibers,
grain, and tobacco
United Arab Republic5
Egypt-25-214-116-3642974
Syria-16-75-8-243017
Sudan-46-49-3-338751
Pakistan-82-98-82-3325862
Turkey-52-5178-382976
Greece-304-333-15-2017634
Exporters of rice
Burma-66-9-282911951
Thailand-41-7418-132785
Source: Based on data from International Monetary Fund, International Financial Statistics.

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

Payments balance includes, as a negative item, net official borrowing from abroad to the amount of $12 million in 1957 and $123 million in 1958.

Payments balance based on gold and net foreign exchange reserves and net IMF position. The 1958 figure is based on holdings at the end of October 1958.

Payments balance based on net official reserves and net IMF position. The figure shown under official reserves refers to gold holdings only.

Trade balances exclude trade between Egypt and Syria.

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 and net IMF positions.

Payments balance includes, as a negative item, net official borrowing from abroad to the amount of $12 million in 1957 and $123 million in 1958.

Payments balance based on gold and net foreign exchange reserves and net IMF position. The 1958 figure is based on holdings at the end of October 1958.

Payments balance based on net official reserves and net IMF position. The figure shown under official reserves refers to gold holdings only.

Trade balances exclude trade between Egypt and Syria.

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

In Argentina inflation was intensified in 1958 to a degree not experienced since 1952. Despite the mitigating effect of a substantial decrease in foreign reserves, both the money supply and the cost of living increased by some 50 percent in the course of the year. The most important source of inflation was government deficit spending, financed by borrowing from the Central Bank, where claims on the Government increased during 1958 by an amount equivalent to 28 percent of the total money supply at the beginning of the year. The commercial banks, whose liquidity was thereby increased, in turn expanded credit to the private sector by an even greater amount. To a considerable extent, the government deficit arose from the failure of nationalized utilities, such as the railways, to raise their charges in line with the considerable increases in their wage costs. The aggregate government wage bill, including the utilities, increased by some 60 percent, the increase in the average take home pay of workers in general being some 44 percent.

Despite inflationary pressure at home and the severe fall in the price of wool abroad, the dollar value of Argentina’s exports rose a little as a result of an increased volume of meat, corn, and wool exports. This was made possible, at the cost of a progressive depletion of cattle herds, by the gradual elimination of export taxes and the shifting of increasing proportions of export proceeds to the free exchange market, where the peso depreciated in the course of the year by some 47 percent.

At the end of 1958 the Argentine Government adopted a plan of stabilization with the support of the Fund and of public and private U.S. agencies. The plan provided for the elimination of direct exchange controls and the establishment of a unified free exchange market with a substantial depreciation of the effective exchange rate for most trade transactions. Many taxes, duties, and rates were to be substantially increased and subsidies were to be eliminated. The legal reserve requirements of commercial banks were to be raised from 20 percent to 30 percent and the government-owned Mortgage and Industrial Banks were no longer to have access to central bank credit. Most of these measures have been implemented, but at the time of writing this Report there were still many adjustments to be made in order to deal with the distortions to which the Argentine economy has been subjected in recent years.

New Zealand’s trade and payments balances deteriorated from 1957 to 1958 for the second year in succession. While the value of imports declined by 4 percent, the value of exports fell more than twice as much, as a result of a sharp fall in the international prices of New Zealand’s main exports, wool and butter. The volume of exports increased by 6 percent, but their average price fell by 14 percent. Employment and industrial activity continued to expand, and only the introduction of a stricter import policy at the beginning of 1958 made possible the reduction of imports. The Government financed the payments deficit, and even built up reserves in the course of 1958, by means of large-scale overseas borrowing. Net official borrowing during 1958 amounted to $123 million. For a loan of $34 million from J.P. Morgan and Company, New York, the New Zealand Government pledged gold. At the same time certain financial measures were taken, the reserves of the banking system being slightly reduced and the legal reserve requirements for commercial banks increased. As a result, the money supply declined by 6 percent over the year. Higher taxes were imposed in June 1958.

As the Egyptian Region of the United Arab Republic and the Sudan, the major exporters of long-staple cotton, gradually reduced their export prices from the very high levels at which they had been held in 1957, their shipments expanded. The value of their exports, however, was less in 1958 than in 1957.

In the Egyptian Region cotton export prices were lowered, largely through the operation of the “export pound” arrangements, without affecting returns to domestic producers. Receipts from Suez Canal fees increased by 75 percent from 1957 to 1958, when they were the highest on record. There was a sharp increase in imports, largely connected with the development program, and the deficit on current account widened. Drawings on reserves were less than in 1957, however, becausfc of an increase in the amounts drawn under bilateral lines of credit, largely from the Federal Republic of Germany, Japan, and the U.S.S.R., and because a large capital export had been required in 1957 to redeem Egyptian currency held in the Sudan. Net government borrowing from the banking system, which in preceding years had been a source of inflationary pressure, ceased in 1958. While credit expansion to the private sector continued at roughly the same rate as in 1957, the effect on the money supply was offset by the payments deficit. The money supply was somewhat reduced in the course of the year, and prices remained virtually unchanged.

In the Sudan the reduction of cotton export prices also affected the earnings of domestic producers. There was again in 1958 a payments deficit. Drawings on gross reserves were greater than in 1957, when reserves were augmented by the currency settlement with Egypt. Intensification of import restrictions in April was followed by a sharp reduction of imports. A large increase in development expenditures and a fall in revenues from cotton caused a further drain on the Government’s cash balances. Bank credit to the private sector was contracted in 1958, however, partly as a result of further measures restricting certain types of bank advances. There was a substantial increase in the money supply and some increase in prices. Toward the end of 1958, the Sudan made use of the Fund’s resources and obtained other short-term advances, as foreign exchange reserves outside the statutory currency cover were rapidly nearing depletion. The reserves were further replenished in early 1959 by large reimbursements from an IBRD loan and a sharp increase in cotton sales following a revision of cotton marketing procedures and further reduction of prices.

By the early months of 1958, domestic output in Turkey was adversely influenced by shortages of materials and spare parts, as imports could not be maintained, and a serious deterioration in the general economic situation had become apparent. A comprehensive stabilization program, introduced in August 1958 with the participation of the Fund and the OEEC, provided for the balancing of the government budget and of the accounts of state enterprises and for the limitation of investment to resources available from noninflationary financing. Credit ceilings were established to help stabilize over-all demand. After an initial price rise, largely in response to the exchange rate adjustments which were also part of the program, there was an improvement in internal conditions. In the first four months of 1959 imports, of which there had been serious shortages, increased according to the requirements of the stabilization program. By the beginning of the second quarter of 1959, there were some indications that exports might show a rising trend.

There was a further deterioration in Pakistan’s trade balance in 1958, with a continuation of domestic inflation arising mainly from the financing of the budget deficit by the banking system. While imports declined slightly, exports fell rather sharply, mainly because of difficulties in disposing of cotton and cotton textiles. The value of jute exports rose, however, despite a decline in their price. Increased use was made of external financial assistance, but exchange reserves declined. In the early months of 1959 there was an improvement in the financial situation and some increase in reserves. This was due partly to a more rigorous exchange control and to fiscal policies initiated in late 1958 in order to terminate recourse to the banking system for deficit financing. The full impact of budgetary reforms will not be felt before the new budget year, which begins in July 1959. In January 1959 the State Bank raised its discount rate from 3 percent to 4 percent and commercial banks adjusted their interest rates accordingly.

Countries Exporting Metals, Rubber, and Petroleum

All the countries exporting mainly metals and rubber were adversely affected in 1958 by slackened demand and lower prices for their products. The sharp cut in export quotas under the International Tin Agreement and the virtual cessation of contractual tungsten shipments to the United States resulted in a considerable reduction from 1957 to 1958 in Bolivia’s export earnings (Table 23). Its imports, particularly of food, were lower than in 1957. Though foreign debt repayment in 1958 was estimated at $10 million, against $15 million in 1957, the payments balance showed some deterioration (Table 24). The progress initially achieved in checking inflation under the comprehensive stabilization program adopted late in 1956, which included the almost complete elimination of public sector deficits, was interrupted in mid-1958. Public sector deficits reappeared largely because of wage adjustments made in order to avoid the threat of widespread strikes, which raised wages by 27.5 percent above the level at the beginning of the stabilization program. There was pressure on the balance of payments, the exchange rate depreciated, and the cost of living rose by 20 percent in the last quarter of the year. In the early months of 1959, however, wages generally ceased to rise, public sector deficits financed by borrowing were eliminated, and the exchange rate and the cost of living were again stabilized. Mining production and exports, however, continued to be low.

Table 23.Trade of Countries Exporting Rubber, Metals, and Petroleum, 1957 and 1958(Value figures in millions of U. S. dollars)
Exports f.o.b.Imports c.i.f.
19571958Percentage

change
19571958Percentage

change
Exporters of rubber and metals
Bolivia7449-349260-35
Chile1455380-16441400-9
Belgian Congo473404-15438360-18
Rhodesia and Nyasaland437380-13560497-11
Malaya, Federation of713615-14590542-8
Indonesia969755-22803513-36
Viet-Nam8155-32289232-20
Total3,2022,638-183,2132,604-19
Exporters of petroleum
Venezuela2,3662,321-21,8681,599-14
Netherlands Antilles1871808-71,1641,085-7
Trinidad228230120824015
Iraq36056758343307-11
Kuwait28851,0852319025032
Saudi Arabia28558803285275-4
Iran41857237
Brunei and Sarawak1275254-8183167-9
Total36,4906,87064,6594,495-4
Total9,6929,508-27,8727,099-10
Source: Based on data from International Monetary Fund, International Financial Statistics.

1958 figures partly estimated.

Export data based on petroleum production; import data for Kuwait based on unpublished estimates, and those for Saudi Arabia derived from indirect trade.

Including estimates for exports from Iran.

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

1958 figures partly estimated.

Export data based on petroleum production; import data for Kuwait based on unpublished estimates, and those for Saudi Arabia derived from indirect trade.

Including estimates for exports from Iran.

Lower prices and a 15 percent reduction in the volume of copper exports, only partly offset by increased shipments of iron ore, were responsible for the further decline of Chile’s export receipts from 1957 to 1958. Government revenue, which depends to an important extent on the income tax on copper companies, declined as the companies’ earnings from exports fell, and as declining imports brought in smaller customs receipts. This decline contributed to an increased budget deficit, financed primarily by borrowing from the Central Bank. Bank credit to the private sector increased somewhat less during 1958 than during 1957. On the other hand, owing to the shortage of foreign exchange, imports had to be reduced some 9 percent below the 1957 level, and inflationary pressure was thus increased. The cost of living advanced during 1958 by 33 percent, nearly twice the rise during 1957. The reduction in imports was brought about by increased advance deposit requirements and a step-by-step adjustment of the exchange rate applied to trade transactions, which resulted in a depreciation during 1958 of roughly 30 percent. The establishment of a single rate on January 27, 1959 involved a further depreciation, by 7 percent, of the rate for trade transactions. In April 1959, the Government was authorized to carry out a further series of stabilizing measures, including tax revisions.

Table 24.Trade and Payments Balances and Official Reserves of Countries Exporting Rubber, Metals, and Petroleum, 1957 and 1958(Value figures in millions of U.S. dollars)
Trade

Balance
Payments

Balance1
1957195819571958Official

Reserves,

End of 1958
Official

Reserves

as Percent

of Annual

Average

of Imports,

1956-58
Exporters of rubber and
metals
Bolivia-18-11-72
Chile14-20-1202-4725915
Belgian Congo3544-1593022155
Malaya, Federation of123734333058
Indonesia166242-30-721730
Viet-Nam-208-17762115965
Exporters of petroleum
Venezuela3498722504-3421,10470
Iraq17260-902728889
Iran151625357
Source: Based on data from International Monetary Fund, International Financial Statistics.

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

Deficits include loans from the Export-Import Bank of Washington, U.S. International Cooperation Administration, and U.S. commercial banks.

Payments balance and reserve figures as of end of November 1958.

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

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

Deficits include loans from the Export-Import Bank of Washington, U.S. International Cooperation Administration, and U.S. commercial banks.

Payments balance and reserve figures as of end of November 1958.

The payments deficit was reduced considerably from 1957 to 1958 by cutting imports (Table 24). It was covered by loans from the Export-Import Bank of Washington, the International Cooperation Administration, U.S. commercial banks, and a drawing on the Fund. As a result of a substantial increase in exchange receipts in December, reserves at the end of the year were some $14 million higher than at the end of 1957.

From 1957 to 1958, the export receipts of the Federation of Malaya declined by about 14 percent, in continuance of the downward trend of the last few years. The decline was accounted for mainly by reduced world prices of rubber and by a sharp cut in Malaya’s export quota under the International Tin Agreement. The volume of rubber shipped was slightly larger in 1958 than in 1957, as the falling off in U.S. and European demand was offset by increased purchases by Mainland China and the Soviet area. The decline from 1957 to 1958 in imports, which had continued to rise up to 1957 while exports were declining, offset more than half of the shortfall in exports. The fact that the decline in the payments balance was still smaller than that in the trade balance (Table 24) is attributable largely to capital movements.

Since government revenue is much dependent upon customs duties, the reduction of both exports and imports adversely affected the fiscal situation. Expenditure was reduced to some extent by delaying the execution of the five-year development program. External loans arranged in late 1958 and early 1959—$36 million from the IBRD, $20 million from the U.S. Development Loan Fund, and the equivalent of $33 million from the Brunei Government—and a domestic loan equivalent to $17 million will permit this program to get under way again. Official foreign exchange holdings, other than those held by the Currency Board, declined by $25 million in 1957 and by a similar amount in 1958.

In Indonesia the rapid inflation that began in the latter part of 1957 continued in 1958, as production and normal shipping and marketing facilities were disrupted by disturbed political conditions. The economic situation was further aggravated by declining world prices for Indonesia’s principal export commodities. In these circumstances the reform of the exchange system in June 1957, which provided for greater reliance on market forces, proved to be only temporary; import restrictions were reimposed in February 1958 and the exchange certificate rate was pegged in April 1958. However, after the third quarter of 1958, when order was largely restored, there was some recovery in production, exports, and reserves.

Although trade was severely depressed during the first half of the year, when compared with the same period of 1957, exports improved in the second half while imports continued to be severely restricted. For 1958 as a whole, exports were less than in 1957 by nearly one quarter, mainly on account of a sharp fall in the volume of rubber shipments. Exports of tin, restricted under the terms of the International Tin Agreement, and of coconut products were also much lower than in 1957. Petroleum exports, on the other hand, continued their steady growth. As a result of the restriction of imports, which fell even more sharply than exports, there was a rather large trade surplus which, together with a small inflow of private and official long-term capital, was nearly sufficient to finance the customary large deficit in payments for invisibles. In addition, the cancellation of a short-term trade debt of US$117 million in accordance with the Reparations Agreement with Japan permitted net official reserves to increase by $92 million during the year. Heavy demand pressures were generated by the severe import restrictions and large government deficits financed by borrowing from the Bank Indonesia, and retail prices rose sharply during 1958.

The exports of oil producing countries, which over the last ten years have been increasing at an annual rate of 11 percent, continued to expand from 1957 to 1958, though at a somewhat reduced rate (Table 23). There was little change in the average export price of crude petroleum.

The exports of Venezuela were slightly less in 1958 than in 1957—when they had risen sharply as oil supplies from the Middle East were interrupted—and petroleum production declined by 5 percent. Foreign investment was considerably below the high levels of 1956 and 1957, when substantial oil concessions had been sold. Furthermore, following the change of Government in early 1958, there was a large outflow of domestic capital. As a result, despite some decline in imports related to the decline in foreign investment, there was a large deterioration in the payments balance, and reserves declined for the first time since 1954. During 1958, the Government withdrew a substantial part of the cash deposit balance which it had accumulated with the Central Bank during the previous four years of fiscal surplus. In the late months of 1958 substantial increases were effected in the rates of income taxation on corporations and in import duties. In the early months of 1959 petroleum production was again increasing.

With the restoration of the oil pipelines to normal operations by April 1958, Iraq’s petroleum exports expanded by almost 60 percent from 1957 to 1958, and its payments balance showed a substantial improvement. Kuwait’s exports also increased considerably.

Iran’s exports continued to increase, but its payments surplus showed little change as government expenditures on development and for other purposes increased rapidly, and credit expansion for the private sector was accelerated. Imports rose more rapidly than exchange earnings; Iran drew on external credits during the year, and exchange reserves declined sharply in the last quarter of 1958 and the first quarter of 1959. Also, prices began to rise.

As a result of large government spending, Saudi Arabia’s balance of payments and internal economic conditions continued to deteriorate during the first half of 1958. In May 1958, a program was introduced which aimed at correcting the fiscal imbalance by reducing public expenditure and providing for a more rational utilization of foreign exchange, with less reliance on restrictions. Under this program, the Saudi Arabian Monetary Agency, which has responsibility for various central banking functions, has increased its activities. The revised exchange arrangements provide for imports of certain essential goods at a lower official exchange rate, while other imports are permitted freely at the free market exchange rate.

Since this reform has been in effect, the Government has not contracted any new loans. It has announced that allocations for major projects will be increased only after the currency has been successfully stabilized. From the outset of the program to the end of 1958, government liabilities declined and the free market exchange rate for the Saudi riyal appreciated by about 20 percent. Foreign exchange reserves also have been accumulating. The 1959 budget provides for a further reduction of the public debt.

Other Countries, Including Countries with Diversified Exports

In 1956 and 1957 India’s development program, which was financed in part by central bank credit, had given rise to increasing expenditures and large deficits in trade and payments. The large import content of development expenditures caused a rapid depletion of reserves, but it also helped to limit the inflationary pressure on the domestic economy, and in 1957 the rise in the money supply was less than in any of the preceding three years. In view of the deteriorating reserve situation, however, the Government took steps in 1957 and 1958 to restrict imports and credit expansion, while seeking to maintain the pace of development with the aid of foreign credits.

During the greater part of 1958, world recessionary trends affected both the demand for and the prices of India’s export products, especially cotton textiles, jute, and manganese. The Indian authorities took various measures to promote exports, including the removal of export control of many commodities, the reduction or abolition of export duties, and the provision of other fiscal incentives. The value of exports in 1958 (exclusive of the lend-lease silver transactions) is estimated to have been some 6 percent less than in 1957.

As a result of unfavorable weather conditions, the harvest in the crop year 1957-58 was 9 percent smaller than in the previous crop year. This made necessary a substantial volume of food imports in 1957 and 1958. Restrictions on imports and on bank credit were applied with some severity; the value of imports declined by 16 percent from 1957 to 1958 (Table 25).

Table 25.Trade of Countries with Diversified Exports, 1957 and 1958(Value figures in millions of U.S. dollars)
Exports f.o.b.Imports c.i.f.
19571958Percentage

change
19571958Percentage

change
Canada5,4565,4406,3465,790-9
Mexico72773111,1551,129-2
Peru320281-12400335-16
Paraguay33343323819
Union of South Africa1,2961,120-141,6931,7141
Algeria47148841,0571,1398
Morocco3253456411401-2
Spain4764862862849-2
Finland838775-8901729-19
Yugoslavia395441126616854
Israel1411442436432-1
India11,3501,216-102,1541,815-16
Hong Kong529524-1901804-11
Singapore1,1361,027-101,3271,222-8
Source: Based on data from International Monetary Fund, International Financial Statistics.

Exports include return of lend-lease silver of $79 million in 1957 and $24 million in 1958.

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

Exports include return of lend-lease silver of $79 million in 1957 and $24 million in 1958.

Despite the reduction in the trade deficit (Table 26), the rate of monetary expansion, 3 percent, was slightly less in 1958 than in 1957. The food shortages at first raised food prices; these prices, however, declined somewhat during the fourth quarter of 1958, mainly because of a larger crop in 1958-59. A slackening in consumer demand also resulted in falling prices and in reduced output of important consumer goods, such as cloth and edible oils. The earlier trend of rising prices was therefore reversed; at the beginning of 1959 the cost of living was, however, still 5 percent higher than at the beginning of 1958.

Table 26.Trade and Payments Balances and Official Reserves of Countries with Diversified Exports, 1957 and 1958(Value figures in millions of U.S. dollars)
Trade

Balance
Payments

Balance1
1957195819571958Official

Reserves,

End of

1958
Official

Reserves as

Percent

of Annual

Average

of Imports,

1956-58
Canada-890-350-1091121,94832
Mexico-428-398-38-8436833
Peru-80-54-33-12318
Paraguay1-4-4-1721
Union of South Africa-397-594-84-731719
Spain-386-363-44-32
Finland-63467925030
Yugoslavia-266-2446-13508
Israel-295-288-7469222
India-804-599-694-22472238
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.

One half of the current account deficit in 1957, and one third in the first three quarters of 1958, was financed by drawing on foreign exchange holdings, the remainder being covered by imports of capital. The reserves fell by almost one third between October 1957 and October 1958. Such a drain could not continue. After discussions in August 1958, under the auspices of the International Bank for Reconstruction and Development, between representatives of the Governments of Canada, Japan, the United Kingdom, the United States, and the Federal Republic of Germany, assistance for India totaling $350 million was announced for the period ended March 1959. As a result of increased foreign aid and the growing effectiveness of the import restrictions applied earlier, the drain on exchange reserves was stopped, and since November 1958, with these influences reinforced by a normal seasonal trend, reserves have in fact increased. The amount of expected foreign resources, however, has not been sufficient to permit the Second Five Year Plan (April 1956 to March 1961) to be carried out as originally envisaged; in November 1958, the Indian authorities announced that the reduction of the total Second Plan outlay in the public sector, which had been under consideration for some time, would amount to 6 percent in money terms and about one sixth in real terms.

The decline in economic activity from 1957 to 1958 was less acute in Canada than in the United States. Industrial production decreased by 2 percent, but farm output rose, and gross national product in real terms remained unchanged for the second year in succession. The fall in business investment was partly offset by higher government investment and by a 24 percent increase in residential construction. The recession in Canada was accompanied by some reduction in the current account deficit. The substantial fall in demand for imported investment goods reduced the total value of imports by 8 percent. The average rate of exchange for the U.S. dollar in Canada was 97.1 Canadian cents in 1958, compared with 95.9 cents in 1957. Gold and foreign exchange reserves, which had fallen by just over $100 million in 1957, rose by approximately the same amount in 1958.

In 1957 an active antirecession policy was adopted, which was continued into 1958. The upturn in activity, which became marked in the last quarter of 1958, continued in the early months of 1959, and unemployment (seasonally adjusted) fell from almost 8 percent of the labor force in October to 5.5 percent in April (compared with an average of 4.3 percent in 1957). The housing program was stimulated by government loans and mortgage guarantees. Social transfer payments increased, and, partly on account of lower tax rates, government revenues declined. The budget, which in 1957-58 had been in approximate balance, showed a substantial deficit in 1958-59. Government debt increased by $1.3 billion in the fiscal year ended March 1959. However, the effect of this increased deficit was partly offset by a rise of personal savings from 7 percent of disposable income in 1957 to 9 percent in 1958. The money supply increased during the year by 13 percent, and short-term interest rates declined through the first seven months. The banking system added over $1 billion to its holdings of government securities in 1958. Despite slackened demand and the high rate of unemployment, prices rose by over 2 percent during the year. Wages also rose in 1958, though at a slower pace than during 1957.

In the middle of the year, a large conversion loan operation made possible a substantial lengthening of the term of the outstanding government debt. Holders of nearly $6.5 billion of World War II 3 percent Victory Loan Bonds, all of which would mature at intervals over the next eight years and one third of which would mature within the next two years, were offered in exchange longer term, higher coupon, conversion loan bonds. Despite a considerable softening in the Canadian Government securities market in August, following the weakness that developed in the U.S. market, more than 90 percent of the outstanding Victory Loan Bonds were converted, with more than $3.5 billion going into the two longest maturities offered in exchange. The average term of all outstanding marketable government securities was thus increased from 6.2 years to 10.6 years in mid-September.

In the first three quarters of 1958, Canadian imports were some 13 percent lower than in the corresponding period of 1957, but in the last quarter they increased sharply with the recovery in economic activity and were about 4 percent greater than in the fourth quarter of 1957. The decline in imports from 1957 to 1958 was chiefly in investment goods, including machinery and construction materials, and in industrial materials. The whole of the decline was concentrated on imports from the United States; imports from other sources were unchanged. Exports in 1958 were maintained at the 1957 rate. Lower receipts from base metals and lumber products were offset by increased earnings from beef, wheat, uranium, and aircraft. The distribution of exports changed little. For 1958 as a whole, the deficit on merchandise trade declined by some $400 million. The deficit on service payments, which has been characteristic of recent years, rose by more than $100 million. (Except as indicated, figures are in Canadian dollars.)

The net surplus on capital transactions was $1,200 million, some $100 million less than in 1957. The sharpest drop was in direct investment and in new issues, the inflow from the United States accounting for most of the decline. There was also a fall of $50 million in Canadian direct investment abroad. In the first half of 1958, there was an inflow of almost $130 million of shortterm capital of various kinds, which was reversed in the third quarter; with a renewed inflow in the last two months of the year, the movement of short-term capital into Canada for the year as a whole was $125 million, about $100 million more than in 1957. These variations during 1958 may have been in part related to changes in differential money rates between Canada and the United States, as well as to changes in the exchange rate and in the timing of payments.

As in previous years, lower interest rates in the United States throughout most of the year made external borrowing attractive. Although the net total of new issues of securities (excluding those of the Dominion Government) was some 29 percent less than in 1957, the amount raised externally, $560 million, was only 14 percent less. The changing composition of demand for investment funds was reflected in securities transactions; the net inflow from government, municipal, and provincial issues was twice as large, and from corporate issues half as large, as in 1957. Trade in outstanding securities again resulted in a small inflow of capital. Although the net inflow from all securities transactions, at $680 million, fell by 10 percent from 1957, the inflow from the United States rose by 8 percent; net sales to the United Kingdom fell by 70 percent, and those to other countries by 43 percent.

In Finland the effects of the devaluation of September 1957 and the associated restrictive monetary policies were evident in a substantially improved balance of payments in 1958. Although world demand for wood and wood products decreased, Finland’s export volumes were well maintained. Lower prices, however, caused export earnings (expressed in U.S. dollars) to fall by about 8 percent below their 1957 level. The dollar value of imports declined by 19 percent as a result of a fall in domestic demand caused by reduced economic activity, lower import prices, and a reduction of the inventories accumulated in anticipation of devaluation. With a current account surplus, an inflow of long-term capital, and increased short-term trade credits, reserves, which had not changed in 1957, rose by $79 million, or 46 percent, in 1958, and there was a further increase of $18 million in the first five months of 1959.

The export levy imposed at the time of devaluation and maintained until September 1958 absorbed part of the increased liquidity arising from the accumulation of reserves, and also helped to achieve a surplus in the government budget. Prices rose less after the devaluation than had been expected, and after April 1958 they were virtually stable. Savings deposits recovered sharply during 1958. There was a slight fall in industrial production in 1958, and during the winter there was unusually high unemployment, caused mainly by a low level of industrial activity and a decline in residential construction. During the first half of 1959, however, production and employment began to recover.

The rate of growth of the Mexican economy was again slower in 1958 than in previous years, chiefly as a result of lower world demand and prices for its principal exports. Despite unfavorable world prices and the introduction by the United States of import quotas for nonferrous metals, the value of Mexico’s commodity exports was slightly higher than in 1957, though still some 17 percent less than in 1956. Except for cotton shipments—which increased by 20 percent in volume, more than offsetting a price decline of 7 percent—the volume of major exports generally declined in 1958, but both the volume and the value of minor exports increased. While export demand remained relatively low, domestic demand was stimulated by government action. Government expenditures rose by about 8 percent and revenues by less than 3 percent, so that the fiscal imbalance was increased. Central bank financing of this deficit, combined with additional central bank credit to government banks, was primarily responsible for an increase of some 7 percent in the money supply in 1958, despite a considerable payments deficit. Internal prices, however, rose less than in the previous year.

Expanding domestic demand led to a 10 percent increase in imports of consumer goods. However, the total value of imports was a little less than in 1957 as imports of capital goods declined. Tourist receipts fell but tourist expenditures abroad rose.

The 1958 balance on current account showed little change from the previous year, the deterioration being almost entirely in the capital account, with a net outflow of short-term private capital of $65 million, which contrasted with a net credit on this account in each year since the devaluation of 1954. Foreign direct investment fell by $40 million, and amortization payments abroad increased by about the same amount. Imports of capital goods were financed largely by foreign loans of $216 million (including loans from the IBRD and the Export-Import Bank of Washington), an increase of 40 percent from the previous year. Despite this increase, the outflow of gold and foreign exchange in 1958 was $46 million greater than in 1957.

In order to redress the situation, the Mexican Government decided early in 1959 that retrenchment in government expenditures and administrative reforms to improve tax collections were necessary. The measures taken included adjustment of the prices of petroleum products charged by the Government Petroleum Corporation and a reduction of the deficits of the National Railroads and of other official agencies. The Bank of Mexico continues to apply policies of credit restraint.

The results of these measures were already evident by the middle of the year. The trade deficit, which had been $417 million in the first quarter of 1958, fell to $40 million in the first quarter of 1959. The seasonal decline in the Bank of Mexico’s reserves was considerably less during the first five months of 1959 than during the same period in 1958. The Bank of Mexico’s credit to the public sector declined, and the supply of money increased by less than ½ percent. The domestic price level also was fairly stable.

The deterioration in South Africa’s balance of payments, which began in the second half of 1957, continued through the first six months of 1958. The liberalization of imports in 1957 revealed an unexpectedly large backlog of demand, and as there were fears that new restrictions might be imposed, imports in the first half of 1958 were some 12 percent higher than in the first half of 1957. Merchandise exports (excluding nonmonetary gold) were approximately 12 percent less than in the first half of 1957, chiefly as a result of the drastic fall in wool prices. There was a deficit of $356 million in the trade balance for the half year, compared with $175 million in January-June 1957; and reserves, which had fallen by $17 million in the latter period, fell by $105 million in the first half of 1958.

In addition to drawing on the Fund in the first half of 1958, the South African authorities introduced and later intensified a policy of monetary restraint. Commercial banks were requested to limit credit to importers, interest rates were raised, and supplementary reserve requirements were imposed. In addition, fiscal measures were taken to reduce imports, and controls on transfers of sterling were tightened. With private investment declining and farm income falling as a result of lower prices and a smaller harvest, the effects of these measures were evident in a slackening of economic activity, which continued in the early months of 1959. Demand for imports in the second half of 1958 was nearly 20 percent less than in the first half. Exports continued to decline slightly; however, lower receipts from wool, diamonds, and base metals were offset somewhat by improvement in receipts from uranium and fruit. For 1958 as a whole, merchandise exports were about 14 percent less than in 1957 and imports about 1 percent higher. Gold production continued to expand throughout the year, though the increase was less than in 1957.

The rise in South African interest rates, at a time when U.K. rates were falling, arrested the substantial outward movement of private capital which developed during 1957, and this outflow was reversed in 1958. By the end of 1958, net reserves of gold and foreign exchange declined by $7 million, after $36 million had been drawn from the Fund, compared with a decline of $84 million in 1957. Reserves increased by $12 million in the first quarter of 1959.

While the money supply declined during the year by 3 percent, the cost of living rose by the same percentage. The rate of growth of national product, about 3 percent, was slightly less than the average of recent years. In November, the decline in economic activity caused the authorities to reverse a scheduled increase in commercial bank reserve requirements and to reduce the ratio from 8 percent to 6 percent, although the improvement in foreign reserves was not considered completely satisfactory. In January 1959, the discount rate, unchanged since 1955, was lowered from 4.5 percent to 4 percent and the legal reserve ratio for banks was further lowered, to 4 percent. The budget presented in March granted some tax concessions to industry and gold mining, and in May further contracyclical measures were taken in the form of changes in unemployment insurance, relaxation of credit restrictions, and measures to stimulate housing and municipal capital expenditure.

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