V Exchange Practices and Payments Arrangements

International Monetary Fund
Published Date:
September 1959
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External Convertibility

THE year under review in this Report has been one of unusual importance in the evolution of the exchange practices and payments arrangements of the Fund’s members. It has been noted earlier that at the turn of the year 14 Western European countries1 agreed to establish external (or nonresident) convertibility for their currencies. By this important step, and the consequences that follow from it, the world has been brought closer than at any time since World War II to the establishment of a truly international multilateral payments system in accordance with the objectives set forth in the Fund’s Articles of Agreement. Other policy decisions, related to though not directly dependent upon the establishment of external convertibility, point in the same direction.

Fifteen other countries,2 most of which were associated in a monetary area with one or other of the Western European countries that took the initiative in establishing external convertibility, have taken steps to adjust their exchange control regulations to the new conditions. There are 11 “Article VIII” members of the Fund which maintain convertibility.3 Also, there are a number of members that have, for varying lengths of time, maintained free exchange markets in which their currencies can be converted at will into major trading currencies. Thus a majority of the Fund’s members now generally permit nonresidents to transfer their currencies to all countries, and a number of them accord the same facilities to residents.

The almost complete removal by major trading countries of barriers to the transfer of foreign-held balances of their currencies into other currencies marks a major step toward general freedom from exchange restrictions. With the exception of certain accounts—related mainly to bilateral agreements and to capital holdings—nonresidents can now freely convert their holdings of almost all major currencies into any other currency within official exchange margins. Prior to the establishment of nonresident convertibility by the members of the Organization for European Economic Cooperation (OEEC), countries in the sterling area and most European countries differentiated in their regulations governing nonresident accounts according to the currency area in which the account holder resided, and in practice this different treatment applied to virtually all balances acquired from current trade transactions. The practical consequences of these differences in exchange arrangements had gradually diminished as it was made increasingly possible for the owners of “transferable” accounts to use them to purchase dollars at a small discount in certain exchange markets in various parts of the world, but the transferability thus provided was organized only on an ad hoc basis and was therefore somewhat precarious. Following the formal establishment of external convertibility, nonresidents are generally able to draw freely upon their accounts in major currencies to make payments in any country. According to the country concerned, there are some variations in the technical arrangements (which are described in detail in Part II of the Tenth Annual Report on Exchange Restrictions), and, as noted above, there are some exceptions to the general rule. The withdrawal of certain capital holdings is still subject to approval, and external convertibility does not apply in certain cases where bilateral payments arrangements are maintained with certain other countries—mainly with the U.S.S.R. and other countries associated with it.

Although it was not to be expected that the immediate practical consequences for trade of these recent changes should be very great, the degree of freedom now established by the widespread extension of external convertibility contrasts sharply with the restrictions widely imposed upon the flow of international payments a few years ago.

The external convertibility announced at the end of 1958 does not establish the right of residents to obtain foreign exchange freely. However, in some countries other steps were taken at the same time which extend the range of freedom of convertibility permitted to residents. In the Federal Republic of Germany, convertibility has been established for residents as well as for nonresidents, and with one minor temporary exception, the German public now has complete freedom in all its foreign exchange transactions.

Some of the direct consequences of the establishment of external convertibility are also indications of further significant progress toward the achievement of the Fund’s objectives. The European Monetary Agreement (EMA), which had been drafted in 1955 in anticipation of the termination of the European Payments Union (EPU), has come into effect. The prescription of currency regulations of the European countries have been simplified and in the Federal Republic of Germany they have been eliminated. Some countries have found it possible to reduce the number of their bilateral payments arrangements. These developments have not been confined to the countries which formally participated in the establishment of external convertibility. For example, Brazil was able to eliminate the distinction which formerly existed in its exchange auction system between the U.S. dollar and the currencies of the European members of the “Hague Club.” In free markets, such as those in Hong Kong and Thailand, disorderly cross rates are no longer of importance.

The establishment of external convertibility does not in itself mean that freedom of trade has been immediately or automatically expanded; nor is the importance of the relaxations of restrictions and discrimination, which in several countries have accompanied this decision, to be measured in terms of their visible immediate effects upon the volume and direction of trade. These relaxations have been made—and the intention has been announced to carry the movement further—because the reserve positions and the competitive strength of the countries mainly concerned have already improved to such an extent that they can stand up to the competition of other producers with less dependence on restrictions. The fact that the authorities in the countries where external convertibility has been established no longer find it necessary to differentiate between one currency and another shows that there has been a radical change in the conditions which hitherto have been widely regarded as justifying discrimination in the trade restrictions that have been imposed.

After a detailed analysis of the implications of the establishment of external convertibility, the Tenth Annual Report on Exchange Restrictions summed up the Fund’s interpretation of the current situation as follows: “The developments in the year under review provide a basis for optimism that there will be continued progress in eliminating restrictions imposed for balance of payments reasons … The Fund is currently examining the questions raised by the remaining discriminatory restrictions. In the meantime, it is urging members to proceed with the elimination of discrimination, including bilateralism, as rapidly as possible.”

The European Payments Union and the European Monetary Agreement

Upon the recommendation of the Managing Board of the EPU, the OEEC Council in June 1958 prolonged the EPU for another year ending June 30, 1959, with the same operating rules and termination provisions as in the preceding year. All the EPU credit facilities—including unlimited credit extended by the Federal Republic of Germany up to 25 percent of its surpluses—were maintained in 1958-59.

On December 27, 1958, when EPU members representing more than 50 percent of the EPU quotas decided to make their currencies externally convertible, it was also decided to terminate the EPU agreement. The European Monetary Agreement accordingly came into operation immediately.

In the final six-month period of the EPU, the Federal Republic of Germany further increased its claims and remained by far the largest creditor of the Union. Its monthly surpluses were considerably larger than in the first half of 1958, both in absolute terms and in relation to total surpluses. The Netherlands, Italy, and Belgium-Luxembourg remained the next largest creditors; France was again the largest debtor; the United Kingdom, which was in surplus in the first half of 1958, showed a deficit in the second half of the year.

Upon completion of the settlement operations for its final accounting period, the Union’s gold and U.S. dollar assets were $403.7 million. In accordance with the liquidation provisions, $167.1 million was distributed to creditor members in proportion to their claims against the Union; the remaining $236.6 million, together with the EPU’s claims against Turkey and Norway, totaling $35 million and representing the initial position loans granted to these countries, was transferred to the European Fund established under the EM A. The final claims or debts of the Union, totaling $1,117 million, were converted into bilateral claims and debts between the countries which had been EPU members. The claim of the Federal Republic of Germany accounted for more than three quarters of these final claims; of the total final debt, 43 percent was a liability of France and 34 percent a liability of the United Kingdom. These figures exclude the special credit of $150 million granted to France in January 1958 to help it make its gold payments to the Union. This credit, which had been fully utilized by November 1958, has been made the subject of a special arrangement.

In the eight and a half years of its existence the European Payments Union, which provided a clearing mechanism and substantial automatic credits, played an important role in helping its members to move from a system of restrictive and largely bilateral trade and payments arrangements to one of multilateral trade and payments with few restrictions. The EPU, which was not designed to work under a system of external convertibility, was terminated and replaced by the EMA, from which automatic credits such as were provided by the EPU are not available.

The EMA provides for the establishment of a European Fund and of a Multilateral System of Settlements between the contracting parties. The European Fund is intended to facilitate the operation of the System of Settlements and to provide special credits for periods not exceeding two years to member countries to overcome temporary balance of payments difficulties. Its capital is $600 million, consisting of $271.6 million transferred from the assets of the EPU (including the original U.S. contribution) and of participants’ contributions amounting to $328.4 million; the capital will be paid up to the extent necessary to maintain its liquid assets at an appropriate level and in accordance with the provisions of the Agreement. The operations of the EMA institutions are controlled by a Board of Management under the authority of the OEEC Council. European Fund credits were granted in January 1959 to Turkey ($21.5 million) and to Greece ($15 million).

In contrast to the EPU procedure, whereby, since July 1955, 25 percent of any net balance has been settled in credit, settlements under the EMA are effected 100 percent in U.S. dollars. Settlements may be effected at the end of the monthly accounting period by a payment in U.S. dollars at predetermined rates of exchange. However, whereas the monthly EPU settlements were made on the basis of the official parity of the various currencies in relation to the U.S. dollar, EMA settlements are made on the basis of the declared buying or selling rate for the U.S. dollar. In the case of interim finance, any amounts owed by a contracting party are settled on the basis of the buying rate of the creditor country, i.e., at a rate less favorable to the borrower and more favorable to the lender. Any balances held in the currency of a contracting party which are voluntarily reported are settled on the basis of the selling rate of the debtor country, i.e., at a rate less favorable to the creditor and more favorable to the debtor. As had been expected, little use has been made of these facilities, and settlements have taken place largely through the exchange markets.

Other General Developments in 1958-59

Other important changes during the past year in the exchange rate practices and restrictive systems of Fund members are recorded in a later section of this chapter. Many of these changes were not directly related to the establishment of external convertibility. Although there were some exceptions, the broad pattern was one of notable advance toward a regime of freer trade and payments, and of increasing exchange rate stability, simplification of exchange systems, and reduction of restrictions. Three countries which have recently joined the Fund, Ireland, Ghana, and the Sudan, agreed with the Fund on the establishment of initial par values. A new par value was established by France, which for more than ten years had not had an agreed par value with the Fund. Several other members took important steps which had the effect of simplifying their complex rate systems. Some of these countries are still confronted with severe economic problems; the reforms which they have made are not so much a reaction to a more favorable payments situation as an’ indication of a determination to adopt more effective economic policies for dealing with their problems—policies which in turn will strengthen their balances of payments. On the other hand, a few countries faced with difficult balance of payments problems found it necessary to extend their multiple exchange practices.

The diminution during the past year of the number of bilateral payments arrangements in operation continued a trend that has been evident for some time. However, bilateral payments arrangements still have considerable importance, even in some countries which otherwise have established their currencies on a convertible basis. Some countries reduced their restrictions on imports during the year, and there was some progress, particularly in late 1958 and early 1959, in making these restrictions less discriminatory. The use of advance deposits to limit imports has increased during the year. The continuance of the “Paris Club” trade and payments arrangements between Argentina and certain European countries became unnecessary when a new exchange system was established in Argentina at the end of 1958, though the “Paris Club” machinery has been maintained to facilitate the liquidation of certain debts.

External convertibility does not generally apply to capital transfers. Over these transfers most countries continue to exercise the control that for Fund members is authorized by the Articles of Agreement, provided that the control is exercised in a manner which will not restrict payments for current transactions or unduly delay transfers of funds in settlement of commitments. However, some European countries have relaxed appreciably the controls imposed on capital payments, and one of them, the Federal Republic of Germany, eliminated the last remaining limitations on the movement of capital by both residents and nonresidents. On the other hand, some countries have found it necessary to extend the scope of their exchange surrender requirements, usually with a view to making the control of capital movements more effective.

Regional Economic Communities

The payments relations between all Fund members are likely to be affected by any steps taken to establish regional economic communities whose purposes include the reduction of barriers to trade between the members of the community. On January 1, 1959 the 6 countries (Belgium, France, the Federal Republic of Germany, Italy, Luxembourg, and the Netherlands) which were signatories of the Treaty of Rome in 1957 establishing the European Economic Community (EEC) took the first steps toward the elimination over a period of 12 to 15 years of customs duties and other obstacles to trade and to the free movement of persons, services, and capital among themselves. In accordance with the provisions of the Treaty, all tariffs on imports from other EEC members were reduced by 10 percent. Also, any bilateral import quotas granted to any EEC member were converted into “global” quotas open to all participants without discrimination, and existing global quotas were enlarged.

The 6 countries of the EEC and the remaining 11 members of the OEEC have continued to explore ways of associating all OEEC members in a European Free Trade Area or Economic Association, but no agreement has yet been reached. On December 3, 1958, the Council of Ministers of the EEC decided to extend to the other members of the OEEC and to all other participants of the General Agreement on Tariffs and Trade the 10 percent reduction in import tariffs that was to become effective between members of the EEC on January 1, 1959, provided that these tariffs were higher than the EEC common external tariff. Part of the quota liberalization for imports of industrial goods was also extended to other OEEC countries.

The Governments of Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom have been discussing a plan for a trade association of these countries which contemplates a reduction of industrial tariffs by 20 percent on July 1, 1960, in order to keep in line with the tariff reductions of the EEC countries. According to the report on this plan, it is intended to stimulate the reopening of negotiations for a free trade area which would include the 17 OEEC countries.

The Latin American countries also have been exploring means for organizing closer regional cooperation which might lead to the establishment of a common market in Latin America. Steps taken earlier to establish closer economic ties between the Central American countries have been carried further, and the Eighth Session of the Economic Commission for Latin America in May 1959 gave careful consideration to the problems involved in the creation of an effective common regional market which would be consistent with the maintenance of liberal trading relations between the Latin American countries and the rest of the world.

Par Values and Exchange Rates

During the last fiscal year of the Fund, three initial par values were agreed with countries whose Fund membership had been established in 1957. On May 14, 1958, a par value of £0.357143 per U.S. dollar, or $2.80 per Irish pound, was agreed for the currency of Ireland. A par value at the same rate, £G 0.357143 per U.S. dollar, or $2.80 per Ghana pound, was agreed on November 5 for the currency of Ghana, the issue of which had begun in July 1958. The currency previously in use in Ghana was the West African pound, which also had a par value of $2.80 per pound. These par values are in conformity with the relationship of parity which had been maintained between sterling and the currencies of Ireland and West Africa at the time of the devaluations of September 1949. The par value of LSd 0.348242 per U.S. dollar, or $2.87 per Sudanese pound, agreed with the Sudan on July 23, maintained the hitherto existing parity with the Egyptian pound, which was the currency in use before the introduction of the new Sudanese currency in 1957.

France, which had not agreed a new par value with the Fund since the original par value was altered in 1948, proposed on December 27 a par value of F 493.706 per U.S. dollar, which was agreed by the Fund. The exchange rate for the French franc which had been effective since August-November 1957 was F 420 per U.S. dollar, so that the new par value represented a depreciation of 14.9 percent. The French Government announced that during 1959 it would introduce a “new franc” which would be the equivalent of 100 old French francs. The new unit has been used since the beginning of the year for the quotation of foreign currencies on the Paris market; notes and coins in terms of the new unit will be put into circulation gradually.

Initial par values have now been agreed between the Fund and all but 15 of its members—Afghanistan, China, Greece, Indonesia, Italy, Korea, Libya, Malaya, Morocco, Saudi Arabia, Spain, Thailand, Tunisia, Uruguay, and Viet-Nam. Of these 15 members, 5 joined the Fund during 1958 and 1 in 1957.

Among the members that have no par value, Greece and Italy have maintained unitary fixed rates—Italy since 1949 at approximately 625 lire per U.S. dollar and Greece since 1953 at 30 drachmas per U.S. dollar.

The free market selling rate for the U.S. dollar in Thailand fluctuated between 20.81 baht and 21.10 baht, and the rate for sterling between 58.10 baht and 59.11 baht, during 1958. With the establishment of external convertibility for sterling, the problem of disorderly cross rates no longer arises in Thailand. The quotations at the end of April 1959 were 21.20 baht for the U.S. dollar and 59.71 baht for sterling.

The exchange rate for the Canadian dollar, which since September 1950 has been allowed to fluctuate in accordance with supply and demand conditions in the exchange market, with the Exchange Fund intervening only in order to contribute to orderly market conditions, averaged US$1.0303 during 1958, compared with an average rate of US$1.043 in 1957. The difference between these average rates can be attributed to the reduction in 1958 of the long-term capital inflow, the effect of which more than offset an increased net short-term capital inflow and a reduced current account deficit. Variations in exchange market conditions, mostly in relation to short-term capital movements, produced fairly wide fluctuations in the rate during the year. A peak of US$1.0437 was reached in June 1958, and with minor interruptions the rate remained above US$1.04 through mid- August. In September it declined to US$1.0175, but by the end of December 1958 it had recovered to US$1.0371. In February 1959 it again declined, to US$1.0194, but subsequently rose and at the end of April was US$1.0391. Official reserve holdings increased in 1958 by about US$110 million, to US$1,939 million; in 1957 there had been a reduction of about the same amount. The 1958 increase was entirely in holdings of U.S. dollars; during the year the Exchange Fund purchased about US$133 million of domestically produced gold, but its gold holdings declined by US$20 million. During the first four months of 1959, Canada’s reserves were reduced by US$28 million.

In Lebanon and the United Arab Republic (Syrian Region), there are no exchange transactions at the par values of 2.19 pounds per U.S. dollar agreed by these countries with the Fund. The acute political disturbances of 1958 caused only a slight depreciation of the Lebanese pound in the Beirut free market, the U.S. dollar rate moving from LL 3.16 in April to LL 3.22 in July. Thereafter, the rate improved gradually: by early 1959 it had returned to the precrisis level, and in March it was quoted at LL 3.15. The Syrian pound was fairly stable in the first half of 1958 but weakened in the latter half of the year. Payments difficulties were due in part to a decrease in exports, and the free market rate moved from LS 3.59 per U.S. dollar in August to LS 3.76 at the end of the year. However, in early 1959 the rate recovered and by February it had returned to LS 3.62. The controlled exchange rate applying to most trade transactions remained unchanged in terms of the U.S. dollar throughout 1958 and early 1959.

The number of Fund members that have endeavored to ease the transition from a complex multiple currency system to a unitary fixed rate system was increased in December 1958 when, as part of a general program of stabilization, a single exchange market was established in Argentina in which the peso is free to fluctuate, without direct restrictions, in accordance with changing conditions of supply and demand.

The background of the continued depreciation of the exchange rate structure in Argentina during the greater part of 1958 has been described in Chapter IV. Up to December, depreciation was brought about principally in the same way as in the previous year, viz., through successive adjustments of export surrender prices and the transfer of selected import commodities to the free market and to higher surcharge categories. In August 1958, the introduction of fixed proportion mixing arrangements for both exports and imports resulted in a further depreciation of the effective buying and selling rates. As the balance of payments position continued to weaken, the free market exchange rate depreciated from about M$N 42 per U.S. dollar at the end of April 1958 to a low of M$N 75 in November.

When the single free market was established at the end of 1958, export taxes of 20 percent on most agricultural products and 10 percent on animal products were also imposed. Various import categories were made subject to surcharges, initially of 20 percent, 40 percent, and 300 percent, and to different advance deposit requirements. During December 1958 there was a slight appreciation of the exchange rate to about M$N 70, which reflected a restoration of confidence when the stabilization program was initiated. When the exchange market, which was closed for some time to facilitate the transition to the new system, was reopened on January 12, 1959, the unified rate was quoted at about M$N 67 per U.S. dollar. Subsequently the rate depreciated and at the end of April 1959 it was M$N 80.

Fluctuating exchange rates were maintained throughout 1958 in Peru, Chile, Bolivia, Colombia, and Paraguay. In Peru, where two free markets had been established in November 1949, the certificate rate, which had been maintained since 1954 at S/. 19 per U.S. dollar, began to depreciate in January 1958, when official support was withdrawn from the certificate market; this movement continued until July, when the rate was quoted at S/. 25 per U.S. dollar. Thereafter there were slight fluctuations, with the Central Reserve Bank intervening to support the rate from time to time. The lowest figure quoted in 1958 was S/. 25.48 per U.S. dollar on November 12. In the first quarter of 1959, the certificate rate again came under pressure as a result of further credit expansion and some speculative activity and, despite some exchange sales in the certificate market by the Central Reserve Bank, the rate fell in February to S/. 27.32 per U.S. dollar. Quotations for sterling certificates followed closely those for U.S. dollar certificates, with sterling certificates generally at a slight premium in the early months of 1959. The movements in the free or draft market rate paralleled those of the certificate rate, the free market rate usually being quoted at a discount of less than 1 percent against the certificate rate.

In Chile, the two fluctuating exchange markets, which had been established in 1956, were combined in January 1959. The rate in the Brokers’ Free Market, in which transactions in invisibles were effected, depreciated from Chil$980 per U.S. dollar at the end of April 1958 to about Chil$ 1,100 at the end of the year, primarily as a result of domestic inflation. In the Banking Free Market, which served trade transactions, the rate depreciated from Chil$757 at the end of April 1958 to Chil$838 by November. The depreciation in this market was limited by substantial support from the Central Bank, and the spread between the two markets accordingly widened substantially. In December, the Banking Free Market rate was permitted to depreciate to Chil$993; the spread was thus reduced to about 10 percent and the markets were then combined. The unified market started to operate at a selling rate of Chil$ 1,051, which was approximately halfway between the closing rates in the two markets that had previously been in operation. The stabilization program of April 1959 includes the creation of a new monetary unit, the escudo, equivalent to Chil$ 1,000.

In the single fluctuating exchange market which has been in operation in Bolivia since December 1956, a U.S. dollar exchange rate of Bs 8,855 was maintained from March through July 1958. The effort to maintain this rate was prompted largely by apprehension of price increases and wage demands. With declining earnings from exports and a resurgence of inflationary pressures produced by large wage increases and expanded fiscal deficits, however, the authorities found it necessary to allow the rate to depreciate. After a minor depreciation in August, exchange operations were suspended for ten days in September pending a study of new policies. At the reopening of operations on October 1, the rate was quoted at Bs 10,890; it depreciated further by the end of the year to Bs 11,885 per U.S. dollar, a rate which has since been maintained.

Further modifications in the exchange system of Colombia were made by legislation adopted in January 1959. The basic system of an exchange certificate market with a fixed buying rate and exchange auctions, and a free exchange market with a fluctuating rate, was maintained. However, a preferential fluctuating exchange rate, based on the average free market rate of the preceding week, is applied to minor exports, while the official buying rate of Col$6.10 per U.S. dollar continues to be applied to major exports. The auction rate, which previously applied only to imports and specified nontrade payments, was extended to part of the proceeds from refined petroleum exports. Moreover, payments for freight and insurance costs connected with importation were again permitted through the auction market instead of the free market as had been the practice since March 1958. The legislation also authorized special exchange rates, which would involve mixing between the official and the free market rates, for exports of manufactured goods with an import component.

The use of the 15 percent export tax applicable to coffee, bananas, and precious metals, which had originally been imposed for the repayment of foreign debts, is to be changed gradually. Beginning in 1959, a small part of this tax is to be used to reduce the indebtedness of the National Federation of Coffee Growers to the central bank and to finance further coffee stockpiling, and the part so used will be increased in successive years.

The certificate rate in the auction market fluctuated for the most part between Col$6.50 and Col$7.00 per U.S. dollar from the opening of the auctions in March 1958 through June. Thereafter it appreciated to about Col$6.40 per U.S. dollar and has remained fairly steady around that level since September 1958. The free market rate depreciated from about Col$7.50 at the end of April 1958 to over Col$8.00 per U.S. dollar toward the end of November; thereafter the dollar rate fluctuated within narrow limits around Col$8.00.

The single fluctuating exchange market in Paraguay, which was established in August 1957 as part of a general stabilization program, operated throughout 1958 with a stable U.S. dollar exchange rate of about G 111. Reserves declined by about $ 1 million, and there was also a drastic change in their composition, convertible exchange reserves being virtually exhausted. The main reason for this was the payments arrangements with Argentina, which operated in such a way as to divert payments for many Paraguayan imports into the free market in Argentina—which in effect meant payment in convertible exchange—while settlements for Paraguayan exports continued to be effected under the bilateral payments agreement. As a result, the demand for convertible exchange was accentuated while under the agreement with Argentina there was a substantial accumulation of inconvertible balances. In January 1959, the authorities ceased to quote a rate for the U.S. dollar, and the exchange rate depreciated by the end of February to 6 122.5 per U.S. dollar. The Central Bank has quoted the payments agreement currencies at a discount on the convertible U.S. dollar, except that prior to January 1959 the Argentine agreement dollar was dealt in at par.

Other Changes in Exchange Practices

During the past year Brazil made a number of important changes in its multiple exchange rate structure which involved progressive devaluation of both export and import rates. Intermediate measures taken in June included a depreciation of the rate applicable to exports other than coffee and cocoa. The rates for preferential imports—those not subject to the auction system—also were devalued at that time, and again later in the year. In July the average effective rate for coffee was depreciated, and in October there was further depreciation for a number of export commodities, some being placed in the free market. In early 1959, the variable premium that had applied to coffee exports in combination with an exchange rate of Cr$37 per U.S. dollar was abolished and a uniform rate of Cr$60 was applied to that commodity. At the same time, the export rate for cocoa beans and certain derivatives was raised from Cr$43 to Cr$70, while practically all other exports were granted the rate of Cr$100. Imports eligible for preferential rate treatment, with the exception of newsprint and parts for automobile assembly, were made subject to a single rate of Cr$100. In April 1959, the exchange proceeds from cotton and sugar exports, and also payments for freight and insurance on imports, were transferred to the free market.

These steps were taken in the face of continued inflationary conditions and balance of payments pressures, which in turn were related to large fiscal deficits and a steady expansion of credit to the private sector combined with declining coffee exports. These circumstances also produced a sharp depreciation in the market exchange rates for the cruzeiro. The auction premium for general imports rose from Cr$121 per U.S. dollar at the end of April 1958 to Cr$198 at the end of December. After wide fluctuations early in 1959, which were due principally to variations in the amount of exchange offered at auction, the premium was back to Cr$199 at the end of April. The premium for special category imports rose from Cr$268 per U.S. dollar at the end of April 1958 to Cr$325 at the end of December; at the end of April 1959, the premium was Cr$318.5.

In the free market, which is used primarily for nontrade transactions, the exchange rate for the U.S. dollar moved from about Cr$ 120 at the end of April 1958 to Cr$ 136.5 at the end of April 1959. Throughout the year the rate for the U.S. dollar was lower in this market than in the auction market. Such a situation arises partly because free market exchange cannot be used legally to pay for imports. In the early months of 1959, there was some appreciation of the free market rate from the lowest rates reached in 1958—a trend attributable to the transfers, which were noted above, of export proceeds to the free market.

On November 21, 1958, the exchange rate in China (Taiwan) was depreciated for certain transactions. In April 1958, the number of effective rates had been reduced to two: one, NT$24.58 per U.S. dollar (buying) and NT$24.78 (selling), applied to essential imports, exports of sugar, rice, and salt, and government invisibles, and the other, NT$36.08 (buying) and NT$36.38 (selling), to all other imports and exports and to private invisibles. For a short time in November, the rate of NT$36.08 (buying) and NT$36.38 (selling) was applied generally. Subsequently, the rate applying to all other imports and exports and to private invisibles was allowed to fluctuate, and since January 1959 this rate has been applied also to exports of salt. In April 1959, the fluctuating rate averaged NT$38.28 per U.S. dollar.

In March 1959 Denmark decided to liquidate its dollar export arrangement: the premium obtained by exporters who have dollar proceeds was to remain at 6 percent until the end of 1959; as of January 1, 1960 it will be reduced to 4 percent, and as of January 1, 1961 to 2 percent. At the end of 1961, the system will be completely abolished. In February 1959, the annual quota for tourist travel, etc., to the Western Hemisphere was abolished and dollars and externally convertible currencies were made available for travel to all foreign countries except Spain, Israel, and the countries of Eastern Europe with which Denmark has bilateral arrangements, with the condition that the amount purchased must be in reasonable proportion to the trip planned. The limit of DKr 500 on the importation of Danish banknotes was abolished in June 1958.

In Finland, the amount of foreign exchange which residents may purchase for each trip abroad was raised on March 23, 1959 from Fmk 20,000 to Fmk 40,000 for travel within the Scandinavian countries and from Fmk 40,000 to Fmk 80,000 for travel to other countries. The levy on export proceeds, introduced after the devaluation in September 1957, was reduced gradually, and on September 15, 1958 it was abolished.

In May 1958 Iceland introduced major changes in its exchange system. New exchange premiums of 55, 70, and 80 percent on export proceeds were introduced, replacing the assistance previously granted to exports through various forms of subsidization. Discrimination between countries of destination was terminated. The premium of 55 percent was also made applicable to the proceeds from most invisibles and capital. New exchange taxes of 30 and 55 percent were applied to payments for all imports, replacing the previous exchange tax of 16 percent. Import fees of 22, 40, and 62 percent, depending on the type of commodity, replaced the previous fees. Payments for most invisibles were subjected to the 55 percent tax, and an additional fee of 45 percent was payable on exchange licenses for travel.

In Indonesia, the Export Certificate System (Bukti Expor or BE System), which was introduced in June 1957, has undergone some significant modifications since early 1958. Contrary to the original intention and practice of allowing the export certificate rate to fluctuate freely in accordance with market forces, the Indonesian exchange authorities began in the early months of 1958 to control the range of fluctuations. Since April 19, 1958, the BE rate has been pegged at Rp 37.848 per U.S. dollar, which is 332 percent of the nominal official exchange rate of Rp 11.40.

In July 1958 the Export Certificate System was extended to the foreign oil companies in Indonesia. To cover their local expenditures, these companies had hitherto purchased rupiah from the Foreign Exchange Institute at the official rate of Rp 11.40 per U.S. dollar. Under the new regulations, the rate for all exchange transactions of the oil companies was to be the average of the daily effective rates for exports during the preceding month. At the present pegged BE rate of Rp 37.848, this rate is Rp 30.278 per U.S. dollar.

In view of the adverse balance of payments position in 1958, quantitative import restrictions were reintroduced early in the year; however, they were relaxed somewhat in the last quarter. The 100 percent advance deposit requirement against applications for import licenses, based on the c. and f. value of imports at the official rate, which had been restored early in 1958, was raised to 133⅓ percent as from January 2, and to 230 percent as from April 16, 1959.

Changes in the course of the past year in Israel’s multiple exchange rate system tended to reduce the number of effective export rates, while the average value of the premiums given was increased. Most discounts on the proceeds of exports to certain countries were abolished. The application of the retention quota system was reduced in several important export branches. Import licensing procedures were liberalized for a number of products, particularly raw materials for industry, while special surcharges were imposed on imports of these products. Foreign tourists in Israel now receive a premium of 20 percent on the official rate on exchanging their foreign currency into Israel pounds. This premium has replaced the 20 percent discount which tourists had formerly received at approved hotels and shops.

During the past year Nicaragua’s exchange rates for trade transactions were almost completely unified by gradually moving the export rate to the official rate, C$7.00 per U.S. dollar. Previously, the rate for most exports had been C$6.60 and the rate for imports had been an official rate based on the par value. The C$7.00 rate, which had been granted to exports of cotton and certain minor exports in late 1957, was extended to coffee exports in October 1958. Subsequently, the remaining minor exports, except the current crop of cottonseed, were shifted to the official rate. By the end of the crop year, all trade transactions were thus to be unified at an exchange rate based on the par value. The gradual elimination of the exchange differential was designed to maintain Nicaragua’s export trade in the face of declining international prices.

Major changes in the exchange practices of Turkey were made in 1958 as a part of the country’s stabilization program. Effective August 4, 1958, the previous complex exchange system was replaced by a simplified structure of rates consisting of a single effective selling rate and three effective buying rates. All transactions take place at these rates, and the other multiple rate practices formerly in effect have been eliminated. Under the new system, the effective export rates result from adding premiums of LT 2.10, LT 2.80, and LT 6.20 per U.S. dollar to the par value rate of LT 2.80 per U.S. dollar. The single import rate is LT 2.8252 plus a surcharge of LT 6.20 per U.S. dollar.

At the same time, Turkey made extensive changes in the administration of its exchange control. The many separate regimes under which imports had taken place were replaced by a system of global import quotas set periodically for specified commodities. A system of advance deposits for imports was established. The export regime was also considerably simplified by the elimination of barter transactions. A number of specified exports, however, still require licenses. New rules were established for transfers to Turkey of funds for investment purposes and for capital remittances abroad.

Under the pressure of a deteriorating balance of payments situation, several modifications were made during 1958 in the exchange system of Uruguay. The deterioration was associated with intensified inflationary pressures and special export difficulties. Although the 1957-58 wool clip was one of the largest on record, declining world prices and speculation on the rate of exchange likely to be applicable to wool kept exports of wool at depressed levels. Meat exports continued to be hampered by domestic price and supply factors.

Various techniques were used within the framework of Uruguay’s complex exchange system to provide more remunerative effective exchange rates for exports and to restrain imports. In June, premiums were granted for a number of minor exports, in order to depreciate some of the export rates beyond the “free commercial” buying rate, which was held at Ur$4.10 per U.S. dollar, and in December similar treatment was extended to exports of meat. These premiums range as high as 77 percent. In September, the effective rates for major exports, including wool and wool products, were devalued by increasing the ratio of the “free commercial” rate to the official rate. At the same time, the average effective rate for imports was devalued by transferring a list of commodities from the basic selling rate of Ur$2.10 to the “free commercial” rate of Ur$4.11 per U.S. dollar. In December, a limited amount of imports was, for the first time, given access to the free financial market, additional surcharges being at the same time imposed upon them. Quantitative restrictions on imports were intensified in 1958, and imports were reduced to about 60 percent of their average value in recent years. With the help of these measures, the outflow of international reserves in 1958 was kept considerably smaller than in 1957.

As a result of the inflationary pressures, the weakening balance of payments situation, and its effect on public confidence, the free financial rate depreciated from about Ur$6.80 in April 1958 to Ur$ 10.20 in December 1958. By the end of April 1959, the rate had recovered to Ur$8.95.

In the course of the year, Yugoslavia continued to simplify somewhat its complex rate structure. On July 23, 1958, the number of export coefficients (by which the settlement rate is multiplied in order to obtain the effective exchange rate for each group of commodities) was reduced from 16 to 14 and the number of import coefficients from 19 to 12. Beginning June 25, 1958, prior approval was required for imports of parts, equipment, machinery, and transport equipment purchased by manufacturing enterprises for the purpose of assembly in Yugoslavia, as well as for all finished equipment goods. Prior approval was also required for the importation of consumer goods. Imports of several types of motor vehicles were made subject to license.

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