Chapter

II Activities and Policies of the Fund, 1959-60

Author(s):
International Monetary Fund
Published Date:
September 1960
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Fund Membership and Quotas

Applications from Portugal and Laos for membership of the International Monetary Fund were approved by the Board of Governors at the Fourteenth Annual Meeting on September 29, 1959. Upon acceptance of membership of the Fund, Portugal will have a quota of US$60 million and Laos a quota of US$7.5 million.

Upon the admission of Portugal and Laos, the total membership of the Fund will be 70. Applications for membership of the Fund and Bank were submitted by Nigeria on August 17, 1959 and by Nepal on April 13, 1960.

By April 30, 1960, 57 members, representing 91.57 per cent of the Fund’s quotas as of January 31, 1959, had consented to the increases of quotas which had been recommended by the Executive Directors to the Board of Governors on December 22, 1958 and February 24, 1959, and approved by the Board of Governors on February 2 and April 6, 1959, respectively; 54 of them had paid their increased subscriptions, either in full or to the extent of the first of the installments which were authorized by the Board of Governors as being in certain circumstances an appropriate method of paying an increased subscription. The period within which other members of the Fund might consent to increases in quotas under the Board of Governors’ Resolutions has been extended by the Fund to July 31, 1960.

As a result of all the increases in quotas which had become effective during the preceding year, the aggregate of Fund quotas on April 30, 1960 amounted to $14,276.55 million. The Fund also agreed to a further increase from $300 million to $400 million in Australia’s quota.1

The members of the Fund, their quotas, voting power, Governors, and Alternate Governors as of April 30, 1960 are listed in Appendix I, and changes in membership of the Board of Governors in Appendix II. The Executive Directors and Alternate Directors of the Fund and their voting power are shown in Appendix III, and changes in the membership of the Executive Board in Appendix IV.

Use of the Fund’s Resources

As in 1958-59, purchases from the Fund during the financial year from May 1, 1959 to April 30, 1960, $165.5 million, were substantially less than repurchases, $522.4 million (Table 1). The total amount of repurchases was the second highest in the Fund’s history, having been exceeded only in the preceding year. The number of members making repurchases, 21, was again greater than in any previous year. Repurchases were made by 3 members in Europe, 10 in Latin America, 5 in the Far East, 2 in the Middle East, and 1 in Africa. Several members spread their repurchases over a period of time and engaged in more than one repurchase transaction.

Table 1.Summary of Fund Transactions, Fiscal Years Ended April 30, 1948-60(In U.S. dollars)
Total Repurchases

by Members
Total Stand-By

Arrangements in Force

at End of Fiscal Year
Total Purchases

by Members
1948606,045,000.00
1949119,438,380.91
195051,800,000.0024,207,652.46
195128,000,000.0019,093,244.36
195246,250,000.0036,578,805.97
195366,125,000.0053,000,000184,958,162.26
1954231,290,000.0090,000,000145,106,208.24
195548,750,000.0090,000,000276,275,398.29
195638,750,000.0097,500,000271,661,333.80
19571,114,047,648.76968,900,00075,038,810.14
1958665,731,620.70884,280,00086,806,219.72
1959263,517,042.671,132,840,000537,319,879.89
1960165,534,000.00291,880,000522,405,603.23
Total3,445,278,693.042,179,451,318.36

The geographical distribution of the 12 members that purchased exchange from the Fund during the last year was narrower than in 1958-59. Seven of these are in Latin America, while purchases were made by only 2 members in Europe, 2 in the Middle East, and 1 in Africa. There were no transactions with industrial countries, and nearly all of the purchases were by members whose main source of exchange earnings is exports of primary products. Four of the transactions, those with Bolivia, Haiti, the Sudan, and the United Arab Republic (Egyptian Region), were for the purpose of replenishing members’ foreign exchange resources after payment of gold subscriptions to the Fund in connection with the quota increases that were approved in 1959. Provision was made for such purchases in Section III of Enlargement of Fund Resources Through Increases in Quotas, the report in which the Executive Directors had recommended an increase in the Fund’s resources to the Board of Governors. Members that wish to make such purchases are required to represent that they would make repurchases in equal annual installments commencing one year after the purchase and to be completed not later than three years after the purchase.

The changes that have taken place in the magnitude and relative importance of members’ purchases and repurchases and in the geographical distribution of the members which have had transactions with the Fund are indicative of the general improvement in the world’s payments relations. They are also in part the result of repurchase commitments given by members either at the time of purchases made in earlier years or at a later date. Since the introduction of external convertibility by several countries at the end of 1958, there has been continuous improvement in the general international reserve position. Many of the countries which have reduced their quantitative restrictions and eliminated discrimination for balance of payments purposes against imports from the dollar area were able to do so without recourse to the Fund’s resources. The financial assistance granted to member countries by the Fund has, in most instances, been requested in support of stabilization programs. Further funds in support of these programs have been obtained by several of these members from a variety of other sources, so that they have had a wider margin within which to maneuver while the new policies were taking effect.

For members in need of financial assistance from the Fund, the stand-by arrangement has continued to be a valuable instrument. The number of stand-bys granted or extended during the fiscal year was the same, 13, as in the preceding year; the total amount available under these stand-bys, apart from the U.K. stand-by arrangement that terminated at the end of 1959, was somewhat greater. As a result of improvements in their external position, several members did not request an extension of their stand-by arrangements, and one member (Pakistan) canceled its arrangement three months before its expiration. As in previous years, some members found it sufficient to have the Fund’s assurance of financial assistance without actually making use of their stand-by arrangements.

Of the new stabilization programs with which the Fund has been concerned in the past year, two, which involved exchange transactions with the Fund and the establishment of a new par value, were put into effect by European countries, Spain and Iceland. In recent years, Spain has made considerable efforts to expand industrial production and to raise its standard of living; however, strong inflationary pressures and the serious deterioration of the balance of payments that they generated created difficult problems. Most of Spain’s foreign trade was on a bilateral basis, and the distortions which followed excessive credit expansion were further aggravated by a complicated system of multiple exchange rates and trade restrictions. By the end of 1958, gold and foreign exchange reserves were practically exhausted, and it was decided in July 1959 to carry out, in cooperation with the Fund and the Organization for European Economic Cooperation, a comprehensive stabilization program, which included the establishment of a par value of 60 pesetas per U.S. dollar. Taxation was increased, and public expenditure was reduced. Limitations were placed upon the expansion of credit, and interest rates were raised. A number of price controls and other impediments to the flexibility of the economy were removed, and a more liberal foreign investment law was introduced. At the same time, there was some liberalization of imports and multiple currency practices were abolished. In support of this program, Spain purchased from the Fund $25 million and the equivalent of $12.5 million each in sterling and in French francs, and entered into a stand-by arrangement for a further $25 million. A credit of $100 million was also granted by the European Fund, and $200 million was obtained from various U.S. sources, including some $70 million from commercial banks. While adoption of such radical measures of reform brought about some decline in employment and economic activity, excessive demand was eliminated, and the inflationary psychology which had prevailed for many years disappeared. Prices rose only slightly, and bank credit was well within the prescribed limits. Exports began to revive, outstanding debts were repaid, and by the end of 1959 gold and foreign exchange reserves (excluding drawings on the International Monetary Fund and the European Fund) had risen by about $120 million. All these changes were signs of the considerable success of the stabilization program.

Throughout the postwar period there were substantial increases both in Iceland’s exports, which consist mainly of fish and fish products, and in its real national income; the expansion was, however, accompanied by large balance of payments deficits, rising prices, and substantial distortions in the economy. The average annual increase in the cost of living since 1950 was about 10 per cent. Effective exchange rates were depreciated several times by changes in the exchange premiums and taxes on exports and imports; but despite substantial foreign loans, foreign exchange liabilities at the end of 1959 exceeded foreign exchange reserves. In these circumstances, the Government of Iceland adopted on February 19, 1960 a comprehensive stabilization program prepared in consultation with the Fund and the OEEC. The program included a balanced budget, a sharp increase of interest rates and other forms of credit restraint, the elimination of multiple currency practices, and the introduction of a new par value for the króna. The link between wages and salaries and the cost of living index was abolished, and it was decided to introduce gradually measures of trade and payments liberalization. In support of this program, Iceland purchased $2.8 million from the Fund and entered into a one-year stand-by arrangement for a further $5.6 million. At the same time, Iceland was granted a credit of $12 million from the European Fund.

In Latin America, the stand-by arrangements in support of the stabilization programs of Argentina, Bolivia, Colombia, Haiti, Paraguay, and Peru were renewed or extended, and new stand-by arrangements were concluded with El Salvador, the Dominican Republic, Honduras, and Venezuela.

In order to strengthen its reserve position at a time of seasonal weakness, El Salvador was granted a six-month stand-by arrangement in October 1959 for $7.5 million, with an undertaking to make a corresponding repurchase six months after any purchase made in terms of this arrangement.

In December 1959, financial support was given to a stabilization program in the Dominican Republic by a one-year stand-by arrangement which permits purchases from the Fund of currencies equivalent to $11.25 million.

The funds made available under the stand-by arrangement requested by Honduras in March 1960 are to serve as an assured second line of reserves to strengthen the member’s international reserve position while it continues to carry out the stabilization program initiated at the beginning of 1959. At that time, the Fund supported the program with a stand-by arrangement for $4.5 million which expired in January 1960. The new stand-by arrangement is for one year and enables Honduras to purchase currencies equivalent to $7.5 million.

In April 1960, the Fund entered into a one-year stand-by arrangement under which Venezuela may draw up to the equivalent of $100 million in support of a program designed to achieve economic and financial stability, which is described in Chapter IV of this Report. The Fund agreed to make available to Venezuela $15 million before, and a further $85 million after, the legislative steps are completed to make effective the increase of Venezuela’s quota in the Fund from $15 million to $100 million, which was approved by the Fund last year. Toward the end of April, negotiations for a loan to Venezuela of $200 million were also completed with a group of U.S. and Canadian banks.

Morocco requested a stand-by arrangement in November 1959 in connection with the introduction of a par value and in support of its monetary and fiscal policies and of its intention to bring about a progressive and substantial nondiscriminatory reduction of its import restrictions. The Fund agreed to a one-year stand-by arrangement which authorizes drawings up to $25 million.

With the exception of the purchases by Iran and the four members that made special drawings in accordance with Section III of the report, Enlargement of Fund Resources Through Increases in Quotas, all the purchases last year were made under stand-by arrangements concluded in the current or the preceding year, or were made simultaneously with the conclusion of a stand-by arrangement.

The Fund’s policy and practice relating to the use of its resources have been fully described in previous Annual Reports.1 They have now been extensively tested by the experience gained in dealing with members’ requests for financial assistance, and have been found to be eminently practicable. The Fund’s principles require, in brief, that the greater the assistance provided in relation to a member’s quota, the more certain the Fund must be that the policies followed by the member are likely to restore equilibrium within a limited period of time. In accordance with these principles, it has become the accepted practice for the Fund in appropriate cases to receive from members seeking to purchase exchange or to enter into stand-by arrangements declarations of intent as to the policies that would be followed. A member which finds itself obliged to deviate from the policies specified in its declaration of intent consults with the Fund, in order, where it is appropriate, to reach a new understanding on the basis of which further drawings may be made.

Throughout the past year, Fund members have again given full support to the principles laid down in the Executive Board’s decision of February 13, 1952 on the use of the Fund’s resources. According to these principles, members are expected to make repurchases within a period reasonably related to the payments problems in respect of which purchases were made, and normally within an outside range of three to five years. In fact, the total amount of commitments outstanding for more than 60 months has diminished rapidly and is likely to have disappeared by July 1960. The application of the principles adopted in February 1952 has contributed significantly to the maintenance of the revolving character of the Fund’s resources.

As a result of all these developments, and particularly because of the excess of repurchases over purchases, the liquidity of the Fund in terms of gold and convertible currencies has increased. Furthermore, the implementation of the resolutions on the Enlargement of Fund Resources Through Increases in Quotas added substantially to the Fund’s liquid resources. Its gold holdings increased during the year by the equivalent of $1,442.4 million, to $2,994.6 million on April 30, 1960. Its total holdings of gold and of currencies that had previously been in demand by members—U.S. dollars, sterling, deutsche mark, Canadian dollars, French francs, Belgian francs, and Netherlands guilders—amounted at the end of the financial year to the equivalent of $9,306.7 million, $3,830.0 million more than on April 30, 1959, while Fund commitments on account of the unutilized balances of standby arrangements decreased from the equivalent of $1,132.8 million on April 30, 1959 to $291.9 million on April 30, 1960. This notable improvement in the Fund’s liquidity position, which is expected to be further enhanced by scheduled repurchases during the fiscal year 1960-61, should further increase the confidence of members that substantial resources are available in the Fund to serve as a second line of reserves.

Fund Transactions

The operational activities of the Fund in the year ended April 30, 1960 are summarized in Table 2 (purchases of currency), Table 3 (stand-by arrangements), and Table 4 (repurchases of currency).

Table 2.Purchases of Currency from the Fund, Fiscal Year Ended April 30, 1960
MemberSterlingDeutsche MarkFrench FrancsNetherlands

Guilders
U.S. DollarsTotal Equivalent

in U.S. Dollars
Argentina£2,857,142–17–2DM 73,500,000f. 26,600,000$42,500,000$75,000,000
($8,000,000)($17,500,000)($7,000,000)
Bolivia3,375,0003,375,000
Chile700,000700,000
Dominican Republic7,000,0007,000,000
El Salvador7,500,0007,500,000
Haiti1,646,5001,646,500
Honduras3,750,0003,750,000
Iceland2,812,5002,812,500
Iran5,000,0005,000,000
Spain4,464,285–14–3F 6,171,321,42925,000,00050,000,000
($12,500,000)($12,500,000)
Sudan446,428–11–51,250,000
($1,250,000)
United Arab Republic, Egyptian Region7,500,0007,500,000
Total£7,767,857–2–10DM 73,500,000F 6,171,321,429f. 26,600,000$106,784,000$165,534,000
($21,750,000)($17,500,000)($12,500,000)($7,000,000)
Table 3.Fund Stand-By Arrangements with Members, Fiscal Year Ended April 30, 1960(In millions of U.S. dollars)
MemberDate of

Inception
Date of

Expiration
AmountAmount Available

April 30, 1960
ArgentinaDec. 19, 1958Dec. 18, 1959175.00
Dec. 3, 1959Dec. 2, 1960100.0049.00
BoliviaMay 18, 1959Sept. 30, 19601.501.25
BrazilJune 3, 1958June 2, 195937.50
ChileApril 1, 1959Dec. 31, 19598.10
ColombiaJune 19, 1958June 18, 195915.00
Oct. 22, 1959Oct. 21, 196041.2541.25
Dominican RepublicDec. 22, 1959Dec. 21, 196011.254.25
El SalvadorOct. 1, 1959March 31, 19607.50
HaitiJuly 14, 1958July 13, 19595.00
July 14, 1959Sept. 30, 19595.00
Oct. 1, 1959Sept. 30, 19604.004.00
HondurasJan. 29, 1959Jan. 28, 19604.50
March 7, 1960March 6, 19617.506.25
IcelandFeb. 23, 1960Feb. 22, 19615.635.63
MexicoMarch 5, 1959Sept. 4, 195990.00
MoroccoNov. 15, 1959Nov. 14, 196025.0025.00
PakistanDec. 8, 1958Dec. 7, 1959225.00
ParaguayJuly 30, 1958July 29, 19591.50
Aug. 13, 1959Aug. 12, 19602.752.75
PeruMarch 1, 1959Feb. 29, 196013.00
March 1, 1960Feb. 28, 196127.5027.50
SpainAug. 17, 1959Aug. 16, 196025.0025.00
United KingdomDec. 22, 1958Dec. 21, 1959738.53
VenezuelaApril 7, 1960April 6, 1961100.00100.00
Total1,377.01291.88

Canceled as of December 2, 1959.

Canceled as of September 22, 1959.

Canceled as of December 2, 1959.

Canceled as of September 22, 1959.

Table 4.Repurchases of Currency from the Fund, Fiscal Year Ended April 30, 1960(In U.S. dollars)
MemberU.S. DollarsGoldTotal
Argentina10,000,000.0010,000,000.00
Australia14,081,000.0014,081,000.00
Bolivia1,750,000.001,750,000.00
Brazil10,329,924.419,920,075.5920,250,000.00
Burma4,000,000.004,000,000.00
Chile700,000.00700,000.00
Colombia24,945,499.342,638,599.1427,584,098.48
El Salvador5,500,000.005,500,000.00
France82,000,000.00118,000,000.00200,000,000.00
Honduras3,744,902.753,744,902.75
India50,000,000.0050,000,000.00
Indonesia9,000,000.009,000,000.00
Iran12,481,285.334,391,383.8916,872,669.22
Mexico22,498,727.5322,498,727.53
Paraguay1,750,000.001,750,000.00
Peru13,240,237.121,258,430.6314,498,667.75
Philippines15,417,000.0015,417,000.00
Turkey3,000,000.003,000,000.00
Union of South Africa31,941,519.744,238,305.8436,179,825.58
United Arab Republic, Egyptian Region9,578,711.929,578,711.92
United Kingdom56,000,000.0056,000,000.00
Total367,877,808.14154,527,795.09522,405,603.23

During the year, several drawings were made in currencies other than U.S. dollars. Of the 37 exchange transactions of the Fund, 6 included sterling, French francs, deutsche mark, or Netherlands guilders. Of the total amount of currency purchased, 35.5 per cent was in currencies other than U.S. dollars, the highest percentage so far in any financial year of the Fund. As in previous years, wide use was made of the power, conferred upon the Fund by Article V, Section 4, of the Articles of Agreement, to waive the limitation of a member’s drawing to 25 per cent of its quota in any twelve-month period.

All the 13 stand-by arrangements entered into or extended during the year were for a period of twelve months, except the arrangement with El Salvador, which was for a six-month period, and that with Haiti, which first involved a short-term extension, followed by an agreement for one year.

Since the Fund started its operational activities, 40 members have made use of its resources, and 3 members have concluded stand-by arrangements without making a purchase. Of these 43 members, 17 are in Latin America, 12 in Europe, 4 in the Middle East, 6 in the Far East, and 4 in Africa. Seven of these members are in the sterling area. The total amount purchased from the Fund is equivalent to US$3,445.3 million. Fund transactions for the entire period of its activities, i.e., from March 1, 1947 to April 30, 1960, are summarized in Table 5, and additional details appear in Appendix V. Total repurchases by 35 members that had previously drawn from the Fund have been made with gold or convertible currencies amounting to the equivalent of US$2,026.2 million. Purchases outstanding on April 30, 1960 were equivalent to US$1,160.2 million. The periods during which the amounts drawn were outstanding on April 30, 1960 are as follows:

Table 5.Summary of Fund Transactions from the Beginning of Operations to April 30, 1960(In millions of U.S. dollars)
MemberCurrencies Purchased

by Fund
Currencies Sold

by Fund
Repurchases by

Members
Argentina168.510.0
Australia50.064.1
Austria7.5
Belgium83.011.471.6
Bolivia11.91.8
Brazil260.7168.5
Burma15.010.2
Canada15.0
Ceylon3.0
Chile63.725.7
Colombia40.037.6
Costa Rica1.22.1
Cuba72.547.5
Czechoslovakia6.0
Denmark44.255.3 1
Dominican Republic7.0
Ecuador5.05.0
El Salvador10.08.0
Ethiopia0.62.0
Finland9.518.2
France518.812.5347.9
Germany, Federal Republic of86.445.1
Haiti5.4
Honduras11.310.0
Iceland2.8
India300.0149.9
Indonesia70.036.0
Iran51.045.9
Iraq2.0
Israel3.83.8
Japan249.0249.0
Lebanon0.9
Mexico67.567.4
Netherlands144.112.0139.1
Nicaragua8.08.0
Norway9.69.6
Paraguay7.12.6
Peru14.517.6
Philippines23.817.9
Spain50.0
Sudan6.3
Sweden8.0
Turkey73.538.0
Union of South Africa46.246.2
United Arab Republic
Egyptian Region40.518.1
Syrian Region1.4
United Kingdom861.5229.6368.0
United States3,078.3
Yugoslavia31.99.0
Total23,445.33,445.32,179.5

On the basis of the settlement with Czechoslovakia, an amount of $5.0 million has also been offset against the drawing of $6 million, the remainder to be paid in installments not later than July 2, 1961.

Totals may not equal sums of items because of rounding.

On the basis of the settlement with Czechoslovakia, an amount of $5.0 million has also been offset against the drawing of $6 million, the remainder to be paid in installments not later than July 2, 1961.

Totals may not equal sums of items because of rounding.

Amount

in millions of

U.S. dollars
Number of

members

involved
12 months or less157.5312
13 to 18 months26.684
19 to 24 months182.599
25 to 30 months103.825
31 to 36 months199.137
37 to 48 months480.697
49 to 60 months8.001
More than 60 months1.752

All purchases made by present Fund members prior to May 1953 have been fully reversed. Repurchases have also been made by 19 of the 32 members that had paid less than 25 per cent of their original subscriptions in gold. The total of such repurchases in excess of any previous transactions that these members may have had with the Fund is equivalent to US$158.2 million. These repurchases have had the effect of placing members in, or bringing them closer to, a position comparable to that of a member whose original gold subscription equaled 25 per cent of its quota.

Fund Charges

The Fund’s holdings of a member’s currency in excess of its quota are subject to charges. Since the beginning of the Fund’s operations, 35 members have paid such charges. Currently, 17 members are paying charges on balances in excess of quota, the amount incurred during the year under review totaling $16.9 million, compared with $23.8 million during the previous year. Four members are at present paying part of the charges in their own currencies in accordance with the provision of the Fund Agreement that permits such payments if a member’s monetary reserves are less than half its quota. Service charges on drawings totaled $0.8 million in the past financial year, compared with $1.3 million in the year ended April 30, 1959.

The revised schedule of charges, which has been in effect since January 1, 1954, was extended by the Executive Board until April 30, 1961. The schedule of charges is kept under review by the Fund.

Computation of Monetary Reserves

Monetary reserves data as of April 30, 1959 have been received from all members with the exception of five. None of these five members, however, could have incurred a repurchase obligation.

Investment of Fund’s Assets

During the year, the Executive Directors increased from $200 million to $500 million the amount invested under the Fund’s program, which has been described in earlier Annual Reports, of investing a portion of its gold holdings in U.S. Treasury bills, with the understanding that the same quantity of gold could be reacquired upon the termination of the investment, and decided that there was authority under the Articles of Agreement to make such investment in U.S. securities having a term to maturity not exceeding 12 months (Appendix VI). These decisions were made fully effective in the course of the year. Investment income from May 1, 1959 to April 30, 1960 amounted to $15,359,726.47 and was placed in the Special Reserve Account, which at the end of the year under review showed a balance of $22,298,813.34.

The Fund and Exchange Restrictions

During the past year, the Fund devoted much attention to certain important questions of policy which have arisen as a result of the decisions taken by 14 European countries at the end of 1958 to make their currencies externally convertible. These decisions were an indication of the growing strength of payments and reserve positions, but at the same time they were more than the mere formal recognition of an existing situation. With the reserves of most industrial countries, other than the United States, continuing to show further substantial increases, it was natural that, after the decisions to establish external convertibility had been taken, Fund members should find themselves able to take further important steps—in particular to abandon discriminatory currency practices—toward the achievement of one of the Fund’s primary purposes, the establishment of a system of free multilateral current payments. With so many currencies of importance in international trade freely interchangeable with each other, the great majority of Fund members no longer have any monetary reasons for preferring imports from any one country to imports from any other. The case for discriminating between any of these currencies for balance of payments reasons has accordingly been greatly weakened, if not entirely destroyed. On October 23, 1959, therefore, a decision that “there is no longer any balance of payments justification for discrimination by members whose current receipts are largely in externally convertible currencies” was approved by the Executive Board. The Board’s statement added that, where such discriminatory restrictions have been long maintained, a reasonable amount of time may be needed to eliminate them fully. The time should be short, however, and members were informed that they were “expected to proceed with all feasible speed in eliminating discrimination against member countries, including that arising from bilateralism.” This decision, which is reproduced in Appendix VII, was communicated to the Contracting Parties to the General Agreement on Tariffs and Trade at that time meeting in Tokyo, and a statement issued at the conclusion of the meeting of ministerial representatives of the Contracting Parties expressed views similar to those of the Fund, thus emphasizing further the international community’s interest in this matter. By measures taken during the past year, the practice of many Fund members has been brought into conformity with this decision of the Executive Board. Details of these and other important changes in restrictions made in the past year are given later in this Report and in the Fund’s Eleventh Annual Report on Exchange Restrictions.

Most of the members of the Fund continue to maintain exchange restrictions under Article XIV of the Fund Agreement and are required to consult the Fund annually concerning such restrictions. In the year ended April 30, 1960, consultations were completed with 46 member countries. Fund staff members visited 44 of the member countries concerned; the other 2 consultations were held at the Fund’s headquarters in Washington, D. C. These periodic reviews with individual member countries occupied a large part of the activities of the Executive Board and of the management and staff of the Fund.

As in previous years, these consultations have been a valuable means whereby the Fund and its members have been able to collaborate in achieving the objectives of the Fund. The periodic reviews of the restrictions that still remain and of the justification for their maintenance, together with the advice given by the Fund in connection with the consultations, have played an important part in the progress made in the simplification of exchange systems and the reduction of restrictions. Progress has gone so far that quite a number of Fund member countries now have no, or only very few, restrictions on the making of payments and transfers for current international transactions. This movement gained considerable momentum during 1959 as a result of the generally favorable economic climate.

In some countries, the Article XIV consultations have been associated with requests for stand-by arrangements or drawings from the Fund in support of general economic stabilization programs or other efforts to protect the currency. In several countries, these efforts have been associated with the simplification of the exchange system. Action in accordance with the decision of the Executive Board on June 26, 1957 urging that “early and substantial steps should be taken to simplify complex multiple rate systems” has been taken by an increasing number of members, and only some 7 members now maintain multiple rate systems which can properly be described as complex. The Fund has also continued in the consultations to explore with members which are parties to bilateral arrangements involving the use of exchange restrictions the possibility of their early removal in accordance with the policy decision adopted by the Executive Board on June 22, 1955.

Article VIII and Article XIV

At the Annual Meeting of the Board of Governors of the Fund in September 1959, the conditions under which Fund members would give up the transitional arrangements of Article XIV of the Fund’s Articles of Agreement and assume the obligations of Article VIII, Sections 2, 3, and 4, were discussed. Such a transition from Article XIV to Article VIII presented a number of important problems, which have been under consideration by the Fund throughout the past year. The decision finally approved by the Executive Board on June 1, 1960 was as follows:

There has been in recent years a substantial improvement in the balance of payments and the reserve positions of a number of Fund members which has led to important and widespread moves to the external convertibility of many currencies. Most international transactions are now carried on with convertible currencies, and many countries have progressed far with the removal of restrictions on payments. In consequence of these developments, it seems likely that a number of members of the Fund either have reached or are nearing a position in which they can consider the feasibility of formally accepting the obligations of Article VIII, Sections 2, 3, and 4. Previous decisions taken by the Fund, such as those on multiple currency practices, bilateral arrangements, discriminatory restrictions maintained for balance of payments purposes, and payments restrictions for security reasons, indicate the Fund’s attitude on these matters. The present decision has been adopted as an additional guide to members in pursuance of the purposes of the Fund as set forth in Article I of the Articles of Agreement.

1. Article VIII provides in Sections 2 and 3 that members shall not impose or engage in certain measures, namely restrictions on the making of payments and transfers for current international transactions, discriminatory currency arrangements, or multiple currency practices, without the approval of the Fund. The guiding principle in ascertaining whether a measure is a restriction on payments and transfers for current international transactions under Article VIII, Section 2, is whether it involves a direct governmental limitation on the availability or use of exchange as such. Members in doubt as to whether any of their measures do or do not fall under Article VIII may wish to consult the Fund thereon.

2. In accordance with Article XIV, Section 3, members may at any time notify the Fund that they accept the obligations of Article VIII, Sections 2, 3, and 4, and no longer avail themselves of the transitional provisions of Article XIV. Before members give notice that they are accepting the obligations of Article VIII, Sections 2, 3, and 4, it would be desirable that, as far as possible, they eliminate measures which would require the approval of the Fund, and that they satisfy themselves that they are not likely to need recourse to such measures in the foreseeable future. If members, for balance of payments reasons, propose to maintain or introduce measures which require approval under Article VIII, the Fund will grant approval only where it is satisfied that the measures are necessary and that their use will be temporary while the member is seeking to eliminate the need for them. As regards measures requiring approval under Article VIII and maintained or introduced for nonbalance of payments reasons, the Fund believes that the use of exchange systems for nonbalance of payments reasons should be avoided to the greatest possible extent, and is prepared to consider with members the ways and means of achieving the elimination of such measures as soon as possible. Members having measures needing approval under Article VIII should find it useful to consult with the Fund before accepting the obligations of Article VIII, Sections 2, 3, and 4.

3. If members at any time maintain measures which are subject to Sections 2 and 3 of Article VIII, they shall consult with the Fund with respect to the further maintenance of such measures. Consultations with the Fund under Article VIII are not otherwise required or mandatory. However, the Fund is able to provide technical facilities and advice, and to this end, or as a means of exchanging views on monetary and financial developments, there is great merit in periodic discussions between the Fund and its members even though no questions arise involving action under Article VIII. Such discussions would be planned between the Fund and the member, including agreement on place and timing, and would ordinarily take place at intervals of about one year.

4. Fund members which are contracting parties to the GATT and which impose import restrictions for balance of payments reasons will facilitate the work of the Fund by continuing to send information concerning such restrictions to the Fund. This will enable the Fund and the member to join in an examination of the balance of payments situation in order to assist the Fund in its collaboration with the GATT. The Fund, by agreement with members which are not contracting parties to the GATT and which impose import restrictions for balance of payments reasons, will seek to obtain information relating to such restrictions.

Decision on Exchange Margins

After the introduction of external convertibility by Western European countries at the end of 1958, most of the countries participating in the European Monetary Agreement which came into effect on the termination of the European Payments Union announced that for exchange transactions taking place in their territories the rates between their own currencies and the U.S. dollar would not be permitted to exceed margins of approximately ¾ of 1 per cent on either side of the par values agreed with the Fund for their respective currencies. The rates of exchange between the currencies which had been made externally convertible were, however, to be left to market arbitrage. The margins from par for the exchange rates between these currencies in the market would therefore be the sum of the margins prevailing for each currency against the U.S. dollar. If one currency were to move to the maximum permitted premium against the U.S. dollar while another currency moved to the maximum discount, the rate of exchange between the two currencies would move to a point approximately 1.5 per cent from the respective par values. The Fund took the view that the extension of exchange arbitrage through well-organized markets, which would be facilitated by these arrangements, would contribute to the achievement and maintenance of convertibility. Hence, on July 24, 1959, the Fund adopted the following decision:

The Fund does not object to exchange rates which are within 2 per cent of parity for spot transactions between a member’s currency and the currencies of other members taking place within the member’s territories, whenever such rates result from the maintenance of margins of no more than 1 per cent from parity for a convertible, including externally convertible, currency.

Cooperation with Other International Organizations

As in previous years, the Fund has maintained close relations with other international organizations whose interests and work impinge upon the fields in which the Fund also has a responsibility to its members. The Fund has a special relationship with the International Bank for Reconstruction and Development, and has also maintained close contacts with the United Nations and its regional and technical bodies, the Contracting Parties to the General Agreement on Tariffs and Trade (GATT), the Organization for European Economic Cooperation (OEEC), and the Bank for International Settlements. There are direct working arrangements with the staffs of UN agencies, and staff studies and reports have been prepared for these agencies on subjects within the Fund’s field of competence. During the past year, Fund representatives have also attended and submitted papers to the UN Statistical Commission and to the UN Commission on International Commodity Trade. Fund representatives have attended meetings of the General Assembly of the United Nations, of the UN regional Economic Commissions, and of the UN Administrative Committee on Coordination and their subsidiary bodies, and observers from the United Nations and several other international agencies were invited to attend the Fund’s Fourteenth Annual Meeting. The Managing Director of the Fund presented a report on the Fund’s activities and policies at the Twenty-Ninth Session of the UN Economic and Social Council in April 1960.

The close connection which has developed in recent years between the work of the OEEC and that of the Fund was carried further during the last year, when the two organizations were again associated in “parallel arrangements” which are part of stabilization programs adopted by Fund members. Such “parallel arrangements” had been made with France and Turkey in 1958, and during the last year programs, which are described in detail elsewhere in this Report, were adopted by Spain and Iceland. It is expected that, as plans for changes in the purposes and structure of the OEEC begin to take shape, there will also be a continuation in some appropriate form of Fund relations with the new organization as fruitful as those which have developed between the Fund and the OEEC.

The Fund continued its close cooperation with the Contracting Parties to the GATT during the period under review, and was represented at the Fourteenth and Fifteenth Sessions of the Contracting Parties. As indicated earlier in this chapter, the Fund transmitted to the Contracting Parties at their Fifteenth Session its decision on discrimination for balance of payments reasons.

At the Fourteenth Session held in Geneva in May 1959, the Fund consulted with the Contracting Parties in connection with their balance of payments consultations with four countries, and with two of those countries in connection with their continuance of discrimination. Similar consultations with respect to four other countries took place in July. At the Fifteenth Session held in Tokyo in October 1959, the Fund consulted with the Contracting Parties in connection with their balance of payments consultations concerning seven other countries. Similar arrangements were set in motion concerning consultations with about twenty countries during 1960.

The consultations with a number of these countries are the first of a biennial series required with less developed countries which maintain balance of payments import restrictions. The consultations with the other countries are the second in an annual series required to be held with more developed countries maintaining such restrictions.

As in previous years, representatives of the Fund have attended the meetings of the working parties assigned to carry out the consultations between the Contracting Parties and individual countries, and the Fund has continued to provide the Contracting Parties with the results of its Article XIV consultations with the countries concerned, and with other relevant material.

Australia’s increased quota became effective on May 31, 1960, the date on which Australia’s consent was received in the Fund.

See Annual Report, 1959, page 22.

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