Chapter

IV External Payments and Domestic Financial Developments in Selected Countries

Author(s):
International Monetary Fund
Published Date:
September 1960
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United States

Internal Developments

The expansion of economic activity in the United States which had started in mid-1958 continued in 1959, with some interruption in the second half of the year as a result of the 116-day steel strike. Gross national product (GNP), which had been roughly the same in 1958 ($442 billion) as in 1957, increased from 1958 to 1959 by 8½ per cent, to $480 billion. Adjusted for price changes, GNP was almost 7 per cent larger in 1959 than in 1958, nearly all its components contributing to the increase.

Seasonally adjusted GNP rose by 12½ per cent from the first quarter of 1958, the lowest quarter during the recession, to an annual rate of $485 billion in the second quarter of 1959. In the third quarter the annual rate declined by more than $6 billion, but in the last quarter recovered to $484 billion. The decline from the second to the third quarter was related to changes in inventory investment; nonfarm inventories were built up in the second quarter, partly in anticipation of the steel strike, at an annual rate of almost $10 billion, while they were reduced at a rate of nearly $2 billion during the third quarter, as supplies of steel were drawn upon to maintain production in the metal-using industries.

“Final purchases,” i.e., GNP less change in business inventories, continued to rise throughout 1959, though the rate of increase fell in the second half, and especially in the last quarter, of the year. Up to mid-1959, inventory investment (partly in anticipation of the steel strike), residential construction, and government purchases had been, in conjunction with a steady advance of private consumption, the major expansionary factors. In the second half of 1959, there was a sharp fall in inventory investment related to the steel strike, which also affected final purchases through its impact on production and income; residential construction and private consumption expenditures on durable goods declined, and government expenditures on goods and services tended to level off, whereas private investment in plant and equipment rose over the first half, although at a declining rate, and there was a moderate increase in exports of goods and services.

In the first quarter of 1960, GNP reached an annual rate of $500 billion. The increase over the last quarter of 1959 resulted from an advance of $10 billion in “final purchases” and from a post-strike rise of over $7 billion in the rate of inventory accumulation, particularly of steel products and automobiles. The rate of GNP receded slightly in the early months of 1960 from the peak reached in December and January, the decline in inventory accumulation being a major factor in this movement.

The average unemployment rate in 1959 was about 5.5 per cent of the civilian labor force, compared with 6.8 per cent in 1958. The seasonally adjusted rate fell to 4.9 per cent in May and June, but layoffs caused by steel shortages raised it to 6.0 per cent in October. In April 1960 it was 5.0 per cent.

From April 1958, the low point of the recession, to April 1960, the wholesale price index remained roughly constant and consumer prices rose by 2.2 per cent. The food prices paid by consumers declined by 1.7 per cent, while the consumer price index for all other items rose by almost 4 per cent, the increase being concentrated mainly upon the costs of medical care, transportation, and other services. The wholesale prices of farm products declined by 7 per cent and those of processed foods by 5 per cent, while the wholesale prices of industrial commodities rose by 2.5 per cent.

As the expansion proceeded, the stimulus to economic activity given by the Government’s cash operations during the early stages of the recovery lost its force. Sharply rising expenditures during the fiscal year ended June 30, 1959 increased the Government’s cash deficit to more than $13 billion, compared with a deficit of $1.5 billion in the preceding fiscal year. However, as a result of increased revenue, the deficit was much lower in the second half of 1959 than in the second half of 1958, and the fiscal year 1960 closed with a cash surplus of $0.7 billion.

As the demand for credit rose toward the end of 1958 and in the early part of 1959, the Federal Reserve System shifted from a policy of neutrality in the money market to one of restraint. During 1959, the increase in total reserve bank credit was less than the amount that would have been necessary to offset the effects on member bank reserves of the reduction in the U.S. gold stock and of the rise in currency in circulation. The Federal Reserve discount rate was raised three times during the year, until it reached 4 per cent in September.

As a consequence of the restraint shown in open market operations, which kept bank reserves approximately constant, the increase in the quantity of money (adjusted demand deposits and currency outside banks) during the year was less than 1 per cent. The increase in total commercial bank loans and investments was the smallest in more than a decade, although commercial bank loans expanded by almost $12 billion, a figure matched in the past only in 1955. With approximately constant reserves, commercial banks were able to achieve this expansion of loans largely by selling $8 billion of U.S. Government securities to nonbank investors.

Developments in financial markets were influenced by the increasing credit requirements of business and consumers associated with the expansion of business activity, as well as by the large credit demands of the Federal Government and the increased restraint shown in monetary policy. The total of “funds raised in credit and equity markets”—as measured by the new Federal Reserve flow-of-funds series—increased in 1959 to $62 billion, a peacetime record. The demand for credit was particularly large during the second quarter of 1959, in part because of the extraordinary inventory build-up in anticipation of the steel strike.

As long-term bond yields advanced beyond 4¼ per cent, the statutory ceiling for U.S. Government long-term issues, the Treasury was forced to satisfy all its requirements in the short-term and medium-term markets. The 3-month Treasury bill rate advanced from 2.8 per cent in December 1958 to 4.6 per cent 12 months later, while the yield on 3-5 year issues rose from 3.7 per cent to about 5.1 per cent. In the early months of 1960, public and private demand for funds declined more than seasonally. An easing in the reserve position of the commercial banks was evident in the reduction of net borrowed reserves to $200 million in March and April 1960, from $400-500 million in the latter part of 1959. Interest rates and bond yields weakened in January. In April, the yield on 3-month Treasury bills was 3.2 per cent, and that on medium-term government bonds, 4.2 per cent. In mid-June, Treasury bill rates fell below 2.5 per cent and reached the lowest level since the third quarter of 1958. Throughout the year, common stock yields were considerably below corporate and U.S. Government bond yields. Corporate financing through the sale of bonds was accordingly of less importance than in 1958, while new issues of corporate stocks increased. The rise in stock prices was arrested in the second half of 1959, as it became apparent that risks of further commodity price rises had much diminished and when higher bond yields made stocks relatively less attractive. In the first two months of 1960, stock prices receded by about 10 per cent, but for some time thereafter showed little net change.

External Payments Developments

The change in the U.S. balance of payments on account of goods and services (including military expenditures), which had begun in 1958, when the surplus had declined to $1.5 billion from $5.1 billion in 1957, continued in 1959, when there was a deficit of $0.9 billion (Table 21). The greater part (with allowance for seasonal factors) of the 1959 deficit was incurred in the first half of the year; there was a further improvement, to a surplus of $1.0 billion, in the seasonally adjusted annual rate in the first quarter of 1960. The change from 1957 to 1958 had been the result of a sharp contraction of exports; from 1958 to 1959 it was due to a large increase of imports. The value of exports was much the same in 1959 as in 1958, a continued weakening in the first half being followed by revival in the second half of 1959 and in the first quarter of 1960. Also in 1959 the net outflow of both U.S. private and government capital abroad declined, and the inflow of foreign capital, recorded and unrecorded, increased. Thus, despite the deterioration by some $2.4 billion in the goods and services balance, the net transfer of gold and U.S. dollars to non-U.S. official and bank holders exceeded the transfer in 1958 by only $580 million. This contrasts with 1958, when changes in capital movements as a whole reinforced the effects of the reduction in the surplus on goods and services account.

Table 21.United States: Summary of Balance of Payments, 1957—First Quarter 19601(In millions of U.S. dollars)
19591960 2
195719581959Jan.-Mar.Apr.-JuneJul.-Sept.Oct.-Dec.Jan.-Mar.
Exports: Merchandise19,39016,26316,2253,8024,0604,0354,3284,596
Services7,3437,0627,2391,6191,7371,8432,0401,715
26,73323,32523,4645,4215,7975,8786,3686,311
Imports: Merchandise–13,291–12,951–15,315–3,597–3,884–3,848–3,986–3,819
Military expenditures–3,165–3,412–3,090–775–790–773–752–757
Other services3–5,169–5,412–5,934–1,249–1,478–1,780–1,427–1,371
–21,625–21,775–24,339–5,621–6,152–6,401–6,165–5,947
Balance on goods and services5,1081,550–875–200–355–523203364
Balance, seasonally adjusted–193–51641–125269
U.S. Government capital and grants–2,574–2,587–1,981–516–681–561–223–602
U.S. private capital–3,175–2,844–2,301–391–745–392–773–567
Foreign capital (not included below)
International organizations4263282143–524–913383
Private long-term capital3612454872190158128190
Private short-term capital39834424822410148–12522
Errors and omissions748380783160365322268
Foreign official and bank liquid dollar assets and gold5
Bank assets289–261,450435285387343483
Official assets–6206021,25412641969316–31
Gold 6–7982,275731953971677250
Memorandum item–1,1292,8513,4356561,1011,247431502
Change (decrease –) in foreign gold and recorded liquid dollar assets through transactions with the United States7–4683,4773,8268931,2101,077646706
Sources: U.S. Department of Commerce, Survey of Current Business, and Fund staff estimates.

Excluding military aid and transfers financed by it. No sign indicates credit; minus sign indicates debit.

Preliminary.

Including private donations but excluding military expenditure.

Excluding the International Monetary Fund (IMF), the Bank for International Settlements (BIS), and the European Payments Union (EPU).

Including the IMF, BIS, and EPU. The U.S. subscription to the IMF in 1959 ($344 million in gold and $1,031 million in U.S. dollars) is excluded.

From transactions with the United States.

This item is the sum of foreign capital, international organizations; foreign capital, private short-term; and foreign official and bank liquid dollar assets and gold. For the quarterly figure, the sum of items does not equal the memorandum item, since the latter is seasonally adjusted.

Sources: U.S. Department of Commerce, Survey of Current Business, and Fund staff estimates.

Excluding military aid and transfers financed by it. No sign indicates credit; minus sign indicates debit.

Preliminary.

Including private donations but excluding military expenditure.

Excluding the International Monetary Fund (IMF), the Bank for International Settlements (BIS), and the European Payments Union (EPU).

Including the IMF, BIS, and EPU. The U.S. subscription to the IMF in 1959 ($344 million in gold and $1,031 million in U.S. dollars) is excluded.

From transactions with the United States.

This item is the sum of foreign capital, international organizations; foreign capital, private short-term; and foreign official and bank liquid dollar assets and gold. For the quarterly figure, the sum of items does not equal the memorandum item, since the latter is seasonally adjusted.

Total transfers of gold and liquid assets to non-U.S. holders were $3.5 billion in 1958 and $3.8 billion in 1959. There were also marked changes in the form in which these transfers were made. Of the $2.9 billion which in 1958 accrued to official institutions and banks, 80 per cent was in gold and 20 per cent in dollars; in 1959, when $3.4 billion was accumulated by these holders, this proportion was reversed. The change is partly explained by the fact that about half of the dollars transferred in 1959 went to commercial banks, while in 1958 most transfers were for official account. This reflects the influence of higher interest rates obtainable on U.S. dollar assets in 1959, as well as the greater freedom in foreign exchange transactions given to private banks in many countries and their increasing role in the settlement of international transactions since the establishment of external convertibility at the end of 1958.

Despite the improvement in the balance on goods and services of over $550 million in the first quarter of 1960 compared with the same quarter of the previous year, transfers of gold and dollars to non-U.S. official and bank holders amounted to $0.5 billion, or only $150 million less than in the corresponding 1959 quarter. However, after allowance is made for the reduction, by $150 million, of net transfers in the first quarter of 1959—a reduction that was due to advance debt repayments on U.S. Government loans—the 1960 transfers were $300 million less than in the previous year. In comparison with the previous year, there was also in the first quarter of 1960 an increased outflow of U.S. private capital, a diminished net inflow of foreign private capital, and a decline in net unrecorded receipts.

After two years of comparative stability, U.S. merchandise imports were higher by some 18 per cent in value, and by slightly more in volume, in 1959 than in 1958. The increase was most pronounced in the first half of the year and thereafter gradually leveled off. It was in part attributable to the upswing in the domestic economy. The value of food imports, however, declined slightly, mainly because of a fall in coffee prices, even though the volume of coffee imports rose considerably as stocks were replenished. Although imports of petroleum and products were restrained by quotas, their volume was slightly greater than in 1958, but their value declined by some 6 per cent because of lower prices. Demand for imported industrial raw materials was stimulated by expanding manufacturing production, and a further impetus was given by the steel and copper strikes. Imports of industrial materials, which had fallen sharply in 1958, were greater, by some 20 per cent in volume and 23 per cent in value, than they had been in that year. The still sharper increase in imports of finished manufactures was an indication of the growing competitive strength of Western Europe and Japan. In the preceding four years, these imports had increased, in both value and volume, at an average annual rate of some 20 per cent; from 1958 to 1959 their value rose by nearly $1.2 billion, or 37 per cent. Imports of steel manufactures increased sharply, but the main factor was again a considerable expansion in imports of automobiles, accounting for almost one fourth of the total increase; larger purchases of machinery and of textile manufactures accounted for another fourth.

Partly as a result of these changes in the commodity composition of imports, there were also significant changes in the relative importance of other countries and regions as suppliers to the United States. U.S. imports from Western Europe and Japan rose by 40 per cent; those from Latin America were much the same as in 1958; overseas sterling area countries supplied well over 20 per cent more than in 1958; imports from Canada and other primary producing countries rose by some 12 per cent.

Despite the steel strike, which cut exportable supplies, there was after mid-1959 a revival of U.S. exports, which had declined almost continuously from an exceptionally high level in the first half of 1957. Seasonally adjusted data indicate an increase of 9 per cent between the first and the second half of the year and a further rise of 7 per cent in the first quarter of 1960. This was due, to some extent, to special factors; a change-over to new models of aircraft delayed deliveries to foreign buyers, and the early announcement of a reduction in export prices of cotton to become effective in August 1959 prompted a postponement of purchases. Cotton exports, which in the first three quarters of 1959 were some $300 million lower than during the same period of 1958, rose substantially in the last months of 1959. The main factors determining U.S. exports, however, were the conditions prevailing in major import areas. The decline in exports to Western Europe in the first half of 1959 and their subsequent substantial recovery are explained largely by the relatively late and initially slow revival of activity in many European countries. The upturn in exports to Canada in the first part of 1959 reflected the early recovery in that country’s economic activity; similarly, the revival and rapid growth in Japan’s economy was accompanied by an early and sustained advance in U.S. exports to Japan. For 1959 as a whole, exports to these two countries were some $400 million higher than in the preceding year. The overseas sterling area, whose exports recovered substantially in 1959, was the only major primary producing area that bought more from the United States than in 1958, partly because of an increased inflow of U.S. capital. Exports to Latin America, on the other hand, were less than in 1958 by some $575 million, or about 14 per cent. The reduction was to a large extent a result of the balance of payments adjustments which many Latin American countries had to make as prices and receipts for their major export products declined. The reduction of net U.S. Government lending and of private direct investment in Latin America may have contributed to this decline of U.S. exports.

There was some reduction in 1959 in U.S. military expenditure abroad, mainly in Western Europe and the Far East. Expenditure on “other services” was 9 per cent higher than in 1958, partly on account of greater outlays for transportation and travel, but also because of a rise in interest payments on increased holdings abroad of U.S. Government obligations.

U.S. Government grants in 1959 were virtually the same as in 1958, and their geographical distribution also changed little. Net government lending, however, declined from nearly $1 billion to some $350 million, largely because of advance debt repayments of $250 million by the United Kingdom to the Export-Import Bank and of $150 million by Germany. There was also some reduction in new government loans, with smaller capital outflows to Latin America and Europe and only small increases to some other areas.

U.S. private investment abroad was almost 25 per cent less in 1959 than in 1958. Only in direct investment was there an increase, about 10 per cent, a sharp expansion of investment in U.S. subsidiaries in the European Common Market area exceeding the reduction in the net flow to Latin America. New issues declined by some $350 million, mainly because there were no IBRD bond issues in 1959. The reflux of short-term funds, which set in late in 1958, continued in 1959 as interest rates in the United States became increasingly attractive. In the last quarter of the year, short-term advances to Venezuela and Japan caused a reversal of this trend, but for the year as a whole net short-term lending was some $200 million less than in 1958.

The net inflow of foreign funds into the United States, which had fallen off between 1957 and 1958, was again substantial in 1959. The net inflow of private (nonbank) capital increased by more than $400 million (Table 21), and the increase of more than $400 million in receipts from unrecorded transactions also probably reflects an additional inflow of short-term funds. These movements took place partly in response to the gradual rise of interest rates in the United States; other contributing factors may have been the relaxation in some countries of restrictions on capital movements and the rise in U.S. stock prices. The rise in interest rates and in yields on U.S. Government securities was probably also responsible, in part, for the large accumulation of U.S. dollar assets by foreign commercial banks.

United Kingdom

The economic expansion in the United Kingdom that began in the second half of 1958 continued through 1959. Price stability was maintained, but there was some deterioration in the balance on current international transactions and in the over-all balance of payments position. In contrast to the gold and foreign exchange surplus of £276 million (including changes in positions with the IMF and the EPU) in 1958, there was approximate balance in 1959 or, if allowance is made for the advance repayment of a credit from the Export-Import Bank of Washington, a surplus of £90 million (Table 22). In addition, the accumulation of sterling balances was substantially greater than in 1958.

Table 22.United Kingdom: International Transactions, 1958 and 1959 1(In millions of pounds sterling)
19581959 2
Transactions

with

Sterling

Area
Transactions

with

Non-Sterling

Area
TotalTransactions

with

Sterling

Area
Transactions

with

Non-Sterling

Area
Total
Goods, services, and donations
Exports f.o.b.1,4311,9973,4281,3612,1863,547
Imports f.o.b.–1,280–2,050–3,330–1,378–2,227–3,605
Trade balance151–5398–17–41–58
Services and donations276–25251236–33203
Total427–78349219–74145
Capital (not included below)
Official long-term–34–15–49–56–41 3–97 3
Private long-term–22010–210–160–30–190
Private short-term–202020–20
Total–27415–259–196–91–287
Net errors and omissions1149123130–9832
Surplus of rest of sterling area
with non-sterling area settled through the United Kingdom4–178178–337337
Changes in overseas sterling holdings (excluding IMF)–891526318416 5200 5
Repayment of Export-Import Bank loan–89–89
Reserve movements (increase –)
Net IMF position–5–5–137–137
EPU debit balance–10–1099
Official holdings
Nonconvertible currencies232388
Gold and convertible currencies–284–284119119
Total–276–276–1–1
Sources: United Kingdom Balance of Payments 1957 to 1959 (Cmnd. 977), U.K. Treasury, Press Release, June 29, 1960, and Fund staff estimates.

No sign indicates credit; minus sign indicates debit.

Preliminary.

Excludes repayment of loan from Export-Import Bank of Washington (shown separately) and German transfer to the U.K. Government of £60 million, the remainder of the £75 million previously deposited in advance for debt repayment.

Includes sterling area sales of gold in United Kingdom.

Excludes decrease resulting from German transfer referred to in footnote 3.

Sources: United Kingdom Balance of Payments 1957 to 1959 (Cmnd. 977), U.K. Treasury, Press Release, June 29, 1960, and Fund staff estimates.

No sign indicates credit; minus sign indicates debit.

Preliminary.

Excludes repayment of loan from Export-Import Bank of Washington (shown separately) and German transfer to the U.K. Government of £60 million, the remainder of the £75 million previously deposited in advance for debt repayment.

Includes sterling area sales of gold in United Kingdom.

Excludes decrease resulting from German transfer referred to in footnote 3.

A rapid rise in consumer expenditures in the second half of 1958, in response to the elimination of restrictions on hire purchase and bank lending, gave the initial impetus to renewed expansion. Under the further stimulus of tax reductions, personal consumption in real terms rose by 4 per cent from 1958 to 1959, personal savings rising at a somewhat higher rate. Real fixed investment, which had changed little from 1957 to 1958, rose by about 5 per cent, and there were increases also in public consumption and in inventory investment and, from the second quarter of 1959, in exports.

The increase in fixed investment occurred almost entirely in public construction and private residential and commercial building. Private investment in manufacturing industry was slightly smaller in 1959 than in 1958. Industrial production rose by nearly 10 per cent from the last quarter of 1958 to the last quarter of 1959; this was made possible by increases in productivity and in hours worked. The end-of-year unemployment rate declined from 2.4 per cent to 1.9 per cent, though in some regions substantial pockets of unemployment still remained. There was practically no change during 1959 in the general price level of goods and services or in wage rates; in contrast to 1958, labor costs per unit of output declined, while profits per unit of output increased.

Financial developments in 1959 were dominated by a rapid expansion of bank advances; more than half the increase went to the personal and professional group, hire-purchase and other private finance companies, and the retail trade. The expansion was financed largely by a substantial reduction of the gilt-edged security holdings of the banks to an amount lower than at any time since 1951. Gilt-edged security holdings outside the banking system increased over the year as a whole, but in contrast to 1958, the authorities were also substantial net purchasers. This was done in order to alleviate pressures on medium-term and long-term interest rates which might otherwise have checked the upswing at too early a stage. The authorities’ net purchases of medium-term and long-term securities were financed in part by increased issues of marketable Treasury bills. The decline in market interest rates that had continued throughout 1958 ceased in the second quarter of 1959. In the following months there was some increase, which became more marked toward the end of the year. Relative to foreign money markets, however, there was a decline in short-term rates, which encouraged an outflow of funds in the latter part of the year.

The decline of £ 204 million in the surplus on current account was the principal factor in the deterioration of the U.K. balance of payments between 1958 and 1959. Three fourths of the decline was attributable to merchandise trade. As imports rose faster than exports, there was again a trade deficit similar to those of 1956 and 1957, which contrasted with the exceptional surplus of 1958. In its trade with non-sterling countries, however, the substantial rise in total exports, especially to industrial countries, somewhat exceeded the increase of 9 per cent in imports (f.o.b.); the value of exports to North America was 23 per cent, and to Western Europe 9 per cent, higher than in 1958. But while imports (f.o.b.) from the sterling area rose by 8 per cent, the value of exports to that area fell by 5 per cent. In the early part of 1959, exports to the sterling area were still limited by the import restrictions imposed in 1958 by several countries whose international reserves were affected by the deterioration in export earnings. However, in the last quarter of 1959 exports to the sterling area were 5 per cent, and in the first quarter of 1960 they were 9 per cent, higher than a year earlier.

While imports in general increased, there was a slight reduction in the volume of food imports, which had been unusually high because of a poor harvest in 1958. With increases in production and stock building, imports of industrial materials expanded sharply in the last two quarters of 1959. For the year as a whole, however, the volume of raw material imports, which had fallen by 11 per cent from 1957 to 1958, rose by only 6 per cent and remained significantly smaller than in any of the three years before 1958. The volume of imports of mineral fuels and semimanufactures was some 15 per cent larger than in 1958. The rise in private consumption and the effect of recent liberalization measures were reflected in a 21 per cent increase in imports of finished manufactures, which accounted for one third of the increase in the total value of imports.

The surplus on service transactions was smaller in 1959 than in 1958 by nearly £50 million, mainly because of a decrease in the net current receipts of the oil industry, a rise in net government expenditure abroad, and higher net expenditure on overseas travel. A reduction in interest charges on overseas sterling holdings, however, led to an increase in net investment income receipts.

The deficit on account of recorded capital transactions (excluding certain extraordinary transactions) was £30 million larger than in 1958. The estimate of “errors and omissions” is smaller than for 1958. A marked increase in the capital outflow, both recorded and unrecorded, to non-sterling countries in the second half of 1959 may, in part, have been related to the rise in interest rates in other financial centers. In contrast, the net outflow of capital to the sterling area declined from 1958 to 1959. While there was an increase of £22 million in net official lending to other sterling area countries, mainly India and the Colonial Territories, the recorded net outflow of private long-term capital was reduced by £60 million.

The sterling balances held by sterling area countries, which fell by £211 million in the two years 1957 and 1958, rose by £184 million in 1959. This increase reflected the favorable developments in their over-all balance of payments. Sterling balances held outside the sterling area (and excluding those held by the Fund), which had increased by £152 million in 1958, increased by £16 million in 1959.

In the first four months of 1960, the United Kingdom’s holdings of gold and convertible currencies rose by £34 million; at the end of April 1960, they amounted to £1,011 million. This increase was, after excluding extraordinary transactions, considerably smaller than in the corresponding period of 1959. The balance of trade in the early months of 1960 was rather more unfavorable than in the same months of 1959. With a continued high level of industrial production and further rebuilding of inventories, imports continued to rise strongly. The seasonally adjusted monthly average value of imports during the first four months of 1960 was about 12 per cent higher than in 1959 as a whole. The corresponding figure for exports was 9 per cent. Total overseas sterling holdings (excluding the sterling holdings of the Fund), which had risen by £67 million in the last quarter of 1959, fell slightly in the first quarter of 1960.

In early 1960, it was apparent that demand was continuing to expand and that, in particular, investment in manufacturing industry was likely to rise considerably. Actual and prospective wage increases underlined the danger that some strain might develop in an economy in which production was moving closer to capacity in terms of both labor and equipment. These considerations caused a shift in the direction of official policy. An increase in the bank rate in January from 4 per cent to 5 per cent was designed partly to check the growth in total demand; it also brought short-term interest rates in London more closely into line with those in other financial centers and thus contributed to the progressive increase in U.K. reserves in subsequent months.

The over-all deficit in the 1960-61 budget, introduced in April, was practically the same as the deficit realized in 1959-60. On several occasions, however, the U.K. authorities expressed their desire that bank advances should grow less rapidly, and the object of discouraging excessive credit expansion influenced their policy in open market operations in gilt-edged securities. At the end of April, a scheme of “special deposits” designed primarily to restrain the growth of bank advances was introduced. Initially, the London clearing banks were called upon to lodge 1 per cent, and the Scottish banks ½ per cent, of their deposits, on or before June 15, 1960, in special accounts with the Bank of England; these deposits would not be part of the banks’ liquid assets. At the same time, restrictions on hire purchase were reimposed on a wide range of goods. In the second half of June, the bank rate was raised further to 6 per cent, the special deposits required from the banks were doubled, and it was announced that the program of expenditure on investment in the public sector for 1961-62 would be held at the level of the program for the current year.

Federal Republic of Germany

After some slowing down in the rate of expansion during 1958, the buoyant growth of the economy of the Federal Republic of Germany was resumed in 1959. Increasing pressures developed during the second half of the year, but internal stability was maintained and the balance of payments on goods and services account continued to show a substantial surplus. However, as a result of higher payments on donations and capital account, some of which were of a nonrecurrent nature, there was a decline in Germany’s official gold holdings and foreign assets (Table 23).

Table 23.Federal Republic of Germany: Summary of Balance of Payments, 1957—First Quarter 19601(In millions of deutsche mark)
1959 21960 2
195719581959 2Jan.-Sept.Oct.-Dec.Jan.-Mar.
Goods and services3
Exports f.o.b.35,95336,97441,16329,26311,90011,417
Imports c.i.f.4–31,870–32,020–35,802–25,565–10,237–10,000
Trade balance4,0834,9545,3613,6981,6631,417
Other goods and services3744–927–2,216–1,752—464–224
Total4,8274,0273,1451,9461,1991,193
Military transactions (excluding defense imports)
Paid services to foreign troops2,6603,8774,1213,0071,1141,109
Contribution to U.K. troops–2825–2825
Advance payment for defense imports (net)–1,741285–1,435–1,327–108–977
Total9194,1622,4041,3981,006132
Donations–1,647–1,649–2,035 5,6–1,444 5,6–591–580
Private capital (including net errors and omissions)
Long-term133–522–1,395–1,218–177–536
Short-term7394–47357–3764334
Net errors and omissions1,721–681–589–125–464147
Total2,248–1,676–1,927–1,719–208–385
Government capital
Reintegration of the Saar….….–382 6–382 6
Advance debt repayment–903–895–8
Other–829–1,140–619–615–4–127
Total–829–1,140–1,904–1,892–12–127
Commercial bank foreign exchange assets–397–265–1,255–1,820565160
Official gold and net foreign assets Gold and freely usable foreign exchange assets (increase –)–2,947–2,1003002,634–2,334–602
Net IMF position–271–509–480–29–29
EPU balance–1,352–355411 8411 8
Other Bundesbank assets9 (increase –)–1,381–3921,6191,144475318
Bundesbank liabilities559–341–249–178–71–80
Total–5,121–3,4591,5723,531–1,959–393
Sources: Deutsche Bundesbank, Monthly Reports.

No sign indicates credit; minus sign indicates debit.

Preliminary.

Excluding military services, which are included below.

Including nonmonetary gold (net) and defense imports.

Contributions to the United Kingdom for the support of U.K. troops in Germany are included in military transactions rather than in donations.

All payments to France in connection with the reintegration of the Saar are included in government capital rather than in donations.

Foreign exchange assets of the commercial banks are shown as a separate category. Other short-term capital of commercial banks is included in private capital.

Covers only the January 1959 settlement made prior to the liquidation of EPU. Subsequent redemption of former EPU debt is included in other Bundesbank assets.

Includes special loans to the IBRD (debit of DM 735 million for 1957, DM 431 million for 1958, and DM 257 million for 1959); earmarking of Bundesbank sterling balances for future debt repayment to the United Kingdom (debit of DM 794 million for 1957); and repayments received on bilateral claims arising from the liquidation of EPU (credit of DM 1,027 million for 1959).

Sources: Deutsche Bundesbank, Monthly Reports.

No sign indicates credit; minus sign indicates debit.

Preliminary.

Excluding military services, which are included below.

Including nonmonetary gold (net) and defense imports.

Contributions to the United Kingdom for the support of U.K. troops in Germany are included in military transactions rather than in donations.

All payments to France in connection with the reintegration of the Saar are included in government capital rather than in donations.

Foreign exchange assets of the commercial banks are shown as a separate category. Other short-term capital of commercial banks is included in private capital.

Covers only the January 1959 settlement made prior to the liquidation of EPU. Subsequent redemption of former EPU debt is included in other Bundesbank assets.

Includes special loans to the IBRD (debit of DM 735 million for 1957, DM 431 million for 1958, and DM 257 million for 1959); earmarking of Bundesbank sterling balances for future debt repayment to the United Kingdom (debit of DM 794 million for 1957); and repayments received on bilateral claims arising from the liquidation of EPU (credit of DM 1,027 million for 1959).

The increase from 1958 to 1959 in gross national product, 7.5 per cent at current prices and 5.7 per cent at constant prices, was substantially more than the increase from 1957 to 1958; greater productivity accounted for an increase of 4.1 per cent. In the early part of 1959, the main demand factor underlying the expansion was private residential and public construction; later, inventory accumulation, exports, and industrial investment contributed progressively to the upswing. While unemployment declined to less than 1 per cent in September, wages increased only moderately and exerted no upward pressure on prices. Most of the increase of 3.5 per cent in the cost of living was due to an increase in agricultural prices caused by severe drought.

One of the main purposes of the repeated reductions in the German official discount rate to a postwar low of 2¾ per cent in January 1959 was to stimulate capital exports with a consequent reduction of the balance of payments surplus. Capital exports did in fact increase, and so did the commercial banks’ holdings of foreign exchange; but the lowering of interest rates also gave a sharp stimulus to building activity, which provided the initial impulse to the new upswing in the economy.

Signs of increasing strain in the labor market, a rapid rise in foreign and domestic orders, and a build-up of business inventories gave rise to apprehensions of excessive pressure on domestic resources. From September 1959 onward, the monetary authorities resorted increasingly to restrictive credit policies, even though such measures ran counter to the objective of stimulating capital exports. After the official discount rate had been raised to 4 per cent in October, the outflow of short-term capital was reversed and official reserves, which had decreased during the first nine months of the year, again increased. Subsequent monetary measures, such as the successive raising of reserve requirements between October 1959 and June 1960, were aimed at reducing bank liquidity and increasing interest rates. To discourage banks from offering attractive terms for foreign funds, the monetary authorities raised the reserve requirements for increases in the banks’ foreign liabilities to the maximum rates permitted by law. In the first half of 1960, pressure on domestic resources continued to rise, and the official discount rate was raised to 5 per cent in June. At the same time, the payment of interest on foreign deposits and the sale of money market paper to foreign residents were prohibited in order to discourage any inflow of nonresident short-term capital which might offset the internal effects of credit restrictions, and to minimize any adverse effects on the reserve positions of other countries.

The surplus on goods and services account was reduced from 1958 to 1959, mainly as a result of higher payments for services and, in particular, tourist expenditure and investment income. At the same time, there were increases in donations, in the outflow of private capital, and in advance payments for defense imports (Table 23). The surplus on account of all these transactions together fell from DM 4,864 million to DM 1,587 million. In addition, the outflow of government capital increased because of certain special transactions, such as payments to France in connection with the transfer of the Saar and advance repayments to the United States and the United Kingdom of debts arising out of postwar economic assistance.

Net exports of long-term private capital were DM 900 million greater in 1959 than in 1958; there was a fivefold increase in net German purchases of foreign securities, while foreigners’ net purchases of German securities were lower than in 1958. In the first three quarters of 1959, the commercial banks increased their foreign balances by more than DM 1.8 billion; rather less than a third of this amount returned to Germany in the last quarter after more restrictive monetary policies had been introduced.

After payment of an additional gold subscription of DM 480 million to the Fund, official holdings of gold and freely usable foreign exchange declined in 1959 by DM 300 million. All other foreign assets of the Bundesbank (net of foreign liabilities) fell by DM 1,781 million, of which the larger part was due to a decrease of claims arising from the liquidation of the EPU. Further repayments in the next few years will automatically lead to further reduction of these claims, the outstanding balance of which at the end of 1959 amounted to about DM 3 billion. Total gold and U.S. dollar holdings of German official and banking institutions were about DM 1,000 million higher at the end than at the beginning of the year. In January-April 1960, net official holdings of gold and dollars increased further, by nearly DM 1,700 million, more than half of the increase occurring in April. The current account surplus, although higher than in the corresponding period of 1959, was about DM 280 million less than the surplus in the last four months of 1959. The accelerating accumulation of reserves was mainly due to a net inflow of capital, including repatriation of commercial banks’ foreign assets.

France

Further progress toward internal stability was made in France during 1959, industrial production began to expand again, and a substantial balance of payments surplus was achieved. However, since recovery did not get going until the second quarter of the year, real gross national product rose much less than in the years prior to the recession, and the increase was also less than in most other industrial countries. For 1959 as a whole, the cost of living increased by about 6 per cent, money wages rising by about 7 per cent. Most of the increase in domestic prices occurred, however, in the early months of the year, immediately following the stabilization measures announced at the end of 1958.

Private consumption and exports accounted for most of the rise in demand. Private consumption, however, rose less than 1 per cent in real terms. Gross fixed investment in real terms was the same as in 1958—with a fall in private investment in plant and equipment and an equivalent rise in public investment.

The increase in liquidity arising from the balance of payments surplus permitted the commercial banks to reduce their rediscount with the Bank of France; and an increase in commercial bank holdings of government obligations in part offset the decrease in the Government’s debt to the Bank of France. The increase of 12 per cent in the money supply was mainly attributable to the balance of payments surplus and, in the last quarter of the year, to credit expansion by the commercial banks. The money supply expanded about twice as fast as income, and at a rate higher than in any of the previous three years. The increase was almost entirely in the form of bank deposits.

While the authorities continued their efforts to minimize price and wage increases, the renewed expansion of production was stimulated by a moderate relaxation of credit in the first half of 1959. There was also an increase in public investment. Nevertheless, the government cash deficit fell slightly, and with the restoration of confidence in the currency, a much higher proportion of the deficit was financed from savings than has been usual in recent years. In fact, the Government repaid a substantial part of the advances made to it by the Bank of France in preceding years.

French official reserves of gold and convertible currencies rose in 1959 by $670 million, notwithstanding repayments of $430 million of official short-term liabilities, including repayment of $212 million and a gold subscription payment of $66 million to the Fund. Thus the net official foreign exchange position of the franc area improved by about $1,150 million. The net foreign exchange holdings of commercial banks were, however, reduced by some $100 million, so that the improvement in the total gold and foreign exchange position was about $1,050 million, compared with a deterioration of $100 million in 1958 and of almost $1 billion in 1957.

More than half the improvement between 1958 and 1959 was associated with the change from a French trade deficit with non-franc countries (of nearly $300 million in 1958 and of $950 million in 1957) to a trade surplus of $440 million in 1959. The volume of exports in 1959 was higher by 29 per cent, and the volume of imports lower by 1 per cent, than in 1958, and the unfavorable trend of “leads and lags” was reversed after the devaluation of the franc. By eliminating the disparity between French and foreign prices, devaluation led to an increase in French exports and to some substitution of goods produced in France or in other franc countries for goods imported from outside the franc area. Most of the decline in imports reflected, however, a reduction in inventories of imported materials, which were increased in 1957 and early 1958 in anticipation of an intensification of restrictions or the devaluation of the franc. Between the first and the second half of 1958, when industrial production had declined by some 2 per cent, the volume of imports fell by nearly 14 per cent; in the first half of 1959, although industrial production was nearly as great as it had been a year earlier, the volume of imports remained 11 per cent smaller, despite the easing of restrictions in January. Notwithstanding further liberalization measures during 1959, the increase of imports between the first and second half of the year was less than the increase in industrial production.

In 1959 there was an improvement of some $300 million in the service transactions of metropolitan France with the non-franc area, and of some $150 million in the balance of the rest of the franc area’s transactions with countries outside the franc area. Despite the reintroduction of a foreign exchange allowance for travel abroad, the surplus on tourism rose by more than $100 million, as devaluation stimulated foreign expenditure in France and discouraged French expenditure abroad. The improvement in private service transactions was partly offset by increased government expenditures abroad and a decline in foreign government expenditures in France.

The marked changes in certain capital transactions largely offset each other. Thus the reduction in U.S. aid was offset by the increase in the payments made by the Federal Republic of Germany in connection with the transfer of the Saar. Official contractual debt repayments rose by almost $200 million, in part as a result of repayments of debt contracted under the EPU scheme, including the special credit granted to France in 1958. The net inflow of private capital, however, increased by almost $400 million, but private sales of dishoarded gold to the authorities, which in 1958 had reached the exceptional total of some $200 million, were negligible.

Italy

Italy attained a high rate of growth in 1959 under conditions of virtual price stability and with a further substantial increase in its foreign reserves. Unemployment, although still high, declined to a lower level than in any recent year. The rise of 6.6 per cent in real gross national product was generated in part by an increase in exports of goods and services, but also by higher private consumption and public investment expenditures. Private investment did not begin to contribute to the expansion until the second half of the year. Imports rose more rapidly than GNP, but much less rapidly than exports.

The external surplus was the main source of the continued increase in money supply, at a much higher rate than income. An increase in bank credit, which occurred mainly in the second half of the year, was for the most part offset by an increase in savings deposits and similar liabilities of the monetary system. The resulting further improvement in the liquidity of the economy, which was reflected in a further decline in long-term interest rates during 1959, enabled the Government to finance its cash deficit almost entirely outside the banking system, so that it contributed to the monetary expansion to only a negligible extent.

Italian foreign exchange holdings (including changes in net IMF and EPU positions) rose by almost $2 billion from the end of 1957 to the end of 1959. More than two thirds of this increase resulted from a large current account surplus, and the remainder from an inflow of private capital. Over the two years, official donations and capital transactions were roughly in balance, economic aid and loans received being about equal to loan repayments and reparations and other official donations. While the general pattern of the balance of payments in 1959 was in most respects similar to that of 1958, the surplus was somewhat larger.

Much of the increase in the surplus was due to a further decline in the trade deficit. This deficit, which had averaged $700 million (with imports at f.o.b. values) in the five years before 1958, fell to $373 million in 1958 and to $125 million in 1959. Most of the improvement between 1957 and 1958 was due to a lower volume of imports and a sharp fall in import prices; there was little increase in the value of exports. In 1959, however, the rapid expansion of exports was resumed, and more than offset the rise in imports, the volume of which was 11 per cent larger than in either 1957 or 1958. Italy’s terms of trade remained almost as favorable in 1959 as in 1958.

The large surplus on service transactions and private donations changed little from 1958 to 1959. The recorded net inflow of private capital rose, and net official borrowing abroad was somewhat larger. The increases in the recorded inflow of public and private capital were, however, more than offset by the effects of a sharp change in the timing of payments, which had been highly favorable to Italy in 1958.

In the first quarter of 1960, industrial production was 18 per cent higher than in the corresponding period of 1959, as a result of marked increases in both private and public investment. Imports rose sharply, and the surplus on current account was more than $100 million less than in the first quarter of 1959. The increase of $55 million in the aggregate gold and foreign exchange holdings of the official authorities and the commercial banks was correspondingly less than the increase of $178 million in the first quarter of 1959. Official reserves were reduced by $120 million during the first quarter of 1960, but the holdings of commercial banks increased by more than $170 million. Budgetary investment expenditures in 1960 are expected to be considerably higher than in 1959 and are mainly intended to stimulate activity in the private sector, so that the rate of accumulation of exchange reserves should be reduced.

The recent growth of Italy’s balance of payments surplus has been partly due to structural factors. Rising prosperity and the gradual liberalization of trade and service transactions in Western Europe, together with the growth of U.S. demand for imported consumer goods and of U.S. tourism, have particularly favored the expansion of Italian exports of goods and services, and there has also been a continuing development of domestic sources of supply for fuels, chemicals, and other industrial products which were formerly imported. But the relatively low level of Italian prices and their increase at a rate slower than that in most industrial countries have also contributed to the growth of the surplus on current account. Wages have risen comparatively little, in part because of continued unemployment kept up at a rate that is still high by an outflow of labor from agriculture. Increases in wages have generally been smaller than the large annual increases in productivity that have resulted from industrial development. Consumption has tended to grow more slowly than production, and private savings more rapidly than domestic investment. At the same time, price stability, confidence in the currency, and industrial advances, together with the still relatively high Italian interest rates, have encouraged a considerable inflow of private capital in recent years.

Japan

Rapid economic expansion has continued in Japan since the second half of 1958, when recovery from the recession of 1957-58 began. In the last quarter of 1959, the seasonally adjusted index of industrial output was 41 per cent above the recession low of the second quarter of 1958 and 33 per cent above the peak in the second quarter of 1957. A substantial increase in productivity, which exceeded the increase of 7 per cent in wage rates, made it possible for industrial production to expand much more than employment. As there was only a small rise in the cost of living, real wages increased considerably. Wholesale prices rose in 1959, but by much less than they had declined during the recession and the early stages of recovery.

The upswing was supported by a substantial increase in both domestic investment and exports. There were substantial additions to fixed capital, inventories were rebuilt, and exports, which had been practically the same in 1958 as in 1957, were about 20 per cent greater in 1959 in both volume and value, though Japan’s exports are still handicapped in many markets by special restrictions. Nearly 60 per cent of the increase occurred in trade with the United States.

The volume of imports was some 25 per cent greater than in 1958 and slightly greater than in 1957, but, as import prices were lower than in 1958, there was little change in the trade balance (c.i.f.), and the value of imports was still substantially less, by about $700 million or 16 per cent, than in 1957.

Receipts from foreign military establishments and offshore military procurement declined slightly, and the surplus of $360 million on goods and services account was about $100 million less than in 1958. However, the increase in Japan’s official reserves and net IMF position, $454 million, was almost as large as in 1958, and the foreign exchange assets of the commercial banks rose by $100 million more than in 1958. At the same time, the short-term liabilities of Japanese official and banking institutions, which had decreased by $74 million in 1958, increased by $191 million. The authorities have been taking advantage of the comfortable external payments position to undertake a substantial relaxation of restrictions on foreign trade and payments. In further pursuance of this policy, the use of yen for the settlement of international transactions was permitted as from July 1, 1960, and nonresidents were authorized to establish in Japan freely convertible and freely transferable yen accounts. Capital exports are being encouraged, especially in the form of export credits and investments in less developed countries.

The rapid and sustained recovery and growth of the Japanese economy occurred with comparatively little active support from the authorities, although the increase in foreign reserves was allowed to provide additional liquidity. The Treasury’s cash deficit in the last nine months of the year was about the same as in the corresponding period of 1958 and much below budget estimates. When pressures on domestic resources increased in the latter part of 1959, some measures were taken to prevent the emergence of inflationary conditions. In September, the law enacted in 1957 which authorized the imposition of reserve requirements upon banks was put into effect for the first time. The initial requirements, ranging from ¼ per cent to 1½ per cent of deposits, were followed by stricter loan directives to the banks and, in December, by an increase, from 6.94 per cent to 7.30 per cent, in the basic discount rate of the Bank of Japan, which brought the rate back to the level of early 1959.

India

Developments in the Indian economy during the year under review were on the whole favorable. Agricultural output was at a record high level in 1958-59, and industrial production increased more in 1959 than in the previous year. Developmental expenditure in the public and private sectors continued to increase in keeping with the revised targets of the Second Five Year Plan. The sharp fall in foreign exchange reserves that continued from the initiation of the Second Five Year Plan in early 1956 was arrested late in 1958, and since that time there has been relatively little net change in the reserve position. A major factor in this favorable development was an increased flow of foreign assistance. In addition, imports, particularly of consumer goods, were curtailed, so that the current account deficit was substantially reduced. In 1959 there was a rise in exports, in contrast to the experience of the two preceding years.

The money supply, which over the whole period since the beginning of the First Five Year Plan (1951) had increased somewhat more slowly than real production, rose a little more rapidly in 1959. This growth reflected in part the disappearance of the offset to domestic expansionary factors previously provided by the decrease in monetary reserves, although the accrual of time deposits, including counterpart funds from imports of U.S. surplus agricultural products, continued to act as a restraining factor. In spite of rising development expenditures, the excess of government expenditure on revenue and capital accounts over combined revenue receipts and internal nonbank borrowing was significantly less in the fiscal year ended March 31, 1960 than in the year before, and as a result of this and of larger foreign loans, the Government’s recourse to the monetary system, although substantial, was markedly reduced. Bank credit to the private sector, on the other hand, increased more rapidly in 1959 than in 1958. This was principally the counterpart of the sharp upturn in agricultural and industrial output.

Systematic and flexible use was made of selective credit controls, and the Reserve Bank of India engaged in open market sales. In June 1959, the commercial banks were requested to reduce substantially the volume of their loans during the ensuing slack agricultural season, which conventionally lasts until the end of October. In March 1960, the Reserve Bank introduced a series of further measures, including the imposition of higher margins for certain advances and additional reserve requirements for commercial banks, with a view to curbing advances, especially those for speculative purposes.

Wholesale prices increased by 6 per cent in 1959, against 4 per cent in 1958. Moreover, the rise, which had previously been confined largely to food items, extended to other commodity groups, and especially to industrial raw materials. On the whole, these increases were the result of supply factors which affected individual prices, but the general monetary expansion may also have had some effect.

Canada

Canada’s gross national product, which in real terms had not changed during the two previous years, rose in 1959 by 4 per cent in volume and by 6 per cent in value, to $34.6 billion (all figures are in Canadian dollars unless otherwise specified). Almost all the GNP components participated in the increase, except that construction activity leveled off and government expenditures declined in the second half of the year.

The expansion of economic activity was accompanied by large private credit demands. Bank loans to business firms and individuals increased during 1959 by $900 million. This credit expansion was financed in part by commercial bank sales of $700 million of government securities. At the same time, government borrowing needs, although reduced by 22 per cent from the preceding year by an increase in revenues, still amounted to slightly more than $1 billion. The Bank of Canada sought to contain inflation by keeping the money supply steady and therefore did not add to its holdings of government securities. In these circumstances, holdings of government securities by the nonbank public (including local governments) expanded over the year by the record amount of $1,750 million.

These developments led to tighter credit conditions and rising interest rates. For 1959 as a whole, a 3 per cent decrease in money supply was more than offset by a substantial rise in the velocity of circulation. Interest rates reached a peak in late summer, when Treasury bill yields rose to more than 6 per cent. Thereafter, the pressure of demand for credit abated somewhat, and interest rates declined slightly. This decline accelerated in March 1960, when the rate averaged 3 per cent, or almost ½ per cent below the U.S. rate. In April, the short-term credit market firmed and the Treasury bill rate rose to 3.3 per cent, approximately the same as the corresponding U.S. yield.

The economic expansion in 1959 was accompanied by a rise of 25 per cent in the external current account deficit, to more than $1.4 billion (Table 24). The value of merchandise exports rose by about 5 per cent, and the value of imports by 9 per cent, with industrial materials, machinery and equipment, and consumer goods almost equally responsible. The current nonmerchandise deficit (excluding nonmonetary gold), which has grown steadily in recent years, again increased, to $1.2 billion.

Table 24.Canada: Summary of Balance of Payments, 1958 and 1959 1(In millions of Canadian dollars)
1959 2
19581959 2Jan.-JuneJuly-Dec.
Goods, services, and donations
Exports (including nonmonetary gold)5,0475,3012,4952,806
Imports–5,066–5,533–2,755–2,778
Trade balance–19–232–26028
Services and donations, net–1,112–1,197–588–609
Total–1,131–1,429–848–581
Direct investment in Canada420500250250
Other long-term capital movements
New issues and retirements of Canadian securities519449174275
Other 3–28–30–22–8
Total491419152267
Private short-term capital movements
Outstanding Canadian securities8820211389
Other, including net errors and omissions4241297327–30
Total32949944059
Official holdings of gold and foreign exchange5 (increase –)–1091165
Source: Dominion Bureau of Statistics, Quarterly Estimates of the Canadian Balance of International Payments, Vol. VIII, No. 1.

No sign indicates credit; minus sign indicates debit.

Preliminary.

Covers Canadian direct investment abroad, new issues and retirements of foreign securities, and Canadian Government loans and repayments.

Covers outstanding foreign securities, Canadian dollar holdings of foreigners, and the balancing item, which is believed to represent mainly private short-term capital.

Including net IMF position

Source: Dominion Bureau of Statistics, Quarterly Estimates of the Canadian Balance of International Payments, Vol. VIII, No. 1.

No sign indicates credit; minus sign indicates debit.

Preliminary.

Covers Canadian direct investment abroad, new issues and retirements of foreign securities, and Canadian Government loans and repayments.

Covers outstanding foreign securities, Canadian dollar holdings of foreigners, and the balancing item, which is believed to represent mainly private short-term capital.

Including net IMF position

Foreign direct investment in Canada in 1959 was greater than in 1958 by almost 20 per cent, but the net inflow from new security issues declined, so that the total long-term capital inflow (excluding net foreign purchases of outstanding securities) was practically the same. In 1959, it offset only about three fifths of a larger current account deficit, compared with more than four fifths in 1958. An increase in net new issues of municipal and provincial government securities, encouraged by lower U.S. interest rates, was partly offset by larger redemptions of Dominion Government bonds. Net sales abroad of private securities in 1959 were only one third as large as in 1958. As in earlier years, the imbalance of current and long-term capital transactions was offset by an equilibrating movement of private short-term capital (including net foreign purchases of outstanding securities), which responded both to changes in the exchange rate and to changes in the interest differential. The inflow in 1959 was about $500 million, or 50 per cent greater than a year earlier. The relations between these movements and Canada’s fluctuating exchange rate are further examined in Chapter V. Canada’s gold and foreign exchange reserves, which had risen during 1958 by US$112 million, declined during 1959 by US$72 million (including US$62.5 million paid to the Fund on account of the increase in Canada’s quota), to US$1,869 million. During the first four months of 1960, Canada’s reserves were further reduced by US$26 million.

Australia

The Australian Government budgeted for a further small deficit for the fiscal year 1959-60, and influenced by both official policy and a marked improvement in the external position, economic activity expanded in 1959, and there was a fall in the number of unemployed. With a more favorable trade balance and a greater net inflow of capital, exchange reserves (including the net IMF position) rose by $146 million in the calendar year 1959. The rise in reserves and the Government’s cash deficit increased bank liquidity, and bank credit to the private sector rose slightly. Prices continued to rise, and there were considerable wage increases in the second half of the year. The central bank reduced bank liquidity by increasing reserve requirements in the closing months of 1959 and in early 1960. By the end of 1959, a strong expansion of demand was apparent, and in February 1960 the Government announced its intention of resisting any tendency to imbalance in the economy by avoiding any deficit finance in the 1960-61 budget and by largely abolishing import restrictions. It was emphasized that further increases in wages should be moderate until the economy had absorbed the large increases granted in 1959. The Government had responded earlier to improved external prospects by relaxing import restrictions in August and December 1959. By the end of February 1960, import restrictions, together with any remaining discrimination, had been largely eliminated.

A major factor in the improvement in Australia’s external payments position was the increase in wool exports, from $680 million in 1958 to $790 million in 1959. While wool prices in the last quarter of 1959 were 28 per cent above the ten-year low to which they had fallen in the last quarter of 1958, the average price was not much higher in 1959 than in 1958, and the increased value reflected mainly an increase in volume. Wheat and butter exports advanced significantly and together contributed some $90 million toward improving the trade balance; other food exports also rose, as a result of high production and more favorable conditions in overseas markets. Total export earnings were some $350 million greater in 1959 than in 1958—an increase of more than 20 per cent. An increase in the net inflow of private and official capital also contributed to the improvement in Australia’s reserves.

For 1959 as a whole, imports (including aircraft and ships not covered by the ordinary trade statistics) were greater than in 1958 by some $124 million, most of the increase occurring in the last quarter of the year. Imports continued to expand rapidly in the first quarter of 1960, and although export proceeds were also rising, the balance of trade was slightly less favorable than in the same period of 1959.

Argentina

After the adoption by Argentina at the end of 1958 of a comprehensive stabilization program, supported by credits totaling $329 million from the Fund and from public and private U.S. agencies, inflationary forces that had previously been repressed were released. As a result, there was a steep increase of prices and wages and a depreciation of the peso during the first half of 1959.

Argentina’s stabilization measures produced substantial increases in government revenue. Apart from central bank losses on exchange insurance guarantees contracted prior to the stabilization program and payable by the Government, borrowing by the public sector from the monetary system, which had been the principal source of inflation, was reduced to some 3 per cent of the money supply at the beginning of the year, compared with 32 per cent a year earlier. The expansion of credit to the private sector continued high during the first half of 1959, when payments to the public under these exchange insurance guarantees added to liquidity. Moreover, a prolonged strike of bank employees rendered credit control ineffective. After mid-year, however, the expansion of credit to the private sector slowed down considerably.

By the middle of 1959, the unfavorable price and exchange rate movements of earlier months were slowing down. Retail prices, which had risen by 75 per cent from December 1958 to June 1959, rose by only 15 per cent during the second half of the year and by 5 per cent in the first four months of 1960. The exchange rate, which had depreciated sharply, improved, and since August it has been stable around 83 pesos per U.S. dollar. Industrial production, however, continued to be less than in 1958.

The balance of payments showed a remarkable improvement in 1959, both on goods and services and on capital accounts. Exports rose only a little, with increases in wool and grain exports but smaller shipments of meat, as slaughter was reduced in order to rebuild depleted stocks of cattle. Imports, however, were some $240 million lower than in 1958, partly because of an increase of 30 per cent in domestic petroleum output, but mainly as a consequence of measures which were part of the stabilization program. Instead of a trade deficit, such as had been recorded in every year since 1954, there was a small export surplus. There was a considerable inflow of foreign funds, long-term and short-term, and some repatriation of domestic capital. Foreign exchange holdings, which had been declining gradually throughout the preceding four years, were replenished. Gold and convertible currency reserves rose during 1959 by some $175 million, while foreign exchange liabilities increased by not more than $35 million. The improvement in Argentina’s external position continued in the first months of 1960 with further substantial increases in reserves.

Brazil

Inflation in Brazil gathered momentum in 1959, the main source of monetary expansion being again a growing deficit in the public sector. The Government increased its borrowing from the monetary authorities and, in order to finance both the purchase of a very large part of the current coffee crop for stockpiling and a program of development, drew heavily on the exchange profit account, which for the first time showed a net deficit. The large public sector deficit increased the liquidity of the banking system to an extent that permitted not only credit expansion to the private sector at a much higher rate than in previous years but also an improvement in the banks’ net position vis-à-vis the monetary authorities. Substantial wage and salary increases granted early in 1959 also contributed to progressive inflation.

The effect of these developments on the external payments position of Brazil was mitigated by a relatively substantial depreciation of the exchange rates, the average of which exceeded the rise in internal prices. Consequently, the payments position remained much the same as in 1958. The value of exports was some 3 per cent higher than in the previous year; restocking in the United States permitted expansion of the volume of coffee exports, and more aggressive sales policies ensured full utilization of the export quota allotted to Brazil by international agreement. Exports of cocoa declined as a result of much lower prices, and other exports changed little. Although imports rose only slightly, the goods and services deficit was larger than in 1958 because of higher payments for services. In 1958, the deficit had been financed largely by the use of reserves and IMF resources, and by drawing on loans and lines of credit extended by foreign banks and on a special loan of $100 million from the Export-Import Bank of Washington. In 1959, most of the goods and services deficit was matched by an inflow of capital, which included suppliers’ credits and funds made available through swap operations, i.e., contracts under which private parties, mainly foreign investors, make foreign exchange available to the monetary authorities on condition that they are permitted to repurchase equivalent amounts at the same rates of exchange at specified later dates. To encourage an inflow of private capital, arrangements for swap operations were modified to permit five-year contracts; in 1959, these operations contributed $114 million, in contrast to an outflow of $22 million on this account in 1958. Gold and convertible exchange holdings increased during the year, and repayments were made to foreign banks and to the Fund, while Brazil’s bilateral balances, mainly with Argentina, were utilized to the equivalent of $55 million.

Other Countries

The improvement achieved in 1958 in the economic conditions of the Egyptian Region of the United Arab Republic was by and large maintained in 1959. The trade deficit was smaller than in 1958 despite a further decline in cotton prices in the early months of the year and a poor rice crop in 1958-59, which not only made exports of rice impossible in 1959 but necessitated larger imports of foodgrains. Receipts from cotton exports were maintained, a larger volume offsetting the effects of lower prices. For the new crop season which started in September 1959, various changes were made in cotton export policy. Barter trade was discontinued, and the export pound was replaced by a variable premium system, intended to promote exports by modifying the effects of changes in international market prices on exporters’ earnings. There was increasing demand for cotton in Western Europe, and the resulting recovery of prices continued at an accelerated rate through the first months of 1960. The volume of cotton exports from September 1959 to April 1960 was 15 per cent greater than in the comparable period of 1958-59, and the trend of recent years toward a rising proportion of cotton shipments to the U.S.S.R., Mainland China, and Soviet countries was reversed.

The total value of exports was less in 1959 than in 1958, as rice exports, which amounted to nearly $40 million in 1958, ceased almost completely. Receipts from Suez Canal dues increased slightly. There were larger food supplies from abroad, but imports in general were limited by restrictions, and the trade deficit was reduced by nearly $20 million. Nevertheless, reserves declined by some $70 million, twice as much as in 1958, mainly as a result of contractual payments, including payments to the Suez Canal Company and the U.K. Government.

Government borrowing from the banking system, which had ceased in 1958—indebtedness actually declined in that year—was resumed in 1959, though on a comparatively moderate scale and mainly in relation to a build-up of cotton stocks. Credit to the private sector, however, expanded sharply, partly to finance imports of U.S. surplus agricultural commodities, but also for investment purposes. The money supply, after having declined in 1958, rose by 4 per cent in 1959. Domestic prices, which are subject to controls, remained stable.

For the second successive year, the Syrian Region was adversely affected in 1959 by poor grain crops, and exports of wheat and barley fell to a negligible amount. Total exports in 1959 were some 16 per cent lower than the year before; but as continued credit expansion to both the public and the private sectors kept demand at a high level, imports declined by only 8 per cent. As a result of greater external financial assistance and some repatriation of capital, the drain of previous years on exchange reserves was, however, reversed.

A series of measures taken by the Sudan during 1958, and the drastic revision early in 1959 of its cotton marketing procedures, which had been hampering exports, reversed the adverse payments developments of recent years and permitted replenishment of reserves, which had been severely depleted in 1958. In contrast to the trade deficit which had developed in 1957 and persisted in 1958, there was a substantial trade surplus. The volume of cotton exports more than doubled, and stocks accumulated with the Gezira Cotton Board were liquidated. Despite much lower average prices, earnings from cotton exports rose from some $68 million in 1958 to roughly $115 million in 1959. Receipts from other commodities also increased, and the total value of exports was nearly $70 million greater than in 1958. Imports, checked through the first three quarters of the year by severe restrictions, were somewhat less than in 1958, though relaxation of controls led to a sharp expansion in the last quarter of the year. The improvement in exports continued into 1960, with strong demand for long-staple cotton, which, despite record crops, led to a substantial recovery of prices. The inflow of foreign capital also increased considerably, mainly for development purposes. These additional loans permitted the continuation of development programs on roughly the same scale as in 1958, without further drawing on the government cash balances, which had been the main source of inflationary pressure. Internal revenue increased as a result of additional taxes imposed in mid-1959, and cash balances were replenished. Credit to the private sector remained virtually stable during 1959 and, as a result of some liberalization late in the year, expanded slightly thereafter. The money supply, which had risen in 1958 despite the reduction of foreign assets, remained unchanged in 1959.

Turkey’s foreign trade recovered in 1959 from the very low level to which it had fallen before the introduction of the stabilization program in August 1958. In that year some export shipments had been deferred in expectation of exchange rate changes, and the flow of trade was also interrupted until adjustments were made to the new conditions prevailing under the stabilization program. However, the exchange depreciation and the effects of other stabilization measures helped to raise exports in 1959 to a level higher than in any of the previous five years, while foreign assistance extended to Turkey in connection with the stabilization program made it possible to finance a much greater quantity of imports in 1959.

In certain sectors of the domestic economy, some effects of the stabilization program could also be observed in 1959. There was a substantial decline in the price of gold. The fiscal position improved, and the central bank and commercial bank credits that are subject to ceilings remained within the limits established for them. However, types of commercial bank credit not subject to ceilings increased significantly.

The increase in Iran’s foreign exchange receipts from the oil sector was again less in 1959 than in the previous year. Because of reduced prices, these receipts were only slightly higher than in 1958, in spite of a 12 per cent increase in petroleum output. Imports, however, continued to rise, and the foreign exchange holdings of the monetary authorities, which had been slowly accumulating for a number of years, declined considerably. Monetary expansion continued, primarily as a result of the growth of bank credit to the private sector, largely for investment purposes. Domestic prices, which had been fairly stable up to October 1958, rose by nearly 20 per cent in the succeeding twelve months. Government expenditure, including expenditure for the development program, was financed mainly from oil revenues and involved little if any borrowing from the banks. Nevertheless, since investment by the private sector was greatly stimulated by the opportunities created by the development program, the latter contributed indirectly to the expansion of credit. In order to bring demand into line with available resources, the authorities cut back planned development expenditure, and the Bank Melli Iran imposed limitations on its credit operations in the private sector.

Economic conditions in Pakistan improved in 1959. Inflationary pressure was reduced by the program adopted late in 1958 with the primary objective of eliminating inflationary financing of the budget deficit. Increased foreign aid and loans and some reforms in the tax structure and tax collection helped to improve the fiscal position. During the first three quarters of the year, the Government’s indebtedness to the banking system was reduced; in the last quarter, however, borrowing from the State Bank was resumed. At the beginning of 1959, the State Bank raised the discount rate from 3 per cent to 4 per cent, but some restrictions on bank credit were lifted. There was only a slight increase in credit to the private sector, and this was offset by an increase in time deposits. The money supply, which up to September remained virtually stable, increased in the last quarter by about 5 per cent. Drastic price controls, imposed late in 1958 and gradually relaxed during 1959, led to a temporary reduction of retail prices. Some rise in the output of textiles, and imports of foodgrains, partly under U.S. disposal programs, relieved temporary shortages of food and other consumer goods but did not prevent a steady rise in the cost of living, which for the whole year amounted to 12 per cent.

The improvement in Pakistan’s external position was due to increased export receipts and increased foreign assistance, combined with a considerable cut in imports and the repatriation of certain assets held abroad. Though prices of cotton and jute declined, the value of Pakistan’s exports in 1959 increased by 6 per cent, in part under the stimulus of an export bonus scheme for some manufactures. As a result of severe restrictions imposed toward the end of 1958, imports in the first six months of 1959 were 30 per cent less than in the corresponding period of the previous year, and despite a subsequent relaxation of controls, the total value of imports for the year as a whole was 11 per cent less than in 1958. Foreign assistance in the form of grants, loans, and credits rose by some $25 million, to $186 million. As a result of the improvement in its balance of payments, Pakistan was able to cancel its stand-by arrangement with the Fund, and by the end of 1959 its holdings of gold and foreign assets had increased by $88 million, in contrast to the decline of $50 million in 1958.

During 1959 the Federation of Malaya substantially increased its foreign trade surplus. The improvement in the trade position was caused mainly by increased demand and higher prices for rubber and tin, as economic activity revived in the United States and elsewhere. The quantity of rubber exported also rose, and the total value of all exports in 1959 was more than 30 per cent greater than in 1958. An increase in imports lagged behind the increase in export earnings, so that reserve assets increased substantially. With government revenue highly dependent on import and export customs duties, and declining exports in 1958, Malaya’s budget expenditures for 1959 were set relatively low. During the year, increased revenues from higher exports, together with the proceeds of domestic and foreign loans, more than sufficed to cover total expenditures, including supplementary expenditures authorized in the course of the year, and the budget thus showed a surplus. The central bank, established in January 1959, imposed legal reserve requirements upon commercial banks, and subsequently increased these requirements. Although the money supply increased during the year pari passu with the increase in foreign assets, the domestic price level did not rise and the cost of living index for Malay workers was somewhat lower than in 1958.

Economic developments in the Philippines in recent years have been characterized by a high rate of credit expansion, especially to the public sector, a persistent fall in reserves, a moderate rise in money supply, and price stability for home goods. When a combination of exchange controls and certain selective credit policies failed to relieve pressures on the balance of payments, the authorities adopted a series of monetary and fiscal measures in 1959 which were designed to limit the increase in over-all demand and to restore balance of payments equilibrium. The rediscount rate and bank reserve requirements were raised; a “margin fee” of 25 per cent was imposed on most sales of foreign exchange, the proceeds of which were in part to be sterilized in the central bank; and fiscal operations were planned to have a deflationary effect in the fiscal year ending June 1960. These measures, in combination with favorable external factors, helped to increase net official reserves (including the net IMF position) by $58 million and commercial bank foreign assets by $28 million in 1959, following approximate balance in these accounts in 1958 and a deficit of $115 million in 1957. In April 1960, further modifications were made in the exchange system with the purpose of ultimately freeing all payments from restrictions. The change in the balance of payments in 1959 was attributable mainly to a decrease in the trade deficit, as imports declined and exports increased. Exports benefited from high prices for coconut products at the beginning of the year and rising prices for abaca and lumber. Export receipts from copper concentrates and chromite also increased substantially, and sugar was the only major export commodity that declined in both volume and price. Despite the increase in the net foreign assets of the monetary system and continued expansion of credit to the private sector, money supply increased at a slower rate than in 1958, mainly because of a greater increase in time and savings deposits and the sterilization of part of the proceeds from the foreign exchange margin.

In the Union of South Africa, the effectiveness of the measures taken in 1958 to restrain demand in order to restore balance of payments equilibrium was reflected in a substantial improvement of the external position during 1959. Although imports, which had already begun to fall in 1958, rose again in the latter part of 1959, a decline in consumer demand and caution in the replenishment of inventories kept their value for 1959 as a whole 12 per cent less than for 1958. Wool exports increased in volume and, to a less extent, in price; the value of diamond exports increased substantially, but there were some declines in uranium and fruit. Total export receipts rose by about 10 per cent, and the output of gold reached a new high. As a result of all these changes, there was a current account surplus of just over $200 million, whereas in 1958 there had been a deficit of the same magnitude. Official reserves rose by $114 million, and a further $49 million was transferred to the Fund in repurchases and as the gold payment on South Africa’s increased Fund quota. A net outflow of private capital was mainly the result of the repatriation of foreign-held domestic securities and direct investment in Rhodesia and Nyasaland. Official reserves changed little during most of the first quarter of 1960, but declined in April as a result of further repatriation of foreign-held domestic securities and of adverse seasonal factors.

Mainly as a result of the increase in gold production, gross national product, in real terms, is estimated to have been more than 2 per cent greater than in 1958, and prices increased very little. The volume of agricultural output, however, was no higher than in the previous year, and in manufacturing, building, and other sectors of the economy, activity and employment were less than in 1958.

Because of the slackness in business conditions in the first half of 1959, official policy was directed toward the encouragement of private and local government investment. The official discount rate was reduced from 4½ per cent to 4 per cent in January, and supplementary reserve requirements for the commercial banks were reduced in February and removed entirely in November 1959. Interest rates tended to decline throughout 1959. As signs of economic recovery appeared toward the end of the year, the Government announced relaxation of some of the remaining import controls and exchange restrictions; and in the budget presented early in 1960, income taxes were reduced and further tax concessions were made to encourage investment from domestic and foreign sources.

Chile benefited greatly in 1959 from increased demand and higher prices for copper, as a result of which export receipts were some 30 per cent greater than in 1958. Imports remained virtually unchanged, and instead of substantial deficits, as had been recorded in 1957 and 1958, there was again, as is usual in Chile, an export surplus. Inflow of foreign funds continued, and $70 million was added to official holdings of gold and foreign exchange. Industrial production expanded by 13 per cent, and there was a sharp recovery in construction activity, which had been depressed. Mining production increased by 11 per cent, but unfavorable weather conditions caused some decline in agricultural production. Inflationary pressure continued to be a serious problem. During the first ten months of 1959, the cost of living index rose by 37 per cent, compared with 33 per cent during the year 1958. Thereafter, through mid-1960 it remained slightly below the level of October 1959. The rise of prices in 1959 resulted from higher costs attendant upon the devaluation at the end of 1958, as well as from a general wage increase and higher public utility rates; the rising budget deficit and a large credit expansion to the private sector, which occurred despite the elimination of central bank rediscounts, continued to provide excess liquidity. The budget deficit was covered, in part, by borrowing abroad—the foreign debt incurred for budgetary purposes rose from $50 million to $76 million—and in part by the issue of Treasury securities denominated in dollars and made eligible for payment of advance import deposits. Preferential treatment for reserve requirements of deposits in foreign exchange facilitated the expansion of bank credit and contributed to its excessive growth. Nevertheless, because of a substantial increase in the nonmonetary liabilities of the banking system, including foreign currency deposits, the money supply, conventionally defined to exclude such deposits, increased less rapidly than in 1958. In September 1959, in order to curb the expansion of bank credit, the central bank established reserve requirements of 75 per cent on increases in deposits of all types, and the cost of central bank credit to commercial banks was substantially raised. Credit extended by the commercial banks and money and foreign currency deposits subsequently expanded somewhat more slowly, and prices tended to level off.

The improvement in the external position of Colombia which had begun in 1958 continued in 1959. Despite repayment of debt arising from the refinancing of import arrears amounting to $20 million, reserves (including net IMF position) increased by $73 million. The official exchange rates were maintained, and the free rate appreciated during the year by 15 per cent. There was a small increase in export receipts, as the decline in coffee prices was more than offset by a considerable increase in the volume of shipments—some 18 per cent from 1958 to 1959. Imports remained subject to restrictions and controls, and import demand was checked by restrained monetary and fiscal policies. A rise in import registrations early in 1959 was countered by a further stiffening of advance deposit requirements, and imports actually rose very little.

Despite the larger payments surplus, total money supply increased during 1959 at only about half the 1958 rate, although by more than twice the estimated increase of 4 per cent in real national income. The money supply in fact increased by less than the payments surplus. Bank credit to the private sector rose somewhat less than nonmonetary deposits, including advance deposits for imports, and there was no net borrowing by the Government from the banks. The National Coffee Federation, which in 1958 had borrowed heavily from the central bank to finance the stockpiling of coffee, repaid part of its debt. In 1959, stockpiling in excess of the quantities which exporters are obliged to retain was financed by the exchange tax on coffee exports and by exchange profits allocated to the National Coffee Fund. As a result of Colombia’s restrictive monetary and fiscal policy, domestic prices rose much less in 1959 than in 1958.

After two years of balance of payments deficits, Mexico added to its international reserves in 1959. Export receipts rose by about 2 per cent. Despite a fall in the price of cotton, the disposal of stocks accumulated in previous years raised cotton earnings more than enough to compensate for declines in receipts from coffee; receipts from other major exports were about the same as in 1958. Imports declined by more than 10 per cent, partly as the result of increased tariffs but mainly because of the decline in government imports of foodstuffs and investment goods. The trade deficit was consequently reduced by $140 million. Also, there was a substantial increase in net earnings from travel and from remittances by Mexican workers abroad. While government long-term borrowing abroad was lower than in 1958, the large outflow of short-term private capital that had occurred in 1958 was almost entirely arrested. Official reserves, which had declined by $81 million in the preceding year, rose by $41 million in 1959, even after payment of $22.5 million in gold to the Fund on account of the increase in Mexico’s quota.

The rate of growth in the domestic economy was about the same in 1959 as in 1958. Agricultural output improved substantially, and mining and manufacturing were well maintained. Although still large, the deficit of the public sector was reduced by the decision taken late in 1958 to scale down the substantial outlay of the Federal Government on investments and on subsidies for government enterprises. The deficit was again financed by the Bank of Mexico, but in contrast to 1958 its inflationary effects were to a large extent offset by open market operations. Substantial quantities of government securities were bought from the Bank of Mexico by commercial banks and finance organizations, in part to comply with reserve requirements, and further purchases were made by the private nonfinancial sector. Central bank credit both to banks and to private borrowers was reduced. The balance of payments surplus, however, added to the liquidity of the private banks, and bank credit to the private sector rose substantially. Further additions to money supply resulted from a shift from foreign currency to domestic currency deposits with Mexican banks, a development that reflected both increased confidence in the peso and some changes in the regulations governing such deposits. Total money supply increased by 16 per cent. However, this rise had no counterpart in the movement of prices; the indices of wholesale prices and of the cost of living were both virtually unchanged from 1958 to 1959, as food prices declined.

Economic conditions in Peru in recent years were characterized by spurts of pronounced inflation and subsequent periods of marked retrenchment. In 1959 credit was expanded, prices rose, and the exchange rate depreciated through August; thereafter restraining measures were imposed. For 1959 as a whole, real national income was higher than in 1958 by about 5 per cent. This increase, however, was not sufficient to restore the level recorded before the severe recession of 1958.

The deterioration in the first half of 1959 was due mainly to increased government borrowing from the central bank necessitated by an unexpected rise in expenditure, while delay in the application of new tax measures prevented the increase in revenue that had been planned in the stabilization program adopted in early 1959. The resulting inflationary pressure was further enhanced when, during a strike of bank employees, it became difficult to render the customary accounts, and large deficiencies reappeared in legal bank reserves; the penalty rate of 18 per cent on reserve deficiencies thus became inoperative from April to July. These developments were largely responsible for the depreciation of the exchange rate and an increase of some 16 per cent in the cost of living during the first eight months of the year.

The renewed enforcement of stabilization measures in August, including the restoration of the penalty rate on reserve deficiencies, produced a marked financial recovery. There was some contraction of credit, and by the end of 1959 commercial banks held substantial excess reserves. Government borrowing from the central bank ceased as accounts with commercial banks were drawn upon during the last quarter of the year. Inflationary pressure subsided, and both internal prices and the exchange rate remained stable through the rest of the year.

The external position of Peru markedly improved in 1959. Exports were some 11 per cent higher than in 1958, and there was a further contraction of imports, which were some 12 per cent lower than in 1958 and 26 per cent lower than in 1957. Depreciation of the exchange rate and an increased average rate of import duties were mainly responsible for this contraction. Exchange reserves were replenished in the second half of the year, and in December $14.5 million was repurchased from the Fund.

With the application of restrained monetary policies, Peru’s over-all financial position improved further in the early months of 1960. The 1960 budget provides for a substantial increase in revenues, mainly through tax reforms, and a reduction of some expenditures. Seasonal fiscal needs in the first quarter of 1960 were met without borrowing from the banking system, and thereafter the Government began to build up a cash surplus. Peru’s stand-by arrangement with the Fund was renewed in March.

In order to prevent the excessive expansion of bank credit that might have followed the accumulation of substantial excess reserves as the commercial banks received large additional private deposits, a 100 per cent marginal reserve requirement was applied to all increases in bank deposits above the level of April 22, 1960. With exports increasing, the central bank was able to maintain its gross foreign reserves during the period of seasonal balance of payments pressure, even after repaying to the Export-Import Bank of Washington $15.5 million of a balance of payments support loan. As a result of the stronger position that had been established, the monetary authorities on May 16, 1960 unified Peru’s two exchange markets by suspending the exchange certificate system which had been in existence for ten years.

The reserves of Venezuela, which had declined by nearly $400 million in 1958, fell further, by nearly $360 million, in 1959, even with an advance of $100 million to the Government by the petroleum companies in November. This decline continued in 1960 and was not brought under control until the second quarter, when Venezuela received a credit of $200 million from a group of U.S. and Canadian private banks. The drain on reserves was largely accounted for by an outflow of domestic and foreign capital. The small deficit on current account was reduced from 1958 to 1959, because a reduction in the value of exports by some 8 per cent was more than offset by a simultaneous decline in imports and in transfers of investment income.

In part, the capital outflow resulted from the settlement of government obligations discounted abroad, incurred in past years, which added to the fiscal cash deficit. This deficit, which in 1959 amounted to almost 20 per cent of the money supply at the beginning of the year, in contrast to more than 40 per cent in 1958, was met by drawing on government deposits built up in 1956 and 1957 from the proceeds from sales of oil concessions. Moreover, in the second half of 1959, fears for the stability and convertibility of the bolívar provoked a run on the banks and a substantial flight of capital made possible by the existence of large liquid funds. The run on the banks and the flight of capital continued in the first half of 1960, reducing the money supply by almost 17 per cent in the nine months ended March 1960. In November 1959, the central bank had eased its rediscount conditions to alleviate the liquidity position of the commercial banks, and as the banks began to call outstanding loans, the volume of private credit was reduced somewhat.

Early in 1960, the Venezuelan Government adopted fiscal and monetary measures designed to maintain the convertibility of the bolivar at the current exchange rate without restrictions and with no further decline of reserves. The program provided for a drastic cut in government expenditure and for a balanced budget in the fiscal year 1960-61. The deficit for the first half of 1960 was to be met from part of the proceeds of the loan advanced by the U.S. and Canadian private banking group. To counteract the effect of increased liquidity arising from the current government deficit, the central bank was to reduce its advances and rediscounts and raise the rediscount rate. The cash deficit of the Government in the first five months of 1960 was practically offset by the reduction in the net lending of the commercial banks to the private sector, and in the second quarter of the year the flight of capital abroad abated. A one-year stand-by arrangement with the Fund permits Venezuela to draw up to $100 million in support of its efforts to achieve stability.

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