Chapter

V Exchange Practices and Payments Arrangements

Author(s):
International Monetary Fund
Published Date:
September 1960
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General Developments in 1959

The year under review in this Report was particularly satisfactory in the lessening of exchange restrictions, the simplification of exchange controls, and a decline in the number of bilateral payments agreements. These measures followed from, or were considerably facilitated by, the establishment of external convertibility by most Western European countries at the end of 1958 and the taking of similar steps by a number of countries elsewhere. The world is now closer to the attainment of a multilateral system of payments free from exchange restrictions than at any time since the beginning of World War II. About half of the Fund’s members have currencies which are convertible for virtually all nonresidents, and in a number of these countries any restrictions on current payments that remain have dwindled to the point of insignificance. The external convertibility of the currencies of most Western European countries has also removed the financial justification for most discrimination between currencies, and considerable progress has been made in eliminating such discrimination, particularly between those of dollar and non-dollar countries. There is, moreover, an increasing number of countries where restrictions are no longer applied for balance of payments reasons. The development of this new environment in which the restrictive and discriminatory elements are small has been strongly supported by smoothly functioning exchange markets and shifts in commercial financing which respond to small changes in money market conditions.

Exchange markets all over the world have benefited from the stability of the U.S. dollar and of the Western European currencies which have become externally convertible. There has been a tendency for the Western European currencies to be strong in terms of the U.S. dollar; the dollar rates quoted for most of these currencies were above their par values throughout the year, and only occasionally have one or two of them been below that level.

Discriminatory restrictions imposed for balance of payments reasons have now been almost completely eliminated by the great majority of Fund members. The steady and continuous decline in the number of bilateral payments arrangements, which has been observed in recent years, was carried still further in 1959, when Fund members reduced the number of their bilateral payments arrangements from some 290 to some 260, of which about 160 are with countries that are not Fund members.

In eight countries, the use of advance deposit requirements as a condition for obtaining import or exchange licenses or for clearing goods through customs has been reduced or eliminated; in only three countries have they been introduced or their range extended. There still remain at least six countries where advance deposit requirements for some imports exceed 100 per cent of the import value, and in several of these countries the deposits are not returned until some time after the clearance of the import.

In countries maintaining exchange controls, the liberalization of payments of a capital nature has been continued. As a result of measures taken during the past twelve months, there is now considerable freedom for such payments in several Western European countries. In many countries outside Western Europe and the monetary areas associated therewith, capital movements may, in general, be made without limit through free exchange markets. However, a large number of Fund members maintain the machinery of exchange control because they consider this to be necessary for the control of capital movements.

Par Values and Exchange Rates

Five initial par values were agreed by the Fund during the past fiscal year. Three of these par values were established by countries which had become members of the Fund during 1958.

The establishment on July 17, 1959 of a par value of 60 pesetas per U.S. dollar for the currency of Spain was part of a general program of economic and financial reconstruction described in Chapter II of this Report. The new exchange rate represented a devaluation in relation to previous official rates, the magnitude of which cannot be precisely measured, because of the multiplicity of exchange rates in use prior to July 17.

On August 12, 1959, a par value of £L 0.357143 per U.S. dollar, or $2.80 per Libyan pound, was agreed for the currency of Libya. This rate was in conformity with the relationship of parity which had previously existed between sterling and the Libyan pound.

On October 16, 1959, a par value of 5.06049 dirhams per U.S. dollar was agreed for the currency of Morocco. The dirham is a new currency unit, equal to 100 Moroccan francs, and its par value represented a devaluation of 17 per cent in relation to the previous official Moroccan exchange rate.

On January 8, 1960, a par value of 4.50 riyals per U.S. dollar was agreed for the currency of Saudi Arabia, which had become a member of the Fund in August 1957 and whose official exchange rate had been 3.75 riyals per U.S. dollar. The par value thus represented a formal depreciation of 16⅔ per cent, but it also represented a substantial appreciation in comparison with the free market rate of 6.7 riyals per U.S. dollar, to which the riyal had fallen in July 1958. This improvement was made possible by the financial rehabilitation program initiated in 1958. By the end of 1959, the free market exchange rate had appreciated to 4.50 riyals per U.S. dollar, and this rate was adopted for the par value agreed with the Fund. At the same time, practically all restrictions on imports and payments were abolished, the exchange system being unified, with the par value as the basis for all international transactions.

On March 31, 1960, a par value of 625 lire per U.S. dollar was agreed for the currency of Italy. Italy, which had become a member of the Fund on March 27, 1947, had maintained since 1949 a stable exchange rate equivalent to the par value now agreed.

As part of a comprehensive program of economic and financial measures intended to establish internal and external balance in the Icelandic economy, a new par value of 38 krónur per U.S. dollar was proposed for the currency of Iceland and agreed by the Fund on February 22, 1960. The program included the elimination of Iceland’s multiple exchange rate system and of its special assistance to exports. The new rate represented a formal depreciation of about 57 per cent from the par value of 16.2857 krónur per U.S. dollar agreed on March 20, 1950, or an average de facto depreciation of the effective exchange rate for exports of more than 20 per cent.

Initial par values have now been agreed between the Fund and all but ten of its members—Afghanistan, China, Greece, Indonesia, Korea, Malaya, Thailand, Tunisia, Uruguay, and Viet-Nam. Of these ten members, two joined the Fund in 1958.

Among the members that have no par value, Greece has since 1953 maintained a unitary fixed rate of 30 drachmas per U.S. dollar. In Thailand, the free market selling rate for the U.S. dollar fluctuated during the year ended April 1960 between 21.15 baht and 21.20 baht, and the rate for sterling between 59.30 baht and 59.71 baht. The Malayan dollar, which is legal tender in the Federation of Malaya, Singapore, Brunei, North Borneo, and Sarawak, maintained its statutory fixed exchange rate in terms of sterling of 2s. 4d.

The fluctuating rate for the Canadian dollar averaged US$1.043 in 1959, compared with US$1.030 in 1958 and US$1.043 in 1957. The rate rose steadily throughout most of the year, reaching the high average of US$1.055 in October, and thereafter declining slightly. It was fairly steady in the first quarter of 1960, within the range of US$1.049-1.052, but declined to around US$1.015 in early June.

The strength of the rate during 1959 was the result of a strong demand for Canadian dollars for both long-term and short-term investment purposes, which offset the effect upon the rate of the deterioration in Canada’s current account balance. The Canadian Treasury bill rate rose far above the bill rate in the United States, particularly during the third quarter, and the wide spread between these rates, as well as between the longer-term interest rates, contributed heavily to the influx of foreign capital during the year. In the second half of 1959, exports increased, imports were unchanged, and the long-term capital inflow was larger, with the result that the current and long-term capital accounts were in closer balance. There was a further, though reduced, inflow of short-term funds into Canada during the third quarter, followed by an outflow in the fourth. The net effect of these several developments was a strengthening of the exchange rate in the second half of the year, despite a narrowing in the interest rate differential between the United States and Canada. The decline after the end of the first quarter of 1960 reflected a greatly reduced demand for Canadian funds. Interest rates declined faster in Canada than in the United States, and flotations of Canadian provincial and municipal government securities virtually ceased after the end of March.

In Lebanon and the Syrian Region of the United Arab Republic, there are no transactions at the par values of 2.19 pounds per U.S. dollar agreed with the Fund. The U.S. dollar rate for the Lebanese pound in the Beirut free market was fairly stable throughout most of 1959 at LL 3.15-3.17. Toward the close of 1959 and during the first four months of 1960, the Lebanese pound tended to depreciate, with the dollar rate reaching LL 3.19 in April.

The Syrian Exchange Office selling rate for the U.S. dollar has remained unchanged at LS 3.585 throughout the last three years. The discount on the controlled rate at which the Syrian pound is quoted in the free market was 4.60 per cent at the end of 1958. By March 1959 the discount had fallen to 1.09 per cent, and thereafter rose gradually until by April 1960 it was 3.98 per cent.

Several countries have endeavored in recent years to ease the transition from a complex multiple currency system to a unitary fixed rate system by establishing an exchange market in which the rate is determined, without direct restrictions, in accordance with changing conditions of supply and demand. In Bolivia, Chile, and Paraguay, which are among the countries where this policy operates, the exchange rate has been kept stable in a unitary free market since early 1959. The experience during the past year of other countries with similar free exchange markets is described elsewhere in this Report. The completion of the adaptations required for the establishment of a stable unitary rate in an economy long accustomed to multiple rates may sometimes take a considerable period of time; the Fund expects, however, that in due course all its members will establish and maintain effective par values.

Two Fund members have put into effect decisions which had been announced earlier to establish new monetary units. In Chile the escudo, equivalent to 1,000 pesos, was established on January 1, 1960. A “new franc,” equivalent to 100 old francs, was made legal tender on January 1 in France and the French franc area, except in French Guiana, Reunion, the French Antilles, and St. Pierre and Miquelon, where similar action is to be taken later.

Other Changes in Exchange Practices

In Argentina, the unified free market introduced at the end of 1958 has been maintained without substantial change. The exchange rate in this market was subject to wide variations in 1959. The opening rate in January was about M$N 67 per U.S. dollar; under the pressure of rising domestic costs, the rate then depreciated, reaching a low of about M$N 109 in early June. With the establishment of more effective credit controls following the end of a long strike of bank employees, the depreciation was reversed quickly, and by August the rate was M$N 83. Since then the rate has remained virtually stable, further appreciation being prevented by substantial purchases of foreign exchange by the central bank. With the improvement of the payments position, advance deposit requirements on imports were abonshed and the higher import surcharges were reduced.

Under the impact of increasing inflationary pressure in Brazil, the exchange rates applicable to most transactions were depreciated substantially during the past year, either by direct action on the part of the authorities or as a result of the reactions of market rates to increases in demand. In July 1959, the effective export rate for coffee was depreciated from Cr$60 to Cr$76 per U.S. dollar, and for cocoa beans and some derivatives from Cr$70 to Cr$76. At that time, proceeds from some other exports were transferred to the free market. At the end of 1959, a further substantial group of exports was granted the free market rate, and the application of the second fixed export rate of Cr$100 per U.S. dollar was thereby limited to cocoa derivatives, castor beans, and crude minerals. At the same time, however, an arrangement was introduced whereby exporters eligible for free market treatment were to receive any excess of the free market rate over Cr$130 in the form of six-month notes on the Bank of Brazil.

The preferential import rate has been maintained at Cr$100 since January 10, 1959. The auction market rates which apply to nonpreferential imports have varied widely. The general category rate, which was Cr$218 per U.S. dollar at the end of April 1959, appreciated to Cr$174 at the end of June 1959. This appreciation was mainly the result of an increase in exchange allocations to the auctions and of a reduction in demand which followed the shifting of freight and insurance payments from the auction market to the free market. Later the rate again depreciated, to Cr$236 on March 22, 1960. Regulations were then introduced which authorized the allocation for general category imports of additional supplies of exchange up to three times the amount offered at past auctions. These additional supplies were to be made available at a price equal to the average of the rates paid at the previous three auctions. This increased supply of exchange prevented further depreciation of the general category rate. The effective rate for imports under the special category auction depreciated from Cr$337 at the end of April 1959 to about Cr$508 on April 30, 1960.

Despite the transfer to the free market of additional export proceeds, the free market rate depreciated during 1959, the lowest rate, Cr$220, being quoted in December 1959. After the subsequent transfer of most other export proceeds except coffee and cocoa, the rate was stabilized at about Cr$186 per U.S. dollar.

On August 10, 1959, a new official exchange rate was established in China (Taiwan). The effective rates which had been applied from November 21, 1958 to August 10, 1959, as a result of adding the official value of an exchange certificate to the official exchange rate, became the new official exchange rate, NT$36.08 buying, and NT$36.38 selling, per U.S. dollar. All exporters and recipients of inward remittances are required to surrender their exchange receipts, and they may choose between cash settlement at the new official buying rate and receipt of an exchange certificate. Except by government organizations, foreign exchange may be acquired only by surrendering an exchange certificate, but without further payment to the bank supplying the exchange. The Bank of Taiwan continues to buy any exchange certificates offered to it at the official buying rate of NT$36.08 per U.S. dollar, but all holders of certificates are permitted to sell in a free market where the rate is allowed to fluctuate. The right to purchase exchange from the Bank of Taiwan at the new official selling rate of NT$36.38 per U.S. dollar is confined to government organizations; all other purchasers of exchange are required to surrender an exchange certificate purchased in the free market. The market rate for certificates in April 1960 averaged NT$39.99 per U.S. dollar.

In Colombia, the basic system of an exchange certificate market with a fixed buying rate and exchange auctions and a free exchange market with a fluctuating rate was maintained in 1959. In August, exports of manufactured goods with an imported raw material component not exceeding 40 per cent were given the benefit of the minor export rate, i.e., the average free market rate of the preceding week less a 2 per cent export tax. Manufactured exports with a higher import component continued to receive the official fixed buying rate, and no mixing rates were introduced.

The free market rate fluctuated within narrow limits around Col$8.00 per U.S. dollar from the beginning of the year through September, when it began to appreciate and reached a high of Col$6.74. This appreciation was largely the result of a reduction in the official exchange surrender prices applied to coffee and bananas. The surrender price of coffee had been considerably higher than actual export proceeds, and the reduction meant that exporters had to purchase a smaller amount in the free market to complete their surrender obligations. The lowering of the surrender price of bananas meant an increased supply of exchange in the free market. Toward the end of 1959 the free market rate depreciated slightly, but by the end of April 1960 it had recovered to about Col$6.75 per U.S. dollar. The certificate rate in the auction market, which had remained virtually unchanged at Col$6.40 per U.S. dollar since December 1958, began to depreciate in March 1960, in response to an increase in import demand. At the end of April, the rate was Col$6.70. The divergent movements in the two markets reduced the spread between the certificate and the free market rates to a negligible magnitude.

In September 1959, Cuba introduced exchange surcharges ranging from 30 per cent to 100 per cent for a wide variety of imports, which in 1958 had represented about 15 per cent of total imports, and in December 1959 exchange and import licensing requirements were introduced for virtually all foreign transactions.

In Indonesia, the Export Certificate System (Bukti Expor, or BE System), which had been introduced in June 1957, was abolished on August 25, 1959, and at the same time monetary measures were taken with a view to eliminating excess domestic liquidity. A new basic exchange rate of Rp 45.00 per U.S. dollar replaced both the pegged BE rate of Rp 37.848 and the nominal official rate of Rp 11.40. The application of a uniform tax of 20 per cent to all incoming transfers produced an effective buying rate (with allowance for bank charge of ⅜ per cent) of Rp 35.865 per U.S. dollar; prior to August 25, with proceeds from exports and current invisibles settled at the BE rate minus a tax of 20 per cent, the effective rate had been Rp 30.278 per U.S. dollar. By basing effective selling rates, which continue to be six in number, upon the rate of Rp 45.28125 per U.S. dollar (i.e., the basic rate plus bank charge of ⅝ per cent), these rates were depreciated and some of the import surcharge rates were also increased. Effective selling rates now range from Rp 45.28 to Rp 135.84 per U.S. dollar, instead of from Rp 37.848 to Rp 104.082 per U.S. dollar. The average depreciation of the effective rates for both imports and exports is roughly estimated at about 20 per cent. At the same time that these changes were made in Indonesia’s exchange system, advance deposit requirements attached to applications for import licenses were withdrawn. However, rigorous restrictions on imports were maintained. In April 1959, state trading was expanded to cover several essential imports, so that about 80 per cent of Indonesia’s total imports is now handled exclusively by state enterprises.

On February 23, 1960, the official exchange rate in Korea was changed from 500 hwan per U.S. dollar, the rate established in August 1955, to 650 hwan per U.S. dollar. The change was made in view of the increase in prices that has occurred in recent years, the index of wholesale prices in Seoul having averaged 130 (September 1955 = 100) in July-December 1959.

The official exchange rate applies to government imports, sales of hwan to UN forces in Korea, certain invisibles, and to foreign exchange obtained from exports or invisibles and sold at the owner’s option to the Bank of Korea. A flat tax of 150 hwan per U.S. dollar has been made applicable to sales of U.S. aid funds at the official rate for certain imports—during the first half of 1960, of wheat, raw cotton, and lumber; this results in an effective selling rate of 800 hwan per U.S. dollar. Foreign exchange for all other imports not paid for with foreign exchange earned from exports or certain invisibles is supplied for specified commodities by government auctions of U.S. aid funds and of exchange owned by the Korean Government. During January 1960, the fluctuating selling rates arising from these two auctions averaged 1,233 hwan per dollar and 1,103 hwan per dollar, respectively. No government-owned exchange was auctioned during the next three months; in April the auction rate for aid funds averaged 988 hwan per U.S. dollar. Other minor effective rates arise from sales to importers of foreign exchange received from exports and certain invisibles and retained in foreign currency accounts. A retention quota system was introduced on July 1, 1959, under which, according to the trade program for the first half of 1960, either 20 or 30 per cent, depending on the commodity exported, of the earnings from 9 export items may be used by the exporter, or by an importer to whom the exporter’s right has been transferred, to pay for 15 specified import items.

In mid-May 1960, Peru took an important step to liberalize further its exchange system. As the exchange and foreign reserve position of the central bank continued to improve, the two exchange markets—the exchange certificate market for most trade transactions and the draft market for most invisible and capital transactions—were unified, and the exchange surrender requirements for export proceeds in U.S. dollars and sterling were abolished. The exchange rates in the two markets had come under pressure about the middle of June 1959 after several months of comparative stability. The certificate rate, which had been quoted at an average of S/. 27.25 per U.S. dollar in May, reached a low of S/. 29.49 per U.S. dollar in early July, while the rate in the free or draft market depreciated from S/. 27.46 to S/. 30.67 per U.S. dollar in the same period. In late July, the rates began to appreciate consistently under the influence of the anti-inflationary policies pursued by the authorities and the substantial improvement in Peru’s export position and balance of payments. By October, the certificate rate had recovered to S/. 27.70 per U.S. dollar and was stable at this level, with the draft rate a fraction higher, up to the time of unification.

In the Philippines, the central bank was authorized by legislation passed in June 1959 to impose a “margin fee,” or exchange margin, of not more than 40 per cent above the banks’ selling exchange rates, on sales of foreign exchange, with some exemptions, principally for certain imports. The margin was to be fixed at such an amount as the Monetary Board might deem necessary to curtail effectively any excessive demand upon the international reserves of the Philippines; it may not be changed more often than once a year except upon the recommendation of the National Economic Council and with approval by the President.

A margin of 25 per cent, to be collected by authorized banks, was imposed in terms of this authorization on July 17, 1959. The banks’ selling rate, based on the par value of 2.00 pesos per U.S. dollar, is 2.015 pesos per U.S. dollar. Including the 25 per cent margin and allowing for a ½ per cent service charge on payments for imports, the effective selling rate was therefore 2.529 pesos per U.S. dollar. Of total payments for imports and invisibles, some 26 per cent was exempt from payment of the margin up to the end of 1959.

The law of June 1959 also required the monetary authorities to take steps to adopt a four-year program for gradual exchange decontrol. The Philippine Government accordingly introduced on April 25, 1960 a free market for certain exchange receipts and payments. The free market is under the supervision of the central bank, which through a committee fixes the free market rate, taking into account free market forces. The Government has announced its intention to broaden the free market gradually so that not later than 1964 all payments will be free from restriction.

During the first year of the program, the free market is to be supplied with all exchange proceeds from gold exports and from tourism and with 25 per cent of exchange receipts from other exports and from capital imports and other invisibles. The remaining 75 per cent of exchange proceeds from these transactions will continue to be surrendered to the central bank or its authorized agents at the official buying rate of 2.004 pesos per U.S. dollar.

During the first year, exchange payments in the free market will include payments for (1) imports of nonessential producer goods, semiessential consumer goods, nonessential consumer goods, and unclassified items, according to the central bank’s commodity classification; (2) invisibles, except blocked fiduciary funds and investment earnings prior to 1960, Philippine Government expenditures, existing contractual obligations previously approved by the Monetary Board of the central bank, and reinsurance premiums; and (3) import goods not included in (1) above and in excess of the exchange allocations granted at the official selling rate under the exchange budget. For import payments not made in the free market, those exempted from the margin will continue for the time being at the official selling rate; other such payments will be subject to the margin of 25 per cent.

After the adoption of the new system on April 25, 1960, the Philippine exchange rate structure was as follows: The free market buying rate for gold exports and tourist receipts was 3.194 pesos per U.S. dollar, and the mixing rate applied to all other receipts (25 per cent at free market rate and 75 per cent at official rate) was 2.301 pesos per U.S. dollar. A selling rate of 4.015 pesos per U.S. dollar, i.e., the free market rate plus the margin, applied to less essential imports and most invisibles; the official selling rate of 2.015 pesos per U.S. dollar applied to imports and other payments exempted from the margin; and a rate of 2.519 pesos per U.S. dollar, i.e., the official selling rate plus the margin, applied to all other permitted payments.

The exchange system of Turkey has been further simplified by successive steps since the introduction of the stabilization program of August 1958. Changes made during 1959 reduced the number of effective buying rates from three to two, and involved a depreciation of the effective rates for chromium, tobacco, copper, and opium exports. The Turkish import system was also further liberalized during the second half of 1959 and early 1960.

On September 1, 1959, major changes were made in the trade and exchange system of the Egyptian Region of the United Arab Republic, which previous to that date was based largely on individual deals and barter transactions involving substantial and variable discounts on the Egyptian pound. These discounts averaged 30-40 per cent but for some transactions were as high as 60 per cent. The changes introduced in September eliminated all barter and other similar deals and established effective official discounts on the Egyptian pound for receipts and payments. The discount for cotton export receipts was initially set at 22.5 per cent, and gradually reduced to 12 per cent by March 21, 1960. There is a fixed discount on the Egyptian pound of 17.5 per cent for most other export receipts, and of 21.6 per cent for invisible receipts in convertible currencies. The discount for payments for imports and invisible payments in convertible currencies was fixed at 21.6 per cent in September 1959 and reduced to 16.7 per cent on January 5, 1960. Some receipts and payments, mostly Suez Canal dues and bilateral agreement payments, are still conducted on the basis of the par value.

Monetary expansion and crop failures caused a further deterioration in 1959 in Uruguay’s external payments position. The depreciation of most effective exchange rates culminated in an exchange reform at the end of the year. A free market was established in which all exchange transactions are to take place, export proceeds being made subject to withholding taxes which vary from the equivalent of 30-40 per cent on wool to 5 per cent on meat. Though prohibition was maintained on many imports of consumer goods, other imports were freed from restrictions; for certain permitted imports, advance deposits are required.

The free market rate depreciated from Ur$8.95 per U.S. dollar at the end of April 1959 to Ur$ 11.18 at the end of December 1959. After the unification of the exchange markets, the rate in the free market continued to depreciate slightly and at the end of April 1960 was Ur$ 11.44.

The European Monetary Agreement

The European Monetary Agreement (EMA) came into operation at the end of 1958, when external convertibility was restored for the major European currencies and the European Payments Union was accordingly terminated. Under the EMA multilateral payments system, which was prolonged for an indefinite period at the end of 1959, the central banks of the member countries set buying and selling rates for the U.S. dollar, thereby giving each other a mutual exchange guarantee under certain conditions and setting the limits for exchange rate fluctuations between the currencies of member countries. Within this framework, actual payments are carried out smoothly in the exchange market. The facilities for interim credit between member countries which are provided by the Agreement have been used very little, and nearly all transactions have been settled through the exchange market.

The capital of the European Fund, which was established under the EMA to provide credit facilities to participating countries, was increased from $600 million to $607.5 million when Spain became a member in July 1959. This total consists of $271.6 million transferred from the assets of the EPU, and of participants’ capital subscriptions of $335.9 million. Of these subscriptions, only $38 million had been called by April 30, 1960. The loan of $15 million to Greece, which was authorized in January 1959, was not taken up and was canceled at the request of Greece in December. The loan of $21.5 million which was authorized to Turkey was fully drawn, and drawings under a loan of $100 million to Spain, which was granted in July 1959, amounted to $24 million. A loan of $12 million was granted to Iceland in February 1960, of which $5 million is subject to a further decision by the OEEC Council. Of this loan, $5 million had been drawn by April 30, 1960.

When the functioning of the EMA was reviewed at the end of its first year, a number of amendments were made in the detailed provisions of the Agreement. All these amendments were technical, with one exception that has made it possible for the European Fund to obtain, under certain conditions, special means of finance from participating countries in order to place a larger amount at the disposal of a member wishing to borrow than would be available if the Fund had to rely exclusively on the capital subscriptions of members. The capital subscriptions of some countries were revised: for the United Kingdom, the subscription was reduced from $86.6 million to $60.6 million; the subscriptions of France and Germany were both increased from $42 million to $50 million; and Italy’s subscription was raised from $15 million to $25 million.

Regional Economic Associations

The payments relations between Fund members are likely to be affected in various ways by the establishment of regional economic associations, which have as one of their main purposes the reduction of barriers to trade between the members of an association. Further steps have been taken during the past year for establishing associations of this kind.

The European Economic Community and the European Free Trade Association

The six countries (Belgium, France, the Federal Republic of Germany, Italy, Luxembourg, and the Netherlands) that together form the European Economic Community (EEC) took further steps for the gradual elimination, which had begun on January 1, 1959, of customs duties and of other obstacles to trade and to the free movement of persons, services, and capital among themselves. Additional increases in the quotas for imports of industrial goods from member countries took effect January 1, 1960, and a further reduction of 10 per cent in the tariffs on imports from EEC members is scheduled to take effect July 1, 1960. On November 24, 1959, the Council of the EEC declared that the member countries were prepared to extend these new quota increases to other GATT members, as they had done already for the earlier increases. It was also decided that EEC member countries might extend the new tariff reductions to members of the GATT and to other countries which are accorded most-favored-nation treatment, provided that the reductions did not bring the rates of duty below the EEC common tariff rates. Earlier, the 10 per cent tariff reduction of January 1, 1959 had similarly been extended.

According to the Treaty of Rome, adjustments in the tariffs of individual EEC members on imports from third countries to a common tariff to be negotiated between member countries were scheduled to begin on January 1, 1962 and to be completed by the end of 1969. The negotiations for a common tariff were virtually completed early in 1960, and it was decided that the first adjustment of individual tariffs to this common tariff should take place by the end of 1960, i.e., one year earlier than originally planned. The new common tariff will be the subject of negotiations between the EEC and the Contracting Parties at the 1960-61 GATT tariff conference.

The ratification of an agreement for the formation of a European Free Trade Association (EFTA) by seven OEEC members, Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom, that do not participate in the EEC was completed in May 1960. The preamble to the agreement sets forth the determination of the EFTA countries to facilitate a multilateral association for the removal of trade barriers and the promotion of closer economic cooperation between the members of the OEEC. The constitution of the EFTA does not provide for a common tariff, but tariffs and quantitative restrictions on imports of industrial goods from other members of the Association are to be progressively reduced, and finally eliminated by January 1, 1970. The first 20 per cent of tariff reductions among EFTA members is due to become effective on July 1, 1960 and is thus to coincide with the second 10 per cent EEC tariff reductions mentioned above. As this Report was being written, efforts were being made to mitigate the unfavorable consequences that might arise from failure to coordinate the extent and application of these and other contemplated measures.

Latin American Free Trade Association

Seven Latin American countries—Argentina, Brazil, Chile,’ Mexico, Paraguay, Peru, and Uruguay—on February 18, 1960 signed the Treaty of Montevideo, which, when ratified, will establish a Free Trade Area (FTA) and create the Latin American Free Trade Association. The Treaty provides for the gradual elimination over a period of twelve years of tariffs and restrictions of any kind on trade between the contracting parties. This is to be achieved by means of a common list in which commodities currently traded within the area are to be incorporated in several stages so that by the end of the period most of that trade would be free of customs duties and of restrictions. In addition, members are to negotiate on the basis of most-favored-nation treatment the inclusion of items in national lists to which annual tariff reductions are to apply. The Treaty, to which any other Latin American country may adhere, calls for the expansion and diversification of trade within the area, the promotion of economic complementarity, and the coordination of policies of agricultural development. The Association is to provide the machinery to carry out the Treaty, coordinate commercial policies, and facilitate the expansion of reciprocal trade and the integration and diversification of the economies of its members. At the request of the countries concerned, the Fund prepared a study on payments problems within the FTA, in which it pointed out the advantages of a system of settlements in freely convertible currencies. A meeting of representatives of the central banks of these countries has affirmed that free convertibility of currencies is the objective to be attained, and it is planned to initiate the FTA without any special payments arrangements involving limitations on convertibility. A protocol attached to the Treaty provides for informal meetings of central bank representatives to undertake studies on credits and payments that may help achieve the objectives of the Treaty.

Central American Common Market

In an effort to accelerate plans for a Central American common market, Guatemala, El Salvador, and Honduras in February 1960 signed a Treaty of Economic Association, which became effective in April upon completion of ratification. Nicaragua and Costa Rica, the two other Central American countries that had also signed the Multilateral Treaty of Free Trade and Central American Economic Integration in 1958, were invited to join in the new Treaty. At a meeting of all the five countries in April 1960, an understanding was reached about the timing of the program, and it was decided to draft a new agreement speeding up the formation of a common market and the economic integration of the area. Following the general pattern of the tripartite arrangement, the new agreement is intended to provide for immediate liberalization of a substantial part of intra-area trade with the aim of establishing within five years a common market within which the persons, goods, and capital of the participating countries would circulate freely. The Multilateral Treaty of 1958, which has been ratified by four of the five signatories and in which Panama has also expressed an interest, had provided for the initial freeing from tariffs and restrictions of only a limited list of goods and envisaged the attainment of a customs union within ten years.

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