II. The Achievement of External Convertibility

International Monetary Fund. External Relations Dept.
Published Date:
September 1959
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Scope of Recent Measures

As from December 29, 1958, most countries in Western Europe freely permitted nonresident1 current earnings of their currencies in general to be exchanged into any foreign (nonresident) currency at rates within the official margins, whereas formerly there had been limitations on such transactions, as described in previous Annual Reports on Exchange Restrictions. Shortly thereafter, other countries, mainly those in the monetary areas of Western European countries, took steps to adjust their exchange control regulations to the new conditions.

The following countries have made this move toward convertibility:

These countries permit nonresident holdings of their currencies to be transferred to the accounts of other nonresidents throughout the world. It has become a matter of indifference to the exchange control authorities in what currency or to what account in local currency authorized payments to nonresidents are made by the residents of their country. However, while this principle applies generally to outgoing payments, few countries regard all currencies as acceptable in payment for their exports.

Except for the Federal Republic of Germany, none of the other Fund members concerned grants nonresident convertibility at rates within the official margins for all payments of a capital nature.4 Also, residents of countries within a monetary area are regarded as residents of the entire area, and a distinction is made between transactions within the area and transactions between countries in the area and those outside. Moreover, most Western European countries have bilateral payments arrangements with some other countries, mainly those in the Soviet bloc. Nonresident convertibility, therefore, does not apply to the earnings of those countries and the regulations prescribing the method of payment and receipt are designed to ensure that financial settlements are kept in bilateral channels (see table, page 6).

In the countries listed above whose currencies are seldom used in international trade, special regulations for nonresident holdings have not been necessary, and the nonresident convertibility of their currencies has been made effective by permitting all authorized payments to nonresidents to be made in some other externally convertible currency, e.g., sterling or French francs.

The Federal Republic of Germany took the opportunity provided by the moves toward nonresident convertibility—and the very strong gold and foreign exchange reserve position of the Federal Republic justified this—to announce convertibility of the deutsche mark for residents. By a series of general licenses, the German public has been given complete freedom in foreign exchange transactions. The connection between licensing of imports (and of service transactions) and foreign exchange transactions has been eliminated. There are no foreign exchange surrender obligations and no prescription of currency requirements (except for one temporary item).

European Monetary Agreement and Exchange Markets

The European Payments Union (EPU), which had served since 1950 as an organization for the settlement of the mutual surpluses and deficits of its member countries, was dissolved when a majority of the participating countries established nonresident convertibility and the termination of the EPU brought into force the terms of the European Monetary Agreement (EMA). This Agreement was signed in 1955 by the 17 countries which constitute the OEEC and were members of the EPU.5 Under the EMA, automatic credit no longer exists, but member countries are obliged to make available limited amounts of very short term interim finance, and credits may be granted to assist in meeting temporary balance of payments difficulties, the approval of each application being subject to examination of the merits of the case.

Countries Listed as Bilateral Account Countries in the Exchange Control Regulations of Western European Countries Which Have Established External Convertibility(As at April 30, 1959)
Bilateral Accounts with \

Western European Countries
Portuguese Monetary AreaSpanish Monetary ArU.A.R. (Egyptian Region)Eastern Bloc
BrazilChileColombiaEcuadorFinlandFrench Franc AreaGreeceIcelandIndonesiaIranIsraelItalyParaguaySaudi ArabiaTangierTurkeyUruguayYugoslaviaAlbaniaBulgariaChina, MainlandCzechoslovakiaGermany, EastHungaryPolandRumaniaU.S.S.R.

Settled monthly under the European Monetary Agreement.

Settled monthly under the European Monetary Agreement.

One important practical change that has resulted from the coming into force of the EMA and the liquidation of the EPU is that the 12 European countries in the multilateral exchange arbitrage arrangements are no longer required to support each other’s currencies in their own exchange markets at margins approximately 0.75 per cent on either side of the parity relationship. Instead, under the EMA, each country has assumed the obligation to maintain fixed maximum and minimum rates of exchange in terms of gold, dollars, or some other currency, but the EMA leaves it to the country concerned to decide what those rates will be. In practice, the member countries of the EMA have all elected to declare their exchange margins in terms of the U.S. dollar, and the margins for each currency have been fixed at approximately 0.75 per cent on either side of the dollar parity, except for Switzerland, where the margin is somewhat larger, and Sweden, where the margin is smaller.

In addition to undertaking to prevent the dollar rates for their currencies from moving beyond officially announced margins, the EMA countries have also authorized their commercial banks to engage freely in exchange transactions involving dollars against EMA currencies or EMA currencies against each other. Arbitrage is relied on to keep the various cross rates in line. From this it follows that EMA currencies quoted in the market of an EMA country are free to move within a range determined by the official dollar margins of those currencies. Through market forces, the quotation of an EMA currency in terms of another EMA currency will conform to the dollar quotations in the two countries; and at any given time, the maximum range between these dollar quotations is equal to the sum of the dollar margins maintained by the two EMA countries involved.

Associated with the nonresident convertibility measures is the increase in the facilities for foreign exchange dealings. Prior to December 29, 1958, most of the Western European countries concerned had two separate exchange markets, one for U.S. dollars and Canadian dollars against their own currency and the other for negotiable European currencies, including their own. The new facilities have combined the markets for the two groups of currencies. The special market for transferable sterling, which previously had considerable importance in New York and Zürich (where the exchange rates had steadily been getting nearer and nearer to the official market exchange rates), has ceased to exist. As a corollary, the importance of free market quotations in such places as Hong Kong has lessened considerably. For example, in Hong Kong, the official and free market rates for the U.S. dollar are now both within 1 per cent of the parity relationship of the Hong Kong dollar. In Brazil, the introduction of external convertibility in Europe made possible the unification of the auctions for the dollar and the so-called ACL currencies introduced when the “Hague Club” was formed.

In the period following the European convertibility moves, the official market quotations for the European currencies concerned have almost without exception continued to be firm in relation to the dollar. It does not appear that during this period any of the quotations for the currencies of the Western European members of the Fund have been as much as 0.75 per cent away from their parity relationships.

Significance of the New Measures for Remaining Restrictions

The steps taken at the close of 1958 formally established a system in which the currencies used for the great majority of international payments are convertible into other currencies, or into gold. By and large, this is true whether the payments are received from residents of countries whose currencies are externally convertible or from residents of other countries, since the foreign trade of the latter is, to a very great extent, financed in what are now convertible currencies. The most important exceptions are the payments made through bilateral or other special accounts under which the methods of financing and payments are still subject to a high degree of restriction.

The currency moves made in Europe at the end of 1958 have special significance for the general level of the remaining restrictions and, particularly, for the problem of discrimination. In the first place, the introduction of external convertibility followed the substantial strengthening, during the past years, of the reserve and balance of payments positions of the Western European countries taken as a group, and the considerable improvement in the position of sterling during 1958. In the second place, exchange developments during the first four months of 1959 have been distinctly favorable—perhaps even more than had been expected—reflecting the fact that these countries have, on the whole, attained a balanced position internally and increased strength in relation to other countries. If the present improvement continues, one country after another should cease to have any balance of payments reasons for continuing to maintain restrictions. This situation would permit the elimination of restrictions introduced during earlier periods for balance of payments reasons and relieve domestic economies and international trade of the distortions which such restrictions are likely to cause.

The advent of external convertibility has an even greater significance in relation to discriminatory restrictions introduced for balance of payments reasons. As long as the principal European currencies, especially sterling, were not freely convertible by nonresident holders, it was understandable that countries hesitated to eliminate discriminatory restrictions. With the coming of nonresident convertibility, earnings in one currency can be freely converted into any other currency, including dollars. The Fund is currently examining the questions raised by the remaining discriminatory restrictions, in the light of the developments which have been described in the preceding pages. In the meantime, the Fund is urging members to proceed as rapidly as feasible with the elimination of discrimination, including bilateralism.

Finally, not the least significant aspect of the introduction of external convertibility is that the countries concerned have thereby been brought so much closer to the time when the Fund’s objective of avoiding restrictions on current payments will be fully achieved. Experience has shown that after the disturbances of World War II convertibility could not be introduced all at once; it had to be achieved by successive steps, and it was therefore of the greatest importance that the industrialized European countries seized the opportunity to go ahead—and it was also important that they did so by concerted action.

The changes which have taken place in the restrictions on imports and payments applied by different countries are set out in Part II of this Report. While a few countries have found it necessary to introduce import licensing or to intensify their restrictions, additional imports have been freed from licensing in such countries as Australia, France, the Federal Republic of Germany, Norway, and the United Kingdom. There has also been some relaxation of restrictions on imports elsewhere, as in Burma. At the same time, restrictions on payments for invisibles have been abolished in the Federal Republic of Germany and relaxed in several other countries.

The term “nonresident” in this context is used in the same sense as in exchange control regulations, that is, resident outside not only the country concerned, but also the monetary area to which it may belong.

In Ghana the necessary measures had not actually been incorporated in the exchange control regulations at the time this Report was prepared, April 30, 1959.

The Swiss franc was already convertible for residents of Switzerland as well as for those nonresidents whose own currencies were convertible. Following the steps taken by the other Western European countries, Switzerland extended the same facilities to them.

In some of these countries, however, a free exchange market exists in which capital transactions are unrestricted.

The OEEC countries are Austria, Belgium, Denmark, France, Federal Republic of Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Sweden, Switzerland, Turkey, and United Kingdom.

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