III. Developments in Multiple Currency Practices
- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1959
In the past year, considerable further progress has been made in the substitution of unitary exchange rates for multiple currency practices and in the simplification of exchange systems. There has also been a growing conviction that economic development and rising living standards are best achieved if they can be built upon monetary stability and realistic unitary exchange rates. It may be expected that the recent convertibility moves will strengthen this trend both by facilitating such reforms technically and by demonstrating the feasibility and benefits of pursuing domestic policies which make exchange reform possible. The Fund’s work in this field has been focused particularly on complex multiple currency practices, both in its regular Article XIV consultations and, where appropriate, in connection with discussions regarding the use of Fund resources to support comprehensive stabilization programs.
The progress made in reforming multiple currency practices has frequently not been directly related to any prior improvement in the balance of payments positions of the countries concerned. Economic development programs, coupled with weakness in the prices of major exports, have continued to exert pressure on the balance of payments and in many countries have increased the magnitude of the adjustments involved in simplifying the rate structure. Thus, the simplification of exchange systems has often been not a response to an easier international payments position but rather part of an attempt to adopt more effective economic policy tools to deal with continuing economic problems. The Fund has generally been in a position to aid these countries in the implementation of their new policies.
Two outstanding cases of simplification in the exchange rate structures have been in Argentina and Turkey. At the turn of the year, Argentina substituted a single, fluctuating, exchange rate for its system of many export and import rates and eliminated quantitative import restrictions. At the same time, taxes on imports and exports were introduced and the advance deposit requirements were changed in order to help prevent any excessive outflow of exchange during the early stages of the free market. The new Argentine exchange system made unnecessary the continuance of the special arrangements for trade and payments with certain European countries known as the “Paris Club.” In Turkey also there has been a major simplification of the exchange system in the year under review; as a result of these changes, a single rate is applied to all sales of exchange and on the export side the number of rates has been greatly reduced. In both these countries the measures involved fundamental decisions to adopt bold new policies to curb inflation and, through reform of the exchange system, to remove distortions in the economy. These decisions were facilitated by the availability of financial resources from the Fund and other sources, by the use of which the strains of the transitional period could be eased.
Nicaragua virtually eliminated multiple rates for exports by applying the official rate to coffee exports in October 1958 and, in March 1959, to all other exports except cottonseed from the 1958-59 crop. When that year’s cottonseed crop is exported, Nicaragua is expected to have a single rate for all trade and most invisible transactions. Chile took a major step in reducing the complexity of its exchange rate structure in 1956. A further important step was taken early in 1959 when the two exchange markets, one primarily for trade and the other primarily for capital items, were merged so that there is now only one fluctuating rate. The “transit dollar” scheme has been discontinued in Sweden, and Denmark has announced a program for the liquidation of the “title to import license” scheme. In Iceland, the Government eliminated an elaborate scheme of export subsidies and introduced three export rates. A reduction in the number of import and export coefficients resulted in some simplification of the exchange system in Yugoslavia.
There have been some instances where multiple currency practices have been extended during the past year. In Spain and Uruguay, exchange systems which already had a large number of rates became more complicated. In Colombia, some simplification had been achieved in earlier years but in January 1959 a new arrangement for exports laid the basis for a proliferation of rates. In Pakistan, a multiple currency practice appears to have been introduced in January 1959 in the form of transferable vouchers for exports which permit the import of specified items. This scheme for promoting exports is expected to affect about 15 per cent of total exports.
There has also been increased use of small exchange taxes for fiscal purposes during the past year. At the end of 1957, such taxes were imposed in Afghanistan, Chile, Cuba, and Jordan. Since then, a new exchange tax of 2 per cent has been introduced in Bolivia and in Chile the tax has been raised from 1 per cent to 2 per cent.
Although the record for the past year is mixed, there is a clear trend over the longer term toward reduced dependence on multiple currency practices. During the last five years, complicated systems involving elaborate rate structures have disappeared in Argentina, Bolivia, Chile, China (Taiwan), Iran, Nicaragua, Paraguay, and Thailand. Progress has been made in simplifying the rate structures in certain other countries; in some countries, however, complex rate structures remain.
Enough experience has been gained with multiple currency practices to warrant certain conclusions which may be of general interest to member countries. Intervention in economic affairs through the exchange system handicaps economic development and fosters fundamental distortions in the economy. Simplification of the rate structure, if it is to provide a lasting solution to balance of payments problems, must be accompanied by fiscal and monetary restraints designed to arrest inflation. A fluctuating exchange rate adopted to facilitate the transition from a complex rate structure to a unitary rate may be temporarily called for until equilibrium is reached, but it cannot be a substitute for proper monetary and fiscal policies.