- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1980
The past year has been a period of slower economic growth in the industrial countries, of higher average rates of inflation both in those countries and in the developing countries, and of rising imbalances in the external current accounts of each of the main groups of countries. For the industrial countries as a group,2 the increase in real gross national product (GNP) amounted to about 3.5 per cent in 1979, compared with nearly 4 per cent in the two preceding years and well over 5 per cent in 1976. The 1979 slowdown was mainly a reflection of developments in the economies of the United States and the United Kingdom, where annual gains in real output were sharply lower than in 1978. In Western Europe as a whole, and in Japan, rates of increase in real GNP continued to strengthen moderately in 1979, but remained well below those generally prevailing prior to the early 1970s. In the nonindustrial countries, the average growth of output receded somewhat in 1979 from the rates recorded in the previous few years. However, this weakening of output trends reflected mainly developments in Asia. Elsewhere, growth rates tended to be either sustained or, as in several countries in Latin America, quite buoyant. Inflation in the industrial countries accelerated in 1979, with the average increase in prices as measured by GNP deflators exceeding 7.5 per cent, compared with an increase of slightly more than 7 per cent in 1978. In terms of consumer price indices, which reflect price increases for oil and other imported goods, as well as for domestically produced output, the acceleration from 1978 to 1979 was considerably more pronounced.
The growth of world trade registered a moderate increase in 1979. In volume terms, trade grew by about 6.5 per cent, compared with the average growth of 4.5 per cent recorded in the second half of the 1970s and of almost 9 per cent achieved in the 1960s and the early 1970s. Measured in terms of U.S. dollars, the value of world trade was sharply higher in 1979. A strengthening of import demand in the industrial countries was partly responsible for further gains in export volume by the non-oil developing countries. Large increases in the prices of primary commodities during the period under review also contributed to buoyancy of export earnings of the non-oil developing countries. After declining somewhat in 1978, commodity prices again rose strongly in 1979 and in early 1980. The expansion of export earnings of the developing countries, however, was by no means sufficient to keep pace with both the continuing upward momentum of real imports and a considerably accelerated rise in import prices, reflecting not only the persisting inflation in costs of manufactured goods from the industrial countries but also the marked increase in the cost of imported energy. Indeed, as a result of the steep upward movement of oil prices, the terms of trade of both the industrial countries and the non-oil developing countries deteriorated, in the case of the latter countries for the second consecutive year.
There were marked swings in the payments balances on current account (exclusive of official transfers) for the main groups of countries in 1979. The surplus of the oil exporting countries expanded rapidly, from US$5 billion in 1978 to more than US$68 billion, while the industrial countries experienced a sharp turnaround in their current account, from a surplus of US$30 billion in 1978 to a deficit of US$10 billion in 1979. With total imports rising faster in value than exports, and with net external payments for services also increasing rapidly, the combined current account deficit of the non-oil developing countries is estimated to have risen from US$36 billion in 1978 to more than US$55 billion in 1979. Both the enlarged indebtedness incurred to finance the deficit and higher average interest rates in 1979 contributed to a worsening of the balance of payments outlook for these countries. These difficulties appeared likely to be compounded by a marked further slowdown of real economic activity in the industrial countries in 1980, probably accompanied by a considerable deceleration of growth in the volume of world trade and a continuation of unduly rapid price increases in most parts of the world, leading to a still further widening of current account imbalances in developing countries.
In the early months of 1979 there was an absence of the sustained pressures that characterized the exchange markets for the major world currencies in 1978. This reflected in part the realignment in October 1978 of the exchange rates of the currencies participating in the European common margins arrangement (the “snake”)3 and the measures of November 1, 1978 to support the U.S. dollar.
After some delay from the originally scheduled date of January 1, 1979, the agreement on the European Monetary System (EMS) came into operation on March 13, 1979. The purpose of the EMS is to establish a greater measure of monetary stability in the European Community (EC)4 as a fundamental component of a more comprehensive strategy aimed at lasting growth with stability, a progressive return to full employment, the harmonization of living standards and the lessening of regional disparities in the Community.5 All member states of the EC are members of the EMS, but the United Kingdom chose not to become an original participant in the exchange rate and intervention mechanism of the system. The EMS is centered on the European Currency Unit (ECU), which since the commencement of the EMS has been identical in value and composition to the European Unit of Account (EUA). A central rate for the currency of each member of the EMS was established in terms of the ECU which was derived from a grid of bilateral exchange rates. Fluctuation margins around these rates were established at plus or minus 2.25 per cent, with the exception that currencies not included in the European common margins arrangement could temporarily establish fluctuation margins of up to plus or minus 6 per cent. Margins for the Italian lira were initially fixed at 6 per cent.
Between March 1979 and August 1979 there was moderate intervention within the exchange rate and intervention mechanism of the EMS to maintain bilateral exchange rate limits between EMS participants, but intervention increased markedly in September.6 A realignment of EMS currencies was effected on September 24, 1979 when the bilateral intervention limits of the deutsche mark in EMS countries other than the Federal Republic of Germany were raised by 5 per cent against the Danish krone and 2 per cent against the remaining participating currencies. Subsequently, as part of a program to strengthen Denmark’s external position, the bilateral intervention limits in that country of all EMS currencies were raised by 5 per cent against the Danish krone, effective November 30, 1979. Between the commencement of the EMS on March 13, 1979 and December 31, 1979, the ECU appreciated by about 7 per cent in terms of the U.S. dollar but depreciated by 10 per cent during the first three months of 1980 for a cumulative depreciation of 4 per cent since the inception of the EMS. Over this period no EMS currency reached the upper divergence threshold, but the Belgian franc and the Danish krone each reached their lower divergence thresholds on several occasions, resulting in the introduction of monetary policy measures.7
The major support measures for the U.S. dollar announced by the United States in November 1978 were followed, during the period under review, by other official actions affecting the exchange rate of the U.S. dollar. On October 6, 1979 the U.S. Federal Reserve Board announced a series of actions to assure better control over the expansion of money and bank credit. Later in October the U.S. Treasury announced that future gold auctions would not follow a regular monthly pattern and that future sales would be subject to variations in amounts and dates. Also in October the U.S. Treasury announced two new issues of treasury notes denominated in deutsche mark to be offered in the German market in November 1979 and January 1980. A marked tightening of U.S. monetary policy in the first quarter of 1980 and the announcement of an anti-inflation program in March 1980 contributed to the strengthening of the U.S. dollar in this period.
Among the currencies of other major industrial countries, the pound sterling rose strongly in terms of the U.S. dollar through July 1979 and remained in a relatively strong position in the exchange markets during the remainder of 1979 except for a period following the lifting of U.K. exchange controls; the pound weakened against the U.S. dollar in the first quarter of 1980. The Japanese yen, on the other hand, depreciated against the U.S. dollar almost continuously during 1979 and in the first three months of 1980. The weakness of the yen reflected a number of factors, including the sharp turnaround in the current account of the balance of payments and uncertainties regarding oil supplies and prices. The Swiss franc moved higher against the U.S. dollar from May until the end of 1979, while the exchange rate of the Canadian dollar in terms of the U.S. dollar remained within a relatively narrow range. During January–March 1980 the U.S. dollar strengthened considerably against all major currencies except the Canadian dollar as U.S. interest rates continued to firm relative to those offered in other major markets. With respect to the currencies of the Federal Republic of Germany and Switzerland, the strengthening of the U.S. dollar occurred despite heavy intervention during March and various policy measures by both countries to encourage capital inflows. Notwithstanding the tightening of domestic monetary conditions in some other countries, the appreciation of the U.S. dollar accelerated in the second half of March 1980 after the announcement of the U.S. anti-inflation program on March 14, 1980.
The effective exchange rates8 of the currencies of most of the major industrial countries registered relatively moderate movements during 1979 and early 1980, following the sharp changes that occurred during 1978. The largest movements in effective exchange rates during 1979 were those of the Japanese yen, which on average declined by 7 per cent after increasing by 24 per cent over 1978, and that of the pound sterling, which rose by 8 per cent during 1979, compared with an increase of 1 per cent in the previous year. The effective exchange rates of the deutsche mark and the Austrian schilling rose on average by 6 per cent and 5 per cent, respectively, about the same as the increases in the effective exchange rates of those currencies in 1978. There were small increases in the effective exchange rates of the Belgian franc, the French franc, the Netherlands guilder, and the Swedish krona, while the effective exchange rates of the Danish krone, the Italian lira, and the Norwegian krone registered a slight decline during 1979. After a downward movement of 9 per cent in 1978, the effective exchange rate of the U.S. dollar decreased by 2 per cent in 1979. The Canadian dollar declined by 4 per cent in 1979, following a decrease of 10 per cent in 1978. During the first quarter of 1980, the effective exchange rate of the U.S. dollar rose strongly, while rates for most other major currencies, except the Canadian dollar, the Japanese yen, and the pound sterling, declined.
Between January 1, 1979 and March 31, 1980, 22 members notified the Fund, in accordance with their obligations under Article IV, Section 2(a) of the amended Articles of Agreement, that they had adopted new exchange arrangements. In addition, there were numerous exchange rate actions notified to the Fund that did not involve changes in members’ exchange arrangements. Continuing the trend observed in recent years, a number of members adopted diversified forms of exchange arrangements during the period in their efforts to avail themselves of an exchange rate regime best suited to their particular institutional and policy needs. The majority of exchange actions involving the adoption of a new exchange arrangement consisted of the abandonment of a pegged exchange rate between the member’s currency and another denominator—usually a single currency, such as the U.S. dollar or the pound sterling or, less commonly, the SDR or other currency composite—in favor of a more flexible exchange rate regime. Three members (France, Ireland, and Italy), upon the commencement of their participation in the exchange rate and intervention mechanism of the EMS, joined the five members of the European “snake” in maintaining cooperative exchange arrangements. Ten members adopted a pegging exchange arrangement during the period, including four which pegged their currencies to the SDR and three which established a fixed relationship to another currency composite. In addition, two countries which became members during the period informed the Fund of their intention to maintain an exchange arrangement in which their currencies were pegged to the U.S. dollar.
At the end of March 1980, the currencies of 59 members were pegged to a single currency (41 to the U.S. dollar, 14 to the French franc, 2 to the South African rand, and 1 each to the pound sterling and the Spanish peseta). Fourteen currencies were pegged to the SDR and another 20 to other currency composites. Three members were adjusting their exchange rates at relatively short, irregular intervals according to a set of indicators, 8 were maintaining cooperative exchange arrangements, while 35 were maintaining other, more flexible, exchange arrangements.9
During the period under review, the Fund’s membership rose from 138 countries to 140 countries with the accession to membership of St. Lucia on November 15, 1979 and St. Vincent and the Grenadines on December 28, 1979. Three countries, Dominica, Finland, and Solomon Islands, informed the Fund of their acceptance of the obligations of Article VIII, Sections 2, 3, and 4, of the Fund’s Articles of Agreement, bringing to 50 the number of members that have formally accepted these obligations. Two countries, Cape Verde and the Comoros, which became members in 1978, informed the Fund that they were availing themselves of the transitional arrangements under Article XIV, Section 2. Three members, Djibouti, St. Lucia, and St. Vincent and the Grenadines, have not yet indicated their intention with respect to their status under Article VIII or Article XIV.
Developments in trade and payments practices of member countries during the period covered by this Report are dealt with in detail in the following section. These developments reveal that there was a continuation of the protectionist pressures that have built up since the early 1970s. These pressures have been caused by high rates of inflation, the occurrence of large-scale payments imbalances among the major groups of countries, and the widespread problem of structural unemployment in many of the industrial countries. Even though there was a small gain in the rate of growth of world trade in 1979, the sharp widening of the payments deficits of oil importing countries and the slowdown in growth in the industrial countries, together with the negative impact on prospects for the world economy arising from the steep increases in oil prices, were not conducive to any new initiatives for a broad-based effort to reduce the level of restrictions on trade and payments. Progress in liberalizing restrictions beyond the Multilateral Trade Negotiations (MTN) was achieved in only a few countries.
In several of the industrial countries, the continuation of excess capacity and uncertain prospects in key economic sectors and industries presented a serious obstacle to a scaling down of the use of trade restraints, notwithstanding the conclusion in April 1979 of the Tokyo Round of the MTN. Japan was the only major industrial country to continue liberalization of its import regime, in accordance with the policy introduced in 1978. For most industrial countries there was an absence of any marked liberalization of trade other than the proposed measures related to the MTN, although these countries initiated no major new restrictive actions during the period under review. Especially in such key sectors as iron and steel and textiles and clothing, mechanisms to control low-cost imports became institutionally entrenched. It was particularly in these sectors that the major industrial countries widened their use of restraint agreements with exporting (mostly developing) countries. In the shipbuilding sector, substantial subsidization was combined with adjustment programs with a view to the elimination of excess capacity in the medium term, while tight quantitative import controls continued to affect trade in consumer electronics and footwear. The continuing emphasis given in these countries to maintaining levels of protection rather than to substantive adjustment efforts inevitably has had an adverse effect on the growth of international trade; as well as inhibiting trade among the industrial countries, it is also damaging to the efforts of the developing countries to achieve vitally needed growth in their exports.
The Tokyo Round of the MTN, which was the seventh round of trade negotiations under the auspices of the General Agreement on Tariffs and Trade (GATT), and the first to address comprehensively the question of nontariff barriers, ended in April 1979.10 With the conclusion of the Tokyo Round there began the process of opening for signature a series of agreements to lower tariff and nontariff barriers. The tariff concessions provide for a reduction of tariffs in the industrial countries by, in principle, about one third, phased over a period of eight years beginning in 1980. By February 1, 1980 the tariff reductions incorporated in the Geneva Protocol of 1979 had been accepted by 25 countries and the Supplementary Protocol had been accepted by 19 countries. Also opened for signature were the texts of a number of agreements on nontariff barriers. These were the Agreement on Technical Barriers to Trade (Standards Code), the Agreement on Government Procurement, the Code on Subsidies and Countervailing Duties, the Arrangement on Bovine Meat, the International Dairy Arrangement, the Customs Valuation Code, the Agreement on Import Licensing Procedures, the Agreement on Trade in Civil Aircraft, and the Amendments to the Antidumping Code. By February 1, 1980 acceptances for the various agreements ranged from 10 countries in the case of the Customs Valuation Code to 22 countries for the Standards Code. Also adopted were texts on differential and more favorable treatment of developing countries and on trade measures for balance of payments purposes, safeguard actions for development purposes, and notification, consultation, dispute settlement, and surveillance. Late in 1979 the Contracting Parties to the GATT adopted a series of decisions which included the establishment of a committee to continue the unfinished negotiations on the multilateral safeguard system, and the establishment of a subcommittee of the GATT Committee on Trade and Development to monitor future protective actions by developed countries affecting imports from developing countries. The Contracting Parties also decided to give permanent status to the GATT Consultative Group of Eighteen, which was first established as an advisory body in July 1975. The Consultative Group of Eighteen retains its mandate to follow developments in international trade and trade policies, to act to forestall any threats to the multilateral trading system, and to coordinate relations between the GATT and the Fund in the context of the international adjustment process.
Last year’s Report noted that considerable progress in liberalizing trade and payments systems had been made by several developing countries in Asia during 1978. These countries generally maintained their more liberal policies during the period under review and in some cases extended them, while a number of countries in Latin America adopted new measures to reduce exchange and trade restrictions. The liberalization in these countries involved the elimination or relaxation of restrictions on payments and transfers for current international transactions, as well as a reduction in the use of multiple currency practices. There was also a reduction, although of more modest proportions than in recent years, in the number of bilateral payments arrangements between members. Several of these countries also reduced their reliance on quantitative import restrictions or lowered import duties or surcharges. In contrast to these developments, many developing countries, particularly in Africa, remained heavily reliant on current account restrictions, both on payments and trade, or they intensified such restrictions by introducing new import restraints in the form of either direct or quantitative controls or through measures adding to the cost of imports. There was a noticeable increase in the application of advance import deposit requirements. The exceedingly difficult payments situation of many developing countries and their burgeoning external debt service problems are reflected in the large and growing number of countries currently incurring payments arrears. During the period under review, 22 members were reported to have arrears on current and/or capital payments and transfers. This development is of utmost concern to the Fund because of its damaging effects on the international trade and payments system, as well as on the credit standing of the members with arrears. It is therefore imperative for countries with arrears of payments to take appropriate steps to restore a system of prompt payments as soon as possible. The reduction and eventual elimination of payments arrears is an important element of adjustment programs supported by the Fund’s financial assistance in several countries.
Changes in capital control measures in the industrial countries represented, in general, an appreciable liberalization of existing restraints on international movements of funds. The changes in many cases reflected efforts to adapt capital control measures to prevailing economic circumstances and the introduction of new and in some instances more flexible approaches to monetary and exchange rate management. In other countries, measures to relax restraints on capital outflows were aimed at encouraging foreign investment in the developing countries and/or in particular sectors abroad. The developing countries, in general, continued their efforts to attract external capital; however, there were few instances of a relaxation of restraints on capital outflows. Adaptations in capital controls in these countries reflected in varying degrees the changed outlook with respect to external financing requirements in the short term, and efforts to strengthen management of external debt and domestic liquidity. Further adaptations were made in respect of existing institutional arrangements and regulations for off-shore banking, and a few developing countries introduced such facilities during the period.
The second half of the 1970s can be viewed as a period in which there was a cessation of the long-term decline in the use of restrictive trade and payments practices experienced over the previous 25 years. The uncertain prospects facing the world economy in the period ahead pose a continuing threat to the efforts of both the industrial and the developing countries to maintain outward-looking policies. The alternative of an increased resort to protectionism and other forms of restrictions on trade and payments can only serve to retard the growth of world trade and production. A vigorous effort to implement effectively the agreements of the Tokyo Round of the MTN can make an important positive contribution to the restoration of a more favorable setting for the conduct of international trade. The Fund, for its part, will continue its efforts to assist countries to avoid undue resort to restrictive practices, especially by the provision of its financial resources to assist members in implementing appropriate adjustment policies.
This Report centers on exchange arrangements and exchange restrictions, but it also covers other external economic policy measures and intergovernmental arrangements that may have balance of payments implications. The period covered is 1979 and, where possible, the early part of 1980.
The country classification used by the Fund has been revised since last year’s Report. The classification now comprises three main categories—industrial countries and oil exporting and non-oil exporting developing countries. The coverage of the industrial countries’ category has been expanded from 15 countries to 21 countries.
The currencies of Belgium, Denmark, Federal Republic of Germany, Luxembourg, Netherlands, and, until December 1978, Norway.
Comprising Belgium, Denmark, France, Federal Republic of Germany, Ireland, Italy, Luxembourg, Netherlands, and United Kingdom.
The text of part of the Resolution of the European Council on the establishment of the EMS of December 5, 1978 was given in the Annual Report on Exchange Arrangements and Exchange Restrictions, 1979, pages 29–30.
Intervention in EMS currencies, which is required in unlimited amounts when bilateral limits are reached, creates claims and liabilities on the very short-term facility of the European Monetary Cooperation Fund (EMCF) which normally must be settled by the transfer of ECUs or other assets within 45 days of the end of the month in which intervention takes place.
The divergence indicator is a measure of the divergence of the market rate expressed in ECU for each EMS currency from its ECU central rate. Divergence is permitted as far as the divergence thresholds, which are established for each currency, taking into account its weight in the ECU basket in such a manner that there is broadly the same degree of probability of each EMS currency reaching its threshold. When a threshold is reached, there is a presumption that the authorities concerned will correct the situation by diversified intervention, measures of domestic monetary policy, changes in central rates, or other measures of economic policy.
Based on the Fund’s multilateral exchange rate model (MERM), in which the implicit weighting structure takes account of the relative importance of a country’s trading partners in its direct bilateral relationships with them, of competitive relationships with “third countries” in particular markets, and of estimated elasticities affecting trade flows. Changes in effective exchange rates derived from MERM may differ from estimated effective exchange rate changes based on changes in trade-weighted exchange rate indices for which the relative importance of the exchange rate changes of particular countries is measured in terms of these countries’ shares in bilateral trade of the country in question.
No information is available with respect to the present exchange arrangements of Democratic Kampuchea.
The MTN agreements were formally accepted by the Contracting Parties to the GATT in November 1979.