- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1982
This Report covers events in 1981 and, where the information is available, the early part of 1982, drawing upon a number of sources of information available to the International Monetary Fund. The primary source is data provided to the Fund staff in the course of consultation visits to member countries. The Fund’s Articles of Agreement require that changes in members’ exchange controls and exchange rate arrangements be notified to the Fund promptly as they occur; measures intensifying members’ trade restrictions are subject to similar reporting requirements when the member has been granted an arrangement by the Fund for the use of its resources. In addition, the individual country references in Part Two of the Report have been prepared in close collaboration with national authorities. The Report centers on exchange arrangements and exchange restrictions, but it also covers other external economic interventions by governments and intergovernmental arrangements that may have balance of payments implications.
Global environment—Stagflation persisted in 1981 and was pervasive both in its domestic implications and in its consequences for the international exchange and trade system. For the first time since 1975, the growth rate of the volume of world trade fell below the growth rate of output, in part reflecting reduced demand for oil (Chart 1). Compounded by problems associated with mounting unemployment and structural adjustments to the new level of energy prices, and additionally in the case of the developing countries by relatively depressed commodity export prices and heavy debt servicing burdens, the stagnant trade environment has led to increased calls for government intervention in support of domestic industries. High and widely dispersed inflation rates have impaired the effectiveness of exchange rate adjustments and also caused interest rate differentials that induced capital flows that were at times seen as incompatible with domestic objectives. As a result, some countries have resorted to capital controls with a view to obtaining a measure of independence for domestic financial policies. The resulting combination of sectoral pressures for government support to counter import penetration, and financial market pressures that have contributed to exchange rate levels not fully consistent with sustainable balance of payments positions, has weakened the commitment to an open and multilateral trade and exchange system. Thus far, the slump in trade may be viewed as a cause rather than as an effect of increasingly restrictive tendencies. Nevertheless, restrictionist pressures, if unchecked, could exert cumulative contractionary effects on world trade and growth and result in the loss of the momentum toward the liberalization of members’ exchange and trade systems built up over the past three decades.
Chart 1.Growth of World Trade and Output, 1963–821
Source: International Monetary Fund, International Financial Statistics (various issues) and Fund staff estimates.
1 Trade (exports plus imports) and output (gross national product) are expressed in volume terms, and changes are annual rates compounded for 1963–72. Data for 1982 are projections, and prior to 1977, the People’s Republic of China is excluded.
The increased volatility of exchange rates that became evident in 1980 continued over the past year. Exchange and financial markets were generally disturbed by the deterioration of overall economic performance and uncertainties as to the future path of fiscal and other policies. With the adoption of more flexible exchange rate regimes by a growing number of members since the advent of generalized floating, exchange rates have been increasingly free and have reflected not only underlying but also ephemeral forces, and volatility in the foreign exchange markets has risen markedly. Nevertheless, the development in recent years of greater expertise in foreign exchange management at the enterprise level and the wider availability of forward cover have served to neutralize much uncertainty. Available evidence suggests that increased flexibility has not seriously hampered investment decisions, at least in the industrial countries, and may therefore have not impeded the long-run expansion of trade.
Official intervention aimed at dampening exchange rate fluctuations by making purchases or sales in the foreign exchange markets has therefore been viewed increasingly in terms of its likely benefits and costs. With the integration over the years of the international financial markets, the amount of intervention required to prevent exchange rate movements against fundamental influences has become very large, with implications for domestic monetary conditions. Partly in reflection of such considerations, the amount of intervention, as measured by gross monthly changes in official foreign exchange reserves, undertaken by authorities in the industrial countries lessened in 1981.
Exchange rates of developing countries, on balance, were little changed in nominal terms in 1981 after substantial depreciations in earlier years. When the continuing higher inflation rates generally prevailing in these countries are taken into account, real effective exchange rates, on average for the group, appreciated sharply in 1981. This appreciation, which was evident both for oil exporting and for non-oil developing countries, also reflected in part the strength of the U.S. dollar, to which the currencies of a large number of developing countries are pegged. Countries in this group have increasingly adopted more flexible exchange regimes in recent years. The number of discrete adjustments of exchange rates against their pegs also rose in 1981, but the frequency and magnitude of adjustments of regimes and of rates were generally insufficient to offset inflation differentials.
Commercial and exchange policy developments—As noted above, there has been a weakening over the past year in the commitment to an open and free trading system by influential groups at the national level. This has led to an increasing tendency to bilateral and sectoral policy actions outside these channels. Recent measures have included the continued maintenance by Japan of voluntary export restraints on automobiles, television sets, and, more recently, on certain computer components; bilateral agreements pertaining to imports of steel by the European Community (EC);1 antidumping actions for steel imports by the United States; and frequent countervailing actions involving a number of the industrial countries. A recent example of these pressures is the second Multifiber Arrangement (MFA) which, although retaining a multilateral framework and limiting the extent of retrogression, permits a more restrictive stance toward imports of textiles from low-cost countries, especially those from dominant suppliers. Agricultural protectionism also continued unabated. Export subsidies reflecting the political importance of the agricultural sector and “food security” concerns in many countries not only protected the domestic markets in these countries but also led to the displacement of more efficient producers from third markets.
These developments contrast with the liberalization of trade and the introduction of generalized tariff preferences for developing countries that occurred during the early 1970s. Despite the conclusion in 1979 of the Tokyo Round of the Multilateral Trade Negotiations (MTN) and the implementation of tariff concessions for tropical products, which contained a number of positive elements, progress toward liberalization stalled in the late 1970s, and there is a danger of retrogression. With the conclusion of the MTN, the mechanisms of the General Agreement on Tariffs and Trade (GATT) have been strengthened. In a recent decision taken by the Executive Board in April 1982, the Fund’s support was also pledged for the continuing efforts of the GATT in the trade liberalization area.
The general balance of payments difficulties of non-oil developing countries and the consequent lack of progress toward liberalization of their trade and payments systems, noted in the preceding Annual Report on Exchange Arrangements and Exchange Restrictions, 1981, continued in 1981 and in early 1982. Compared with the establishment of a realistic level for the exchange rate, supported by appropriate monetary and fiscal policies, restrictive trade measures not only incur large administrative costs (of paramount importance to countries with limited resources) but they also serve to divert resources from efficient (usually export) industries to relatively inefficient (usually import-substituting) industries.
Article VIII of the Articles of Agreement underpins the Fund’s role in encouraging its members to avoid restrictions on payments for trade and other current payments (which Article XXX defines to include payments due in connection with normal short-term banking and credit facilities, and moderate amortization payments on capital). Over the years, considerable progress has been made toward this basic objective of the Fund—promoting an open system of multilateral payments—both with respect to the original membership and with respect to the many members joining the Fund after its inception who have generally entered with a higher than average level of restrictiveness. Chart 2 traces trends in the number of various forms of restrictive practices maintained by a representative group of Fund members since the mid-1960s; it indicates broad progress in the 1970s in eliminating bilateral payments arrangements, multiple currency practices, and sundry forms of restrictions on payments for current transactions (mainly direct quantitative restrictions).2 That the incidence of import surcharges has increased over this period while the use of advance import deposits has shown little reduction reflects, in part, generalized fiscal difficulties. Restrictions on payments for capital transactions have also remained relatively widespread.
Chart 2.Incidence of Restrictive Practices by Fund Members, 1966–811
Source: International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions (various issues) and Fund staff estimates.
1 Data are based on 1966 Fund membership, which comprised 106 countries (on December 31, 1966.)
2 Based on 1975 membership of 128 countries; data for preceding years are not available.
Most important in its implications for the smooth functioning of the international payments system is the fact that the number of Fund members incurring external payments arrears (including government defaults) has continued to rise: 32 countries had outstanding arrears in 1981, compared with 15 countries in 1975. Relative to trade and to external debt, the aggregate amounts in arrears peaked in 1977 and have declined since then. Although this reduction in the aggregate amounts may indicate an improvement in the overall risk climate for creditors, the existence of still significant amounts of arrears in a wider group of countries signals increased difficulties for debtor-creditor relations.
The use of import-restricting measures, on balance, increased in 1981. In the industrial countries, protectionist pressures intensified in several industrial sectors involving products of developed as well as developing countries. As bilateral trade imbalances were viewed as the main cause of the resurgence in protectionist pressures, there was a growing tendency to attempt to find solutions through bilateral consultations and agreements in the area of nontariff barriers, including quantitative restrictions. Notably, a significantly greater share of world trade in automobiles has become subject to restrictions in the form of voluntary export restraint agreements. A number of developing countries with improving balance of payments prospects liberalized quantitative restrictions, while those experiencing balance of payments difficulties intensified restrictions, including import prohibitions and import surcharges. However, as many of the countries suffering from balance of payments difficulties were also experiencing deteriorating fiscal positions, the budgetary aspect of import surcharges was as important as their import-restricting effects in these countries. Reliance on multiple currency practices by the developing country group as a whole did not change significantly in 1981. In a number of countries engaging in multiple currency practices the multiple exchange rate structure reflected typically a dual exchange market system under which one of the rates was allowed to be determined by supply and demand conditions rather than resulting from an officially determined rate structure through direct exchange rate quotations or exchange taxes. Further progress was recorded in the decrease in the reliance on bilateral payments arrangements among Fund members. The volume of trade conducted under bilateral payments arrangements by Fund members, excluding that with state trading countries, is now small.
In general, the direction of modification of capital control regimes by industrial countries in the period under review continued overwhelmingly toward liberalization and, consequently, toward fuller integration of international capital markets. There were, however, several instances involving the reintroduction of measures affecting capital flows with a view to partly insulating national exchange markets from financial conditions abroad. There were also members retaining significant capital control regimes that administered quotas and ceilings in such a way as to achieve similar insulating effects but without introducing new controls. Adjustments to differential reserve requirements on foreign liabilities were also used to this end. Continued balance of payments pressures in developing countries were reflected in the virtual absence of movement toward liberalization of capital controls. Although many countries in this group approached these difficulties by removing or reducing impediments to capital inflows, an equal number of actions in 1981 involved increased limitations on capital outflows.
With the accession to membership by Bhutan and Vanuatu on September 28, 1981, the total Fund membership increased to 143 countries as of end-1981. During 1981, one country, St. Vincent and the Grenadines, accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement, raising to 54 the number of members that have formally accepted these obligations and 88 members, including Bhutan, were availing themselves of the transitional arrangements under Article XIV, Section 2. Neither Vanuatu nor two of the three countries that joined the Fund in the first half of 1982, viz., Antigua and Barbuda (February 25, 1982) and Belize (March 16, 1982), have yet indicated their intention with respect to their status under Article VIII or Article XIV. The Hungarian People’s Republic, which became a member of the Fund on May 6, 1982, has availed itself of Article XIV status.3
The members are Belgium, Denmark, France, Federal Republic of Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, and United Kingdom.
The data shown in Chart 2 are for a constant sample of countries (the 1966 Fund membership, with the exception of external payments arrears, which are based on the 1975 membership).
Article VIII of the Fund’s Articles of Agreement sets out, inter alia, the general obligations of members to avoid restrictions on payments and transfers for current international transactions, to avoid discriminatory currency practices, and to ensure convertibility of foreign-held balances. Article XIV describes transitional arrangements by which a member may, notwithstanding the provisions of Article VIII, notify the Fund that it will maintain and adapt to changing circumstances the restrictions on payments and transfers for current international transactions that were in effect on the date on which it became a member.