- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1983
The period covered by this Report is 1982 and, for major developments, the first quarter of 1983. The Report draws on information available to the Fund from a number of sources, including that provided in the course of consultation visits to member countries, and it has been prepared in close collaboration with national authorities. The Fund’s Articles of Agreement provide for notification by member countries to the Fund of a comprehensive description of their exchange controls and exchange rate arrangements, and changes in these as they occur. Measures intensifying members’ trade restrictions are subject to similar reporting provisions when a member has been granted an arrangement for the use of the Fund’s resources. The Report centers on exchange arrangements and exchange restrictions, but it is also more comprehensive in that it presents other external economic policy measures and intergovernmental arrangements that may have balance of payments implications. As in previous Reports, questions of definition and jurisdiction have not been raised; the description in the Report of a restrictive practice by a member does not imply that it is or is not being maintained consistently with the Fund’s Articles, or that, if subject to Article VIII, it has or has not been approved by the Fund.
Developments in exchange arrangements and exchange restrictions took place against a background of declining world output and trade in the period under review. After stagnating in the preceding year, the volume of world trade declined by 2.5 percent in 1982 (Chart 1). This was the first decline in world trade since 1975; the fall in global economic activity, by 0.3 percent, was the first in over two decades. Within this broad context, developments in the major country groups were diverse. Imports declined slightly and retained their share of domestic markets in the industrial countries, following sharp declines in market shares in 1980 and 1981; imports of the non-oil developing countries contracted in response to the financing difficulties of a number of these countries, while output rose. Despite the contraction of imports, the aggregate current account deficit of the non-oil developing countries declined only slightly to US$87 billion, compared with the peak deficit of US$108 billion in 1981, reflecting continued weak export markets, adverse terms of trade developments, and substantial increases in debt-servicing payments. Sharp declines of oil revenues were also reflected, in some oil exporting countries and in the group as a whole, in a slowing of import growth that had previously been a major source of world trade growth. A number of developing countries adopted or intensified restrictive exchange and trade measures.
Chart 1.Growth of World Trade and Output, 1963–821
1 Trade (exports plus imports) and output (gross national product) are in volume terms Changes for 1963–72 are annual compound percentage rates. Prior to 1977, the People’s Republic of China is excluded.
Unemployment in industrial countries continued to rise, reaching almost 9 percent by the end of 1982, and added further pressure for protectionist measures to counter import penetration in major sectors that had been undergoing structural adjustments. In 1982, the pressures for protectionism in the manufacturing industry were increasingly expressed within an expanding framework of bilateral and multicountry agreements to limit imports of automobiles, steel, textiles, and other products. The existing highly restrictive structure of agricultural protectionism remained largely unchanged, although the level of subsidization under arrangements for price equalization increased markedly as a result of depressed commodity prices. In early 1983, agreements for trade in manufactures tended to become more formalized; bilateral agreements became more restrictive, as precise undertakings were included in some agreements to hold down exports and a floor-price system that would commit exporters to align their export prices with domestic prices in the importing country was introduced in others. One major factor often pointed to by industrial groups seeking protection has been the failure of flexible exchange rates to move in ways consistent with early equilibration of trade flows, although protectionism represents a costly response to such problems of inappropriate exchange rates. Through most of 1982 the effective exchange rates of the U.S. dollar and pound sterling, as measured in terms of the Fund’s multilateral exchange rate model (MERM), appreciated in the face of deteriorating balance of payments prospects for those countries. Despite continued unsettled conditions in exchange markets and problems with foreign debt exposure, the long-term trend toward liberalization of capital transactions in the industrial countries was sustained in 1982, although in several larger developing countries capital flows became severely restricted.
In the area of exchange rate arrangements in 1982 there was less official intervention by authorities in the industrial countries than in 1981—as measured by the sum of gross monthly changes in official foreign exchange reserves (thereby excluding very short-term reversible intervention). In other countries, the trend observed since the early 1970s toward greater flexibility of exchange rate arrangements continued; however, at the end of 1982, the majority of Fund members still pegged their currencies to a single currency or a currency composite (including the SDR). Of the total Fund membership of 146, 33 members, including the larger members, maintained flexible exchange arrangements, but only 8 permitted the exchange rates of their currencies to float truly independently. Adjustments to pegged exchange rates occurred on 30 occasions in 1982 involving, in all instances, devaluations against the peg. Movements of effective exchange rates of the major currencies subject to flexible exchange arrangements, other than the U.S. dollar, generally showed sizable depreciations from the end of 1981 to the end of 1982, as did movements of virtually all other flexibly determined exchange rates.
In several instances, devaluations of exchange rates to improve competitiveness in the presence of balance of payments pressures were limited to particular categories of international transactions. In the main, these members introduced, sometimes in the context of adjustment programs supported by the Fund, multiple exchange rates to limit price increases of essential imported goods, or to support public and private enterprises that had assumed heavy external debt-servicing obligations. At the same time, several countries eliminated existing multiple currency practices, although in most instances these had been limited in their coverage. Thus, following an increase in 1981, the number of Fund members maintaining multiple currency practices leveled off in 1982, although overall the practices became more significant.
Commercial and Exchange Policy Developments
The international exchange and trade system in 1982 remained subject to restrictive pressure. In the industrial countries, the demands for restrictive actions stemmed mainly from rising unemployment, and in the developing countries, mainly from severe external financing difficulties. Two features marked trade actions in general: The first, an increased recourse to quantitative, rather than price-or cost-related restrictions, and the second, the distinctly discriminatory, bilateral and commodity-specific character of members’ actions; fewer members’ actions were “across-the-board.”
Members generally did not opt for increases in tariffs, taxes, or import deposit requirements in 1982. However, increased resort was made to quantitative restrictions, with attendant adverse effects on resource allocation in trade; it may be noted that, unlike taxes and tariffs which tend to become part of the fiscal system, one somewhat positive aspect of quantitative controls is that they may be more easily reversed in the event of a recovery in international markets. The tendency in the industrial countries was to take action in the interest of limiting the loss of employment in specific manufacturing industries; an exception was Japan, which undertook some import-liberalizing measures. In most instances, the actions were also country-specific. In the textiles sector, the concept of discriminatory limitation of imports from “dominant” suppliers was introduced in the protocols of the Multifiber Arrangement (MFA). Measures to curb imports of steel, automobiles, and consumer electronics were predominantly bilateral. Most developing countries’ actions in the quantitative area were to limit directly imports of luxury or “nonessential” goods and allowances for travel abroad. Among the developing countries as a group too, there was a clear trend toward intensification of quantitative as well as other restrictions. In the instances in which exceptionally some liberalization did occur, it took place within the framework of members’ programs in support of use of Fund resources.
Against the background of the protracted recession and falling commodity prices, the impact of existing restrictions varied according to the form of restrictions; although, overall, their impact has probably been to raise the effective level of protectionism. For example, quantitative restrictions expressed in share-of-market terms were more restrictive than limits expressed in absolute terms. Price-related measures varied in their impact according to the form of tax, subsidy, or multiple exchange rate employed. With falling commodity prices abroad, producers in markets protected by variable-rate subsidies designed to equate domestic prices with world market prices required increased protection, in contrast to situations of flat rate ad valorem levies on imports or subsidies on exports and fixed multiple exchange rates.
Bilateralism falling within the Fund’s purview was reviewed in 1982 by the Executive Board. Formal bilateral payments arrangements maintained by members were found to have declined further in importance since the mid-1970s. However, arrangements falling mainly outside the payments system, such as the export restraints and other trade agreements concluded bilaterally between the major industrial countries, and barter and countertrade arrangements in other member and nonmember countries, have become increasingly widespread. These latter types of arrangement have in recent years extended beyond their traditional East-West trade environment, despite frequent problems with the quality, cost, and range of goods obtained by one or both parties to the arrangements.
As noted above, a smaller, yet still significant, number of price-related actions (taxes, surcharges, and tariffs) were taken in 1982 than in 1981 to influence imports. Under the Generalized System of Preferences (GSP) several developed countries continued to improve market access for developing countries; outside of the GSP, industrial countries made some modest reductions in tariffs. Developing countries made various modifications to both tighten and liberalize their tariff structures. As for advance import deposit requirements, there were relatively few actions to increase or impose such requirements in 1982 and in several instances, the scope of these practices was reduced. Balance of payments difficulties led a number of countries to introduce or increase incentives to increase exports. These were mainly fiscal in nature (as there were few unilateral quantitative restraints on exports to be relaxed) and took the form of specific rebates, or a lowering of export taxes or duties. Also common were preferential financing facilities for exports. Where multiple exchange markets existed, the application of a relatively depreciated rate for certain exports was also used.
Measures taken by developing country members to restrict current invisibles were widespread, particularly with respect to “nonessential” travel expenditures. Remittances of nonresident income were also made more difficult to effect in a number of countries. Few measures were introduced to liberalize invisibles transactions.
The postwar trend toward a gradual liberalization of international capital flows, both portfolio and direct investment, continued. Among developing countries, liberalization measures affecting capital were directed mainly toward facilitating inflows of capital for balance of payments support; new restrictions on capital outflows were relatively few but were of considerable importance in several countries encountering severe debt-servicing difficulties.
The growing imbalances in international payments were reflected in a sharp increase in external payments arrears in respect of payments for current international transactions, as well as external debt. After remaining at a relatively constant level of SDR 6–7 billion in the five years through 1981, the total of arrears of Fund members rose sharply toward the end of 1982 to SDR 14 billion, or 2.5 percent of the outstanding debt of non-oil developing countries. In view of the serious consequences of arrears for the international payments system—and for countries maintaining them in terms of access to and cost of international credit and traded goods—programs in effect with the Fund have as an important objective the programmed reduction, and where possible, the elimination of arrears by members.
Fund Treatment of Restrictions
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). The considerable progress that has been made over the years toward this basic objective of the Fund—promoting an open multilateral system of payments—was noted in the introduction to the 1982 Annual Report on Exchange Arrangements and Exchange Restrictions. Under Article VIII, all members of the Fund have an obligation not to impose restrictions on the making of payments and transfers for current international transactions, nor to engage in discriminatory currency arrangements or multiple currency practices. When members maintain restrictions and currency practices inconsistent with Article VIII, or when not specifically approved by the Fund or authorized under the transitional provisions of Article XIV of the Fund’s Articles, these regulations are legally unenforceable in other members’ territories. The determination whether or not a particular measure constitutes an exchange restriction or multiple currency practice within the meaning of Article VIII, Sections 2 and 3 is made by the Fund on the basis of information provided by the member’s authorities, and within the guidelines established by the Fund’s Executive Board.
Actions affecting both the exchange and trade areas fall within the ambit of general surveillance of members’ economic policies under Article IV, of the Fund’s Articles, as amended in 1978 to incorporate the floating exchange rate system. In particular, “the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital” are considered by the Fund as developments that might indicate the need for discussion with a member.1 Surveillance of these policies by the Fund takes place in the context of its regular consultations with members, and on other occasions when developments indicate the need for special consultations.
In addition, the Fund makes its financial resources available to countries facing balance of payments difficulties in support of adjustment programs designed to restore balance of payments equilibrium in a manner that is consistent with a liberal exchange and trade system conducive to world trade growth. In accordance with this aim, most programs in association with stand-by arrangements and the extended Fund facility that were approved during 1982 provided for a reform or liberalization of the exchange and trade system. The exchange liberalization measure most frequently specified was the adoption of greater flexibility in exchange rate management, to lessen the need for reliance on administrative controls for the allocation of foreign exchange that would sustain exchange rates at an inappropriate level. Unification of exchange markets at a more realistic rate and the reduction in the scope and number of multiple currency practices were also provided for in several programs. As was noted above, provisions relating to the reduction and, where possible, the elimination of external payments arrears were also a feature in an increasing number of programs. Trade liberalization measures typically involved the dismantling of the protective system created by import-substitution policy—the level and dispersion of tariff rates were reduced and quantitative restrictions were abolished for a large share of imports. Other measures included streamlining the import licensing system and replacing quantitative restrictions with a more efficient tariff system. In a number of cases in which immediate liberalization was considered unfeasible owing to the severity of balance of payments pressures, the programs included an intention to liberalize trade as progress was made in restoring balance of payments equilibrium. In addition, all economic programs adopted by members in support of use of the Fund’s financial resources incorporated a standard performance criterion limiting the availability of financial assistance to the member country if it imposed or intensified exchange and trade restrictions.2
With the accession to membership by Antigua and Barbuda (February 25, 1982), Belize (March 16, 1982), and Hungary (May 6, 1982), the total Fund membership increased to 146 countries as of the end of 1982. During 1982, 2 countries, New Zealand (August 5, 1982) and Vanuatu (December 1, 1982) accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement, raising to 56 the number of members that have formally accepted these obligations, and 88 members, including Hungary, were availing themselves of the transitional arrangements under Article XIV, Section 2. Neither Antigua and Barbuda nor Belize have yet indicated their intention with respect to their status under Article VIII or Article XIV. In addition to those members that have accepted the obligations of Article VIII, 29 countries availing themselves of the transitional arrangements of Article XIV maintain exchange systems that are free or virtually free of restrictions on payments and transfers for current international transactions. Thirteen of these countries are members of the West African Monetary Union or the Central African Monetary Area.
Executive Board Decision No. 5392-(77/63), adopted January 22, 1979, “Principles of Fund Surveillance Over Exchange Rate Policies,’ Selected Decisions of the International Monetary Fund and Selected Documents, Ninth Issue (Washington, 1981), pages 12–13.
This performance criterion states that if a member modifies its exchange system inconsistently with Article VIII of the Fund’s Articles, whether approved by the Fund or not, or imposes or intensifies import restrictions for balance of payments reasons, it is prevented from purchasing under a stand-by arrangement or the extended Fund facility.