- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1984
The period covered by this Report is 1983 and, for major developments, the first quarter of 1984. 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 the previous Report, 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.
Global output and trade staged a welcome recovery in 1983 from the depressed levels of the previous year, and inflation continued to subside. Trade protectionism, however, continued unabated as the effects of recession on employment persisted in the world economy, and as exchange rates continued to respond to financial sector developments. An encouraging development at the global level was the moderate strength of trade growth in relation to that of output, for the first time since 1980 (Chart 1). Even so, the global trade elasticity remained well below its long-run level, underlining concerns as to persistent dampening effects of the resort to trade protectionism that has been widespread in recent years.
Import demand strengthened in the industrial countries. The strengthening was mainly accounted for by surges of demand for imported goods in North America and, to a lesser extent, in the Federal Republic of Germany and the United Kingdom. A noteworthy aspect was an incipient increase in demand for energy products in some major industrial countries, as cyclical factors offset the underlying trend toward energy conservation. In the developing countries the room for maneuver was constrained by balance of payments and debt considerations. Imports by oil exporting developing countries weakened sharply in response to ongoing budgetary difficulties, reflecting lower oil prices. In non-oil developing countries, import volumes remained approximately unchanged owing to the widespread implementation of demand and supply management measures aimed at curbing inflation and strengthening their balance of payments to a sustainable level. Nevertheless, this was a marked easing compared with the preceding year, when imports declined by 8 percent in real terms. The combination in 1983 of continued import demand restraint, somewhat improved terms of trade, and a firming of export markets abroad produced a further narrowing of the current balance of payments deficit of this group of countries—to US$56 billion, or about one half of the peak deficit of US$109 billion in 1981. Payments for the servicing of external debt amounting to US$97 billion continued to exert pressures on the availability of official foreign exchange. In a number of countries imports were curbed by direct and comprehensive restrictions on international trade and payments, as an emergency response to continuing balance of payments difficulties, including heavy debt service payments. This mix of factors was reflected in a slower accumulation of debt by non-oil developing countries, by 5½ percent in 1983 (to US$670 billion, excluding debt to the Fund), down from an average 17 percent rate in the preceding three years. Short-term debt, in particular, declined from 20 percent to 15 percent of total debt, and a general lengthening of maturities was obtained through restructuring exercises that in 1983 involved some US$72 billion of debt service obligations, either overdue or soon to fall due, compared with US$6 billion in 1982. Nevertheless, external payments arrears (including government defaults, as explained below in Section III) increased further from the high end-1982 level of US$25 billion, despite the rescheduling of some US$30 billion of obligations overdue or falling due in 1983, to stand at US$27 billion at end-1983.
Exchange Rate Arrangements
As rates of inflation continued to decline in most countries, inflation differentials between industrial countries were less prone to large fluctuations. Increased overall stability in international financial markets was reflected in diminished volatility of exchange rates in 1983. Interest differentials remained high, reflecting in part the different fiscal treatment of net savings in major industrial countries. Questions arose as to the role of these differentials in a misalignment of major currencies, as the pattern of trade which emerged was widely viewed as unsustainable. Recourse to official intervention to influence exchange rates lessened, continuing the trend in recent years that was noted in the 1983 Report. The increasing integration of capital markets, inter alia, has contributed to a further increase in the large amounts of intervention required in relation to the total volumes of financial assets in these markets in order to influence exchange rates. Increased use of monetary targeting techniques in recent years has also implied that the monetary impact of intervention has largely been sterilized. Exchange rate arrangements of smaller industrial countries tended also to have less official intervention—one member adopted an independently floating exchange rate system—and those of other industrial countries with managed floating regimes tended to have a higher degree of flexibility.
Most developing countries in 1983 continued to maintain pegged arrangements for their exchange rates. There was, nevertheless, a continuing shift toward arrangements involving greater flexibility, short of independently floating. An important aspect of the evolution toward greater flexibility in recent years has been the substitution of various forms of managed floating for pegged arrangements—in particular, arrangements involving a peg to a single currency. This movement in 1983 took the form of four countries adopting pegs to currency composites, rather than to single currencies, and to a shift of five countries from pegged to more flexible arrangements. Given the preponderance of pegging, combined with relatively infrequent adjustments to exchange rates, a feature of developing countries’ exchange rate policies in recent years has been inertia in adjusting their exchange rates to regain and maintain international competitiveness. However, as the cost of an overvalued exchange rate in a recessionary world economy became increasingly burdensome during 1983, many developing countries altered their exchange systems or operated the systems in such a way as to achieve a real devaluation of their currencies. In several instances, countries adopted arrangements embodying periodic adjustment of the exchange rate explicitly to maintain competitiveness according to an indicator. This has also been a feature of several programs supported by the use of Fund resources.
As in 1982, all discrete adjustments of pegged currency exchange rates were in a downward direction. The average nominal devaluation against the peg was on the order of 20 percent. However, adjustments in some countries were substantially larger, ranging up to 78 percent for the zaïre, 61 percent for the Bolivian peso, and 50 percent for the Guinea-Bissau peso and the Sierra Leone leone; the median change was 6 percent. Virtually all changes in the exchange rates of currencies with more flexible arrangements also represented depreciations against the U.S. dollar, and most exceeded the 12 percent weighted appreciation of the U.S. dollar itself against its major trading partners. The effect of these adjustments, in terms of inflation-adjusted performance, was an average (unweighted) real appreciation of developing members’ currencies of less than 1 percent in 1983. One feature of the flexibility in exchange rate arrangements in some countries was the temporary application of more than one exchange rate to certain different groups of transactions, as a transitional step toward a new unitary exchange rate.
Commercial and Exchange Policy Developments
With high unemployment still present in most industrial countries, and with severe balance of payments and debt problems continuing in a large number of developing countries, the international exchange and trade system continued to be affected by restrictive and protectionist tendencies in 1983. Resort to protectionist measures continued to hamper progress toward global economic integration and greater efficiency in resource allocation. Following the pattern of the previous year, there was a preference in many countries in 1983 for actions of a quantitative rather than price or cost-related nature, and most of the measures were of a commodity-specific character, or involved bilateral negotiations. On balance, it would appear that there was a continued tendency last year to increase barriers to trade through quantitative controls or agreements of various forms aimed at limiting imports, while at the same time—and to a lesser extent—reducing the level of restrictiveness in the form of taxes and tariffs or their equivalent exchange measures. Structural problems were still apparent in many industries, in part owing to the retarding influence of protected domestic markets on technological development and on reorganization to reflect changed price structures, including continued adjustment to energy prices.
The continuing spread of protectionism was a manifestation of a weakening of the trade policy stance of governments and of the increased frequency with which requests for barriers against foreign competition were granted. To some extent, the adoption of a stronger protectionist stand has been facilitated during the last several years by the drift away from commercial policies based on published schedules or protective tariffs toward non-tariff barriers—for example, safeguards, antidumping laws, and countervailing duties. The high degree of uncertainty about the invocation of these measures against a trading partner and the highly legalistic and political character of such decisions have made commercial policies particularly disruptive to the pattern of trade. In the past, the expectation in some quarters has been that the drift toward protectionism would be at least arrested when recovery from the protracted recession commenced. Despite recovery in some countries and sectors, unemployment has remained generally high, capacity utilization low, and protectionist measures strong. A multiplicity of arguments is advanced for protectionism, such as concerns about safeguarding employment and avoiding disruption in affected industries, the magnitude of bilateral trade balances, the impact of exchange rate movements, strategic reasons, and retaliation against protectionist measures in other countries. In effect, however, protectionist policies have been detrimental to policies that promote structural adjustment and a sustained economic recovery. There were several antiprotectionism pledges by governments in 1983—for example, those at the OECD ministerial meeting, the Williamsburg summit meeting of heads of state, and UNCTAD VI. An issue which has been increasingly contentious is that of subsidization of exporting industries. This has been a predominant source of complaints of unfair competition, and a major source of friction in the steel and agricultural sectors. The concern has broadened from export subsidies per se to official support through industrial targeting that may affect the competitiveness of a range of export sectors; it has raised demands for matching subsidies and other forms of intervention.
The trend toward increased reliance on quantitative controls and quotas was particularly evident in industrial countries. These measures were not only intended to restrict trade among themselves, but were also aimed at limiting market access to manufactured exports of the more advanced developing countries. Security and infant industry considerations played an increasing role in 1983 as arguments for increased protection in such sectors as electronics and high technology. In more traditional sectors (agriculture, textiles, automobiles, steel), the overriding reason for the intensification of protection continued to be the need to maintain employment levels in the face of structural maladjustments which had led to a considerable loss of competitiveness. There were, however, two important exceptions to this trend toward increased restrictiveness among major trading countries. First was the EC Council’s decision to review regulations under the Common Agricultural Policy with the intention of bringing domestic prices for certain farm products more in line with world market prices. Agricultural sectors in general continued to be the most intensely regulated and supported. The second was a number of measures taken by Japan to open up the economy to foreign competition.
In the textile and steel sectors a number of bilateral agreements were concluded, although unilateral measures to restrict imports of steel and steel products from newly industrialized countries intensified in 1983, with adverse consequences for the latter countries’ balance of payments. These actions were accompanied by so-called voluntary export restraints on the part of some countries, limiting trade flows particularly in electronics and automobiles.
Among developing countries, several oil-exporting countries intensified quantitative import restrictions, increased tariffs, and adopted exchange rate measures aimed at protecting the balance of payments from the effects of a further decrease of oil prices in the world market. Among other developing countries, an increased number made use of more realistic exchange rate policies to improve their external position, usually within the framework of financial programs implemented in conjunction with the use of Fund resources. A large number of developing countries, however, introduced new or intensified existing restrictions on current invisibles, particularly those relating to exchange allowances for travel and related expenses, and income remittances to nonresidents. Also, several major developing countries facing severe debt-servicing problems resorted to relatively intense and comprehensive exchange restrictions on an emergency basis, and disorderly and ad hoc restrictions continued to be marked in this group. As noted earlier, despite a restructuring of external obligations of unprecedented proportions external payments arrears increased further from the high level in the previous year.
The number of bilateral payments agreements between Fund members declined again in 1983. As in recent years, arrangements not involving the payments system (i.e., voluntary export restraints and other bilateral trade agreements, including barter and countertrade arrangements) were actively used in 1983. Countertrade arrangements have become more widely used over the last few years, as countries have attempted to cope with the disruptions of normal financing arrangements owing to the disturbed debt situation. The Fund has continued to voice its concern at the proliferation of countertrade arrangements, which have discriminatory and restrictive features similar to those of bilateral payments agreements, and thus are detrimental to the promotion of a multilateral trading system.
Even though overshadowed by the impact of quantitative restrictions, price-related measures were also used in 1983 by some countries in their attempts to influence the structure of external transactions. Tariff and duty increases were largely absent in the industrial countries. In fact, lower tariffs on imports from developing countries were adopted by industrial countries under the Generalized System of Preferences (GSP), and other reductions in import duties were undertaken by several countries outside the GSP; in some cases, however, conditions for GSP eligibility were tightened. Among developing countries, tariff and import duty reductions were adopted in a few countries and increases were enacted in many others. While changes in advance import deposit requirements were only minor in 1983, there were a number of changes in regulations affecting import payments or the procedures of such payments, which on balance tended to ease conditions on import payments. As in previous years, a number of developing countries adopted measures aimed at promoting exports, especially in the form of increased fiscal incentives or special credit facilities supporting export activities.
Taxes and subsidies on international transactions administered through the exchange system, and therefore subject to Fund jurisdiction in accordance with Article VIII of the Articles of Agreement, continued to be employed in a number of developing countries, and in two industrial countries. Recourse to multiple exchange rate practices had increased in 1981 and 1982, and the volume of Fund members’ transactions conducted under such arrangements had also increased. In 1983, however, the tendency toward fragmentation of exchange markets was reversed, as a number of members unified exchange rates, often in the context of programs in support of the use of the Fund’s financial resources.
The pattern of international capital flows last year was not determined to an important extent by changes in regulations affecting such flows. As in previous years, the main forces behind international capital movements in 1983 were interest rate differentials, expectations regarding exchange rate movements, and the large borrowing requirements of a number of countries, including some oil exporters and non-oil developing countries faced with severe debt-servicing difficulties. The long-term trend toward liberalization of capital flows continued in 1983 as industrial and developing countries on the whole tended to liberalize both portfolio and direct investment flows. Greater openness of capital markets was pursued in order to remove impediments to market determination of exchange rates, as sustained imbalances of controls could be reflected in over- or undervaluation of exchange rates. However, in several developing countries experiencing large external disequilibria, existing regulations were administered more restrictively in an attempt to curb capital flight. Despite this, capital flows through illegal parallel exchange markets increased substantially in some instances.
Total Fund membership remained unchanged in 1983 at 146 countries. During 1983, 3 countries, Belize (June 14, 1983), Iceland (September 19, 1983), and Antigua and Barbuda (November 22, 1983) accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement, raising to 59 the number of members that have formally accepted these obligations. Eighty seven countries were therefore availing themselves of the transitional arrangements under Article XIV, Section 2. In addition to those members that have accepted the obligations of Article VIII, 28 countries availing themselves of the transitional arrangements of Article XIV maintain exchange systems which 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.