Part I: Recent Developments in Exchange Restrictions
- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1960
During 1959 and the first four months of 1960, progress in reducing or eliminating exchange restrictions has been substantial and has been made on a wide front; retrogressions have been comparatively few. The beneficial effects of the widening scope of currency convertibility have been felt in many areas, and the evolution toward freer, more orderly, and less discriminatory trade and payments has been strongly supported by a high level of economic activity, expanding international trade, and the general maintenance of monetary stability. Progress has not been confined to highly industrialized countries; other Fund members also have been active in the movement toward better trade and payments conditions. A larger percentage of world trade and payments is now being carried out in accordance with the principles set forth in Article I of the Fund’s Articles of Agreement, and this percentage continues to increase. A firmer basis has thus been established for a smoothly functioning international monetary system.
Recent developments in trade and payments have not merely reduced the scope of restrictions; they have also changed the nature of these restrictions. Of key importance was the introduction of external convertibility by several countries at the end of 1958. Today, the currencies of about half of the Fund’s members are convertible for virtually all nonresidents. In a number of countries, whatever restrictions on current payments remain have dwindled to the point of insignificance. Moreover, countries that continue to apply restrictions—profiting from the convertibility of the currencies of other countries—have simplified their own regimes. Several countries have also liberalized payments of a capital nature.
Under these conditions it is becoming increasingly possible to visualize in practical terms, for many of the Fund’s members, the establishment of the multilateral system of current payments, with the absence of foreign exchange restrictions, that was foreseen in Article I of the Fund’s Articles of Agreement. In consonance with this development it now appears that a number of member countries at present availing themselves of Article XIV of the Articles of Agreement will soon be able to implement in full the obligations of Article VIII. The Fund is presently studying the various aspects of such a step and is looking forward to the formal acceptance of Article VIII status by a number of countries in the near future.
Consequences of External Convertibility
In the last Annual Report on Exchange Restrictions, the introduction of external convertibility was described as the major monetary event of the reporting period.1 Since that time, external convertibility has been practised for a further twelve months, and the experience thus gained makes possible a more thorough appraisal of its achievements. External convertibility has worked well without any setbacks.
Quotations for externally convertible currencies in exchange markets throughout the world have shown only minor fluctuations in the past twelve months. Most Western European currencies have generally been strong in terms of the U.S. dollar. The French franc, the Italian lira, the deutsche mark, and the Netherlands guilder were quoted above par throughout the period. Quotations for sterling, the Austrian schilling, and the Norwegian krone were above par for most of the time, weakening slightly toward the end of 1959 but recovering somewhat in the first quarter of 1960. The Belgian franc and the Swedish krona fluctuated either side of par. All these exchange rate fluctuations were moderate and within the official limits. Late in 1959 and early in 1960, several Western European central banks, including those of Austria, Belgium, the Federal Republic of Germany, the Netherlands, Sweden, and the United Kingdom, raised their discount rates, thereby influencing not only their internal situations but also the international flow of funds through the exchange markets. An important consequence of the recent changes in the international monetary system is that international financial transactions and the rates in foreign exchange markets are again sensitive to relatively small changes in the major money markets.
Under the European Monetary Agreement (EMA), which came into operation when the introduction of external convertibility in Western Europe brought about the liquidation of the European Payments Union, nearly all the foreign exchange transactions of EMA participants have taken place through the normal foreign exchange market mechanism, within the limits set either directly or through arbitrage by the official buying and selling rates notified under the EMA. Only in a very few cases have some of these countries availed themselves of the facility to obtain short-term interim finance through the EMA mechanism; and all of the amounts so obtained have been repaid through the market.
In most of the countries whose currencies have been made externally convertible, the adaptation of their restrictive systems to this situation has been carried still further. These adaptations generally have been of a twofold nature. In the first place, the introduction of external convertibility made it possible for countries to simplify their systems of nonresident accounts and their prescription of currency regulations, since many of the rules in those fields had become meaningless or redundant. Also, discriminatory restrictions, initially based on the distinction between convertible and inconvertible exchange settlements, had generally lost their economic justification. The reduction of dollar discrimination and, in a more general fashion, the reduction of discriminatory treatment for balance of payments reasons had begun well in advance of the introduction of external convertibility, but when that step was taken, many countries carried the reduction of discrimination much further. The majority of Fund members have now achieved the elimination of dollar discrimination through liberalization of dollar imports, and several other members have announced programs that will lead to the final abolition of dollar discrimination in the course of 1960.
Despite this very real progress, discrimination, including that arising from bilateralism, continues to play an important role in the import policies of many countries. In a few countries, it is maintained for balance of payments reasons, but in others, protectionist considerations, especially in regard to agriculture, are now frequently hindering its elimination. The Fund is continuing its efforts with its members to achieve the elimination of discrimination when it is maintained for balance of payments reasons or when it is practised through the exchange system.
During 1959, the Fund formulated two decisions on problems arising in connection with the convertibility moves, one on the continued balance of payments justification for discrimination and the other on certain aspects of exchange rate quotations.
It was mentioned in the Tenth Annual Report on Exchange Restrictions that the Fund was examining the questions raised by the remaining discriminatory restrictions. As a consequence of this examination, the following decision on discrimination, which gave additional impetus to the evolution described above, was taken on October 23, 1959:
The following decision deals exclusively with discriminatory restrictions imposed for balance of payments reasons.
In some countries, considerable progress has already been made towards the elimination of discriminatory restrictions; in others, much remains to be done. Recent international financial developments have established an environment favorable to the elimination of discrimination for balance of payments reasons. There has been a substantial improvement in the reserve positions of the industrial countries in particular and widespread moves to external convertibility have taken place.
Under these circumstances, the Fund considers that there is no longer any balance of payments justification for discrimination by members whose current receipts are largely in externally convertible currencies. However, the Fund recognizes that where such discriminatory restrictions have been long maintained, a reasonable amount of time may be needed fully to eliminate them. But this time should be short and members will be expected to proceed with all feasible speed in eliminating discrimination against member countries, including that arising from bilateralism.
Notwithstanding the extensive moves towards convertibility, a substantial portion of the current receipts of some countries is still subject to limitations on convertibility, particularly in payments relations with state-trading countries. In the case of these countries the Fund will be prepared to consider whether balance of payments considerations would justify the maintenance of some degree of discrimination, although not as between countries having externally convertible currencies. In this connection the Fund wishes to reaffirm its basic policy on bilateralism as stated in its decision of June 22, 1955.
This decision was communicated to the Contracting Parties to the General Agreement on Tariffs and Trade, then meeting in Tokyo. The Contracting Parties welcomed the decision, and at the end of their ministerial meetings issued a similar statement, thus emphasizing further the international community’s interest in this matter.
As a concomitant of the move to external convertibility, central banks in Western Europe have declared their readiness to guarantee through official intervention that the U.S. dollar quotations in their markets shall not exceed officially established margins—most of which are about ¾ of 1 per cent—leaving to arbitrage the task of ensuring orderly cross rates with other currencies. In accordance with these arrangements, other currencies, if they move in opposite directions in relation to the dollar, may fluctuate in terms of one another within limits in excess of the margins set forth in Article IV, Section 3 (i), of the Fund Agreement. In order to regularize this technical situation, the Fund on July 24, 1959 formulated the following decision:
The Fund does not object to exchange rates which are within 2 per cent of parity for spot exchange transactions between a member’s currency and the currencies of other members taking place within the member’s territories, whenever such rates result from the maintenance of margins of no more than 1 per cent from parity for a convertible, including externally convertible, currency.
Multiple Currency Practices
Considerable progress has again been made during the past twelve months in eliminating and reducing the use of multiple currency practices. In several countries, this has been achieved by replacing complex multiple rate systems with a single rate; elsewhere, there has been further simplification of the existing multiple rate systems. As a result of these changes and of the reforms made in earlier years, the number of complex multiple currency systems has been reduced substantially. Those countries which during the last few years have substituted single exchange rates for complex multiple rate systems had, in general, satisfactory experiences with their new exchange systems during 1959, and most of them were able to strengthen their international reserves.
In three countries, Iceland, Saudi Arabia, and Spain, exchange reforms during the past twelve months included the establishment of a par value made effective for practically all exchange transactions. In Spain and Iceland, the elimination of complex multiple rate systems took place as part of comprehensive stabilization programs involving use of the Fund’s resources. Spain adopted an initial par value; and Iceland changed its existing one. As a result of its stabilization program, Saudi Arabia eliminated its multiple currency practice, abolished all exchange restrictions, and declared an initial par value applicable to all exchange transactions.
Two countries which undertook major exchange reforms in 1958 made further progress in 1959 in simplifying their exchange systems. In Argentina, the single fluctuating rate system was maintained, with a tendency to stability toward the end of the year. The authorities eliminated advance deposits for imports and some export taxes, and reduced the special import taxes introduced at the time of the exchange reform. Further progress was made in Turkey in simplifying the exchange rate structure for exports; as a result of these changes, a single rate now applies to all transactions except exports of two commodities.
In some other countries with relatively simple multiple currency practices, further steps were taken to reduce multiple rates. In Chile, the exchange markets for trade and for invisibles and capital transactions were merged. In China (Taiwan), all transactions except government payments were included in an exchange market with a single fluctuating rate. In Morocco, the establishment of a par value in October 1959 was accompanied by the removal of the 10 per cent tax on payments to other parts of the French Franc Area. In Nicaragua, the official rate now applies to almost all transactions.
The multiple currency systems of four other countries were simplified somewhat, but they continue to be complex. In Brazil, the number of export rates was reduced by moving more commodities to the free market. The exchange system of Yugoslavia was simplified by eliminating some of the effective import and export rates and by bringing the average import rate closer to the average export rate. Uruguay, in December 1959, introduced a new exchange system based on a fluctuating exchange rate; at the same time, however, advance deposits for imports and withholding taxes on exports were introduced and more imports were prohibited. Viet-Nam resolved its outstanding problems with the French Franc Area and was thus able to remove the broken cross rates that had existed in respect of the French franc.
As exceptions to the general progress in this field, some countries introduced multiple currency practices. In Cuba, exchange taxes ranging from 30 per cent to 100 per cent were introduced for many imports, and exchange controls were extensively applied. Korea established a retention quota system in July 1959, thus adding to the complexity of its multiple rate system. In the Philippines, a “margin” fee of 25 per cent was introduced in July 1959 on sales of foreign exchange for most purposes, and in April 1960 the use of a free exchange market was authorized for certain transactions.
While resort to multiple currency practices has been greatly reduced in the last few years, restrictions have not yet been completely eliminated. In some countries, bilateral agreements and restrictions on trade and payments have been continued. In others, advance deposit requirements for imports have been imposed and export and import taxes have been introduced, in part as substitutes for multiple currency practices. Nevertheless, the exchange reforms of the last few years, involving more realistic exchange rates and more appropriate fiscal and monetary policies, give promise of further progress in limiting the use of exchange restrictions.
In Latin America, where multiple rates were most common in the postwar period, the use of multiple currency practices has diminished greatly in the last few years, and complex systems now survive in only a few countries. Authorities in most Latin American countries that have had experience with multiple rate systems now regard them as unsatisfactory. On the other hand, a number of countries outside Latin America have, during the past few years, introduced multiple currency practices or made their existing systems more complex. Although these new practices may be intended as temporary measures designed to avoid the introduction, or even permit the relaxation, of trade and exchange restrictions, they involve the danger of proliferation of exchange rates, which, if allowed to go unchecked, may hamper economic development, create distortions within the economy, and hinder the balanced expansion of international trade.
The general decline in the number of bilateral payments arrangements which was noted in the previous Report continued throughout 1959 and the first months of 1960. Payments relations between the Spanish Monetary Area and other Western European countries were placed on a convertible currency basis after the introduction of Spain’s stabilization program; of the 9 bilateral payments agreements which the Spanish Monetary Area had with EMA countries in April 1959, none remain. France terminated 9 of its bilateral payments agreements (including the one with the Spanish Monetary Area). Western European countries (excluding Spain) have reduced the number of their bilateral payments arrangements in the past twelve months by 33, including 8 with countries in the Eastern bloc. There still remain, however, 84 bilateral payments arrangements, 52 of which are with countries in the Eastern bloc (see table, page 8).
A similar comparison of the bilateral payments agreements of all Fund member countries indicates that during 1959 and the first four months of 1960 Fund member countries terminated 53 bilateral payments arrangements, of which 37 were with other Fund members and 16 with nonmember countries. On the other hand, during the same period Fund member countries introduced 15 new bilateral payments arrangements, 5 of which were with other Fund members and 10 with nonmember countries. In addition, 6 new bilateral payments arrangements were established by two countries for the channeling of payments related to specified sectors of their trade with certain other countries, although most of their trade continues to be settled on a convertible basis.
The general liberalization of international payments resulting from the introduction of external convertibility has made it easier to dispense with bilateral payments arrangements. Nevertheless, Fund members still maintain some 260 bilateral payments agreements, of which 102 are with other Fund members and 158 with nonmember countries (mainly in the Eastern bloc).
Although the number of bilateral payments arrangements still operated by Fund member countries may appear arithmetically large, in fact they cover a relatively small proportion of the international payments of all but a few of those countries. In recent years, members have been increasingly able to eliminate bilateral payments arrangements with state-trading countries. However, bilateral payments arrangements frequently give rise to appreciable discrimination against Fund members and continue to be of concern to the Fund. In its discrimination decision (see page 3), the Fund reaffirmed its views on the need for reduction of bilateralism, which had been expressed in its policy decision on bilateralism, of June 22, 1955:
|Bilateral Account with\European Countries||Eastern Bloc|
|Brazil||Chile||Colombia||Ecuador||Finland||FrenchFranc Area||Greece||Iceland||Indonesia||Iran||Israel||Italy||Paraguay||Portuguese Monetary Area||Saudi Arabia||Spanish Monetary Area||Tragier||Turkey||U.A.R (Egyptian Region)||Uruauay||Yugoslavia||Albania||Bulgaria||China, Mainland||Czechoslavakia||Germany, Eastern||Hungary||Poland||Rumania||U.S.S.R|
1. This decision records the Fund’s views on the use of bilateral arrangements.
2. Fund policies and attitude on bilateral arrangements which involve the use of exchange restrictions and represent limitations on a multilateral system of payments are an integral part of its policy on restrictions. This policy aims at the elimination of foreign exchange restrictions and the earliest possible establishment of a multilateral system of payments in respect of current transactions between members. The Fund’s policies and procedures on such restrictions rest on Articles I, VIII and XIV of the Fund Agreement.
3. Certain members have already taken steps to reduce their dependence on bilateral arrangements, but many members still use them. The Fund welcomes the reduced reliance on these arrangements and believes that the improvement in the international payments situation makes it less necessary for members to rely on such arrangements. The Fund urges the full collaboration of all its members to reduce and to eliminate as rapidly as practicable reliance on bilateralism. In this respect the Fund recommends close cooperation of those who plan to make their currencies convertible in the near future. Unless this policy is energetically pursued by all countries, both convertible and inconvertible, there is serious risk that widespread restrictions, particularly of a discriminatory character, will persist. Moreover, the persistence of bilateralism may impede the attainment and maintenance of convertibility. This whole problem is one not only for countries which maintain bilateral arrangements but also for other countries whose domestic and foreign economic policies may adversely affect the balance of payments of other members.
4. The Fund will have discussions with its members on their need to retain existing bilateral arrangements or their ability to facilitate the reduction of bilateral arrangements by other countries. During the coming year, the Fund will explore with all countries which are parties to bilateral arrangements which involve the use of exchange restrictions, the need for the continuation of these arrangements, the possibilities of their early removal, and ways and means, including the use of the Fund’s resources, by which the Fund can assist in this process. In its examination of the justification for reliance on such bilateral arrangements the Fund will, without excluding other considerations, have particular regard to the payments position and prospects of the members concerned.
In its further contacts with members, the Fund will continue to urge the implementation of this decision.
Bilateral trade agreements have generally been maintained, even where bilateral payments agreements have been eliminated. In many countries, these trade agreements cover commodities not subject to import liberalization. As in other aspects of restrictions, it is important that the gains to be derived from the establishment of a multilateral system of payments should not be frustrated by action in the trade field.
In the light of its broad interest in matters relating to world trade and payments, the Fund has followed developments with respect to several regional arrangements which are of importance to its member countries generally.
The European Economic Community (EEC), which comprises Belgium, France, the Federal Republic of Germany, Italy, Luxembourg, and the Netherlands, has been in existence since the beginning of 1958. The first active steps toward the formation of a customs union among these countries were taken on January 1, 1959, when all their tariffs against one another were reduced by 10 per cent from the level of January 1, 1957. These tariff reductions were for the most part applied also to imports from other member countries of the OEEC and from countries outside Europe, including the contracting parties to the General Agreement on Tariffs and Trade, unless the reduction would have brought duties below the level provided for under the common external tariff. The initial increase in quotas for imports from EEC countries required by the Community’s treaty was extended, with certain limitations, to other members of the OEEC.
On January 4, 1960, a convention establishing a European Free Trade Association (EFTA) was signed by seven countries—Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom. Among other things, the convention calls for a reduction on July 1, 1960 of 20 per cent in the existing tariffs on goods imported from other countries in the EFTA.
On February. 18, 1960, seven Latin American countries—Argentina, Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay—signed the Treaty of Montevideo, which established a Free Trade Area and created the Latin American Free Trade Association. The treaty, which is subject to ratification, envisages a twelve-year period in the course of which the contracting parties shall gradually eliminate tariffs and restrictions of any kind in their reciprocal trade. The Fund, at the request of the countries concerned, prepared a special study on payments problems within the Free Trade Area, and communicated to them its preference for a system of settlements in freely convertible currencies.
The Multilateral Treaty for Free Trade and Economic Integration, signed in June 1958 by Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, became effective in January 1959 when it was ratified by El Salvador, Guatemala, and Nicaragua. Honduras ratified in March 1960. The treaty provides for freedom of movement of certain goods between the participant countries and the elimination of export and import taxes, as well as of quotas, on nearly half of the commodities in trade within Central America. Tariffs on some of the items concerned are to be lowered gradually over a ten-year period. Another part of the treaty provides for the granting of free trade privileges and certain tax benefits to special industries to be designated joint regional enterprises.
In an attempt to carry these principles further, a Treaty of Economic Association was signed on February 5, 1960 by El Salvador, Guatemala, and Honduras. The treaty, which is open to signature also by Costa Rica and Nicaragua, provides for the establishment over a five-year period of a common market in which the persons, goods, and capital of the participating countries would circulate freely. As this Report was being written, further discussions were taking place among the five countries concerned as to the best way to bring the common market into effect.
During the past few years, a large number of Fund members have introduced advance deposits for imports as a prerequisite to obtaining import or exchange licenses or to clearing goods through customs. At present, there is significant use of such requirements in Chile, Colombia, Ethiopia, Greece, Israel, Nicaragua, Paraguay, the Philippines, and Uruguay. In six of these countries, the advance deposits for some imports exceed 100 per cent of the import value.
Advance deposit requirements in most countries have been subject to frequent changes. During the past twelve months, they were reduced or eliminated in Argentina, Chile, Ecuador, France, Indonesia, Japan, Paraguay, and Spain. On the other hand, they were increased in Colombia and were introduced in Ethiopia and Uruguay. The number of countries using advance deposit requirements had increased in earlier years, but there has been a marked decline in their use during the past year.
Experience during the past few years has indicated that these devices are not very effective in reducing the demand for imports. The main reasons for this appear to be that the additional cost of importing which arises from the requirements is not very significant and that importers generally appear to have ready access to credit facilities to finance the deposits. As a method of monetary control, advance deposits for imports may be useful in absorbing liquidity from the economy for a short period after their introduction. Generally, however, they create a central bank liability in relation to importers, and therefore, once they have been imposed, it may be difficult to eliminate them without inflationary consequences. Moreover, the temporary absorption of funds resulting from advance import deposits may mislead governments into believing either that the funds in question can be used for current spending or that the use of the regular fiscal and other monetary tools can be neglected.
The progress in liberalizing payments of a capital nature which was noted in last year’s Report has continued. In Saudi Arabia, all limitations on the movement of capital by residents and nonresidents were removed. Many countries which now maintain controls largely for the purpose of screening capital movements, and which have recently achieved considerable liberalization of current transactions, also further liberalized capital transactions. In Austria, blocked balances as at the end of October 1959 belonging to residents of most countries were released, and many types of capital payment due to nonresidents that were previously available only for credit to such accounts are now authorized freely for remittance abroad. Increased facilities were announced in Denmark for the repatriation of capital funds and balances held by nonresidents, in addition to the facilities already available to foreign banks. In Finland also, facilities for the repatriation of blocked accounts held by nonresidents have been extended. In Italy, Italian companies may now, subject to certain conditions, invest abroad. Regulations in the Netherlands governing transactions in securities have been liberalized, and other authorized capital transactions are now channeled through the official exchange market. In Sweden also, the regulations concerning transactions by residents in foreign securities have been liberalized. Similar measures had been taken earlier in other Western European countries. In a number of other Fund member countries, mostly outside Europe, capital movements may take place freely through free exchange markets.
In addition to the countries mentioned in the previous Report, Saudi Arabia now permits its currency to be exchanged into any currency at rates within the official margins, and Greece also has established external convertibility for its currency.