Chapter II. Fund Activities in the Field of Restrictions
- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1951
1. In 1950
During 1950, the Fund advised a number of countries on policies to be pursued in the field of exchange practices. This involved both Fund review and approval of specific measures, and general advice on a wide range of matters affecting the restrictive policies of member countries. Throughout the year, the Fund continued and intensified its efforts to encourage countries to restore conditions favorable to relaxation of restrictions. The Fund has sought to encourage members to relax restrictions where this was financially feasible. At the same time, efforts have been made to encourage members to simplify their restrictive systems. Some progress was achieved during the year, particularly in the simplification of multiple rate structures. In some cases, these steps involved the readjustment of the par value of the country’s currency.
As in past years, the Fund has worked directly with many countries with regard to their multiple currency practices and has sent missions to them for the study and discussion of their problems. During 1950, the Fund discussed changes in the multiple currency practices of several members, including Austria, Bolivia, Chile, Ecuador, Greece, Iran, Nicaragua, Thailand and Uruguay. In many cases, the elimination of multiple currency practices proved impossible, but many of the adjustments made during 1950 represented simplification of rate structures. Among the more important developments was the elimination in some countries of compensation transactions, which usually imply an extensive multiplicity of exchange rates.
Effective July 1, 1950, Honduras was able to bring its exchange rate spread within the limits permitted by the Fund Agreement and became the first country which, having taken advantage of Article XIV of the Fund Agreement at the outset, accepted the obligations of Article VIII. This followed a period of close collaboration between Honduras and the Fund and coincided with certain reforms in the banking and monetary system of Honduras, which were developed with the assistance of members of the Fund staff. The Fund has also been engaged in the study of the restrictive systems of certain other members and is working with them with a view to seeing if they, too, might accept the obligations of Article VIII.
Associated with its work in exchange restrictions are the Fund’s relations with the Contracting Parties to the General Agreement on Tariffs and Trade. The Fund participated in the Fourth Session of the Contracting Parties at Geneva early in 1950. The Contracting Parties, in accordance with Article XV of the GATT, invited the Fund to take part in the consultations on recent changes in the import restrictions of Australia, Ceylon, Chile, India, New Zealand, Pakistan, Southern Rhodesia and the United Kingdom. This consultation took place at the Fifth Session held at Torquay, England, in the autumn of 1950.
The Fund analyzed conditions in each of the countries where restrictions were under review and submitted to the Contracting Parties a report and a more extensive background paper on each of them. The background papers covered the restrictive systems and the balance of payments and presented analyses of the causes and effects of the import restrictions in the light of the existing situation. The reports contained the Fund’s conclusions with respect to the import restrictions. The Fund’s representatives at Torquay discussed this material with the contracting parties and took part in their deliberations.
The results of the Fund’s analysis varied from case to case. For some countries, balance of payments conditions did not seem to warrant further relaxation of import restrictions. For others, the conclusion was that circumstances were such that a progressive relaxation of discriminatory import restrictions could begin, having due regard to the uncertainties of the situation.1
During the formative stages of the European Payments Union, the Fund took part in the formal and informal discussions held among the participating countries of the OEEC in Paris. The Council of the Organization for European Economic Cooperation at its meeting on July 6-7, 1950, approved a document agreeing to the establishment of a European Payments Union. Paragraph 82 of this document entitled “Relations with the International Monetary Fund” reads as follows:
82. The functioning of E.P.U. will be of great interest to the International Monetary Fund of which many participating countries are members, and these countries will be concerned to ensure that obligations incurred by them as Members of the E.P.U. should be consistent with obligations which they may have as members of the International Monetary Fund. Close co-operation and consultation with the International Monetary Fund are desirable, and it will be necessary for the Management Committee to examine and report to the Council what shall be the appropriate relationships.
The Fund and the Managing Board of the EPU have under consideration the nature of the relationship which should be established between them. The Fund is continuing to study the significance of EPU developments for its member countries, including the effects of such arrangements upon the trade and payments positions of Fund members not participating in the EPU.
2. Fund Activity in the Future
The Fund anticipates important developments in the field of restrictions during 1951. Certain new measures may well be required as a result of rearmament needs. Nevertheless, conditions favorable to the substantial relaxation of restrictions, including the reduction of discrimination, should continue and pressures for the adoption of policies of relaxation are likely to be strong. The possibilities of relaxation will depend upon individual country situations. Some countries possibly could now undertake the elimination of restrictions and the restoration of the convertibility of current foreign earnings of their currencies. Other countries are financially able to make considerable progress in this direction. Some, however, still face financial and other obstacles of such magnitude that they can do relatively little in the way of relaxation of restrictions. In any case, the risk involved in the substantial relaxation of restrictions is considerably reduced as supplier countries—as a result of national or international decisions—take measures to control their exports.
For the postwar transitional period, Article XIV, Section 2, of the Fund Agreement provides that member countries may maintain restrictions on current payments and transfers, without the specific approval of the Fund as would otherwise be required by Article VIII, Section 2. Article XIV, Section 2, however, requires that “Members shall, however, have continuous regard in their foreign exchange policies to the purposes of the Fund; and, as soon as conditions permit, they shall take all possible measures to develop such commercial and financial arrangements with other members as will facilitate international payments and the maintenance of exchange stability. In particular, members shall withdraw restrictions maintained or imposed under this Section as soon as they are satisfied that they will be able, in the absence of such restrictions, to settle their balance of payments in a manner which will not unduly encumber their access to the resources of the Fund.” This means that the Fund cannot be indifferent to restraints and barriers to international payments when they are no longer financially necessary.
Furthermore, five years after the date on which the Fund began operations, that is, by March 1952, member countries are required by Article XIV, Section 4, to consult the Fund as to the further retention of restrictions inconsistent with Article VIII, Sections 2, 3, or 4.1 This active consultation with members will cover such matters as the adjustment of existing restrictive systems to the changed conditions, the removal and relaxation of restrictions, and the working out of measures necessary to overcome financial obstacles to relaxation, including the use of the Fund’s resources under appropriate conditions and adequate safeguards. Where only partial relaxation is feasible, different types of action may be appropriate for different countries. As the problems and potentialities of each country differ, it would not be appropriate to suggest a formula for general applicability. However, the case for discrimination based on source of supply (i.e., against “hard currency” goods) has been greatly weakened.
In certain cases, it may be possible for countries to make substantial progress toward convertibility. The feasibility of the assumption of convertibility in certain countries has been considerably heightened by the recent shifts in world demand which, as noted above, have greatly narrowed the distinction between “hard” and “soft” currencies. Convertibility would be an important international approach which would aid trading partners in turn to overcome their financial obstacles to the removal of restrictions and the restoration of convertibility. In this connection it is emphasized that, if progress toward convertibility is made simultaneously by several countries, the inevitable strains on each will be reduced.
It is necessary to do everything possible to prevent the recurrence of the problems which followed World War II, problems which would lead to the increasing use of restrictions in the future. The significance of export policies on the imports of other countries may be expected to become a matter of increasing concern. There exists today a basic choice between meeting international problems internationally and seeking to meet them by uncoordinated and self-defeating national action. Raw materials are scarce all over the world. Inflationary pressures are widespread. Military expenditures are rising, and this has world-wide direct and indirect effects. No country can isolate itself from these powerful developments, and no country can follow a completely independent economic policy in the face of them. The elimination of national restrictions which no longer meet the real needs of the present situation is an essential step in creating the climate for effective international action on specific problems.
The international approach through the Fund to the problems of restrictions is in the self-interest of member countries as well as being in accordance with their obligations. The Fund can take account of the experience of other countries with similar problems. International consideration of a country’s problems might mean that more consideration is given to the longer-run effects of proposed actions. Where certain restrictions must be practised, action through the Fund should prevent retaliation or ill-feeling toward the member concerned.
The desirable removal or relaxation of restrictions would be facilitated in one country if restrictions were also removed by other countries. For example, a country might remove its restrictions if other countries relaxed discrimination against it. The latter countries might relax such discrimination if they could sell for convertible exchange. One act of relaxation could facilitate a chain of relaxation elsewhere. Recognizing the interdependence and cumulative nature of relaxation, the Fund is ready to assist in its being carried through according to a pattern which would decrease the risks and difficulties and produce greater results.
In all matters of international monetary cooperation, the Fund machinery is available to aid its members to secure their long-run objectives individually and as a group. Through the Fund, changes will be more orderly and consistent with the interests of the world community as a whole.
In view of the obligations of member countries and also of their interest in the orderly removal of unnecessary restrictions, the Fund expects during the coming year to be in active consultation with its members on the appropriateness of their restrictive systems under existing conditions. Despite the new sources of strain and uncertainties which have arisen in the world since the outbreak of hostilities in Korea, in view of the marked improvement in the balance of payments of a number of its member countries, the Fund believes that it will be possible to make substantial progress toward the removal of restrictions and the achievement of the objectives of the Fund.
The Fund Press Release of December 13, 1950, dealing with the Torquay consultations is attached to this Report as an Appendix.
Article VIII, Section 2, requires the “avoidance of restrictions on current payments”; Section 3, the “avoidance of discriminatory currency practices”; and Section 4, the “convertibility of foreign-held balances”.