I. Introduction

International Monetary Fund. External Relations Dept.
Published Date:
September 1966
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The year 1965 and the early months of 1966 did not show a clear pattern of developments in the use of exchange and other restrictions by the Fund’s membership as a whole. It was to be expected that, after extensive relaxations in the 1950’s, the removal of remaining restrictions would be more and more difficult and further progress slower. Much of what liberalization did take place in 1965-66 was in the industrially more advanced countries; but even here there were exceptions, especially if the varied measures taken to influence capital movements are included. While some developing countries were able to liberalize, intensification of restrictions was more frequent as demands for exchange tended to outstrip the supply. Developments in individual countries reflected domestic policies, but also the way in which their economies were affected by international economic developments. Generally, countries which have assumed the obligations of Article VIII of the Fund Agreement—and which as noted in the last Report account for some 70 per cent of world trade—were making less use of restrictions, and some were able further to reduce that use in 1965-66. With effect from July 1, 1965, Australia accepted the obligations of Article VIII, Sections 2, 3, and 4, bringing to 27 the number of members which have rendered their currencies convertible under the Articles of Agreement.1

At the outset of 1965 there were a number of disturbing tendencies in the international payments situation. The growth of international trade was noticeably slackening, and the prices of primary products were declining. The payments position of many developing countries was under pressure. The two major reserve centers—the United States and the United Kingdom—also had large payments deficits. In the course of 1965 these tendencies changed. Demand increased, the decline of primary product prices was reversed in the second half of the year, and export proceeds for the primary producing countries rose again at a more rapid rate. The balance of payments deficits of the United States and the United Kingdom were substantially reduced. More broadly, by the end of 1965 increasing attention had once again to be given to the problem of containing inflation.

Although these changes were on the whole favorable to a reduction of restraints on payments, their nature was not such that the tendencies of the earlier part of the year were completely overcome. In particular, while the position of the developing countries was aided by the changed environment, their terms of trade again declined in 1965 as a whole, and the rate of growth of exports of the developing countries was little more than half that of the industrial countries. This contrasted with the 1963-64 period, when the developing countries had a much larger share in the rapid expansion of trade. A number of developing countries were handicapped by a continued rapid growth of debt service, arising both from an increase in the level of debt and from a tendency to a shorter average term. As a group, developing countries held the rate of growth in their imports (which was about a third of that in developed countries) to substantially less than the rate of growth in their exports, and improved their exchange reserves.

Among the industrial countries export increases in 1965 were generally largest for those whose payments positions were already strong and whose restrictions on payments had been largely eliminated. Thus, the member countries of the European Economic Community (EEC)2 had a very satisfactory expansion of exports; this was partly associated with economic developments in France and Italy, where some easing of domestic demand released resources for export. Exports from the United Kingdom increased and the current account position improved substantially; imports, however, continued in part to be subject to a temporary surcharge. The United States had a somewhat reduced current account surplus as imports grew more rapidly than exports under the stimulus of a domestic expansion significantly greater than that of the rest of the world. In both the United States and the United Kingdom the improvement in the payments position rested heavily on a substantial reduction in the net outflow of capital, in part achieved by restraints on capital movements although in the United States it was aided by increases in interest rates. Japan, on the other hand, was able to strengthen its balance of payments position as a result of an increase in exports amounting to more than 25 per cent.

International cooperative efforts continued toward sustaining a steady and balanced growth of international trade and the elimination of restrictions. Institutional developments have included the setting up of the machinery of the United Nations Conference on Trade and Development (UNCTAD). The International Bank for Reconstruction and Development has sought to improve the coordination of aid to developing countries through an expanded program of consultative groups, which have been meeting for individual developing countries. Circumstances within the EEC inhibited the Kennedy Round of trade negotiations but work was carried on and efforts are being made to accelerate it. Meanwhile, other efforts for the expansion of world trade have continued in the UNCTAD and under the General Agreement on Tariffs and Trade.

The Fund’s General Arrangements to Borrow, which enable the Fund to supplement its resources by borrowing up to US$6 billion in the currencies of ten of its industrialized members, were extended for a further period of four years in October 1965. In February 1966 the required conditions were met for the increase in Fund quotas by 25 per cent, the increase becoming effective for an individual member with its consent thereto and payment of the additional subscription; there were also a number of special increases. Further discussions concerning international liquidity have been proceeding both inside and outside the Fund.

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