II. Main Developments in Exchange Practices
- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1961
Acceptance of the Obligations of Article VIII
During the period under review, a decisive step in the move away from the transitional period following World War II was taken when 11 member countries of the Fund accepted the obligations of convertibility for their currencies, as set forth in Article VIII, Sections 2, 3, and 4, of the Fund’s Articles of Agreement. Ten other countries, all in the Western Hemisphere, had accepted these obligations in earlier years. The countries which took the step early in 1961 were Belgium, France, the Federal Republic of Germany, Ireland, Italy, Luxembourg, the Netherlands, Peru, Saudi Arabia, Sweden, and the United Kingdom. These countries had earlier availed themselves of the transitional period arrangements of Article XIV of the Fund Agreement, under which they were able to maintain and adapt exchange restrictions without obtaining prior approval from the Fund. Under Article VIII, they are required to avoid restrictions on current payments, multiple exchange rates, and discriminatory currency practices, and should they have to resort to such measures, they would have to consult with the Fund and obtain prior approval.
Discussions were held during 1960 in preparation for the move to Article VIII. On June 1, 1960, the Executive Board took a decision on certain broad policies which would be applied with respect to exchange practices in a regime of formal convertibility. Subsequently, discussions were held with the countries concerned to clarify, among other things, technical questions relating to exchange practices which might require Fund approval once the countries concerned assumed the obligations of Article VIII.
The main points of the Executive Board’s decision of June 1, 1960 are the following (for the text of the decision, see page 15): Fund members may at any time notify the Fund of their formal acceptance of Article VIII status. However, it was agreed that it would be desirable that, before they did so, they eliminated as far as possible measures which under Article VIII are subject to the approval of the Fund, and satisfied themselves that they were not likely to need to have recourse to such measures in the foreseeable future. The Fund would approve practices under Article VIII, maintained for balance of payments reasons, only where it was satisfied that the measures were necessary, and that their use would be temporary while the member sought to eliminate the need for them. The view was expressed that the use of exchange restrictions for other than balance of payments reasons should be avoided to the greatest possible extent. Members maintaining measures subject to Fund approval under Article VIII should consult with the Fund with respect to the further maintenance of those measures. It was noted that consultations with the Fund under Article VIII were not otherwise required or mandatory. However, there was thought to be great merit in periodic discussions between the Fund and its members even though no questions arose involving action under Article VIII. Such discussions would be planned between the Fund and the member and would ordinarily take place at intervals of about one year. The continued cooperation of members was also requested to facilitate the work of the Fund in its collaboration with the Contracting Parties to the GATT.
The move to Article VIII by the 11 countries named above represents the culmination of efforts on their part to strengthen their internal economies and to achieve balance of payments and reserve positions which would enable them to remove restrictions on the making of payments and transfers for current international transactions. Thus, the formal acceptance of Article VIII status by these countries was made on the basis that they retained no restrictions on current payments or, at most, very few such restrictions. Furthermore, their acceptance reflected their confidence that they would be able to avoid the reimposition of restrictions in the predictable future.
Continued Operation of External Convertibility
The member countries which assumed Article VIII status early in 1961 have eliminated all, or nearly all, restrictions on current payments and transfers. However, these countries in most cases restrict the making of some capital payments at official rates, but permit payments to be made freely for all, or virtually all, current payments. Two of the countries of the recent Article VIII group—Germany and Saudi Arabia—permit all current and capital payments to be made at market rates maintained between official limits. Peru has similar arrangements, except that payments are made at a unitary fluctuating rate. In some of the other countries there are provisions for all or some capital payments to be made in free markets, but, generally speaking, the rates in these markets have remained close to the official rates.
The move to Article VIII during the year can be considered as a consequence of the successful maintenance of the regime of external convertibility, which was established by a concerted European move at the end of 1958. The European countries were joined by others in succeeding months. With the addition of Japan and Thailand in the period under review, two thirds of the Fund’s members have made official arrangements for permitting nonresidents to transfer freely to other nonresidents the local currency they acquire from current transactions.
Except for the 11 countries mentioned above, the countries which recently established external convertibility have felt that their balance of payments prospects or remaining restrictions, or both, make it advisable for them to await further developments before assuming formal Article VIII status. Nevertheless, virtually every currency which is used in financing international trade is now convertible in terms of the Fund Agreement, and virtually all of the trade of the other Fund members is conducted in these convertible currencies. Thus, while important obstacles to international trade persist, only bilateral payments arrangements remain as a significant impediment to conducting that trade on the basis of a multilateral payments system.
The successful maintenance of widespread convertibility has continued to provide the basis and incentive for further reductions in both trade and payments restrictions during the past year. Import restrictions were reduced or simplified in at least 17 countries scattered throughout the world. Discrimination against imports from Canada and the United States was eliminated, or virtually eliminated, in Australia, Austria, Finland, France, Greece, Japan, Malaya, Norway, and Sweden. Discrimination against imports from Japan and other non-dollar, non-OEEC countries continues to be exercised by a number of countries. Ceylon, Cuba, Jordan, the United Arab Republic (Syrian Region), and Venezuela found it necessary for various reasons to increase or introduce restrictions on imports.
Several countries—France, Iceland, Italy, Japan, the Netherlands, Pakistan, Spain, Sweden, and the United Kingdom—have been able to liberalize further the granting of exchange for payments for invisibles, but in three others faced with balance of payments difficulties—Ceylon, Cuba, and Venezuela—restrictions have been imposed on such payments.
The cumulative effect of several years of relaxation of restrictions on trade and payments was evident, in the period under review, in the developments in foreign exchange markets. Increasingly, as special markets for transferable currencies were eliminated, as exchange allocations were enlarged, and as surrender requirements were relaxed, the economic and political prospects of member countries have come to be reflected more prominently in official exchange markets. International monetary developments, which in earlier years gave rise to, intensification of restrictions or wide movements in special exchange rates, can now be traced in relatively small movements of rates in official markets, and relatively large movements of liquid funds through those markets.
In these circumstances, official intervention—sometimes on a large scale—was necessary, during the period under review, to give effect to the determination of countries to maintain exchange rates within the margins specified by the Fund. Rates in special markets for capital transactions did not, for the most part, show any marked change, deviating only slightly from the official rates. Another development of some interest during the period was a significant increase in trading in so-called “Euro-dollars” and “Euro-sterling.” Short-term loans of balances held by European banks in these currencies formed at times an important element in international movements of funds.
Multiple Currency Practices
In the period between 1955 and the beginning of 1960, 11 Fund members undertook major reforms of complex multiple rate systems and replaced them with single exchange rates. Most of these exchange reforms were accompanied by fundamental revisions of monetary and fiscal policies designed to bring inflationary pressures under control. As a result, the countries concerned have found that their economic activities are now better oriented and that they are able to cope with balance of payments problems without extensive reliance on restrictions on external trade and payments. This is amply illustrated by experience in Argentina, Chile, Spain, and Thailand. Two countries, Korea and Yugoslavia, initiated major reforms during the past twelve months.
Some Fund members still maintain multiple rate systems which can be regarded as relatively complex. Although several of these countries adjusted their exchange rates during the past year, the adjustments were, in the main, made in response to particular problems and represented little real progress toward exchange rate unification. Early and substantial steps to simplify complex multiple rate systems are desirable in a number of these countries.
In the course of 1960, Yugoslavia developed a broad program for reforming its trade and exchange system and strengthening its economy. To assist in this program, the Fund granted Yugoslavia a drawing and a stand-by credit. Yugoslavia also received substantial credits from the United States and several European countries. A new single rate of exchange of Din 750 per U.S. dollar, applicable to all transactions except tourist receipts, was introduced; and in conjunction with this, Yugoslavia established a program designed to bring about a significant liberalization and simplification of its import regime.
The other important change was the major adjustments made by the Korean Government in its exchange rate system early in 1961. In place of the official rate of hw 650 per U.S. dollar (the rate under the old system), a new rate has been introduced consisting of a basic rate of hw 1,250 per U.S. dollar plus an exchange certificate valued at hw 50 per U.S. dollar. The certificate component of the rate is to be changed from time to time in the light of market forces. The new exchange system represents a considerable advance, since transactions will be conducted at a more realistic exchange rate. Consequently, the system should lead to a better allocation of domestic resources and more effective use of foreign aid.
On March 14, 1961, Brazil instituted important changes in its exchange system. The auctioning of exchange was abolished and exchange to pay for imports in the General Category and the Special Category has now to be obtained in the free exchange market. Special Category imports, however, require import licenses which are auctioned on the basis of global quotas. Importers may not acquire in any one week exchange exceeding US$20,000. A new exchange rate of Cr$200 per U.S. dollar, instead of Cr$100, was applied to payments for preferential imports (e.g., petroleum, wheat, and newsprint) and to outward financial transfers previously subject to the preferential rate. For export proceeds sold in the free market, Cr$100 of each U.S. dollar sold is paid to the exporter in the form of 120-day bills of the Bank of Brazil. Exchange rates for inconvertible currencies are determined by the Bank of Brazil.
Two countries, Peru and Turkey, which earlier had undertaken major exchange reforms, removed the last of their multiple rates during 1960. In Peru, the merger of the exchange certificate system with the draft market brought into being a unified exchange market with a single fluctuating rate. This progress in the exchange system was made possible by the improvement that has resulted from the stabilization program that Peru is following. A further advance was made in early 1961, when Peru terminated its last remaining bilateral payments arrangements and, as mentioned above, accepted the obligations of Article VIII. In Turkey, the principal step to eliminate multiple currency practices was taken in 1958 as part of a comprehensive stabilization program involving foreign assistance. In mid-1960 Turkey completed its exchange reform by eliminating all remaining multiple rates and establishing a new par value. Subsequently, trade and payments restrictions have been liberalized to some extent.
In three countries, the Philippines, Viet-Nam, and Venezuela, there was an increase during the period under review in the number of multiple exchange rates. In April 1960 the Philippines introduced a “free” market rate, which is fixed from time to time by the Central Bank, in addition to the official rate. This, coupled with exchange “margins” for certain outward payments and mixing arrangements for exports, meant the establishment of four buying rates and four selling rates. In 1960 and 1961 important steps were taken to increase the volume of transactions admitted to the free market, and this resulted in some reduction in the spread between the rates. The free market was introduced as a means of establishing a realistic exchange rate and decontrolling imports. By the end of March 1961, some 75 per cent of total exchange payments were taking place through the free market and further shifts of transactions to that market were planned.
In September 1960, Viet-Nam introduced a separate rate to apply to imports of goods that were formerly financed under the U.S. International Cooperation Administration program and which would in the future be paid for from Viet-Nam’s own foreign exchange resources. Earlier in the year there had been a change in the method by which the rate applicable to exports was determined, but the variation in the actual rate was only minor.
Late in 1960, Venezuela made several changes in its exchange system; these included the introduction of a free market for certain current and capital transactions. For some exports there was the option of using official mixing rates or the free market, depending on world prices for these commodities and the exchange rates. Also, exchange control, involving restrictions on some types of transactions at the official rate, was introduced.
The fall in world prices of certain commodities during the past year has been offset in some countries by various measures which have had the effect of depreciating the exchange rates and maintaining the local currency revenues from exports. This has occurred in Brazil, Colombia, and Venezuela in respect of coffee; in Brazil, Ecuador, and Venezuela for cacao; in Uruguay for wool; and, to a lesser degree, in Colombia for raw hides, precious metals, and bananas.
The continuous decline in the number of bilateral payments arrangements noted in earlier Reports in this series has been carried further. During 1960 and the first three months of 1961, some 50 bilateral payments agreements were allowed to lapse and payments between the countries concerned were placed on a convertible currency basis. Of these agreements, about 30 were between Fund members and 20 between a Fund member and a nonmember country. Argentina, which had 15 bilateral payments agreements at the end of 1959, abolished 11, of which 5 were with member countries and 6 with nonmember countries. France terminated 4 payments agreements with member countries and 4 with nonmember countries. Major progress was also made by Finland and Uruguay. In some cases, efforts have been made to moderate the bilateral features by introducing more flexible provisions into the agreements.
On the other hand, during the same period, 18 new bilateral payments agreements were introduced by Fund members, but except for 3 agreements—Afghanistan-Yugoslavia, Ceylon-United Arab Republic (Egyptian Region), and Iraq-Tunisia—the partner countries were not members of the Fund. The new agreements with nonmember countries represent, in most cases, attempts by primary producing countries to diversify their export outlets, or to increase their sales to existing markets.
Although the development of external convertibility has made it easier for countries to dispense with bilateral payments agreements, Fund members still maintain some 225, of which about 75 are with other members and 150 with nonmember countries (mainly in the Eastern bloc). A majority of Fund members still have one or more bilateral payments agreements, although for most of these countries, the arrangements cover less than 10 per cent of their total trade. Ten countries—Brazil, Finland, Greece, India, Israel, Spain, Turkey, the United Arab Republic (Egyptian Region), Uruguay, and Yugoslavia— still maintain more than 10 bilateral payments agreements each.
The Fund has continuously encouraged member countries to abolish their bilateral arrangements and has collaborated with them to that end. The Executive Board’s decision of June 22, 1955 stated that “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.” At the beginning of 1961, the Fund met the request of Chile for a drawing in Argentine pesos in order to help liquidate a balance in favor of Argentina which had arisen under a bilateral trade and payments arrangement that was being terminated.
The Fund will continue to work with its members to achieve reduced reliance on bilateral payments arrangements, in the belief that persistence of bilateralism may detract from the benefits of convertibility and that it may involve discrimination. In cases where the partner country is a nonmember, the Fund is concerned that such arrangements do not prejudice the interest of members. Moreover, bilateral trade agreements exist even in countries which maintain no bilateral payments agreements. It continues to be important that limitations in the trade field should not frustrate the gains to be derived from the establishment of a multilateral system of payments.