I. Introduction1

International Monetary Fund. External Relations Dept.
Published Date:
September 1977
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The world economy made somewhat irregular progress toward cyclical recovery during 1976. For the year as a whole, gains in output were moderate by reference to prior experience in the postwar period. Real output in the industrial countries rose by almost 5½ per cent, after registering a fall of about 1½ per cent in 1975. The rate of inflation in those countries was much lower in 1976 than in the two preceding years, but was still far above rates recorded during the previous decade. It was accompanied by a continuation of unemployment at average levels which for the postwar period were historically very high during a period of recovery. Among the nonindustrial countries, there was a moderate improvement in economic performance in the more developed primary producing countries and in the non-oil developing countries, while economic activity in the oil exporting countries, though high, appears to have slackened a little. Common to all the main groups of nonindustrial countries was a continuation of high rates of price increase.

The recovery of demand in the industrial countries led to a marked revival of growth in the volume of international trade, which rose by 11 per cent in 1976 after declining by 4½ per cent in the previous year—the first such decline since 1958. There was also a moderate increase in the unit value of world trade. The growth in the volume of exports was about 10–12 per cent for each of the four major groups of countries. Export unit values for the non-oil developing countries rose sharply, thereby helping to reverse in part the erosion in the terms of trade which these countries had experienced over the previous two years. The volume of imports of both the industrial and the major oil exporting countries rose sharply, whereas import demand in the more developed primary producing and the non-oil developing countries remained subdued over much of the year.

There were further sizable shifts in the pattern of current account balances of the major groups of countries. After moving strongly into surplus in 1975, the current account of the industrial countries was in approximate balance in 1976. On the other hand, there was an appreciable increase in the surplus of the major oil exporting countries, while the deficits of the more developed primary producing and the non-oil developing countries were substantially reduced, partly as a result of measures of adjustment. There were, however, some sharply differing payments outcomes for individual countries within each of these groups. In financing their reduced current account deficits the non-oil primary producing countries had recourse to a generally adequate flow of funds from official sources, including the Fund, as well as through the international financial markets, especially from commercial banks. Indeed, overall financing flows to deficit countries in 1976 were sufficient to permit a sizable increase in their reserves, in contrast to the reserve loss experienced in the previous year, although certain individual countries remained in a weak reserve position.

During the early months of 1976 exchange markets were subject to large and at times abrupt changes, especially for depreciating currencies. From January the Italian lira came under steady downward pressure which continued until May. The French franc also came under pressure from late January, although at first this was contained by official intervention. From early March, heavy downward pressure on the pound emerged, which continued until early June. Official quotations for the Italian lira were suspended between mid-January 1976 and March 1, 1976. France announced on March 15, 1976 that it had suspended until further notice interventions aimed at maintaining the French franc within the limits prescribed by the European common margins arrangement. At the same time, the arrangement under which maximum margins of 1.5 per cent were maintained between the Netherlands guilder and the Belgian and Luxembourg francs was discontinued. Exchange rates for the currencies operating within the European common margins arrangement, and for the Austrian schilling, remained fairly stable in terms of the U.S. dollar over the first half of the year, while exchange rates for the Canadian dollar, the Japanese yen, and the Swiss franc exhibited a moderate firming trend over this period.

Market exchange rates exhibited renewed volatility in the second half of 1976. Beginning in mid-year, exchange rates for the currencies of the European common margins arrangement commenced a pronounced advance against the U.S. dollar, which continued over the remainder of 1976. The exchange rates for these currencies vis-à-vis the U.S. dollar declined during January 1977 but rose slightly in February 1977. Throughout the period under review, there were appreciable variations in exchange rates for individual currencies within the European common margins arrangement reflecting pressures in the exchange markets arising, in part, from divergent rates of price and cost inflation in the member countries of the arrangement.2 After declining sharply against the U.S. dollar in July and early August, the exchange rate for the French franc showed little variation in subsequent months. The Italian lira and the pound sterling came under renewed pressure during September and October 1976 and both currencies suffered a further sharp decline against the U.S. dollar. Toward the end of the period under review the pound regained some of the lost ground; the lira, however, eased in a number of small steps. Both the Canadian dollar and the Japanese yen were subject to greater variation in the second half of 1976, the Canadian dollar experiencing a particularly sharp decline vis-à-vis the U.S. dollar in late November. In early 1977 the Canadian dollar depreciated and the Japanese yen appreciated against the U.S. dollar.

The effective exchange rate of the deutsche mark (as measured by the Fund’s multilateral exchange rate model)3 registered a strong upward movement in 1976 and the early months of 1977; the effective exchange rate for the Swiss franc followed a similar upward course during 1976, although it was less pronounced, but it eased somewhat in the first few months of 1977. There was a slight increase in the effective exchange rate for the U.S. dollar and a somewhat greater rise in the rate for the Japanese yen. The effective exchange rate for the Canadian dollar registered a modest gain over the first half of 1976 but then declined, with a particularly sharp fall in late November; after recovering slightly around the end of the year, it fell again in the early months of 1977. Effective exchange rates for the French franc, the Italian lira, and the pound sterling all declined, but the decline in the rate for the French franc was of moderate proportions. The effective exchange rate for the lira fell sharply through mid-April, and thereafter remained fairly constant. The effective exchange rate for the pound sterling declined continuously from March through November, but subsequently recovered a little.

During the period under review a number of member countries adopted exchange measures which involved the introduction of a new exchange rate regime. As in the previous year, however, there was no indication that countries resorted to competitive devaluation. At the end of January 1977, some 94 of the 130 member countries of the Fund were pegging their currencies to another currency, to the SDR, or to another composite of currencies. Seven countries were adjusting their currencies at irregular intervals according to a set of indicators, and 7 countries were participating in the European common margins arrangement. The remaining 20 countries were following other exchange rate arrangements.

Last year’s Report noted that the recession in 1975 and the emergence of serious payments difficulties had led to the introduction of more restrictive trade and payments policies in a large number of countries, although few had introduced comprehensive import restrictions or exchange restrictions on an across-the-board basis. During the period under review there was a further drift toward the application of restrictions on current payments and transactions. This occurred under pressure for increased protection arising in part from high levels of unemployment, especially in labor-intensive industries in the industrial countries. At the same time, the upturn in world trade in 1976 aided countries in resisting pressures to resort to current account restrictions for balance of payments purposes on a large-scale basis. Nonetheless, a larger number of member countries and a greater proportion of world trade became subject to more restrictive policies, especially nontariff barriers to imports applied on a selective basis. Moreover, measures to restrict imports were supported, to an increasing extent, by the negotiation of export restraint agreements. While previously these agreements occurred usually between industrialized countries and developing countries, they have also been used recently to restrain trade between some of the industrial countries. By early 1977, it was apparent that there had been an interruption to the reduction of protectionism that had characterized the commercial policy of the industrial countries over the postwar period. Import restrictions for protective purposes in the latter countries, as well as in the more developed primary producing countries and in the developing countries, now appear to be at a perceptibly higher level than before the emergence of the recession in 1974.

In May 1976 the member countries of the Organization for Economic Cooperation and Development (OECD) other than Portugal extended for a further year their Declaration on trade. This Declaration, under which the countries concerned agreed to avoid the use of trade restrictions for balance of payments purposes, was adopted in May 1974 for a period of one year, and was extended for a second year in May 1975.

In the communiqué issued at the conclusion of its meeting in Manila, the Philippines, on October 2, 1976, the Interim Committee agreed that, given the constraint under which demand management policies must operate in the industrial countries, special efforts would be needed on the part of these countries, including the reduction of barriers to trade in the negotiations which were in progress. The Committee also indicated a need to improve market access to the exports of developing countries, and to increase the flow of development assistance.

The Tokyo Round of multilateral trade negotiations—in which some 90 countries are participating—continued under the auspices of the General Agreement on Tariffs and Trade (GATT). An interim result of the negotiations was the agreement reached on tariff concessions to be extended by certain developed countries to developing countries exporting tropical products. Concessions in the tropical products sector were implemented early in 1977 by Australia, the European Economic Community (EEC),4 Finland, New Zealand, Norway, Sweden, and Switzerland. A number of other developed countries are expected to implement concessions in this sector in favor of developing countries in the near future. A further noteworthy development was the establishment of a group which will examine various possibilities for improving the international framework for the conduct of world trade, especially trade between developed and developing countries. Discussions were also initiated in a new subgroup which was established to negotiate possible improvements in government procurement practices which might be considered as impeding international trade.

In contrast to the early 1970s, when many industrialized countries erected mechanisms for preventing disruptive short-term capital inflows, the last few years have witnessed a substantial diminution in the resort to such measures. A few of the industrial countries, which had maintained significant controls and restrictions on capital outflows, relaxed some of these restraints during the period under review. Among nonindustrial countries, restrictive policies were tightened in a few cases in respect of inward investment and the contracting of foreign loans, but a number of other countries eased regulations limiting foreign participation in domestic enterprises. In the communiqué issued at the conclusion of its meeting in Manila, the Philippines, on October 3, 1976, the Development Committee agreed that capital market countries would endeavor, as far as their balance of payments position allowed, to move progressively toward greater liberalization of capital movements, in particular capital outflows. In the meantime, the capital market countries would afford favorable treatment to developing countries, as among all foreign borrowers, with regard to permission to make issues.

At its meeting in Washington in April 1977, the Interim Committee reviewed a memorandum “Surveillance over Exchange Rate Policies”5 which had been discussed by the Executive Directors of the Fund. Following the examination by the Committee, the Executive Directors took the following decision:

  • 1. The Executive Board has discussed the implementation of Article IV of the proposed second amendment of the Articles of Agreement and has approved the attached document entitled “Surveillance over Exchange Rate Policies.” The Fund shall act in accordance with this document when the second amendment becomes effective. In the period before that date the Fund shall continue to conduct consultations in accordance with present procedures and decisions.

  • 2. The Fund shall review the document entitled “Surveillance over Exchange Rate Policies” at intervals of two years and at such other times as consideration of it is placed on the agenda of the Executive Board.

    Decision No. 5392-(77/63) April 29, 1977

During the period under review two countries, the Comoros and Guinea-Bissau, became members of the Fund, bringing the membership to 130 countries. Venezuela accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement, raising to 44 the number of members which have formally accepted these obligations.

This Report centers on exchange restrictions, but it also covers other measures and intergovernmental arrangements that may have direct balance of payments implications. The period covered is 1976 and the early part of 1977.

On October 16, 1976 the member countries of the European common margins arrangement informed the Fund that they had agreed to adjust most of their mutual intervention rates. In terms of SDRs the new central rates which took effect as a result of these actions represented an increase of 2 per cent for the deutsche mark, a decrease of 4 per cent for the Danish krone, and decreases of 1 per cent each for the Norwegian krone and the Swedish krona; the central rates of the Belgian franc and the Netherlands guilder remained unchanged.

An index of effective exchange rates is designed to measure the average change of a country’s exchange rate against all other currencies. In the calculation of such an index, a weight representing the comparative importance to the home economy of each foreign country is applied to the value, relative to a chosen base period, of the exchange rate between the foreign currency in question and the home currency. The index based on the Fund’s multilateral exchange rate model is one of several such indices using alternative weighting schemes. For further information on indices of effective exchange rates see Rudolf R. Rhomberg, “Indices of Effective Exchange Rates,” IMF, Staff Papers, Vol. XXIII, No. 1, March 1976, pp. 88–112.

The members are Belgium, Denmark, France, Federal Republic of Germany, Ireland, Italy, Luxembourg, Netherlands, and United Kingdom.

The text of the memorandum “Surveillance over Exchange Rate Policies” was made public on April 29, 1977, and is reproduced in the Appendix to Part I of this Report. See pages 23–24.

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