- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1974
The course of the world economy during 1973 and early 1974 was marked by a succession of dramatic developments. Among these were the crest of a major boom in world production and trade, an extraordinary upsurge in primary commodity prices, the most severe inflation since World War II in the industrial countries, unprecedented increases in the costs of fuel, and wide swings in market exchange rates for most of the leading currencies and in the price of gold.
In volume terms, world trade rose by some 13 per cent in 1973, compared with an average annual gain of about 8 per cent over the previous decade. Because of high rates of inflation in the industrial countries in particular and the very sharp rise in primary commodity prices, an exceptional increase in export and import unit values also contributed to a steep rise in trade values. Measured in terms of the U.S. dollar (and thus reflecting—in addition to the factors just mentioned—the effective depreciation of that currency from 1972 to 1973), the increase in the average unit value of goods moving in world trade was on the order of 20 per cent, and the increase in aggregate dollar value was well over 35 per cent.
As a result of the sharp upward movement of commodity prices, the terms of trade of developing countries improved substantially in 1973, despite the rise in costs of imports of manufactured goods. The improvement in the terms of trade was especially notable in the case of the oil exporting countries, but was quite marked even for many other less developed countries. Although, as a group, the nonoil exporting less developed countries were able to enlarge their net imports in real terms because of the better terms of trade in 1973, the external position of a substantial number of these countries improved little, if at all. With inflows of capital showing some further expansion, the combined overall balance of payments surplus of the developing Countries remained high.
The unsettled conditions of world exchange markets of recent years continued in 1973 and early 1974. Some of the salient developments in the early part of 1973 were the introduction of a dual exchange market by Italy with effect from January 22, 1973 to limit the outflow of capital; the suspension by the Swiss National Bank on January 23 of its intervention in the foreign exchange market; the February 12 announcement by the U.S. authorities of the intention to seek congressional authorization to reduce the par value of the dollar by 10 per cent changing the official price of gold from US$38 to US$42.22 a fine ounce; and the announcement at the same time by Italy and Japan that exchange rates for the lira (in the official market) and the yen would not necessarily be maintained within established margins; in the new realignment of the world’s currencies that began to emerge after the announced devaluation of the U.S. dollar, the currencies of more than one half of the members of the Fund appreciated in terms of the U.S. dollar, in most cases to the full extent of the announced U.S. devaluation percentage, while most others remained unchanged in terms of the U.S. dollar.
As noted in the previous Report, on March 12, 1973 the Council of Ministers of the European Economic Community (EEC)2 issued a statement recording decisions that included the following: (1) the maximum margin between the Belgian franc, the Danish krone, the deutsche mark, the French franc, the Luxembourg franc, and the Netherlands guilder would be maintained at 2¼ per cent; in the case of member states operating a two-tier exchange market this understanding would apply only to the regulated market; and (2) the central banks would no longer be obliged to intervene to maintain the margins previously observed for the U.S. dollar. Germany, in concert with this action, appreciated the deutsche mark in terms of special drawing rights (SDRs) by 3 per cent.
On March 16, after a Ministerial Meeting of the Group of Ten3 and the EEC, a statement was issued in which, inter alia, the Ministers and Governors (1) took note of the decisions of the members of the EEC announced on March 12; (2) reiterated their determination to ensure an orderly exchange system; and (3) agreed in principle that official intervention in exchange markets may be useful at appropriate times to facilitate the maintenance of orderly conditions, keeping in mind also the desirability of encouraging reflows of speculative movements of funds. From the start Norway and Sweden became participants in the EEC’s 2¼ per cent margins arrangements. At the same time Belgium, France, the Netherlands, and Sweden announced additional measures designed to prevent undesired capital inflows.
Within the EEC’s 2¼ per cent margins arrangements the currencies moved considerably and the arrangement came under strong pressure at times. In June the deutsche mark was appreciated by 5.5 per cent, in September the Netherlands guilder was appreciated by 5 per cent, and in November the Norwegian krone was appreciated by 5 per cent, all in terms of SDRs. At various times during 1973 the French franc came under pressure, particularly in September following the revaluation of the guilder. On January 19, 1974 France advised the Fund that, during the next six months and on a provisional basis, the exchange rates between the French franc and certain other currencies in the official market would not necessarily be confined within the margins hitherto observed; the dual exchange market was not eliminated until March 21, 1974. The Operations Account countries4 followed France in these actions. On the following day, Italy eliminated its dual exchange market.
The U.S. dollar and the pound sterling, which serve as intervention currencies for a large number of developing and primary producing countries, were weak in terms of the currencies of countries participating in the EEC’s 2¼ per cent margins arrangements during a large part of 1973. The U.S. dollar, for example, at mid-year had depreciated by as much as 9-15 per cent in terms of these various currencies since March; late in the year and in January 1974 it appreciated by nearly a similar amount. The weakness of these two intervention currencies, together with the balance of payments strength originating in the primary products boom, precipitated numerous exchange rate actions. Thus, Australia declared a new par value, revaluing its currency by 5 per cent in terms of gold in September 1973; Kenya, Tanzania, and Uganda established new central rates in June 1973, when they appreciated their currencies by 3.5 per cent, only to depreciate their currencies by a similar amount when they established new central rates in January 1974 following the strengthening of the U.S. dollar; The Gambia appreciated its currency by 25 per cent in terms of sterling in March 1973; South Africa, together with Botswana, Lesotho, and Swaziland, appreciated the value of the rand by 4.8 per cent in relation to the U.S. dollar when, without announcing any new margins, it quoted new buying and selling rates for the rand in terms of the U.S. dollar in June 1973. A considerable number of countries adopted independent exchange rate policies when they informed the Fund that announced margins on their intervention currencies would not necessarily be maintained. These included Austria and Portugal (March 1973); Morocco (May 1973); Finland, Iceland, Malaysia, and Singapore (June 1973); Cyprus, New Zealand, and Yugoslavia (July 1973); Greece (October 1973); Malawi (November 1973); Spain (January 1974); and Tunisia (February 1974).
Most of the countries (including most of the developing countries not mentioned above) that use the French franc, pound sterling, or the U.S. dollar as their intervention currency continue to do so with no change in the relationship between their own currency and the intervention currency involved. However, some countries, e.g., Jamaica, repegged from sterling to the U.S. dollar.
In November the Executive Directors of the Fund amended the decision on “Central Rates and Wider Margins: A Temporary Regime.”5 This decision was adopted by the Executive Directors in December 1971 in order to indicate practices that members might wish to follow in the then prevailing circumstances consistently with Article IV, Section 4(a) and the Board of Governors Resolution No. 26-9, which called on all members to collaborate with the Fund and with each other in order to maintain a satisfactory structure of exchange rates within appropriate margins. The decision was intended to enable members to observe the purposes of the Fund to the maximum extent possible during the tem porary period preceding the resumption of effective par values with appropriate margins. The effect of the amendment was to bring the decision more in conformity with present realities. Mainly, the changes in the decision accommodate adherence to par values with margins maintained only in relation to an intervention currency or to central rates in terms of an intervention currency including a floating currency, and recognize the possibility of using more than one intervention currency. In addition, the amendment revised the earlier decision with regard to multiple currency practices and discriminatory currency arrangements by stipulating that no member shall permit, except as approved or authorized under Article VIII, Section 3, or Article XIV, Section 2, a difference in excess of 2 per cent between any two buying or any two selling rates for spot exchange transactions between its currency and the currencies of other members; or a spread in excess of 2 per cent between a buying and a selling rate for spot exchange transactions between its currency and the currency of another member.
Despite the flexible exchange rate regime operating in relation to the major currencies, measures to curb capital inflows, particularly those on short-term funds taken in 1971 and strengthened thereafter, were not relaxed in general until after mid-1973. The first relaxation came after a strengthening of the U.S. dollar against the major European currencies in the third quarter of the year. Then in late 1973 the rise in petroleum prices brought the prospect of a drastic alteration of established global balance of payments patterns. As a direct result of the rise in petroleum prices most if not all the industrial countries were expected to incur substantial current account deficits in 1974.
In late 1973 and early 1974 there was a major reversal in the application of measures to control capital flows. Whereas the United States eliminated its controls against capital outflows, most EEC countries and Japan dismantled many of the controls over inflows and in some countries borrowing abroad was encouraged. There was also in this period some tightening of the controls over capital outflows, especially by France, Italy, and Japan.
In 1973 when substantial growth in the volume of world trade coincided with continuing inflationary pressures, many countries eased quantitative and tariff and other cost restrictions on imports. At the same time, instances multiplied of industrial and primary producing countries resorting to export taxation and quota limitation or outright prohibition of commodity exports in order to ensure sufficient domestic supplies at reasonable prices.
The changed expectations regarding global balance of payments patterns and the effect that the sharp increase in petroleum prices might have on world trade and payments constituted a major topic of discussion by the Committee of the Board of Governors of the International Monetary Fund on Reform of the International Monetary System and Related Issues (the Committee of Twenty) which held its fifth meeting in Rome on January 17 and 18, 1974. Following that discussion the Executive Board of the Fund adopted a decision on January 24, 1974 that reflects many of the concerns raised at the meeting of the Committee of Twenty. This decision stated:
The Committee on Reform of the International Monetary System and Related Issues on January 18, 1974 reviewed important recent developments and agreed that, in the present difficult circumstances, all members, in managing their international payments, must avoid the adoption of policies which would merely aggravate the problems of other members. Accordingly, the Committee stressed the importance of avoiding competitive depreciation and the escalation of restrictions on trade and payments; and emphasized the importance of pursuing policies that would sustain appropriate levels of economic activity and employment, while minimizing inflation. It was also recognized that recent developments would create serious payments difficulties for many developing countries. The Committee agreed that there should be the closest international cooperation and consultation in pursuit of these objectives.
The Executive Directors call on all members to collaborate with the Fund in accordance with Article IV, Section 4(a), with a view to attaining these objectives. The consultations of the Fund on the policies that members are following in present circumstances will be conducted with a view to the attainment of these objectives.
During the period under review the Bahamas became a member of the Fund, raising total membership to 126 countries. The Bahamas, Bahrain, Qatar, South Africa, and the United Arab Emirates accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement, bringing to 41 the number of members who have formally accepted these obligations.
This Report, and in particular the following sections, centers on exchange restrictions, but it also covers other measures and intergovernmental arrangements that may have direct balance of payments implications.
The period under review in this Report covers 1973 and the early part of 1974.
Member countries of the EEC are Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg, Netherlands, and United Kingdom.
The Group of Ten are countries that participate in the General Arrangements to Borrow, viz., Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, United Kingdom, and United States. Switzerland was represented at the meeting.
Countries whose institutes of issue maintain an Operations Account with the French Treasury; they are Cameroon, Central African Republic, Chad, People’s Republic of the Congo, Dahomey, Gabon, Ivory Coast, Mali, Niger, Senegal, Togo, and Upper Volta.
The full text of the amended decision is given in the Appendix to Part I of this Report. See pages 19-20.