II. Main Developments in Restrictive Practices

International Monetary Fund. External Relations Dept.
Published Date:
September 1974
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1. Trade and Payments Restrictions

In the period under review, many countries eased quantitative and cost restrictions on imports. At the same time, industrial and primary producing countries increasingly resorted to taxation and quota limitation or outright prohibition of commodity exports in order to ensure sufficient domestic supplies at reasonable prices. The most important development of 1973 was the production cutbacks and discriminatory export embargoes imposed by most Middle Eastern oil producing countries in October 1973. From 1972 to 1973, world production of crude oil increased by an estimated 8 per cent, and the value of production more than doubled. Following the imposition of export restraints in the Middle East, a number of oil importing countries, in particular the major industrial countries, took steps to prevent undesired exports or re-exports of crude oil and petroleum products to conserve domestic supplies. Soon these measures began to be followed in many countries by restrictions on exports of petroleum-based fertilizers, chemicals, and plastics.

World-wide shortages of protein meal and oilseed led many countries to impose or tighten export controls during the first half of 1973 on soybeans, cottonseed, rapeseed, copra, and various derivatives. Outright export prohibitions, usually of a temporary character, were imposed in Brazil, Colombia, Greece, India, Indonesia, Pakistan, Sri Lanka, the Sudan, and the United States. Later in the year, many of these restrictions were eased, and those of the United States were lifted on October 1, 1973. A number of countries introduced or intensified export restrictions on a wide range of other agricultural products such as cotton, grains, hides and skins, meat (in particular beef), and sugar. Export restrictions also affected a number of other basic commodities such as iron and steel scrap, lead, manganese ore, natural rubber, tin, and zinc.

a. Restrictions on Imports and Import Payments

The industrialized and the more developed primary producing countries continued to relax their remaining restrictions on imports. Initially, with an easing of balance of payments pressures, many developing countries also reduced reliance on external restrictions. Toward the end of the year, however, the actual or anticipated balance of payments impact of the oil price increases began to be reflected in a reversal of this trend.

Among countries with a high degree of liberalization, Japan increased import quotas for the remaining restricted commodities by 30 per cent over fiscal year 1972 or to 8 per cent of domestic consumption of these commodities, whichever was larger. France increased virtually all remaining import quotas by 50 per cent and eased exchange controls over the terms of payment for imports and lifted the restrictions on forward cover, but the latter were reimposed in early 1974. Austria and France eased their remaining restrictions on imports from Japan. Austria, France, Germany, and the United Kingdom further improved their market access for member countries of the Council for Mutual Economic Assistance (CMEA),6 and Denmark joined other countries in applying a high degree of liberalization to such countries. In the beginning of the year the United States continued to increase oil import quotas and in April suspended them fully. The United States also increased quotas on imports of certain dairy products. The Generalized Systems of Preferences (GSP) in favor of developing countries were expanded in 1973, in part through increased preferential quotas, while many countries also expanded the product coverage and declared additional countries eligible for the benefits of their preferences. With effect from January 1, 1974 the countries which joined the EEC in 1973 (Denmark, Ireland, and the United Kingdom) adopted the EEC system of preferences for developing countries, which was to supersede their own GSP schemes. The U.S. authorities stated their readiness to introduce a scheme of generalized tariff preferences for the less developed countries as soon as enabling legislation, now before the Congress, is enacted.

South Africa continued its process of dismantling import controls. Spain liberalized imports of basic foodstuffs and extended indefinitely the temporary liberalization of certain industrial products introduced in November 1972. Yugoslavia continued to relax its restrictive system, and more than half of total imports are now free of quantitative restrictions. Turkey also reduced the restrictiveness of its import system. In July, Australia unilaterally reduced its tariffs by 25 per cent. Israel reduced tariffs on some 1,350 items by an average of 15 per cent. In addition, in Greece, Spain, and Yugoslavia, various import taxes were reduced. Iceland ceased to invoke Article XII of the General Agreement on Tariffs and Trade (GATT).

Colombia eliminated its list of prohibited imports, transferred most of the goods concerned to the list of goods subject to licensing, and shifted many items from the latter list to the free list. Iran further reduced import restrictions, lowered or eliminated commercial benefit taxes on various imports, and removed the import registration fee on certain essential commodities in 1973; this liberalizing policy was carried further by the import regulations announced in March 1974. Venezuela reduced considerably the list of commodities subject to license requirements. There was also some relaxation of the import control systems in Egypt, Korea, Morocco, Nigeria, Pakistan, Tunisia, and Uruguay. Various countries relaxed discriminatory import restrictions on goods of Japanese origin, and the People’s Republic of the Congo, Gabon, and Sierra Leone ceased to invoke Article XXXV of the GATT against that country. Sierra Leone brought imports from Guinea under its general import license, and Iraq eased restrictions on imports from the United States. Various exchange control requirements affecting imports were eased in El Salvador, Portugal, and Togo, and Kenya relaxed its import controls significantly. Ecuador, Saudi Arabia, and Singapore reduced their tariffs, and Algeria made its tariff nondiscriminatory by applying to all countries the preferential tariff previously applicable only to imports originating in EEC countries.

On the other hand, Finland introduced a temporary licensing system for imports of automobiles and other consumer goods together corresponding to one fourth of total imports, and restricted the use of suppliers’ credit for imports. The Benelux countries and Italy imposed discriminatory restrictions on imports of certain goods from Japan; in the Benelux countries these were later removed when Japan agreed to restrict exports of the items concerned.

Chile and Ghana were among the developing countries with severe import restrictions where little substantial progress toward liberalization was made during 1973. Chile, however, toward the end of the year and in early 1974 simplified substantially its import regime. A number of other developing countries intensified their import restrictions, mainly by extending licensing requirements, but also by imposing prohibitions on imports of certain products. Severe restrictions were introduced in Uganda in the beginning of 1973 and there was subsequently some tightening of restrictions in Paraguay and Surinam and, in early 1974, in Jamaica.

The trend toward increased state trading in developing countries continued, e.g., in Bahrain, The Gambia, Nepal, Pakistan, Somalia, Surinam, and the People’s Democratic Republic of Yemen. The immediate objectives of nationalizing transactions in specified imports or exports are extremely diverse. They often include the aim of obtaining the advantages of large-scale operations, to restrain increases in domestic prices, or to prevent capital flight through overinvoicing and underinvoicing. The actual effects of such actions are as yet unclear, but they may include undesirable side-effects dealt with in the state trading provision of the GATT (Article XVII).

In the course of 1973 payments arrears in respect of imports were eliminated in Costa Rica and the Dominican Republic. Nigeria reduced the mandatory 180-day deferred payment requirement for certain imports, to a 90-day requirement which was subsequently abolished in early 1974. But arrears continued to exist on some current invisibles. Outstanding arrears on payments for imports were reduced in Ghana, where current imports have been settled promptly since early 1972. Arrears in Uruguay on import payments were eliminated by the end of 1973 through cash payments or consolidation into medium-term bonds. In the Sudan arrears on remittances of profits and dividends were fully settled in early 1974. In the Syrian Arab Republic, however, arrears on payments for imports continued to be incurred.

b. Restrictions on Current Invisibles

All restrictions on payments for invisibles were abolished by Guatemala early in 1973, and Qatar abolished all approval requirements for current and capital payments. Iran, in June 1973, in addition to increasing the travel allocations, increased the facilities for personal remittances and, in principle, limited the effective surveillance over exchange transactions to capital movements.

The major industrial countries and a number of other member countries which have accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement, do not maintain restrictions on current payments or transfers; however, most of them do maintain some form of exchange control on invisibles in order to prevent unauthorized capital outflows. During the period under review none of the major industrial countries reintroduced restrictions on travel exchange, although Italy reduced the basic exchange allocation for travel and subsequently reduced sharply the amount in domestic banknotes that travelers may take out, and Japan tightened its supervision on purchases of foreign exchange for travel purposes. In August 1973 France took a wide-ranging series of measures to simplify and liberalize the exchange control regime. The basic travel allocations for tourism and business were increased, and limits on payments abroad for travel by means of credit cards or by transferring funds were removed. Among other countries, travel allocations were increased in Colombia, El Salvador, Fiji, Iran, New Zealand, Pakistan, Surinam, and Turkey. Countries that maintained or recently reintroduced restrictions on travel exchange included Guyana and Jamaica.

Remittances of profits and dividends were again permitted in Tanzania after having been suspended since mid-1970. In Nigeria, restrictions on remittances of profits and dividends were lifted and such remittances would be freely made after declaration subject to the payment of the appropriate taxes; the arrears still outstanding are to be cleared in the 1974/75 fiscal year. The Philippines lifted the restriction permitting only 25 per cent of profits and dividends to be remitted abroad. Profits and dividends from earlier years which had not been remitted because of the restriction were allowed to be transferred in a lump sum before April 1, 1974. In addition, the 50 per cent limitation on the remittance of royalties or rentals on patents and trademarks was removed. In Uruguay, where remittances of profits and dividends had for some time been refused access to either exchange market, such remittances were resumed, although limited to 10 per cent a year of the invested capital denominated in foreign currency, including reinvested profits converted at the exchange rates prevailing at the time of the effective reinvestment. Zambia extended to the previously exempt major copper producers the existing exchange controls on the transfer of profits and dividends; the remittances, however, were not restricted.

Restrictions on other invisibles were eased in El Salvador, Israel, Pakistan, and the Philippines but were introduced or intensified in India, Korea, Zaïre, and Zambia. Chile severely intensified restrictions on payments for invisibles in the early part of 1973, but some relaxation was achieved later in the year and in early 1974. In Paraguay most transactions in invisibles were relegated to a more depreciated rate in a newly created secondary exchange market.

Restrictions on exports or imports of domestic banknotes were eased in France and Norway, while they were intensified in Fiji, Italy, and the Malagasy Republic.

2. Multiple Currency Practices and Fluctuating Exchange Rates

Dual exchange markets were unified in Ecuador, Mauritania, Oman, the Syrian Arab Republic, and the United Arab Emirates. The Belgian-Luxembourg Economic Union (BLEU), France, and the African countries whose institutes of issue maintain an Operations Account with the French Treasury maintained their dual exchange markets, while Italy and Paraguay each introduced one. The dual exchange markets in France and the Operations Account countries and in Italy were eliminated in March 1974. Further proliferation of already complex multiple rate systems took place in Brazil, Chile, and Colombia, but Chile in September 1973 simplified its multiple rate structure considerably. The complex multiple rate structure of Viet-Nam was simplified.

In February 1973 Ecuador abolished the exchange tax on free market transactions and the Central Bank undertook to limit fluctuations in the free market to within 1 per cent on either side of the central rate, thereby achieving de facto unification of the exchange market. In May 1973 the Syrian Arab Republic reorganized its dual exchange market system and in July the rates in the commercial and financial markets were unified. Throughout 1973, Viet-Nam periodically devalued its official exchange rate and the special rate in terms of the U.S. dollar, with the special rate depreciating at a faster pace. Toward the end of the year, Viet-Nam embarked on a basic reform of its exchange system. All exchange subsidies for exports, exchange taxes on import payments (péréquatiorì), and the preferential exchange rate for tied commodity aid imports from the United States were eliminated. Following the reform, a flexible, unitary exchange rate system, largely free of multiple currency practices, was established.

During 1973 Afghanistan changed the surrender rates for the main export products by introducing or increasing exchange subsidies; for some of these exports either the modified surrender rate applied or the free market rate, whichever was more depreciated, but as a result of an appreciation of the free market rate the exchange subsidies on major exports remained ineffective. In March most foreign exchange payments of the Government previously settled at the official rate were shifted to the free market rate. Argentina adjusted the exchange rate for nontraditional exports by changing the proportion of foreign exchange that could be sold in the commercial and financial markets, an adjustment equivalent to an 8.4 per cent depreciation in terms of the U.S. dollar. For traditional exports, however, the rate remained unchanged in terms of the U.S. dollar. In July 1973, Bangladesh extended the premium payments scheme for personal inward remittances in convertible currencies for another year, and effective from July until June 1974, gave exporters a cash subsidy for most exports amounting to 30 per cent of the value of exports.

Chile reorganized its exchange system in July 1973 by merging the banking and the brokers’ markets and reducing the basic exchange rates to seven. However, on September 30 the banking and brokers’ markets were re-established. In the banking market, through which pass all trade and trade-related transactions, capital movements, and most services, a uniform exchange rate was set, except for proceeds from copper exports, which are converted at a higher rate for Chilean escudos in terms of U.S. dollars. In the brokers’ market, through which exchange for tourism, travel expenditures, and a few other transactions in invisibles are settled, a uniform rate was also introduced. Subsequently, these three rates were changed several times and the spread between the banking market and the brokers’ market was reduced; in addition the principal tax on transactions in the brokers’ market was reduced from 50 per cent to 10 per cent. In January 1973 Costa Rica fixed the selling rate in the official market at Ȼ 6.68 per US$1, and the buying rate in the free market at Ȼ 8.54 per US$1. During the year the proportion of export proceeds which could be sold in the free market was extended several times.

Egypt reorganized and expanded a parallel exchange market with effect from September 1. Dealings in the parallel market were restricted to the commercial banks; transactions covering most invisible items and some merchandise exports, as well as specified merchandise imports, could take place at rates based on the official rates with a premium of 50 per cent (buying) and 55 per cent (selling). Following the depreciation of the basic exchange rate in August, the Khmer Republic did not allow the preferential rate for the riel to deviate by more than 20 per cent from the basic rate. With a further depreciation of the riel in October, this margin was reduced to KR 45 per US$1 or 16.4 per cent. In March 1973, Laos introduced a combination of exchange bonus and export taxes for timber exports, resulting in an additional effective exchange rate, and in July the import items eligible for financing at the preferential rate of K 600 per US$1 were sharply reduced. Morocco introduced a 5 per cent bonus in July payable on the dirham equivalent of foreign currencies repatriated by means of bank or postal transfers by Moroccans working abroad. Nepal formalized the transfers of exporters’ exchange entitlements in April, thus giving legal form to a complex system of multiple exchange rates.

In February 1973 Venezuela altered the rates at which the Central Bank purchases proceeds of cacao, coffee, iron ore, and petroleum, and sells foreign exchange to the Government, its agencies, and to commercial banks; the rates at which commercial banks buy and sell foreign exchange were also modified. The changes were designed to appreciate the bolivar in terms of the U.S. dollar following the announced devaluation of the U.S. dollar. On the other hand, the Philippines abolished the stabilization tax on proceeds from the exports of certain commodities and replaced it with a customs duty on the value of exports. Turkey eliminated, with effect from August 1, the special appreciated buying rate of LT 13 per US$1 applicable to several traditional export products.

Following the announcement in February that the U.S. dollar would be devalued, the Brazilian cruzeiro was revalued by 3 per cent in terms of the U.S. dollar. Subsequently, the cruzeiro continued to be devalued at irregular intervals, and by the end of 1973 the exchange rate in terms of the U.S. dollar was approximately the same as in December 1972. During the year, taxes, called “contribution quotas,” were introduced on proceeds from exports of soluble coffee and beef. The “contribution quotas” for these exports, and that for green coffee, were changed during the year. Early in 1974 new “contribution quotas” were introduced on the export proceeds from certain hides and skins. Colombia introduced an additional multiple exchange rate in March by granting exporters of specified agricultural products tax credit certificates amounting to only 13 per cent of the export value, while maintaining the previous 15 per cent for other minor exports, and then on January 1, 1974 reduced from 15 per cent to 1 per cent the tax credit certificate rate for a few of the minor exports. In June, the deposit requirement of 50 per cent of exchange bought for travel was abrogated. The advance payment deposit requirement, also constituting a multiple currency practice, was raised in August to 100 per cent of the exchange license. Throughout the year several modifications were made to the multiple rate system. Colombia continued to depreciate its principal exchange rate in terms of the U.S. dollar in 1973.

In July Paraguay established a dual exchange market consisting of a fixed rate in terms of U.S. dollars and a fluctuating rate. Most receipts from, and payments for, current invisibles as well as some capital transactions are channeled through the market with the freely fluctuating rate.

There were no significant changes in the regulations affecting the structure of the exchange market in the BLEU although a number of measures were taken that affected its functioning (see section on Measures Affecting Capital, below). The rules affecting the operation of the investment currency market in the United Kingdom were modified in March 1974.

3. Import Deposits, Import Surcharges, and Measures to Stimulate Exports

a. Advance Import Deposits

A number of countries abolished advance import deposits, while others eased the requirements for import deposits by lowering the rates applied or by narrowing their scope. In Ecuador, the prior import deposit requirement was abolished. El Salvador exempted imports of raw materials for industry from the 100 per cent import deposit required for imports from countries outside the Central American Common Market that apply discriminatory restrictions against its exports. Israel reduced deposit requirements and then abolished them on January 1, 1974. Uruguay exempted imports of preferred capital goods from special import deposits, and extended the scope of imports free of advance deposits. Import deposit rates were also reduced in Greece, Indonesia, and Turkey.

In May 1973, Colombia introduced a supplementary import deposit requirement and subsequently, throughout the year, made further changes in both the rates of deposit and their coverages; imports from other member countries of the Andean Group were exempted from advance deposits. Chile extended the application of the 10,000 per cent advance import deposit to additional imports; in early 1974, however, the coverage was reduced to a few items classified as luxuries. Viet-Nam established import deposit requirements at varying rates on specified commodities for imports financed from its foreign exchange reserves. The deposit requirement for imports under the Commercial Import Program (CIP) was raised from VN$30 per US$1 for a three-month period to VN$100 per US$1 for six months. The deposit requirement applied to certain imports financed under U.S. aid programs was abolished in January 1974.

b. Import Surcharges

On January 1, 1973 Denmark reduced the temporary surcharge on imports from 7 per cent to 4 per cent, and in accordance with the originating legislation abolished it on April 1, 1973. In the Dominican Republic, imports subject to a fully prepaid letter of credit were exempted from the prepayment of 80 per cent of duties and surcharges. Panama removed the import tax of 6 per cent from goods exempt from import duty, and Paraguay reduced by 50 per cent the surcharge applied to certain imports.

The Bahamas increased the “emergency tax” on imports from 7½ per cent to 12½ per cent. Ecuador imposed a surcharge of 1 per cent on imports of essential and semiessential goods, and of 6 per cent on less essential and luxun goods to compensate for the loss of revenue resulting from the abolition of the exchange tax on free market transactions. In Israel the temporary import surcharge was increased from 20 per cent to 25 per cent of the c.i.f. value of imports on November 5, 1973 and extended until March 1974. Pakistan introduced a flood relief surcharge of 25 per cent on most imports from September 15. As part of the major exchange reform in Viet-Nam, exchange taxes on import payments were replaced by import surcharges payable at the time of clearance by customs in the country. Zaïre increased the temporary surcharge on imports of specified luxury goods from 5 per cent to 20 per cent, and in Zambia the surcharge applied to all dutiable imports was doubled.

c. Export Incentives and Export Taxes

Both developed and developing countries continued to employ various forms of export promotion measures to expand and diversify their exports. In particular, a wide variety of measures were taken in fields of export credit or exchange risk facilities, only a few of which are indicated below.

A number of countries offered assistance to exporters by introducing or supplementing special credit facilities for exports, guarantees against exchange risks, and other measures designed to influence export credit terms. Industrial countries already possessing comprehensive guarantee systems extended the cover provided to exporters. In France, the Compagnie Française d’Assurance pour le Commerce Extérieur (Coface) extended the exchange rate guarantee for exporters to cover contracts with terms over one year (formerly two years). Beginning January 1, 1973, the German Bundesbank offered certain exchange risk facilities to exporters of goods and certain services in respect of forward payments for 3 to 24 months, but this facility was discontinued some months later. Japan resumed the export financing scheme which had been terminated in 1972 in order to allow small Japanese firms to cover their forward exchange transactions. The Netherlands established a guarantee system for exporters to cover exchange risks in respect of capital goods transactions with a life of two years or more. Spain introduced a new insurance program for exporters’ exchange risks to be operated by the Exports Credit Insurance Company. It was also announced that exporters and importers would be compensated for losses caused by the devaluation of the peseta in 1967 and the revaluations in 1971 and 1973. In the United Kingdom, the Export Credits Guarantee Department (ECGD) offered increased credit insurance cover, and widened financial facilities for exporters’ subcontracts placed in member countries of the EEC.

Peru allowed exporting firms to use exchange certificates earned as entitlements for the payment of interest on foreign borrowings. Sri Lanka extended the coverage of the Convertible Rupee Accounts, a currency retention and utilization scheme for exporters.

Several countries granted concessions for exports in the form of tax rebates, tax credit arrangements, and tax exemptions. Export taxes on some commodities were eliminated in Argentina, India, Kenya, Nigeria, and Uruguay or reduced in Ecuador and India to encourage the production and export of specific commodities. Chile suspended the application of all export subsidies. Indonesia exempted additional export goods from the 10 per cent exchange tax. Mexico increased the special tax rebate on exports of manufactured goods from 10 per cent to 14 per cent. Israel increased tax incentives for exports on two occasions in 1973.

On the other hand, taxes on specific export items were introduced in Austria, India, Laos, Nicaragua, Pakistan, and the Philippines or increased by Brazil, Guyana, India, Pakistan, and the Philippines.

4. Bilateral Payments Arrangements

During the period under review further progress was achieved in eliminating bilateral payments agreements between member countries. Romania terminated its agreements with Austria, Spain, and Turkey, and Pakistan those with Nepal, Sri Lanka, and Yugoslavia. The agreements between the Syrian Arab Republic and Spain, Yugoslavia, and India, and between Greece and Brazil were also abolished. Thus at least nine agreements between Fund members were terminated, and the total number of operative bilateral payments agreements between Fund members now stands at about 60.

Member countries also made progress in terminating bilateral payments agreements with non-members, but the total number of such agreements (about 200) remains considerable. Austria, Denmark, Iceland, Norway, and Sweden all eliminated their arrangements with Eastern Germany; for all but Iceland this represented the final step in abolishing their remaining payments agreements. Tunisia also terminated its payments agreement with Eastern Germany, as well as those with Bulgaria, Czechoslovakia, Hungary, Poland, and the U.S.S.R. Spain abolished its agreements with Bulgaria and Hungary, and Afghanistan those with Bulgaria and Poland. In addition, four other agreements with nonmembers expired: those between the Syrian Arab Republic and Cuba, Turkey and Poland, Portugal and Poland, and Romania and Switzerland. However, seven members, Bangladesh, Chile, Cyprus, Dahomey, Greece, Iran, and Malta, concluded new agreements with the People’s Republic of China and two members, Bangladesh and Iran, a new agreement each with Eastern Germany.

5. Measures Affecting Capital

The period under review again witnessed large-scale resort to measures to influence the direction and size of capital movements, by the developed countries as well as by many developing countries. Continuing a trend that had become pronounced in 1971, many of these actions again were designed at first to influence inflows of capital or to induce outflows, but a sharp reversal occurred in the last quarter of 1973 and the early months of 1974. There was widespread resort to direct and indirect controls on banks and nonbank financial institutions and a variety of techniques were employed, including selective reserve requirements against external liabilities, limitations on banks’ net foreign positions, and restrictions on the acceptance of nonresident deposits and payment of interest on foreign funds. In addition, many countries continued to apply measures affecting the terms and cost of foreign borrowing, particularly by nonbanks, such as mandatory deposit requirements. The use of these various controls outside Europe and Japan was rare. In addition to their balance of payments effects, measures affecting direct and portfolio investment, both inward and outward, the terms of payment for trade transactions, and personal capital transfers, continued to be used as instruments to achieve domestic policy objectives.

During the period under review, the volume of transactions in the Euro-currency markets continued to increase. Activity in medium-term syndicated bank loans grew particularly fast, while Euro-bond issues slowed down. Developing countries were increasingly successful in tapping the resources of the Euro-currency markets. With the financing problems arising from the petroleum supply situation, access to the Euro-currency and Euro-bond markets has assumed increased importance. Certain oil producing nations and nations receiving oil funds for on-lending have already indicated their willingness to increase their lending abroad, through bond issues or otherwise; these include Iran, Kuwait, Lebanon, Trinidad and Tobago, and Venezuela. Some oil importing countries have expressed the intention to rely increasingly on foreign borrowing to ease their reserve strains; they include France, Greece, Italy, Spain, and the United Kingdom.

In European countries in the early months of 1973 there was a widespread tightening of measures to curb capital inflows, particularly those of short-term funds, but in many cases bearing on medium-term and long-term flows as well. They included the erection of an elaborate set of controls in two of the countries previously virtually without transfer or transaction controls, Germany and Switzerland. In the third quarter of 1973 policy changes in the direction of a relaxation of the measures previously adopted became apparent, beginning in France and culminating in the dismantling of many, but not all, such controls in Western European countries in January and February 1974. The reversal in policy toward capital inflows was manifested most clearly in controls applied in the domestic banking system. The number of countries applying selective reserve requirements at first increased, as did the complexity of such requirements. Among the countries which introduced or tightened provisions with respect to average or marginal reserve requirements against banks’ external liabilities were Luxembourg (January), Spain (February), Belgium-Luxembourg, France, the Netherlands (March), and Switzerland (March and November). Between May and October Germany tightened reserve requirements on nonresident deposits by repealing certain exemptions and reducing the reference level for the calculation of the growth of banks’ foreign liabilities. France abolished reserve requirements against increases in nonresident franc deposits in October, and those on the level of such deposits in January 1974. In January and February 1974 a number of the other countries which earlier had tightened reserve requirements either reduced or removed them, e.g., Belgium-Luxembourg and Germany.

The number of countries prohibiting the payment of interest, or imposing “commission charges” or negative interest rates on the holding of nonresident deposits exhibited a pattern similar to that shown with regard to reserve requirements as an indirect control on the banking system. Belgium and Luxembourg in April introduced a “special commission” of ¼ of 1 per cent a week on nonresident holdings of Belgian francs in Convertible Accounts that exceeded the daily average for the last quarter of 1972. The measure was suspended with effect from August 1, but was reintroduced at the end of September, on a modified basis, in order to ward off further speculative inflows of capital in the wake of the appreciation of the Netherlands guilder. The measure was again suspended in January 1974. In March, France prohibited interest payments on nonresident franc deposits of less than 180 days’ maturity and in April the banks on their own initiative introduced an interest charge of ¾ of 1 per cent a month on increases over the level of January 4, 1973 in balances on Foreign Accounts and Financial Accounts. The interest charge was removed in October when the prohibition on interest payments was eliminated. In Switzerland, the rules governing payment of the negative interest rate of 2 per cent a quarter on foreign-held bank deposits in Swiss francs were made more stringent from March to June, and again from July to September, when the negative interest rate was suspended. Banks and authorized depositories in the Netherlands were directed in March 1973 to charge a special commission initially of ¼ of 1 per cent a week on increases on balances in most Convertible Guilder Accounts over the average credit balance during February 1-14, 1973. The commission was reduced to zero in May but the prohibition on interest payments remained in effect. Israel applied a negative interest rate on specified foreign currency deposits of nonresidents between April 1973 and January 1974. Prohibitions on the payment of interest on specified external liabilities of banks continued in force in Germany, the Netherlands, and Spain.

Supporting the controls over payment of interest on nonresident deposits, a number of countries introduced direct restrictions of various kinds on banks, including virtual prohibitions on the acceptance of nonresident deposits, the temporary inconvertibility of new nonresident deposits, and limitations on banks’ net foreign positions, but most were relaxed late in 1973 or early in 1974.

Many of the indirect controls on nonbanks were intended to reduce the attractiveness of foreign borrowing by requiring domestic currency deposits, often noninterest-bearing, against such borrowing. At times, these measures covered banks and nonbanks, but they were usually addressed to the latter. European countries applying deposit requirements against inflows of capital included Germany, Ireland, Spain, Turkey, and Yugoslavia and outside Europe this technique was employed in Australia and Brazil.

Controls of a direct or quantitative measure to limit inflows of capital resulting from inward direct investment or the acquisition of domestic securities or real estate by nonresidents were applied by Austria, Germany, and Switzerland, among others.

On the other hand several countries, some of which had earlier taken steps to curb capital inflows, took measures to stimulate capital inflows or discourage capital outflows. Italy introduced in July a 50 per cent interest-free deposit requirement against outward capital transfers for direct investments, portfolio investments, financial loans, purchases of real estate, and personal capital movements. The deposit rate was 25 per cent or zero on investment fund securities depending on whether the investment fund had invested at least 50 per cent or all of its portfolio in Italian securities; exemptions were also granted on many direct investments and on bond placements by certain EEC agencies. Italy and the United Kingdom throughout the period under review resorted to large-scale public sector borrowing abroad, and France followed early in 1974. Denmark reduced its public sector borrowing abroad from 1972 levels. Moreover, in September 1973 France terminated the de facto prohibition on borrowing abroad for the financing of inward and outward direct investment and in January 1974 prohibited franc lending to nonresidents and allowed foreign currency borrowing up to F 10 million by non-bank residents. In March 1973 the United Kingdom reintroduced exchange cover facilities for foreign currency borrowing by certain public sector bodies. Although initially available only for borrowing in U.S. dollars, it was later extended to certain other currencies. In the case of the private sector, but not the public sector, the minimum period for foreign currency borrowing for most domestic uses was reduced.

Among the European countries, measures toward liberalization of capital outflows were minor after the beginning of 1973. Denmark, Ireland, and the United Kingdom had taken various measures of this kind either upon their accession to the EEC on January 1, 1973 or shortly before. In May, the United Kingdom eased the restrictions on sterling financing of nonresident-controlled U.K. companies and branches. In August, a series of measures was announced in France which dismantled or relaxed most of the remaining exchange restriction on capital outflows introduced in 1968 and 1969, but several of the old controls were restored in January 1974 when France in addition prohibited virtually all lending in francs to nonresidents. Some relaxation of the very restrictive controls over outward portfolio investment took place in Finland and Spain.

The group of European countries channeling all or selected capital flows through a separate exchange market—Belgium-Luxembourg, France, Ireland, and the United Kingdom—was enlarged in January 1973 when Italy introduced a separate financial exchange market with, in principle, a freely fluctuating rate for capital transactions. The dual exchange market arrangements in France and Italy were eliminated in March 1974. The Netherlands abandoned the O-guilder mechanism for nonresidents’ purchases of listed guilder bonds in February 1974 when the O-guilder premium had all but vanished.

Japan until October 1973 maintained various regulations and guidance measures designed to discourage capital inflows and encourage outflows. Measures favoring the participation of Japanese banks and institutional investors in financial markets overseas also continued, as did measures facilitating outward direct investment. In November and December a number of the earlier measures were reversed or weakened. Thus the prohibition on any net nonresident investment in Japanese securities was lifted, nonresidents’ acquisitions of balances in Free Yen Accounts were facilitated, and residents’ investment in foreign short-term securities was made subject to case-by-case screening. Japan around the turn of the year somewhat eased borrowing abroad by resident nonbank companies, principally for direct investment overseas. Japan also discouraged certain types of outward investments, particularly in securities, real estate, and less essential services.

The United States took a number of measures in 1973 to relax its controls on capital outflows. In conjunction with domestic monetary policy measures, the United States in June 1973 reduced from 20 per cent to 8 per cent the reserve minimum to be held by Federal Reserve member banks against Euro-dollar borrowings in excess of amounts permitted as a reserve-free base. Such reserve-free bases were to be eliminated gradually. Also, in June the Federal Reserve Board requested U.S. agencies, branches, and nonmember bank subsidiaries of foreign banks to observe voluntarily the same marginal requirement on new borrowings applicable to domestic banks.

In May 1973 the Office of Direct Investments introduced amendments to the Foreign Direct Investment Program (FDIP), retroactive to January 1, 1973, substantially improving benefits for direct investors selling equity securities abroad for cash or exchanging them for the stock or assets of a foreign company held by a large number of foreign nationals. In July 1973 the U.S. Federal Reserve Voluntary Foreign Credit Restraint Program (VFCRP) was extended by a request to U.S. agencies and branches of foreign banks that held US$1 million or more in foreign assets to observe specific foreign lending ceilings. Previously these institutions had been asked simply to act in conformity within the spirit of the VFCRP guidelines. Amendments to the regulations under the FDIP in July and again in November eased the year-end compliance requirements, including an increase in the “earnings allowable” from 40 per cent to 60 per cent of 1972 or 1973 affiliated foreign national earnings (previously based exclusively on the previous year’s earnings), and a relaxation in the controls covering the minimum allowable investment by small direct investors. The minimum world-wide allowable was raised from US$6 million to US$10 million.

Toward the end of December the United States announced relaxations in the programs restraining capital outflows including a reduction in the Interest Equalization Tax (IET) from the equivalent of 0.75 per cent to 0.25 per cent for all transactions after December 31, 1973. Subsequently, on January 29, 1974, the IET was reduced to zero, effective the same day. New guidelines under the VFCRP included increases in the ceilings on foreign loans by commercial banks and by U.S. agencies and branches of foreign banks, and eliminated the request that banks refrain from making nonexport loans with maturities of over one year to residents of the developed countries of Western Europe, as well as the restraint against term loans to these countries by U.S. agencies and branches of foreign banks. The ceilings for non-bank financial institutions were also increased. Also with effect from January 1, 1974, amendments to the FDIP increased the minimum worldwide allowable from US$10 million to US$20 million, the earnings allowable from 60 per cent to 100 per cent of foreign affiliate earnings for 1973 or 1974, at the direct investor’s choice, and added a debt repayable allowable, which would authorize a direct investor to repay 20 per cent of total outstanding borrowing allocated to positive direct investment as at the end of the 1973 compliance year. On January 29, 1974 the VFCRP and the FDIP programs were terminated, effective the same day. Following the dismantling of the U.S. capital controls, Canada revoked balance of payments guidelines which had been issued primarily in order to obtain and safeguard that country’s exemption from the U.S. capital controls.

Among countries other than those mentioned above, a number adopted measures to influence capital flows, the most prominent of which affected inward direct investment. Particularly noticeable was a strengthening of the trend observed in previous years to control foreign ownership of domestic enterprises. Measures aiming at such control were taken or announced in Argentina, Australia, Canada, Ecuador, Ghana, India, Malaysia, Singapore, and South Africa. Additional incentives for inward direct investment were offered in Ivory Coast, Malta, and the Philippines. Other countries such as Australia used a variable deposit requirement to reduce the attractiveness of foreign borrowing, while Brazil varied its cash deposit requirement which it had previously imposed for similar reasons from time to time in 1973 and then suspended it in February 1974. Many developing countries facilitated residents’ access to foreign borrowing, particularly in the Eurocurrency markets; those that restricted it included Brazil, Colombia, and Turkey. In developing countries, liberalization of certain outward transfers of capital, in many cases of private persons’ assets only, occurred in Algeria, the Bahamas, Cyprus, Ivory Coast, Korea, Malaysia, Malta, Morocco, and Pakistan. Most of these measures were of limited scope. Developing countries that tightened restrictions on outflows of resident-owned capital included Guyana and Jamaica.

In September, the U.K. Government extended its guarantee to participants in the 1968 Sterling Agreements on certain of their official sterling reserves for another six months until March 1974 at the rate of US$2.4213 per £ stg. 1. In March 1974 the continuation of the guarantee for a further nine months was announced but with some modifications, including a change of numeraire to the “effective rate” for sterling against a group of major currencies.

Changes in regional economic arrangements in 1973 also had an impact on the application of existing exchange control systems, particularly as they apply to capital transactions. Reference has already been made to measures taken by Denmark, Ireland, and the United Kingdom in connection with their accession to the EEC. Ireland and the United Kingdom in January 1973 also redesignated Gibraltar a Scheduled Territory. Former Scheduled Territory countries, such as Barbados (February 1974), Malta (February 1973), and Malaysia (May 1973), continued to amend their exchange control legislation in response to the United Kingdom’s decision in June 1972 to extend exchange control to U.K. residents’ transactions with the rest of the Sterling Area. In July, the Malagasy Republic and Mauritania ceased to maintain an Operations Account with the French Treasury. Foreign exchange control regulations were henceforth in effect between the two countries and France and the remaining Operations Account countries.

6. Gold

There were two major developments during the period under review with respect to arrangements governing movements of gold. On November 13, the Chairman of the Federal Reserve System of the United States announced that the Federal Reserve System and the six European central banks (those of Belgium, Germany, Italy, the Netherlands, Switzerland, and the United Kingdom) which up to 1968 had actively participated in the gold pool had decided to terminate the agreement of March 1968 not to sell gold to the free market. Subsequently, on December 7, at the request of South Africa, the Fund reviewed its decision on the policy governing sales of South African gold to the Fund, adopted on December 30, 1969, and decided to terminate it.

During the year a number of countries modified their regulations governing nonofficial transactions in gold. Australia freed gold producers in Papua New Guinea from the requirement to surrender all gold produced to the Australian Reserve Bank. In Costa Rica, private persons were permitted to sell domestically produced gold at home and abroad. Early in the year Denmark fully liberalized imports of gold coins from EEC countries. In Hong Kong, with effect from January 1, 1974, licenses ceased to be required for the import and export of gold. Austria and Italy subjected domestic dealings in gold bars and coins to value-added tax. Under new guidelines issued by the Italian Foreign Exchange Office, banks in Italy were required to ensure that imported gold sold by them was used exclusively for industrial use. Japan liberalized the import of gold bullion, gold coins, and various types of gold jewelry. The Philippines extended the stabilization tax to cover proceeds from the export of gold. Singapore abolished the charge on imports of gold, lifted the restrictions on imports by individuals and companies, and freed the export of gold from licensing. On May 4, 1973, the United Kingdom removed certain restrictions on dealings in gold. The restrictions applied to (1) forward transactions by authorized dealers in gold; (2) the financing of purchases of gold by nonresidents through foreign currency lending by authorized banks; and (3) authorized banks accepting gold as collateral against advances of foreign currency to nonresident customers.

On September 21, 1973 the U.S. Congress adopted an Act to Amend the Par Value Modification Act; Section 3 of the new Act repealed Sections 3 and 4 of the Gold Reserve Act of 1934 and lifted all restrictions prohibiting U.S. citizens and residents from purchasing, holding, selling, or otherwise dealing in gold. Pursuant to the Act, these provisions will come into effect only when the President finds and reports to Congress that international monetary reform shall have proceeded to the point where elimination of regulations on private ownership of gold will not adversely affect the United States’ international monetary position. In December 1973 the U.S. Treasury eased the restrictions on imports of gold coins by issuing a general import license covering all foreign cold coins minted from 1934 through 1959; the import of such coins minted prior to 1934 had long been unrestricted. However, it was announced that licenses would no longer be issued for the import of gold coins minted after 1959. The Yemen Arab Republic formally removed all restrictions on the import and export of gold, which for some time had not been enforced.

Albania, Bulgaria, Cuba, Czechoslovakia, Eastern Germany, Hungary, Mongolia, Poland, Romania, and U.S.S.R.

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