III. Regional Arrangements
- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1974
Denmark, Ireland, and the United Kingdom joined the EEC on January 1, 1973. During the year the first steps were made by the new members to apply the Common Agricultural Policy, and to eliminate customs duties on industrial goods imported from the original members; on January 1, 1974 the first alignment on the Common External Tariff took place. Industrial Free Trade Agreements with all remaining member countries of the European Free Trade Association (EFTA) came into force in the course of 1973: with Austria, Portugal, Sweden, and Switzerland on January 1, with Iceland on April 1, and with Norway on July 1. A similar agreement with Finland was signed on October 5, 1973 and entered into force on January 1, 1974. The Free Trade Agreements are accompanied by agreements on coal, steel, etc., with the European Coal and Steel Community, not all of which have yet been ratified, but all of which have already been put into effect. Under all these Free Trade Agreements and Coal and Steel Agreements, the second stage (generally a 20 per cent cut in tariffs on industrial products) took effect from January 1, 1974. Virtually all trade in industrial products between the seven EFTA countries and Denmark and the United Kingdom remains duty free as it was before the withdrawal of the latter two countries from EFTA. A general Community policy toward Mediterranean countries was formulated and negotiations based on this policy took place with Algeria, Israel, Morocco, Spain, and Tunisia. Also, with the enlargement of the Community, protocols were added to a number of existing agreements with Mediterranean countries which either extended preferential treatment to the new members or temporarily postponed such treatment. Conferences to prepare for negotiations on future association with the Community were held in Brussels on July 25-26, 1973 and October 17-18, 1973 between the Community and 41 invited states from Africa, the Caribbean area, and the Pacific region. The invited countries consisted of the 22 participants to the Yaoundé and Arusha Agreements and 19 “associable” countries mainly from the Commonwealth. Trade agreements were concluded with Brazil (December 19), India (December 17), Uruguay (April 2), and Yugoslavia (June 26).
The EEC’s 2¼ per cent margins arrangements underwent considerable strain in the period under review. Italy established a dual exchange market on January 22, 1973, and after the devaluation of the U.S. dollar was announced on February 12, Italy withdrew from the arrangements. After a further monetary crisis at the beginning of March, a decision was taken whereby the remaining participants continued to adhere to the margins arrangements among themselves but were not obliged to maintain previous announced margins for other currencies except of such other European countries that would maintain 2¼ per cent margins with the EEC currencies; from the start, Norway and Sweden associated themselves with the revised arrangements by way of bilateral agreements between their central banks and the central banks of the EEC countries. Austria subsequently announced it would, without assuming any formal obligation to do so, observe margins of up to 2¼ per cent either side of cross-parities in respect of the currencies participating in the European common margins arrangements. During the period under review, there were two appreciations of the deutsche mark and one appreciation of the Netherlands guilder and the Norwegian krone, all in terms of SDRs. In January 1974 France suspended for six months its participation in the EEC margins arrangements. The European Monetary Cooperation Fund, which was described in the previous Report, was established on April 6, 1973 and came into operation on June 1, 1973.
The fluctuations of member countries’ currencies accentuated existing problems for the operation of the Common Agricultural Policy which is based on parities. The system, which determines the rates for calculating the monetary compensation amounts that have to be paid on agricultural imports and exports between one market and another, underwent a number of revisions during the year.
Effective cooperation in the field of capital controls proved difficult to obtain given the dissimilar situations faced by the different countries. Early in 1974, in view of the revised balance of payments outlook on current account for these countries, a general dismantling or relaxation of the capital controls erected in the last three or four years to ward off capital inflows took place in Belgium-Luxembourg, France, Germany, and the Netherlands. Similar action was also taken in Sweden and Switzerland.
Some progress was made during 1973 in preparing a second stage of the Economic and Monetary Union, scheduled for the period commencing January 1, 1974 until December 31, 1976. Pending agreement on the financing of measures to correct structural and regional imbalances, the Council of Ministers of the EEC on February 18, 1974 took a number of decisions as part of the transition into a second stage. They concern an enlargement of the 1970 scheme for short-term monetary support, the closer coordination of economic policies (establishing new consultation procedures on any changes in par values, central rates, or intervention policies among EEC countries), the establishment of an Economic Policy Committee, and new guidelines on stability, growth, and full employment.
In Africa, the contracting parties to the treaty establishing the West African Economic Community (CEAO), which was signed by Ivory Coast, Mali, Mauritania, Niger, Senegal, and Upper Volta, met in April 1973. Dahomey and Togo assumed observer status. The Community treaty came into force on January 1, 1974 when the CEAO replaced the West African Customs Union (UDEAO). The new Community is intended to go beyond the previous Customs Union. It is to establish an “organized trade area” for agricultural and industrial products with a system of mutual compensation of gains and losses for every member country, to promote greater economic cooperation between members, to set up a fund designed to finance community actions, and to facilitate the free movement of capital, goods, and services. In December 1973 the finance ministers of 14 West African countries met for further discussions on the possibility of enlarging the CEAO to include English-speaking West African countries. The ministers agreed on the principle of a 15-year deadline for the liberalization of trade within the region. Further meetings at the technical and ministerial levels are scheduled later in 1974.
Under new agreements signed with France by the member countries of the Banque Centrale des Etats de l’Afrique Equatoriale et du Cameroun (BCEAEC)7 and the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO),8 substantial changes occurred in the charters of these banks and in monetary relations within the French Franc Area. The BCEAEC was replaced by a new central bank with unchanged membership, the Banque des Etats de l’Afrique Centrale (BEAC). The BEAC, established by the Brazzaville Agreement of November 23, 1972, maintains a common monetary unit and the pooling of foreign exchange reserves in a joint reserves fund for the five Central African states. The new agreement, however, provides that, upon decision of the Board of Directors of the BEAC, up to 20 per cent of net foreign reserves of the Bank, excluding SDRs, may be deposited in current accounts with central banks outside the French Franc Area. The agreement also provides for the harmonization of the member states’ policies in the area of exchange and payments, credit distribution and control, and banking legislation. On December 4, 1973 an agreement was signed by the six countries of West Africa9 and France which established new links between a revamped Union Monétaire Ouest Africaine (UMOA) and France. The agreement, which modified substantially the statutes of the BCEAO, also created a Banque Ouest Africaine de Développement (BOAD). With regard to the BCEAO, the major modifications which were introduced by the new statutes relate to the power of decision making in the field of monetary and credit policy and reserve management. As with the BEAC, the pooling of reserves in Operations Accounts with the French Treasury became subject to new diversification arrangements which provide that upon decision of the Board of Directors of the BCEAO up to 35 per cent of net foreign reserves of the bank, excluding SDRs, may be deposited in current accounts with central banks and certain other specified institutions outside the French Franc Area. The BCEAO Agreement, which is to come into force in May 1974, also provides for an exchange guarantee on the relevant French franc balances in terms of a yet to be determined unit of account. The BOAD, established with a capital of CFAF 2.4 billion, will extend to its members long-term loans for development projects. Mauritania and the Malagasy Republic ceased to be linked to the French Treasury by Operations Accounts and the former country withdrew from the BCEAO and the UMOA.
The ninth annual meeting of the Board of Governors of the African Development Bank (AfDB) was held on July 2, 1973. During the meeting the inauguration of the African Development Fund (AfDF) took place, which started operations on August 1. Pending approval of its lending policy by its Board of Governors, the AfDB will temporarily provide development financing on concessional terms. Mauritius became the thirty-ninth member of the AfDB in January 1974.
The Convention establishing the Arab Fund for Economic and Social Development, which was approved by the Economic Council of the League of Arab States in May 1968 and entered into force on December 18, 1971, made its first loans in 1973. The Arab Fund is located in Kuwait and has a membership of 16 countries.10 It is designed to finance development projects within the region. In 1973 the member countries of the Islamic Conference worked toward the establishment of an Islamic Development Bank. Several drafts of the statutes have been prepared which are to be discussed in the second quarter of 1974. The Bank, which would grant interest-free loans to member countries, would aim principally at financing social projects in member countries.
In Central America a special consultative meeting was held on June 20-21, 1973 by economic ministers to examine developments within the Central American Common Market (CACM). This meeting was followed in July by a joint meeting with finance ministers on the occasion of which a high level committee for the restructuring of the Central American Common Market was formally installed. This committee held its first meeting on August 13. At a later meeting in December, the high level committee agreed to submit its recommendations on intraregional trade, the common external tariff, and fiscal harmonization between members before the end of April 1974. Trade with Honduras has been further normalized by the signing of free trade agreements with members of CACM.
Following a decision taken on April 13, 1973 to establish a common market between the members of the Caribbean Free Trade Association (Carifta), Barbados, Guyana, Jamaica, and Trinidad and Tobago ratified the Caribbean Community Treaty signed on July 4. The Caribbean Common Market (Caricom) came into operation on August 1. The Treaty provides for the harmonization of fiscal incentives for industrial investments, the establishment of a common external tariff, and greater cooperation between members in the fields of economic and monetary policies. The four present members of Caricom also intend to set up a Caribbean Investment Corporation designed to promote the establishment of new industries in the area providing equity capital and preinvestment assistance to private entrepreneurs. The others—Belize, Dominica, Grenada, Montserrat, St. Kitts-Nevis-Anguilla, St. Lucia, and St. Vincent, are expected to accede to the Treaty on May 1, 1974, when Carifta is to be formally dissolved.
Within the Latin American Free Trade Association (LAFTA),11 Chile and Peru ratified on February 4 and June 14, respectively, the Caracas Protocol which allows for the postponement until the end of 1980 of the completion of a free trade area between LAFTA members originally scheduled in the Montevideo Treaty for the end of 1973; the ratifications by Colombia and Uruguay, the last ones outstanding, were given in December 1973 during the Thirteenth General Conference of LAFTA. Representatives of financial intermediaries of the LAFTA member countries met several times in 1973 to study the possibility of creating a market for banking acceptances. Although not a member of LAFTA, the Dominican Republic, through its Central Bank, joined, with effect from January 1, 1973, the multilateral system of payments in existence between LAFTA members since 1965.
In March 1973 Venezuela became a member of the Andean Group.12 The terms of admission were declared compatible with Venezuela’s obligations under the Montevideo Treaty by the Venezuelan courts. Following its admission Venezuela undertook to eliminate tariffs on intraregional trade and to bring its external tariff in line with the Common Minimum External Tariff, a transitory stage before the establishment of a Common External Tariff, which is presently being drafted by the Andean Common Market Secretariat and is scheduled to come into force at the end of 1980.
In Asia the Draft Agreement of the Asian Clearing Union (ACU) prepared in the United Nations Economic Commission for Asia and the Far East (ECAFE) was discussed by senior officials and central bank experts of interested member countries at a meeting on February 28, 1973. The finalized Draft Agreement was then considered by the delegates to the twenty-ninth session of ECAFE in April. It was signed by Iran and Sri Lanka and subsequently, in early 1974, by India. The Agreement, which is to come into force after five countries have signed it, is intended to promote the use of regional currencies for payments for intraregional transactions and provides for the establishment of a clearing mechanism for the multilateral settlement of these payments. The accounts of the ACU are to be kept in a special unit of account to be called the Asian Monetary Unit (AMU) equivalent to SDR 1. By the end of March 1974 no other countries had signed the Agreement; Bangladesh, Nepal, and Pakistan have indicated their intention to do so.
These countries are Cameroon, Central African Republic, Chad, People’s Republic of the Congo, and Gabon.
These countries are Dahomey, Ivory Coast, Niger, Senegal, Togo, and Upper Volta.
The BCEAO member countries.
The members are Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libyan Arab Republic, Morocco, Qatar, Sudan, Syrian Arab Republic, Tunisia, United Arab Emirates, Yemen Arab Republic, and People’s Democratic Republic of Yemen.
The members are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela.
The original members are Bolivia, Chile, Colombia, Ecuador, and Peru.