II. Main Developments in Restrictive Practices
- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1970
Trade and Payments Restrictions
Although the strains and stresses to which the international monetary system was subject tended to ease in the last quarter of 1969, during the period under review there were no substantial changes in the restrictions maintained on imports and current payments by the industrial countries as a group. The pressures for voluntary restraints on exports of such commodities as textiles, steel, and meat continued. Market access for temperate zone agricultural products remains an unsolved problem. In many Western European countries the process of gradual liberalization of imports from Japan and from countries of the Council for Mutual Economic Assistance (CMEA) was carried forward. Germany, after the revaluation of the deutsche mark, rescinded the adjustments in value-added tax that had aimed at encouraging imports and discouraging exports.
Outside the group of major industrial countries, import liberalization of some importance took place in Chile, Indonesia, Israel, Morocco, and New Zealand. Chile substantially reduced the number of goods subject to advance deposit requirements and Morocco freed a large number of goods from quantitative restrictions. South Africa ceased to invoke Article XII of the General Agreement on Tariffs and Trade (GATT). Turkey, however, severely restrained imports. Imports were also heavily restricted by a variety of means in the Philippines, mainly by limitations on the opening of import letters of credit, but early in 1970, after the creation of a free market in which the peso depreciated, most of these restrictions were lifted. Import liberalization was often accompanied by the application of alternative measures tending to reduce effective import demand, such as advance deposits, import surcharges, and increases in customs duties and other indirect taxes. Israel and Spain introduced advance deposit schemes, and the United Kingdom, while twice reducing the rate of deposit required, continued its import deposit scheme for a year. The trend toward state trading continued in some developing countries, more on the import side than on the export side.
Payments arrears in respect of imports or invisibles still exist in a number of member countries, including Ghana, Haiti, Nigeria, and Paraguay.
Certain Article VIII countries have in recent years received temporary approvals allowing them to introduce specified restrictions on payments and transfers in respect of current international transactions. The United Kingdom recently abolished its restriction on travel allowances. Costa Rica, when unifying its exchange rate structure, abolished its exchange restrictions. Japan abolished the restriction on travel exchange, which was the last of the two restrictions on current payments that it had maintained when assuming the obligations of Article VIII. This meant that the authorities approved bona fide applications for any amount of travel exchange. Subsequently, Japan also increased the basic travel allowance that banks may make available without consulting the Bank of Japan. Several Article XIV countries decided to cut back travel expenditures by a reduction in exchange allocations, an increase in travel or exit tax, or a depreciation of the applicable exchange rate. These included Israel and Viet-Nam. Colombia, however, reduced the guarantee deposit requirements for tourist travel and a number of countries increased allocations for such travel. The Philippines introduced additional restrictions on travel expenditures and various other invisibles when its balance of payments came under severe pressure, but most of these restrictions were subsequently lifted.
Fund members have made further progress with the termination of their bilateral payments agreements. Countries terminating one or more such agreements with other member countries included China, Indonesia, Israel, the Philippines, Spain, Turkey, and Yugoslavia. Austria reached preliminary agreement with the U.S.S.R. to terminate their clearing arrangement in the near future.
Multiple Currency Practices
Multiple currency practices continue to be employed by some 30 member countries. Cambodia devalued its currency prior to joining the Fund at the end of 1969 and in so doing eliminated its broken cross rate for the French franc. Costa Rica reunified its dual rate structure at the level of the previous official rate. Peru reduced its reliance on multiple currency practices when an exchange tax that had been applied on most import payments was replaced by a customs duty surcharge. Indonesia merged its two exchange markets and took certain further measures as part of a major exchange reform. The Philippines introduced temporarily a multiple currency practice with the establishment of a fluctuating free market by prescribing the surrender at the par value of a specified portion of the proceeds from major exports.
In a number of member countries, existing multiple currency practices proliferated or the spread between effective rates widened. Ceylon further increased the domestic price of exchange certificates and extended the coverage of the certificate market to include most public sector imports. Chile increased the exchange tax applied to certain payments channeled through the brokers’ market and introduced another tax on all payments through that market. Prior to the exchange reform, the overprice system in Indonesia became still more complex and the overprice ratios were gradually raised for most commodities. Pakistan extended its bonus system to additional categories of foreign exchange earnings and, through this system, further raised the effective cost of imports. Paraguay increased the small tax levied on all foreign exchange transactions. Turkey introduced a new effective buying rate by undertaking payment of a premium on purchases of convertible currency acquired by residents in respect of air or road transport. The United Arab Republic permitted certain holders of convertible currency to sell foreign exchange to residents for specified payments at freely negotiated rates.
The use of cost restrictions on travel has continued; in some countries these have involved an additional effective exchange rate, as, for example, in Chile, Colombia, Iraq, and Turkey. During 1969, Colombia reduced the prior deposit requirement which is applied to the sale of foreign exchange for travel abroad to ensure that the transaction is a bona fide one intended for travel purposes only. In Chile, the effective cost of travel exchange rose as a result of the further depreciation of the brokers’ market rate and an increase in taxation on exchange purchases in that market. Iraq extended the coverage of its exchange tax by withdrawing certain exemptions previously granted on sales of foreign exchange to persons leaving Iraq, and Bolivia raised its travel tax.
The premiums over the par value that are paid in the investment currency market in the United Kingdom and in the Belgian free market both fluctuated widely during the period under review. The former moved between 17 per cent and 60 per cent, with recently a downward trend to the 25-30 per cent range, and the latter exceeded 10 per cent in May and August (but in each case for only one day) prior to the German revaluation, but has since become negligible. France reintroduced a “security currency” by creating a market for dealings between residents in exchange proceeds arising from sales abroad of certain securities. The premium over the official market rate went up to some 15 per cent prior to the revaluation of the deutsche mark but has since come down to less than 10 per cent.
Import Surcharges, Import Deposits, and Measures to Stimulate Exports
There has been a further increase in the number of countries employing import surcharges, advance import deposits, and similar devices aimed at increasing the cost of imports. Import surcharges on certain categories of commodities were introduced by Ghana, Guinea, and Honduras, although the 1 per cent license fee levied by Ghana on the c.i.f. value of imports was abolished. Guyana imposed a 3 per cent defense levy on all imports other than those currently exempt from customs duty. Malawi introduced a customs surcharge. The United Arab Republic introduced a development tax of 10 per cent—5 per cent for certain essential imports—of the c.i.f. value of imports, but reduced the “statistical tax” on imports from 10 per cent to 1 per cent of the c.i.f. value. The Sudan raised its import surcharge from 10 per cent of the c.i.f. value to 15 per cent. The stamp tax levied on most imports into Greece was raised from a range of 1 to 2 per cent to one of 2 to 5 per cent. Ecuador’s stabilization surcharge was raised. The rates of specific taxes on imports into Uruguay were doubled, but at the same time certain import surcharges were reduced. Many modifications in austerity and equalization taxes occurred in Viet-Nam, resulting over the period in a considerable increase in the effective cost of imports. Measures to reduce the cost of imports included the lowering of equalization levies in Austria, following the revaluation of the deutsche mark, and the action taken in Indonesia to allow the payment of duties, surcharges, or import levies on imports of essential goods to be postponed under certain conditions for upward of two months; in April 1969 the requirement for the prepayment of import duties on category B and C imports had already been abolished.
Spain introduced a scheme, which is to remain in operation until December 31, 1970, requiring importers to lodge with the Bank of Spain a local currency deposit equal to 20 per cent of the c.i.f. value of imports prior to applying for an import license. El Salvador reintroduced advance deposit requirements consisting of local currency deposits of 100 per cent of the c.i.f. value of certain imports. Israel has introduced an import deposit scheme for less essential imports under which importers are required to deposit with customs 50 per cent of the value of imports on which the customs duty is 30 per cent or more. The deposits will be transferred to the Bank of Israel and frozen for six months. Advance deposit rates were raised in Ecuador, Turkey, and Viet-Nam. In Turkey, one fourth of the guarantee deposit received by the Central Bank was to be made available to assist export financing. In Korea, the rates of advance deposits were increased for certain categories of commodities, but were reduced or abolished for others. In Paraguay, the Central Bank prohibited authorized banks from accepting financing for advance import deposits from foreign banks.
In the United Kingdom, the import deposit scheme was extended for a further 12 months, to December 5, 1970, but the rate of deposit was reduced first from 50 per cent to 40 per cent and then to 30 per cent of the value of the goods, payable at the time of entry into customs. Greece extended the operation of advance deposits on imported passenger cars to March 2, 1970.
In Chile and China the import deposit rates were lowered sharply, and they were eliminated in Ethiopia and Somalia. In Colombia, the further shifting of some commodities to groups subject to a lower rate of deposit reduced the impact of the advance deposit requirement. In Japan the deposit requirement for imports of consumer goods was lowered from 5 per cent to 1 per cent, bringing it into line with the requirement for all other commodities. Selective reductions in deposit rates were introduced in Argentina and Uruguay. With the introduction of an exchange reform early in 1970, the Philippines abolished an existing requirement of advance import deposits.
In both industrial and developing countries there has been a further elaboration of arrangements designed to encourage exports, usually focusing on nonagricultural commodities—mainly capital goods in the industrial countries and non-traditional exports in the developing countries. Export promotion arrangements have generally tended to become more ambitious, involving, among other things, tax rebates, interest rate subsidies, credit insurance schemes, and the establishment of special institutions for export promotion. Several industrial nations have again raised the over-all ceilings on export credit insurance and provided coverage for additional types of transactions or risks or for exports to additional countries.
A new export financing procedure was introduced in Germany, whereby banks could directly purchase from exporters government-guaranteed medium-term and long-term suppliers’ credit claims on developing countries. A special guarantee fund was established for this purpose. The Swiss ordinance implementing the federal law on export risk guarantees was revised and the range of operations eligible for such insurance was widened. The Export-Import Bank of the United States began to guarantee foreign banks’ loans that would finance U.S. exports, in addition to guaranteeing the loans being made to foreign financial institutions for relending to local buyers of U.S. equipment. The Export-Import Bank also announced that it was prepared to make advance commitments on export insurance and guarantees for U.S. firms bidding on capital projects abroad, as well as to finance the export of U.S. engineering and planning services. In the United Kingdom, the Bank of England agreed to refinance fixed-rate export and shipbuilding credits when that part of a bank’s fixed-rate lending not eligible for inclusion in liquid assets exceeded 5 per cent of its gross deposits.
Against this general trend, Belgium discontinued the preferential discount rate for export bills and selectively reduced the turnover tax rebates granted to certain exporters. In France, in early 1969, the temporary export subsidy on exports of most goods other than agricultural commodities and fuel was abolished, and the facilities of the “economic risk” insurance procedure, covering exporters against abnormal increases in their costs, were reduced to their pre-June 1968 levels. Furthermore, the French preferential rediscount rate for short-term export credits was abolished on August 11, 1969, while that for medium-term credits was eliminated on February 19, 1970 in respect of sales to countries of the European Economic Community (EEC) but was continued for sales to non-EEC countries. In Japan, the Bank of Japan decided to raise its interest rates on export finance by about 1 per cent per annum effective May 1970, in order to modify the existing preferential treatment of export financing.
Bilateral Payments Arrangements
Further progress has been made in terminating bilateral payments agreements between member countries. During 1969 and early 1970 eight such agreements were terminated against two agreements contracted. Of some 55 agreements still in operation between member countries, none involve any of the major trading nations. During the same period, six payments agreements with nonmembers were terminated and the termination of three more was decided upon, while four agreements were added. At the end of 1969, some 60 member countries maintained bilateral payments agreements; of these, 12 countries maintained agreements with other members only, 32 with members and nonmembers, and 14 with nonmembers only. Some of the agreements were inoperative. Of the some 240 agreements, operative and inoperative, between members and nonmembers,2 nearly 200 agreements were with Eastern European countries, 19 with mainland China, and 16 with other state trading countries in Asia. It is estimated that exports by member countries financed under bilateral payments arrangements are less than 2 per cent of total world exports.
While reliance on bilateralism has been reduced progressively over the years, and bilateral payments arrangements between major trading nations now are extinct, trade and payments relations with bilateral partners continue to be important to some individual member countries. There has been a noticeable tendency, on the other hand, for members who are reducing their reliance on bilateralism to harden the settlement provisions under their remaining agreements by agreeing on earlier settlement in convertible currencies of swing overdrafts or net balances.
Measures Affecting Capital
Changes in the regulations concerning capital movements again were frequent and widespread. On balance, there was a further tightening of controls over the foreign assets and liabilities of commercial banks in Europe and in the United States, while the controls over outward direct investment were maintained with only minor changes in France, the United Kingdom, and the United States. Industrial and developing countries alike took further steps to check outflows on private account for investment in foreign securities and real estate or for deposit abroad.
In Germany, the administrative restriction of November 1968 requiring the prior approval of the Bundesbank for the acceptance of new deposits from nonresidents and for the payment of interest on newly opened nonresident savings accounts was revoked in February 1969. At the same time the need for the Bundesbank’s approval for the raising of new loans and credits from nonresidents by German financial institutions was also abolished. With effect from the beginning of May, the authorities revoked an earlier decision that the minimum reserve requirement of 100 per cent on additions to commercial bank liabilities to nonresidents was to be terminated at the end of April. The reserve ratio on existing external liabilities was increased with effect from the beginning of June. With effect from December 20, 1969, existing restrictions were abolished on payment of interest on nonresidents’ deposits (other than savings accounts of private individuals) and on the sale of domestic money market paper to nonresidents (including repurchase agreements on domestic fixed-interest securities). Many changes took place in the conditions on which the Bundesbank made swap facilities in U.S. dollars available to authorized banks until these facilities were suspended on September 29. Since then, the Bundesbank has not intervened in the forward exchange market. In November, following the establishment of the new par value, reserve requirements for foreign liabilities were brought into line with those for liabilities to residents. While Germany did not through official action limit foreign access to its capital market, the Central Capital Market Committee, a panel of representatives from all sectors of the banking industry, recommended that the volume of foreign issues be limited through voluntary restraint. This was primarily done to avoid excessive tension on the market for long-term capital. Certain tax facilities were introduced to stimulate outward direct investment, particularly investment in developing countries.
France did not significantly alter its exchange controls over capital movements, other than by the reintroduction of a “security currency.” However, it revised the special controls over capital transactions introduced early in 1967. The liquidation of French investments abroad was made subject to prior declaration to the Minister of Economy and Finance, who could request its postponement. The transfer abroad of the liquidation proceeds of direct investments in France owned or controlled by nonresidents had to be supported by documentary evidence submitted to the Treasury in advance. Control over borrowing abroad was also tightened, since the scope of exemptions from prior approval for such borrowing was reduced. Exemptions were maintained only for borrowing abroad for the purpose of financing direct investment or the execution of works abroad, for the financing of foreign trade or certain international merchanting transactions, for borrowing by specially authorized banks, and for loans not exceeding F 2 million taken up by individual firms. All repayments had to be made through authorized banks and notified ex post to the Treasury. The Operations Account countries3 generally took corresponding measures and in addition most made subject to prior approval the purchase of French securities and the collection of funds for investment or deposit in France or any other country. In August France re-established a market for dealings between residents in foreign exchange proceeds of French or foreign securities held abroad under the control of an authorized bank. “Security currency” acquired in this market could be used within one month for the purchase of French or foreign securities abroad.
Italy took various measures to prevent unauthorized capital outflows. In April the emigrant transfers previously authorized by the authorized banks were made subject to direct approval by the Italian Exchange Office. Regulations concerning the mutual granting of financial short-term and medium-term loans between residents of Italy and those of other countries of the European Economic Community were tightened: loans could be extended by Italian residents only up to a total of Lit 250 million for each applicant, and each beneficiary was required to certify that he had not received any other loan from an Italian resident which would raise his total receipts from such loans above Lit 250 million. Similar regulations were introduced regarding loans granted to Italian residents by residents of other EEC countries. In February 1969 the regulations for swap lira transactions were tightened, and the cost of new swap forward transactions was raised by 5 per cent, increasing the cost of forward cover to the banks. In March, commercial banks were instructed to liquidate their net credit positions abroad by June 30 and to repatriate the funds. To help stem the illegal outflow of banknotes, Italian residents selling fixed assets located in Italy against Italian banknotes presented by nonresidents were made subject to penalty if the foreign origin of the funds could not be verified. Checks on the illegal export of lira banknotes were tightened and from February 1970 shipments of Italian banknotes from foreign banks could no longer be accepted by commercial banks, but rather had to be shipped direct to the Bank of Italy for credit to special accounts. Italy also took measures to regulate investment by Italian residents in foreign investment funds and to encourage portfolio investment in Italy. In April 1969 commercial banks were forbidden to participate in syndicates placing new issues of Euro-bonds, except for issues by international companies with interests in Italy. All investment by Italian residents in non-Italian investment funds was made subject to individual authorization by the Ministry of Foreign Trade. In February 1970 the permissible lapse of time for settlement of import and export transactions was reduced substantially.
During the course of the year the Netherlands introduced measures to limit the net foreign asset position of authorized banks. In November the remaining restrictions on domestic borrowing by nonresidents to finance direct investments in the Netherlands were removed. In Belgium-Luxembourg, commercial banks were instructed to tighten the extension of credit to nonresident customers. The supervision over certain capital market operations became more strict.
The United Kingdom’s voluntary restraint program for investments in specified Sterling Area countries was maintained in 1969. As noted in the Twentieth Annual Report on Exchange Restrictions, early in the year restrictions were lifted from portfolio investment by institutional investors in securities whose capital or dividends or interest are payable or optionally payable in currencies of countries outside the Sterling Area. The requirements with respect to the use and surrender of investment currency, however, remained unchanged. Nationalized industries were again encouraged to borrow outside the Sterling Area to meet part of their capital requirements. There was a tendency for the use of “back-to-back” financing by nonresident-controlled firms in the United Kingdom to increase, but this was to some extent offset by control measures in the United States.
In the United States, the mandatory Department of Commerce program and the voluntary Federal Reserve Board programs relating to outflows of U.S. capital were maintained but eased somewhat. The easing related mainly to export transactions and to investment in developing countries. The restrictions on foreign investment introduced in 1968 were relaxed slightly in 1969 and simplified. In April, the 1969 “minimum” world-wide direct investment allowable authorized to every U.S. direct investor was raised from $200,000 to $1 million. Construction companies were authorized to exceed their direct investment allowables in certain circumstances, and airlines were granted special treatment to permit necessary investments for the introduction of “jumbo jets.” Small and medium-sized investors were permitted to file their reports once a year instead of quarterly. In June, U.S. direct investors were permitted to use proceeds of long-term foreign borrowing to offset reinvestment of foreign earnings as well as to offset transfers of capital from the United States. In July, the Office of Foreign Direct Investments announced that it would consider specifically authorizing direct investment resulting from the exchange by U.S. direct investors of “limited” amounts of their equity securities with “limited” groups of foreign nationals to finance direct investments, if the foreigners agreed not to dispose of such securities for at least three years. The Office also announced that it would specifically authorize direct investment involving financing based upon parallel domestic and foreign loans if the Office is assured, among other things, that the foreign company or its U.S. affiliate intends to invest or retain the proceeds of the U.S. loan in the United States. Under the direct investment program announced for 1970, the “minimum” direct investment allowable was raised from $1 million to $5 million, provided that the additional $4 million is spent in the less developed countries (Schedule A countries). The rest of the program remains substantially unchanged.
Under the Federal Reserve Board programs, ceilings on bank lending abroad were maintained without much change. In April 1969 it was announced that a bank could either maintain its present ceiling on foreign lending (generally the same as the one in effect during 1968) or adopt a new ceiling equal to 1½ per cent of total assets, whichever was greater. For nonbank financial institutions, the ceiling was raised from 95 per cent to 100 per cent of the level of foreign loans outstanding at the end of 1967. For 1970, in addition to their existing ceilings, banks could adopt a separate ceiling of ½ of 1 per cent of their total assets at the end of 1968 for export term loans of at least $250,000 and of an original maturity of one year or longer. Nonbank financial institutions remained subject to a single ceiling, but were permitted to exceed this “moderately” through extension of additional export credits.
In November 1969 the Interest Equalization Tax was extended to March 31, 1971; meanwhile, the effective rate—i.e., the amount by which the cost of foreign borrowing in the United States is increased over the levels of domestic interest rates—had been lowered in April 1969 from 1¼ per cent to ¾ of 1 per cent a year. The exemption for Japan from the tax was terminated when Japan informed the United States that the exemption was not required. The exemption for Japan from the Federal Reserve guidelines for new long-term investments by nonbank financial institutions was also terminated at the end of December.
During 1969 the Federal Reserve Board introduced marginal reserve requirements intended to stabilize the volume of Euro-dollar borrowing by U.S. banks (mainly through their branches abroad). From October, member banks were required to hold in reserve 10 per cent of additions (above a May 1969 base level) to borrowing from their foreign branches or from foreign banks, as well as additions to foreign branch loans directly to U.S. residents. The same requirement applied to assets acquired by foreign branches from the head offices of banks in the United States. (An alternative formula calls for a 10 per cent reserve on borrowings from branches in amounts greater than 3 per cent of the bank’s total deposits.) During the year the Board also requested all member banks with foreign branches to refrain from soliciting or accepting deposits by U.S. residents at foreign branches.
In Japan, inward direct investment had been liberalized in 204 industries by the end of 1969, including the 50 industries in which investment had been liberalized in 1967. Japan also introduced an automatic approval procedure for outward direct investment up to $200,000 for each transaction. The restrictions on the transfer of profits from “yen-based” branches, dividends on foreign-owned “yen-based” stocks, and liquidation proceeds of “yen-based” branches, stocks, and real estate were removed. The restrictions affecting certain income from “yen-based” assets related only to balances that had accumulated before Japan’s acceptance of the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement.
The Euro-currency market during the period under review increased further in size. In Southeast Asia, Singapore licensed a number of banks to accept deposits from non-Sterling Area residents for on-lending outside the Sterling Area, and a small “Asian dollar” market has arisen.
The two-tier price system for gold was maintained in 1969. By the end of the year the free market price had fallen close to the U.S. official price of $35 a fine ounce. In December an agreement was reached between the Fund and South Africa on the circumstances in which South Africa might request to purchase currency from the Fund against the sale of gold. These circumstances were stated in a letter dated December 23, 1969 from South Africa to the Managing Director of the Fund. On December 30 the Fund decided that it would purchase gold from South Africa when that country represented that it was making a sale in accordance with the letter of December 23. In the first quarter of 1970 the Fund purchased $283 million in gold from South Africa. Throughout April the price of gold was somewhat above $35 a fine ounce, and it closed the month at $35.85.
A free gold market was established in Singapore in April 1969 for nonresidents of the Sterling Area. Relatively few changes appear to have taken place in the extent to which member countries allow residents other than industrial users to hold or acquire gold.
Including eight agreements maintained by Cambodia, which joined the Fund during 1969.
These are countries whose institute of issue maintains an Operations Account with the French Treasury: Cameroon, Central African Republic, Chad, People’s Republic of Congo, Dahomey, Gabon, Ivory Coast, Malagasy Republic Mali, Mauritania, Niger, Senegal, Togo, and Upper Volta.