I. Introduction1

International Monetary Fund. External Relations Dept.
Published Date:
September 1973
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After three years of progressive deceleration, world trade recovered in 1972, reflecting a sharp upturn in the rate of growth in the volume of imports into the industrial countries. In 1972, the volume of world trade expanded by 7-8 per cent, compared with 5-6 per cent in 1971. In terms of dollar values, the increase was exceptionally large, about 17 per cent, compared with about 11 per cent in 1971. The 1971-72 change in dollar value, in addition to reflecting the increase in dollar prices associated with the 1971 currency realignment, included a large element of price changes in internationally traded goods.

The external trade of the primary producing countries, however, in 1972 continued to be affected by the 1970-71 economic slowdown in the industrial world. The effect was particularly evident for the less developed countries other than the major oil exporters. For this group, the increase in the aggregate volume of exports averaged only 4 per cent in 1971 and 1972, and the rise in import volume tapered to only 2 per cent in the latter year, compared with 8½ per cent in 1970 and 4 per cent in 1971. In value terms, however, the import expansion from 1971 to 1972 was 10 per cent.

It was expected that 1972 would be a year of consolidation and adjustment to the new exchange regime following the Smithsonian Agreement of December 1971 and the subsequent realignment of exchange rates in which the Canadian dollar continued to float. In the event, after a brief period, unrest and uncertainty again entered into world exchange markets. An already high volume of international liquidity was increased by a continuing U. S. balance of payments deficit. However, the unrest in the world’s exchange markets did not deter world trade from expanding rapidly as demand grew in the industrial countries.

Most of the industrial countries had over recent years attained a high degree of import liberalization, and in 1972 a number of them took further measures to liberalize trade. In addition, several of these countries joined those applying a Generalized System of Preferences to manufactured and semimanufactured items originating in developing countries. On the other hand, a substantial number of developing countries, still affected by the slowdown of economic activity in the industrial countries in 1971 and by the rising prices for their imports, while export prices improved only late in 1972, took steps to restrict imports either through trade measures or exchange measures; several also restricted other payments and transfers for current international transactions.

The unrest and uncertainty in world exchange markets were manifested in surges of short-term capital which could not be contained by the measures introduced in 1971 to control short-term capital movements and further strengthened in 1972. An unusually large capital flow in June 1972 put heavy pressure on the pound sterling, which had shown signs of weakness earlier in the year, and on June 23 the United Kingdom notified the Fund that for the time being the market rate for the pound sterling would not necessarily be confined within announced limits. Accordingly, the exchange rate for the pound sterling was allowed to float. In response, many of the Overseas Sterling Area countries also allowed their currencies to float by maintaining their previous exchange rate relationship with sterling.2 Others repegged from sterling to the U. S. dollar. Malta unpegged from sterling, indicating that the exchange rate for the Malta pound would be determined at a level between that of sterling and the currencies of the other European countries that are its major trading partners, while the rates would vary with changes in the international exchange markets. The Swiss National Bank on June 23, the day that sterling was floated, suspended its intervention in the foreign exchange market. It did not resume its dealings in the exchange market until July 3, after a number of stringent measures had been taken to restrain capital inflows.

The exchange rate for the pound sterling soon after it began to float, moved within a relatively narrow range in relation to other major currencies and unrest in the exchange markets moderated.

In 1971 various measures to control destabilizing capital flows had been added to the existing capital controls maintained by members. While the former aimed mainly at preventing or reducing undesirable inflows, the latter, although gradually eased in many countries over the years, continued to be directed to restrict outflows. Although the more recent complex of measures was largely dismantled in a number of industrialized countries after the currency realignment in December 1971, reliance on capital controls increased after mid-1972 and intensified sharply in late 1972 and early 1973. Controls were directed largely at two major types of destabilizing capital inflows, those motivated by prevailing interest rate differentials and those induced by speculation regarding exchange rate adjustments. While many of the measures taken were again of an indirect, monetary nature affecting the operations of the domestic banking system, countries increasingly applied indirect controls also to the nonbanking sector, e.g., by affecting the cost of corporate foreign borrowing or the cost to nonresidents of maintaining balances in domestic currency. In contrast to 1971, a number of developing countries and more developed primary producing countries, e.g., Australia, Brazil, Indonesia, Mexico, Spain, Turkey, and Yugoslavia, also took steps against capital inflows. Moreover, direct controls consisting of outright restrictions or prohibitions of certain capital transactions in both the banking and nonbanking sectors were adopted on a large scale after mid-1972. In addition, the dual exchange market continued to be used by some members as an instrument to ward off excessive capital inflows.

In some countries, such as Australia and Spain, where outward capital movements were still subject to considerable restrictions, these were relaxed to various extents.

In a number of primary producing as well as industrial countries, the control of inward capital movements was motivated not by their immediate balance of payments impact but by concern over the extent of foreign ownership of certain sectors of the economy. At the same time many member countries continued to solicit or stimulate, by fiscal or other measures, inward direct investment and medium-term and long-term borrowing abroad, particularly by the public sector. There was increased floating of new debt issues on both the Euro-bond market and the market for medium-term multicurrency loans, which have become a growing new source of financing, particularly for selected developing countries. In this connection, one of the major developments was the emergence of Japan as an important source of finance in the medium-term and long-term capital markets.

With effect from January 22, 1973, Italy introduced a dual exchange market to restrict the outflow of capital. The next day the Swiss National Bank again suspended its intervention in the foreign exchange market. In the following weeks capital movements put increasing pressure on the capital controls which were adjusted to offset new movements of mobile international capital. After a massive movement in the week beginning February 5, it became evident that the controls were unable to contain these speculative flows without further actions. The U. S. authorities announced on February 12, 1973 their intention to seek Congressional authorization to reduce the par value of the dollar by 10 per cent. Following this action Italy announced that the exchange rate for the lira in the official market would not necessarily be maintained within the announced margins, and thus allowed it to float; it continued the fluctuating rate for capital transactions in a second market. Japan at the same time announced that the exchange rate for the yen would not be maintained within established margins and for the time being would be allowed to float. In the two weeks following these actions, a new realignment of the world’s currencies began to emerge. Information received from members indicated that, in terms of the prospective value of the U. S. dollar, the currencies of more than one half of the members appreciated, usually to the full extent of the announced U. S. devaluation percentage, while most of the others remained unchanged. Countries that maintained exchange rates for their currencies within maximum margins of 2¼ per cent of their parities or central rates included most industrial countries of continental Europe; the pound sterling, the Canadian dollar, the Italian lira, and the Japanese yen continued to float.

Contrary to expectations, the monetary unrest remained and capital movements increased. After moderating somewhat in the second half of 1972, late in the period gold prices started to rise again, and they reached new peaks in early 1973. Following a short period of intensive capital movements, most official exchange markets were closed in Europe and many others elsewhere on March 2, 1973. After a period of intensive consultation between the major trading countries, Belgium, Denmark, France, Germany, Luxembourg, and the Netherlands took new measures. On March 12 the Council of Finance Ministers of the European Economic Community (EEC)3 issued a statement4 recording decisions which included the following:

—the maximum margin between the DM, the Danish crown, the florin, the Belgian franc, the Luxembourg and the French franc will be maintained at 2.25%; in the case of Member States operating a two-tier exchange market, this undertaking will only apply to the regulated market;

—the Central Banks will no longer be obliged to intervene in the fluctuation margins of the United States dollar;

—in order to protect the system against disruptive capital movements, the Directive of 21 March 1972 will be more effectively implemented and additional controls will be put into operation as far as is necessary. . . .

Germany, in concert with this action, revalued the deutsche mark in terms of special drawing rights (SDRs) by 3 per cent. On March 16, following a Ministerial Meeting of the Group of Ten5 and the European Economic Community, a statement6 was issued which included, inter alia, the following:

3. The Ministers and Governors took note of the decisions of the members of the EEC announced on Monday [March 12]. Six members of the EEC and certain other European countries, including Sweden, will maintain two and one quarter per cent margins between their currencies. The currencies of certain countries, such as Italy, the United Kingdom, Ireland, Japan, and Canada remain, for the time being, floating. However, Italy, the United Kingdom, and Ireland have expressed the intention of associating themselves as soon as possible with the decision to maintain EEC exchange rates within margins of two and one quarter per cent and meanwhile of remaining in consultation with their EEC partners.

4. The Ministers and Governors reiterated their determination to ensure jointly an orderly exchange rate system. . . .

5. They agreed in principle that official intervention in exchange markets may be useful at appropriate times to facilitate the maintenance of orderly conditions, keeping in mind also the desirability of encouraging reflows of speculative movements of funds. Each nation stated that it will be prepared to intervene at its initiative in its own market, when necessary and desirable, acting in a flexible manner in the light of market conditions and in close consultation with the authorities of the nation whose currency may be bought or sold. . . .

9. Ministers and Governors reaffirmed their attachment to the basic principles which have governed international economic relations since the last war—the greatest possible freedom for international trade and investment and the avoidance of competitive changes of exchange rates. They stated their determination to continue to use the existing organizations of international economic cooperation to maintain these principles for the benefit of all their members. . . .

Following the statement, Norway joined the above-mentioned EEC countries and Sweden by announcing that it would participate in the EEC’s 2¼ per cent margin arrangements. At the same time, Belgium, France, the Netherlands, and Sweden announced additional measures designed to prevent undesired capital inflows. The official exchange markets were reopened on March 19.

Largely independent of the overall developments in world exchange markets, a number of developments took place involving separate exchange rate actions by individual countries that led to the establishment by them of new par values. In May 1972 Pakistan changed the par value of the Pakistan rupee as part of a major reform of its exchange system, involving a substantial devaluation and unification of the complex multiple rate structure maintained since 1959. In October, when South Africa devalued, it ceased to peg its currency to sterling. In the same month, Bolivia, which since 1962 had had a unitary fluctuating rate that, de facto, was pegged, devalued its currency. In December, Australia revalued. Jamaica ended the float of its currency with sterling when it devalued in January 1973. Iceland, which devalued in December 1972, revalued in April 1973.

Guatemala, Hong Kong, and Kuwait abolished exchange control. Germany, invoking Article 23 of the Foreign Trade and Payments Law, restricted additional types of capital transactions between residents and nonresidents in order to ward off capital inflows. Switzerland also restricted certain transactions that previously did not require approval.

In 1972 important developments took place within the Sterling Area and the French Franc Area. In the Sterling Area, when in June the United Kingdom announced that the market rate for the pound sterling would not necessarily be confined within announced limits, exchange control was extended to capital transactions by U. K. residents with residents of the Overseas Sterling Area except Ireland (and, subsequently, Gibraltar) as a precaution against fresh speculative outflows, since the market rates for Sterling Area currencies were in many cases no longer necessarily linked to sterling; a number of the Overseas Sterling Area countries responded by terminating the differentiation in their exchange control regulations between the Sterling Area and non-Sterling Area territories and countries, while others maintained their prescription of currency and nonresident account systems unchanged for the time being. Also, after the floating of the pound sterling, a number of the Overseas Sterling Area countries repegged from sterling to the U. S. dollar, thus adding to the number that had done so following the action by the United States on August 15, 1971. These Sterling Area developments coincided with a recasting of Commonwealth commercial policy in view of the United Kingdom’s accession to the EEC. The United Kingdom, while making its capital controls applicable to the Overseas Sterling Area (except Ireland and Gibraltar), relaxed restrictions on certain transactions involving residents of the enlarged EEC. Since 1958, when external convertibility on current account was restored, residents of all countries outside the Sterling Area had been in principle treated alike. In the French Franc Area several Operations Account countries7 indicated they wished to renegotiate their economic cooperation agreements concluded with France upon independence. The Malagasy Republic, Mauritania, and the People’s Republic of the Congo terminated in principle the distinction between Franc Area countries and non-Franc Area countries in their exchange control regulations. Mauritania also indicated its intention to end its membership in the Central Bank of West African States (BCEAO)8 and to establish its own central bank and issue its own currency. At the request of some members the charter of the Central Bank of Equatorial African States and Cameroon (BCEAEC)9 was revised.

During the period under review five countries—Bangladesh, Bahrain, Qatar, Romania, and the United Arab Emirates—became members of the Fund, raising total membership to 125 countries. Bahrain and Fiji accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement, bringing the total to 37 members who have formally accepted these obligations.

This Report, and in particular the following sections, centers on exchange restrictions, but it also covers other measures and intergovernmental arrangements that may have direct balance of payments implications, such as import deposits, import surcharges, and measures to stimulate exports.

The period under review in this Report covers 1972 and the early part of 1973.

These countries included Bangladesh, Barbados, Botswana, Fiji, The Gambia, Guyana, India, Ireland, Jamaica, Lesotho, Malawi, Mauritius, Sierra Leone, South Africa, Sri Lanka, Swaziland, and Trinidad and Tobago. For some of these, such as Sri Lanka, this amounted to a reversal of their 1971 action when they had repegged from sterling to the U. S. dollar. Among the countries that had repegged from sterling to the U. S. dollar in 1971 and that continued the new relationship were Australia and New Zealand.

Member countries of the EEC are Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg, Netherlands, and United Kingdom.

The full text of the communiqué is given in the Appendix to Part I of this Report. See page 19.

The Group of Ten are countries that participate in the General Arrangements to Borrow, viz., Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, United Kingdom, and United States. Switzerland also attended the meeting.

The full text of the communiqué is given in the Appendix to Part I of this Report. See pages 19-20.

Countries whose institutes of issue maintain an Operations Account with the French Treasury; they are Cameroon, Central African Republic, Chad, People’s Republic of the Congo, Dahomey, Gabon, Ivory Coast, Malagasy Republic, Mali, Mauritania, Niger, Senegal, Togo, and Upper Volta.

The members are Dahomey, Ivory Coast, Mauritania, Niger, Senegal, Togo, and Upper Volta.

The members are Cameroon, Central African Republic, Chad, People’s Republic of the Congo, and Gabon.

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