II. Main Developments in Restrictive Practices

International Monetary Fund. External Relations Dept.
Published Date:
September 1973
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1. Trade and Payments Restrictions

a. Restrictions on Imports and Import Payments

As mentioned above, world imports expanded rapidly in 1972 with further progress being made in the elimination of restrictions on imports, especially in the developed countries. In addition, several of these countries joined with those applying a Generalized System of Preferences to manufactured and semimanufactured items originating in developing countries. Generalized tariff preferences for specified imports from the developing countries were introduced on or after January 1, 1972 by Austria, Denmark, Finland, Ireland, Norway, Sweden, and the United Kingdom. Counter to this trend were more intensive restrictions on textiles in several industrialized countries. Also, some industrial countries made further resort to export restraint agreements. Thus agreements were negotiated to limit exports of steel from Japan and the EEC to the United States, and the United Kingdom added an agreement on woven polyester/cotton goods to the one it already had with Hong Kong on cotton textiles.

Germany, the United Kingdom, and several other European countries continued to liberalize imports from member countries of the Council for Mutual Economic Assistance (CMEA or COMECON).10 Japan eliminated quota restrictions on a number of items, and increased the quotas for commodities remaining on the quantitatively restricted list. The United Kingdom liberalized restrictions on some of the few commodities that remained subject to quantitative restriction when of Dollar Area origin. The United States eased and subsequently removed quota restrictions on meat imports and on several occasions increased quotas on oil imports. South Africa, by increasing the number of items on the free list and raising the quota value for a number of other items, largely reversed the measures to curtail imports taken in 1971. Spain transferred a number of items from the restricted to the free list. Turkey made some progress toward import liberalization, while Yugoslavia took important steps to relax its import regime.

Algeria, Colombia, Iran, Morocco, Nigeria, and the Syrian Arab Republic also made some progress toward import liberalization. Bangladesh, following some rehabilitation of its economy, relaxed slightly its heavily restricted import regime. Tanzania and several other developing countries lifted or eased restrictions on imports from Japan. Many developing countries have in the last two or three years disinvoked Article XXXV of the General Agreement on Tariffs and Trade (GATT) in respect of Japan.

A number of developing countries, however, adopted measures to restrict the flow of imports, or, maintained intensified restrictions resorted to in recent years. Among the former were Ghana, Jamaica, Kenya, Tanzania, Uganda, and Zambia, and among the latter were Argentina, Chile, Korea, Sri Lanka, and Uruguay. The balance of payments difficulties of these countries arose from the domestic policies followed and/or their export earnings continued to be affected by the 1970–71 economic slowdown in the industrial countries. Furthermore, several developing countries operating multiple currency systems shifted a significant proportion of imports to a more depreciated rate, e.g., Costa Rica and Sri Lanka. Relatively minor intensifications of import restrictions occurred in Barbados, Panama, Sierra Leone, Somalia, Thailand, and Trinidad and Tobago. These often represented action to protect new domestic production.

The trend noted in earlier Reports for state trading to play an increasingly important role in the import trade of developing countries continued. It is difficult to make an assessment in these cases as to whether such arrangements constituted merely institutional arrangements to facilitate trade or in cases might have been used to limit the direction or source of imports.

Payments arrears with respect to imports were eliminated in Nigeria in March 1972 and in April steps were taken in reducing arrears on invisibles. The Sudan reduced its arrears substantially. On February 7, 1972 Ghana eliminated its mandatory 180-day import credit regime and for imports contracted thereafter a prompt payments system was instituted. However, as a result of suspension of payments for imports contracted before that date the volume of payments arrears rose. Payments arrears of Egypt increased in 1972; some of these, however, were consolidated in early 1973. Uruguay also increased its arrears in 1972 but late in the year it was announced that a large part of them would be consolidated into medium-term bonds.

b. Restrictions on Current Invisibles

The major industrial countries have all formally accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement, and do not maintain quantitative restrictions on current payments or transfers for invisibles. The abolition of the temporary restriction on tourist travel expenditure by France was followed by a number of Operations Account countries which either lifted their corresponding restrictions or substantially increased the exchange allocations for foreign travel. They included Dahomey, Senegal, Togo, and Upper Volta. Yugoslavia abolished certain limits on the use of foreign exchange for this purpose, while Greece and Israel also raised exchange allowances for travel abroad. On the other hand, steps to restrict the availability of exchange for foreign travel were taken in Chile, Ghana, Iraq, Jamaica, the Malagasy Republic, and Mauritania.

With regard to invisible payments other than for travel, France and several Operations Account countries, including Dahomey and Togo, increased the amount of “minor transfers” that may be made abroad freely without prior authorization. Similarly, in Pakistan, restrictions were relaxed on payments and transfers for various invisible items. Guatemala, early in 1973, eliminated its restrictions on payments for current invisibles and then proceeded to eliminate exchange control altogether. Shortly thereafter, El Salvador eased its restrictions on current payments. Permissible remittances for educational support and family maintenance were substantially increased in Israel and the Libyan Arab Republic. Conditions guiding remittances of profits and dividends were relaxed in Rwanda.

Restrictions on payments for current invisibles were, however, introduced or intensified in Burundi, Chile, the Dominican Republic, the People’s Republic of the Congo, the Syrian Arab Republic, Tanzania, and Zambia. Transfers of profits and dividends were subject to tighter restrictions during the year in Burundi, the Dominican Republic, Tanzania, and Zambia. Several developing countries also introduced or tightened restrictions on the transfer of rents and on salary remittances by nonresident workers.

Several countries again changed the regulations governing the import and export of domestic currency by travelers. France relaxed restrictions on exports of franc notes by residents making a day’s trip abroad; and Yugoslavia doubled the amount of local currency that could be exported. Dahomey and Mauritania, however, curtailed the permissible export of their local currencies, and Zaïre prohibited the import and export of domestic currency.

2. Multiple Currency Practices and Fluctuating Exchange Rates

Effective May 11, 1972 Pakistan changed the par value of the Pakistan rupee as part of a major reform of its exchange system, involving a substantial devaluation. The reform abolished the export bonus scheme, and in doing so Pakistan unified its exchange rate structure. Bangladesh had taken similar action earlier in the year but in July, a premium payments scheme for personal inward remittances in convertible currencies was introduced for a period of one year. Costa Rica abolished the exchange surcharge in the official market, but the existing regime of multiple rates was extended to cover nontraditional industrial exports and the dual market arrangements were extended to the Central American Common Market countries. Ecuador proceeded to a de facto unification of its dual exchange market. In May 1972 Egypt revised the existing “incentive” scheme, primarily affecting receipts from tourism and remittances by Egyptians working abroad and payments for certain imports and private sector invisibles, and the premium surcharge for the U. S. dollar was raised from 35 per cent to 50^55 per cent. In February 1973 a further increase, to about 58–65 per cent, was introduced, but at the same time the official exchange rate was appreciated in terms of the U. S. dollar. The Khmer Republic introduced in January 1972 a special exchange rate for most imports financed with tied-aid. The preferential rate has subsequently moved in line with the rate in the general exchange market within a spread of 30 per cent of the latter. Laos imposed in May 1972 a 40 per cent tax on certain categories of exchange purchases, including imports for which exchange has not been made available at the official exchange rate. The Sudan undertook an exchange reform in March 1972 under which the par value of LSd 1 = US$2.87 continued to apply only to proceeds from exports of cotton and gum arabic and an effective rate of LSd 1 = US$2.50, achieved by means of exchange taxes and subsidies, was applied to all other foreign exchange transactions. In Sri Lanka, the effective exchange rates under the Certificate Scheme were depreciated and additional imports were shifted from the official to the certificate market. Viet-Nam in July 1972 revised its exchange system and established a new exchange rate at VN$425 = US$1 to be applied to all invisible transfers and to all import payments other than those effected under the Commercial Import Program (CIP) and certain U. S. Public Law 480 programs. Imports financed under the latter programs were effected at a more appreciated rate while exports received a higher rate than the newly established rate. By means of exchange taxes and subsidies a number of additional effective exchange rates apply to transactions including those of the CIP. These rates have since been adjusted from time to time.

In Chile additional multiple currency practices were introduced. In both the banking and the brokers’ markets the number of exchange rates was increased from two to three basic rates. In addition, differential exchange taxes continued to apply to sales of exchange for certain specified purposes, resulting in a larger number of effective exchange rates. Indonesia, which applied an exchange tax of 10 per cent to most export proceeds, lowered this tax to 5 per cent for certain exports.

There was no significant change in countries operating flexible exchange rate policies. Argentina continued to depreciate its peso at irregular intervals. Brazil fixed the contribution quota on proceeds from exports of cocoa beans and cocoa products at 10 per cent; previously, the contribution quota had been 15 per cent on proceeds from exports of cocoa beans and cocoa paste and 5 per cent on proceeds from exports of cocoa derivatives. In addition, in January 1973 a new contribution quota of US$200 a ton was introduced on proceeds from meat exports in response to rapid increases in domestic meat prices. Otherwise, Brazil continued to depreciate its currency at frequent, irregular intervals reflecting the rate of domestic inflation; following the U. S. announcement in February 1973, however, the cruzeiro was appreciated slightly in terms of the U. S. dollar. Colombia and Uruguay continued to depreciate their currencies in terms of the U. S. dollar in 1972 and early 1973. The Philippines, however, kept its currency closely aligned with the U. S. dollar. Korea gradually depreciated its currency on a daily basis during the first half of 1972 and stabilized the rate from August 1972 as part of an overall economic stabilization program announced at that time.

Following the Smithsonian realignment and the adoption of the decision on wider margins, a number of countries applied spreads between buying and selling rates which were wider than those provided for in the decision. Also in some cases cross rates between currencies were not maintained within the announced margins under the wider margin decision. As a result minor multiple currency practices developed in a number of countries. In most cases such practices were eliminated within a short period.

France shifted a number of current transactions from the financial market to the official franc market; as a result the principal current payments and receipts that remained in the financial market were those relating to travel expenses, investment income, and workers’ remittances. Most of the Operations Account countries took similar action.

In January 1973 Italy established a dual exchange market. As in France, capital movements were channeled through a financial market with a freely fluctuating rate. Following the announcement in February of the prospective devaluation of the U. S. dollar, however, Italy decided that the rate for the lira in the official market would not be confined within the announced limits. In March, at the time of decision taken by the EEC Council of Finance Ministers described above, Italy decided to continue this policy.

The Belgian-Luxembourg Economic Union (BLEU) maintained its dual exchange market. The investment currency market in the United Kingdom also continued in operation. The Netherlands still relies on the O-guilder mechanism to prevent net new investment by nonresidents in officially listed guilder bonds.

A number of developing countries have in recent years introduced schemes to promote the repatriation of foreign currency earned by their citizens working abroad. Occasionally these schemes have involved multiple currency practices as a result of the granting of bonuses or premiums or of even special rates.

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

During the period under review a number of countries reduced their reliance on advance import deposits and import surcharges as devices to lessen import demand or to finance government expenditure.

a. Advance Import Deposits

Several countries, while still maintaining advance import deposit schemes, eased their deposit requirements by narrowing the scope of the system, lowering the rates applied, or reducing the retention period for deposits. Colombia reduced advance deposit rates for a wide range of goods. The 85-day waiting period for the return of advance import deposits after customs clearance of imported goods was eliminated when these funds were used for the payment of current imports. Advance deposit requirements were, moreover, reduced to a maximum of 10 per cent in early 1973. Ecuador granted exemptions from advance deposit requirements to imports of certain capital goods for use in the agricultural sector and imports of nonmonetary gold. In addition, the maximum requirement was reduced from 280 per cent to 130 per cent. Early in 1973 the requirements were terminated. Israel reduced deposit requirements from 40 per cent to 30 per cent of the c.i.f. value of imports subject to a rate of customs duty of 50 per cent or more. Uganda exempted all spares and raw materials for industry from prior import deposit requirements. In June the prior import deposit scheme was lifted.

On the other hand, Chile extended the application of the prohibitive 10,000 per cent prior import deposit to additional import items. The opening of documentary credits for imports required the prior deposit in escudos within seven (later extended to ten) days of the import registration of an amount equivalent to 130 per cent of the c.i.f. value of the imports. In the case of deposits made in foreign currency, the import deposit was 100 per cent. Rwanda introduced a prior import deposit scheme for a few luxury imports and Viet-Nam established an advance deposit scheme for imports effected on U. S. Agency for International Development funds. The deposit was later reduced and the period shortened to three months.

b. Import Surcharges

Denmark reduced the temporary import surcharge from 10 per cent to 7 per cent in July 1972, further reduced it to 4 per cent in January 1973, and abolished the surcharge in April. Finland at the beginning of 1972 abolished the supplementary sales tax of 15 per cent that had been levied on certain consumer durables, whether imported or domestically produced. Honduras removed the customs surcharge of 50 per cent or 100 per cent which had been levied on most Japanese imports since 1971. Paraguay reduced by 50 per cent the import surcharge applicable to imports of raw materials and other imports destined for domestic industries. The Sudan reduced the import surcharge of 15 per cent to 5 per cent as part of the exchange reform described above, while Yugoslavia reduced the 6 per cent import surcharge for certain products to 2 per cent.

Some countries, however, introduced surcharges on specified imports or raised the applicable rates. Iceland levied an import surcharge of 25 per cent ad valorem on the c.i.f. króna price of motor vehicles and motorcycles, which later was reduced to 15 per cent for specified vehicles. Zambia levied a temporary 5 per cent ad valorem surcharge on all dutiable imports, but later suspended the tariff surcharge on certain commodities.

c. Export Incentives and Export Taxes

A wide range of export promotion measures involving incentive mechanisms in the tax and banking fields were employed by a number of countries to provide further stimulus for exports.

Brazil established new incentives for firms exporting manufactured goods by allowing them to import duty-free machines, raw materials, and intermediate products. Such firms could apply any payment of the supplementary income tax toward any other tax liability, and were further entitled to receive exemptions from the manufacturers’ excise tax. Indonesia exempted certain exports from the 10 per cent exchange tax and reduced the rate to 5 per cent for others. Peru extended the exemption from all export taxes enjoyed by exporters of nontraditional manufactures to exports of non-traditional primary and semiprocessed agricultural commodities. Furthermore, tax credits were given to exporters to compensate them for duties and taxes paid in the process of extracting and/or producing the commodities concerned. Malaysia reduced the export tax on East Malaysian rubber and the Philippines again reduced the stabilization tax on export proceeds. Sri Lanka introduced new incentives for the promotion of nontraditional exports such as tax holidays of up to eight years on profits, dividends, and income derived from the export trade and full deductibility of research and export promotion expenses. Thailand granted refunds to exporters in the form of tax credit notes on taxes imposed on raw materials and intermediate products to be used in processing goods for export. Tunisia provided additional incentives to export-oriented manufacturing industries through exemptions from profit and turnover taxes. Turkey added several items to the list of commodities eligible for a tax rebate which ranged from 5 per cent to 40 per cent depending on the export value and the category of the exported goods. Companies in the United States began to use Domestic International Sales Corporation (DISC) facilities whereby tax deferral privileges are available on 50 per cent of gross export income.

In some countries exporters were given cash subsidies and export bonuses to improve the competitive position of exports. Afghanistan raised the exchange subsidy for the proceeds from cotton exports received under bilateral payments agreements as an incentive to increased production. Ghana announced an export bonus of 20 per cent of value for nontraditional exports. Israel increased by 2 percentage points export incentives paid to exporters retroactive to January 1972. The United States, on the other hand, suspended late in the year the entire system of subsidizing agricultural exports.

Several industrial and more developed primary producing countries provided exchange rate guarantees to exporters, in the face of the widening exchange rate margins and nonobservance of announced margins, and of increased uncertainties in international exchange markets. These included Austria, Belgium-Luxembourg, France, Germany, Italy, the Netherlands, and Portugal.

There was increased government participation in export financing as evidenced by the introduction of special credit facilities, e.g., Colombia, Ecuador, and Israel; or the expansion of existing ones, e.g., Italy, the Netherlands, Spain, and Turkey; provision of preferential interest rates, e.g., Paraguay and the United Kingdom; and export credit insurance. The variety of the measures taken was considerable; most represented primarily a spread of measures already in large-scale use by both developed and developing countries to stimulate exports.

Japan abolished its two remaining preferential export financing schemes—discounting of export bills and advance credit for exports; in addition it eliminated several minor income tax concessions favoring exports. Japan also resorted to “voluntary” and official restraints on the growth of its exports. The steel manufacturers extended voluntary controls on exports to the United States a further three years, and the electrical machinery industry imposed voluntary restraints on exports of several items to Western Europe. Official controls agreed to by the Japanese and U. S. Governments replaced the voluntary controls on exports of cotton, wool, and man-made fibers. For the period September 1972-August 1973, the Japanese Government restricted the growth of 20 leading export items to an annual rate of about 26.5 per cent over the previous 12-month period. Japan also discouraged the early repatriation of export proceeds. Hong Kong added to the existing restraints on the export of cotton textiles to the United Kingdom similar restraints on mixed polyester/cotton textiles to the United Kingdom.

4. Bilateral Payments Arrangements

During the year under review further progress was achieved in the elimination of bilateral payments arrangements by member countries. Spain terminated its payments agreements with Bulgaria, Czechoslovakia, Hungary, Paraguay, Poland, Romania, and the Syrian Arab Republic. Moreover, Yugoslavia and Iceland eliminated their bilateral payments arrangements with India and Romania, respectively.

Although the total number of such agreements between Fund members increased from some 50 at the end of 1971 to about 75 at the end of 1972, this increase reflects primarily the fact that Romania and Bangladesh became members of the Fund in the course of the year; the former is a party to 37 payments agreements, including 24 with Fund members, and Bangladesh negotiated 10 such agreements after becoming independent, 5 of them with Fund members.

5. Measures Affecting Capital

In 1971 various measures designed to restrain destabilizing capital flows were superimposed on the existing controls over capital movements maintained by most Fund members. While the new controls aimed mainly at preventing or reducing inflows, the latter, although gradually eased in some countries, continued to be directed against outflows.

Although the recent measures to control capital movements were eased somewhat in a number of industrialized countries after the currency realignment in December 1971, reliance on capital controls was intensified very sharply during 1972 and early 1973. As in 1971, such controls were mostly aimed at curbing the undesired accumulation of foreign exchange reserves and at easing the burden of domestic monetary management caused by an accelerating inflow of exchange. While many of the measures taken were again of an indirect, monetary nature affecting the operations of the domestic banking system, a few countries applied such indirect controls also to the nonbanking sector, e.g., by affecting the cost of corporate foreign borrowing. Moreover, direct controls consisting of outright restrictions or prohibitions of certain capital transactions in both the banking and nonbanking sectors were resorted to on a large scale during the sterling crisis in June 1972 and prior to the announcement by the United States at the beginning of 1973 that the U. S. dollar would be devalued. In addition, the dual exchange market continued to be used to ward off capital inflows, and in some countries where outward capital movements were still subject to restrictions, such restrictions were liberalized to stimulate capital outflows. Separately, in a number of primary producing as well as industrial countries, the control of inward capital movements was motivated by concern over the growth of foreign ownership of certain sectors of the economy.

Indirect capital controls applied in the domestic banking system have consisted primarily of selective reserve requirements against banks’ external liabilities and of restrictions on interest payments on nonresident deposits. In Austria, the gentlemen’s agreement of August 1971 between the National Bank and credit institutions was extended on several occasions until mid-1973; it provided, inter alia, for the sterilization of 75 per cent of the domestic counterpart of foreign exchange inflows after August 13, 1971. In France special average reserve ratios against banks’ external franc deposits, after having been removed in December 1971, were reimposed in March 1972. Germany increased the difference between the average reserve ratios for banks’ domestic and external liabilities, with higher ratios applied to external liabilities. In addition, the marginal reserve requirement applied on the growth of banks’ external liabilities only was raised from a rate of 30 per cent to 40 per cent in March 1972 and to 60 per cent in July 1972, thus bringing the total reserve requirement on new external liabilities up to 90-100 per cent (when taking into account the 30-40 per cent reserve requirements on the stock of external liabilities). Japan introduced in June 1972 a reserve requirement of 25 per cent on the growth of deposits in free yen accounts and in July increased this reserve ratio to 50 per cent. In Spain, where a 100 per cent reserve requirement had already applied against increases after October 1971 in nonresident convertible peseta deposits at sight and at less than three months’ notice, a 50 per cent reserve requirement was introduced against any increases after July 29, 1972 in such deposits with a maturity of three months or more; additional measures were taken in early 1973.

Restrictions on the payment of interest on balances in nonresident accounts were intensified in the Netherlands where an outright prohibition of interest payments on all nonresident-held guilder demand deposits was introduced in March 1972, with only a minor exception relating to deposits held by private individuals. Switzerland incorporated the prohibition on the payment of interest on nonresident deposits, previously based on a gentlemen’s agreement, into a Federal Ordinance in July 1972. Moreover, it also introduced a negative interest rate of 2 per cent a calendar quarter, payable in advance, on all increases in foreign-held bank deposits in Swiss francs accrued after June 30, 1972. In addition, prohibitions on the payment of interest on specified external liabilities of banks continued in force in Germany and Spain. Some German banks began to apply negative interest rates when the acceptance of nonresident-owned funds became unprofitable as a result of an increase to 100 per cent in the marginal reserves required against such deposits. Various measures were taken in Belgium-Luxembourg, France, the Netherlands, and Sweden after the March 12 announcement of the decision taken by the EEC Council of Finance Ministers, which endorsed additional measures to protect against disruptive capital movements; these included negative interest rates and 100 per cent reserve requirements against new nonresident deposits, the interest charge in France being introduced by the banks themselves rather than the authorities.

Indirect capital controls applied in the non-banking sector were aimed primarily at reducing the attractiveness of raising credits abroad. Among such controls the requirement to maintain interest-free deposits against foreign borrowing was the most important. Germany, which enforced a cash deposit requirement in March 1972 with a deposit rate of 40 per cent, increased the rate to 50 per cent in July, the maximum then permissible under the Cash Deposit Law. On February 24, 1973 the Law was amended, empowering the Government to raise the rate of the deposit from 50 per cent to 100 per cent of funds borrowed abroad by residents (primarily nonbanks). This authority has not so far been invoked. The amount exempt from the deposit was reduced in two steps from DM 2 million to DM 50,000. Brazil introduced in October 1972 a 25 per cent interest-free deposit requirement against all new foreign currency loans. In December 1972, Australia introduced a similar requirement on new borrowings from foreign lenders for periods of more than two years.

Yugoslavia in May 1972 introduced interest-free deposit requirements against all new foreign loans and time deposits in foreign currencies held with Yugoslav banks. The deposit rates vary according to the purpose and maturity of the loan (or time deposit), the highest rate of 40 per cent being for time deposits in foreign currencies and financial credits with maturity of less than two years, and the lowest rate of 1 per cent being for loans with a maturity of over five years for the financing of the import of capital goods. In December 1972 the deposit rate for all financial loans and new time deposits in foreign currencies was increased to 75 per cent.

As in 1971, direct capital controls applied in the domestic banking system have consisted primarily of limitations on the acceptance of nonresident deposits by banks and, more generally, on banks’ net external positions. In Belgium-Luxembourg banks were instructed in March 1972 not to increase their net foreign liabilities and to make arrangements with their foreign correspondents with a view to having these limit their balances in convertible franc accounts, provided that such limitation would be consistent with the needs of the normal development of current transactions. Denmark limited in January 1973 the right of expatriate Danes to make payments from abroad into krone accounts, and imposed ceilings on outstanding balances in other nonresident accounts. At the same time, Denmark also changed the rules governing the net “commercial” foreign position of authorized foreign exchange dealers. An individual bank’s position could not be negative, except that for all banks collectively an overall quota was set up to which they could incur a negative net “commercial” foreign position insofar as this resulted from the taking up of foreign currency loans for purposes of on-lending in foreign currency to finance Danish foreign trade. In March 1972, the Netherlands prohibited nonresidents from placing guilders on time deposits or from renewing such accounts, subject to a minor exemption for private individuals. Switzerland prohibited banks, between July and October 1972, from maintaining net foreign exchange liability positions. Certain other direct control measures were applied to banks’ external transactions aimed at preventing such transactions from giving rise to excessive capital inflows. Japan restricted the conversion of foreign funds into yen by resident foreign banks. In Mexico, private financial institutions have been required, since July 1972, to obtain central bank authorization in order to conduct operations implying a receipt of funds from foreign residents, whether in domestic or foreign currency. In Switzerland banks participating in new issues of medium-term Swiss franc notes by nonresidents had to place, since February 1972, at least 60 per cent of such issues with resident customers and were prohibited from selling any of the new notes to nonresident banks. In June 1972 banks and other financial intermediaries were prohibited from investing funds belonging to foreigners in domestic securities, foreign securities denominated in Swiss francs, and Swiss real estate or mortgages on real estate.

Controls of a direct or quantitative nature to stem the inflow of capital were particularly widespread in regard to the nonbanking sector. The measures were directed, inter alia, at the acquisition by nonresidents of domestic securities, the contracting by residents of financial loans abroad, the terms of payment in respect of merchandise transactions (“leads and lags”), and the participation by nonresidents in domestic companies. Germany in June 1972 introduced licensing requirements for the acquisition by nonresidents, against payment, of domestic bearer and order bonds, and in February 1973 extended these requirements to all domestic securities. Austria limited the sale to nonresidents of Austrian fixed-interest-bearing securities during the period November 1972 through May 1973 to the amount of purchases from nonresidents, plus a specified quota. In Japan measures were adopted in October 1972 to prevent any further increase in the net acquisition of Japanese securities by foreigners. Finally, restrictions were imposed by Austria and Germany on certain nonresident investment in, or nonresident financing of, domestic companies, including subsidiaries and affiliates of foreign companies. Austria in addition restricted the acquisition of real estate by nonresidents in November 1972, and in Switzerland the investment of foreign funds in Swiss real estate was prohibited in June. Australia took similar measures in 1973.

Countries which applied direct restrictions to residents borrowing abroad included Australia, Austria, Brazil, Germany, the Netherlands, and Switzerland. In Australia, approval was no longer granted, beginning late September 1972, for borrowing abroad repayable in two years or less other than borrowings specifically to finance trade transactions on normal trade credit terms or borrowings not exceeding $A 100,000 in any period of 12 months. In addition, Australia terminated the exemption from exchange controls on borrowing in Australian dollars from Sterling Area residents. In Austria, in connection with the extension of the gentlemen’s agreement, credit institutions undertook, in February 1972, to appeal to their customers not to borrow abroad, and in June 1972 an undertaking was given by the Government to refrain from such borrowing. Moreover, in November, all capital transfers to Austria became subject to prior approval of the National Bank. Brazil first limited approvals of new financial loans with a maturity of up to one year to amounts of such loans outstanding at the end of November 1971, but since June 1972 approvals of such loans have been suspended. For loans with a term of more than one year, the minimum acceptable maturity was raised successively between February and September 1972 from two years to six years. While the above measures initially were aimed at strengthening controls over the management of external debt, subsequently their intent was to ease the burden for domestic monetary management caused by inflows of exchange. In Germany, the contracting of foreign loans and credits in excess of DM 50,000 was made subject to the prior approval of the Bundesbank with effect from February 5, 1973. In the Netherlands, the issue of licenses to residents for the taking up of financial credits abroad was, in principle, suspended in July 1972; the restriction also applied to long-term loans extended to each other by the constituent parts of multinational corporations. Switzerland restricted the raising and renewal of Swiss franc or foreign currency loans abroad by residents through the introduction in July 1972 of a prior approval requirement by the National Bank for such transactions. In Germany and the Netherlands prior approval was required for payment terms relating to imports and exports whenever such terms exceeded normal commercial practices. Japan reimposed a limit, in February 1972, on the conversion into yen of advance payments for Japanese exports and in June reduced this limit to the equivalent of US$5,000.

Among the industrialized countries, Belgium-Luxembourg and France continued to use dual exchange markets as a means of stemming capital inflows. Italy introduced such a market primarily to discourage capital outflows. The investment currency market in the United Kingdom continues in operation and has been considerably enlarged as a result of portfolio investment in securities of the Overseas Sterling Area being channeled into it. The Netherlands, as stated above, maintained its O-guilder mechanism, which is applicable only to officially listed guilder bonds.

A number of countries, notably Japan, Spain, and France, reduced exchange restrictions or other controls so as to stimulate capital outflows. In Japan, remittances abroad of up to US$1,000 were permitted freely beginning March 1972, and this limit was raised to US$3,000 in November. Japan also fully liberalized the acquisition of foreign securities by resident individuals, banks, and institutional investors and lifted restrictions on Japanese investment in real estate abroad. Beginning in June 1972, Japanese corporations were permitted to make capital investments abroad, irrespective of whether or not this would lead to effective control over the foreign undertaking, and in September government institutions and authorized foreign exchange banks were permitted to lend foreign currencies to Japanese investors for up to 70 per cent of overseas direct investment; this percentage was raised to 90 in May 1973. Moreover, a number of foreign issues of yen-denominated bonds were permitted and issuers were required to convert 90 per cent of the proceeds into foreign exchange; the remainder could be held in yen for up to one year. Spain liberalized certain remaining restrictions on the transfer by nonresidents of proceeds from sales of real estate and Spanish bonds and shares, as well as from the liquidation of direct investment. In France a number of restrictions on certain types of capital transfers abroad were eased in May 1972, including those relating to gifts and the purchase of real estate. Also, subject to certain conditions, the making or liquidation of direct investments abroad by residents was exempted from prior declaration and, where previously applicable, from prior authorization, provided that the amount involved did not exceed F 1 million a year for each beneficiary firm. In March 1972 agreement was reached on the conditions under which French banks could participate in international issues of bonds denominated in French francs. Prior to 1972, only three Euro-franc issues had taken place, and the suspension of further issues had been announced in October 1971. In 1972 Luxembourg authorized a number of Eurobond issues denominated in Luxembourg francs, and early in 1973 the first issue of such bonds expressed in Belgian francs took place. The Netherlands also liberalized access by nonresidents to its capital market. Beginning April 1972, the Netherlands Bank for the first time granted nonresidents access to the market in onderhandse leningen (privately issued debt certificates not traded on the stock exchange) by licensing guilder loans to nonresidents in the form of debt certificates, and more recently it admitted issues by nonresidents of convertible guilder debentures on the Netherlands market. Australia abolished in September 1972 the guidelines operating since 1965 with respect to borrowing in Australia by foreign-owned companies and eased the prohibition on outward portfolio investment by Australian residents.

The United States, in its announcement in February 1973 regarding the devaluation of the U. S. dollar, also announced the phasing out by the end of 1974 of the existing restraints on outflows of capital: the Interest Equalization Tax, the Federal Reserve Voluntary Foreign Credit Restraint Program (VFCRP), and the Foreign Direct Investment Program. During the period under review, however, the mandatory foreign direct investment controls and the voluntary program for the restraint of foreign credits by banks and other financial institutions were maintained, although certain relaxations in the regulations were introduced. For purposes of calculating the permissible export credits to their foreign affiliates, U. S. companies could benefit beginning mid-1972 from more advantageous ratios of export credits to exports, and the use of financing from U. S. sources to reduce such export credits no longer constituted a negative transfer of capital under the VFCRP. Moreover, beginning 1973, credits extended by direct investors to their foreign affiliates in connection with the export or lease of qualifying U. S. goods and services were exempted from the foreign direct investment regulations. The alternative minimum positive direct investment allowables were consolidated into a single world-wide minimum allowable of US$6 million per year, and, as in 1971, direct investors who had foreign claims in excess of the amount permitted under the ceiling for 1972, as established under the mandatory program, were permitted to postpone until the end of February 1973 the repatriation of these funds to comply with the program ceilings for 1972. Early in 1973 legislation was introduced into the Congress to extend the Interest Equalization Tax until the end of 1974; the proposed rates are the same as those presently in force.

The developing countries, on the whole, did not relax restrictions on capital outflows. A number of these countries intensified restrictions to curb outward capital movements. They included Jamaica, Peru, Tanzania, and Uganda. Moreover, the extension of exchange controls to formerly exempt areas (see below) has involved a widening in the geographical scope of existing controls on capital outflows. Certain Operations Account countries, however, followed France in the relaxing of restrictions on personal capital transfers.

The United Kingdom on March 22, 1972 abolished the program of voluntary restraint applied to direct and portfolio investment in the more developed countries of the Sterling Area (Australia, Ireland, New Zealand, and South Africa), and certain restrictions on capital outflows to EEC countries were relaxed in anticipation of EEC requirements. Further relaxations covering certain personal capital movements were introduced for the same purpose in May 1972. On June 23, 1972, however, when the United Kingdom announced that the market rate for sterling would not necessarily be confined within announced limits, the United Kingdom and Ireland extended exchange control to the rest of the Sterling Area by deleting the countries concerned from the list of Scheduled Territories. The excluded countries became part of the External Account Area, which previously consisted only of the non-Sterling Area. This measure was not intended to involve the introduction by the United Kingdom or Ireland of restrictions on payments and transfers for current international transactions, but it had considerable impact on inward and outward capital transfers. Outward direct investment in the Overseas Sterling Area became subject to individual exchange control approval, although this was normally given and foreign exchange for this purpose was granted at the official rate; outward investment in real estate for personal use became subject to individual approval and had to be financed with investment currency; and outward portfolio investment, although covered by a general permission, also required the use of investment currency or borrowed foreign currency. All securities payable in the currencies of Overseas Sterling Area countries became foreign currency securities, and the proceeds of sale by a resident of the United Kingdom or Ireland qualified as investment currency, although the “25 per cent surrender requirement” was not applied to such proceeds. As a result, the scope of the investment currency market in the United Kingdom was widened considerably and the premium on the official exchange rate began to reflect transactions in Overseas Sterling Area securities. Large-scale sales of Australian and Hong Kong securities early in 1973 helped to reduce the premium to an exceptionally low level.

The Overseas Sterling Area countries generally reacted to the move by the United Kingdom by extending exchange control to the rest of the Sterling Area. As in the United Kingdom and Ireland, this implied considerable changes in the prescription of currency regulations and in the application of controls to inward and outward capital transfers, and an extension of the surrender requirements to receipts in Sterling Area currencies.

During the period under review, the Euro-currency markets continued to grow, despite various new capital control measures in 1971 and later. Activity in medium-term multiple currency loans grew particularly fast, as did Euro-bond issues in French francs and Luxembourg francs and Euro-note issues in Netherlands guilders. Developing countries were increasingly successful in tapping the resources of the Euro-currency markets. The Asian Dollar market in Singapore, which is increasingly linked to the Euro-currency markets, also continued to expand.

6. Gold

During the period under review, there were only few major modifications in the regulations governing nonofficial transactions in gold. In early 1973 Japan liberalized its restrictions on gold imports and discontinued controls on domestic resale prices. Singapore liberalized the import and export of gold coins. In Ecuador, imports of nonmonetary gold, as from April 1972, could only be financed through the free exchange market and the advance import deposit requirement was reduced from 100 per cent to 50 per cent; in August the requirement was eliminated. In Mexico, trading in gold coins, which had been interrupted since August 1971, resumed in early 1972. On November 15, a gold futures market was opened in Canada by the Winnipeg Commodity Exchange. Its regulations provided for a minimum purchase of 400 ounces of gold 0.995 pure with a 10 per cent margin requirement and a limit of US$2 an ounce for price variation during any trading session. The Treasury Department of the United States confirmed that U. S. brokers were able to deal in the new futures market, though only for citizens and concerns holding licenses to purchase gold; the severe restrictions on the holding and purchase of gold by U. S. citizens and U. S. residents were not relaxed, nor were the almost equally stringent regulations in the United Kingdom after the 1971 restoration of the permission for residents to hold and negotiate gold coins. Issuers of commemorative gold coins included Ethiopia, Malaysia, Jersey (United Kingdom), and Malta. Such issues have been quite widespread in recent years, although they have occurred mainly in developing countries, e.g., prior to the period under review, in Chad, Guinea, Haiti, Indonesia, Korea, Laos, Lesotho, Malaysia, Singapore, and Tunisia.

Albania, Bulgaria, Cuba, Czechoslovakia, Eastern Germany, Hungary, Mongolia, Poland, Romania, and U. S. S. R. Iraq and Yugoslavia have observer status.

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