I. Introduction1

International Monetary Fund. External Relations Dept.
Published Date:
September 1976
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The dominating development in the world economy during 1975 was the deepening and spreading of the international recession and the beginning of its reversal in the second half of the year. In the industrial world, real output declined by an estimated 2 per cent, following a cessation of growth in 1974, and unemployment rates rose to the highest levels witnessed in recent decades. The resultant drop in aggregate demand had a severe impact on international trade, interrupting its growth for the first time in many years. In terms of volume, trade was some 6 per cent lower in 1975 than in 1974. The trough of the recession appears to have been passed toward the middle of 1975, and resumption of growth in the industrial countries, especially in the United States, in the second half of the year presaged an upturn in world trade during 1976.

The recession brought important shifts in the global pattern of payments balances. For the industrial countries as a group, it induced much larger volume declines in imports than in exports, and the effect on current account balances was reinforced by stronger increases in export prices than in import prices. The result was a turnaround of the order of US$25 billion from deficit to surplus in the combined current account balance of the industrial countries. The principal counterpart to this shift was a marked decline in the combined current account surplus of the major oil exporting countries, reflecting both a drop in the volume of their exports and a further expansion of their imports (the only important segment of world trade expanding during 1975). For non-oil developing countries and some developed primary producing countries, the main impact of the recession was an adverse movement in the terms of trade, as their import prices continued to rise while prices for their exports of primary commodities declined. A fall in the aggregate volume of their exports also contributed to the reduction of foreign exchange receipts. Even with a reduction in the volume of imports, the non-oil developing countries as a group thus incurred a larger current account deficit in 1975 than in 1974 (US$35 billion compared with about US$28 billion).

To finance their enlarged current account deficit, the non-oil developing countries continued to borrow heavily from external sources, on which they had already relied in 1974, and some drew on their reserve assets. By the beginning of 1976, the resultant increases in external debt and impairment of international liquidity positions posed difficult problems of balance of payments management for some developing countries.

Relationships in market exchange rates among the major world currencies again registered marked swings. In the early months of 1975 the market exchange rates for the currencies of the European common margins arrangement as well as the Austrian schilling, the French franc, and the Swiss franc reflected the upward movement against the U.S. dollar that had been evident in the latter part of 1974. Rates for the Italian lira, the pound sterling, and the Japanese yen followed a similar trend over this period, but movements in the rates for these currencies were less pronounced. From around the beginning of March 1975 the market exchange rates for most major currencies became relatively more stable although the general trend through June 1975 was a modest downward adjustment vis-à-vis the U.S. dollar. The French franc, however, rose further against the U.S. dollar during this period. On May 9, France formally announced its intention of rejoining the European common margins arrangement. This was implemented with effect from July 10, 1975, and the French franc, which had been floating independently since January 1974, rejoined at the old cross parities. The downtrend in exchange rates for the major European currencies in terms of the U.S. dollar gathered momentum during July and continued through September; they regained a measure of stability during the remainder of the year. In the early months of 1976, exchange markets became unsettled and more volatile. After the rate for the Italian lira declined sharply in mid-January 1976, the authorities suspended official quotations in the Italian exchange market; they were resumed on March 1, 1976. The deutsche mark, which had been at the bottom or in the lower half of the European common margins arrangement during most of 1975, rose to the top of the arrangement between mid-January and mid-February. In early March the pound sterling declined abruptly. On March 15 France announced that it had decided to suspend until further notice interventions aimed at limiting the margins for the French franc within those prescribed by the European common margins arrangement. At the same time, the arrangement was terminated under which Belgium and the Netherlands maintained maximum margins of 1.5 per cent in respect of each other’s currencies.

Between January 1975 and the end of March 1976 there was a slight overall decline in the effective exchange rates of the major continental European currencies other than the Italian lira and the Swiss franc. The effective rate for the Italian lira after remaining relatively stable through 1975 fell appreciably in early 1976. The effective rate for the Swiss franc after declining through most of 1975 subsequently rose considerably. The effective rate for the pound sterling registered a persistent decline over the period January 1975-end March 1976, while the effective rate for the U.S. dollar showed a rising trend through this period. The effective rate for the Canadian dollar after declining early in 1975 showed a rising trend thereafter. The effective rate for the Japanese yen was stable through most of 1975 and rose moderately in early 1976.

Most other currencies peg on one of the major currencies, mainly the French franc, the pound sterling, or the U.S. dollar. During the period under review a large number of countries changed the relationship of their currency to the currency to which they are pegged. In several instances these actions were associated with a depreciation of the currency, and more rarely with an appreciation. The following countries repegged their currencies from the U.S. dollar to the SDR: Burma, Iran, and Jordan (February 1975); Qatar and Saudi Arabia (March 1975); Guinea and Malawi (June 1975); Kenya, Tanzania, and Uganda (October 1975); and Zaïre (March 1976). In January 1976, Mauritius repegged its currency from the pound sterling to the SDR. Countries which pegged their currencies to a composite of the currencies of their main trading partners included Greece and Kuwait (March 1975), Fiji (April 1975), and India (September 1975). Subsequently, Saudi Arabia (in September 1975) and Qatar (in January 1976) informed the Fund that they would maintain margins of up to 7.25 per cent around the fixed relationship between their currencies and the SDR. In October, Western Samoa repegged its currency from the U.S. dollar to the composite used in determining rates for the New Zealand dollar. In June 1975 South Africa, which had been following an independent exchange rate policy since June 1974, repegged the rand to the U.S. dollar. Botswana and Lesotho continued to use the South African rand as their currency while Swaziland informed the Fund that the central rate for the lilangeni (which circulates with the rand) continued to be E 1.00 = R 1.00. Turkey informed the Fund in July 1975 that the rate for the Turkish lira for the time being would not be kept within the margins hitherto observed, and the currency began to float independently. Israel established a new par value in June 1975 and in August informed the Fund that it would henceforth follow a policy of small but rather frequent adjustments in the official exchange rate. Barbados (in July) and Guyana (in October) repegged their currencies from the pound sterling to the U.S. dollar. In Papua New Guinea the kina was issued to replace the Australian dollar and was pegged on that currency at the rate of K 1 = $A 1.

Against the background of the decline in world trade and widespread payments disequilibria, member countries in general continued to avoid large-scale resort to restrictions on current payments and transactions. Also, based on existing information in the Fund, members in managing their international payments did not engage in competitive devaluation. While this outcome was on the whole satisfactory, given the difficult circumstances faced by many countries, there was a clearly discernible trend toward the greater use of import controls and other restraints on current transactions by countries which as a group accounted for a significant share of world trade. Most member countries applying restrictions have made use of trade controls rather than exchange restrictions. Only a few countries took action to limit the availability of exchange for imports, while there was no marked retrogression in respect of other restrictions and exchange practices inconsistent with the Fund’s Articles of Agreement. Indeed, despite the prevailing unfavorable conditions, some progress was made in limiting the use of multiple currency practices and in further reducing reliance on bilateralism. While it was mainly in a few developing countries that severe restrictions were imposed, an important feature of developments during the period under review was the increasing use of selective import controls and of surveillance licensing for specified imports by some of the industrialized countries and of agreements on export restraint with producers of such items.

In facing the substantially changed global situation described above world capital markets demonstrated considerable resiliency. Foreign lending by banks followed a modest upward trend in 1975 while financing through international bond markets expanded strongly. The industrial countries of Europe and Japan in general maintained or increased the degree of freedom from control over capital inflows which had been re-established by early 1974; several of these countries took additional steps to ease the remaining limitations further and some permitted or undertook a considerable volume of borrowing abroad. The main exception to these developments was Switzerland which, after reimposing certain recently eliminated controls on capital inflows in November 1974, intensified them in 1975. A few of the industrial countries tightened controls on capital outflows but some others relaxed them, e.g., by giving nonresidents improved access to the domestic capital market. Among other countries, the efforts of national authorities were designed in many cases to facilitate inflows of capital through the banking system and to encourage foreign borrowing by nonbank firms. In the area of inward direct investment, however, there was a continuation of the trend toward the restriction of foreign ownership or control of domestic enterprises and resources.

Last year’s Report incorporated the statement issued by the Committee of Twenty at the end of its final meeting in June 1974, which invited member countries to subscribe on a voluntary basis to the Declaration concerning trade and other current account measures for balance of payments purposes. Members subscribing to the Declaration would represent not to introduce or intensify such measures for balance of payments purposes without a finding by the Fund that there was a balance of payments justification for the measures. The Executive Directors established the necessary procedures in connection with the Declaration, which was to become effective for two years among the subscribing members when accepted by members having 65 per cent of the total voting power. The required majority has not as yet been reached. In May 1975 a similar Declaration of the Organization for Economic Cooperation and Development (OECD) adopted in May 1974 was extended for a further year. The substantive phase of the Tokyo Round of multilateral trade negotiations—in which some 90 countries are participating—was initiated early in 1975, following passage of the U.S. Trade Act of 1974. During the year, the participating governments broadly agreed on the organization of the negotiations covering the following areas: reduction or elimination of tariffs; liberalization of nontariff barriers to trade; reform of the system of safeguards under the General Agreement on Tariffs and Trade (GATT) which permits countries to introduce temporary import restrictions to prevent dislocation of domestic industries due to sudden increases in imports; liberalization of international trade in agricultural products; special and priority treatment of tropical products, a particular concern of many developing countries; and coordinated reduction of trade barriers in certain selected sectors.

Through its policies on the use of Fund resources as well as its consultation procedures, the Fund has continued to pay special regard to the efforts by members to avoid the use of restrictions on current international payments and transactions. Thus the Fund decided that requests for assistance under the 1974 and 1975 oil facilities would be met if the Fund was satisfied that the members were following policies not inconsistent with the understandings set forth in the Rome communiqué of January 1974. Furthermore, a member requesting a purchase under the 1974 and 1975 oil facilities was expected to represent that while the purchase was outstanding, it would refrain from imposing new, and from intensifying existing, restrictions on current international payments inconsistently with its obligations under the Fund’s Articles of Agreement and from imposing new, or intensifying existing, restrictions on current international transactions without prior consultation with the Fund. At the end of March 1976, a total of 55 members had made purchases under the 1974 and 1975 oil facilities.

In the communiqué issued by the Interim Committee at the end of its meeting held in Kingston, Jamaica, on January 7–8, 1976, the Committee welcomed the agreement which had been reached on provisions concerning exchange rates and endorsed a proposed new Article IV of the Fund Agreement which establishes a system of exchange arrangements. Under the proposed new Article IV each member undertakes to collaborate with the Fund and with other members to assure orderly exchange arrangements and to promote a stable system of exchange rates, recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability. The proposed new Article IV is included in the Second Amendment to the Articles of Agreement sent to members at the end of March for acceptance in accordance with the relevant provisions of the present Articles.2 In the Second Amendment, the rules in the present Articles VIII and XIV relating to the imposition or intensification of restrictions on the making of payments for current international transactions, and the introduction of discriminatory currency arrangements and multiple currency practices, have been retained.

Two countries, Grenada and Papua New Guinea, became members of the Fund during the period under review, raising the total membership to 128 countries. Papua New Guinea accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement, bringing to 43 the number of members which have formally accepted these obligations.

This Report centers on exchange restrictions, but it also covers other measures and intergovernmental arrangements that may have direct balance of payments implications. The period covered is 1975 and the early part of 1976.

The texts of the proposed Article IV and Schedule C are reproduced in the Appendix to Part I of this Report. See pages 22–24.

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