I. Introduction1

International Monetary Fund. External Relations Dept.
Published Date:
September 1975
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The world economy in 1974 was marked by widening payments imbalances in many member countries, high rates of inflation on a world-wide scale, and declining growth rates among developed and developing countries alike. Although in terms of value world trade increased at a sharp rate, the rise was in only a small degree due to an expansion in the volume of trade. Because of the inflation and the sharp increase in the prices of oil and some other primary products, the value of world trade, in terms of SDRs, rose by some 45 per cent or nearly double the rate of growth in 1973. The volume of trade, however, increased at most only about 5-6 per cent–roughly half of the rate of the previous year and well below the long-term average rate of expansion.

As a result of a steep upward movement of commodity prices in 1973, the terms of trade of the developing countries and other primary producing countries had improved substantially in that year, while those of the industrial countries had been unfavorably affected. In 1974, a tendency toward reversal of these shifts in terms of trade, together with the increase in the price of oil, resulted in a considerable deterioration in the terms of trade of the non-oil producing developing countries and of other primary producing countries. Reduced rates of increase in export volumes also affected the international payments positions of these two groups of countries in 1974. Nevertheless, their import volumes increased at nearly the same rates as in 1973, thus continuing to rise considerably faster than during the decade 1960-70. This maintenance of the flow of imports into primary producing countries was accompanied by greatly increased external borrowing and sharp curtailment of the reserve gains of the immediately preceding years. It was instrumental, along with sharply rising imports by the oil exporting countries, in sustaining the expansion in the volume of exports from the industrial countries after their own imports had ceased to rise.

During the period under review, conditions in world exchange markets continued to be characterized by pronounced fluctuations in spot exchange rates between the major currencies as had prevailed in 1973. However, the movements in market exchange rates of these currencies have been less abrupt. In January 1974 the U.S. dollar reached a post-1973 devaluation peak against almost all other major currencies. Between January 1974 and early 1975 the currencies of the participants in the European common margins arrangement, the Austrian schilling, the French franc, and the Swiss franc registered an appreciation against the Canadian dollar and the U.S. dollar. Within the period the movement of these exchange rates was quite divergent. There was an appreciation of the above-mentioned continental European currencies in the period January-May, followed by a substantial reversal in the period to September 1974. From September to March 1975, movements in the market exchange rates for these currencies followed a pattern similar to that in the early months of 1974. Movements in the exchange rates of the Italian lira, the Japanese yen, and the pound sterling followed a pattern within the period roughly similar to that of the movement of the currencies of the European common margins arrangement against the Canadian dollar and the U.S. dollar, but in considerably smaller amplitude. In terms of effective exchange rates, the currencies of the European common margins arrangement, the French franc, and the Swiss franc appreciated between January 1974 and March 1975, while the Canadian dollar, the Italian lira, the Japanese yen, the pound sterling, and the U.S. dollar experienced moderate but varied downward movements.

Most other currencies peg on one of the major currencies, mainly the French franc, the pound sterling, or the U.S. dollar. In 1974 and early 1975, as in 1973, a number of countries either changed the relationship of their currency to the intervention currency, or adopted an independent exchange rate policy when the movement in the exchange rate of the intervention currency relative to other major currencies did not seem appropriate to the country’s particular circumstances. Countries which had pegged their currency on the U.S. dollar and no longer do so include: Spain (January 1974), South Africa together with Botswana, Lesotho, and Swaziland (June 1974), Australia (September 1974), Burma and Iran (February 1975), and Greece, Kuwait, Qatar, and Saudi Arabia (March 1975). Burma, Iran, Qatar, and Saudi Arabia have pegged their currencies to the SDR. The other countries mentioned above have pegged their currencies to a composite of currencies of their main trading partners. After France withdrew from the European common margins arrangement in January 1974, Algeria, Mauritania, and Tunisia unpegged from the French franc and have pegged their currencies to a composite of currencies.

Despite the changes in the patterns of world trade and payments, the emergence of widespread balance of payments disequilibria, and the disparate movements in the exchange rates of major currencies, developed countries and developing countries, with some exceptions, did not resort in a substantial degree to restrictions on current international transactions. Although a number of countries did take a variety of domestic policy measures to restrain effective import demand, it was primarily through capital inflows and the use of reserves that most countries sought to meet the new balance of payments situation.

Starting January 29, 1974, the United States removed all limitations on the outflow of capital, and Canada immediately revoked its guidelines on “pass-through” flows. The previous Report noted the rather abrupt change which occurred in the latter months of 1973 in the policies of the European countries and Japan toward capital inflows. The period preceding this change had seen a pronounced tightening of controls on most forms of capital inflows, directed particularly at controlling destabilizing inflows of short-term funds. Commencing in the third quarter of 1973 but particularly in January and February 1974 the European countries and Japan, in general, dismantled many of their controls on capital inflows. Throughout the remainder of 1974 and early 1975 some of these countries maintained policies of positive encouragement to capital inflows, and in several, public sector borrowing abroad was resumed or intensified. There appears also to have been some tightening of controls on capital outflows. Notable exceptions to this policy reversal were the Belgian-Luxembourg Economic Union (BLEU), the Federal Republic of Germany, the Netherlands, and Switzerland. The last three countries also maintained certain regulations limiting the acquisition by nonresidents of deposits and other short-term assets denominated in their currencies.

In this period there was also a liberalization of external controls in several of the oil exporting countries, particularly Iran, Iraq, and Nigeria. Many of the other major oil exporters already had accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement, namely, Bahrain, Kuwait, Qatar, and Saudi Arabia. In February 1974 the United Arab Emirates and in June 1974 Oman accepted these obligations, bringing to 42 the number of members who have formally accepted these obligations.

Early in 1974 concern was expressed by the Committee of the Board of Governors of the International Monetary Fund on Reform of the International Monetary System and Related Issues (the Committee of Twenty) on the changed expectations regarding global balance of payments patterns, in their Rome communiqué following discussions in Rome on January 17 and 18, 1974. Paragraph 2 of that communique states in part:

Members of the Committee . . . expressed serious concern at the abrupt and significant changes in prospect for the world balance of payments structure. They recognized that the current account surpluses of oil producing countries would be very greatly increased, and that many other countries–both developed and develop-ing-would have to face large current account deficits. In these difficult circumstances the Committee agreed that in managing their international payments, countries must not adopt policies which would merely aggravate the problems of other countries. Accordingly, they stressed the importance of avoiding competitive depreciation and the escalation of restrictions on trade and payments. They further resolved to pursue policies that would sustain appropriate levels of economic activity and employment, while minimizing inflation. They recognized that serious difficulties would be created for many developing countries and that their needs for financial resources will be greatly increased; and they urged all countries with available resources to make every effort to supply these needs on appropriate terms….

The Fund continued its efforts to aid countries to avoid undue resort to restrictive devices. Thus when the oil facility for 1974 was established by the Fund in June 1974 to provide assistance to members with a balance of payments need resulting from the increase in the costs of petroleum and petroleum products in 1974, it was provided that access to the facility requires that a member represent that it is following policies not inconsistent with the undertakings set forth in paragraph 2 of the Rome communique. Furthermore, a member requesting a purchase under the oil facility is expected to represent that while the purchase is outstanding, the member will 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.

Moreover, in the Outline of Reform accompanying the final Report to the Board of Governors by the Committee of Twenty, June 1974, Part II, Immediate Steps, paragraph 36 states:

. . . Particular importance will be attached during the interim period to avoiding the escalation of restrictions on trade and payments for balance of payments purposes. To this end, member countries of the Fund will be invited to pledge themselves on a voluntary basis, in addition to observing their obligations with respect to payments restrictions under the Fund’s Articles, for a period of two years, not to introduce or intensify trade or other current account measures for balance of payments purposes without a finding by the Fund that there is balance of payments justification for such measures. In this connection arrangements will be made for continuing close coordination between the Fund and GATT.

The Committee of Twenty in the detailed statement issued at the end of its sixth and final meeting on June 12-13, 1974 invited members to subscribe on a voluntary basis to the Declaration concerning trade and other current account measures for balance of payments purposes to give effect to this recommendation. The Executive Directors of the Fund were invited to establish the necessary procedures in connection with the Declaration and to make arrangements for continuing close coordination with the General Agreement on Tariffs and Trade (GATT). The Declaration is to become effective among subscribing members when members having 65 per cent of the total voting power of members of the Fund have accepted it, and shall expire two years from the date on which it becomes effective unless it is renewed. The Executive Directors associated themselves with the Declaration and established the necessary procedures for its implementation. The required majority has not as yet been reached. Earlier, at the end of May 1974, a Declaration similar to that endorsed by the Committee of Twenty was adopted for a period of one year by the Governments of the member countries of the Organization for Economic Cooperation and Development (OECD) and the Secretary-General of the OECD has proposed that it be renewed for another year.

In June 1974, the Committee of Twenty examined a memorandum “Guidelines for the Management of Floating Exchange Rates”2 which had been discussed by the Executive Directors of the Fund and the Deputies of the Committee of Twenty. Following the examination by the Committee, the Executive Directors took the following decision:

The Executive Directors have discussed the attached memorandum entitled “Guidelines for the Management of Floating Exchange Rates.” They recommend, pursuant to Article IV, Section 4(a), that, in present circumstances, members should use their best endeavors to observe the guidelines set forth and explained in the memorandum. Consultations with members with floating currencies will be based on the memorandum. These guidelines will be reviewed from time to time in order to make any adjustments that may be appropriate.

Decision No. 4232-(74/67),

adopted June 13, 1974

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.

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