II. Main Developments in Restrictive Practices
- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1975
1. Trade and Payments Restrictions
In the period under review, widening balance of payments deficits and declining growth rates were reflected in a tendency toward increased reliance on quantitative and cost restrictions on imports, particularly in the latter part of the period. The actual intensification of restrictions was restrained, although fairly widespread. However, many countries resorted to selective credit or fiscal measures designed to reduce imports of specified goods. On the other hand, certain countries reduced import duties or other import charges to moderate upward price pressures.
Last year’s Report noted the development in 1973 of shortages on a world-wide scale of basic materials and foodstuffs, and the adoption by many countries of measures to restrict exports as support for domestic supply and price policies. These considerations were again prominent in the period covered by this Report and the use of outright export prohibitions, usually on a temporary basis, and of quota restrictions was often resorted to. At the same time, increased efforts were made to prevent a decline in prices of primary products. They were reflected in measures designed to reduce production or to build up stockpiles. The measures that were taken had either a purely national character or reflected the concerted policies of several primary producers. An example of the first is the stockpiling of rubber by Malaysia, while the agreement between Chile, Peru, Zaïre, and Zambia to reduce production of copper and the periodic review of pricing and production policies by the members of the Organization of the Petroleum Exporting Countries (OPEC) with regard to oil are examples of the latter.
a. Restrictions on Imports and Import Payments
The industrialized countries, with some notable exceptions, avoided the use of restrictions on imports as a means of countering rising current account deficits in the balance of payments. In July 1974, the European Economic Community (EEC), in implementing its common agricultural policy, prohibited imports of beef and cattle from “third” countries, a measure which had a considerable impact on the export earnings of some non-EEC members. Some of the developing countries and a few of the more developed primary producing countries, which in 1973 had attempted to dampen domestic inflationary pressures by lowering cost and quantitative barriers to imports, applied import restrictions for balance of payments, and, at times, for protective purposes. As part of their efforts to conserve energy, a number of countries took measures to restrict imports and consumption of oil and in some instances of passenger automobiles above a certain size. On the other hand, the oil exporting countries in general liberalized imports considerably.
In July 1974, Ireland increased global quotas for imports of specified industrial goods for the period to July 1, 1975, when these items are to be fully liberalized from all sources. Austria, Finland, France, Sweden, and the United Kingdom reduced restrictions on imports from member countries of the Council for Mutual Economic Assistance (CMEA).3 On the other hand, France imposed a tax on imports of oil in January 1974 and later placed a ceiling on the value of oil imports. Portugal set up a commission to control all imports in excess of Esc 1 million in value.
Canada and Yugoslavia introduced systems of generalized tariff preferences in favor of developing countries, and several other countries expanded and improved their existing. schemes for Generalized Systems of Preferences (GSP). They included Austria, Japan, and Switzerland. The GSP schemes of Denmark, Ireland, and the United Kingdom were superseded by the EEC scheme, which was itself further liberalized. The U.S. Trade Act of 1974, which came into force in January 1975, gave the President authority to introduce a GSP scheme; administrative steps for its implementation are being taken.
Australia continued to liberalize its import regime early in 1974 by reducing duties on imports of heating and domestic appliances, and abolishing quotas on clothing; toward the end of 1974, however, there was a reversal of this trend through the introduction of quotas on footwear and fabrics, while higher duties and quotas were placed on motor vehicles. In May 1974, Finland ceased to apply restrictively a licensing system for imports of certain consumer goods which had been introduced temporarily in August 1973. Early in 1974 Greece announced the abolition, in principle, of all remaining quantitative restrictions on private sector imports of any origin and Iceland ceased to invoke Article XII of the GATT. New Zealand raised global import quotas for raw materials and consumer goods, with arrangements to assure importers of continued supply; subsequently, however, New Zealand tightened its administrative arrangements for licensing to curtail speculative buildups of stocks of imported goods. South Africa eased its import restrictions, moving a large number of goods to the free list, and others to the list of goods for which reasonable requirements of importers are allowed; import permit allocations for consumer goods were raised.
During the period under review, several of the oil exporting countries reduced quantitative restrictions on imports. Iran in addition reduced various cost barriers to imports. Both Iraq and Nigeria eased licensing requirements during the year. Venezuela eliminated quotas for 80 items, mostly foodstuffs.
Among other developing countries, Colombia moved 221 items from the prior consultation list to the free list. In January 1974 Pakistan transferred a number of goods from the tied to the free import list and in July introduced the Import Policy Order, 1974, providing for additional import liberalization. Pakistan and India also removed their prohibitions on trade with each other. Thailand introduced a bill to lift its ban on trade with the People’s Republic of China and the Philippines signed a preliminary trade agreement with that country. Cameroon, the Central African Republic, Mauritania, Tanzania, and Togo ceased to invoke Article XXXV of the GATT with respect to Japan.
During the first half of 1974 Brazil continued the policy of suspending or lowering import duties to reduce the domestic impact of international price developments. At the end of June these suspensions and reductions were revoked for all commodities except important raw materials and capital goods. In addition, duty increases of 100 percentage points were applied to a wide range of consumer goods, to be effective through the end of 1975. These increases were later extended until the end of 1976, and the increase was applied to additional goods, including some basic materials and semimanufactured goods. In November, Brazil announced a program to curtail imports of consumer and capital goods by government agencies. Israel continued its policy of lowering tariffs, and general reductions in duties on a wide range of commodities were implemented in January and July 1974. However, in November 1974 duties on 38 “luxury” imports were raised by 10 percentage points for a period of six months, while a temporary prohibition was placed on imports of 31 “luxury” items.
Many countries extended the use of quantitative controls. Among these were Barbados, the Republic of China, Ghana, Jamaica, and the Khmer Republic. Countries imposing certain import prohibitions included Ethiopia, Fiji, Ghana, Guyana, Indonesia, Laos, Somalia, Viet-Nam, Zaïre, and Zambia. Several of these countries prohibited the import of automobiles, in some cases confining the ban to vehicles with larger engine capacities.
Sierra Leone and the Syrian Arab Republic reduced the degree of state trading by permitting a greater share for private sector imports. The general trend among developing countries was, however, toward increased state intervention. In December the Government of Guyana announced its intention to take over all foreign trade. Honduras introduced state trading for certain products, while India channeled ten additional import items through state agencies. Other countries extending state trading activities included Colombia, Niger, Nigeria, Tanzania, and Togo.
Several countries amended the regulations governing methods of import payments. Iran allowed payment against bills of collection for all imports, removing the prescription of letters of credit for nonessentials. On the other hand, in June 1974, Brazil required imports bearing customs duty of 55 per cent or more to be made on the basis of cash payment on sight; Peru imposed minimum-term financing arrangements for imports. The Philippines directed banks not to accept applications for the sale of foreign exchange, or the opening of letters of credit, for specified textiles, and made payments for imports of certain synthetic fibers and yarns subject to prior approval by the Central Bank. Uruguay reduced the minimum terms for external finance of imported capital goods and Zaïre imposed a requirement of 90 days credit or a 3 per cent discount for all imports.
Nigeria abolished the compulsory 90-day deferred payment requirement for imports in April 1974 and eased the financing requirements for capital goods.
b. Restrictions on Current Invisibles
The major industrial countries and a number of other member countries have formally accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement, and do not in general maintain restrictions on current payments and transfers; most of them, however, maintain controls on invisibles in order to prevent unauthorized capital flows. Early in 1974 Italy sharply reduced the amount of domestic banknotes which could be taken out by travelers and in May tightened the supervision over certain invisible payments, as well as reducing the allocation of exchange for tourist travel. Japan also tightened its supervision of sales of exchange for travel purposes.
In January 1974 Iran announced the abolition, in principle, of all existing exchange restrictions. Among other countries, standard travel allocations were increased in Algeria, Barbados, Chile, Ireland, and Nigeria, and those for business travel in Mauritania, South Africa, and Zambia; in response to a rapidly deteriorating balance of payments Chile reduced these allocations in January 1975. Bangladesh imposed a 30 per cent tax on travel exchange for business and other specified purposes, and ceased to provide foreign currency for other forms of travel. Colombia and El Salvador introduced or increased deposit requirements on the sale of exchange for travel. In January 1974 Guyana reduced the standard allocation for tourist travel and shortly thereafter suspended it indefinitely. Pakistan restricted the allowance for tourist travel but raised the allocation for business travel. Other countries which restricted allocations or tightened controls on exchange for travel included Cyprus, Fiji, Israel, Tanzania, and Turkey.
The Malagasy Republic terminated the de facto prohibition on the transfer of dividends, commencing with amounts accruing in its fiscal year 1973; provision was made for the transfer, in stages, of accrued dividends relating to earlier years. Nigeria announced in April 1974 that all arrears of investment income accruing to nonresidents were to be cleared in the fiscal year 1974/75, and the transfer of new profits and dividends could be effected without delay. In addition, remittances of technical and management fees and royalties were permitted when they related to the import of technology. On the other hand, Rwanda suspended the transfer of rents accruing to nonresidents, Tanzania reimposed a restriction on dividend payments, Uruguay allowed remittances of profits and dividends (previously limited to 10 per cent of capital per annum) to be made freely, but imposed a tax on remittances in excess of 20 per cent of capital, and Zambia extended for a further year the restrictions on remittances of profits, dividends, and rents.
Several countries changed the regulations governing the import and export of domestic currency by travelers. In Mauritania the import and export of domestic notes and coins (and the holding by residents of any means of payment in foreign currencies) without the prior authorization of the Central Bank were both prohibited. Existing limitations of this nature were also intensified in Cyprus,
Ghana, Italy, and Portugal, but they were eased in Australia and Jordan.
2. Multiple Currency Practices
In March 1974 the dual exchange markets in France, the Operations Account countries4 of the French Franc Area, and Italy were unified. Costa Rica unified its dual exchange market in April 1974 when it established a new par value. Ecuador formally unified its dual exchange market, after the U.S. dollar rates in both markets had remained identical for a considerable period. In the Syrian Arab Republic, a unitary exchange rate has been applied since 1973, but the regulations providing for a dual exchange market have not yet been formally revoked. In January 1974, Iran introduced a dual exchange market by creating a “noncommercial free market” with a fluctuating exchange rate and abolished all other restrictions on current and capital payments; the rates in the two markets have been virtually identical. The basic structure of the dual exchange markets in Argentina, Belgium-Luxembourg, Chile, Paraguay, Peru, and Uruguay was maintained, although in each there were some modifications in exchange rates or regulations governing access. In Egypt’s dual exchange market, the role of the secondary market was expanded.
With effect from February 28, 1974, Turkey abolished the tax of 50 per cent on foreign exchange purchased for most travel purposes. In July 1974, Burma discontinued the variable commission applied to the selling rate for sterling since June 1972. The Central African Republic in November 1974 abolished the tax on exchange operations of 2½ per cent levied on most exchange transactions with, and payments to, countries outside the French Franc Area. Also in November, Nicaragua eliminated the stamp tax of ½ of 1 per cent on sales of foreign exchange by commercial banks to the public, thus unifying the exchange rate structure. Indonesia terminated its only remaining multiple currency practice by replacing the 10 per cent exchange tax on proceeds from most exports with an export tax of 10 per cent on the f.o.b. value of such exports.
In January 1974, Argentina established a temporary scheme whereby foreign exchange for the payment for specified imports could be bought at the commercial rate, subject to special charges to be paid to the Treasury; the scheme was gradually phased out and was eliminated by June. During the year a number of imports were added to the list of goods eligible for payment at the mixed rate of 26 per cent commercial and 74 per cent financial rate, while others were removed from it. In May, a foreign exchange tax was imposed on remitted profits of existing companies choosing to remain subject to the old regulations rather than the new foreign investment law. In January 1975, Argentina doubled the exchange tax on the sale of exchange for travel purposes, and on March 3 the fixed exchange rates in both exchange markets, as well as the mixing rate applicable to specified commercial transactions, were depreciated sharply. Brazil continued to follow a flexible exchange rate policy by depreciating the cruzeiro at short, irregular intervals. Between December 1973 and December 1974 the cruzeiro was depreciated on 11 occasions for a total depreciation in terms of the U.S. dollar of 16.4 per cent. Exchange taxes (contribution quotas) were imposed on proceeds of exports of hides and skins of wild animals and of quartz chips. Contribution quotas continued to be applied to export proceeds from green coffee and cocoa and derivative products but those on proceeds from exports of beef were abolished in March 1974.
After having simplified substantially its exchange rate structure late in 1973, Chile depreciated its exchange rates in terms of the U.S. dollar frequently during 1974. The exchange rates in the brokers’ and banking markets were changed repeatedly and the spread between them was considerably reduced. The exchange rate for copper receipts was also depreciated several times; in August 1974 this rate was unified with the exchange rate in the banking market. Further simplification of the exchange rate structure occurred in March 1975.
Colombia reduced the rates of the tax credit certificates for some agricultural, manufactured, and mineral products from levels of 13 per cent and 15 per cent to 0.1 per cent and 5 per cent of export proceeds. In March 1974, an advance deposit requirement for travel exchange was reintroduced when residents were required to make an advance deposit at the time of application for exchange licenses for overseas travel; it was raised in September. Colombia, in accordance with its existing policy, continued to depreciate its principal exchange rate in terms of the U.S. dollar in 1974. Uruguay completed the reopening of access to the financial market in September 1974 and removed the identification requirement for purchases and sales in that market. Exchange rates in the financial market would be determined by supply and demand, with no intervention by the monetary authority.
In June 1974, Bangladesh extended the premium payments scheme for personal inward remittances in convertible currencies for another year; additional types of foreign exchange receipts were brought under the scheme in August 1974. Egypt revised the regulations pertaining to the operation of the parallel market in June 1974. Exchange rates in the parallel market were to be determined by a committee established by the Government. In addition to commercial banks, those permitted to operate in the parallel market included tourist companies, hotels, and shops selling goods for foreign currency, and banks were permitted to deal among themselves in foreign currency eligible for the parallel market. The new regulations specified the transactions eligible to be effected in the parallel market. On the supply side, there was a considerable increase in eligible funds through the inclusion of receipts from a number of current invisibles, and 50 per cent of the receipts from exports of cement in excess of annual export targets. Most payments for current invisibles have to be settled in the parallel market.
In the Khmer Republic the exchange rate structure was modified as a result of various measures taken in response to the military emergency. The dual exchange market in Laos was practically terminated by a further reduction in transactions eligible for the official market. Sri Lanka, in September 1974, exempted imports of tallow, palm oil, and milling copra from the requirement to surrender Foreign Exchange Entitlement Certificates, thus permitting payments for such imports to be effected at the official exchange rate rather than at the different effective exchange rates resulting from transactions in certificates. This measure was reversed, however, in January 1975.
In January 1974 the regulations affecting the exchange market arrangements in the BLEU were amended to enable outward payments in respect of investment earnings again to be made through either the official or the free exchange market at the option of the remitter. The United Kingdom introduced measures in March 1974 which affected access to the investment currency market by U.K. residents (see section on “Measures affecting capital,” below). During the year, the investment currency premium rose considerably. Ireland also took measures with respect to the use of investment currency, both in March 1974 and January 1975.
3. Import Deposits, Import Surcharges, and Measures to Stimulate Exports
a. Advance Import Deposits
During the period under review, requirements for advance import deposits were eased in several countries, but the number of countries that introduced new, or intensified existing, advance deposit requirements on imports appears to have been greater than in recent years. Chile suspended the 10,000 per cent advance import deposit requirement on most imports in the permitted list, while Viet-Nam abolished advance deposit requirements on imports under the Commercial Import Program financed by U.S. aid. A number of other countries eased the requirements for import deposits by lowering the rates applied or by narrowing their scope. In March 1974, Iran reduced deposit requirements for some goods from 100 per cent or 40 per cent to 15 per cent, and in July it exempted most food items from advance deposit requirement and reduced the rate for all remaining goods to 15 per cent. In the Philippines, a number of essential import commodities were exempted from the 50 per cent advance import deposit requirement, while the rate was reduced to 25 per cent on other items. Argentina exempted certain commodities from advance deposit requirements, and the Sudan reduced the rate of deposit from 5 per cent to 2 per cent.
The Republic of China reduced the advance settlement requirements on imports. In March 1974, Greece, which has long used a range of advance deposit requirements, prescribed a higher deposit of 200 per cent for passenger automobiles and certain “luxury items”; it also increased the deposit and the retention period for a number of other goods, but for many this measure was revoked in September. The deposit requirement for the remaining items, however, was extended until June 30, 1975. In March 1975, Finland introduced an import deposit system covering some 63 per cent of the total value of imports. The deposits vary between 5 and 30 per cent of the import price of the goods and are for a period of six months. Israel abolished the advance deposit requirement on imports on January 1, 1974, but reintroduced it in March 1974 at the rate of 20 per cent of the value of the imports subject to customs duties of 35 per cent (including import surcharge) or over. The coverage of the deposit requirement was reduced later in the year. Iceland took measures in 1974 under which importers were required to make an advance deposit equivalent to 25 per cent of the value of imports for 90 days; basic foodstuffs and raw materials were exempted. In Italy, most imports other than raw materials and capital goods became subject to a 50 per cent import deposit requirement in May 1974, with the amounts deposited to be held for 180 days; during the second half of 1974, the deposit requirement was eliminated for imports of beef and other agricultural products; the system of advance deposits was terminated as of March 24, 1975. In August Lebanon introduced a 15 per cent advance import deposit requirement in foreign exchange for letters of credit for imports. Colombia raised the prepayment deposit rate for imports from 35 per cent to 40 per cent, and later applied a prepayment deposit of 100 per cent to imports financed by foreign borrowing. El Salvador imposed an advance deposit requirement of 100 per cent on imports of specified items, including automobiles, furniture, and appliances, and in August 1974, Yugoslavia established import deposit requirements on specified commodities at rates of 30 per cent and 50 per cent; in November and December, certain of these goods were exempted from the deposit requirement.
b. Import Surcharges
Israel extended the temporary import surcharge for a further year to April 1, 1975, and in July increased the rate from 25 per cent to 35 per cent but, in conjunction with the devaluation of the Israel pound in November 1974, the surcharge was reduced to 15 per cent and the number of items subject to the surcharge was increased. Jordan exempted imports of foodstuffs and of paper and raw materials used in the paper industry from the surcharge applicable to goods not imported through the port of Aqaba. In October, Uruguay substantially lowered import surcharges, reducing the maximum rate in effect from 300 per. cent to 200 per cent ad valorem. On April 1, 1974, Nigeria abolished the 5 per cent “national reconstruction” surcharge on imports. Pakistan absorbed the “flood relief surcharge” into the customs tariff and in January 1975 introduced a new surcharge, also applicable to virtually all imports. Yugoslavia, on January 1, 1974 reduced the import surcharges on crude petroleum and gas oil to 2 per cent and in April the same reduction was applied to additional agricultural and food products.
c. Export Incentives and Export Taxes
During the period under review many countries expanded their schemes for promoting exports. These often involve assistance to exporters through special credit facilities, exchange risk guarantees, and other measures to influence export credit terms. Australia introduced a new incentive scheme for exports, to operate for a period of five years, and early in 1975 established facilities to finance medium-term and long-term export sales of capital goods. Denmark established a new export credit institution and announced improved refinancing for export credits of more than two years. Finland issued new domestic credit regulations, aimed at strengthening the competitiveness of new export industries and expanded export financing facilities. In France, the Compagnie Française d’Assurance pour le Commerce Extérieur (COFACE) extended the country coverage on short-term commercial risks on exports and raised the ceiling on covered risks by F 9 billion. In addition, to assist medium-sized export firms which might not have access to the international capital markets, the authorities allowed a considerably higher rate of growth of short-term export credits than of total bank credit. The Netherlands, New Zealand, and Norway also expanded export financing facilities. In December 1974, Italy exempted bank credits for the financing of exports from the ceiling imposed on the expansion of bank credit during the year ended March 1975 and provided for priority treatment for export business in the granting of refinancing facilities.
Bangladesh extended the duration of its cash subsidy scheme for exports and raised the rate of subsidy for certain export commodities. Chile withdrew tax refunds on minor exports and Colombia reduced the value of export subsidies for agricultural and manufactured products under the Tax Credit Certificates (CAT) scheme. Israel increased tax rebates for exporters in July 1974 and lowered them in November; they were raised again in January 1975. The Bank of Jamaica introduced an export credit financing scheme under which exporters could obtain credit for three months at a preferential rate of interest. Kenya introduced an export subsidy scheme under which exporters are eligible for a 10 per cent payment on the f.o.b. value of selected manufactured exports to countries other than Tanzania and Uganda. In Venezuela, two export incentive schemes for nontraditional exports, which had been created in 1973, became operational in 1974; one provides for a fund to grant credit to exporters, the other involves negotiable tax credit certificates. Malaysia, Sri Lanka, and Uruguay provided additional tax incentives for exporters.
A number of countries introduced or increased taxes on export commodities. These included Afghanistan, Costa Rica, Guatemala, Guyana, Honduras, India, Jordan, Malaysia, Panama, and Peru. India and Pakistan reduced or suspended export duties on certain commodities.
4. Bilateral Payments Arrangements
Considerable progress was made during the period under review in reducing the number of bilateral payments arrangements maintained by Fund members both among themselves and with nonmember countries. There was a substantial move toward the elimination of such arrangements by certain developing countries. Thus, Tunisia terminated its payments agreements with two member countries (Egypt and Romania) and seven nonmember countries (Bulgaria, the People’s Republic of China, Czechoslovakia, the German Democratic Republic, Hungary, Poland, and the U.S.S.R.); Morocco abolished four agreements with nonmembers (Bulgaria, Czechoslovakia, Hungary, and Poland); the Syrian Arab Republic eliminated its arrangements with two members (Egypt and Romania) and two nonmembers (Hungary and Poland); Turkey terminated its payments agreements with four nonmembers (Bulgaria, the People’s Republic of China, Hungary, and Poland); and Singapore those with two nonmembers (Poland and the U.S.S.R.). Another six Fund members placed settlements with the German Democratic Republic on a convertible currency basis (Austria, Denmark, Norway, Spain, Sweden, and Tunisia), but Pakistan entered into a new bilateral payments arrangement with that country.
Other bilateral payments agreements between member countries that were terminated included those between Bangladesh and India, Iraq and Yugoslavia, the Libyan Arab Republic and Romania, and Romania and Sri Lanka. Some of the remaining agreements maintained by Fund members are in fact inoperative; the number of operative bilateral payments arrangements between members now stands at about 50. The number of Fund members’ payments agreements with nonmembers has been reduced to some 180.
5. Measures Affecting Capital
As noted in the Introduction, the United States terminated its controls on capital outflows in January 1974. Toward the end of 1973 the sharp turnaround in the balance of payments of many of the developed countries was accompanied by a reversal of policies to control capital movements. Commencing in 1971, the industrial countries of Europe and Japan had progressively extended the network of controls on inflows of capital, directed especially at short-term inflows, as a means of reducing pressure on the balance of payments and in support of domestic monetary and fiscal policies. By February 1974 most of these countries had partially dismantled the complex system of controls over inflows applied in part through the banking system, through restrictions on foreign borrowings by domestic nonbanks, and through limitations on the acquisition by nonresidents of domestic securities.
During the period under review most of the industrial countries either avoided the use of new controls on inflows or took steps to facilitate them, particularly in the form of medium-term or long-term borrowing, while a few tightened controls on outflows. Among other countries, there was a continuation of the trend observed in previous reports in the use of measures to control and to reduce foreign ownership of domestic enterprises; several also employed capital controls to influence capital flows through the banking system, and to affect directly portfolio and direct investment, payments terms on foreign trade, and personal capital transfers. Some of the more developed primary producing countries and some of the developing countries eased the conditions for foreign borrowing by bank and nonbank residents or tightened the controls over domestic lending to nonresidents.
The Euro-currency markets continued to expand during 1974, especially in the first half of the year when there was a strong demand for credit stemming primarily from industrial countries with oil-related balance of payments difficulties, accompanied on the supply side by sizable increases in Euro-deposits by the oil exporting countries. Some of the developing countries also received substantial Euro-credits during this period. The growth of the Euro-credit market slackened markedly (and the currency deposit market probably showed a slight net fall) in the second half of 1974 as a result in part of uncertainties and a setback to confidence in the international banking system following the announcement of bank failures in July and August. More recently, the growth of lending in the Euro-currency market has resumed but the banks continue to be cautious and now prefer project and export financing to general purpose or balance of payments loans. There has also been a marked reduction in the share of loans with maturities above five years. In addition, the demand for funds was partially satisfied through other channels, such as government-to-government loans, or loans through international institutions. The amount of Euro-bonds issued was much reduced during 1974, although toward the end of the year there was a modest revival as short-term interest rates fell.
Direct and indirect controls on banks, which had been applied extensively in industrial countries as a means of limiting capital inflows through the domestic banking system, were suspended or relaxed in many countries in January and February 1974. Limitations on banks’ foreign positions and on their ability to accept foreign-owned deposits were progressively modified to ease restraints on banks’ access to foreign funds. Later in the year, stricter reporting requirements on banks’ foreign assets and liabilities, both spot and forward, were imposed in a number of countries to increase official surveillance of banks’ foreign operations. Toward the end of 1974 increased concern began to be shown over the possible renewal of inflows in certain countries that early in the year had removed certain barriers to inflows. This was shown most clearly in Switzerland, which, beginning in November and carrying on into the new year, reversed a number of relaxation measures.
In the BLEU, a ceiling was imposed in January 1974 on the net foreign asset position of banks (i.e., on their net credit spot positions in foreign currencies on the official market), and banks could accept time or notice deposits on Convertible Accounts provided the maturity did not exceed one year. The maturity requirement was removed in August 1974. In February 1974, the Belgo-Luxembourg Exchange Institute increased (after two reductions) the limit imposed on the net debtor positions of Belgian and Luxembourg banks on Convertible Accounts and in foreign currency on the official market. The National Bank of Denmark in January 1974 eased the rules governing demand and time deposits in convertible krone accounts held by specified financial institutions; in August the ceiling on the net negative “commercial” foreign position of authorized foreign exchange dealers was increased from Dkr 250 million to Dkr 400 million. In Italy, on the other hand, concern with the growth of banks’ short-term foreign indebtedness resulted in the imposition, in July 1974, of a ceiling on banks’ net external debit positions, i.e., the spot and forward position in relation to nonresidents in foreign and domestic currencies. In September 1974, Turkey established minimum and maximum limits on the foreign currency positions of the larger authorized banks.
During the period under review, concern with the extent of exposure assumed by banks in their foreign exchange dealings led the authorities in several European countries, and in the United States, to tighten their surveillance over banks’ foreign exchange operations, particularly forward transactions, by imposing more stringent reporting requirements. In addition, the Federal Republic of Germany limited banks’ net exchange positions to a specified proportion of pledged capital resources. In Spain, limits were placed on Euro-currency deposits with Spanish banks, and on Euro-currency loans granted by these banks. The Bank of England sought formal acknowledgment from consortium banks in London that ultimate responsibility for their affairs lies with their shareholder banks; the Bank also approached London subsidiaries of foreign parent banks for similar assurances.
In 1974 and early 1975 the authorities in many European countries relaxed or abolished selective reserve requirements against banks’ external liabilities and lifted restrictions on interest payments on nonresident deposits. With effect from March 1, 1974 the gentlemen’s agreement of August 18, 1971 between the National Bank of Austria and the credit institutions which called, inter alia, for interest free deposits with the National Bank equal to 75 per cent of any increase in banks’ schilling liabilities to nonresidents, was relaxed by changing the base date for the calculation of the deposit requirement from August 13,1971 to December 31,1973. On January 1, 1975 the requirement was suspended. The negative interest charge levied by banks in Belgium and Luxembourg on accruals to Convertible Accounts was suspended with effect from January 1, 1974; in the same month the prohibition of interest payments on such balances was revoked. In France, the remaining reserve requirements against nonresident-owned franc deposits were rescinded in January 1974. The Federal Republic of Germany in January 1974 abolished the 60 per cent reserve requirement on the increase in banks’ deposit liabilities to nonresidents, and lowered the average reserve requirements against such liabilities. Further reductions in the average reserve requirements took place in the course of that year. However, the requirement of approval by the Bundesbank for the payment of interest on nonresident deposits remained in effect. Ireland retained the requirement that banks must deposit with the Central Bank at least 50 per cent of net capital inflows after January 16, 1973 but from June 1974, and subject to prior consultation with the Central Bank, the requirement could be waived for capital inflows that assist in the financing of major industrial projects. In Switzerland, reserve requirements on banks’ foreign liabilities were lowered in stages during most of 1974, reaching a low point in October, while the prohibition of interest payments on most nonresident deposits received after July 31, 1971 was abolished in October 1974. However, toward the end of the year Switzerland again tightened controls on capital inflows through the banking system. In November, it was announced that any increase in Swiss franc deposits by nonresidents above Sw F 50,000 since October 31, 1974 would be subject to additional minimum reserve requirements of 24 per cent for demand deposits and 18 per cent for time deposits. A prohibition of interest payments on nonresident Swiss franc deposits was introduced with respect to funds received after October 31, 1974, and such increases in deposits were then made subject to a negative interest charge of 3 per cent a quarter. In January 1975, all nonresident Swiss franc deposits in excess of Sw F 50,000 became ineligible for interest upon the expiration of any contractual commitments, regardless of the date of deposit, and the negative interest charge on deposits made after October 31 was increased to 10 per cent a quarter.
The easing of controls over inflows of capital through the banking system was accompanied in some cases by measures to relax controls on, and in some cases provide stimulus to, inflows through nonbanks, including public sector borrowing abroad. In January 1974, agencies and enterprises in France were permitted to borrow at medium term and long term in foreign markets. The exemption from approval for financial foreign currency credits taken up abroad by nonbank residents was raised from a total indebtedness per borrower of F 2 million to F 10 million, provided each loan drawing and the corresponding repayment were at least one year apart. In addition, the regulations governing foreign direct investment in France, and its liquidation, were relaxed slightly in August 1974. Early in 1974 the Federal Republic of Germany adopted a series of measures designed to reduce selectively the existing barriers to the entry of capital through nonbanks. Short-term import financing no longer required approval and was exempted from the cash deposit requirement (Bardepot). Borrowing for other specified purposes, e.g., to finance the purchase of real estate abroad, also became exempt from the cash deposit. In February 1974, Bundesbank approval requirements were lifted for all borrowings abroad by residents, the acquisition by nonresidents of domestic securities (except domestic money market paper and fixed-interest securities maturing in less than four years), and inward direct investment. In February 1974 the cash deposit requirement applicable to most nonbank borrowing from nonresidents was reduced from 50 per cent to 20 per cent and in September it was abolished. In Denmark the taking up of financial loans abroad was made subject to more stringent conditions in January 1974, but toward the end of the year the ceiling on individual loans was raised from DKr 5 million to DKr 20 million, and conditions for raising such loans were eased somewhat. During the year the quota for sales to nonresidents of listed Danish krone bonds was increased and in December 1974 such sales were fully liberalized. In August 1974 Sweden permitted borrowing abroad by residents to finance economic activity in Sweden, on maturities of normally at least five years, and without restrictions as to the use of proceeds. In Austria, restrictions on capital inflows introduced in November 1972, when Austria suspended the liberalization of inward capital movements, continued in force. However, adaptations were announced in July 1974 with a view to easing some of the restrictions. These included a liberalization of inward direct investment in the “secondary sector” and of specified commercial credits up to five years granted by nonresidents to residents. From October 1974 Spain no longer required prior authorization for foreign majority investments in certain sectors.
Several of the European countries also adopted measures to discourage capital outflows or ensure foreign financing of such flows. In June 1974, Sweden to an increasing extent required foreign financing of at least five years’ maturity for outward direct investment. Changes in the exchange control regulations in the United Kingdom in March 1974 provided for, inter alia, a tightening of the restrictions on the use of official exchange for the financing of direct investments in the EEC and the Overseas Sterling Area. Ireland also tightened requirements for the financing of direct investments in the Overseas Sterling Area but on January 1, 1975 allowed the use of official exchange for all approved new direct investments by Irish residents in EEC member countries. In February 1974, Switzerland reduced the permissible volume of new issues of Swiss franc bonds by nonresidents, and of placements of medium-term Swiss franc notes by nonresidents; in May 1974, such issues and placings were temporarily prohibited, but these measures were withdrawn in August 1974, when ceilings were again applied. In November 1974, the Swiss authorities reintroduced with immediate effect the regulation suspended in February 1974, which had stipulated that all capital exports denominated in Swiss francs and licensed by the National Bank must, upon approval, be converted into foreign currency at Swiss banks (subsequently only at the National Bank). Throughout the period, Italy retained the deposit requirement of 50 per cent on most outward transfers of capital and fewer exemptions were granted than in 1973. Among the capital control measures taken in France in January 1974, forward cover facilities for outgoing payments again were limited to imports and such cover was normally restricted to three months; export credit was also generally limited to six months after the arrival of goods at their destination unless special authorization was obtained. In addition, all other lending of francs to nonresidents, whether by banks or nonbanks, was made subject to authorization, which was not normally granted while previously such lending for maturities up to two years was unrestricted. In August, however, the regulations governing outward direct investment were relaxed slightly.
With the elimination in March 1974 of the dual exchange markets in France and Italy, and the termination by the Netherlands in February 1974 of the O-guilder mechanism for nonresidents’ purchases of listed guilder bonds, the use of separate exchange markets for capital flows by European countries is now confined to Belgium-Luxembourg, Ireland, and the United Kingdom.
During 1974, Japan took a number of measures designed to stimulate inflows of capital and to limit long-term outflows. Beginning in November 1973, the yen conversion ceilings were raised progressively for prepayments to Japanese exporters, and additional amounts were approved automatically provided they were received within six months of shipment. Key industries were allowed greater access to foreign bank loans and overseas bond markets to finance their operations in Japan; bond issues abroad were facilitated by the removal in April 1974 of the withholding tax on interest payments on such securities. Restrictions on nonresidents’ portfolio investments in Japan were relaxed considerably in August 1974. A series of measures to limit outflows took effect in January 1974. Additional measures to encourage capital inflows took effect in August and September 1974, including substantial increases in the yen conversion quotas of foreign banks in Japan, the elimination of the 10 per cent reserve ratio on free yen deposits of nonresidents, and the withdrawal of controls on interest payable on residents’ and nonresidents’ foreign currency deposits with Japanese banks. The acquisition by residents of all foreign short-term securities was made subject to approval. In addition, it was announced that resources under the Foreign Currency Lending Program of September 1972 for the financing of Japanese direct investment abroad would not be available in such sectors as services or real estate, and that the percentage of loans in foreign currency would be reduced to 50 per cent. Also, in January 1974, resident-owned foreign currency deposits were made subject to a ceiling, while securities dealers were required to dispose of their foreign exchange proceeds, by conversion into yen or reinvestment in securities, within seven business days of each transaction. Later in the year, the authorities increasingly permitted “out-in” borrowing in addition to the “out-out” borrowing resumed around January 1974.
With effect from January 29, 1974 the United States terminated the Foreign Direct Investment Program and the Voluntary Foreign Credit Restraint Program, and reduced the Interest Equalization Tax to zero, thereby eliminating the system of controls over capital outflows. (Following the dismantling of the U.S. controls, Canada revoked the balance of payments guidelines which had been issued primarily in order to obtain and safeguard that country’s exemption from the U.S. capital controls.) Certain other U.S. regulations were amended to take account of the termination of controls on capital outflows. These included an amendment to Regulation M to eliminate the Euro-dollar reserve requirements on loans by a foreign branch of one member bank to the domestic office of another member bank when the borrowing bank maintained reserves against the borrowing under Regulation D, and the termination of the withholding tax exemption for offshore financing subsidiaries of U.S. companies with respect to interest and dividend payments to non-U.S. residents for financing in the form of securities arranged after June 30, 1974.
During 1974 various reporting requirements were introduced on international aspects of the activities and ownership of U.S. banks and nonbank firms in the United States.
The use of capital controls in countries other than those mentioned above in many cases continued to be directed, in addition to restricting outflows of resident-owned capital, toward limiting foreign ownership of domestic enterprises and resources. Several adopted measures facilitating access by residents to international capital markets. Australia and Brazil both suspended the mandatory deposit requirements on certain forms of foreign borrowing and eased other restrictions on foreign currency loans. Other countries relaxing restraints against foreign borrowing included the Republic of China, South Africa, the Syrian Arab Republic, and Turkey, but such borrowing was brought under closer supervision in Ecuador, Fiji, Indonesia, and the Philippines. A deposit requirement was subsequently removed in the last mentioned country. Measures to control the degree of foreign ownership included the introduction of registration requirements or the screening of direct investments. Fiji, India, Malaysia, Peru, Uruguay, and Venezuela were among the countries which introduced or widened the application of such measures. Direct restrictions, generally aimed at limiting the extent of foreign ownership and control of domestic enterprises or domestic real estate, were introduced in Afghanistan, Indonesia, Malta, and South Africa, and additional investment screening procedures were introduced in Australia. In addition, the partial or total nationalization of foreign-owned interests in the petroleum sector took place in a number of countries, including Abu Dhabi in the United Arab Emirates, the People’s Republic of the Congo, Dahomey, Iraq, Kuwait, the Libyan Arab Republic, Morocco, Nigeria, Saudi Arabia, Trinidad and Tobago, and Zaïre. A similar trend was noticeable with respect to phosphates and bauxite.
During the period under review there was considerably greater use by the developing countries of measures affecting the foreign operations of domestic banks. Countries that made the net foreign position of banks or banks’ foreign liabilities subject to new or stricter controls included Indonesia, Iran, Lebanon, the Philippines, Turkey, and Uganda. Lebanon introduced legislation to establish a “free banking zone,” under which arrangement foreign currency deposits of nonresidents would be exempt from reserve requirements and the withholding tax on interest payments. Laos removed the ban on foreign currency deposits by residents and nonresidents, while Tunisia permitted the payment of interest, and Mexico increased the rate of interest, on such deposits. Restrictions on outflows of capital, in many cases relating to the transfer abroad of personal assets, were tightened in the Central African Republic, Costa Rica, Cyprus, Guyana, Fiji, Jamaica, and Kenya, but lifted in Iran. Nonresidents were given freer access to domestic credit in Iran, but the opposite occurred in various other countries, e.g., Kenya and New Zealand.
On March 15, 1974 the United Kingdom announced a modification and extension of the guarantee arrangements on certain official sterling reserve holdings of Sterling Area countries to cover the nine-month period from April 1, 1974. The guarantees, which were first introduced in 1968, were allowed to lapse on December 31, 1974.
When the United Kingdom in March 1974, changed some of the exchange control regulations affecting direct investment, a change was also made with respect to portfolio investment. This terminated the preferential treatment of the sale proceeds of securities payable in Overseas Sterling Area currencies. During 1974, Barbados ceased to exempt capital transfers to Sterling Area countries from exchange control approval.
During the period under review a number of countries made major changes in their laws and regulations governing the holding of and dealing in gold. Iran lifted the restrictions on authorized banks’ imports and exports of gold and silver bullion, introduced a free market for gold and silver, and allowed private individuals to hold gold and silver in any form. All banks authorized to deal in foreign exchange were permitted to import gold and to sell it freely to any person in Iran. While banks were not permitted to sell gold forward, they could lend up to 50 per cent against gold or silver collateral put up by private individuals. The Central Bank reserved the right to intervene in the gold or silver market. The Philippines, where previously virtually all sales of new gold were made to the Central Bank, also created a free market for gold. It gave primary gold producers the option of either selling their refined gold production to authorized gold dealers, or holding it abroad for subsequent sale to authorized gold dealers or in the free market abroad. Gold dealers may lend pesos to producers up to 80 per cent against gold collateral and are given special rediscount facilities at the Central Bank. South Africa reduced the number of Kruger rand coins made available to the domestic market in order to increase their availability for export, and also expanded the production facilities for these coins.
In April 1975, the United Kingdom restricted the import of gold coins minted after 1837 and of gold medals, medallions, etc., manufactured after 1837, while the manufacture of the latter group of objects would not normally be permitted. The holding and buying and selling, between residents of the United Kingdom, of post-1837 gold coins and gold medals, etc., that were already in the United Kingdom remained unrestricted. The Bank of England discontinued its sales of gold sovereigns to residents of the Scheduled Territories (the United Kingdom, Ireland, and Gibraltar).
The United States lifted the 1933 prohibition on the holding by U.S. citizens and U.S. residents of gold other than for industrial, medical, artistic, or numismatic purposes. With effect from December 31, 1974, U.S. citizens and residents were freely permitted to buy, hold, and sell gold in any form, at home or abroad, while previously individuals were not normally allowed to hold gold except in the form of numismatic coins or jewelry. In December the Federal Reserve Board announced that gold in the form of coins or bullion may not be counted as vault cash in order to satisfy reserve requirements, because gold bullion and gold coins are not legal tender in the United States. Furthermore, the Federal Reserve banks would not accept gold as collateral for an advance to a member bank.