II. Main Developments in Restrictive Practices
- International Monetary Fund. External Relations Dept.
- Published Date:
- September 1969
Trade and Payments Restrictions
Several countries made important changes in their exchange and trade systems during the year tending toward liberalization of their restrictions. In May, Ceylon introduced an exchange certificate market. At the same time the severe quantitative restrictions on imports of raw materials and spare parts, which were to be settled through the new exchange market, were relaxed. In Colombia, import licensing requirements were withdrawn from a number of essential products. South Africa further eased import restrictions following a sharp increase in reserves during 1968. There were, in addition, a number of other countries that made modest progress toward more liberal import policies either by reducing quantitative restrictions or by applying more liberal licensing policies, e.g., Finland, Ghana, Iraq, Israel, and Japan. Most “Operations Account” countries in the French Franc Area removed most or all of their restrictions on imports from countries of the European Economic Community (EEC).
However, more restrictive import policies were adopted in other countries, which generally have a more important share in world trade. In July 1968, France imposed quotas on a temporary basis on the import of automobiles and industrial vehicles, textiles, steel, and household electrical appliances. These measures were later revoked on schedule, this process being completed early in 1969. The United Kingdom imposed advance deposits on imports in November 1968. France and Germany adjusted their value-added taxes to discourage or encourage imports, respectively; action was also taken by Germany to restrain exports. The possibility that the United States might impose quantitative restrictions caused a number of countries, including Australia, New Zealand, and Nicaragua, to limit exports of meat to that country and led Japanese and EEC steel producers to practice voluntary restraint with respect to exports of steel. Nigeria subjected a wide range of “nonessential” imports, which previously had been under open general license, to specific licensing in order to strengthen the country’s external reserve position. The countries of the Central American Common Market agreed in principle to impose a surcharge on imports from outside the Market: the relative protocols, however, have not yet been ratified by all signatories and therefore the surcharge has not been implemented in all countries. In June, Guatemala introduced import restrictions in order to prevent speculative importing pending the application of this import surcharge; these restrictions were removed, following the introduction of the surcharge by Guatemala in November. Other countries to move toward somewhat tighter restrictions on imports included Bolivia, the Dominican Republic, Iran, Kenya, Tanzania, Uganda, Venezuela, and Yugoslavia. Brazil raised import duties on a number of consumer goods but did not restore quantitative restrictions. Several countries imposed or raised import surcharges (see below). A number of countries again took measures to restrict imports of textiles from less developed countries; the same objective was sought in other cases by agreements on voluntary export restrictions.
No clear pattern is apparent in the changes made during the year in restrictions on payments. Exchange control measures in France were closely related to the severe speculative pressures to which the franc was subjected. Tighter controls on the sale of foreign exchange for travel abroad were applied by Ethiopia, Kenya, the Philippines, Tanzania, Uganda, and Zambia. Early in 1969, Kenya, Tanzania, and Uganda all adopted a set of measures involving a limitation on foreign exchange allowances for emigration, travel, and certain personal remittances. Zambia introduced restrictions on the transfer of profits and dividends. Toward the end of 1968 the United Kingdom prohibited banks in the United Kingdom from providing sterling finance for trade between non-Sterling Area countries.
In September 1968, the United Kingdom entered into agreements with most other Sterling Area countries. The United Kingdom guaranteed to maintain the dollar value of that part of each Sterling Area country’s official sterling reserves which exceeded 10 per cent of its total reserves, while the partner countries undertook to maintain not less than an agreed minimum proportion of their total reserves in sterling.
Moves toward more liberal policies in regard to current payments affected mainly profit and dividend remittances and travel expenditure. Ceylon lifted the moratorium on remittances of current profits; in addition, provision was made for accumulated profits and dividends to be remitted gradually over a period of time. Colombia and Ghana also adopted more liberal policies in respect of remittance of profits. Japan lifted the restrictions on the provision of foreign exchange for tourism. Included among the other countries announcing some measures of liberalization in the field of invisibles were Finland, Israel, and Morocco.
Pursuant to a second Resolution of the United Nations Security Council calling for mandatory sanctions on Rhodesia many countries took additional action which often entailed restrictions on trade, payments, capital transfers, and investment operations relating to Rhodesia.
Multiple Currency Practices
Flexible exchange rate policies are employed in a number of member countries. They include Brazil, Chile, Colombia, Indonesia, Korea, and Uruguay. The Fund continues to view rates responding to market forces as a step toward realistic par values. In the past year there has been no major change in the number of countries applying multiple currency practices. Some simplification in existing multiple currency systems has taken place in Brazil, Colombia, and Indonesia. Brazil abolished the special rate applicable to petroleum imports; Colombia, by abolishing the capital exchange market, unified the two principal exchange markets, though some important categories of transactions still take place at different effective rates. Indonesia reduced the number of effective rates by eliminating the special BE rate.1 In a few other countries, the trend was different. Neither Costa Rica nor Peru was able to eliminate the dual exchange market system; in addition, Peru introduced an exchange tax on most import payments which gave rise to a further multiple currency practice. Ceylon’s exchange certificate scheme resulted in a dual rate structure; Afghanistan introduced additional exchange subsidies on exports, which had the effect of increasing the number of effective export rates; and Turkey introduced a multiple rate for foreign exchange sold by nonresidents. During the course of the year Pakistan varied the operation of the system in such a way as to increase reliance on bonus import rates, also for the public sector. In Viet-Nam the rate structure proliferated as a result of equalization taxes (taxes de péréquation) on imports and exchange subsidies on minor exports, and the spread between the official rate and other effective rates widened. In a number of countries, mandatory margin deposits on import letters of credit were raised.
It is apparent that the use of various restraints on travel has increased. Chile, Colombia, the Dominican Republic, Ecuador, El Salvador, Ghana, Guatemala, Iran, Iraq, Israel, Turkey, the United Arab Republic, and Viet-Nam maintained restrictions on travel abroad by subjecting tourism, and sometimes other travel also, to taxes on travel, or by requiring prior deposits on the provision of exchange for travel purposes. In a few cases, these measures gave rise to effective selling rates that constituted multiple currency practices.
The spreads between official market rates and capital market rates widened in the United Kingdom and the Belgian-Luxembourg Economic Union; those in the United Kingdom are applicable to countries outside the Sterling Area only.
Import Surcharges, Advance Deposits, and Export Subsidies
The number of countries employing import surcharges and advance import deposits has continued to increase. During the period under review, as mentioned above, surcharges of 30 per cent of the applicable duties were agreed in principle among the countries of the Central American Common Market on all imports originating outside the Market. Import surcharges on a large number of goods were raised in Indonesia, in some cases to 300 per cent and 400 per cent, while a surcharge of 10 per cent of the applicable customs duties was introduced by Peru. In addition, Turkey again raised the rate of the stamp duty on imports, and the Sudan and China raised the rates of existing surcharges. Malawi introduced an 8⅓ per cent uniform surcharge; Yugoslavia imposed additional taxes on most imports, and Guyana introduced customs surcharges.
A number of countries introduced import deposits or raised the rates applied. In November, the United Kingdom imposed deposits of 50 per cent of the value of imports payable at the time of entry into customs. The deposits, repayable after 180 days, applied to most imports other than basic foods, feeding stuffs, fuels, certain categories of goods imported mainly from developing countries, and goods for re-export or those used in the production or manufacture of exports. The scheme, which did not involve exchange restrictions, was to be maintained for a maximum of 12 months. Ethiopia introduced advance deposits of up to 150 per cent but subsequently lowered the rates. Advance deposit rates were raised in Korea, the Philippines, the Sudan, and Turkey, while the retention period for deposits was prolonged in Greece, and in Colombia the advance deposits payable at the time of purchase of exchange for travel were increased. In Pakistan and El Salvador, however, the deposit requirements were abrogated. The scope of the deposit schemes was narrowed or the applicable rates were decreased in Argentina, Chile, China, Iran, and Viet-Nam. Colombia maintained the system of import deposits, but shifted many commodities to a lower rate of deposit and reduced all deposits on imports financed by the U.S. AID program to 10 per cent of the applicable rate. Indonesia introduced a system of prepayment of import duties on certain categories of imports and Ecuador raised the rate of advance payment on such duties. Where advance deposit requirements involve exchange restrictions on current payments, prior Fund approval is required for their introduction by countries not entitled to maintain or adapt existing restrictions by virtue of Article XIV; where a multiple currency practice is involved, prior approval is required both for its introduction and modification, irrespective of whether the country is under Article VIII or Article XIV. This applies also to certain practices not usually referred to as advance deposits, such as mandatory margin requirements on import letters of credit.
Numerous changes were made in the arrangements to encourage exports, mainly involving tax rebates, cash subsidies, interest rate subsidies for export credits, and official export credit insurance. In India the budget for 1968/69 included an export market development allowance, increased cash assistance for certain exports, tax rebates, etc. The cash subsidies for certain exports were increased in Viet-Nam and Afghanistan. Tax rebates for certain exports of Argentina and Turkey were increased. In the United Kingdom the export rebate arrangements were discontinued.
Official export insurance was expanded in many countries, including Greece and Korea, whether by the introduction of new facilities or by the raising of ceilings on existing ones. France increased an interest preference for the rediscounting of export bills; on January 1, 1969 the interest preference was reduced. The Belgian-Luxembourg Economic Union abolished, for EEC countries, an existing differential of this type.
Bilateral Payments Arrangements
The period covered by this report has shown a further decrease in bilateralism in payments. At least 7 agreements between member countries were terminated and at the beginning of 1969 substantially less than 50 per cent of member countries still maintained bilateral payments agreements. Of the 63 agreements in operation between members, none involved any of the major trading nations. At the end of the period there were 228 agreements with nonmembers. Seven member countries maintained agreements only with other members, 29 member countries both with members and non-members, and 14 members only with nonmembers. Of the total of 228 agreements between members and nonmembers, 189 agreements were with Eastern European countries, 17 with mainland China, 12 with other state trading countries in Asia, 7 with Cuba, and one each with Cambodia, Switzerland, and Yemen. In addition, there were, at the beginning of 1969, 12 inoperative agreements between members and 6 between members and nonmembers. It is estimated that exports by member countries financed under bilateral payments arrangements have declined to well under 2 per cent of total world exports.
Measures Affecting Capital
In connection with the reintroduction of exchange controls in France all capital transactions are controlled, except that some capital payments by residents to nonresidents are authorized on a general basis. The new exchange control system is not applicable to French Overseas Departments and Territories (except the French Territory of the Afars and the Issas), to Monaco, and, except in respect of gold, to the “Operations Account” countries. Outflows of resident-owned capital were made subject to restrictions but not outflows of nonresident-owned capital. Although foreign securities are quoted in France at a premium over their price abroad, the system of “security dollars” traded between residents at a premium (devisestitre) has not been re-established. Various measures have been taken to control leads and lags. Commercial banks have been instructed to maintain their foreign currency positions if negative and to level them if positive. France also imposed restrictions on the outflow of domestic banknotes and prohibited their being credited to nonresident accounts. French banknotes may be freely imported by travelers; their use in France by nonresidents is limited to tourist expenditures. In March 1969 the controls over direct investment were reinforced. The “Operations Account” countries generally took measures corresponding to those taken by France.
The capital measures in the U.S. balance of payments program, and the exemption granted to Canada were noted in the Nineteenth Annual Report on Exchange Restrictions. During the past year the regulations concerning direct investment were made somewhat more flexible and the maximum exempted amounts were raised. Late in 1968, the controls on direct investment were slightly modified for 1969, and there was a further slight relaxation in April 1969, when the Interest Equalization Tax also was lowered. During the period, developments in the U.S. balance of payments had major repercussions on the Euro-dollar and the Euro-bond markets and interest levels in Europe rose.
Canada undertook various steps to ensure that its exemption from the U.S. program did not result in Canada being used as a channel by which the purposes of the U.S. program would be frustrated. Canadian chartered banks were requested not to increase their foreign currency claims on residents of countries other than Canada and the United States unless such claims were accompanied by equal increases in foreign currency liabilities to residents of such countries. Guidelines to the same effect were issued to nonbank financial institutions, and Canadian nonfinancial companies were asked to avoid undertaking new investment programs in Western Europe, or increasing their assets there by transferring capital funds, unless an investment was likely to bring unusually large and early benefits to Canada and could not be financed abroad.
The United Kingdom’s voluntary restraint program for direct investments in specified Sterling Area countries was maintained in 1968. The restrictions on direct investment outside the Sterling Area were relaxed slightly; small amounts of official exchange were made available, mainly for projects promoting exports of U.K. commodities and services. The gradual rise of the investment currency premium to about 50 per cent, however, made borrowing of foreign currency virtually indispensable for the financing of direct investment outside the Sterling Area. Early in 1969, the nationalized industries were encouraged to cover part of their domestic capital requirements by borrowing outside the Sterling Area.
Many countries again took measures to supervise or restrict the activities of foreign mutual funds, etc. Belgium made public bids by foreign companies or individuals, for the purchase or exchange of shares issued by Belgian companies, subject to prior approval of the Ministry of Finance. The Netherlands took a similar step in respect of shares issued by domestic banks. Certain other countries also endeavored to stifle undesirable takeover bids. In 1969 Japan extended the liberalization of inward direct investment by adding new industries to the list of those for which such investment is automatically approved. As regards short-term and medium-term finance there was some relaxation of controls, e.g., in the Netherlands, which ceased to require exchange control approval for all import and export credit. Previously the exemption was applied to credit where the term did not exceed five years. In the developing countries there appears to be a trend toward increasing controls over such flows, mainly to prevent or reduce excessive reliance on suppliers’ credits.
Some important changes took place with respect to banking funds. The measures taken by France have already been mentioned. The United Kingdom permitted the issue and negotiation of sterling certificates of deposit. Spain permitted the opening of new nonresident accounts in convertible foreign currencies, which authorized banks could use to participate in foreign money markets. The German authorities in November 1968, in order to ward, off speculative capital inflows, introduced an approval requirement for the acceptance by German financial institutions of virtually all deposits from nonresidents and for the raising of loans or credits abroad. The acceptance of savings deposits from nonresident individuals was generally permitted within specified limits. Approval for other deposits was granted only exceptionally. There were parallel regulations concerning borrowings, in the form of loans and credits, by financial institutions from nonresidents. The virtual prohibition of interest payments on nonresident accounts was expanded by a prior approval requirement for the payment of interest, with certain exceptions, on newly opened savings accounts of nonresident individuals. In addition, the Bundesbank fixed a 100 per cent minimum reserve requirement on additions to liabilities to nonresidents; the requirement was subsequently relaxed. With the exception of the reserve requirement, these measures were rescinded late in February 1969.
After the termination of the gold pool arrangements, many central banks announced that they would not buy or sell official gold on the free market. Except in the Netherlands, however, where the free gold market that had been closed in 1940 was reopened, relatively few changes appear to have taken place in the extent to which member countries allow residents other than industrial users to hold or acquire gold. In the United States and the United Kingdom, for example, the holding of gold in any form other than jewelry or for industrial and numismatic purposes continues to be virtually prohibited to residents. Indonesia restricted imports, as did France and the “Operations Account” countries. The right of free access of French residents to the Paris free market was retained, however.
Relating to program-aid funds.