Abstract

IMPORTANT developments in the balances of payments of several major industrial countries during the past year make it desirable to examine these in more detail. In this chapter an analysis is given of the balances of payments of the United States, Canada, the United Kingdom, the Federal Republic of Germany, France, Italy, and Japan. These are followed by a discussion of the balances of payments of some nonindustrial countries—Australia, Brazil, Ghana, India, and Mexico—to supplement the more general review in Chapter 7.

IMPORTANT developments in the balances of payments of several major industrial countries during the past year make it desirable to examine these in more detail. In this chapter an analysis is given of the balances of payments of the United States, Canada, the United Kingdom, the Federal Republic of Germany, France, Italy, and Japan. These are followed by a discussion of the balances of payments of some nonindustrial countries—Australia, Brazil, Ghana, India, and Mexico—to supplement the more general review in Chapter 7.

United States

When considered as a whole, 1964 was in many respects a good year for the balance of payments of the United States. The goods and services surplus was substantially larger than in 1963 and, in spite of an almost equivalent rise in the outflow of U.S. capital, an inflow of foreign short-term capital and other factors helped to keep sales of gold by the United States at a low level. The over-all deficit as measured in Table 25 (p. 67) was about $1 billion lower than in 1963, although on the “regular transactions basis” used by the U.S. Government the improvement was less than $200 million. However, whereas 1963 had been marked by improvement during the year, the U.S. balance of payments deteriorated considerably in the course of 1964 (Table 30). In the last quarter the deficit was large, and in the first quarter of 1965 it continued high, where-as a year earlier the accounts had been approximately in equilibrium. In the first quarter of 1965 the position appeared greatly improved, but so many special factors were involved that conclusions concerning trend were difficult to draw.

The most promising aspect of the U.S. balance of payments in 1964 was the improvement in the goods and services account (including remittances and pensions), the surplus on which rose by $2.6 billion compared with 1963, to a record figure of $7.7 billion. The value of exports rose by 2 per cent more than the growth in U.S. export markets, and continued to exhibit strength through the year. Imports rose considerably less, and altogether the balance of trade accounted for about three fourths of the rise in the goods and services surplus. The remainder of the improvement was derived mainly from investment income, which has been rising considerably in recent years as a result of the large outflow of capital, and from further savings in net military expenditures. Most of the improvement in the goods and services balance from 1963 to 1964 had, however, occurred by the first quarter of 1964; subsequently there was little further advance. While the strong position on this account in 1964 reflected the rather prosperous state of the world economy, the sharp rise in the trade surplus in recent years was apparently in part attributable to the greater stability of prices and costs in the United States than in most of the other industrial countries. An analysis of U.S. trade in particular markets suggests that the competitive position of the United States vis-à-vis these other countries continued to improve from 1963 to 1964 (see Table 21, p. 58).

The rise in the goods and services surplus was offset for the most part by an increase in the outflow of U.S. private capital, which at a little over $6 billion also reached a record level, more than 50 per cent above the 1963 figure. About two thirds of the rise took the form of short-term capital, but the outflow of long-term bank loans and direct investment also rose substantially. New foreign issues fell slightly from 1963 to 1964 under the influence of the Interest Equalization Tax. The effect of this Tax had been felt immediately after it was proposed in July 1963, although not all the subsequent decline in new issues may be attributable to it. Its enactment in September 1964 removed uncertainty as to the transactions that would be covered, and was followed by a temporary upsurge in new issues,

Table 30.

UNITED STATES: BALANCE OF PAYMENTS SUMMARY, 1963–FIRST QUATER 19651

(In Millions of U.S. dollars)

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Source: U.S. Department of Commerce, Survey of Current Business, June 1965.

No sign indicates credit; minus sign indicates debit.

Preliminary.

Changes in foreign official holdings of U.S. Government nonmarketable, medium-term, inconvertible securities (credit of $63 million for the first quarter of 1963 and debit of $10 million for the second quarter, $95 million for the third quarter and $1 million for the fourth quarter of 1963, $55 million for the first quarter, $8 million for the second quarter, $2 million for the third quarter, and credit of $29 million for the fourth quarter of 1964) are included with liquid liabilities.

Excluding the U.S. Government securities referred to in footnote 3.

mainly of Canadian securities, for which an expected exemption had been granted. Transactions in outstanding foreign issues, for which no exemptions from the tax had been proposed, changed from a small outflow in 1963 to a somewhat larger inflow in 1964.

The rise in the outflow of U.S. capital is difficult to explain fully, although some of the underlying factors can readily be seen. A major influence appears to have been the divergence in economic policies between the United States and a number of other industrial countries. In the

United States, economic policies continued to be directed broadly toward supporting expansion, with some shift in emphasis toward reliance on fiscal rather than monetary instruments. In a number of the other industrial countries, fiscal and, even more, monetary policies were made more restrictive—either on balance of payments considerations, or to contain upward pressures on wages and prices, or for both reasons. This divergence influenced both interest rates and credit availabilities in various markets and may well explain much of the increase in U.S. external bank loans on both long term and short term. It may even have stimulated direct investment, in that some companies in countries with restrictive monetary policies appear to have been induced by these policies to invite participation by U.S. or other foreign organizations. Another factor stimulating a rise in the outflow of direct investment capital from the United States was the evident progress made during the year toward economic integration in the European Economic Community. The rise in the outflow of such capital occurred in spite of indications that U.S. profit rates were rising in relation to those in most other industrial countries, particularly those in the EEC.

From 1963 to 1964 there was a reduction in the inflow of foreign private long-term capital into the United States but a sharp rise in that of short-term capital—in particular, liquid funds of foreign commercial banks. As a result, the deficit settled through movements in U.S. reserves and in other countries’ reserves in the United States fell considerably. This helped to keep the net outflow of gold at a low level. Other factors having the same tendency were net sales of gold by Italy, which reduced its gold holdings in spite of a considerable increase in its total reserves, and by the United Kingdom.

It is difficult to express the over-all balance of payments position of the United States in a single figure, and for 1964 estimates of the deficit vary widely, depending on the conceptual basis adopted; tjhis differs mainly in the role assigned to movements of foreign liquid funds other than exchange reserves. In official U.S. statistics such movements are counted as financing a deficit (whereas changes in U.S. liquid funds abroad other than reserves are included in the deficit itself, “above the line”). Other methods of measurement, including that customarily used in the Fund’s analysis of world payments problems, treat the two symmetrically as part of the over-all deficit “above the line.” As the net inflow of foreign nonofficial liquid funds was very large in 1964, the official estimates of the U.S. deficit during that year show much larger amounts than those in Table 25, and indeed show little change from 1963 to 1964. Both series, however, show a considerable worsening of the balance of payments after the first quarter of 1964.

Several factors toward the end of 1964 and early in 1965 added to the pressures on the U.S. dollar. Among these were a dock strike, postponed from October, which finally broke out in January and brought about a considerable deterioration in the trade balance until it ended on February 20; the announcement by the French Government of plans for reducing its dollar holdings by purchasing gold; the expectation that the U.S. Government would soon take additional action to stem the outflow of capital; and the psychological effects of the announcement of very high figures for the U.S. deficit at a time when the international monetary system was under pressure stemming from the most serious sterling crisis since 1947.

On February 10, the President of the United States announced a new program for dealing with the balance of payments problem, mainly addressed to the outflow of capital. This program included invoking statutory authority to apply the Interest Equalization Tax to bank loans with maturities of one year or more, a two-year extension of the tax to December 1967, and a broadening of it to cover nonbank credit granted for periods of one to three years. A voluntary program was also announced under which financial institutions were requested to limit the increase in their foreign credits so that by March 1966, at the latest, they would not be more than 5 per cent in excess of their December 1964 levels. The ceiling of 5 per cent for expansion of lendings by financial institutions other than banks was to apply only to loans and investments with maturities of up to ten years. Within these overall limits, absolute priority was to be given to export financing; special care was to be exercised to avoid possible adverse effects on Canada, Japan, and the United Kingdom, and credits to less developed countries were to be given high priority. It has been estimated that this program will lead to a reduction of capital exports reported by banks from $2.5 billion in 1964 to less than $1 billion in 1965. Industrial concerns have been asked to take steps to improve their individual balances of payments—by expanding exports and other receipts from abroad, by transferring income receipts from developed countries other than Canada, and by limiting outflows of capital to developed countries other than Canada; they are to report on their results to the Secretary of Commerce. It is noteworthy that these programs involve no reductions in current payments for goods and services.

Canada

The continued upswing in the Canadian economy during 1964 was accompanied by a further improvement in the balance of payments (Table 31). After a comparatively unfavorable first quarter, the balance of payments on current and capital accounts combined strengthened considerably and progressively during the remainder of the year. Canada added $337 million to its foreign exchange reserves, mostly in the form of an improvement by $257 million in its position in the Fund.

The current account deficit for the full year was the lowest in a decade, owing in part to extraordinary levels of wheat exports. Total exports rose to the impressive extent of 16 per cent, and although large shipments of wheat under bulk sales contracts with the U.S.S.R. and other foreign governments were predominant in the growth of exports, a wide range of manufactured goods, as well as the traditional Canadian metals, minerals, and forest products, were also exported in greatly expanded quantities. At the same time imports rose by 15 per cent; a particularly large increase in imports of machinery and equipment was associated with a rapid rise in business investment in plant and equipment. In the fourth quarter of 1964 and the first quarter of 1965 the current account deficit recurred as wheat shipments declined to more normal levels.

The inflow of long-term capital was abnormally low during the first three quarters of the year, but increased very sharply in the fourth quarter after the enactment of the U.S. Interest Equalization Tax and the granting of the exemption for new issues of Canadian securities. Short-term funds, on the other hand, moved outward after midyear, following heavy inflows in the first six months. Over all, the capital inflow for the year was about $100 million larger than in 1963. An unusual feature of capital flows during the year was the receipt and disposition of $254 million raised for the Columbia River Project; all but $50 million of this sum was invested in special medium-term nonmarketable U.S. Government securities maturing serially over a seven-year period, which will be added to the official Canadian exchange reserves as the receipts mature.

Table 31.

Canada: Balance of Payments Summay, First Quater 1965 1

(In millions of U.S. dollars)

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Source: Based on data published by the Dominion Bureau of Statistics.

No sign indicates credit; minus sign indicates debit.

Preliminary.

United Kingdom

In the course of 1963 the balance of payments of the United Kingdom on current account had been deteriorating, under the impact of a considerable rise in imports associated with the upswing in economic activity. In the first quarter of 1964, the seasonally adjusted current account balance swung into deficit after having been close to equilibrium during the second half of 1963. It remained in deficit throughout 1964 (Table 32). At the same time the outflow of long-term capital was much higher than usual, and a very substantial deficit on current and long-term capital account was incurred during the year, compared with a near balance during the three preceding years.

Table 32.

United Kingdom: Balance of Payments Summay, 1963—First Quater 1965 1

(In millions of U.S. dollars)

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Source: Central Statistical Office, Economic Trends.

No sign indicates credit; minus sign indicates debit.

Preliminary.

Early in 1964 the U.K. authorities attempted to moderate the rate of increase in domestic expenditure, which had been rising faster than productive capacity in 1963. Nevertheless, total expenditure continued to outstrip production and the volume of imports was appreciably higher than in 1963; import prices were, on average, also much higher. Almost all available labor was employed, and there is evidence of some spillover of demand into imports during the year. The export performance was also disappointing, as has been the long-term trend in U.K. exports for many years. The failure of U.K. exports to rise at an adequate rate has been a major obstacle to reconciling the policy objectives of achieving a satisfactory rate of economic growth and of maintaining balance of payments equilibrium.

In the first half of 1964 the basic deficit was not reflected in a decrease of gold and convertible currency holdings because there was a further large growth in the balances of the overseas sterling area (OSA) and an inflow of short-term capital. In the third quarter, the inflow of short-term capital continued, but OSA balances rose only slightly and the United Kingdom drew on some assistance from foreign central banks as well as on its own reserves. In the fourth quarter, there was a considerable withdrawal of short-term funds; leads and lags were also unfavorable to the United Kingdom. For the year as a whole, the United Kingdom relied on external assistance amounting to $1,605 million, of which the drawing on the Fund, under a stand-by arrangement concluded in August 1964, represented $1,000 million. In addition, relief was provided through a deferment of the debt service due on U.S. and Canadian postwar loans. Nevertheless, the United Kingdom’s gold and foreign exchange reserves fell by $341 million, to $2,316 million on December 31. The total financing through the use of reserves and external assistance was a little less than the deficit on current and long-term capital account; short-term capital movements and changes in sterling reserves did not on the whole add to the balance of payments problems during 1964.

The new Government which took office in the middle of October quickly introduced a series of measures to help to correct the external imbalance. As a temporary measure, a charge of 15 per cent was levied on about one third of total imports; an export rebate was introduced; and duties on oil and petroleum were raised. The bank rate was raised from 5 per cent to 7 per cent late in November, and credit facilities totaling $3 billion were negotiated with foreign central banks.

In the early months of 1965, the current account of the balance of payments appeared, on a seasonally adjusted basis, to move into approximate equilibrium, although part of this improvement was probably caused by some imports being delayed by the U.S. dock strike; exports in the first quarter were about 5 per cent higher in value than in the same period of 1964, while imports fell. There were further outflows of funds from London at times in January and again before the April budget; during this period heavy recourse was again had to central bank assistance. A further drawing on the Fund in May for $1,400 million was, for the most part, used to repay central banks.

The budget statement on April 6 stressed that the first priority of economic policy was the correction of the balance of payments position. The budget provisions (discussed in Chapter 5) were designed to control the growth of domestic demand, and, by the use of exchange control and a reorganization of the corporate tax structure, to reduce the outflow of long-term capital by about $300 million a year, in addition to the fall from the exceptionally high rate in 1964 that could in any case be expected. The Chancellor of the Exchequer said that his aim was a basic equilibrium (i.e., on the combined current and long-term capital accounts plus allowance for the relevant portion of the balancing item) by the end of 1966. He intended to get most of the way toward closing the gap in 1965 and to complete the process in the course of 1966. He recognized the need to reduce further the import charge and to abolish it as the external position improved. The charge was cut to 10 per cent on April 27.

The prime objective of monetary policy at the moment is also to help to correct the external imbalance. Interest rates have remained high, and bank credit, following the rapid increase in 1964, tended to decline in the early months of

1965. In his budget speech, the Chancellor said that further measures to reinforce control over bank lending would be taken if it proved necessary; the subsequent call for special deposits and later changes in policy are noted in Chapter 5. The introduction of the budget and the related policy measures had a favorable effect on confidence in sterling.

The Government has also been taking a variety of long-term measures to strengthen competitiveness and thus to help the balance of payments. An incomes policy has been introduced; the main principles and the machinery for the implementation of this policy have been agreed at all stages with the representatives of the Trades Unions and the employers. Earlier attempts to evolve an incomes policy lacked such a broad agreement. A drive for the modernization and technical improvement of industry has also been initiated. This involves the establishment of a number of councils for particular industries to suggest specific methods of improving efficiency.

Federal Republic of Germany

One of the most helpful developments in international transactions during the past year was the return of the balance of payments of Germany to approximate equilibrium, from a strong surplus position at the beginning of the year (Table 33). During the greater part of 1963 the German balance of payments had been in surplus. Initially the source of the surplus was an inflow of capital, largely representing purchases of long-term government securities yielding high rates of interest. Toward the end of the year, however, this was supported by a sharp rise in the surplus on goods and services account, attributable for the most part to the rising inflationary pressures in the other EEC countries, mainly Italy and France. The near elimination of the over-all surplus in the course of 1964 was aided by action by the German authorities to discourage an inflow of capital. It also resulted in part from a reduction in the goods and services surplus, which may be ascribed partly to measures taken by the other EEC countries to restrain inflationary pressures and partly to the increase in import demand associated with a remarkable rise in economic activity in Germany. The balance of payments remained in approximate equilibrium in the first quarter of 1965.

The measures to discourage an inflow of capital included the withholding tax on foreigners’ income from German securities discussed in Chapter 5. An outflow was also indirectly encouraged by the U.S. Interest Equalization Tax, which made international borrowers interested in finding new markets for their issues. Altogether, movements of long-term capital (including government as well as private capital) changed from a net inflow of about $530 million in 1963 to a net outflow of about $230 million in 1964. The net effect of this change on the balance of payments, however, was to a considerable extent offset by opposite changes in the flows of private short-term capital (other than changes in the net liquid position of the commercial banks, but including unrecorded transactions), even though the efforts of the German authorities to discourage an inflow of foreign short-term funds continued.

France

Like the German balance of payments, that of France moved nearer to equilibrium between 1963 and 1964. However, in France the progress toward equilibrium was rather modest and it was interrupted early in 1964. After the first quarter of the year the tendency appeared to be again toward a larger surplus (Table 34).

The official French balance of payments statistics cover transactions of metropolitan France and the rest of the French franc area with the nonfranc area. Between 1963 and 1964 the current account surplus of metropolitan France with the non-franc area fell from a little over $500 million to a little less than $100 million. There was a net inflow of private long-term capital from the non-franc area into metropolitan France in both years of well over $500 million. The surplus of metropolitan France on account of current and private long-term capital transactions with the non-franc area was thus reduced by about $400 million. At the same time, the surplus of the overseas franc area with the non-franc area rose by $130 million. In 1963, the French Government made advance repayments on foreign debt amounting to $280 million. No similar payments were made in 1964, and the increase in French net reserves over the year fell only slightly, from $856 million in 1963 to $815 million in 1964.

Table 33.

Fedral Republic of Germany: Balance, of Payments Summary,1963—First Quater 1965 1

(In millions of U.S. dollars)

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Source: Deutsche Bundesbank, Monthly Report, May 1965.

No sign indicates credit; minus sign indicates debit.

Preliminary.

Covers IBRD bonds and notes and repayments received on consolidated credits and other Bundesbank assets of limited usability.

This balance is intended to facilitate analysis of the more basic factors in the balance of payments. It excludes the following extraordinary transactions: (a) advance debt redemption (none in period covered), (b) repayments on post-EPU claims, and (c) other Bundesbank assets, i. e., IBRD bonds and notes, repayments received on consolidated credits, and other Bundesbank assets of limited usability. However, it includes private transactions in securities, which are likely to fluctuate widely in the short run. such transactions of certain conceptual differences; for instance, transactions in German secutities are classfies by the sector of domestic creditor or debtor in Table 23, whereas, in this table, they are classified according to the sector of domestic transactor.

Covers freely usable foreign exchange and earmarked assets.

Toward the end of 1963 the current surplus of metropolitan France with the non-franc area was being sharply reduced under the influence of strong pressures of domestic demand, and in the first quarter of 1964 there was a small current deficit with the non-franc area, while the over-all balance of payments of the franc area as a whole was approaching equilibrium. However, a current surplus vis-à-vis the non-franc area was re-established in the second quarter and maintained during the remainder of the year. The restoration of the surplus position on current account may be associated with the measures taken by the French Government to restrain inflationary pressures, which brought the rise in economic activity to a virtual halt in the course of 1964.

Table 34.

France: Balance of Payments Summary,1963 And 1964 1

(In millions of U.S. dollars)

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Source: Data provided by the French authorities.

Groups A through F cover settlements of metropolitan France with the non-franc area. Groups I and J cover changes in assets and liabilities of institutions in metropolitan France arising from transactions of both parts of the franc area with the rest of the world. No sign indicates credit; minus sign indicates debit.

Preliminary.

Quarterly figures do not add to annual data since certain adjustments made for the year cannot be distributed between the quarters.

Commercial bank long-term capital is included in private long-term capital (Group B).

The increase in the surplus of the overseas franc area with the non-franc area was due in part to the generally higher level of prices for primary products in 1964 than in 1963, and to that extent may be a temporary phenomenon. However, the surplus which the overseas franc area can realize in its transactions with the non-franc area depends to a considerable extent on the pattern of its transactions with metropolitan France, on which complete statistical information is not available. Usually the overseas franc area has had a deficit with France on account of trade and commercial services, which has been more than offset by expenditures by the French Government, including military expenditures and economic aid. Private French investment in the overseas franc area has in recent years presumably been rather smaller than the rather sizable inflow of capital into France from that area, which has been largely associated with the repatriation of French settlers.

It is the aim of the French authorities that the balance of payments of metropolitan France should show a net outflow of private capital and economic aid extended, offset by a surplus on goods and services account. Although the available statistics do not permit an accurate appraisal of France’s balance of payments with the world, it is apparent that it attained a substantial over-all surplus in 1964, as in a number of other recent years. The French Government has expressed a desire to see a reduction in the inflow of foreign capital from the non-franc area; a reduction in the over-all surplus could also be achieved through action to encourage an outflow of capital to that area. Some reduction in the surplus, through adjustment of the current account, might result from steps taken by the French authorities to stimulate domestic investment. However, in the early months of 1965 the large French overall surplus still persisted, while the French authorities accelerated their gold purchases from the United States. It is understood that they intend to reduce their holdings of foreign exchange, which totaled some $1.4 billion at the end of 1964, and to convert current accruals of foreign exchange into gold.

Table 35.

Italy: Balance of payments Summary, 1963 And 1964 1

(In millions of U.S. dollars)

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Source: Ufficio Italiano dei Cambi (UIC), Movimento Valutario, and Bank of Italy.

Current items (Group A) are on a transactions basis; all other items are on a payments (exchange record) basis. No sign indicates credit; minus sign indicates debit.

Preliminary.

Part of “Foreign investments in Italy” is believed to be financed from the proceeds of Italian banknotes remitted abroad and subsequently repatriated; to that extent foreign investment in Italy is overstated.

Italy

The balance of payments of Italy made a dramatic recovery during 1964 (Table 35). At the beginning of the year Italy was the major deficit country in the world, but by the third quarter it had become the major surplus country. During the crisis in the first quarter of the year, the Italian authorities were supported by foreign credits and similar facilities totaling about $1 billion, including $450 million of medium-term credits made available by the United States. When a surplus had been recovered they acted to prevent this from having undesirable repercussions on international liquidity: they did not, on balance, convert accruals of foreign currencies into gold but ordered the commercial banks to reduce their net foreign liabilities. Toward the end of the year, the Italian Government adopted economic policies that seemed likely to reduce, if not eliminate, the surplus.

The developments that led to the large balance of payments deficit in 1963 were described in last year’s Annual Report. Essentially, rapid economic growth over a number of years, supported by steadily rising exports and large-scale emigration of labor to neighboring countries, had brought about strong pressures on wages and prices as the economy was reaching full employment conditions. These pressures were accompanied by a substantial excess demand in the economy in 1963 and 1964, and by a considerable shortfall of supply in domestic agriculture. Together, they both hampered the growth of exports and stimulated the sharp rise in imports. At the same time, the sharply rising incomes accentuated various structural problems of economic adjustment. To deal both with the domestic inflationary pressures and with the balance of payments deficit, the Italian authorities applied monetary and fiscal measures of increasing restraint, beginning in May 1963. In the course of 1964 these measures proved effective in correcting the balance of payments, but appeared to be somewhat less effective in reducing pressures on prices and wages, although some progress in that respect was recorded. They also resulted in a decline in industrial production. The adjustment in the balance of payments was undoubtedly facilitated by the generally buoyant international demand.

The measures applied acted both on the current and the capital account. Exports rose at a substantial rate throughout 1964, while imports tended to fall until the last quarter. A better harvest than in the two preceding years also contributed to the reduction in the trade deficit. Capital transactions (other than changes in commercial bank assets and liabilities) turned from a large outflow into a large inflow, under the influence of both the restrictive monetary policies and the restoration of confidence, which had been much impaired during the period of the large deficits.

Even though the surplus in the second half of 1964 was exceptionally large, there was no clear evidence that the Italian balance of payments was returning to a period of persistent surplus accompanied by rapid economic growth.

Japan

In the postwar period Japan, while maintaining a very high rate of long-term growth, has experienced a series of domestic booms and recessions, which have had pronounced secondary effects on the balance of payments. Severe difficulties in 1961 were met by corrective measures which slowed for a time the steep rise in domestic production. However, recovery was rapid, and by the middle of 1963 a balance of payments problem again began to emerge. On this occasion measures were taken to restrain the boom rather earlier than had previously been done, and tight money measures were introduced at the end of 1963 which markedly slowed the rate of increase in imports. A rapid rise in exports, supported both by strong international demand and by the high degree of competitiveness of Japanese industry, helped to smooth the adjustment; during 1964 the balance of payments recovered while economic growth was moderated, but was not interrupted, as it had been in 1958 and 1962. At the end of the year the Japanese authorities began to relax their policies of economic restraint.

Japan’s deficit on account of goods and services and private transfers was much reduced from 1963 to 1964 (Table 36). The improvement came in the second half of the year; after allowing for seasonal factors there was then a small surplus on current transactions, compared with a seasonally adjusted deficit of about $450 million in the first half of the year. Exports expanded steadily throughout the year, totaling about one fourth more than in 1963. Imports, which in the first half of the year had been running 25 per cent above the figure for the same period of 1963, were only 14 per cent higher for the year as a whole. This resulted in a swing in the trade balance from a deficit in 1963 to a substantial surplus in 1964. The deficit on goods and services account was nearly halved.

Table 36.

Japan: Balance, of Payments Summary,1963—First Quater 1965 1

(In millions of U.S. dollars)

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No sign indicates credit; minus sign indicates debit.

Preliminary.

Including sales to U.S. and UN forces under the special procurement program.

Yen subscription, other than the amount immediately converted into dollars, to the International Development Association ($6.1 million for 1963) and the corresponding increase in liabilities are excluded from this table.

The inflow of private long-term capital into Japan in 1964 was markedly reduced owing to uncertainties concerning Japan’s prospects of obtaining exemption from the U.S. Interest Equalization Tax. During 1964 Japan did not place any new issues in the U.S. market, but borrowed in Europe; the inflow of private capital fell by about $370 million, more than offsetting the improvement in the balance on current account. As a result the deficit on current and long-term capital account increased to $376 million. However, this deficit was for the most part matched by an inflow of short-term capital, reserves showing little change. Net borrowing by the commercial banks played only a minor role; during the second half of 1964, the commercial banks built up their foreign assets by more than the rise in their foreign liabilities, improving their net position by close to $300 million. For the year as a whole their net positions deteriorated only by $71 million, compared with more than $400 million in 1963. This development presumably reflected both the improved trade balance (some assets representing export credits, and a large part of liabilities representing import usance bills) and measures of monetary policy.

The improvement in the balance of payments continued into the early months of 1965, when the current account showed the lowest firstquarter deficit for several years. Although seasonal factors are adverse in this quarter, there was a considerable increase in exports over the same period in 1964. The inflow of private capital was renewed, although at a much lower level than in the first quarter of the previous year, and the reserve position improved by almost $60 million.

Table 37.

Australia: Balance of Payments Summay, 1961–641

(In millions of U.S. dollars)

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Source: Based on data from the Commonwealth Statistician.

No sign indicates credit; minus sign indicates debit.

Australia

The Australian balance of payments became less favorable in the course of 1964, though it was in surplus for the year as a whole (Table 37). A substantial increase in volume contributed to a 9 per cent increase in the value of exports over 1963, but imports rose throughout the year and were more than 20 per cent higher in 1964 than in the previous year. As a result, the trade surplus was reduced by some $250 million. The current account deficit, at about $420 million, was the highest since 1960. There was, however, another heavy inflow of capital, so that reserves rose for the fourth successive year, to $1,847 million. Export prices, which had risen sharply in 1963, reached a peak in the first quarter of 1964 but declined thereafter, largely because of a steady decline in wool and sugar prices after March and a fall in wheat prices in the later part of the year. However, prices of meat and metals were higher in 1964 than in 1963. Wheat exports to countries in the Sino-Soviet area again played an important role in expanding exports.

The continued rise in export earnings has, over the last two or three years, helped to support a substantial rate of economic growth and a high level of employment; real gross national product rose by about 6 per cent in 1964 and unemployment fell to about 1 per cent of the labor force. During the year demand pressures emerged in some areas of the economy, and since March 1964 domestic prices have been rising at a rate of about 4 per cent a year. The budget for the fiscal year ended June 1965 was designed to prevent an excessive rise in domestic demand and included a substantial increase in tax rates. In order to contain the increase in the money supply and discourage any marked change in liquidity preference, action has been taken to raise interest rates, and reserve requirements for the commercial banks at the Reserve Bank were increased on several occasions, although some reductions were subsequently made to allow for seasonal movements in the banks’ liquidity. In the first quarter of 1965 the balance of payments showed a considerable deficit. Exports were slightly below the level of the first quarter of 1964, while imports increased still further. Reserves dropped sharply and, at the end of the quarter, were $1,669 million.

Brazil

In most of the years since World War II, but particularly in recent years, persistent inflation in Brazil was accompanied by great pressure on the balance of payments. During 1964 the rate of inflation moderated somewhat, while remaining high for the year as a whole, and in that year, for the first time in more than a decade, the current account of the balance of payments was brought into surplus (Table 38). Within the current account the trade surplus trebled, owing mainly to a reduction in imports by almost 17 per cent, resulting in part from a further depreciation of the cruzeiro; exports rose only slightly.

Despite the improvement in the merchandize accounts there was a further build-up of import payment arrears until September 1964. Subsequently these arrears were reduced, and by April 1965 they had been eliminated.

The problems of servicing a rising foreign debt appear to have induced some further decline in 1964 in the inflow of foreign capital. However, debt rescheduling agreements reached during the year, together with other action taken by the authorities, appear to have improved the climate for a renewed capital inflow.

Table 38.

Brazil: Balance of Payments Summay, 1961–641

(In millions of U.S. dollars)

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Source: Based on data from the Central Bank of Brazil.

No sign indicates credit; minus sign indicates debit.

Preliminary.

At the end of 1963, the outstanding principal on medium-term and long-term indebtedness registered with the Brazilian monetary authorities amounted to approximately $2.5 billion. Scheduled payments on these debts for 1964 and 1965, including interest, totaled about $1 billion. This prompted the authorities, early in 1964, to begin a series of negotiations with the major creditor countries for a rescheduling of repayments. The resulting agreements provide that Brazil should meet in full as they fall due in 1964 and 1965 suppliers’ credits guaranteed by the foreign Governments participating in the agreement, but that 70 per cent of the total should be refinanced by the Governments concerned. A comprehensive financial program, and important institutional reforms, including the setting up of a central bank, were submitted to the Fund toward the end of 1964. In the field of public finance, the program included new tax measures and restraint m expenditures, better administrative control over government expenditure, and periodic adjustments in the rates for public utility services. Policies for the private sector included allowing the price mechanism to play a wider role and thus gradually eliminating the existing serious distortions, a vigorous stimulus to exports, a firmer control of bank credit, a flexible exchange rate to ensure a better performance of the balance of payments, liquidation of commercial arrears, and measures designed to encourage an inflow of official and private foreign capital to assist in the development of Brazil’s vast economic potential. In January 1965 Brazil concluded a stand-by arrangement with the Fund; details are given on page 109.

Ghana

The balance of payments deficit that has persisted in Ghana since 1959 reflects an excess of domestic demand originating largely in the public sector. A part of this excess demand has been deliberate, representing a preparedness to draw down reserves for purposes of economic development; but another part has resulted from the fact that the Government’s budgeted expenditures were predicated on expectations regarding cocoa export proceeds which did not materialize because of the fall in cocoa prices; the world price of cocoa fell from an average of £336 a ton in 1958 to £179 a ton in 1964 and to £122 in April 1965. On the other hand, output of cocoa in Ghana has increased substantially in recent years—from 264,000 long tons in 1956/57 to a plateau of 400,000-450,000 tons in the early 1960’s and to some 550,000-600,000 tons today. In fact, Ghana’s receipts from cocoa exports, as shown in Table 39, have remained relatively stable in recent years. The price paid to the cocoa farmers has not been reduced commensurately with the fall in world prices, and the income of the cocoa farmers has increased with the rise in output, expanding domestic demand.

Table 39.

Ghana: Balance of Payments Summay, 1961–641

(In millions of U.S. dollars)

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Based on data from the Bank of Ghana

No sign indicates credit; minus sign indicates debit.

Preliminary.

Including nonmonetary gold.

Including an increase in official liabilities (credit of $22 million).