Foreign Exchange Budgets in Latin America

THE CONCEPT of a foreign exchange budget and the use which may be made of it are not so well known or so generally understood as are the more common types of budget, such as the corporation or national budget.1 The use of foreign exchange budgets in various Latin American countries during recent years is reviewed by the present study. Without expressing any judgment on the desirability of exchange controls and restrictions, the study attempts merely to explain the role of exchange budgets where such restrictions exist. The actual use and operation of such budgets in Latin America vary widely, the purpose ranging from a simple statistical control to the application of severe restrictions. A body of literature on this subject has yet to be developed. The objectives of an exchange budget could be more effectively realized if the experiences and techniques of various countries were carefully analyzed, and the results of the analysis made generally available to those responsible for the preparation and implementation of the budget.


THE CONCEPT of a foreign exchange budget and the use which may be made of it are not so well known or so generally understood as are the more common types of budget, such as the corporation or national budget.1 The use of foreign exchange budgets in various Latin American countries during recent years is reviewed by the present study. Without expressing any judgment on the desirability of exchange controls and restrictions, the study attempts merely to explain the role of exchange budgets where such restrictions exist. The actual use and operation of such budgets in Latin America vary widely, the purpose ranging from a simple statistical control to the application of severe restrictions. A body of literature on this subject has yet to be developed. The objectives of an exchange budget could be more effectively realized if the experiences and techniques of various countries were carefully analyzed, and the results of the analysis made generally available to those responsible for the preparation and implementation of the budget.

THE CONCEPT of a foreign exchange budget and the use which may be made of it are not so well known or so generally understood as are the more common types of budget, such as the corporation or national budget.1 The use of foreign exchange budgets in various Latin American countries during recent years is reviewed by the present study. Without expressing any judgment on the desirability of exchange controls and restrictions, the study attempts merely to explain the role of exchange budgets where such restrictions exist. The actual use and operation of such budgets in Latin America vary widely, the purpose ranging from a simple statistical control to the application of severe restrictions. A body of literature on this subject has yet to be developed. The objectives of an exchange budget could be more effectively realized if the experiences and techniques of various countries were carefully analyzed, and the results of the analysis made generally available to those responsible for the preparation and implementation of the budget.

Exchange budgets are prepared in most countries where there is a need for controls or restrictions in the foreign exchange market, but also in some countries where there is a substantial measure of exchange freedom. The present review concentrates particularly on those countries where restrictions are so extensive that the role played by the foreign exchange budget is of great importance. It does not cover all the situations in which exchange budgets are used in Latin America, nor does it discuss exhaustively the role of the budget in each particular case.

Nature of Exchange Budgets

A foreign exchange budget is, in the first place, an estimate of receipts and expenditures of exchange for a future period, usually one year. The nature of the exchange budget and the use to which it is put vary from country to country, and an individual country may adjust the mechanism of the budget to suit its changing needs. This, certainly, has been the experience both in Latin America and in other parts of the world where exchange budgets have been employed.

If an exchange control system is to be operated rationally, its administrators must have some knowledge of expected exchange availability and expenditures. This is simply an application of sound business practice within the framework of exchange management. When a country attempts to gather all or most of its exchange resources into a central exchange fund or pool from which payments abroad are to be rationed in some way, the exchange budget assumes a high degree of importance, the importance varying directly with the intensity of the restrictions applied. In Chile and Paraguay, where restrictions on payments abroad are relatively strict, the budgets are required to relate payments to receipts. In some other countries, however, the exchange budgets serve more as statistical guides to exchange and commercial policy, or as bases for measuring actual performance, than as instruments for controlling or restricting exchange transactions; exchange budgets are used in this way, for example, in Nicaragua and Ecuador, where there is a substantial degree of exchange freedom.

While an exchange budget may be used to estimate all the transactions that pass through the central exchange pool, it usually does not take account of the country’s entire balance of payments. Even in a highly restrictive system, some measure of exchange freedom, or of evasion, appears inevitable, particularly in relation to exchange receipts. The full surrender of exchange receipts may be waived in respect of exports by foreign companies operating under special contracts, or of the operations of certain domestic companies engaged in shipping or similar international services. Barter operations, and loans or capital movements in the form of goods, may be conducted completely outside the exchange budget. The budget may not include the operations of a partially free exchange market, or such transactions as small frontier trade and parcel post exports and imports. These are only some illustrations of elements that may be excluded from the exchange budget but which are nevertheless relevant to the balance of payments.

The use of an exchange budget is prescribed in the basic exchange control laws or in other laws of several Latin American countries, including Argentina, Bolivia, Brazil, Chile, Paraguay, and Uruguay, where relatively important exchange restrictions are maintained. In Chile, for example, Law No. 8403 (December 29, 1945) placed on the National Foreign Trade Council the obligation of distributing exchange in accordance with an annual exchange budget; the budget was to include an estimate of the exchange resources which the country could dispose of in the budget year, and of the distribution of exchange among imports, capital service, and other obligations and necessities. The first exchange budget issued by Chile was for the year 1947.

In Brazil, Law No. 842 (October 14, 1949) and its Regulatory Decree No. 27541 (December 12,1949) referred to the authority of the Minister of Finance, in his role as Chairman of the Council of the Superintendency of Money and Credit, to indicate to the Export and Import Department (CEXIM) and to the Exchange Department, both of the Bank of Brazil, the maximum limits for the issuance of import licenses and exchange licences in respect of certain imports to be paid for with hard currencies. The determination of the limits was to be based on an exchange budget to be prepared every six months by the Exchange Department. The first exchange budget under this provision was prepared in June 1952.

Certain changes were introduced in the exchange budget process in Brazil in 1953 by Law No. 1807 (January 7, 1953) and its Regulatory Decree No. 32285 (February 19, 1953). A rule was adopted that the ceilings for import licenses were to cover payments in all currencies. The CEXIM was obliged to prepare a semiannual estimate of exports, which was to be used by the Exchange Department in preparing the budget. By Law No. 2145 (December 29, 1953), the Export and Import Department was replaced by the Foreign Trade Department (CACEX) of the Bank of Brazil.

The regulations accompanying Paraguay’s basic exchange control law (No. 10043 of August 29, 1945) specified that the Manager of the Monetary Department of the Bank of Paraguay was to submit to the Monetary Board each month estimates for the following three months of probable exchange receipts from various sources, and of exchange to be earmarked for making essential and other authorized payments through the official market. In practice, however, Paraguay did not institute a foreign exchange budget until April 1951, as part of an exchange reform of March 5, 1951; this budget covered the calendar year 1951. Subsequently, annual budgets were published as resolutions of the Directorate of the Central Bank of Paraguay, in accordance with the Central Bank Law (Decree No. 18, March 25, 1952).

In Argentina, the Central Bank began to utilize an annual exchange budget in 1953. This was established in accordance with Chapter VIII (Foreign Trade) of the Second Five Year Plan (1953-57) of the Argentine Government. An exchange budget was also established in Bolivia, under a decree of May 15, 1953. The decree entrusted the Central Bank with the preparation of an annual exchange budget to be submitted for the consideration and approval of the Government no later than December 10 of each year; it would refer exclusively to the official exchange market.

Provision was made for a foreign exchange budget in Uruguay by Law No. 10,000 (January 10, 1941), which established a commission for control of exports and imports, and required the Bank of the Republic to prepare, before December 31 of each year, an estimate both of exchange receipts during the following year and of the distribution of such exchange to specified categories of payments. Although exchange estimates are prepared in Uruguay, the operation of the restrictive system is, apparently, not based on a formal exchange budget.

In several other Latin American countries where restrictions on exchange transactions are few, exchange budget estimates have been established formally by exchange or other laws, or sometimes simply by administrative process. The foreign exchange budget has been publicly announced in only a few countries; these include Chile, Paraguay, and Colombia.

Functions of Exchange Budgets

A common belief is that, in the operation of a restrictive system, the foreign exchange budget is simply a means of controlling or assigning priorities in the treatment of imports or other exchange expenditures. This is, of course, a basic function of an exchange budget, just as other types of budget are intended to control expenditures. However, as the experience of several Latin American countries has shown, the exchange budget may also be considered an instrument of exchange and foreign commercial policy, or of monetary policy, and it may then have a vital significance for the functioning of the economy and for progress toward the country’s economic goals. The budget may serve as a basis for implementing desired policies in regard to the country’s exchange reserves, which in turn affect the domestic monetary situation. It may, moreover, point in advance to the need for external financing. Similarly, the budget may have the function of assuring, to the extent possible, the repayment of debts abroad.

Channeling of expenditures

The exchange budget’s elementary function of channeling exchange expenditures needs little detailed description. In several Latin American countries, the basic or other exchange laws specify priorities for the allocation of exchange for various classes of payments or imports, or other principles to govern exchange policy. Naturally, the prevailing official, or governmental, policies must also be considered. The priorities provide the general basis for the rationing of exchange in the exchange budget. The exchange budgets of several Latin American countries reflect, in effect, decisions on the intensity of the restrictions to be maintained during the budget period. The estimates of receipts may point to the need for action, such as the liberalization or intensification of restrictions on payments abroad.

More specifically, the exchange budget can help to assure that provision is made for supplying the country with at least certain basic essentials—food, raw materials, fuels, newsprint, or other requirements, according to the usual pattern of consumption of such imports. In most Latin American restrictive sytems, an attempt is made to allocate sufficient exchange for cost of living items that need to be imported, with the view of overcoming or forestalling scarcities that cause price rises.

Another important aspect of exchange allocations in Latin American exchange budgets is the close attention given to imports of capital equipment and other materials for development projects; the aim is to foster the growth of existing productive activities or of new industries, including export industries that process domestic materials. In addition, the allocations usually provide for expenditures necessary to the further growth and diversification of the economy, such as those related to transportation and communications, irrigation, public utilities, and specific projects of the government or of official entities.

The channeling of expenditures through the exchange budget takes account of the established policies of the government. For example, the formulation of a budget is bound to be influenced by commercial policy, including any desire to afford a measure of protection or encouragement to certain local industries. It is influenced also by the effect of existing customs tariff rates, and of expected changes in those rates, on import demand. Obviously, all or most of the government’s exchange policies must serve as criteria in formulating an exchange budget.

Where foreign trade is of vital importance, as it is in most Latin American countries, the relationship of the exchange budget to monetary policy is nearly always very close. The implementation through the exchange budget of a policy of accumulating exchange reserves, which may create a problem of an overexpanded money supply, may have important repercussions that demand consideration within the framework of domestic monetary policy. On the other hand, the monetary authorities themselves may establish a policy of reducing inflationary pressure through increased imports; such a policy would be implemented through the exchange budget. The preparation of the exchange budget may, moreover, indicate the need for modification of monetary, fiscal, and other appropriate policies by relevant sectors of the government, in order that the planned budget may be realized. For example, if the budget contemplates a relaxation of restrictions, such a relaxation may be possible only if production for export is encouraged by appropriate means, or if credit for some purposes is restricted.

The monetary effect of the exchange budget requires even more careful consideration in a country that has a multiple exchange rate structure. The multiple rates usually involve, in effect, taxes or subsidies for certain sectors of the economy. Local currency losses on exchange transactions as a result of the operation of multiple rates might lead to a monetary emission by the central bank. The avoidance of such losses and of the inflationary effects that accompany them can be assured by studying the value of transactions that are expected to take place at each rate, and by making appropriate adjustments where necessary. On the other hand, the transactions to be effected at the different effective exchange rates can, if desired, be weighted to help assure a contractionary monetary effect. This policy has been used by some Latin American countries for anti-inflationary or deflationary purposes, or as a means of raising revenue.

These comments point to the need for effective collaboration by the various official agencies in the development and application of an exchange budget. It cannot be overemphasized that the exchange budget itself is only one tool, among many, for carrying out a government’s economic program. It cannot be regarded as a substitute for other measures that should be taken by the monetary authorities or by those responsible for other sectors of the economy. The most skillfully constructed exchange budget can become meaningless if appropriate policies are not followed in the monetary, credit, and fiscal fields.

Developing exchange reserve policy

The foreign exchange budget should also help to develop policy on exchange reserves; when policies have already been determined, it is instrumental in executing them. For example, the initial estimates may indicate the need for a certain utilization of reserves. If in practice the receipts or expenditures cannot be adjusted to yield a balance, a calculated utilization of reserves can be planned in the budget. Moreover, the budget can be utilized to plan any necessary readjustment of the composition of the country’s foreign exchange reserves, for example, a reduction of excessive balances in certain currencies.

On the other hand, a country may have longer-run objectives in mind in regard to its exchange reserves. It may desire to raise them gradually to a more adequate level, say, a level considered as a necessary minimum to help the country weather the temporary payments difficulties that may arise in future years. Some Latin American countries, such as Paraguay, have in the past few years been attempting to implement this policy through an exchange budget. The exchange budget law of Bolivia states that the foreign exchange budget may provide for building up the exchange reserves of the Central Bank until they reach a level that will make possible a normal supply of imports. In Colombia and Nicaragua, policy has the more ambitious goal of increasing reserves sufficiently to make possible removal of all exchange restrictions and the establishment of unified exchange rates when conditions permit.

External financing needs

When exchange budget estimates forecast a payments deficit, methods other than the use of official reserves are, of course, available for coping with the deficit. The exchange budget, by anticipating payments difficulties, may enable the authorities to take certain internal offsetting measures in time, or it may show the need for early steps to contract foreign loans. At times, some Latin American countries have anticipated or met payments problems by giving preference in their licensing policy to certain imports entering under long-term credits granted by foreign suppliers. More commonly, imports are financed by foreign loans contracted by the central bank or the government. Thus, the budget can indicate the approximate portion of the deficit that is expected to require external financing. Alternatively, instead of contracting abroad for a specified amount that might prove insufficient, it might be found practicable to negotiate a line of credit abroad which might, if necessary, be incorporated in the exchange budget. Such lines of credit might be obtainable from foreign banks, governments, or the International Monetary Fund.

The regular use of exchange budgets can assist countries to calculate their longer-run ability to absorb and amortize new foreign loans, particularly large loans associated with a development program. Ecuador and some other Latin American countries have extended their budget estimates for periods longer than a year in order to estimate their capacity to service foreign loans. The regular use of a foreign exchange budget, particularly when restrictions have been found necessary, tends to show that the country concerned is attempting to maintain order in its external accounts, and may serve as a favorable indicator to prospective foreign creditors.

The Latin American countries that make use of exchange budgets are, in general, desirous of obtaining foreign capital in one form or another for their development programs. In recent years, most of them have taken steps to provide certain exchange control guarantees for such capital. Here again the budgets perform a noteworthy function, for they serve to clarify for the authorities the exchange cost of servicing such capital. It is interesting to note in this connection that several Latin American countries have established a top priority for service of the public foreign debt.

Operation of the restrictive system

The management of exchange operations in an environment of restrictions constitutes a task that, in the absence of an exchange budget, is likely to present serious difficulties. The experience of some Latin American countries before they established exchange budgets showed that, if exchange and related problems were dealt with merely on an ad hoc basis, problems of unexpected payments deficits, commercial arrears, administrative malpractices, and even shortages of required essential imports were likely to appear. This does not mean that an exchange budget is a cure-all for all the problems which may arise in operating a restrictive system. The effectiveness of any tool of this kind depends upon the persons using it, and on the environment or circumstances under which it operates. Nonetheless, the continued and growing use of exchange budgets shows that those who are charged with the responsibility of exchange management have usually found this tool to be of material assistance.

Some Latin American countries, such as Chile, Paraguay, and Bolivia, usually establish norms or standards for the implementation of each annual exchange budget. These norms serve, for example, to indicate the procedures to be followed in carrying out the budget, or the desirability of revising the methods of distributing licenses to individuals and firms. The budget control arrangements act as a constant basis of comparison between the original budget estimates and the actual exchange situation as it develops, thus helping to show when a need for changes in the restrictive system may arise. Moreover, formal revisions of the budget are usually undertaken in the course of the year, often as a result of the recommendations of those who are operating the restrictive system.

Preparation of Exchange Budgets

The process of preparation is perhaps the most important step in the functioning of a foreign exchange budget. It is at this stage that the exchange operations for the forthcoming year are coordinated with all the relevant policies. From the institutional standpoint, it is first necessary to take account of the relevant laws, administrative agencies, and procedures. An estimate of exchange receipts then establishes the foundation on which the budget is built. Finally, the policies to be applied are crystallized, and allocations for various types of exchange expenditure are developed.

Institutional aspects

The pattern of institutions and procedures relating to the preparation (as well as the subsequent implementation) of a foreign exchange budget varies from country to country. In most Latin American countries that use such budgets, the central bank has a predominant role in the preparation, probably because the central bank is normally the custodian of the central exchange pool or fund. In Chile, however, the National Foreign Trade Council (on which the Central Bank is represented) has the responsibility for preparation.

In countries where budgets have a restrictive function, some form of approval by a higher governmental authority is usually required. In Argentina, the Executive Power is the approving authority. In Paraguay, the exchange budget published by the Central Bank must have had the prior approval of the National Council of Economic Coordination, of which the President of the Republic is chairman. The exchange budget of Chile must be approved by a decree of the Minister of Economy, which is countersigned by the President of the Republic. The Central Bank of Bolivia must submit, through the Ministry of Finance, the budget to the Executive Power for approval. In Brazil, the Council of the Superintendency of Money and Credit (of which the Minister of Finance is chairman) is the approving authority.

Generally, it is required by law that the exchange budget be prepared and submitted for approval about a month before the beginning of the period that it covers. The budgets in the countries mentioned above cover the calendar year, except that of Brazil, where a semiannual budget is in use. In practice, situations have arisen where the exchange budget was not completed until after the budget period had begun: these delays have, for the most part, been associated with uncertainties in the exchange situation, or perhaps with certain administrative developments.

It has been increasingly understood that the establishment of a realistic budget, and one that will serve the economy to the fullest extent, requires a broad measure of cooperation between governmental agencies. The official agency charged with responsibility for the budget has to receive the cooperation of other agencies and officials in a position to contribute to the preparation and implementation of the budget. This cooperation is necessary, not only for obtaining the basic information needed for these purposes, but also for determining the policies to be implemented through the budget and for avoiding conflicts between policy objectives. The International Monetary Fund missions that advised Bolivia and Paraguay on the inauguration of their foreign exchange budgets actively recommended such cooperation. The Bolivian exchange control law provides that the budget be prepared by the Central Bank with the assistance and advice of the Mining Corporation, the Mining Bank, and other technical governmental agencies. In Paraguay also, the collaboration of interested governmental sectors has been obtained by the Central Bank.

The process of budget preparation is so important and often so difficult that it requires the services of capable and experienced technicians. Most Latin American countries have utilized for this purpose the same advisers and administrators who are charged with counselling on and managing the exchange system, including, of course, the implementation of the budget.

Estimation of exchange receipts

The exchange budget includes all exchange receipts that are directed to the central pool, as contrasted with the total receipts in the balance of payments. Usually the exchange control laws specify the exchange receipts which must be surrendered to the exchange authorities. In some countries that utilize exchange budgets—for example, Brazil and Bolivia—transactions passing through the free exchange market for invisibles and unregistered capital are not taken into account in the budget. In these countries, the partially free market is considered as a “safety valve” where operations not permitted at or subject to the fixed official rates may be equilibrated at a fluctuating exchange rate. Such partially free markets have served at times to insulate the official exchange market from speculative capital movements and similar exchange developments that tend to disrupt official reserves.

In Chile, Paraguay, and Ecuador, the transactions of the partially free markets, which include some trade movements, are included in the exchange budget estimates. In Paraguay and Ecuador, the operations of the small, private exchange houses in the free markets are not restricted, but the Central Banks influence the exchange rate through their own extensive operations in the free market. Free market estimates are included in the exchange budget of Ecuador mainly because of the close relationship between the official and the free exchange markets; however, no licensing restrictions are applied to any of the transactions in the free market.

The estimates of official market receipts usually take account, first, of the record of exchange receipts from the various categories of transactions in recent years. The record of the preceding two or three years is often used, although longer periods are sometimes useful for projecting longer-run tendencies. For export estimates, it has been found convenient or advisable to study not only the values of each commodity exported, but also the corresponding volumes. This procedure has been followed in Chile and Paraguay, and in Colombia for its coffee exports. In any event, export estimates must take account of the volume of exportable production and any recent or prospective tendencies in the foreign prices of exports. Frequently, in preparing the estimates it is useful to obtain the opinion of exporters’ associations and similar groups. A technique for checking estimates, which has been tried profitably by at least one Latin American country, is to obtain separate estimates from different public agencies interested in following the tendencies of some or all exports; a comparison of these estimates and the assumptions on which they are based helps establish a firmer agreed estimate.

The estimation of prospective price tendencies for exports often presents a difficult problem. This problem is especially acute for raw material exports whose international prices are subject at times to sharp fluctuations. In recent years, for example, Chile has revised its original annual exchange budget estimates several times, as a result of marked changes in the international prices for copper.

The information available on the policies adopted in Latin America for estimating export receipts shows that there is a tendency to be conservative. This appears to be the wiser course, particularly since it is more practicable to deal with an excess of exchange receipts than to cope with an unexpected insufficiency. For the same reason, caution is appropriate in estimating foreign loans to be received during the budget period.

Estimates of other nontrade receipts are also made on the basis of receipts during previous periods, with consideration given to the tendencies in each particular class of transaction. These receipts tend to vary in the same direction as the value of trade transactions. For example, an increased flow of trade increases exporters’ and importers’ commissions and other exchange receipts from services connected with trade. Among nontrade receipts, the exchange earnings of the government, such as those from consular fees and royalties, are also included; for these items, estimates may be requested from the government agencies concerned.

An estimate of receipts classified according to foreign currencies can prove useful if non-dollar earnings and payments form a significant part of the total. In practice, the arrangements made for this purpose vary in accordance with the needs of the exchange system. In Bolivia, Colombia, and Ecuador, the exchange budget estimates are expressed entirely in U.S. dollars. In Paraguay, the formal budget is calculated in U.S. dollars, but the proportions of incoming exchange that will be received in “free” dollars and in other currencies are estimated separately: this is useful in allocating later the country’s limited dollar resources for payments requiring dollars. In Brazil, convertible currencies (dollars and Swiss francs) and inconvertible currencies are shown separately in the exchange budget. The inconvertible currency section takes into account the country’s commitments under its trade and payments agreements, and is further subdivided into two groups: “scarce inconvertible currencies” and “nonscarce inconvertible currencies.” Chile has, since at least 1950, also shown dollar and non-dollar currencies separately in its exchange budget.

The arrangements for dealing in the budget calculations with exchange transactions under bilateral trade and payments agreements also vary from country to country. They are sometimes included in the “nondollar” part of the budget, but bilateral accounts may also be placed under the dollar heading, especially when settlements are ordinarily made in gold or dollars.

Finally, there is the problem of estimating exchange receipts according to the appropriate exchange rates when the restrictive system includes multiple buying rates. The annual budgets of Chile and Paraguay present estimates of this kind. Where estimates for the various categories of transaction in the free market are included in the exchange budget, they are of course separated from the operations that take place at the official rates.

Allocations of expenditures

Before the estimated receipts can be channeled to the exchange expenditure allocations in the budget, the policies to be implemented during the budget period must be crystallized. This may be a simple task if all that is required is to continue existing policies. The process of budget preparation, however, also provides an opportunity for re-examining any policies that have not yielded satisfactory results, as well as for introducing new policies. For example, new priorities for payments might be established, or the general order of priorities might usefully be changed.

It is in preparing the exchange budget allocations for expenditures, including payments for imports, that the cooperation of all interested agencies is especially important. Under a restrictive exchange system, the role of the budget in relation to the strength and progress of the economy can be substantial. This emphasizes the need for the agency with primary responsibility for budget preparation to receive effective cooperation from other agencies that can provide careful estimates of import and other needs.

Among the first allocations to be determined are those of government departments and other public or official entities. For this purpose, data must be collected on expected payments for official imports, public debt service, and diplomatic and other expenses abroad. In some countries, these estimates are checked by the Minister of Finance, or by the authorities supervising the national budget. For example, in Brazil in 1953 the inclusion in the exchange budget of the exchange requirements declared by governmental agencies was subjected to the approval of the Council of the Superintendency of Money and Credit. Paraguay has established, as an adjunct to its annual exchange budget, a “Budget for Basic Imports of the Government,” prepared by the Ministry of Finance, in agreement with the Central Bank; this budget is subject to the approval of the Executive Power.

For nongovernmental payments, allocations of exchange are in accordance with established priorities and policies. The techniques followed in the actual preparation of these allocations vary from country to country. Usually, basic imports and payments for essential services are attended to first. If a high order of priority is accorded to the accumulation of exchange reserves, the amount needed for these payments may be segregated before less essential payments are determined. However, it is more common to postpone the calculation of reserves until all payments estimates have been made; the residual, if any, can then be adjusted to the desired level by appropriate changes in other parts of the payments allocations.

As in estimating exchange receipts, the establishment of allocations for the different categories of payment, including those for imports, also utilizes past experience as a guide whenever practicable. However, this is not a substitute for a realistic review of a country’s actual needs. World prices for imports have to be assessed when significant price changes are taking place, as, for example, after the outbreak of the Korean war, when many countries also found it advisable to ensure supplies of scarce or potentially scarce essential items, such as vehicles, tires, certain types of machinery, raw materials for local production, and spare parts.

Consumption patterns may also be undergoing modification, and judgments have to be made of secular or recent trends in the consumption of important imports, such as foodstuffs or building materials. An examination of rejected license applications during the previous period, or of any backlog of applications, may reveal consumer desires that require more considered attention. For all these determinations, the assistance of government agencies, importers’ and producers’ associations, and chambers of commerce, industry, and agriculture may prove to be not only helpful but essential. In Chile, for example, importers and producers are requested to provide to the National Foreign Trade Council estimates of their import requirements for the coming year, along with data on imports during the preceding three years. Some large central banks have used the services of commodity specialists who are in a position to contribute to the judgments on budget allocations for the more important imports.

When the technicians preparing expenditure allocations find that restrictions have to be intensified, policy decisions on the new limits to be imposed must be made. Consideration may then be given to the possibility of deferring some expenditures until the next budget period or until the exchange situation improves. In the past year or two, a few Latin American countries have been faced with exchange stringencies that required them to establish, at least temporarily, severe restrictions, the exchange budget providing for only absolute essentials.

Arrears have sometimes accumulated in commercial payments, which required that in the exchange budgets of the countries concerned allocations had to be made for their payment. If arrears are paid by contracting an official loan, subsequent exchange budgets must take account of the amortization arrangements of the loan, in the same way that other foreign loans are serviced through the budget.

Most Latin American exchange budgets attempt no complete detailed classification (e.g., by customs categories) of import allocations. This practice is justified, for, if the budget were detailed, even minor changes that might subsequently be found necessary might have to be held up pending approval by a higher authority outside the exchange system. Moreover, the announcement of detailed allocations, especially when they are small, may induce importers to seek to monopolize restricted import goods. It has usually been found preferable to establish broader categories of import commodities, which may be created by grouping a number of customs classifications.

One consideration that arises in estimating import expenditures is the value of unutilized and valid import licenses outstanding at the end of the year. These licenses represent import payments that will probably be made during the coming budget period. If this value at the end of each year is approximately the same as the total of pending receipts from exports, there is not any problem that requires action in the preparation of the budget. If, however, there are significant differences between the values of outstanding import licenses and pending receipts, account may have to be taken of them in the exchange budget, in order to avoid the accumulation of payments obligations. Experience, which has given an accurate knowledge of the seasonality of exchange receipts and expenditures, is the customary guide in determining how such matters should be treated in the exchange budget. In any case, the budget is supposed to serve as a guide to the licenses to be granted for imports during the budget year itself; the actual granting of such licenses depends on a variety of factors, referred to below, that are associated with the execution of the budget.

A few Latin American countries have found it practical to establish some form of contingency reserve, sometimes termed a “suspense account,” in the exchange budget. A moderate amount is thus separated from the exchange reserves which it is desired to accumulate, and this amount is ordinarily not earmarked for any single purpose. It is available rather to help meet unexpected or emergency payment requirements or to absorb a shrinkage in estimated receipts. Other and perhaps disruptive adjustments in payments may thus be precluded. The availability of reserves of this kind for different types of use may have to be circumscribed by regulations promulgated with the budget; at least, some such precaution is required if there is any risk that the suspense accounts might be used wastefully.

A budget estimate of payments in the official market on account of invisibles would be a formidable task if the official market covered all the country’s payments on this account. However, in nearly all of the Latin American countries to which reference has been made, only a few types of invisibles are eligible for the official market rate, other payments for invisibles being permitted through the free market. When payments in the official market on account of invisibles are limited to such items as registered insurance, students’ payments, travel payments up to certain limits, or payments for medical treatment, reasonable estimates can be established by projecting past years’ allocations and giving weight to any relevant factors that influence these classes of payment. Payments through the official market on account of capital are readily estimated where the laws or contracts establish registered limits (e.g., percentages of registered value) for such transfers. In other cases, administrative discretion is customarily applied in granting licenses for such transactions. In a few cases, such as Colombia, budget estimates are made of registered foreign capital payments; but in accordance with the policy of encouraging capital inflow, no restrictions are applied to these payments.

Ordinarily no allocations have to be made in the exchange budget for payments for invisibles and capital through partially free markets, inasmuch as such payments are not restricted. However, estimates, based on previous periods, of such free market movements are sometimes made as an aid to free market intervention policy or for guidance in relation to other policy issues. Where trade transactions are permitted in a partially free market, the authorities may wish to ensure a reasonable balance in the market between exports and imports, perhaps in order to reduce the need for their exchange operations there; in these circumstances, some countries have at times attempted to channel more demand into the free market, e.g., by extending the list of imports which are not permitted at the official rate, or they have made other shifts believed to be consistent with over-all exchange rate policy.

Allocations of exchange for payments under a multiple rate structure raise some special issues to which reference has already been made in discussing the estimation of exchange receipts. When there are foreign currency compartments in a budget, presumably some attempt is made to balance the expenditure allocations in each compartment with the estimated receipts, taking account always of desired changes in the composition of reserves. It has sometimes been found necessary, in the convertible currency compartment, to anticipate the use of hard currencies for settling bilateral account deficits. In times of hard currency stringency, some Latin American countries employing multicurrency budgets have tended to move to the soft currency budget many expenditures formerly paid with hard currencies. There is, of course, a wide variety of budget and exchange control techniques for practicing currency discrimination in payments—too wide, indeed, to be analyzed within the scope of the present survey.

Implementation of Exchange Budgets

The implementation of foreign exchange budgets, or their use throughout the budget period, deserves consideration from four points of view—budget control, distribution of exchange, revision of the budget, and the effects of multiple rate structures.

Budget control

Proper control of the exchange budget leads to a more efficient administration of the exchange system. A prime requirement is that the information on transactions effected under the budget and on remaining balances must be accurate and up to date if it is to be fully useful for analysis and for administrative action. The nature of the records to be kept for this purpose is related to the structure of the budget and to the types of information required by those charged with the responsibility of controlling the execution of the budget.

Many countries have found it necessary to install special equipment, such as tabulating cards and machinery, for exchange and budget control purposes. Each card constitutes a complete record of a single licensed or exchange transaction—name of individual, class of merchandise or transaction, currency, amount, date, etc. This equipment makes possible the speedy tabulation of information either for the purpose of budget implementation or revision or for the process of budget preparation itself. A few Latin American countries with small exchange control organizations continue to rely on more laborious techniques for recording and tabulating such information. Regardless of size, however, an important element in each organization, for the purpose of implementing the budget, is the centralization of the necessary information in a single section charged with budget control.

In a large exchange control organization, it is necessary to ensure that copies of forms relating to the various types of exchange transaction controlled or executed by different sections or departments, as well as by authorized banks and other agencies, are forwarded promptly to the budget control section. This permits an early preparation of the corresponding tabulation cards, thereby facilitating submission of required periodic reports immediately after the expiration of the period.

One of the most important types of record, which can be very useful in the process of exchange distribution, is that of exchange availabilities, commonly kept according to currencies. Some Latin American countries include in such computations not only present exchange holdings but also expected exchange receipts, e.g., exchange receipts expected to be surrendered from exports that have been licensed.

Other uses of the records and of the periodic reports for the implementation of the budget, or for the operation of the exchange system, depend, of course, on the nature of the exchange and trade control administration and of the techniques applied to exchange distribution. In any event, the responsibility for the implementation of the budget usually rests with one agency or perhaps one individual. Needless to say, even with an efficient exchange budget the distribution of exchange that is under severe restrictions is a major responsibility.

Distribution of exchange

The process of distributing exchange under an exchange budget takes account of exchange availabilities and of the country’s seasonal patterns of receipts and expenditures. The nature of the exports, often agricultural, of most Latin American countries leads to an irregular flow of exchange receipts during the budget year. There are also seasonal fluctuations in imports and payments, depending on a variety of factors. The problem is complicated by the fact that the seasonal movement of exports is normally not the same as that of imports. The time lag between the granting of licenses under the budget and the eventual corresponding payments (e.g., if on a collection or term credit basis) is another factor that has to be taken into account. This assumes increased importance, for example, when foreign suppliers lengthen their credit terms. Foreign banks also may extend short-term lines of credit to local banks for financing part of the country’s imports.

Some Latin American countries specify in the regulations accompanying the exchange budget the standards or norms for the distribution of exchange. Frequently the exchange authorities themselves are the ones that issue licenses. The distribution of exchange to the government for its requirements, in accordance with the exchange budget, is often an automatic process, handled through a simple registration procedure, but in some countries official imports are carefully scrutinized. Where there is a separate import licensing authority, the central bank may certify from time to time blocks of available exchange against which import licenses may be issued. In the absence of close coordination between import and exchange licenses, the problem of commercial arrears is likely to arise. On the other hand, some countries in the past have tolerated commercial arrears as a means of financing the exchange budget, particularly when payments difficulties were present; this is often a costly procedure, which might in time prove harmful to the country’s interests.

Another important element is the attrition of licenses issued, i.e., the situation presented when licenses which have been granted are for one reason or another not used during their validity period. When licenses are issued very restrictedly, the attrition may be small; however, in some Latin American countries, it has been between 10 and 25 per cent of licenses issued. This means that, provided the exchange situation develops as was expected, the control authorities can and do issue licenses beyond the corresponding budget limits, to the extent of the anticipated attrition.

The distribution of exchange to individuals and firms is a delicate task in every exchange system that is very restrictive, except in respect of those essential goods or payments for which liberal treatment has been accorded in the exchange budget. The techniques used vary from country to country, and during the postwar period the Latin American countries have been continually adapting them to changing circumstances and institutions. The norms, if any, accompanying the annual budget have at times been a convenient means of establishing up-to-date prerequisites for registration of importers; this registration is normally required before the importers’ applications will be processed.

This study does not attempt to survey the many exchange control techniques for issuing licenses under the exchange budget to importers and others. It is sufficient to mention that there is a wide variety of practices, including importers’ quotas, the first-come first-served method, exchange “calls,” ad hoc licensing, and some open general licenses. It is also interesting to note that some Latin American countries with restrictive systems, including Argentina and Paraguay, have published or announced to the public details of the granting of import licenses to individuals and firms.

Budget revisions

While an exchange budget should help ensure the efficient management of the exchange system, there should also be a certain flexibility in its operation to avoid rigidities that might otherwise be embarrassing. Proper budget control and prompt reporting of exchange operations should make possible effective responses to changing circumstances.

In the course of each year, the exchange budget is revised in nearly every Latin American country where there is a budget. The revision may be periodic (e.g., monthly, quarterly, or semiannually) or when circumstances dictate. In either case, the estimates of exchange receipts are reviewed in the light of results to date and of current prospects for the remainder of the budget period. If the revised estimates yield an amount less than the original total, the difference may first be adjusted by using the “suspense account,” if there is one; otherwise, the budgeted exchange expenditures (or estimates of reserves) have to be modified or tailored to meet the new exchange prospects, or new foreign financing may have to be undertaken.

The periodic review of the budget provides an opportunity to make necessary adjustments in licensing or expenditures before it is too late. Such a review also offers an opportunity for adjusting budget expenditures, where necessary and practicable, to changing commercial requirements, and thereby helps to maintain a useful flexibility in exchange budget operations. The dangers of unrealistic rigidity in budget planning have already been emphasized.

Frequent reports on the status of exchange and licensing operations under the budget assist the responsible policy officials in the implementation of the budget. In most Latin American exchange organizations, daily or weekly reports are required on such points as the exchange position, the movement of foreign exchange receipts and expenditures, and export and import licenses issued. Through these reports the policy officers can quickly appraise actual developments and be in a better position to make their decisions. The action that may have to be taken in response to a changing situation is not necessarily a change in the exchange budget or in restrictions. Since the role of monetary and credit policy in facilitating adjustments in the exchange situation has by now become well recognized in most Latin American countries, the necessary action often includes such forms of credit restriction as the use of advance deposit requirements for imports. At times, when heavy pressures are exerted on the exchange rates as a result of payments difficulties, more fundamental adjustments, such as attacking the sources of inflation or exchange rate changes, are needed. Of course, any change in exchange rates during the budget period generally requires a reorientation of the budget to the new situation.

Multiple rate considerations

In the process of budget implementation in a country that has a multiple exchange rate system, exchange developments may point to a need for changes in the multiple exchange rate structure. However, regardless of whether the multiple rate modifications (e.g., changes in particular rates or shifts of commodities or classes of transactions between rates) are for balance of payments or for other reasons, it is considered advisable to appraise the importance of the changes for the exchange budget itself. It has usually been found that any significant multiple rate change necessitates a revision of the exchange budget. In the process of revision, it is customary to re-estimate the monetary effect of the operation of multiple rates on the exchange budget, i.e., the local currency profits or losses expected as a result of the weighting of transactions at different buying and selling rates.

Changes in multiple exchange rates or in multiple currency practices may have considerable importance for the economy as a whole or for sectors thereof, and usually receive careful consideration before they are effected. In many Latin American countries that attempt to control the operation of the restrictive system through an exchange budget, the relation of multiple rate changes to over-all exchange and other related policies is well understood. While some multiple import rates have contributed to reducing the problem of restrictions in exchange budgets, the existence of very complex multiple rate structures may also make the application of exchange budgets difficult. Some countries have found it advantageous to effect changes in their multiple rates as part of a program that tends to provide an increasing measure of exchange rate stability, if not a program leading to the simplification and unification of the exchange rate structure.

Some Problems Associated with Exchange Budgets

Some of the problems associated with exchange budgets in Latin America are of a purely technical nature, e.g., the preparation of estimates, gearing the structure of the budget to the nature of exchange operations, and taking account of the seasonal movements of trade. In the implementation of the budget, other technical problems also arise in the distribution of exchange, including allowance for attrition of licenses and the treatment of licensed operations that overlap budget periods. Experience, and sometimes technical assistance, are influential factors in resolving such technical problems.

Somewhat more difficult problems may arise on the institutional side. Exchange control laws may be out of date, or there may be a dispersion or overlapping of authority and of responsibility for the budget operations, lack of coordination among responsible agencies, and delays in submission of required forms or reports. Institutional reforms and changes in laws and regulations have helped to solve some of these problems, although at times they have also tended to aggravate them. Cooperation among the various agencies dealing with the exchange budget and the restrictive system could quickly remove many of these problems.

The most difficult problems associated with exchange budgets arise, however, in connection with the determination of policies. The application and execution of appropriate policies in the exchange and related fields constitute the principal means whereby the authorities can cope with problems that are substantially outside their control—namely, world trade and exchange movements that have adverse effects on their own country. Proper policies are often easily discernible, though they may prove difficult to apply, for political and other reasons. The determination of proper policy is often difficult because none of the alternatives which are practical seems to harmonize with the wider policy objectives that have been accepted. Examples of this are to be found in situations where it is an accepted objective of over-all policy to restrict imports of nonessential goods of high cost and poor quality, in order to avoid disturbing internal effects, and to conserve exchange for more important requirements, but where imports of these goods are permitted freely under a bilateral clearing account because a swing credit is available. Similarly, there have been situations where a partially free exchange market is established to act as a “safety valve,” but the rate in the free market is later pegged by the authorities to assure a certain level of remuneration to some export proceeds eligible for that market.

Perhaps the most common of the policy problems that arise are those involving the relation of the foreign exchange budget and exchange system to the internal economy. The exchange budget in a restrictive system is a powerful tool at the disposal of the authorities and of the government, but it is not in itself a panacea for the exchange and other ills of the economy. There have been some misuses of exchange budgets, just as excessive reliance has often been placed on the exchange system to solve a country’s economic and financial problems.

The operation of an exchange budget in an environment of inflation has frequently meant that budget revisions were designed principally to intensify restrictions, in view of rising import demand or of the difficulty of marketing certain exports. Budget revisions have also been associated with modifications in multiple exchange rate structures that were necessitated by domestic inflation. Sometimes, however, the deterioration of a country’s external position reaches a point where even stronger remedies must be applied to redress the exchange situation and thereby make the exchange budget viable. To adjust national to international prices, more fundamental measures may be necessary, such as exchange devaluation, simplification or unification of multiple exchange rates, or, when appropriate (e.g., where there is an antiquated tariff structure), an overhaul of the customs tariff. But again, these fundamental adjustments in the external sector must usually be complemented by domestic anti-inflationary policies.

The use of monetary policy has recently been revived in several of the countries that have been mentioned, and this has helped to solve the problem of inflationary pressures without requiring excessive use of the exchange system. Some of the exchange budgets instituted in recent years in Latin America formed, in fact, part of a general effort by the respective governments to restore order and stability in their economic systems. When the use of the foreign exchange budget is coupled with a comprehensive stabilization program, there is greater assurance that the problems which both are attempting to meet may be overcome.


Mr. Mattera, economist in the Multiple Currency Practices Division, is a graduate of the University of Rochester and of the Graduate School of Business Administration, New York University. He was formerly with the Irving Trust Company of New York.


This paper was presented to the Fourth Meeting of Technicians of Central Banks of the American Continent, held in Washington, D.C., May 1954.