international monetary fund annual report 1965...66 68 70 70 71 73 73 75 78 79 79 ©international...

ANNUAL REPORT

1965

©International Monetary Fund. Not for Redistribution

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INTERNATIONAL MONETARY FUND

ANNUAL REPORTOF THE

EXECUTIVE DIRECTORS FOR THE

FISCAL YEAR ENDED APRIL 30, 1965

WASHINGTON, D. C.


CONTENTS

Chap.Letter of Transmittal

PART I. THE WORLD ECONOMY AND THE FUND

1. GENERAL SURVEYInternational PaymentsPrimary Producing CountriesCountries' Reserves and International Liquidity

2. THE INTERNATIONAL MONETARY SYSTEM AND INTERNATIONAL LIQUIDITYCharacteristics of the SystemAppraisal of the System

Role of Capital MovementsScope for Adjustment of Price LevelsRole of Reserve Currencies

Types of International LiquidityPotential Need to Supplement Growth of ReservesDeliberate Reserve CreationCriteria of General Reserve NeedsTypes of Reserve CreationTransferability of Reserves: Direct and IndirectDistribution of Initial Reserve IncreasesInstitutional AspectsReserve Creation Through the FundConclusion

3. SOME PROBLEMS OF DEVELOPING COUNTRIESIntroductionFiscal Systems

The ProblemsSteps to Strengthen Public FinancesBudgetary Planning and ControlTax ReformTax AdministrationPricing Policies of Public Enterprises

Debt Burdens and Debt RenegotiationThe ProblemDebt Repayment SchedulesRenegotiation PossibilitiesPresent Practices in Debt RenegotiationConditions for SuccessThe Role of the FundConclusion

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Chap.4. THE FUND IN 1964/65

MembershipArticle VIII

Executive DirectorsIncrease in Fund Resources .

Proposals for Quota IncreasesSize of Quota IncreasesGold Payments and Their Alleviation

Fund TransactionsPurchases and Stand-By Arrangements

Technical AssistanceThe IMF Institute

PART II. REVIEW OF THE YEAR

5. DEVELOPMENTS IN THE INDUSTRIAL COUNTRIESProduction, Wages, and PricesIncomes PoliciesFinancial and Other Policy Developments Before November 1964

Discount RatesMonetary and Debt Management PoliciesFiscal Policy

Subsequent EventsThe ProblemsChanges in Policy

Foreign Exchange MarketsDevelopment of Securities Markets

6. WORLD TRADE, PAYMENTS, AND RESERVESWorld Trade

Changes in Trade, 1963-64Trade in ManufacturesExport Growth and Market GrowthDevelopment of World Trade During 1964

Private Capital MovementsBalance of Payments Developments

Current Account and "Basic" BalancesOver-All Surpluses and Deficits

Reserve Developments

7. DEVELOPMENTS IN COUNTRIES EXPORTING PRIMARY PRODUCTSPricesTradeBalance of Payments

More Industrialized CountriesLess Industrialized Countries

Domestic Developments

8. BALANCES OF PAYMENTS OF SELECTED COUNTRIESUnited States

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CONTENTS

Chap.CanadaUnited KingdomFederal Republic of GermanyFranceItalyJapanAustraliaBrazilGhanaIndiaMexico

9. GOLDGold ProductionGold HoldingsGold Markets and Prices

New YorkLondonOther Developments

Gold Transactions ServiceChanges in National Policies Affecting Gold

Gold Subsidy Programs

SUPPLEMENTARY NOTE

ACTIVITIES OF THE FUNDPar ValuesArticle VIII CountriesQuotasFund Transactions

Stand-By ArrangementsRepurchasesPurchases and Repurchases Classified by CurrencyMonetary Reserves and Repurchase ObligationsSummary of Transactions, 1948-65Fund Charges

Consultations with MembersRelations with Other International OrganizationsStaffPublicationsAdministrative Finance

APPENDICES

No.I. Executive Board Decisions and Report to Board of Governors

A. Calculation of Repurchase Obligations: Prompt Reporting of MonetaryReserves Data

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Viii CONTENTS

B. Procedure for Drawings in the Gold TrancheC. Increases in Quotas of Members—Fourth Quinquennial Review

II. Executive Directors and Voting Power

III. Changes in Membership of Executive Board

IV. Administrative Budget

V. Comparative Statement of Income and Expenditure

VI. Financial StatementsInternational Monetary FundStaff Retirement Fund

Index

LIST OF TABLES AND CHARTS

Table1. Thirty-Seven Countries: Annual Service Charges on Medium-Term and Long-

Term External Debt, End of Year, 1956-642. Thirty-Seven Countries: Medium-Term and Long-Term External Public Debt,

End of Year, 1956-643. Thirty-Seven Countries: Annual Service Charges on Medium-Term and Long-

Term External Public Debt as Percentages of Outstanding Debts, End ofYear, 1956-64

4. Short-Term Claims on Selected Countries Reported by U.S. Banks and Non-financial Concerns, End of Year, 1960-64

5. Proposed Increases in Quotas, 1965: Special Increases6. Gross National Product at Constant Prices: Percentage Increases from Quar-

ter to Quarter, 1962-First Quarter 19657. Industrial Production: Percentage Changes from Quarter to Quarter, 1962-

First Quarter 19658. Issues of Securities on Markets in Countries Other than That of Borrower,

1963-First Quarter 19659. Foreign Issues of Securities in Currency of Market Where Issued, 1963-First

Quarter 196510. Amounts Raised by Issues of Securities on Markets in Countries Other than

That of Borrower, 1963-First Quarter 196511. Sales of New Issues by Foreign Borrowers in the United States, 1963-First

Quarter 196512. Export Unit Values, 1961-6413. Direction of World Trade, 1963 and 196414. Growth in Value of Trade Between Major Areas, 1961-6415. Trade Between Manufacturing Countries, 1963 and 196416. United Kingdom: Value and Growth of Trade in Three Major Categories,

196417. Growth of Manufacturing Countries' Trade in Machinery and Transport

Equipment and Other Manufactures, by Areas18. Value of Manufacturing Countries' Trade in Machinery and Transport Equip-

ment, Other Manufactures, and All Other Goods, January-September 1964.

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Table Page19. EEC Countries: Imports of Manufactures from Each Other and from the

United States, January-September, 196420. Manufacturing Countries: Changes in the Relation Between Each Country's

Export Unit Value and the Average Unit Value of Other Countries' Exports,1963-64

21. Manufacturing Countries: Actual Growth in Each Country's Exports Relatedto Average Growth in Its Export Markets, 1962-64

22. Net Outflows of Private U.S. Capital, 1963 and 196423. EEC Countries: Balance of Payments Summaries, 1963 and 196424. Other Manufacturing Countries in Continental Europe: Balance of Payments

Summaries, 1963 and 196425. Over-All Balances of International Payments, 1963 and 196426. Countries' Official Reserves, Including Reserve Positions in the IMF, End of

Calendar Years, 1961-6427. Countries Exporting Primary Products: Indices of Commodity Prices, 1962-

First Quarter 196528. Primary Producing Countries: Trade in 1963 and 196429. Primary Producing Countries: Balance of Payments Summaries, 1963 and

196430. United States: Balance of Payments Summary, 1963-First Quarter 1965 . . . .31. Canada: Balance of Payments Summary, 1963-First Quarter 196532. United Kingdom: Balance of Payments Summary, 1963-First Quarter 196533. Federal Republic of Germany: Balance of Payments Summary, 1963-First

Quarter 196534. France: Balance of Payments Summary, 1963 and 196435. Italy: Balance of Payments Summary, 1963 and 196436. Japan: Balance of Payments Summary, 1963-First Quarter 196537. Australia: Balance of Payments Summary, 1961-6438. Brazil: Balance of Payments Summary, 1961-6439. Ghana: Balance of Payments Summary, 1961-6440. India: Balance of Payments Summary, 1961-6441. Mexico: Balance of Payments Summary, 1961-6442. Gold: Value of World Production, 1940, 1945, and 1960-6443. World Gold Reserves: Sources of Changes, 1962-6444. U.S. Gold Transactions, 1963 and 196445. Gold: Prices in Various World Markets, End of April 1964 and 196546. Initial Par Values Established, Fiscal Year Ended April 30, 196547. Countries That Have Accepted Article VIII48. Increases in Quotas, Fiscal Year Ended April 30, 196549. Purchases of Currencies from the Fund, Fiscal Year Ended April 30, 1965 . .50. Position of Participants in General Arrangements to Borrow51. Currencies Purchased by the Fund with Gold, December 1964 and May 196552. Fund Stand-By Arrangements with Members, Fiscal Year Ended April 30,

196553. Repurchases of Currencies from the Fund, Fiscal Year Ended April 30, 196554. Drawings and Repurchases by Currency, Fiscal Year Ended April 30, 196555. Repurchase Obligations Under Article V, Section 7(b), of the Fund Agree-

ment, at April 30, 1948-6456. Summary of Fund Transactions, Fiscal Years Ended April 30, 1948-65 . . . .

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Chart Page1. Thirty-Seven Countries: External Public Debt Service as Percentage of

Exports, 1956-642. Seven Latin American Countries: External Public Debt Service as Percentage

of Exports, 1955, 1960, and 19643. Selected Areas and Countries: Industrial Production, Seasonally Adjusted,

1961-April 19654. Selected Countries of the European Economic Community: Industrial Pro-

duction, Seasonally Adjusted, 1961-April 19655. Selected Areas and Countries: Wage Rates, 1961-April 19656. Selected Countries: Wage Costs per Unit of Output in Manufacturing,

1961-647. Selected Areas and Countries: Import Prices, 1961-First Quarter 19658. Selected Areas and Countries: Wholesale Prices, 1961-April 19659. Selected Areas and Countries: Cost of Living, 1961-April 1965

10. Selected Areas and Countries: Export Prices, 1961-April 196511. Selected Countries: Central Bank Discount Rates, 1961-April 196512. Selected Countries: Term Structure of Interest Rates13. Selected Countries: Exchange Rates, 1961-April 196514. Covered Short-Term Interest Rates, 1961-April 196515. United Kingdom: Term Interest Differentials, 1963-April 196516. Selected Countries: Long-Term Government Bond Yields, 1961-April 196517. U.K. External Sterling Liabilities, 1961-March 196518. U.S. International Liquid Liabilities, 1961-March 196519. Volume of World Exports and Seasonally Adjusted Volume of Exports and

Imports of Four Major Areas, Quarterly, 1961-6420. EEC Countries, United Kingdom, and Other EFTA Countries: Volume of

Trade, Seasonally Adjusted, Quarterly, 1961-6421. Manufacturing Countries: Seasonally Adjusted Trade Balances, 1961-First

Quarter 196522. Selected Areas and Countries: Balances of Payments, 1957-6423. All Countries in Balance of Payments Deficit: Aggregate Deficits, 1958-First

Quarter 196524. Primary Producing Countries: Prices of Commodities Exported (Excluding

Petroleum), 1962-First Quarter 196525. Selected Primary Products: Changes in Average Prices in 1963 and 1964 . .26. Primary Producing Countries: Balances of Payments, 1957-6427. Primary Producing Countries: Basic and Over-All Balances of Payments,

1957-6428. Gold: Estimated Supply and Absorption, 1951-6429. Gold: Price in London Market, Monthly Averages, March 1954-April 196530. Outstanding Balances of Drawings from the Fund, and Unused Stand-By

Arrangements, on April 30, 1948-65

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X


INTERNATIONAL MONETARY FUND

Pierre-Paul Schweitzer

Managing Director and Chairman of the Executive Board

Frank A. Southard, Jr.

Deputy Managing Director

Executive Directors Alternate Executive Directors

William B. Dale John S. HookerJ. M. Stevens Douglas W. G. WassRene Larre Gerard M. TeyssierUlrich Beelitz Walter HabermeierJ. J. Anjaria Arun K. GhoshAhmed Zaki Saad Albert MansourSergio Siglienti Costa P. CaranicasJ. M. Garland Roy DanielGengo Suzuki Eiji OzakiPieter Lieftinck H. M. H. A. van der ValkS. J. Handfield-Jones Patrick M. ReidAndre van Campenhout Maurice ToussaintMauricio C. Bicalho Antonio de Abreu CoutinhoLuis Escobar Enrique DomenechSemyano Kiingi Paul L. FaberEnrique Tejera-Paris Jorge Gonzalez del ValleBeue Tann I-Shuan SunKurt Eklof Otto SchelinAmon Nikoi VacantLouis Kande Antoine W. Yameogo

Directors of Departments and Offices

Phillip Thorson Director, Administration DepartmentHamzah Merghani Director, African DepartmentD. S. Savkar Director, Asian DepartmentL. A. Whittome Director, European DepartmentErnest Sturc Director, Exchange and Trade

Relations DepartmentRichard Goode Director, Fiscal Affairs DepartmentF. A. G. Keesing Director, IMF InstituteJoseph Gold General CounselAnwar Ali Director, Middle Eastern DepartmentJ. J. Polak Director, Research and Statistics

DepartmentRoman L. Home Secretary of the FundY. C. Koo TreasurerJorge Del Canto Director, Western Hemisphere DepartmentJ. V. Ml£dek Director, Central Banking ServiceJean-Paul Salle Director, Office in Europe (Paris)

J. Keith Horsefield Chief Editor

xi


LETTER OF TRANSMITTAL

TO THE BOARD OF GOVERNORS

July 2, 1965

My dear Mr. Chairman:

In accordance with Section 10 of the By-Laws of the International MonetaryFund, I have the honor to present to the Board of Governors the Annual Report ofthe Executive Directors for the fiscal year ended April 30, 1965.

Yours sincerely,

/s/

PIERRE-PAUL SCHWEITZER

Chairman of the Executive Board

Chairman of the Board of Governors

International Monetary Fund

xiii


Part I

THE WORLD ECONOMY AND THE FUND


Chapter 1

General SurveyN many respects the past year was a highly

satisfactory one for the world economy. Worldindustrial production and, in particular, inter-national trade—including the exports of the pri-mary producing countries—were substantiallyhigher than in the preceding year. However, within1964 there was a slowing down of economicactivity in several major countries, and the rateof increase in world trade was somewhat lowerthan during the preceding year, although still sub-stantial. In the last quarter of the year, whilethere were signs of a moderate upturn in industrialactivity, an exceptionally large imbalance in worldpayments, concentrated in the two main reservecenters, put more strain on the international mone-tary system than had been experienced for sometime. For all these reasons, economic prospects atthe end of the year appeared much more uncertain.

During 1964 and the early months of 1965,economic activity continued to expand in theUnited States and Canada under conditions ofsubstantial price stability, while some furtherprogress was made toward reducing the relativelyhigh rate of unemployment. In Europe, highlevels of employment and strong pressures onwages and prices continued in most countries,although their experience was by no means uni-form. In Germany, an acceleration in economicactivity had been stimulated in 1963 by acute de-mand pressures in neighboring countries, mainlyItaly and France. Throughout 1964, productioncontinued to rise strongly, as an increase indomestic demand made up for a relaxation ofdemand pressures emanating from these othercountries; prices rose only moderately. In Italy,pressures of demand were threatening both inter-nal and external stability at the beginning of 1964.However, the economic policies which had beenintroduced progressively after May 1963 broughtabout a dramatic change from a large deficit to alarge surplus in the balance of payments, and someslowing in the rise in prices and wages—but alsoa decline in industrial production until late in the

year. In France, where policies to stabilize theeconomy were pursued throughout 1964, the risein industrial production came virtually to a halt,and some progress was made in reducing the up-ward movement of prices. In a few other coun-tries in continental Europe, where the containmentof inflationary pressures had also become theprimary objective of economic policy, there wasa deceleration of the rise of output in the courseof the year.

In the United Kingdom, the rise in productionduring 1964 was markedly less than in 1963, whenit had been unusually large and had been accom-panied by a gradual deterioration in the currentaccount of the balance of payments. The budgetintroduced in April 1964 was aimed at limitingthe rise in demand so as to correspond to a risein real output of some 4 per cent per annum.However, despite this adjustment in policy, a largedeficit in the balance of payments persistedthrough the year; the measures taken to deal withthis are described below. At the beginning of1964, Japan, too, was facing a balance of pay-ments deficit, and this was a main factor limitingthe rise in production. Here, however, effectivemeasures to adjust the balance of payments, neces-sitated by the very rapid expansion in domesticdemand that had taken place in 1963, wereintroduced at an early stage. During 1964, therise of output slowed down moderately, and thebalance of payments recovered; by the end of theyear, the Japanese Government was relaxing itspolicies of economic restraint.

The net result of these developments was thatlate in 1964 the forces of expansion operating inthe industrial countries as a group were less vigor-ous than at the beginning of the year. Some slow-ing down in economic growth was perhaps to beexpected after the exceptionally rapid rise inproduction that took place in virtually all the in-dustrial countries during 1963. It is probably un-avoidable that from time to time countries willfind it necessary to introduce temporary measures

3

I


ANNUAL REPORT, 1965

of restraint to maintain internal and externalstability. Indeed, some progress was made in1964 in containing upward pressures on prices andwages where these had been excessive.

Although the slowdown continued in somecountries in Europe in the early part of 1965, thereare some grounds for belief that the pause in ex-pansion may be only temporary. Expansion ap-pears to be continuing at a substantial rate inseveral other countries in Europe, particularly inGermany, and in the United States and Canada,while the change in direction of monetary policiesin Japan augurs a new upswing in that country.But the substantial enlargement of the world pay-ments imbalance that took place in the course of1964 imparted considerable uncertainty to theotherwise moderately favorable outlook for 1965.

International Payments

At the beginning of 1964, a reasonable degreeof stability of international transactions prevailed.The balance of payments of the United States wasclose to equilibrium for the first time since thetrough of the 1961 recession, even though theU.S. economy, after three years of continuedgrowth, was still expanding at a substantial rate.The European Economic Community (EEC),which had been in persistent surplus for manyyears, also appeared to be close to equilibrium inits transactions with the rest of the world, eventhough there were considerable imbalances incountries within the area; these imbalances weresharply reduced early in the year. Lastly, the pri-mary producing countries generally found them-selves in improved balance of payments positionsas a result of a rapid rise in their export earnings.But this pattern of relative stability was not main-tained; 1964 was marked by a major deteriorationin the balance of payments of the United King-dom and the re-emergence of a sizable deficit inthe United States and of a large over-all surplusin the EEC. In the last-mentioned area, theradical improvement in the Italian balance of pay-ments was a most important factor. At the sametime, the surplus position of the primary producingcountries as a group was sharply reduced, and thebalances of payments of many individual develop-ing countries showed signs of strain. Thus, amongthe industrial countries, deficits again became con-centrated in the two main reserve centers and sur-

pluses in the European continent. Simultaneously,the gradual deterioration in the positions of pri-mary producing countries, which hold a largeproportion of their reserves in dollars and sterling,threatened to add to the pressures on the tworeserve centers arising from their own balances ofpayments.

The deficits of the United Kingdom and theUnited States arose from rather different causes.In the United Kingdom, the deficit was for themost part due to a deteriorating current accountposition, associated with a rise in domestic de-mand, which had been stimulated by earlier fiscaland monetary measures; the rise in exports wasless than in most other industrial countries and wasinsufficient to make up for the sharp rise in im-ports. In 1964, a large deficit on current accountwas augmented by a larger-than-usual net outflowof long-term capital. During most of the year, thedeficit on current and long-term capital accountwas running at an annual rate of more than $2billion (equivalent to about two thirds of U.K.reserves at the beginning of the year). In themonths to September, however, this deficit waslargely offset by an inflow of short-term capital,and some assistance (mainly in August and Sep-tember) from foreign central banks; reserves didnot change much. In October, when a new Gov-ernment had taken office, a program for dealingwith the deficit problem was announced, includinga temporary surcharge on imports of 15 per cent(lowered to 10 per cent in April 1965) and asystem of rebates of tax on exports, averaging 1.9per cent of their value. At that time, however,confidence in sterling was rapidly diminishing and,even though the Bank of England raised its dis-count rate to 7 per cent in November, a sharpreversal of the inflow of short-term capital, super-imposed on the basic deficit, raised the over-alldeficit to a record level in the fourth quarter. Thiscreated a serious crisis which was only overcomeafter it was announced that further internationalsupport for sterling, totaling $3 billion, had beenorganized in the form of commitments to assist-ance by 11 countries and the Bank for Inter-national Settlements. In December, the UnitedKingdom drew $1 billion from the Fund. TheFund obtained $405 million of this amount byborrowing under the General Arrangements toBorrow, which were activated for the first time,

4


GENERAL SURVEY

and $250 million by the sale of gold. However,though there was a major improvement in theUnited Kingdom's current account position, itsbalance of payments remained under pressure inthe early months of 1965 as outflows of capitalcontinued. The budget introduced in April, whichwas again aimed at restraining domestic demand,and measures introduced to stem the outflow ofcapital helped, however, toward restoring con-fidence in sterling. In May, the United Kingdommade a second drawing from the Fund—$1,400million, of which $525 million was obtained bythe Fund under the General Arrangements to Bor-row and $400 million by the sale of gold.

In contrast to the situation in the United King-dom, the deterioration in the over-all U.S. balanceof payments occurred in spite of a record surpluson goods and services account. The rise in theover-all deficit after the first quarter of 1964 wasentirely attributable to private capital movements.During the first half of 1963, there had been asharp rise in the outflow of U.S. portfolio capital,to which the U.S. authorities had responded byproposing in July the imposition of an InterestEqualization Tax applicable to the purchase ofoutstanding foreign securities and, with certainexceptions, to new issues. A subsequent reductionin the outflow of U.S. capital contributed to animprovement in the over-all balance of paymentsculminating in the first quarter of 1964. After thatquarter there was a new upsurge in the outflowof U.S. capital, a contributory factor being a con-tinuance of moderately expansionary policies inthe United States in combination with policies offinancial restraint in a number of the other indus-trial countries. The rise in the capital outflowincluded a large increase in bank loans, whichwere not covered by the proposed Interest Equal-ization Tax, enacted in September. The outflowincreased during the last quarter of 1964, whenthere was a temporary rise in new issues, mainlyof Canadian securities, following confirmation ofthe proposed exemption of these securities fromthe Tax. A further factor was the deferment, be-cause of the sterling crisis, of payments by theUnited Kingdom of interest and amortization onits postwar loans, due in December.

The large increase in the outflow of U.S. capitalin 1964 was accompanied by an increase in theinflow of foreign private liquid funds, which re-

duced the pressure on U.S. reserves and, togetherwith some other factors, helped to minimize theoutflow of gold. Calculations of the U.S. deficitdiffer—and for 1964 more than for any other re-cent year—mainly because some definitions do,and some do not, allow for this inflow of liquidfunds. According to the concept generally usedby the Fund for the analysis of world paymentsproblems, which makes such an allowance, theU.S. deficit in the last quarter of 1964, on aseasonally adjusted basis, was about the same asthe quarterly average for 1963, although the defi-cit for 1964 as a whole was considerably smallerthan that for 1963. These calculations are lowerthan those based on the conventional concepts ofthe U.S. Government. It is, of course, impossibleto express in a single figure all the varying facetsof strength and weakness of the U.S. balance ofpayments, but whatever viewpoint is adopted thereis no doubt that the re-emergence of a U.S. deficitat a substantial rate after the first quarter of1964—following six years of large deficits—created a very difficult situation.

During the early months of 1965, pressures onthe U.S. balance of payments were augmented bya dock strike, while a further outflow of capitalappeared to be stimulated by an expectation thatadditional measures to reduce the outflow of capi-tal would soon be introduced. In February, theU.S. Government announced a new and compre-hensive program to deal with the balance of pay-ments problem, the main features of which werea broadening of the scope of the Interest Equaliza-tion Tax and the enlistment of the voluntary coop-eration of banks and other financial and non-financial corporations in reducing bank and otherloans to foreigners and the placing of liquid fundsand direct investment abroad. In formulating thisprogram, an attempt was made to avoid as far aspossible discouraging the outflow of capital todeveloping countries and to other countries (suchas the United Kingdom), whose balances of pay-ments were relatively weak. Special treatment wasalso accorded to Canada and Japan, which areheavily dependent on the U.S. capital market.

Early indications of the operation of this pro-gram suggest that it is being reasonably successful,although the precise nature of the market reac-tions and policy responses which it may induce inother countries cannot yet be known. While con-

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ANNUAL REPORT, 1965

trol of the direction of its impact is administra-tively difficult, the intention is that the impactshould fall mainly on continental Europe as themajor surplus area. In those countries "where in-flows of capital from the United States have addedto inflationary pressures, a reduction in these in-flows should enable the authorities to relax some-what the restrictive policies that they have appliedto contain these pressures, where this can be donewithout endangering internal stability. Such re-laxations should help to reduce the repercussionson the U. S. balance of payments of the marketreactions and policy responses referred to above.These repercussions could still be important, how-ever, to the extent that the initial impact falls oncountries in weak balance of payments positions.

Meanwhile, the normal processes of adjustmentof underlying current account positions have con-tinued. Costs and prices in the European areaagain rose in 1964 in relation to those in theUnited States. The U.S. current account positioncontinued strong through the year, and the rise inthe combined current surplus of the EEC countriesin the second half of the year appeared to beattributable mainly to a slowdown in economicactivity in certain countries, and thus likely to beof a temporary character. Indeed, one of theinteresting aspects of the balance of paymentssituation late in 1964 was that, in contrast to thetypical situation some years ago, the major surpluspositions were not accompanied by excess de-mand, but by relative slack in the domestic econo-mies of the countries concerned. Although thesesurplus countries remain subject to pressure onprices and wages—a fact that has to be taken intoaccount—the slack in their economies shouldfacilitate the adoption of policies that would assistin the process of international adjustment withoutdamage to their internal stability.

As discussed in the next chapter, attitudes to-ward the role of capital movements in internationalpayments have recently changed considerably.The large outflows of capital from the UnitedStates, mainly toward the other industrial coun-tries—and in particular their resumption in 1964at a higher rate than ever before in spite of theintroduction of the Interest Equalization Tax—made it apparent that, for the time being, marketforces alone would not bring about a pattern ofcapital movements consistent with balance of pay-

ments equilibrium among the major industrialcountries. The past year has seen increased inter-ference with the free movements of capital throughmeasures of taxation, direct controls, and volun-tary programs. While these programs raise impor-tant issues, they should in present circumstancesassist in reducing the imbalance in internationaltransactions. At the same time, an effort has beenmade to avoid undesirable repercussions on thebalances of payments of the developing countriesthat might tend to slow down their rate of growth.

Primary Producing Countries

For the primary producing countries 1964 was,in general, a good year. On the average, prices ofprimary products exceeded the 1963 level by 5per cent, and they were higher than they had beenin any of the last eight years. However, prices formanufactured products also rose, and the terms oftrade of the primary producing countries as agroup were, on the average, only slightly morefavorable than in 1963; they appeared to beworsening during the latter part of the year. Ingeneral, the experience of the more industrializedmembers of the group continued to be much morefavorable than that of the less developed countries;the terms of trade of the former were, on theaverage, about 13 per cent higher than in 1958,whereas those of the latter had deteriorated slightlysince that year.

The increase in the prices for primary productsin general was accompanied by a rise in the vol-ume of trade, and the rise of about 10 per centfrom 1963 to 1964 in the export receipts of theprimary producing countries was the highest re-corded in a decade. Foreign aid remained atmuch the same level as in 1963, while the inflowof private capital expanded somewhat, and therewas a substantial increase in the imports of theprimary producing countries. Although the moreindustrialized members of the group increasedtheir imports much more than the less developedcountries, nevertheless the latter experienced thelargest rise in several years in the volume of im-ports. As a result, the aggregate balance of pay-ments surplus of the primary producing countries,which had been quite large in 1963, was reducedconsiderably in the course of 1964. The moreadvanced members continued to be in aggregatesurplus through the year, but the less developed

6


GENERAL SURVEY

countries incurred a small deficit in the secondhalf. In many countries, signs of increasing strainswere appearing toward the end of the year.

The prices for metals and minerals, which dur-ing 1964 had shown the most pronounced increaseof any primary product prices, continued to riseduring the early months of 1965. The prices ofmost other primary products remained compara-tively stable during most of 1964 at the relativelyhigh levels reached in the early months, but theytended to weaken for a brief period at the end ofthe year. In general, they recovered slightly inthe early months of 1965. Nevertheless, the inter-national demand situation made it doubtful thatthe value of the exports of these products wouldcontinue to rise at the same rate during 1965 asin the preceding two years. Since the economicgrowth of developing countries depends largely ona sustained and adequate rise in the purchasingpower of their exports, any weakening of theirtrading position would give new urgency to inter-national measures to improve their export earn-ings, including reinforcing their access to marketsin the industrial countries. This is a matter towhich the Fund has given considerable attentionover the years. In the course of 1964, the UnitedNations Trade and Development Board was estab-lished for the continuous study of the trade anddevelopment problems of the developing countries.The Fund has declared its intention to work withthe new'United Nations organs being establishedfor this purpose, as it has for a long time donewith other international agencies concerned withinternational trade problems and the special prob-lems of the developing countries.

At the United Nations Conference on Trade andDevelopment (UNCTAD) in 1964, certain recom-mendations were adopted under the heading"Study of Measures Related to the CompensatoryCredit System of the International MonetaryFund." Some of these recommendations were ad-dressed to members of the Fund rather than tothe Fund itself, but all of them are being keptunder consideration in connection with the con-tinuing review of the still comparatively untriedcompensatory financing facility.1 This facility was

'The facility was described in Annual Report, 1963,pages 196-99. See also Selected Decisions of the Execu-tive Directors and Selected Documents (third issue,Washington, January 1965, hereafter cited as SelectedDecisions), pages 40-43.

set up after a long period of study; thus far, evi-dence as to how it works has been scanty, thanksto the generally favorable export experience ofthe developing countries. Indeed, during the pastfiscal year the Fund did not receive any requestsfor drawings under its compensatory financingfacility; before that, only two countries had madeuse of it. This situation cannot in the nature ofthings be expected to continue for long, andanother compensatory drawing has been maderecently. As more experience is gained, it willbecome easier to form conclusions as to the de-sirability of effecting reforms in the present ar-rangements. The Fund is also cooperating withthe IBRD in its current study of proposals to sup-plement the Fund's compensatory financing facil-ity, which has been initiated by another resolutionof the UNCTAD.

The balance of payments positions of the pri-mary producing countries which prevailed duringmost of the past year were such that comparativelyfew of these countries made use of the Fund'sresources. Drawings by these countries during1964 were the smallest for five years and wereexceeded by repayments. In the early months of1965, however, their drawings rose substantially,and several new stand-by arrangements with non-industrialized countries were made, including onefor $200 million with India and one for $125 mil-lion with Brazil.

A cause of strain in the payments positions ofthe developing countries that has recently becomesignificant arises from their increasing internationaldebt burden. Expenditures for the servicing offoreign debt take a large and growing share of theexport earnings of many of these countries, andit has become a matter of urgency to prevent afurther rise in the burden of debt service. Somecountries with heavy debt burdens have asked theFund to assist, in an advisory capacity, in theirnegotiations for a rescheduling of debt; this aspectof the Fund's activity is reviewed in some detailelsewhere in this Report. In the Fund's consulta-tions, therefore, increasing emphasis is beingplaced on the implications for the balance of pay-ments prospects of member countries of theirdebtor positions, on long-term as well as short-term account. The Fund is also taking steps toimprove its statistical reporting of indebtednesspayable in the near future, in order to be able to

7


8 ANNUAL REPORT, 1965

be of more effective assistance to debtor andcreditor countries alike. On all these problems,the Fund is working in close contact with theIBRD.

In several other directions, the Fund is expand-ing the services that it renders to the developingcountries. The new Central Bank Service has beenengaged on a considerable scale in advising onlegislative proposals for establishing new centralbanks in newly independent countries and on thereorganization and administration of existing in-stitutions. In addition, the panel of central bankexperts that the Service has organized has providedexecutive staff for central banks operated by sev-eral of the Fund's members, and requests for suchexperts are increasing in number. The Fund isalso giving, through its Fiscal Affairs Department,advice and technical assistance on taxation andfiscal administration, and is organizing a panel offiscal experts, in order to be able to supply residentadvisors on the request of member countries. Bythus assisting member countries to strengthen theinstruments of monetary and fiscal control, theFund actively supports their efforts to promoteeconomic growth in a favorable climate of mone-tary stability.

Countries' Reserves and International Liquidity

The increase in world reserves—apart fromthose of the Sino-Soviet area—in 1963 was thehighest figure in any year since World War II,$3.4 billion. In 1964, the increase was some $0.9billion less, at $2.5 billion, the decline being duemainly to a reduction in the rate of accumulationof dollars in the reserves of other countries, and toincreased gold hoarding. In the first quarter of1965, international reserves fell by about $800million. Contributory factors appear to have beenconversion of existing foreign exchange balancesinto gold by certain countries and continued pri-vate gold hoarding on a large scale.

The major event during 1964/65 in the field ofinternational liquidity was the adoption by theBoard of Governors of the Fund of two resolu-tions submitted to them by the Executive Direc-tors for increasing Fund members' quotas. Theseresolutions (reproduced in Appendix I, p. 124)provided for a general increase of 25 per centof members' quotas, together with additionalincreases for 16 countries whose quotas were con-

sidered to be out of line as a result of their recenteconomic development. If all the proposed in-creases become effective, total quotas in the Fundwill rise from the current figure of about $16billion to about $21 billion. This will add sub-stantially to the conditional liquidity available toFund members. The Executive Directors alsodecided to adopt policies and procedures designedto prevent gold subscriptions from reducing un-duly the amount of reserves available to individualmember countries, and in addition to mitigate theimpact on the gold stock of the two major reservecenters of the subscriptions of other members.

Another noteworthy event was the activation ofthe General Arrangements to Borrow in connec-tion with the two drawings by the United Kingdomin December 1964 and May 1965. The activationof the Arrangements not only was a demonstrationof their usefulness but also led to the creation bythe Fund of reserve assets in a new form as eightindustrial countries acquired loan claims on theFund to an amount of $930 million.

Continuing studies of international liquidity andof the functioning of the international monetarysystem are being conducted both by the Fundand by the Group of Ten. While there is wideagreement that there is no urgent need for addi-tional international liquidity, the situation couldalter if the United States succeeds in its programto eliminate its payments deficit. In that event,the environment in which international paymentshave taken place for more than a decade wouldbe fundamentally changed. The rest of the worldwould, after many years, cease to run a largeaggregate balance of payments surplus. Furtherincreases in international reserves would be lim-ited largely to the amount added to world mone-tary gold holdings. In the absence of deliberateinternational action to increase internationalliquidity, this change in the environment of in-ternational payments would reduce the impactwhich, in past years, has been exercised by theannual additions to world reserves. In these cir-cumstances, it is generally recognized as importantthat consideration should continue to be given tothe twin problems of international liquidity andthe workings of the international monetary system.These questions, including the contribution whichthe Fund can make toward their solution, are dis-cussed in Chapter 2.


Chapter 2

The International Monetary Systemand International Liquidity

Characteristics of the System

N recent years, there has been increasing dis-cussion in official, financial, and academic

circles of the present international monetary sys-tem. This system comprises a spectrum of custo-mary institutional and legal arrangements whichgovern the conduct of international economictransactions, the methods of financing deficits andsurpluses in international payments, and the man-ner in which countries are expected to respond tosuch deficits and surpluses.

In its widest sense, the international monetarysystem includes the broad network of banking andcommercial practices through which day-to-dayinternational transactions are undertaken. Thepricing of international shipments, the extension ofcredit, and the settlement of accounts take placein terms of many currencies. Mainly, these are thecurrencies of Western Europe and the UnitedStates, and more particularly, within that group,the major "trading currencies," i.e., the U.S. dol-lar, the pound sterling, and the French franc.

The predominance of the currencies of majortrading countries is not surprising. A country witha very large world trade will develop a network ofbanking arrangements necessary for conductingthat trade. The facilities and experience offeredby these arrangements are then available to trans-act not only the trade and related payments be-tween that country and its trading partners, butalso those between other countries. The fact thata large trading country is also likely to have a well-established money market, and to be an importantsource of capital, further extends the use of itscurrency. For these and other reasons, such acountry is likely to have long-established relation-ships with many other countries, causing them tolook to it as the center of their own internationalfinancial arrangements. In a basic sense, therefore,the international monetary system tends to be

founded on the currencies of a few countries whichloom large in the total trade of the system.

In a narrower sense, the international monetarysystem is the complex of international rules andunderstandings which have evolved in an effort toensure, by international agreement, a fair andefficient method of conducting international trans-actions. In this sense, the present system of inter-national cooperation and consultation, which aroseto a large extent from the 1944 Bretton WoodsConference, is in sharp contrast to that of theinterwar period, particularly the 1930's, whencountries pursued their financial policies with littleregard for, and little understanding of, the effectsthat these policies might have on other countries.

The present system comprises, to begin with,the provisions of the Articles of Agreement of theFund, which are designed to foster the intercon-vertibility of currencies. It includes the par valuesystem, under which a country is expected to main-tain a fixed value for its currency relative to goldand to other currencies—alteration of the valuebeing reserved to circumstances of fundamentaldisequilibrium and requiring consultation with theFund and, in most cases, the Fund's concurrence.It comprises also those provisions of the Articlesof Agreement of the Fund and of the GeneralAgreement on Tariffs and Trade under whichrestrictions on current payments and on trade aregenerally allowable only in situations of balanceof payments difficulty and are subjected to inter-national regulation. In addition, the concept ofthe international monetary system embraces allthose de facto practical arrangements which givelife and reality to the legal provisions. For ex-ample, the principal link between currencies andgold is provided by the fact that the United Statesfreely buys gold from and sells gold to monetaryauthorities, at fixed prices, for the settlement ofinternational transactions; moreover, the principalindustrial countries act together through the Gold

I

9



Pool to keep the price of gold close to par on thefree market. All the main industrial countriesother than the United States, and many othercountries as well, stabilize their rates of exchangeby buying and selling dollars on the exchangemarket, while a number of other countries achievethe same result by pegging on sterling or on theFrench franc. Although under the Fund Agree-ment countries are virtually free from obligationswith respect to the control of capital flows, therehas been a fairly widespread de facto liberalizationof capital movements by the industrial countries.

Finally, the international monetary system cov-ers the arrangements under which external re-serves are held. At the present time, internationalreserves comprise not only gold but also suchcurrencies as the dollar, sterling, and the Frenchfranc, gold tranche positions1 in the Fund, andclaims resulting from loans made to the Fund un-der the General Arrangements to Borrow. Beyondthese reserves, countries have access to the draw-ing facilities in the Fund in the credit tranches;these facilities, which are made available on con-dition that the drawing country maintains oradopts policies calculated to correct in due timethe payments deficit in question, constitute "con-ditional" liquidity. In addition, there has beenbuilt up in recent years a network of bilateralmutual credit arrangements between the UnitedStates and a number of major industrial countries,under which each participant can draw on itspartner for short-term accommodation in theform of a covered "swap." Similar arrangementshave been made on a number of occasions betweenthe United Kingdom and other industrial countries.

Reserves and other forms of internationalliquidity make it possible for countries to financetheir balance of payments deficits; and the volume,distribution, and manner in which these reservesare made available have obviously an important

*A member's gold tranche position is measured bythe extent to which the Fund's holdings of the member'scurrency falls short of its quota. The policies govern-ing drawings in the gold tranche are those set forth inExecutive Directors' 1952 Decision on Use of Fund'sResources and Repurchases (Decision No. 102-(52/ll);see Selected Decisions, pp. 21-24), and in the 1964Decision on Procedure for Drawings in the GoldTranche (see Appendix I, p. 123 and Selected Decisions,p. 49) under which the execution of requests for suchdrawings is expedited. All references to gold tranchedrawings in the present Report should be understoodin the light of these decisions.

bearing on that aspect of the international mone-tary system which is concerned with the adjust-ment of such disequilibria.

The system as described thus combines twofeatures that are complementary in character: thefinancing of imbalances and the elimination ofimbalances. The task of managing the interna-tional system—which is an individual and commonresponsibility of all countries concerned—is, in alarge measure, to strike a balance between thesetwo features, and this has also necessarily been theprimary and crucial task of the Fund as the inter-national organization at the center of the system.It should be emphasized that the task can belightened, and the performance of the system im-proved, insofar as countries see to it that majorpayments disturbances do not arise in the firstplace and are willing to cooperate to that end.

The task of international monetary manage-ment would be simpler if the objective were merelyto finance payments imbalances, or, alternatively,to ensure that any disturbances in balance of pay-ments equilibria were eliminated as quickly aspossible. But it is not sufficient that deficits befinanced; financing which is excessive in amount orin duration may constitute a distortion in the flowof real resources that should be avoided. Nor is itenough that international payments should bebrought into balance without regard to the meas-ures by which this is accomplished. Practicallyspeaking, the aim must be the achievement ofbalance with the least possible sacrifice of thegenerally accepted objectives of economic policy,including full employment, an adequate and sus-tained rate of growth, maintenance of reasonableprice stability, and the maximum degree of free-dom in current international transactions. It isalso important that distortions in the internationalflow of capital and financing be avoided.

In the world of today, national authorities placea higher priority than in earlier times on achievingspecific objectives in the internal economy and aremore willing to adopt economic policies to thisend. Public understanding that marked unemploy-ment and economic stagnation need not be sufferedas conditions beyond the control of man is oneof the most potent forces of the modern world.It is derived from, and it has stimulated, the de-velopment of techniques to influence the internalmonetary situation and, beyond it, the national


INTERNATIONAL MONETARY SYSTEM AND INTERNATIONAL LIQUIDITY 11

economy. The result has been that high employ-ment and sustained economic growth have beenestablished among the social goals that countriesresolutely pursue, and every government seeks toequip itself with the tools of monetary and eco-nomic policy which will allow it to meet thosegoals. Countries reject the concept, implied in thegold standard, that deflation and economic stagna-tion, or inflation and overheating of the economy,must automatically be accepted in the interests ofexternal equilibrium; and in many countries, themost pressing task of national financial authori-ties is to accommodate the public's demands forhigh employment, economic growth, and pricestability while maintaining external balance.Within any context of monetary and economicmanagement, circumstances will arise in whichcountries, particularly when they suffer balance ofpayments disequilibria of a persistent character,will be faced with difficult choices among severalexternal and internal policy objectives. Deficitcountries that find themselves in such circum-stances will need to choose whether to seek a solu-tion to their problem in a degree of deflation or atleast a slowing down of the rate of growth, in theadoption of measures to restrain payments forvisible or invisible imports or capital transfers, inan adjustment in their exchange rate, or in somecombination of these various broad policy ap-proaches. Surplus countries may similarly findthemselves forced to choose between inflationarypressure, the adoption of steps to restrain the in-flow and promote an outflow of capital, and re-valuation of their currencies.

Appraisal of the System

The international monetary system of today isthus a complex framework within which a verylarge number of countries seek to attain simultane-ously, by a combination of policy instruments, anappropriate balance among a number of internaland external objectives. How well has the systemserved .to attain these objectives?

Any attempt at answering this question and thusappraising the performance of the system muststart from the realization that the development ofnational economies individually and of the worldeconomy as a whole cannot properly be attributedonly to the workings of the international monetary

system, even in the broadest sense of that concept.The physical and human conditions under whichproduction proceeds, as well as a country's ownpolicies in many fields and the repercussions ofthe policies of other countries, have undoubtedlyalso had a major influence in determining the suc-cesses and failures of the past 20 years. Theseobservations are particularly pertinent when oneconsiders separately the experience of the develop-ing countries and of the industrial countries; withineach group there have been varying degrees ofsuccess. By and large, the developing countries,hampered by structural problems, notably the un-satisfactory development of their export earnings,have found it difficult to achieve simultaneouslythe goals of rapid growth and internal and externalstability. Restrictions on imports and on paymentsfor invisibles have often been resorted to, exchangerates have been depreciated, and internal im-balances have interfered with the expansion of theeconomy. This has, happily, not been the uni-versal picture of the past 15 or 20 years, but ithas been a common one. In recent years, however,there has been a growing awareness of the contri-bution which stability can make to sustainedgrowth, and many developing countries are show-ing a determination to stabilize their internal andexternal economies to provide a sound basis foreconomic development.

The industrial countries have achieved a veryhigh degree of success, as national governmentshave effectively pursued policies of full employ-ment. Between 1950 and 1964, production in theindustrial countries expanded at a rate of morethan 5 per cent per annum, while the labor forcegrew by 1.3 per cent per annum; the large pocketsof structural unemployment which at one timeexisted in most European countries, and whichseemed likely to persist, were largely absorbed.

With respect to the objective of price stability,it must be noted that inflationary pressures con-tinued to be felt, and the cost of living even inindustrial countries increased over the same periodby an average of 2.5 per cent per annum as coun-tries found it difficult to reconcile full employmentwith price stability, a difficulty which is evokingattempts at establishing "incomes policies." Greatprogress has been made by Fund members in theremoval of barriers to trade and in shifting frombilateral to multilateral payments, and all the



major industrial countries have now accepted theconvertibility obligations of Article VIII.

These on the whole impressive results have beenachieved with rather slight use in the industrialcountries of the instruments of balance of pay-ments adjustment that were provided for at BrettonWoods. With the exception of one large-scale andwidespread devaluation in 1949, which was a partof the postwar readjustment process, there havebeen relatively few changes in agreed par values.Similarly, the instrument of quantitative restrictionon imports, which was provided for in the GATTas a facility for meeting balance of payments dif-ficulties, has in fact been practically abandoned bycountries once they have succeeded in dismantlingcontrols. Payments restrictions have similarly lostimportance as a means of balance of paymentsadjustment, particularly since the widespread ac-ceptance of Article VIII in 1961. Finally, restric-tions on capital payments, which were not placedunder the requirement of Fund approval as wererestrictions on current payments, have been sub-ject to a substantial dismantling, although thistrend has recently been checked.

On the other hand, the instrument of monetaryjxdicy—or, more generally, internal financialpolicy—has been applied for balance of paymentspurposes far more generally than might have beenanticipated at the time of the Bretton Woods Con-ference. This has been attributable in part tocertain favorable features in the general economicenvironment. For example, the persistence of highdemand and expanding output has in many in-stances enabled countries to correct their incipientbalance of payments deficits by measures thathave not gone beyond bringing about a temporarypause in the expansion of their economies. Thishas been conspicuously true of the industrial coun-tries as a group, but there are numerous examplesof the effective application of domestic financialpolicy among less developed countries.

A number of features of the international econ-omy have given rise to considerable re-examinationin recent years; these include the role of capitalmovements and the scope for price adjustment.Questions have furthermore been raised about theworking of the system in terms of the manner inwhich international liquidity is created and theforms in which it is held. These issues are takenup below.

Role of Capital Movements

The Articles of Agreement of the Fund left con-trol over capital movements almost entirely to thediscretion of national governments. Later on, aview that had been dominant before 1930 beganto gain ground, viz., the view that freedom of capi-tal movements was highly desirable in itself, andmoreover that the movement of short-term fundsmight be regarded as an equilibrating factor ininternational payments which would diminish theneed for reserves. In fact, the period since thelate 1950's, especially after the main Europeancurrencies became convertible, has been charac-terized by a massive revival of capital movementsamong the industrial countries, in particular fromthe United States to Europe. The so-called Euro-dollar market has become a large pool of short-term funds connecting the money markets of manycountries and influencing them all. Long-termcapital markets have also become more closelylinked through direct investment, through dollarloans issued in European markets, and throughother channels. As a result of these new develop-ments, a large measure of international financialintegration has taken place in a short span ofyears, and this has had important effects on theconduct of internal financial policy. Before cur-rencies were convertible, countries could to a con-siderable extent follow independent monetarypolicies: the resulting differences in interest ratesand in the tightness of money had relatively littleinfluence in inducing movements of capital. Atpresent, however, the scope for independent mone-tary policy is becoming increasingly narrow. Inthese circumstances more emphasis must fall onfiscal policy, and countries have, to a larger extentthan previously, to bring their monetary policiesinto line with those of each other. Where coun-tries have found the mobility of capital to hamperexcessively the use of monetary policy for domesticpurposes, they have tended to intervene to limitin some degree the freedom of capital movements.Massive movements of long-term as well as short-term funds from the United States to Europeancountries have played a part in the persistent bal-ance of payments problems of the former, whileaccentuating the difficulties which some of thelatter have experienced in containing existing in-flationary pressures. More generally, capital move-



ments have frequently played a disequilibrating,rather than an equilibrating role, especially attimes when there were thought to be prospects ofexchange appreciation or depreciation on thehorizon.

As a reaction to these developments in capitalmovements, several surplus countries have limitedinflows of foreign funds, and certain deficit coun-tries have discouraged the outflow of funds byfiscal measures (such as the Interest EqualizationTax imposed in the United States) and by moredirect formal and informal measures.

The unexpected magnitude in recent years ofcapital movements between the main industrialcountries, and in particular the continued sub-stantial dependence of the world in general on theU.S. money and capital markets, thus confront theinternational monetary system with a new areaof problems, which are the more difficult to dealwith since it is hard to judge the extent to whichthese capital movements are a response to a per-sistent and fundamentally sound tendency forcapital to seek the highest real return, or how farspeculative or other temporary factors or fiscalconsiderations play a role. Should these flows beconsidered as mere temporary phenomena and befinanced by movements in reserves? Should it beexpected that current account balances will beradically changed to accommodate them? Orshould the flows in some way be limited by con-trols? There are no agreed answers to these ques-tions, and it may take much study, discussion, andcoordination of national policies to find a satis-factory practical solution.

Scope for Adjustment of Price Levels

Another element which, as has long been rec-ognized, adds to the difficulties of managing theinternational monetary system is that changes inprice levels cannot be counted upon as a quick oradequate equilibrating force between deficit andsurplus countries. The social forces which arearrayed against deflation have been noted earlier.Modern conditions make it very difficult for deficitcountries to force down their general price levelswithout giving rise to the danger of provoking sub-stantial unemployment of labor and underutiliza-tion of plant. At best those countries may be able(as has the United States in the past few years)

to maintain a fairly stable level of prices. On theother hand, there is an understandable feeling insurplus countries that any addition, through theirpayments surpluses, to inflationary pressures al-ready present in their economies should be re-sisted. Thus, whether or not price adjustmentsplayed a large equilibrating role in the past, it isclear that in present circumstances large im-balances cannot be expected to be eliminatedwithin a short period of time by reliance on dif-ferential price movements alone.

Role of Reserve Currencies

Currencies of the reserve centers form, next togold, the largest component of countries' reserves.Any rise or fall in the holdings of such currenciestends to result in a rise or fall in the gross reservesof the world as a whole. It is sometimes contendedthat this component in the world reserves totalaffords reserve center countries an undue and ex-ceptional facility for financing balance of paymentsdeficits, that its magnitude is determined by factorsthat have little to do with the world's need forreserves, and that it constitutes an element ofpotential instability in the international financialsystem.

It is no doubt a fact that payments deficitsand surpluses of reserve centers, being matched bycorresponding surpluses and deficits of other coun-tries, tend to be associated with rises and fallsrespectively in the value of currency reserves andhence of total reserves. So long as the center isstrong and enjoys unquestioned confidence, someproportion of its balance of payments deficit maybe met by an accumulation of liabilities to officialforeign monetary holders. In the last six years asa whole, the United States has financed some 40per cent of its deficit in this way, despite the grow-ing awareness of the need to reduce this deficit.As far as the United Kingdom is concerned, how-ever, outstanding sterling balances have tended tofluctuate .without a clearly defined trend. Most ofthe financing of the U.K. deficits in the last decadehas been provided by the Fund or, for very shortperiods, by special assistance from the monetaryauthorities of other countries. The ability of anyreserve center to finance deficits by increasing itscurrency liabilities is in any event not withoutlimit.



The gold exchange standard, however, involvesmore than the ability of a reserve center to financeits payments deficit. Reserve centets originated asplaces where the monetary authorities of othercountries—for reasons of convenience, access tocapital markets, etc.—decided to hold a substan-tial proportion of their reserves; and while reservecenter countries have some advantages, they arealso exposed to pressures when currency balancesare transferred into other currencies or withdrawnin gold. These pressures may develop even whenthe reserve center is in external balance or in sur-plus. Whatever criticisms may have been ex-pressed about the present system of reserve cur-rencies, there has been no significant tendency forcountries to transfer their reserves to potential newreserve centers; nor has there been any inclinationon the part of any country whose currency mightbe thought of as an alternative reserve currencyto welcome or to encourage any such development.

The practice of holding foreign exchange re-serves, whatever its merits from the point of viewof the reserve centers themselves, has the inevita-ble consequence that the supply of reserves comesto depend greatly on the balance of payments sit-uation of reserve centers and the confidence inreserve currencies. It is important not to exag-gerate the degree of instability that is likely to arisefrom this cause by looking at parallels drawn fromearlier periods. The international monetary sys-tem has been managed much more effectively inthe postwar than in the interwar period. Initialtendencies toward declines in reserves during theearly postwar period were more than offset bymassive aid financed by the main reserve center,the United States. During recent years, when theUnited States has been in deficit, the rate of re-serve accumulation in other countries has delib-erately been influenced by agreement on suchspecific devices as advance debt repayments andswaps. If the strengthening of the payments posi-tion of the United States that is now under waywere to go so far as to threaten excessive pressureon other countries in general, there would beopportunities for corrective action on the U.S.balance of payments (e.g., by alteration or relaxa-tion of measures to restrain dollar outflows fromthe United States) or on other countries' reserves(e.g., by a build-up of a larger U.S. position in theFund and a possible accumulation of foreign cur-

rencies as part of the U.S. reserves). Nevertheless,these possibilities of ad hoc mitigation do notentirely destroy the validity of some of the criti-cisms made of the system; nor do they justifydelay in exploring other ways in which it may bepossible, as the need may arise in the future, tosupplement the growth of reserves in a moredeliberate manner.

Types of International Liquidity

The subject of international liquidity was dealtwith at considerable length in Part II of lastyear's Annual Report, and some of its aspects canbe dealt with more briefly here. As was therepointed out, a country's external or internationalliquidity represents all those resources to whichits monetary authorities have access for the pur-pose of financing balance of payments deficits. Ifthere is too much international liquidity in theworld, some countries are likely to pay too littleheed to possible deficits and hence to tend toengage in overexpansive financial policies. As aconsequence of this, other countries may find thatsurpluses develop on an excessive scale becausebalance of payments financing is too easy andcheap. If there is too little international liquidityin the world, deficit countries will have too littletime to adjust in a desirable way to the disequilib-ria which develop, and will be forced to adoptunduly restrictive financial policies as well as toimpose restrictions on trade and capital move-ments. As a result, the growth in world produc-tion and trade may be hampered and the pricesof primary products depressed.

To what extent these various consequences willensue depends in part on the composition anddistribution, as well as on the quantity, of theinternational liquidity available. In the Fund ithas been found useful to distinguish betweenconditional liquidity, which is available to a coun-try in the form of credit facilities subject to theadoption of satisfactory policies looking towardbalance of payments adjustment, and uncondi-tional liquidity or reserves which are more orless freely at the disposal of the country. TheFund itself is much the largest provider of con-ditional liquidity in the form of drawing rightsunder the quotas. In the interest of maintainingeconomic activity at a high level and keeping



international trade as free as possible from re-strictions, while at the same time counteringinflationary pressures, the supply of this type ofliquidity should be adequate to meet all legitimateneeds. It is for this reason that the Articles ofAgreement provide for the periodic review ofcountries' quotas in the Fund.

Ideally, countries' needs for additional liquiditycould be met by adequate increases in conditionalliquidity. In practice, however, countries do notappear to treat conditional and unconditionalliquidity as interchangeable. For various reasons,countries which have adequate real resources liketo have the major proportion of their externalliquidity at their free disposal. Even if condi-tional liquidity were expanded on a substantialscale, some countries might attempt—in prefer-ence to relying on these facilities—to increasetheir own reserves by adopting balance of pay-ments policies which, from a broad internationalpoint of view, would have to be regarded asundesirable.

Potential Need to SupplementGrowth of Reserves

Since the publication of last year's AnnualReport, the Fund has been devoting considerableattention to the problem of international liquidity.Its primary practical concern has, of course, beenwith the adaptation of conditional liquidity toworld needs by way of the expansion of Fundquotas; this subject is dealt with at length in Chap-ter 4. In addition, however, it has been givingthought to the issues relating to possible- inade-quacies in the supply of world reserves, or uncon-ditional liquidity, that might arise if the prospec-tive trend of such reserves, based on the availabil-ity of monetary gold and any future increases (ordecreases) in holdings of reserve currencies, wereinsufficient to satisfy the desire for owned reservesin an expanding economy. In fact, as indicated inChapter 1, the current rate of expansion inreserves is substantially less than in the recordyear 1963, and it is unlikely to be of that orderof magnitude in the immediate future. It iswidely agreed that there is no urgent need forsupplementing the volume of reserves, and thatexisting methods to create liquidity may suffice to

meet the world's need for a time. Nevertheless,it is important that further progress be made to-ward an international consensus about the way inwhich the international monetary system shoulddevelop, including possible new techniques where-by the existing methods of reserve creation couldbe supplemented, if and when necessary, and tothe extent required.

Deliberate Reserve Creation

During the past year, studies as to possible newmethods of creating reserves have been made bothwithin the Fund and among the countries par-ticipating in the General Arrangements to Borrow.

A basic assumption of these studies has beenthat no change will be made in the price of goldin terms of currencies in general. This assump-tion corresponds to the endorsement of the estab-lished price of gold as one of the bases of thepresent monetary system, expressed by the re-sponsible authorities of the principal industrialcountries as indicated in the Ministerial Statementof the Group of Ten,2 an endorsement in whichthe Fund concurs. The arguments against achange in the price of gold, including the inequi-ties it involves and the speculative movements towhich it is likely to give rise, are well known andneed riot be repeated here. The progress madein international monetary cooperation since the1930's should make it possible for the world toachieve a more deliberate control over the amountof reserves through international action and toavoid sudden changes in the relative value of dif-ferent reserve media.

The studies mentioned above have focusedmainly on the deliberate creation of reserves bycollective international action in the light of anappraisal of the general need for reserves ratherthan on their creation in response to immediateneeds of particular countries for balance of pay-ments assistance. Compared with the existingmechanisms of reserve creation, this constitutesa new approach which raises a number of im-portant issues, e.g., how to establish and measuregeneral reserve needs, in what forms additionalreserves should be made available, what role they

s Paris, August 1, 1964.



should play in the international payments system,in which ways they should be created, how theyshould be distributed initially, and what institu-tional provisions should be made to ensure propermanagement of their volume and functioning.The question also arises as to the way in which,if conditions warranted, reserves should be re-duced.

All these questions require a great deal offurther study from the point of view of objectivesas well as techniques. This Report can do nomore than discuss them in a preliminary andgeneral way and indicate what could be done bythe Fund. It does not attempt to provide defini-tive answers or present concrete proposals.

Criteria of General Reserve Needs

Appraisal of general reserve needs is not some-thing that can be carried out on the basis ofprecise criteria. Resort to qualitative judgment isinescapable. In particular, no close relationshipexists between these needs and such simple in-dices as the value of international transactions.In the exercise of such judgment, attention hasto be focused primarily on the nature of thereactions, particularly in the sphere of nationalpolicies, which it appears appropriate to encour-age or discourage in the interest of sound develop-ment of the world economy with a minimum ofmonetary disturbance. Some of the consequences,or symptoms, of excess or deficiency in inter-national liquidity were discussed at page 14above. In the light of this analysis, the followingappear to be the main criteria on the basis ofwhich consideration should be given to an in-crease—or, on rare occasions, a decrease—in in-ternational liquidity: whether, in circumstances inwhich countries' financial policies are likely tobe influenced by the level of world reserves, itappears desirable on balance to enlarge the scopefor an expansion of monetary demand or to in-fluence countries in the direction of counter-inflationary action; whether, on balance, exchangerates are under undue pressure, or needed adjust-ments in exchange rates are being unduly delayed;and whether there are widespread restrictions ininternational transactions, or widespread tenden-cies to speculative capital movements that an

expansion in world reserves could to some extentrelieve. Some of these conditions might, of course,call primarily for a change in the supply of con-ditional rather than unconditional liquidity, orfor other changes in the techniques of inter-national cooperation, but they are all relevant insome degree to the question of reserve needs.

Types of Reserve Creation

Reserves may be created directly between coun-tries, either unilaterally (as when one countryacquires a reserve currency for gold) or bilaterally(as when two countries make a reciprocal, i.e.,swap, credit arrangement or carry out an actualswap transaction). Plans for systematic reservecreation, however, have usually involved actionthrough the intermediacy of an international insti-tution. It may be convenient to distinguish twomain techniques through which such an institu-tion can create reserve claims: (1) by extendingunconditional borrowing rights or drawing facili-ties to countries, and (2) by creating reserveclaims on itself in exchange for value received,usually in the form of claims on countries. Thesecountries can be either (a) identical with or (b)to some extent different from the countries thatacquire reserve claims on the institution. Possibil-ity (a), which has been envisaged in certain ofthe plans that are under consideration, is equiva-lent to a multilateral swap transaction or an ex-change of claims between each participating coun-try and the institution. Possibility (b) may beillustrated by analogy with the operations of adomestic banking system, which by lending toone set of customers in due course creates depositliabilities vis-a-vis a somewhat different set.

Transfer ability of Reserves: Directand Indirect

In order that a borrowing right or asset maybe suitable for inclusion in a country's officialreserves, it must be available as needed to meetpayments deficits; that is, it must be convertiblevirtually on demand into the currencies in whichthese deficits are incurred. One way to assure thisis to transfer the reserve claim on the institutionto another holder in exchange, e.g., for dollars or



the currency of the purchaser. Another way is forthe institution itself to convert or encash the re-serve claim for needed currency. In this case, thereserve claim will, in effect, be transferablethrough the institution. This happens, for exam-ple, when a country with a gold tranche positionin the Fund makes a drawing from the Fund—theposition is transferred to the country whose cur-rency is used.

If transferability, whether directly or throughthe institution, is to be ensured, countries musthave certain obligations to accept transfer in theform of lines of credit or otherwise, althoughthese obligations need not be unlimited. The na-ture of any limitations imposed on the acceptanceof transfer will largely determine the usability ofthe reserve asset. For example, if countries under-take to accept transfer of the reserve asset inquestion only in a certain ratio to gold, or togold and foreign exchange, then other countrieswill be able to use the asset to meet their pay-ments deficits only in the specified ratio to gold,or to gold and foreign exchange, respectively. Onthe other hand, if the holder of the reserve claimis to be able to use it freely, other countries mustbe prepared to accept it freely. In practice, themore freely the reserve claim can be transferredat the will of the transferor, the more likely coun-tries are to insist on a quantitative upper limit totheir obligations to accept transfer.

The procedures that are at present applied withrespect to the use and transfer of reserve positionsin the Fund represent something intermediate be-tween free transferability and a system underwhich such positions are held and transferred ina fixed proportion to other reserves. A membercan draw on its gold tranche virtually at will onrepresentation of a payments need. In regard tothe currency drawn—and hence the country towhich the reserve position is transferred—thedrawing country consults the Fund, which strivesto ensure an equitable distribution of reserve posi-tions in the Fund in the light of the balance ofpayments and reserve positions of the countrieswhose currencies are considered for drawing.Over the long run, the reserve positions in theFund of members whose currencies are suitablefor drawing have, as a result of this arrangement,tended to approximate a uniform proportion oftheir total reserves. All this takes place within

the framework of creditor limits set by the quotasand beyond these by commitments under the Gen-eral Arrangements to Borrow.

Apart from these questions relating to the usa-bility or liquidity of the newly created reserveclaims, certain other attributes of these claimshave importance, such as whether they enjoy avalue-maintenance guarantee, whether they bearinterest (or in the case of borrowing rights,whether their use costs interest), and what willhappen to them in the event of liquidation of thescheme. These matters are important primarily asaffecting the acceptability of the new reserveclaims, but also because of their possible reper-cussions on countries' preferences between holdinggold and holding reserve currencies.

Distribution of Initial Reserve Increases

One of the most important questions to beasked with respect to any scheme for creatingreserves would be how the initial increase inreserves would be distributed among countries.If reserves were created in the form of automaticaccess to credit, the initial increase in reserveswould accrue to the countries which received suchaccess. If reserve creation resulted from a pur-chase of assets by the institution, the initial in-crease would accrue to the countries whose lia-bilities the institution acquired, not necessarily tothose that financed the operation by acquiring thenewly created liabilities of the institution. Forexample, if the two groups of countries were sepa-rate and did not overlap, the countries whoseliabilities the institution acquired would obtainadditional reserves (initially in the form of bal-ances in the currencies of countries of the othergroup), while the latter, though they acquiredreserve claims on the institution, would probablylose reserves in other forms as a result of con-version.

A number of important considerations wouldenter into the decision as to the allocation amongcountries of any additional reserves that were tobe created.

Any scheme of reserve creation would have toinvolve criteria to determine what countries wouldparticipate in the distribution of reserves and inwhat proportions. The countries participating in



the distribution would be affected both directly,by having larger reserves at their disposal, andindirectly, because of the effect of increased re-serves on the policies of other countries, which,as a result of easier liquidity conditions, would beinduced to pursue policies that would increasetheir import demand and/or would be more will-ing to export capital or give aid. Countries notparticipating would be affected only in this in-direct manner.

Whatever the initial distribution of reserves,the bulk of them would probably gravitate sooneror later to countries with a high propensity tohold reserves, such as the industrial countries andcertain primary producers. To the extent that theinitial distribution of reserves was confined tocountries with a strong tendency to hold reserves,the effect of reserve creation on balance of pay-ments surpluses and deficits, i.e., on the move-ment of real resources among countries, would beminimized, apart from short-run fluctuations.Conversely, where reserves were distributed di-rectly to less developed countries (which on thewhole have a weak tendency to hold and accumu-late reserves), the creation of reserves would alsoinvolve a long-term movement of real resourcesfrom the more developed to the less developedcountries. An important question to be consideredis whether a mechanism which involved suchtransfers of real resources would be desirable.

Finally, although the likelihood of a reductionin reserves or liquidation of a reserve schememight be remote, all participants would have aninterest in the quality of the assets backing theclaims that were created.

Institutional Aspects

The foregoing discussion of various aspects ofreserve creation has been conducted without ref-erence to any specific institutional framework.The task of influencing the total level of worldreserves could be carried out by a new institutionor by an existing institution, such as the Fund.From a purely technical standpoint, it would ingeneral be possible to attain through the Fundresults similar to those that might be sought inother ways, although this might involve certainamendments of the Articles of Agreement.

It can reasonably be argued that a matterwhich is of concern to all countries should be han-dled in an institution that has been organized asan instrument of financial cooperation on a world-wide basis. This would, moreover, be one way ofensuring coordination between the function ofproviding individual countries with short-to-medium term balance of payments assistance ona conditional basis and any new function of in-fluencing the aggregate supply of world reservesor unconditional liquidity.

Reserve Creation Through the Fund

As foreshadowed in last year's Annual Report,the Fund has, during the past year, continued tostudy technical aspects that could arise in connec-tion with any plans for the creation of reservesin the Fund. The Fund staff has also participatedin the studies carried on within the Study Groupon the Creation of Reserve Assets established bythe countries participating in the General Ar-rangements to Borrow.

The Executive Directors have given some pre-liminary consideration to technical aspects of pos-sible methods of creating reserves in the Fund.The two main ways, although not necessarily theonly ways, would be the following: (1) the exten-sion of quasi-automatic drawing facilities beyondthe gold tranche into some part of the credittranches, and (2) an operation whereby the Fundsimultaneously would obtain special assets andassume additional liabilities.

One way of raising members' reserve positionsin the Fund would be by an Executive BoardDecision on drawing policies under which theratio of Fund currency holdings to quota up towhich members can draw on a virtually automaticbasis would be raised from the present 100 percent to some higher percentage of quota. Such aDecision might apply to all members or only tosuch members as satisfied certain criteria.

It should be observed that unless the extensionof automatic drawing facilities were accompaniedby a corresponding extension of total drawing fa-cilities, some contraction in the amount of con-ditional drawing facilities open to members wouldbe involved. A mere substitution of unconditionalfor conditional drawing facilities would have dis-



advantages from the standpoint of the Fund's abil-ity to influence its members in the direction of theadoption of appropriate balance of payments poli-cies. The contraction of conditional facilities in-volved would also reduce the value of the reserveincrease to members themselves. This would applyparticularly with respect to drawing facilities inthe first credit tranche, which are available to anymember that is making reasonable efforts to copewith its balance of payments problems. Theseconsequences could be averted by extending thelimits for drawing facilities of each type by thesame amount that the limits for automatic draw-ing facilities were extended.

A second approach to an increased role of theFund in the creation of international liquiditywould be through an enlargement of the balancesheet totals of the Fund. The Fund would acquireassets other than the ordinary currency holdingswhich determine the drawing facilities availableto members. In order to finance this acquisition,it would expand its liabilities by borrowing inone form or another. From the asset side of thebalance sheet, this form of reserve creation maybe described as the acquisition by the Fund of"special assets"3; from the liability side, and re-ferring to the form which the additionally createdreserves take, it may be described as the creationof loan claims on the Fund.

The liabilities to be created would have to besuitable for incorporation in countries' reserves.The precise nature of these Fund liabilities (i.e.,members' reserve assets) would have to beworked out, but they could include at least thefollowing: (1) the facility of the asset to be en-cashed for useful currency at least as freely asgold tranche positions or, alternatively, to betransferred directly to other members; (2) a gold-

3 The same concept was referred to as Fund "invest-ment" in Annual Report, 1964, page 38.

value guarantee; (3) interest at a modest ratereflecting the gold value of the claim. It will benoted that claims under the General Arrange-ments to Borrow have these three characteristics.

Under either of the approaches to Fund reservecreation discussed above—the extension of au-tomatism and the acquisition of special assets—reserves could be created on a more or less exten-sive basis, depending on the criteria to be appliedfor countries to be included.

Again, under either approach, suitable actionwould be required to enable the Fund, withoutimpairing its own liquidity, to meet the additionalclaims on Fund resources (in the form of draw-ings or conversions) that would arise from theuse of the reserves created.

Conclusion

The international monetary system as it existstoday is sufficiently strong to allow of a calmand dispassionate consideration of the possibilitiesof amending and improving it. Even if there isno need for immediate action to create additionalreserves, it is nonetheless important to considerwell in advance the many problems of principleand technique that would present themselves ifthe necessity for such action should arise. Thework that has been carried out in the Fund and,with the collaboration of the Fund's staff, else-where has prepared the way for further advancetoward an international consensus regarding boththe major objectives of liquidity policy and thebroad nature of the techniques to achieve theseobjectives. The Executive Directors have not, atthis stage, attempted to reach a common viewon the merits of the various possibilities indicatedabove. They intend, however, to devote furtherattention to these matters in the coming year.


Chapter 3

Some Problems of Developing Countries

Introduction

N its relations with developing countries, aswith other members, the Fund is guided pri-

marily by a desire to implement the purposes out-lined in the first of its Articles of Agreement, andin particular

to facilitate the expansion and balanced growth ofinternational trade, and to contribute thereby to thepromotion and maintenance of high levels of em-ployment and real income and to the developmentof the productive resources of all members asprimary objectives of economic policy.

By far the greatest number of Fund transactionshave been with countries which may be consideredto be developing rather than developed, eventhough a small number of large drawings, such asthose by the United Kingdom in 1956, 1961,1964, and 1965, France in 1957 and 1958, Can-ada in 1962, Japan in 1953 and 1957, and theUnited States in 1964, have accounted for overhalf of the value of total Fund transactions. Sincethe large majority of the Fund's members aredeveloping countries, most of its consultations arewith them, and conducting relations with thesecountries is a major part of its day-to-day activi-ties.

It is difficult to make generalizations regardingthe problems of the developing countries. Manyare primarily dependent on the export of a fewcommodities to provide the imports which accountfor a large part of their consumption and invest-ment; others have already achieved a high degreeof self-sufficiency. Some are faced with seriouspopulation pressures; others are able to absorb afairly large number of immigrants. In many cases,their export products are subject to large pricefluctuations, which make the determination of theprospective profitability of investment uncertainand the maintenance of balance of paymentsequilibrium difficult. Furthermore, most exportersof primary products are also importers of other

primary products. When, as in 1964, the pricesof some such products fall relatively to others,those countries that export the former and importthe latter will suffer. In the field of financialpolicy, many of the developing countries havebeen able to achieve growth in an atmosphere offinancial stability; for a few countries, inflationseems to be almost an endemic problem.

While the Fund is necessarily interested mostdirectly in the financial problems of the developingcountries, it recognizes that these account for onlypart of the real internal and external difficultiesfacing these nations. However, experience indi-cates that these difficulties are most likely to besuccessfully overcome when policy is directed to-ward the maintenance of internal and externalfinancial equilibrium. Even if this stability isachieved, it will not necessarily guarantee thatrapid progress is attained; monetary stability mustbe regarded as a prerequisite for sustained eco-nomic expansion, rather than as an objective initself. Even the best of policies can only speedthe achievement of potential progress.

In previous Annual Reports, a number of thefinancial problems facing developing countrieshave been discussed. In 1962, the relation be-tween inflation and economic development wasreviewed at some length; and in 1963, some of thetrade and payments difficulties of the developingcountries were discussed and methods to cope withthem were considered. These are aspects of themore general financial problem facing developingcountries.

This chapter deals with two other aspects ofthis general problem which are frequently en-countered in developing countries, and with whichthe Fund is increasingly concerned. The first sec-tion of the chapter discusses briefly problemsarising from structural weaknesses in countries'fiscal systems; the second reviews at greater lengthdifficulties arising from excessive burdens of short-term foreign debt.

20

I


SOME PROBLEMS OF DEVELOPING COUNTRIES 21

Fiscal Systems

The Problems

For some years past, the discussions which theFund has had with countries planning stabilizationprograms have shown that budget deficits are amajor problem in many such countries. Indeed, itmay not be too much to say that these deficits arethe most frequent cause of the balance of paymentsdifficulties of countries seeking assistance fromthe Fund in support of stabilization programs.

Many developing countries are faced withrapidly growing populations and a need to im-prove living standards. Their aspirations have ledthem to undertake ambitious expenditure pro-grams in order to accelerate the rate of economicgrowth and to provide more government services.These programs involve not only the expansion ofpublic investment in transportation, power, sanita-tion, and water, but also higher expenditures oneducation, public welfare, and other services, tomeet the rising expectations of the population.Once a government becomes committed to a highand rising level of expenditure, the curtailment ofspending programs is politically difficult. At thesame time, the revenue systems of most of thedeveloping countries are not structurally capableof supplying a rapid increase in financial re-sources. In most such countries, these systems,and the tax rates, are inadequate to obtain thenecessary growth in revenue and are generally notconducive to development. Moreover, they areoften so complicated that a general increase inrates would most likely lead to further economicdistortions and administrative difficulties, withlittle growth in revenue. Simplification and re-orientation, together with judicious increases inappropriate rates, are what is required.

A further complicating factor is that the exist-ing revenue systems are generally inelastic relativeto economic growth. Basically, this inelasticityreflects the fact that taxation does not tap ade-quately the more dynamic sectors of the economy.A major cause of the inelasticity of the revenuesystems has been the inevitably heavy dependenceupon import and export duties. On the importside, these have been rendered comparatively slug-gish by balance of payments limitations upon thegrowth of imports, by the fixed character of spe-

cific duties, and by the shift in the composition ofimports toward capital goods and raw materialsthat generally carry lower duties or are evenexempt from them. The prevalence of specificindirect taxes and of land taxes based on long out-dated assessments also inhibits revenue growth.

The scope for borrowing by the public sector inthe developing countries is quite limited. Usually,the capacity of the capital market in developingcountries is exceedingly small and is limited moreby the low level of income per capita than by thelack of institutions for channeling savings into pro-ductive employment. Some borrowing is possiblefrom small savings—for example, post office sav-ings and low-denomination government bonds—and from pension funds. Usually, however, in-ternal borrowing by the public sector is mainlyfrom the banking system. Since the scanty supplyof financial savings through the banking systemhas to assist in financing the over-all requirementsof the economy, only modest amounts can beobtained from this source if the private sector isto have adequate funds to meet its needs forgrowth. The total amount of external financingis limited by the over-all supply of such funds, bythe shortage of projects suitable for such financ-ing, and by balance of payments considerations.In particular, external credits with short repay-ment terms can lead and in many instances haveled to serious balance of payments difficulties.

When internal borrowing (largely in the formof bank credit) leads to a primary monetary ex-pansion beyond the needs of the economy, risingwages and other internal costs will impair thecountry's competitive position, stimulate imports,and result in a drain on foreign reserves. Such aninflationary situation tends to feed on itself. Wageand salary adjustments and subsidies to alleviaterising living costs increase budgetary expenditures.The revenue structure, in addition to being inelas-tic to growth, is usually not well designed to pro-vide the necessary response to price increases.Specific import duties, where they exist, do not re-flect changing values or composition of goods, andincome and profits taxes are of minor importance.Indirect taxes on the internal economy are oftenspecific, and property tax assessments lag behindchanging values. Delays in payment of tax liabili-ties and inadequate administration and enforce-ment of the tax laws often worsen the situation.



The fiscal difficulties of many developing coun-tries are aggravated by heavy dependence on theexport of raw materials and sensitivity to fluctua-tions in prices due to the shifts in world supplyand demand of a few basic commodities. Any de-cline in the prices of these items is soon reflectedin falling government receipts from customs dutiesand internal taxes. Also, a country's financialproblems may at times be intensified by disasters,such as floods, earthquakes, or prolonged droughts.The resulting loss of production not only precipi-tates a drop in taxable income but also entailsgreater expenditure for relief. However, weakfiscal systems can make the country's problemsmore difficult than they need be, and a strengthen-ing of such systems can facilitate the solution.

The Fund has long aided its members in tack-ling the problems of inflation, and the establish-ment of the Fiscal Affairs Department will enableit to render greater technical assistance to coun-tries seeking to improve tax structures, tax ad-ministration, and budget administration.

Steps to Strengthen Public Finances

Although taxable capacity is limited by low in-comes and the difficulty of taxing the subsistencesector of the agricultural population, few countriesdo not have scope for increasing government rev-enues. Some countries have achieved impressiveresults. In India, for example, the ratio of taxesto national income was more than doubled in a13-year period. The ratio had ranged between 4V2per cent and 6l/2 per cent, until the institution ofthe first development plan in 1951; by 1955-56the tax ratio had risen to almost 8 per cent, andby 1963-64, it was pushed to over 13 per centof national income. (The inclusion of municipaltaxes would raise the level even more.) In Peru,the ratio of taxes to national income between 1952and 1959 averaged approximately 9 per cent; inthe succeeding four years, tax collections rose to14 per cent of national income. In many othercountries, the ratio has also been rising.

Countries attempting to deal with inflation andto bring their balance of payments under controlhave often had to adopt emergency fiscal measureswhich are helpful in the short run but which wouldbe undesirable if long continued. These include

such actions as the deferment of capital outlaysand the imposition of surcharges on imports orforeign payments.

For the long run, improved budgeting, tax re-form, and better administration are required.

Budgetary Planning and Control

The national budget, through which expendi-tures are authorized and taxes and other revenuesare set, is the logical starting point for improvinga country's finances. The budgetary process in-volves the establishment of priorities for expendi-tures for various public purposes, and these shouldbe restrained within the over-all ability of thegovernment to support them. The matching re-sources are made available from internal revenues,including taxes and other receipts and loans, orfrom loans from abroad. In order to ensure theefficient utilization of public funds, some countrieshave organized a budget office that has effectivecontrol over both planning and execution ofbudget expenditures, and have provided the officewith adequate authority to keep expenditureswithin the limit of prospective resources.

It is also important to ensure the coordinationof the operating policies and investment decisionsof autonomous entities with the country's eco-nomic plans through appropriate forms of centralreview or control. This need was recently recog-nized in Mexico, and all decentralized agencieswere required to submit their budgets to the execu-tive for review and formal legislative approval.Improvements in accounting and reporting proce-dures are a necessarily related step for both ex-penditures and revenues, in order to provide theup-to-the-minute data which are essential forproper administrative control over expenditures.

Tax Reform

In recent years, many of the less developedcountries have recognized the need to modernizetax systems so as to facilitate economic develop-ment and other social objectives. In parts of LatinAmerica, for example, important tax reform pro-grams have been undertaken which have greatlystrengthened the revenues. Most of the recentreforms have been designed to introduce or tostrengthen income taxes, to improve the incidenceof import duties and internal sales taxes by higher



rates on luxury and semiluxury goods, or to mod-ify or eliminate tax barriers to new investment byvarious relief measures. Supplemental taxes onnet wealth have been introduced in a few coun-tries, and taxes on exports modified in others.

One of the most intractable problems frequentlyencountered is that of obtaining appropriate taxrevenues from the agricultural sector. In many in-stances, this revenue is obtained through taxes onexports of important agricultural commodities andthrough duties on imports or excises and salestaxes on farmers' purchases. However, new tech-niques need to be developed to tap the predomi-nantly subsistence sector and to widen the taxbase by encouraging the conversion of productionfor subsistence into production for money income.Graduated personal taxes have proved useful inseveral African countries where land taxes areimpracticable, although evasion is sometimes diffi-cult to prevent. In other countries, improvementshave been made in the assessment of land valuesand the collection of land taxes.

Tax reforms are commonly intended not onlyto increase revenues but to lessen interference witheconomic growth and to help to achieve a moreeven distribution of income and wealth. In somerespects these objectives may conflict, so thatcompromises among them often become necessary.

Tax Administration

More and more countries are recognizing thatthe most effective means of strengthening revenuecollection is often the improved enforcement andadministration of existing taxes. Usually a long-range program is required, including reorganiza-tion of revenue departments, the hiring and train-ing of suitable employees, and the payment ofadequate salaries, as well as the introduction ofmodern techniques and controls to check evasionand irregularities. Greater voluntary compliancewith the tax laws may be secured as taxpayers'confidence in the efficiency and fairness of therevenue administration grows.

To improve revenue administration, it may alsobe necessary to redesign and simplify the tax lawsthemselves. This may entail the consolidation ofmany separate taxes into a single integrated tax,as in Ecuador which recently combined 25 sepa-rate taxes on the export of bananas into a single

unified rate of 20.4 per cent. Progress can alsobe made by the elimination of miscellaneous smalltaxes that are not justified by the cost of collection.

Pricing Policies of Public Enterprises

A major cause of government deficits has oftenbeen contributions to finance the operating deficitsof public enterprises, which are frequently due toinadequate prices for the services provided. Rail-roads, other transportation, and electric utilitiesare common sources of drain on public funds;such a drain frequently results also from the pro-duction and distribution of consumer goods. Theselosses are often the result of conscious under-pricing policies designed to provide subsidies tocounter inflation. Many enterprises that coveroperating expenses do not make adequate pro-vision for the amortization of their initial capitalinvestment or for expansion. Financial demandsare often made on the government even by auton-omous entities that are only loosely affiliated toit. The revenue structures of most developingcountries are not strong enough to support boththe increased expenditure required by an adequatedevelopment plan and the large financial contribu-tions that the state enterprises often receive.

Some countries have reduced or eliminated thebudgetary drain of public enterprises by placingthem on a mpre efficiently operating basis. InMexico, most of the state enterprises operateprofitably. India has for many years been strivingto operate its public enterprises so as to obtainsurpluses for investment, and has been particularlysuccessful with respect to the railways and someof the new industrial establishments. Serious at-tempts are also being made to improve the finan-cial results of public enterprises in a number ofother countries, including Argentina, Brazil, andCeylon.

Debt Burdens and Debt Renegotiation

The Problem

In many instances, the strains arising fromweak fiscal structures in developing countries havebeen eased temporarily by recourse to undulylarge foreign credits, often for relatively shortterms. In addition, in attempting to mitigate the


24

ANNUAL REPORT, 1965

immediate effects of inflation, governments have,in certain instances, acquiesced in the incurring oflarge short-term and medium-term debts by busi-nesses and individuals, or, by granting importpermits more freely than foreign exchange hasbeen made available, have allowed the accumula-tion of large commercial debts to foreign sup-pliers. Another important factor in the emergenceof heavy debt burdens has been that a shortage oflong-term capital has induced governments tofinance long-term development by short-term ormedium-term borrowings.

In assessing the problems of development, thereare many aspects of the question of debt burden.In one sense, debt servicing requirements need notbe regarded as a burden, and even a rising level ofdebt service need not be a cause for concern. Ifthe original external financing enables a country tobuild up its capital stock so that the gross flow ofits total output is increased in a manner whichpermits it to improve its balance of payments bymore than the associated debt service payments, itshould be able to meet its obligations and stillenjoy a rising standard of living. On the otherhand, if the maturities of debts are out of line withthe productivity of the investments this may be thesource of difficulties. Even with reasonable agree-ment between debt maturities and investmentproductivity, problems of international transfersmay arise, and, in any event, policies with regardto foreign borrowing must be shaped with a coun-try's eventual capacity to repay constantly in mind.

In some respects, the problems related to acountry's borrowing capacity are of more directconcern to creditor countries and to developmentinstitutions such as the IBRD than to the Fund.However, in a number of countries there are im-mediately pressing problems of financing relativelyheavy debt burdens in the near future, and of con-trolling the incurrence of new indebtedness, whichare of concern to both the Bank and the Fund.

Debt Repayment Schedules

A number of developing countries are presentlyfaced with debt repayment schedules over the nextfew years which are very heavy compared withtheir potential earnings. While government debtswith original maturities of 12 months or more areonly a part of the total, some of the available dataon this component provide an indication of thegeneral magnitude of the short-term debt problemin a number of countries. Thus, the annual debtservice requirements (payments of interest plusamortization of principal) on these public debtsof 37 developing countries covered in Table 1 in-creased by over 250 per cent from 1956 to 1964.Not only have the government debts of some ofthese countries increased markedly in recent years,as indicated in Table 2, but the structure of thesedebts has altered so that relatively short-term debtforms a larger part of the total, as evidenced bythe rise since 1956 in the immediate repaymentrequirements relative to the total outstanding

TABLE 1. THIRTY-SEVEN COUNTRIES1: ANNUAL SERVICE CHARGES ON MEDIUM-TERM ANDLONG-TERM EXTERNAL PUBLIC DEBT, END OF YEAR, 1956-64

(In millions of U.S. dollars)

Latin AmericaSouth Asia and

Middle EastEast AsiaAfricaSouthern Europe

Total

1956

455

95223771

680

1957

575

162274450

858

1958

779

186264960

1,100

1959

848

2174655

1271,293

1960

1,049

2845663

2531,706

1961

1,084

2988978

2021,751

1962

1,280

37862

104174

1,998

1963

1,271

445110127307

2,260

1964

1,442

48599

131341

2,497

Sources: Data for 1956-62 are from Dragoslav Avramovic and associates, Economic Growth and External Debt(Baltimore, 1964), p. 107; those for 1963 and 1964 were prepared by the staff of the International Bank for Recon-struction and Development.

1 Latin America: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador,Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, Venezuela. South Asia and MiddleEast: India, Iran, Israel, Pakistan. East Asia: Burma, Ceylon, Malaya, Philippines, Thailand. Africa: Sudan, Ethiopia,Rhodesia and Nyasaland, Kenya, Tanganyika, Uganda. Southern Europe: Spain, Turkey, Yugoslavia. The debts cov-ered are those with original maturity of one year or more.



debt, indicated in Table 3. In part, this increas-ing importance of short-term debt reflects thefact that sufficient long-term funds were not avail-able to meet the desires of governments to financecapital development, or that there were no pro-grams that could be financed in such a way,while foreign suppliers were willing to supply theequipment for this investment on relatively short-term credits, largely because their own govern-ments guarantee a part of export drives. These

some previous short-term capital receipts, andborrowings greater than repayments, with a con-sequent increasing obligation to meet outstand-ing commitments. Table 4 indicates that theshort-term government and private liabilities ofmany developing countries to private U.S. lendershave been rising quite rapidly in recent years;and the United States has been only one of thesources of short-term finance, although the mainone for Latin America.

TABLE 2. THIRTY-SEVEN COUNTRIES: MEDIUM-TERM AND LONG-TERM EXTERNALPUBLIC DEBT, END OF YEAR, 1956-64


Latin AmericaSouth Asia and

Middle EastEast AsiaAfricaSouthern Europe

Total

1956

4,277

1,398350875

1,0797,981

1957

4,921

1,756440926

1,0829,126

1958

5,711

2,527572997

1,30411,111

1959

5,816

2,811643

1,0791,517

11,866

1960

6,573

3,322655

1,2251,482

13,258

1961

7,615

3,914729

1,3471,695

15,301

1962

8,913

5,073850

1,4371,958

18,231

1963

9,531

6,5491,0971,5982,416

21,191

1964

10,594

8,5751,1251,8732,637

24,804

Sources: Data for 1956-62 are from Avramovic (cited in Table 1), p. 101; those for 1963-64 were prepared by thestaff of the International Bank for Reconstruction and Development.

TABLE 3. THIRTY-SEVEN COUNTRIES: ANNUAL SERVICE CHARGES ON MEDIUM-TERMAND LONG-TERM EXTERNAL PUBLIC DEBT AS PERCENTAGES OF

OUTSTANDING DEBTS, END OF YEAR, 1956-64

1956 1957 1958 1959 1960 1961 1962 1963 1964

Latin America 10.64South Asia and Middle East 6.79East AsiaAfricaSouthern Europe

Total

6.284.236.588.52

11.689.226.134.754.629.40

13.647.364.554.924.609.90

14.587.727.155.108.37

10.90

15.968.558.555.14

17.0712.87

14.247.61

12.215.79

11.9111.44

14.367.457.297.248.89

10.96

13.336.79

10.037.95

12.7110.66

13.615.668.806.99

12.9310.07

Source: Based on data in Tables 1 and 2. The data shown in Table 2 include lines of credit not yet drawn upon;on many of these, service charges are limited to a commitment fee. The percentages shown in Table 3 are thereforelower than those applying to that part of the debt which has in fact been used.

credits generally have maturity schedules that arenot in line with the productivity schedules onthe investment undertaken.

Data on other international indebtedness aremore difficult to assemble, although short-termprivate and government borrowings are a largepart of the total indebtedness. However, therecan be no doubt that many developing countrieshave been receiving a rather continuous net in-flow of short-term finance on government andprivate account, reflecting a "rolling-over" of

Irrespective of the origins of the problem, therecan be no doubt that certain countries are nowfaced with very large external debt repaymentschedules in comparison with their potential for-eign exchange earnings. The rising trends of im-mediate debt service requirements related to ex-port income are demonstrated in Chart 1 and thelevels reached in a few selected countries in LatinAmerica are shown in Chart 2. At present, anumber of Fund members are faced with veryheavy commitments.



TABLE 4. SHORT-TERM CLAIMS ON SELECTED COUNTRIES REPORTED BY U.S. BANKSAND NONFINANCIAL CONCERNS, END OF YEAR, 1960-64


Total as of December 31

1960 1961 1962 1963 1964

Latin American Republics and other WesternHemisphere (excluding Canada)

Other primary product exporting countries

1,650

454

1,810

610

1,989

595

2,157

703

2,746

929

Source: Based on data in Federal Reserve Bulletin.

CHART 1. THIRTY-SEVEN COUNTRIES: EXTERNAL PUBLICDEBT SERVICE AS PERCENTAGE OF EXPORTS,

1956-64

Renegotiation Possibilities

If a country's debt structure is such that itis faced with a heavy burden of repayment inthe near future and much smaller payments inlater years, it is possible that a postponement ofsome payments may convert an essentially in-tractable position into one where orderly repay-ments can be made. However, such reschedulingprecludes further access to large amounts of short-term credit, if the rearrangement of debts is to besuccessful.

It must be recognized that in extreme casescountries are, in fact, faced with a choice be-tween persistent default, reborrowing, unilateralmoratoria (which only postpone the day of reck-oning), and debt renegotiation to spread the bur-den over a number of years. In certain cases, theFund has encouraged debtors and creditors torenegotiate debt contracts when such arrange-ments appeared appropriate to the particular

CHART 2. SEVEN LATIN AMERICAN COUNTRIES: EXTERNALPUBLIC DEBT SERVICE AS PERCENTAGE OF EXPORTS,

1955, 1960, AND 1964

circumstances that had developed. In these situa-tions, the Fund has proceeded on the understand-ing that the debtors would adopt policies to makecertain that the renegotiations would not merelyconstitute another postponement, new debts beingaccumulated during the period over which im-mediately pressing repayments are spread out.

The need for, and appropriateness of, debtrenegotiation arises most frequently for countriestrying to stabilize their economies after fairlyprolonged periods of inflation. An essential part



of many stabilization programs is the regulariza-tion of the countries' foreign debt positions. Thisregularization may require an abatement of thepressure of immediately payable accounts, so thatall debts may be met in an orderly manner, whileat the same time debt repayment does not absorbsuch a large part of a country's supply of foreignexchange that it is unable to pay for its essentialexternal needs.

While debt renegotiation may be an essentialcomponent of an individual stabilization program,not only must such renegotiation involve aneventual complete repayment of the outstandingdebts but it should be a rare event. If there isto be a flow of credit from the developed coun-tries adequate to meet the needs of the develop-ing countries, it is essential that the terms, ofdebt contracts be taken seriously and that orderlyrelations between debtors and creditors be main-tained. In a sense, there is a world-wide poolof international finance for development. Thewillingness of creditors to make funds availableto this pool depends, in part, on their expecta-tions that they will be repaid on the terms onwhich they lend. Failures by developing countriesto meet obligations tend to undermine the elementof confidence in international indebtedness onwhich borrowing by all developing countries ul-timately depends. A formal renegotiation mayserve to improve and gradually restore the creditof a country that is in serious difficulties in meet-ing its obligations, and enable the debtor toavoid a default, with its damaging effects on theinternational credit structure. Yet it may notsuffice to restore the debtor's creditworthiness tothe level at which it would have been if renegotia-tion had not been necessary. Hence the develop-ment of serious short-term indebtedness situationsserves to weaken the forces working toward theraising of living standards in the developing na-tions. Consideration is being given in the Fundand elsewhere to ways in which it might be pos-sible to forestall the emergence of excessive ex-ternal debt burdens.

Present Practices in Debt Renegotiation

Some reasonably well-defined practices havedeveloped in the debt negotiations that have takenplace in recent years. These practices are by no

means so firmly based that they may not bechanged, but they take into account realities thatwill continue to be important.

Difficulties in arranging a new debt schedulesometimes arise from the nature of the debtsunder review. In some instances, they have beenincurred without an adequate review of the orig-inal financing by the appropriate authorities ineither the lending or the borrowing country.Some of these debts are the counterpart of notnecessarily productive investments undertaken byindividuals in the developing countries on thebasis of credit freely extended by exporters in theindustrial countries. As a result, the debts beingrefinanced may have arisen from investmentswhich were not necessarily the most desirable orwhich may have been made at unduly high prices.

The technical prospects of refinancing may alsoinvolve difficulties. Even in creditor countrieswhere the refinancing can be handled by an ex-isting public institution without new appropria-tions, a considerable reluctance is sometimesshown by such an institution to have its fundsused in this relatively unappealing manner.

Although the creditor countries have evidencedconsiderable sympathy for the problems of thedebtors, they have, in general, emphasized theirview that a debt renegotiation must be consideredto be a very unusual event and that it is explicitlyan appeal for creditor forbearance. The sameconcern of creditors has led to the application,where a second approach has been made by adebtor country, of more restrictive standards andmore emphasis on avoiding a recurrence of theproblem.

Refinancing has almost exclusively been on anational basis, the relief given by a creditor coun-try being limited to payments on debts due toits own nationals. As there has been a consid-erable variation between countries in difficult debtsituations, it has been widely felt that those whichhave taken the risks in order to gain exportmarkets are also those which should bear thecosts. Increasingly close attention has been paidto this matter because liberal relief or new creditsby one country can be diverted to maintainingservice on debts to others granting less liberalrelief.

To ensure that the burden of refinancing isshared equitably among the creditors, they have



attached great importance to unity of action, andit is usual for a rule to be adopted requiring allcreditors to be treated alike. The multilateralagreements include a most-favored-nation clause,the purpose of which is to ensure that all debtswithin the scope of the agreement receive thesame treatment. The bilateral agreements whichare necessary to implement the general under-standings reached at the major debt conferencesare tailored to suit conditions and institutions inthe individual creditor countries, and althoughthey may have a varied form and timetable, thesame basic principles, as agreed between thecreditors, are observed.

Although uniformity of treatment has beensought, there has been reasonable understandingthat debt arrangements cannot be negotiated withtoo large a group. No objection has been raisedto the exclusion from the scope of a multilateralagreement of countries that are owed relativelysmall credits, since they hardly affect the basicproblem. In fact, attention has been focusedprimarily on obtaining uniformity of treatmentbetween major creditor countries rather thanon individual country settlements. Particularconcern for uniformity has arisen when the debtwith countries in the Sino-Soviet bloc has beensubstantial.

The coverage of the debt to be renegotiated hasusually been relatively restricted. Frequently ithas been limited to debt arising from commercialarrears and suppliers' credits. In general, previ-ously renegotiated debts and debts to internationalagencies have not been subject to further negotia-tion. Debts of central banks to private foreigncommercial banks have also usually been outsideany arrangement, although there has sometimesbeen parallel but less favorable refinancing in thisarea. Broadly speaking, the arrangements havebeen government to government—a situation fa-cilitated by the widespread guaranteeing of exportcredits in most capital-exporting countries. Thus,the complexity of negotiations with large groupsof private creditors has been avoided, and thedamage to the credit standing of the debtorcountry has also been limited.

The problem of ensuring that the cost of re-financing is borne by those who openly assumedthe risk has affected the coverage of some of theagreements. For example, in cases arising in the

United States, where exporters have financedcapital goods without any government guarantee,the U.S. authorities have generally wished to avoidgiving a retroactive guarantee such as would becreated if a government agency were to refinancethese private debts. In the 1964 Brazilian rene-gotiation, the U.S. authorities did not undertakethe refinancing of amounts due to private U.S.suppliers, and they urged the Brazilian Govern-ment to undertake such renegotiations direct.

The terms of refinancing have differed ratherwidely, but in general creditors appear to havebeen responsive to pleas to keep debt service downto a level considered reasonable in relation to thelevel of balance of payments receipts. They havebeen willing to accept a pause in payments in theearly years when other debt service is unusuallyhigh, to be compensated for by increasing pay-ments in later years. As most of the debts beingrenegotiated have been relatively short term, therenegotiated terms have not usually been beyond10-15 years, and it has been appropriate that thelevel of payments arranged should have providedlittle leeway for accumulating new debts withinreasonable limits of the debtor's capacity to repay.(This limitation generally has a deflationary effectbecause of the reduction in the inflow of capital.)Although there have been important exceptions,rescheduling has usually related only to principalpayments; payments of interest have been ex-pected to continue without refinancing.

Conditions for Success

The willingness of creditors to accept an ap-propriate rescheduling of debt service is related tothe degree of assurance that the problem will notrecur. In principle, the creditors acting collec-tively should be able to prevent this—they usu-ally represent the major part of possible creditfacilities—but in practice, cooperative arrange-ments without effective coordination have notbeen effective. Consequently, increased attentionhas been paid to the safeguards that can be pro-vided through the cooperation of the Fund andthe IBRD.

The need for cooperative action has been par-ticularly important in connection with exportcredits from the countries supplying investmentgoods to the developing countries. Export credits



serve a useful, and indeed a necessary, functionas long as they are limited to the capacity of theimporting country to make repayment in the shortterm or medium term. However, difficulties havearisen because of excessive resort to borrowing inthe form of short-term export credits for thefinancing of the purchase of equipment for long-term investment uses. In part, the responsibilityfor many of these cases of over-indebtedness mustbe shared by the creditor countries, where theover-all national interest is rarely represented ef-fectively. Too often, an exporter, on a plea thatbusinesses in other countries might get contracts,is able to exert a very considerable pressure onhis government to obtain an official guarantee.This is a difficult and delicate problem requiringcooperative action for its solution, to which theFund and the IBRD are directing their attention.

On the debtor's side, the first decision in anydebt renegotiation is to ask for relief. The timingof action to obtain such relief is important. Debtservice builds up over time and may be accom-panied by an accumulation of arrears of currentpayments. It is usually one product of excessiveexpenditures incurred as a result of domestic pres-sures which the financial authorities have not beenable to resist. As long as these various pressuresfor expenditure are stronger than the counter-vailing desires for domestic stability, renegotiationis unlikely to be successful, for new debts will beincurred and the country will continue to be indifficulty. However, when the strain of the debtburden becomes sufficiently apparent, it serves tosupport efforts toward domestic stability, and,as a result, there may be sufficient backing frompublic opinion for responsible financial conduct.At such times, debt renegotiation may be desir-able, and a successful renegotiation can strengthenthe position of the authorities and provide themwith an effective basis for requesting full controlover all governmental foreign borrowing and fordeveloping an integrated planning program.

The Role of the Fund

The Fund has never agreed to refinance debtsdirectly, as such transactions would be outside itsnormal sphere of operations; its resources areavailable for the provision of relatively short-termassistance to meet balance of payments deficits.

In most situations where debt renegotiation isappropriate, there is need for much longer-termfinancing than could be provided under the termsof the Fund's policy limiting the use of its re-sources to three to five years. Moreover, the debtsare frequently large in relation to the member'squota, and their refinancing by the Fund wouldseriously limit the Fund's ability to meet genuinelyshort-term balance of payments difficulties. Inmany instances where debt renegotiation is onlyone aspect of a general stabilization program,financial assistance from the Fund to meet otheraspects of the balance of payments readjustmentproblem is also a prerequisite for the program'ssuccess.

In the course of a debt renegotiation, the bal-ance of payments position of the debtor is certainto be discussed. Although the debtor usually canpresent an exposition of its position, there is adecided advantage to both the debtor and thecreditor if there can be an impartial presentationof the facts. The Fund is in a good position toprovide such an analysis of the short-term andmedium-term balance of payments prospects,while the IBRD is in a comparable position toassess longer-term development trends. The Fundprovided this type of information on an informalbasis as part of the negotiations with respect to theoutstanding debts of Turkey in 1958-59, Brazilin 1961 and 1964, Argentina in 1962 and 1965,Liberia in 1963, Indonesia in 1963, and Chile in1965. In the last-mentioned instance, the IBRDparticipated in the discussion.

The Fund has the opportunity to assist in pre-venting a recurrence of the need for debt renego-tiation when a stand-by arrangement is beingnegotiated parallel to the debt refinancing, al-though it must be remembered that a stand-byarrangement lasts for not more than a year,whereas the repayment of a rearranged debt willtake several years. Subject to this, mutual bene-fits can be derived from commitments given to theFund under a stand-by arrangement, since ifadequate measures to restore the payments bal-ance are implemented, there can be some assur-ance that such problems as the accumulation ofarrears will not recur. Safeguards against othermethods of accumulating an undue amount ofindebtedness—e.g., the excessive use of short-termand medium-term suppliers' credits—probably



require the cooperation of a development agencysuch as the IBRD.

Another method, not connected with a pro-gram supported by a stand-by arrangement withthe Fund, may be illustrated by the role that theFund was asked to play in the negotiations withBrazil in 1964. At that time, the creditors andBrazil agreed to ask the Fund to be responsiblefor reporting to the creditors all information sup-plied by Brazil concerning the observance byBrazil of its new policy on the acceptance ofsuppliers' credits.

Conclusion

Operations with the developing countries haveprovided experience which demonstrates that theFund and the IBRD can expect to be involved inthe debt problems of these countries. In certaincases, the renegotiation of outstanding debts is anessential step toward a return to orderly inter-national financial conditions. While the Fund

recognizes that this step should be taken only inexceptional circumstances, it always stands readyto make its good offices available when appro-priate. It has provided, and will continue to pro-vide, the background information required toassess the need for debt rescheduling and tounderstand the magnitude of the problem facingdebtors. Further, some stand-by arrangementsinclude conditions intended to discourage exces-sive debt burden, including the acceptance of anunduly large amount of suppliers' credits. Finally,in its relations with member countries, the Fundis alert to the possibility (even if remote) of thisproblem emerging, and encourages the adoptionof policies which will forestall the danger. Suchencouragement lies within the Fund's competenceas a source of short-term balance of paymentscredits. By supporting appropriate policies, ithopes to contribute to the maintenance of a sys-tem of international payments which will, amongother objectives, assist in fostering an adequateflow of longer-term international finance forsoundly based development programs.


Chapter 4

The Fund in 1964/65

of the Fund's work in the past fiscal year.Further information, and statistical details, aregiven in a Supplementary Note on page 107-19.

Membership

The membership of the Fund remained at 102during the year under review. With the increasesin the quotas of certain members enumerated inTable 48 (p. 108), the aggregate of quotas onApril 30, 1965 was $15,933.08 million. TheBoard of Governors approved terms and condi-tions for the admission to membership of Malawi,with a quota of $11.25 million, and Zambia, witha quota of $50 million.

The Fund was notified that the Republic ofTanganyika, a member country, had formed aunion with Zanzibar, which had applied for mem-bership in the Fund. The Executive Directorsdecided that the United Republic of Tanganyikaand Zanzibar (subsequently renamed the UnitedRepublic of Tanzania) was a member of theFund.

Article VIII

Nicaragua, with effect from July 20, 1964,Costa Rica, with effect from February 1, 1965,and Australia, with effect from July 1, 1965, ac-cepted the obligations of Article VIII, Sections 2,3, and 4, of the Fund Agreement, bringing to 27the number of members which have rendered theircurrencies convertible under the Articles of Agree-ment. These countries are listed on page 107.

Executive Directors

The number of Executive Directors, appointedand elected, was increased to 20 at the time ofthe 10th Regular Election of Executive Directors,

held during the Annual Meeting in Tokyo inSeptember 1964. A list of the Executive Direc-tors and Alternate Executive Directors and theirvoting power on April 30, 1965 is given inAppendix II, and changes in membership of theExecutive Board during 1964-65 are shown inAppendix III.

Increase in Fund Resources

Since 1963, the Fund has expanded its studiesof the international financial system and of therole of the Fund in this system. The Fund'sviews were set out in Chapters 3 and 4 of theAnnual Report for 1964. That Report concluded(p. 36) that

. . . there is a case for an increase in Fund quotas.The Fund should therefore proceed to an early ex-amination of this question in detail. This examina-tion should encompass the magnitude of a generaland virtually uniform quota increase, the need forspecial additional increases for individual countriesin the light of the considerations mentioned earlierin this chapter, the timing of such increases, andother relevant considerations. Under the Fund's nor-mal practice, the Executive Directors would beginthe quinquennial study of quotas at the end of thisyear [1964] with a view to reaching a conclusion bythe end of 1965. There would be advantage in con-sidering quotas as promptly as possible after theAnnual Meeting of the Board of Governors [inTokyo in September 1964].

At the Annual Meeting in September 1964,a large number of Governors spoke in favor ofan increase in quotas. There was unanimous ap-proval of the resolution "That the Executive Di-rectors proceed to consider the question of ad-justing the quotas of members of the Fund andat an early date submit an appropriate proposalto the Board of Governors."1 The discussionmade it clear, however, that there were differencesof view among the Governors with respect tothe size and urgency of a general increase ofquotas, and with respect to the amount and num-

1 Resolution No. 19-20; see Summary Proceedings,Annual Meeting, 1964, page 269.

31

HIS chapter reviews briefly the main featuresT



her of special quota adjustments. On the questionof the general increase, some Governors ex-pressed a preference for a moderate increase andothers for a substantial one. The outcome of thediscussion was a general feeling that an increaseof the order of 25 per cent would be appropriate.

Proposals for Quota Increases

On February 26, 1965, the Executive Directorsadopted a report entitled "Increases in Quotasof Fund Members: Fourth Quinquennial Re-view," to be submitted to the Board of Governors.The Report, reproduced in Appendix I, page 124,includes two Resolutions, the First proposing ageneral increase of 25 per cent, appropriatelyrounded, of all quotas, and the Second proposingspecial quota increases for 16 members. TheFirst Resolution had to be voted on as a whole,but, for the Second Resolution, votes could becast on all or each of the special quota increases.By March 31, 1965, both Resolutions had beenadopted by the Governors by more than the re-quired majority of four fifths of the total votingpower.

Members may consent to the increases in theirquotas at any time before September 25, 1965;this period may be extended by the ExecutiveDirectors. The increases will not become effectiveunless the Fund has determined that members

having on February 26, 1965 two thirds of thetotal quotas have consented to them. If all mem-bers consent to the proposed quota increases,total quotas in the Fund will be increased to$21,049 million, exclusive of the increases underthe Compensatory Financing Decision after Feb-ruary 26, 1965 which for the purposes of theResolutions have been treated as if they had beensubmitted to the Governors before that date.

Size of Quota Increases

The First Resolution proposed that all quotasbe increased by 25 per cent, rounded in accord-ance with the following formula:

amounts below $500 million are to berounded to the next higher multiple of $1million; and

amounts of $500 million or more are to berounded to the next higher multiple of $5million.

The revised quotas are shown in the table onpage 129.

Under the Second Resolution, special quotaincreases were provided for 16 countries, asshown in Table 5.

A member consenting to a special increase un-der the Second Resolution is expected to requestan increase in its subscription to the capital of the

TABLE 5. PROPOSED INCREASES IN QUOTAS, 1965; SPECIAL INCREASES


AustriaCanadaFinlandGermany, Federal Republic ofGreece

IranIrelandIsraelJapanMexico

NorwayPhilippinesSouth AfricaSpainSwedenVenezuela

7555057

787.560

704550

500180

10075

150150150150

94690

72985

75

885763

625225

12594

188188188188

175740125

1,200100

1258090

725270

150110200250225250

MemberQuota on

Feb. 26, 1965New Quota Under

First Resolution

New Quota UnderFirst and Second

Resolutions


THE FUND IN 1964/65 33

Bank corresponding to the special part of itsquota increase.

Gold Payments and Their Alleviation

Before the increase in a member's quota canbecome effective, the member is required to payan additional subscription equal to the increasein its quota, of which 25 per cent must be paidin gold and the remainder in its currency.

Article III, Section 4(a), of the Articles ofAgreement provides that a member must pay ingold 25 per cent of any increase in its quota,but that the Fund may reduce this percentageif a member's monetary reserves are less thanits new quota on the date that it consents to aquota increase. The Executive Directors havenever used this authority to reduce gold payments.However, in connection with the quota increasesunder the First and Second Resolutions adoptedby the Board of Governors in February 19592

and all increases under the Compensatory Financ-ing Decision of February 1963,3 member coun-tries were offered two alleviation facilities: theycould increase their quotas by installments, orthey could make special drawings up to anamount equal to their additional gold subscrip-tions.

The question whether the burden of gold pay-ments should be alleviated was an important oneduring the Fourth Quinquennial Review ofQuotas. The Executive Directors, after consid-erable discussion, again decided not to exercisethe discretion given in Article III, Section 4(a), toreduce the impact of the required gold subscrip-tions. However, they decided on this occasion,as in 1959, that the facility of increases by in-stallments should be available for increases underthe First and Second Resolutions and that specialdrawings should be available to members in re-spect of increases under the First Resolution.

Where the installment facility is chosen, eachinstallment of the quota increase will correspondto the amount of additional subscription in goldand currency paid by the member; the membermust pay an original installment of its additionalsubscription, and an equal additional installment

in each period of 12 months thereafter; eachinstallment must be one fifth of the quota in-crease; and the member will have the right toaccelerate its payments and quota increase underthe original installment schedule.

Any country consenting to a quota increaseunder the First Resolution may request a drawingfor an amount not exceeding 25 per cent of thequota increase. If the drawing is within the goldtranche, the established gold tranche policy andprocedure will apply. If it is beyond the goldtranche, this special facility will be available tothe member on the basis of its representation thatit will encounter undue payments difficulties inmaking its gold subscription.

Repurchases corresponding to these exchangetransactions beyond the gold tranche will nor-mally be effected in equal annual installmentsto commence one year after the transaction, andto be completed not later than five years after thedate of the transaction. However, if the memberconcerned represents that this schedule wouldcreate undue payments difficulties, the Fund mayaccept the member's representation that it will re-purchase in accordance with the policies whichapply to drawings from the Fund generally.4

Members' representations as to needs for draw-ings beyond the gold tranche or for a reschedul-ing of their repurchase commitments will not bechallenged by the Fund except when it is clearlyevident that they are without basis. The Fundwill be prepared to grant waivers of the limitsprescribed by Article V, Section 3(a)(iii),5 inorder to facilitate such exchange transactions.

Two arrangements were also made to mitigatethe secondary impact of the additional gold sub-scriptions—i.e., the gold purchases which may bemade from the members whose currencies are

-'See Annual Report, 1959, pages 185-89.3 Executive Board Decision No. 1477-(63/8); see Se-

lected Decisions, pages 40-43.

4 Executive Board Decision No. 102-(52/ll); see Se-lected Decisions, pages 21-24.

5 Article V, Section 3(«)(iii), states that a membershall be entitled to buy the currency of another memberfrom the Fund if the proposed purchase "would notcause the Fund's holdings of the purchasing member'scurrency to increase by more than twenty-five per centof its quota during the period of twelve months endingon the date of the purchase nor to exceed two hundredper cent of its quota, but the twenty-five per cent limi-tation shall apply only to the extent that the Fund'sholdings of the member's currency have been broughtabove seventy-five per cent of its quota if they had beenbelow that amount."



reserve currencies by other members in connec-tion with their subscriptions to the Fund.

First, a member which requests an exchangetransaction as mentioned above is expected toconsult the Managing Director on the currencyto be drawn under Executive Board DecisionNo. 1371-(62/36) as mentioned below (p. 35).It is likely that many members which engage insuch exchange transactions will use the currenciesdrawn to purchase gold from the monetary au-thorities of the countries whose currencies aredrawn. They may wish to do this either to paytheir additional gold subscriptions to the Fundor to restore the level of their gold holdings ifthey have already paid the additional subscrip-tions. Normally, such purchases of gold wouldbe made from reserve currency members. Witha view to alleviating the impact which such pur-chases would have on the gold holdings of thereserve currency members, the Fund will suggestthat certain of these drawings, up to the equiva-lent of $150 million, be made in currencies whichthe Fund would then replenish by the sale of goldunder Article VII, Section 2 (ii). In this way,the Fund's holdings of the currencies drawnwould be replenished up to the amount of thesepurchases.

Second, in order to provide a further allevia-tion solely in connection with the quota increasesunder the two Resolutions, the Fund will make"general deposits" of gold totaling not more thanthe equivalent of $350 million with its deposi-tories in the United States and the United King-dom. Approximately $250 million will be placedon general deposit in the United States and $100million in the United Kingdom. However, if theFund determines that total sales of gold by thesetwo countries in connection with the additionalsubscriptions of other members are less than theequivalent of $350 million, the Fund will reduceits general deposits accordingly. The amount ofgold in the general deposits will be available tothe Fund on demand for the use of or transferto the Fund. A general deposit may be termi-nated or reduced at the request of the member inwhich the deposit is placed. On the occasion ofany use of gold, the Fund would normally use, inappropriate proportions, earmarked gold andgold on general deposit in accordance with thegood management of its assets.

Fund Transactions

Purchases and Stand-By Arrangements

During the past fiscal year, the Fund extendedfinancial assistance to more members than in anyprevious year. Sales of currency exceeded all pre-vious years with the exception of 1961-62, andthe amount of stand-by arrangements agreed wasalmost identical with the record total reached in1963-64. Purchases from the Fund were equiva-lent to $1,897.4 million (Table 49, p. 108) andthe stand-by arrangements agreed during the yearamounted to the equivalent of $2,159.1 million(Table 52, p. 109). Of the 34 members whichreceived support from the Fund, either throughdirect purchase transactions or in the form ofstand-by arrangements, 2 were industrial coun-tries (the United Kingdom and the United States)and 32 were nonindustrial countries. The UnitedKingdom and the United States accounted foralmost 78 per cent of total purchases and formore than 69 per cent of the total made availableunder stand-by arrangements. Of the membersreceiving financial assistance, 14 were in theWestern Hemisphere, 7 in the Middle East, 6 inAfrica, 4 in Asia, and 3 in Europe.

The largest purchase during the fiscal year wasmade by the United Kingdom early in December1964; it comprised 11 currencies, totaling theequivalent of $ 1 billion, the full amount availableunder the stand-by arrangement. The Fund bor-rowed the equivalent of $405 million in the cur-rencies of 8 members under the provisions of theGeneral Arrangements to Borrow, and purchased10 members' currencies with gold in amountstotaling the equivalent of $250 million (Tables50 and 51, p. 108). The remainder of the U.K.drawing, equivalent to $345 million, was pro-vided from the Fund's holdings of currencies.This was the first occasion on which the Fundmade use of the General Arrangements to Bor-row, which came into effect on October 24, 1962.In addition, Switzerland made available to theUnited Kingdom on a swap basis Sw F 345 mil-lion ($80 million) in accordance with the agree-ment between Switzerland and the Fund embodiedin the exchange of letters of June 11, 1964.6

6 Executive Board Decision No. 1712-(64/29); seeAnnual Report, 1964, pages 138-40, and Selected Deci-sions, pages 69-72.



Shortly after the close of the fiscal year, theUnited Kingdom drew a further $1,400 millionfrom the Fund. In connection with this drawing,made in 11 currencies, the Fund purchased 10members' currencies with gold for a total equiva-lent to $400 million, borrowed the equivalent of$525 million in 8 currencies under the provisionsof the General Arrangements to Borrow, and pro-vided the equivalent of $475 million from its ownholdings (Tables 50 and 51). Switzerland madeavailable Swiss francs equivalent to $40 millionin accordance with its agreement with the Fund.

The currencies to be used when members makepurchases from the Fund, or make repurchasesother than under Article V, Section l(b), areselected in accordance with the statement on Cur-rencies to Be Drawn and to Be Used in Repur-chases approved by the Executive Directors onJuly 20, 1962.7 Fourteen currencies were sup-plied during the year to countries making pur-chases from the Fund, including, for the first time,Australian pounds and Mexican pesos. Eleven ofthese currencies were also used in repurchases,including for the first time Austrian schillings andJapanese yen. The currency most used, both forpurchases and for repurchases, was the deutschemark, of which $616.3 million was paid out and$283.9 million received in repurchases. Othersused extensively for purchases included theFrench franc, the U.S. dollar, the Canadian dol-lar, and the Netherlands guilder. Details are givenin Table 54, page 113. Details of repurchasesunder Article V, Section 7(fc), are on page 114.

During 1964, the Fund's holdings of U.S. dol-lars continued to be above 75 per cent of theU.S. quota, which precluded the Fund from Ac-cepting U.S. dollars in repurchase from members,as explained in the 1964 Annual Report, page 11.The stand-by arrangement with the United Statesfor $500 million, entered into in July 1963,expired in July 1964 with an unused balanceequivalent to $250 million. In July 1964, theFund entered into a new stand-by arrangement,also for the equivalent of $500 million. The firstpurchase by the United States, equivalent to $125million, was made in February 1964; it was fol-lowed by further purchases equivalent to $125million in June 1964, $150 million in September

1964, $125 million in December 1964, and $75million in March 1965, totaling the equivalent of$600 million. The currencies purchased by theUnited States were intended for sale for U.S.dollars at par by the United States to those mem-bers of the Fund that keep their internationalreserves mainly in U.S. dollars and that had tomake repurchases from the Fund. By April 30,1965, 20 members had availed themselves of thisfacility, to a total of $543.2 million. However,dollars have continued to be purchased from theFund by other members and this, together withother movements of U.S. dollars, had the effectof reducing the U.S. outstanding balance of draw-ings to $323 million on April 30, 1965. TheU.K. drawing in May, referred to above, reducedthis outstanding balance by another $200 million.

For members in need of financial assistancefrom the Fund, the stand-by arrangement has con-tinued to be a valuable instrument. Five mem-bers, Burundi, Korea, Mali, Somalia, and Tunisia,entered into stand-by arrangements with the Fundfor the first time. All except 9 of the purchasesfrom the Fund during the past financial year weremade under stand-by arrangements. Six of these9 purchases—those by Cyprus, Iran, Israel,Morocco, Pakistan, and Panama—were within thegold tranche. Purchases by Cyprus, Morocco, andPanama constituted the first drawings by thesemembers on the Fund's resources, althoughMorocco had in November 1959 entered into astand-by arrangement for $25 million, which ex-pired unused a year later.

In order to strengthen the confidence of mem-bers in the de facto automaticity of drawings inthe gold tranche, the Executive Directors adopteda Decision on August 3, 19648 expediting theprocedure for such drawings. This proceduremakes it possible to deliver exchange to a mem-ber, when it is making a gold tranche drawing,two business days after receipt of the requestby the Fund, thus reducing by three business daysthe normal period for effecting a drawing madeunder Article V, Section 3, of the Fund Agree-ment. By April 30, 1965, a total of 9 drawingshad been consummated under this new procedure,including the last 4 drawings made by the UnitedStates.

7 Executive Board Decision No. 1371-(62/36); seeSelected Decisions, pages 33-39.

8 See Appendix I, page 123.



With effect from June 1, 1964, the Board ofGovernors adopted an amendment of the termsand conditions prescribed in the membership reso-lutions of those members that had not yet agreedinitial par values with the Fund. This Resolutionauthorized the Executive Directors to permit ex-change transactions with a member prior to theestablishment of an initial par value, under suchconditions and in such amounts as might be pre-scribed by the Executive Directors. Similar termswill be incorporated in future membership reso-lutions.9 By the end of April 1965, Korea andMali had agreed with the Fund on provisionalexchange rates for their currencies for this pur-pose and had entered into stand-by arrangements.Mali had drawn the equivalent of $9.9 millionunder its stand-by arrangement.

Technical Assistance

In response to requests from member coun-tries, the Fund's technical assistance services werefurther expanded during the past year. The as-sistance given has been of two main types. Thefirst has comprised the assignment of Fund offi-cers for periods ranging from a few weeks to morethan a year, to give advice on members' specificproblems and programs. In some countries, theseofficers have assisted in the formulation of appro-priate monetary, fiscal, and exchange policies, orin the implementation of stabilization programs.In others they have helped to draft legislation orto prepare monetary and balance of paymentsstatistics. During the year 1964/65, staff officerswere made available on long-term assignmentsto 10 members.

The second type of technical assistance has in-volved the engaging of experts from outside thestaff to assist members in various specializedfields. These experts may serve as executive offi-cers or as advisors. In accordance with this pro-cedure, 6 experts from member countries havebeen recruited for senior positions in financial andeconomic institutions in the Democratic Republicof Congo, and others may be added. The twomost senior of these experts have been serving as

9 Executive Board Decisions Nos. 1686-(64/22) and1687-(64/22); see Annual Report, 1964, page 141.

General Manager of the National Bank and Con-troller of Finance in the Ministry of Finance.This special Congo program is being carried outin close coordination with the United Nations.

Further progress has been made in the develop-ment of the two new branches of the Fund's workdescribed in last year's Annual Report, the Cen-tral Banking Service and the Fiscal Affairs De-partment. The organization of the Central Bank-ing Service was developed during the year to usethe techniques of recruitment mentioned above.The Service was able to meet most of the 25requests for technical assistance received from 18countries. All those involving banking legislationand organization were handled by regular Fundstaff members who went on advisory missions tothe countries concerned, studied their problems,and made recommendations. Other requests weremet by drawing on the Fund's pool of centralbanking experts from member countries; duringthe year, assignments were arranged, or negotia-tions for assignments completed, to provide 11experts to fill positions ranging from advisoryposts to the governorship of a central bank.

The establishment of the Fiscal Affairs Depart-ment in May 1964 has similarly enabled the Fundto respond more effectively to the requests ofmembers for assistance in the fiscal field. Severalofficers of the Department have undertaken tech-nical assistance assignments for short periods, andothers have participated in regular staff missionsvisiting member countries where expertise in thefiscal field was required. In addition, two officerswere recruited specially for long-term advisoryassignments.

It became evident during the year that requestsfor long-term assistance, particularly in the fiscalfield, would increase beyond the capacity of theFund staff unless the number of persons availablefor assignment was substantially expanded. It wasaccordingly decided to establish an internationalpanel of fiscal experts along the lines of the panelof central bank experts. These experts will berecruited from the more experienced fiscal agen-cies of member countries, several of which havealready agreed to make personnel available.Those assigned may serve in either advisory orexecutive capacities, as budget experts, or tax ad-ministrators, or in similar posts in countries re-questing assistance.



The Fund may also recruit experts from timeto time to meet specific requests for assistance inbalance of payments or financial statistics.

The IMF Institute

The IMF Institute was established in May 1964to expand and diversify the Fund's training ac-tivities.

One of the first tasks undertaken by the newInstitute was to acquaint the French-speakingmember countries which had recently joined theFund with the general nature of the Fund, itspolicy objectives and financial resources, and thepotential benefits of Fund training. For this pur-pose the Institute organized, between July andDecember 1964, two six-week seminars conductedin French for high officials from those countries.Each government in the French-speaking areasof Africa and one government in Asia was invitedto designate a senior financial official to attendone of the seminars. Seventeen countries wereable to take advantage of the invitation.

In March 1965, the Institute began the first ofits regular 20-week courses on Financial Policyand Analysis conducted in English. Twenty par-ticipants, broadly representative of all areas ofthe world, attended this course. Of the 20 par-ticipants, 13 are employed in the Central Banksof their countries and 7 in Finance Ministries orTreasuries.

The emphasis of the course is on monetaryand fiscal policy, with attention focused on, butnot confined to, the problems of developingcountries. It draws extensively on the experiencethat the Fund has gained in its contacts withmember countries. The course has been formu-lated with the objective of enhancing the useful-ness of the participants to their employing agen-cies. At the same time, it is hoped that the first-hand acquaintance which participants will gainwith the Fund's objectives, operations, and pro-cedures will contribute to a closer understanding

and to smoother working relations between theFund and its members.

In view of the nature of the regular course,participants have been selected with particularattention to their policy responsibilities. TheFund recognizes that governments in the develop-ing countries may equally wish to send morejunior staff members to Washington for studieswhich emphasize the technical aspects of financialand economic analysis. The IMF Institute istherefore planning to present over the years avariety of courses, dealing with subjects on dif-ferent levels and addressed to officials of CentralBanks, Ministries of Finance, and comparablegovernment agencies in Fund member countries.The present professional staff of the IMF Instituteconsists of six economists, and it is intended toaugment this number. During 1966, the Institutewill move into new quarters where its technicalaccommodation will make it possible to handleseveral groups of participants at the same time.

The program for 1965-66 will comprise fivedifferent courses: (1) There will be two courseson Balance of Payments Methodology, one to beconducted in English from August 30, 1965 toOctober 8, 1965, and the other in French fromFebruary 21, 1966 to April 1, 1966; these twocourses are designed to help member countries toimprove their balance of payments statistics andtheir presentation for purposes of economic analy-sis. (2) Two courses will be given on FinancialPolicy and Analysis, the first to be conducted inFrench from October 14, 1965 to December 22,1965 and the second in English from March 14,1966 to July 29, 1966. (3) One Special Course,to be conducted in English from January 4, 1966to February 11, 1966, will follow the general linesof the special courses given in French during July-August and October-December 1964.

Further particulars of Fund activities are givenin a Supplementary Note, pages 107-19.


Part II

REVIEW OF THE YEAR


Chapter 5

Developments in the Industrial Countries

N international financial relations, 1964 wasmarked by somewhat greater strains than had

been experienced for some time. This was incontrast to the immediately preceding years, dur-ing which the structure of international paymentshad appeared on the whole to be improving. Thestrong pressures on the lira in March, and onsterling in November 1964—both of which wereallayed by drawings on the Fund and by supportfrom central banks and other financial institu-tions—were dramatic symptoms of these strains.Another was the activation of the General Ar-rangements to Borrow.

A general climate of prosperity continued toprevail in the industrial countries, but there wereindications after mid-year that, while still strong,the expansionary forces in the world economywere not as powerful as they had been earlier.The very high rate of growth in world trade pre-vailing in 1963 and the early part of 1964 showeda tendency to moderate, as the rate of growth ofimports of several industrial countries was slowingdown. The measures taken by the United King-dom to protect its balance of payments position,together with the less direct policies of restraintadopted by the United States, may accentuate thisdeceleration. Moreover, while the year witnessedan intensification of efforts in a number of coun-tries to contain upward pressures on wages andprices, there was some relaxation toward the endof the year in the financial policies that severalmajor countries had been following.

One significant corollary of the policies fol-lowed by individual countries to protect their bal-ance of payments positions or to maintain domes-tic stability was a generally upward drift in thestructure of interest rates. Some rates of inter-national importance rose to levels which werequite high by the standards of the present century.Further, the narrowing of the spreads betweenrates in different countries, which seemed to beapparent early in the year, was replaced by agrowing divergence in later months.

Production, Wages, and Prices

In most of the industrial countries, output con-tinued to expand during 1964 at rates comparableto, even if somewhat less than, those prevailingin 1963 (Chart 3 and Table 6). In the UnitedStates, economic expansion continued for thefourth year in succession; but there was nofurther acceleration in the rate of advance. Whileunemployment declined, labor force time lost

CHART 3. SELECTED AREAS AND COUNTRIES: INDUSTRIALPRODUCTION, SEASONALLY ADJUSTED,

1961-APRIL 1965

(1958 = 100)

41

I



through unemployment and part-time work stub-bornly remained above 5 per cent. On the otherhand, the rise in output in the United Kingdomwas quite small until late in 1964, when therewas a marked advance; unemployment continuedto decline. In Japan, where the rise in output in1963 had been greater than elsewhere, the rate

TABLE 6. GROSS NATIONAL PRODUCT AT CONSTANTPRICES: PERCENTAGE INCREASES FROM QUARTER TO

QUARTER, 1962-FiRST QUARTER 1965

1962I

IIIIIIV

1963I

IIIIIIV

1964I

IIIIIIV

Canada

2.20.21.31.2

1.20.51.72.2

2.41.10.50.9

Fed. Rep. ofGermany1

—5.93.52.25.9

—10.36.74.75.5

—8.76.02.67.3

Italy

1.80.91.21.2

0.12.31.21.1

0.6—0.5—0.8

1.2

UnitedKingdom2

—0.91.9

—0.3-0.3

0.23.70.13.9

0.40.50.52.2

UnitedStates

0.90.80.31.2

0.80.91.21.4

1.11.01.00.6

1965I 2.7 1.7

1 Not seasonally adjusted.2 Gross domestic product.

of advance decelerated during 1964 as a resultof measures mainly directed toward protecting thebalance of payments. For the European EconomicCommunity as a whole, the index of industrialproduction has hardly risen since the first quarterof 1964, but there have been marked differencesbetween individual countries (Chart 4). In thecourse of 1963, the main forces of expansion wereoperating in France and Italy. The excessive de-mand pressures in both these countries, whichstimulated a rapid rise in domestic output but alsoappeared to threaten price stability, spilled overinto Germany, where they contributed signifi-cantly to an acceleration of the rise in output.In Italy, where these developments had led to amajor balance of payments deficit, measures wereintroduced progressively after May 1963 to re-strain inflationary forces and to redress the bal-ance of payments. These effectively restricteddomestic demand and, in spite of a sharp rise inexports, brought about a slowdown in economicactivity and a dramatic fall in imports. In France,measures to curb excessive domestic demand simi-larly resulted in a slowdown; industrial production

CHART 4. SELECTED COUNTRIES OF THE EUROPEAN ECO-NOMIC COMMUNITY: INDUSTRIAL PRODUCTION,

SEASONALLY ADJUSTED, 1961-ApRiL, 1965

(1958 = 100)

in that country fell in the third quarter of 1964below the level reached in the last quarter of1963. On the other hand, the upswing in Ger-many continued with increased vigor in 1964 andthrough the balance of payments helped, in turn,to moderate the slowdown in Italy and France.Where output continued to expand rapidly, do-mestic demand usually provided the main stimu-lus. Investment demand was particularly strongin Germany. Elsewhere, both investment andconsumption have been exerting upward pres-sures.

The situation at the end of 1964 and early in1965 was rather unclear, as shown by Table 7.A comparison of quarter-to-quarter changes inindustrial production during this period is madedifficult by the effect of strikes, the possibilityof a major steel strike in the United States, andsome statistical problems of measurement (e.g.,the one apparent in the French series). Thedata in the table show that output in a numberof industrial countries was continuing to rise; yet,with the exception of the United States, the in-creases in the fourth quarter of 1964 and thefirst quarter of 1965 were less than in the cor-responding quarters of 1963 and 1964, respec-tively.


DEVELOPMENTS IN THE INDUSTRIAL COUNTRIES 43

TABLE 7. INDUSTRIAL PRODUCTION: PERCENTAGE CHANGESFROM QUARTER TO QUARTER, 1962-

FIRST QUARTER 1965

Fed. Rep. of United UnitedCanada France Germany Italy Kingdom States

1962I

IIIIIIV

1963I

IIIIIIV

1964I

IIIIIIV

1965I

0.92.21.40.9

1.01.30.44.5..

3.60.30.52.5

2.9

1.21.41.0

—3.67.6

3.2

2.70.4

—3.73.3

—0.4

1.62.31.50.7

—3.05.30.72.2

2.80.72.02.0

10

—3.40.24.4

1.34.7

—1.74.6

—0.5—2.7—2.2

1.8

0.90.90.9

—0.9

—1.74.41.73.3

1.90.60.81.6

1.0

1.41.51.00.2

1.22.81.10.6

1.52.21.90.8

3.5

The general upward movement of wages per-sisted, particularly in continental Western Europe(Chart 5). Increases were especially rapid inthe Netherlands, where the wage rate index forthe fourth quarter of 1964 was 18 per cent abovethat for the comparable period in 1963. How-ever, this overstates the increase in actual wagerates because in 1963 the so-called black wages,paid in addition to the rates set by collective bar-gaining, diminished. The wage agreement madelate in 1964 envisaged a rise in wage rates of5 per cent in 1965. Italy also experienced strong

wage pressures, which, in combination with theslackening in the rate of advance, undoubtedlyled to a marked increase in labor costs per unitof output; there are, however, signs that thesepressures are now declining. Rising productivity,particularly in industry, appears to have offset theeffect of rising wages on costs in Japan and Ger-many (Chart 6), but in Germany wages rosemore than 7 per cent in the first half of 1965over the first half of 1964, and this may endangerthe stability of wage costs. In Canada and theUnited States, wage rates have continued to riseonly slowly. Although some recent labor contractsettlements in the United States have involved in-creases in hourly labor costs (including the effectsof benefits other than higher wages) in excess ofthe "guideposts" outlined in the 1962 AnnualReport of the Council of Economic Advisers,average labor costs per unit of output in manu-facturing have thus far shown little change. Inthe United Kingdom, the authorities are con-cerned at the size of recent wage agreements al-though they realize that it will be some timebefore such agreements can be made consistentwith government policy on incomes and pricesas set out in a White Paper in April 1965.

These domestic pressures, together with someincrease in import prices (Chart 7), contributed

CHART 5. SELECTED AREAS AND COUNTRIES: WAGERATES, 1961-APRIL 1965

(1958 = 100)

CHART 6. SELECTED COUNTRIES: WAGE COSTS PER UNITOF OUTPUT IN MANUFACTURING, 1961-64

(1958 = 100)



in 1964 to a continuation of the upward move-ment of prices. Changes in wholesale priceslargely reflect changes in wage costs (i.e., theeffect of rising wage rates offset by rising pro-ductivity). For this reason, wholesale pricesmoved upward in Europe more slowly thanwages, and they continued to be remarkablystable in the United States and Canada (Chart 8).Only in Japan (where wage costs in manufactur-ing have been tending to fall) was there evidenceof a downward movement. Cost of living indices,which are more responsive to changes in wagerates, continued to rise somewhat more rapidly

Incomes Policies

The fairly strong pressures on costs encoun-tered in a number of countries in 1964 led tocontinued interest in the development of incomespolicies, i.e., policies intended to ensure that therate of increase of money income per capitashould not outstrip the rise in average productiv-ity per capita over the economy as a whole. Theincreasing integration of national economiesmakes it of growing importance that rises in do-mestic prices and costs, such as wages, remain inline with those in competing countries. At the

CHART 7. SELECTED AREAS AND COUNTRIES: IMPORTPRICES, 1961-FiRST QUARTER 1965

(1958 = 100)

CHART 8. SELECTED AREAS AND COUNTRIES: WHOLESALEPRICES, 1961-APRIL 1965

(7955 = 100)

CHART 9. SELECTED AREAS AND COUNTRIES: COST OFLIVING, 1961-APRIL 1965

(1958 = 100)

CHART 10. SELECTED AREAS AND COUNTRIES: EXPORTPRICES, 1961-APRIL 1965

(1958 = 100)

than wholesale prices (Chart 9). This increasewas greatest in Italy and the Netherlands; risingmoney wages also contributed to a rather rapidincrease in Japan. U.S. and Canadian exportprices, on the whole, remained stable, but for thefirst time in several years there was a marked risein the index for the EEC countries (Chart 10).

same time, wages and other costs cannot be keptbelow international levels, as is evidenced by thestrong pressures in the Netherlands, which con-tributed to the recent marked increases in wagesthere. Furthermore, no incomes policy can bemaintained unless accompanied by appropriatefinancial policies.



Progress during 1964 and the early part of1965 toward the effective implementation of in-comes policies was essentially limited to the de-velopment of institutional arrangements in theUnited Kingdom. These arrangements, whichwere set out in a White Paper published in Feb-ruary 1965, may be regarded as a prerequisitefor further progress. Changes in wages and priceswill be reviewed from time to time by the Na-tional Economic Development Council, assistedby government departments (which will in prac-tice supply most of the necessary statistical data).The review of specific cases is to be the responsi-bility of a National Board for Prices and Incomes,comprising two divisions dealing, respectivelywith prices and with incomes. This Board, whichwas set up in April 1965, replaces the NationalIncomes Commission. The Government will retaindirect responsibility for all cases referred to theBoard, whether such referrals are made at therequest of one or both parties involved, or ofindividuals, or on the initiative of the Govern-ment itself. The White Paper states that theGovernment will give the voluntary method everyopportunity for success, but that it may resort toother methods if it becomes convinced that thevoluntary method has failed. In particular, it willuse its fiscal powers or other appropriate meansto correct any excessive growth in aggregateprofits, compared with the growth of the total ofwages and salaries.

In a number of other countries, the vital taskof persuading both sides of industry and othersectors of the economy of the need for an incomespolicy has been undertaken. This, in itself, repre-sents an important step toward the implementa-tion of a policy. However, the specific policies tobe followed have as yet been enunciated only inthe most general terms. It is still too early tojudge whether these developments will prove tobe effective in countering cost inflation.

Financial and Other Policy DevelopmentsBefore November 1964

Discount Rates

The most obvious sign of increasing financialrestraint in some industrial countries is to befound in the rather general upward movement

of central bank discount rates (Chart 11), thefollowing changes being made prior to November:

BelgiumDenmarkJapanNetherlands

SwedenSwitzerlandUnited Kingdom

1964

JulySJune 11Mar. 18Jan. 6June 4Jan. 31JulySFeb.27

Increase(Percentage New

points) Rate

0.501.000.730.500.500.500.501.00

4.756.506.574.004.504.502.505.00

These increases, together with the maintenance ofrelatively low rates in Italy, Germany, and theUnited States, served to widen the spread betweencentral bank rates which had been narrowingduring 1963.

Monetary and Debt Management Policies

In many respects, the upward shifts in Euro-pean discount rates and their stability in the

CHART 11. SELECTED COUNTRIES: CENTRAL BANKDISCOUNT RATES, 1961-ApRiL 19651

(In per cent per annum)

1 Data for end of quarters, 1961-62; for endmonths, 1963-65.

of



United States and Canada were symptoms of thesomewhat disparate monetary, debt management,and fiscal policies followed during the year. Thesein turn reflected the disparate positions of the twoareas. There was continued economic progress inthe United States during the first part of 1964,leading to a rising demand for investment re-sources, but tax reductions and rising businessand personal savings would probably have led toa decline in interest rates. This would have ac-centuated the undesirable balance of paymentsrepercussions to which the rising interest ratesand reduced credit availability abroad alreadytended to lead. Consequently, the authoritiesmade policy adjustments that served to maintaina marked stability in the structure of rates(Chart 12). The free reserves of the commercialbanks were kept relatively low, and debt manage-ment was directed to a lengthening of the averagematurity of the government debt, so that the de-mand for securities by nonbank holders was satis-fied, with very little change in bond prices.

CHART 12. TERM STRUCTURE OF INTEREST RATES

(In per cent)

In the United Kingdom, the authorities adoptedpolicies in the early part of 1964 aimed at limit-ing the expansion of output to a rate which theybelieved could be sustained in the longer run.

The increase in the bank rate from 4 per cent to5 per cent in February 1964, and the policies ofdebt management pursued, served to raise theyields on government securities, particularly at theshort end of the range. Monetary policy was in-tended to permit only a moderate increase in banklending, but bank advances rose by 14 per centin the 12 months ended in November. There weresome declines in the banks' holdings of Treasurybills and British Government stocks.

In Italy and Japan, pressures on the balance ofpayments had led to a tightening of monetarypolicies late in 1963 and early in 1964, as re-viewed in last year's Annual Report. These poli-cies were continued and in both countries con-tributed to a change from deficit to surplus in thecurrent account and to a moderation of the paceof wage and price increases. In March, Italymade an additional swap agreement with theU.S. Treasury, arranged for credit facilities withother U.S. agencies and with European centralbanks, and some weeks later drew the equivalentof $225 million from the Fund. The facilities thusmobilized totaled approximately $1 billion. Oneimportant effect of the restrictive policies was aslowing down of the pace of industrial activityand a consequent relaxation of policies, startingin May.

Belgium, Denmark, Japan, the Netherlands,Sweden, and Switzerland increased their discountrates, and, with France and Germany, took othersteps to restrict the liquidity of the commercialbanks or to restrain the expansion of credit bythem. On previous occasions, rising interest ratesfollowing restrictive changes in monetary policyhave induced inflows of foreign funds which haveserved to augment the banks' liquidity and henceto offset the effects of monetary policy. For thisreason, Denmark, Germany, Italy, Japan, and theNetherlands, among other countries, put limits onthe increases of banks' foreign indebtedness ormade provision for the neutralization of bankliquidity arising from this source. The SwissNational Bank established a new type of short-term security that it hoped would provide a basisfor a domestic money market. Hitherto, the Swissbanks have held most of their liquid assets in theform of money-market balances in financial cen-ters outside Switzerland, which has resulted inperiodic movements of short-term funds occa-

Years to Maturity



sioned by the banks' seasonal needs to obtain cashat the National Bank. It is hoped that the avail-ability of this rather attractive new security, willeliminate or reduce these movements.

Fiscal Policy

A number of countries also made use of fiscalpolicy as an instrument of general economicpolicy. In the United States, the most importantfiscal change was the reduction in income andcorporation taxes approved in February, whichwill result in reductions of $14 billion in taxliabilities in 1965. However, reductions in certainexpenditures and the favorable effect of risingnational income on government-revenue and ex-penditure have served to limit the effect of re-duced tax rates on the Government's cash deficit.In the United Kingdom, the fiscal outturn for thefirst half (April to September 1964) of the newfinancial year was considerably more favorablethan had been expected from the estimates. Fiscalpolicy in Italy continued to be restrictive for aperiod after the pressures of monetary policy hadbeen eased. In the Netherlands, the authoritiestried to limit the growth of some categories ofpublic expenditure by postponing investments andby imposing ceilings on long-term borrowing bylocal authorities who were already subject toceilings on short-term borrowing. In Belgium, tocounter inflationary pressures, the rising trend ofgovernment current expenditures was curtailedand some investment expenditures were post-poned. There was a dramatic improvement inthe budgetary situation in France. Expendituresrose at a slower rate than revenues, and revisedestimates for the 1964 budget indicate an over-alldeficit of F 850 million, compared with an origi-nal estimate of F 4,740 million. The 1965 esti-mates submitted by the Government envisaged abalanced budget for the first time in decades.

Subsequent Events

The Problems

From early in 1964, sterling was under inter-mittent pressure (Chart 13) and the UnitedKingdom had recourse to outstanding credit ar-

CHART 13. SELECTED COUNTRIES: EXCHANGE RATES,1961-APRIL 19651

1 The premium or discount shown for each currencyexcept the dollar is the difference between its premiumor discount from par against the dollar and the averageof the premiums or discounts against the dollar of theother members of the General Arrangements to Borrowand Switzerland. For the dollar, the discount is theinverse of the average of the premiums or discounts ofthe other ten currencies.

rangements with the Federal Reserve Bank ofNew York, and to facilities arranged in Septem-ber with the central banks of Belgium, Canada,France, the Federal Republic of Germany, Italy,the Netherlands, and Switzerland. In the fortnightof November 16-27, there was a large increase inthe flow of international capital, particularly fromthe United Kingdom. This was associated with aloss of confidence and erratic movements in theinternational money markets. Not only did ex-change rates move sharply, but wide spreads de-veloped between comparable interest rates, evenafter allowance is made for the effects of forwardcover (Charts 14 and 15). As the speculation



continued, the central banks referred to above,together with those of Austria, Japan, andSweden, the Bank for International Settlements,and the Export-Import Bank of Washington en-tered into arrangements with the United Kingdom,whereby the equivalent of $3 billion was madeavailable to defend the parity of the pound. Earlyin December, the United Kingdom drew the fullamount ($1 billion) of its outstanding stand-byarrangement with the Fund, using this, inter alia,to repay the credits arranged in September. These

CHART 14. COVERED SHORT-TERM INTEREST RATES,1961-APRIL 1965

(In per cent)

CHART 15. UNITED KINGDOM: TERM INTERESTDIFFERENTIALS, 1963-APRIL 1965


mainly short-term operations were designed toprovide a breathing space during which morefundamental steps could be taken to correct theunderlying disequilibrium. On February 10, itwas announced that the November credits hadbeen prolonged, and on May 25 the United King-dom drew from the Fund the equivalent of $1,400million, primarily to repay outstanding centralbank credits. In connection with the two U.K.drawings, a total equivalent to $930 million wasobtained by the Fund under the General Arrange-ments to Borrow, and the equivalent of $650million by the sale of gold to members.

Changes in Policy

As early as October 25, the new U.K. Govern-ment had announced that it was taking steps tomeet its balance of payments difficulties. OnNovember 11, the Government introduced meas-ures imposing a temporary charge of 15 per centon most imports other than foodstuffs, unmanu-factured tobacco, and basic raw materials, andproviding for rebates of indirect taxes averaging1.9 per cent of the value of exports. The sur-charge was reduced to 10 per cent from April 27,1965. A number of tax increases were also an-nounced in November.

The announcement of these measures did notserve to prevent a further outflow of capital. Con-sequently, on November 23, the bank rate wasraised from 5 per cent to 7 per cent; interest ratesrose sharply and have remained high (Chart 16).To make the "credit squeeze" more effective,on December 8 the Governor of the Bank ofEngland requested the banks and other finan-cial institutions to limit advances for purposesother than exports and productive investment inmanufacturing. Advances by the London clear-ing banks, seasonally adjusted, declined in Janu-ary and February 1965 but turned upward againin March and April; on April 29, a call for specialdeposits by the domestic banks with the Bank ofEngland was announced (for the London clearingbanks the amount called was equivalent to 1 percent of deposits). The Governor of the Bank ofEngland asked the banks to limit the expansionof credit to 5 per cent in the 12 months to March



CHART 16. SELECTED COUNTRIES: LONG-TERMGOVERNMENT BOND YIELDS, 1961-APRIL 1965


attractiveness of foreign short-term rates for inter-nationally volatile funds. The Bank of Canadaresponded to the rise on November 23 in theU.K. bank rate and the Federal Reserve discountrate by increasing its bank rate from 4.0 per centto 4.25 per cent later the same day. The SverigesRiksbank's rate had been raised from 4.5 per centto 5.0 per cent on November 6. These variousmeasures served to push some rates, particularlythe Euro-dollar rate, to markedly higher levels.Throughout the early part of 1965, the FederalReserve maintained rather tight bank liquiditypositions. During this period, also, the U.S. Gov-ernment proposed a two-year extension of the In-terest Equalization Tax, its broadening to coverbank credit with maturities of one to three years,and its extension to cover nonbank credit. TheGovernment also appealed for a program of volun-tary restraint on international lending operations byU.S. financial institutions and other businesses.On January 22, the Bundesbank raised its dis-count rate from 3 per cent to 3.5 per cent inorder to counteract persistent excessive demandand the danger of price increases. As a conse-quence, the high cost of domestic short-termfinance prevailing at the end of 1964 was pushedeven higher.

France, Italy, and Japan were the most impor-tant countries to show signs of moving againstthis tide. From October, public sector investmentin Italy has been increased, in order to encouragea renewal of economic growth, and interest rateshave been declining. The Japanese authorities,faced with an improved balance of payments posi-tion based on rising exports, turned to more ex-pansionary policies in order to impart a newimpetus to economic expansion. The reserve re-quirements for bank deposits other than timedeposits were cut in half, returning them to theirlevel in December 1963. The Bank of Japan'sdiscount rate was lowered on January 9 from6.57 per cent to 6.205 per cent, and on April 3to 5.84 per cent. On April 8, the Bank ofFrance's discount rate was reduced to 3.5 percent. It is possible that these changes may indi-cate that the general levels of international inter-est rates have passed their peaks. In Februaryand March, rates in several countries were lowerthan they had been in the immediately precedingmonths.

1966; he also requested a comparable degree ofrestraint from other financial institutions. Thebudget statement of April 6 outlined the Govern-ment's plans for restoring a balance in externalpayments by the second half of 1966. Its twokey points were that, by the early months of1966, the * Government intended to reduce the.pressure on resources by <£250 million at an an-nual rate, and to reduce, by changes in the ex-change controls, the outflow of long-term capitalby at least £100 million at an annual rate. OnJune 3, the bank rate was lowered to 6 per cent,but the other elements of financial restraint re-mained in force, and hire-purchase regulationswere tightened.

The deterioration of the structure of interna-tional payments during November 1964 induceda further general rise in interest rates. Immedi-ately after the increase in the Bank of Englanddiscount rate, the discount rates of the FederalReserve Banks in the United States were raisedfrom 3.5 per cent to 4.0 per cent, and the ceilingson interest rates payable on savings and timedeposits with commercial banks in that countrywere raised. These steps were taken to offset the



Foreign Exchange Markets

Whereas 1963 could be described as a year ofrelative calm in the international exchangemarkets, 1964 and the early part of 1965 covereda period of fairly severe stress. In March, the lirawas under heavy pressure. In the second half ofthe year, sterling was generally weak; and after atemporary recovery early in 1965 it suffered asecond setback, which was not overcome untilafter the budget statement in April. Early in 1965the dollar also weakened, but this tendency wasreversed by the announcement of the new balanceof payments program. Together, these movementsprovide the main explanation for the apparentlyrather erratic changes in the quotations for othercurrencies, which tended to be the inverse ofthose of the two reserve currencies. Sharp move-ments in rates in November provided the mostdramatic events in the markets in 1964.

In part, these movements in exchange rateswere associated with rather considerable changesin foreign nonofficial sterling holdings (Chart 17)and dollar balances (Chart 18). It is possiblethat the high interest rates prevailing in the Euro-

Development of Securities Markets

Last year's Annual Report drew attention tothe desirability of improving the structure of se-curities markets in Europe, partly to make easierthe role of capital movements in facilitating bal-ance of payments adjustment. There has beenlittle integration of the individual European capi-tal markets, although the problem is being inten-sively studied.

As indicated in Table 8, the total issues of newsecurities on markets other than those of the bor-rowing country were slightly higher in 1964 thanin 1963; and in the early part of 1965 these offer-ings for other borrowers continued at close totheir 1964 levels. The increase in 1964 was theproduct of substantial offerings in the UnitedStates and Germany, and increases in other im-portant markets (see Table 9), of which London(where total new offerings of sterling and foreigncurrency securities rose from the equivalent of$280 million to $583 million) and Germany werethe most important. The international market hasbeen dominated by Canadian and European is-sues, although Japan, Australia (in 1963), and

CHART 17. U.K. EXTERNAL STERLING LIABILITIES,1961-MARCH 1965

(In billions of pounds sterling)

CHART 18. U.S. INTERNATIONAL LIQUID LIABILITIES,1961-MARCH 1965

(In billions of U.S. dollars)

dollar market may well serve to make these tend-encies persist by acting as an attraction for thetransfer of foreign bank and other nonresidentbalances from the United States to Europe whileremaining denominated in dollars.

some European countries have also been impor-tant participants, as indicated in Table 10.

Tables 8 and 9 illustrate an important develop-ment during 1964: the increase in issues in cur-rencies other than those of the markets where



TABLE 8. ISSUES OF SECURITIES ON MARKETS INCOUNTRIES OTHER THAN THAT OF BORROWER


TABLE 10. AMOUNTS RAISED BY ISSUES OF SECURITIESON MARKETS IN COUNTRIES OTHER THAN THAT

OF BORROWER, 1963-MARCH 1965


Issues in CurrenciesOther than That of

Country Where Issued

19631964

1965I

InLon-don1

89442

87

In InLuxem- Newbourg York

32 —17 40

— 25

Total

121499

112

Issues inUnits ofAccount2

4810

Issues inCurrency

of CountryWhereIssued

1,8491,650

546

1 Including issues denominated in external sterling andmade optionally in London or Luxembourg. Excluding twomade optionally in deutsche mark.

2 All issued in Luxembourg.

TotalIssues

2,0182,159

658

issuesissues

International institutionsEurope

European institutionsDenmarkFinlandNorway

CanadaJapanAustraliaOther sterling areaOther

Total

1963

476261

40851877

789246120

89102

2,018

1964

178699145136108120725213

95250

2,159

1965

Jan.-Mar.

26217537

2169

10025253140

658

issued, referred to as foreign currency issues.These included all those made in Luxembourg,a large proportion of those in London, and asmall proportion of those in New York.

The effects of the U.S. Interest EqualizationTax, from the date (August 1963) of its impacton the New York market (the most importantinternational center for the issue of long-termsecurities) were quite important. While the totalvalue of foreign new issues in the United Stateswas somewhat less in 1964 than in 1963, the maineffect of the Tax, as indicated in Table 11, wasto reduce the issues by borrowers from Europeancountries (except Finland, to which the Tax doesnot apply) and Japan, but to make the New Yorkmarket relatively more favorable for borrowersfrom the developing countries. It is to be expectedthat the program of voluntary balance of pay-ments restraint announced in February 1965 willintensify this tendency, even though the height ofEuropean interest rates (e.g., the Euro-dollarrates) might encourage European borrowers toraise funds on the New York market. In 1964,

TABLE 9. FOREIGN ISSUES OF SECURITIES IN CURRENCYOF MARKET WHERE ISSUED


United Fed. Rep.United King- of Ger- Nether- Swit-States dom1 France many Italy lands zerland Total

19631964

1965I

1,44321,155

360

191141

31

1230

—

40 24224 —

1463 —

315

—

13684

9

1,8491,650

546

1 Including $115 million for Shell Funding Corporation in NewYork.

the decline in foreign issues was more than offsetby an increase in bank loans to borrowers whomight otherwise have floated long-term bonds,but in February 1965 the Tax was also applied tobank loans for one year or more.

In March 1964, Germany announced its inten-tion of altering its tax policies, to bring them moreinto line with general practices, by imposing a 25per cent withholding tax on remittances of interestto foreign holders of German fixed-interest secu-rities. This had the prospective effect of reducingsubstantially the net yield on German securitiesheld by foreigners who were unable to obtainrelief under double taxation agreements. Theannouncement led to a sharp fall in the foreigndemand for German securities. The tax took effect

TABLE 11. SALES OF NEW ISSUES BY FOREIGNBORROWERS IN THE UNITED STATES1


1963I

IIIIIIV

1964I

IIIIIIV

1965I

Europe

651541934

11

24

9

Canada

3482606124

8618744

383

99

OtherWesternHemi-sphere

13

23—

135614

125

5

Japan

426552

5

—

—

—

OtherAsiaand

Africa

18171122

25301349

29

Other

—1720—

4

——

160

Total

486513186

85

12728471

581

302

1 Fund estimate.2 Including Shell Funding Corporation, $115 million.3 See footnote 1 to Table 8.

Source: U.S. Department of Commerce, Survey of Current Busi-ness.

1 Purchases by U.S. residents, i.e., excluding purchases by non-U.S. residents of foreign issues in New York, included in Tables9 and 10.



from July 1, 1965. It does not, however, applyto the income from foreign securities issued in theGerman market (a large proportion of which arenormally purchased by foreign investors); thisshould assist in the development of an interna-tional capital market there. Meanwhile, early inMay, the persistence of strong demand for capitalpushed the yield on government bonds to 7 percent.

A second important change in the Germansecurities market was the abolition, with effectfrom January 1, 1965, of the 2.5 per cent tax onall new issues; while the major part of Germanbond issues were already exempt from the tax,issues on behalf of industry and foreigners werenot. The removal of the tax will, therefore, tendslightly to offset the high cost of borrowing inGerman markets. In fact, foreign issues in theGerman bond market increased from the equiva-lent of $45 million in the first four months of1964 to $146 million in the first four months of1965, of which the largest share was sold tononresidents.

In addition to the foregoing changes in theinternational securities markets, a number ofchanges have been introduced in national marketswith the intention of making those markets moreaccessible for purely domestic issues. Attemptsare being made—e.g., in France, Germany, andItaly—to improve the operation of the local se-

curities markets so as to stimulate investor interestand attract funds. In Italy, insurance companiesare now permitted to invest a proportion of theirreserves in long-term private securities, and a lawhas been passed permitting the establishment ofinvestment trusts. These steps, taken to widen thebase of investment in the market, may lead togreater stability of security prices. In France, thetax on income from dividends was modified toincrease the effective yield of shares. There wasalso an easing of the tax on capital gains. In theUnited Kingdom, the imposition of such a taxmay work in the opposite direction, although theexistence in the United States of a tax on capitalgains has not deterred the growth of securitiesmarkets. The reform of company law in Germanyshould strengthen the position of shareholders andthereby increase interest in the acquisition ofshares. A new law in Italy, granting tax benefitsto companies planning to merge, is likely to leadto a series of amalgamations and an increase inthe average size of companies. A projected changein the law governing companies in France wouldalso facilitate company mergers. And, of course,larger companies tend to rely rather more heavilyon the new issue market than is typical of smallercompanies. These developments will add to theimportance of the measures described above tostrengthen the domestic securities markets in someof the leading European countries.


Chapter 6

World Trade, Payments, and Reserves

World Trade

most all the industrial countries during 1963and the continued prosperity in most of them in1964 were associated with a rapid growth inworld trade. The value of world exports, exclud-ing those of Soviet countries and Mainland China,rose by no less than 12 per cent from 1963 to1964, following an increase of SV2 per cent from1962 to 1963 and one of nearly 5V2 per cent from1961 to 1962. The accelerated rate of growthfrom 1963 to 1964 was due in part to a fasterrise in export prices (Table 12). These priceswere higher than in 1963 in all the manufacturingcountries except Japan, and in most primary pro-ducing countries, other than those exporting petro-leum. The volume of world trade was about 10per cent greater in 1964 than in 1963, comparedwith an increase of about ll/2 per cent from 1962to 1963.

TABLE 12. EXPORT UNIT VALUES, 1961-64

(7960 = 100)

1964Fourth

1961 1962 1963 1964 Quarter

Manufacturing countriesUnited StatesEEC countries1

EFTA countries2

Japan

Primary producing countriesCanadaAustralia, New Zealand,

South AfricaOther primary producing

countries outside EuropeOf whichPetroleum producing

countriesOther

10210210095

101

99

97

9797

10210210192

104

100

95

9894

10110210295

105

107

97

9797

10210410593

106

112

99

97100

10410610692

107

110

98

9799

Sources: International Monetary Fund, International FinancialStatistics; United Nations, Monthly Bulletin of Statistics, April1965.

1 Belgium-Luxembourg, France, Federal Republic of Germany,Italy, Netherlands.

a Austria, Denmark, Norway, Sweden, Switzerland, UnitedKingdom.

Changes in Trade, 1963-64

The value of trade between manufacturingcountries increased by about 13Vi per cent, whichwas again somewhat greater than the rise in worldtrade generally, or in the total exports or importsof the manufacturing countries to or from allsources. However, manufacturing countries' ex-ports to primary producing countries in Europeand the higher income primary producing coun-tries outside Europe (Group I in Tables 13 and14) increased by an even greater percentage, asdid the exports of both this group of primary pro-ducing countries and the manufacturing countriesto the Sino-Soviet Area. The latter increase wasin part attributable to very large rises in agricul-tural exports to the Soviet Union from the UnitedStates, Canada, and Australia, and a sharp in-crease in Japan's exports of manufactures toMainland China. The value of trade between the

TABLE 13. DIRECTION OF WORLD TRADE, 1963 AND 1964(In billions of U.S. dollars)

Exports to

Exports from

Primary ProducingManu- Countries Sino-

facturing SovietYear Countries I1 II2 Area3 World

Manufacturingcountries4

Primary producingcountries

Group I1

Group II2

World, excl. Sino-Soviet Area4

Sino-Soviet Area3

19631964

19631964

19631964*

196319645

196319645

49.355.9

11.813.4

20.622.4

81.791.7

3.23.5

13.715.8

0.91.1

2.42.6

17.019.5

0.9

21.523.5

2.12.2

6.67.1

30.232.8

2.1

2.63.1

1.21.7

1.41.6

5.26.4

12.6

87.198.3

16.018.4

31.033.7

134.1150.4

18.8

Sources:International Monetary Fund and International Bankfor Reconstruction and Development, Direction of Trade; Inter-national Monetary Fund, International Financial Statistics, andstaff estimates.

1 Australia, Canada, New Zealand, South Africa, and primaryproducing countries in Europe.2 All other primary producing countries.

3 Including Cuba.4 Military exports from United States are excluded.5 Preliminary estimates.

53

HE exceptionally high rate of expansion in al-T



manufacturing countries and the less developedcountries (Group II) rose less than world tradein general, expanding by some 9 per cent in eachdirection.

The very slight growth of U.K. trade was instriking contrast to this general expansion. Thevalue of U.K. imports (which account for morethan one sixth of all manufacturing countries' im-ports from the less developed countries) increasedby only about \l/2 per cent, and U.K. exports tothe group showed no increase at all. U.S. importsfrom them also rose comparatively little (by about5V2 per cent, compared with an increase of over\\l/2 per cent in imports of EEC countries), butU.S. exports to the group rose faster than theaverage. Japan's trade in each direction rose invalue by nearly 16 per cent.

By contrast, the United Kingdom's importsfrom manufacturing countries rose much morethan the average. Table 15 (which details thecorresponding export flows) shows that U.K. pur-chases from manufacturing countries rose by

TABLE 14. GROWTH IN VALUE OF TRADE BETWEENMAJOR AREAS, 1961-64

(Percentage increase over preceding year)

Exports to

Exports from

Primary ProducingManu- Countries Sinp-

facturing Soviet WorldYear Countries P II2 Area3

Manufacturingcountries4

Primary producingcountries

Group I1

Group IP

World, excl. Sino-Soviet Area4

Sino-Soviet Area3

1961196219631964

19611962196319646

19611962196319646

19611962196319646

1961196219631964°

8.99.6

10.513.4

5.13.55.4

13.6

1.05.57.09.0

6.17.68.8

12.2

1.4512.69.09.0

1.53.5

10.115.3

5.45.6

12.022.2

—2.222.08.08.0

2.15.5

10.414.7

—6.436.713.5

5.0—1.4

4.59.3

2.1—5.7

12.44.8

'5.98.08.0

3.6

6.38.6

8.424.711.0

0.3s

7.52.0

19.2

47.0—1.050.041.7

—2.38.0

14.0

4.410.623.1

5.64.95.5

6.05.68.6

12.9

6.92.49.9

15.0

1.05.87.38.7

4.75.48.5

12.2

2.39.17.0

Sources: See Table 13.1 Australia, Canada, New Zealand, South Africa, and primary

producing countries in Europe.2 All other primary producing countries.3 Including Cuba.4 Military exports from United States are excluded.6 Excluding large changes in Cuba's trade over this period.6 Preliminary estimates.

about 19 Y2 per cent, while those of other EFTAcountries, the EEC as a group, the United States,and Japan each rose by about 12V2-1^V2 percent. Japan, Italy, Norway, the United States,and the Federal Republic of Germany all in-creased their exports to the United Kingdom by20-25 per cent or more.

The United Kingdom's exports to manufactur-ing countries rose by only 5 per cent—i.e., littleover one third as fast as those of the other manu-facturing countries. U.K. exports to other EFTAcountries rose no faster than those of EEC coun-tries, and slightly less than those of the UnitedStates; its exports to the United States rose lessthan half as fast as those of other manufacturingcountries, and there was scarcely any increase inthe value of its exports to the EEC countries. U.S.exports (excluding special categories) to thesecountries, however, rose almost as fast as theirexports to each other.

Trade in Manufactures

Much of the deterioration in the United King-dom's trading position seems to have been associ-ated with the exceptionally high level of domesticinvestment during 1964. Pressure on the capacityof the engineering sector was apparently onereason why imports of machinery and transportequipment rose by more than one third in valuefrom 1963 to 1964, while exports of these goodsshowed practically no change (Table 16). Therewere, however, some more specific reasons for theslow growth of such exports, namely, fewer de-liveries of ships, aircraft, and aircraft engines,sales of which frequently vary sharply from oneyear to another, a fall in exports to the U.S.S.R.,and the weakness of the Italian automobile mar-ket. The value of U.K. exports of other manufac-tures rose by some 10 per cent, compared with a13 per cent increase in the value of all importsother than machinery and transport equipment.There was, however, virtually no increase in thevalue of U.K. exports of foodstuffs, materials, andfuels, owing to a marked decline in exports ofmineral fuels.

The striking difference between the two broadclasses of manufactures is also evident in the com-parison between the growth of U.K. exports andimports and of those of other countries in trade


WORLD TRADE, PAYMENTS, AND RESERVES 55

TABLE 15. TRADE BETWEEN MANUFACTURING COUNTRIES, 1963 AND 1964

Exports from

United Kingdom

Other EFTA countries

EEC countries

United States2

Japan

All manufacturingcountries1- 2

United Kingdom

Other EFTA countries

EEC countries

United States2

Japan

Year

19631964

19631964

19631964

19631964

19631964

19631964

UnitedKingdom

-1,2801,530

1,9802,280

1,1701,470

160200

4,5905,480

—19.6

15.1

25.4

26.9

OtherEFTA

Countries

1,3601,490

1,7002,020

5,7206,290

860960

120200

9,75010,970

10.1

18.8

9.9

12.5

73.0

Exports

EECCountries

-Value in millions of

2,5002,540

3,5303,830

15,79018,390

3,9704,560

330370

26,11029,690

-Percentage increases,

1.6

8.5

16.4

15.0

10.2

to

UnitedStates

U S dollars

1,0201,070

720800

2,5602,860

—

1,5201,870

5,8206,590

1963 to 1964Z

5.2

11.0

11.5

—22.6

Japan

140160

90130

360390

1,7101,910

—

2,3002,590

14.0

36.2

9.5

11.8

—

AllManufacturingCountries1- 2

5,0205,270

7,3308,310

26,40030,200

8,3809,460

2,1302,630

49,26055,870

5.0

13.4

14.4

12.9

23.5

All manufacturingcountries2 19.4 12.5 13.7 13.2 12.6 13.4

Source: International Monetary Fund and International Bank for Reconstruction and Development, Direction of Trade.1 Because of rounding, the figures shown may not add to totals.2 Excluding military exports. Figures in last column include estimate of U.S. special category exports, which cannot be allocated between

the areas shown in the table.3 Calculated from unrounded figures.

with particular areas presented in Table 17.Table 18 indicates the relative importance of thetwo groups of manufactures in the imports andexports of the United Kingdom, other EFTAcountries, EEC countries, the United States, andJapan.

TABLE 16. UNITED KINGDOM: VALUE AND GROWTHOF TRADE IN THREE MAJOR CATEGORIES, 1964

Commodity Grouping

Machinery andtransportequipment1

Other manufactures2

All other goods3

Value in 1964

Exports Imports

Million U.S. dollars

5,113 1,526

4,790 4,105

2,008 9,806

Increase over1963

Exports Imports

Percentage

1 34

10] 261

Source: United Kingdom Report on Overseas Trade, February1965.

1 Standard International Trade Classification (SITC) Group 7.2 SITC Groups 5, 6, and 8.3 SITC Groups 1-4 and 9.

Table 17 (which relates to the first ninemonths of each year) shows the United Kingdom'sexports of manufactures other than machineryand vehicles to the rest of Western Europe didalmost as well as those of the United States andof other EFTA countries; exports from the EECcountries rose one-third faster. U.K. exports ofthese goods to the United States and Canada alsoincreased almost as fast as those of the EECcountries. But British exports of machinery andtransport equipment to Western Europe showedonly a slight increase, compared with increasesof 9 per cent in exports both from the UnitedStates and from the other EFTA countries, andof 15 per cent in exports from EEC countries;U.K. exports of such manufactures to the UnitedStates and Canada rose only half as fast as thoseof the EEC countries. As a consequence, theUnited Kingdom's share in the imports of ma-chinery and vehicles into both the EEC coun-tries and the United States dropped sharply be-

17

813


56

ANNUAL REPORT, 1965

TABLE 17. GROWTH OF MANUFACTURING COUNTRIES' TRADE IN MACHINERY ANDTRANSPORT EQUIPMENT AND OTHER MANUFACTURES, BY AREAS1

(Percentage increases from Jan.-Sept. 1963 to Jan.-Sept. 1964)

Commodity Grouping and Direction of TradeUnited

Kingdom

Trade of

EECCountries

UnitedStates2

OtherEFTA

Countries3 Japan4

Imports of countries shown in column head from areaslisted below

Of machinery and transport equipment fromUnited KingdomOther Western EuropeUnited States and Canada

World

Of other manufactures fromUnited KingdomOther Western EuropeUnited States and Canada

World

Exports of countries shown in column head to areaslisted below

Of machinery and transport equipment toUnited KingdomOther Western EuropeUnited States and CanadaAustralia, New Zealand, and South AfricaLess developed countries

World

Of other manufactures toUnited KingdomOther Western EuropeUnited States and CanadaAustralia, New Zealand, and South AfricaLess developed countries

World

3540

35

2841

29

297

—2

158

104

10

21315

12

1420

8

18

141519199

14

232010229

16

01113*

12

7125s

10

449

235

67«147

18

5116175

22«147

16

101116

13

201623

19

459

1276

3216161110

17

—4

}«48

50

24

15

Sources: United Nations, Economic Survey for Europe, 1964; Statistical Office of the EEC, Monthly Foreign Trade Statistics; U.S.Department of Commerce, U.S. Overseas Business Reports and United States Trade with Major World Areas, January-September 1964(December 1964); United Nations, Commodity Trade Statistics; and Japanese Ministry of Finance, Customs Statistics.

1 Commodity groupings as in Table 16.2 Change in exports, excluding special categories.3 Including Finland.4 Percentage changes partly estimated.

5 Trade with Canada only.6 Australia and New Zealand.7 Also includes South Africa.8 Excluding trade with Eastern Europe, which declined by one third

tween the two periods, whereas its share in theirimports of other manufactures was much morenearly maintained. Table 17 also illustrates therelatively favorable development of U.K. tradewith the EFTA countries. The United Kingdom'sshare in their imports of manufactures other thanmachinery and vehicles actually increased slightly,and there was only a slight reduction in its shareof their imports of machinery and vehicles.

Table 17 also throws some interesting light onthe comparative development of exports of manu-factures from the United States and the EECcountries. It shows that, owing to a greater risein the value of its exports of machinery and trans-port equipment, U.S. exports of manufactures roseproportionately somewhat more that those of theEEC countries between January-September 1963

and January-September 1964. This was due,however, in large measure to an increase of nearly50 per cent in U.S. exports of manufactures to theUnited Kingdom, and to an even greater per-centage increase in its exports of machinery andvehicles to Australia and New Zealand. U.S. ex-ports of both groups of manufactures to the lessdeveloped countries also rose faster than thecomparatively small exports of EEC countries tothis area, while U.S. exports to continental West-ern Europe as a whole rose considerably less thanthose of EEC countries. However, EEC coun-tries' imports of manufactures from the UnitedStates rose at about the same rate as their im-ports from each other (see Table 19).

The faster than average expansion in the manu-factured exports of the United States and Japan

1213

7031

727

2 13*



TABLE 18. VALUE OF MANUFACTURING COUNTRIES'TRADE IN MACHINERY AND TRANSPORT EQUIPMENT,OTHER MANUFACTURES, AND ALL OTHER GOODS,JANUARY-SEPTEMBER 19641


Trade of

OtherUnited EEC United EFTA

Kingdom Countries States2 Countries3 Japan

Imports (c.i.f.)Machinery and

transportequipment

Othermanufactures

Food, materials,fuel. etc.

Exports (f.o.b.)Machinery and

transportequipment

Othermanufactures

Food, materials,fuel, etc.

1,137

3,061

7,313

3,838

3,521

1,452

6,162

10,686

16,252

10,240

14,062

6,648

1,475

5,026

7,158

6,823

5,289

5,544

3,385

4,514

3,845

2,169

4,081

2,984

594

899

4,418

1,310

3,071

230

Sources: See Table 17.1 Commodity groupings as in Table 16.2 Imports f.o.b. Export figures exclude special categories.3 Including Finland.

TABLE 19. EEC COUNTRIES: IMPORTS OF MANUFACTURESFROM EACH OTHER AND FROM THE UNITED STATES,JANUARY-SEPTEMBER 1964

Imports of

Value(million U.S.

dollars)

PercentageIncrease over

Jan.-Sept. 1963

Machinery and transport eqt.From EEC countries 3,642From United States 1,089

Other manufacturesFrom EEC countries 6,095From United States 979

14.315.5

21.620.6

Source: Statistical Office of the EEC, Monthly Foreign TradeStatistics, 1964, No. 1, and 1965, No. 2.

and the slower growth in U.K. exports, illustratedin Table 17, were strongly influenced by demandconditions in the home and export markets and byother nonprice factors. Nevertheless, the changesin the unit value indices for manufactured exportsshown in Table 20 suggest that the disparitiesbetween these rates of growth were associatedwith an apparent improvement in the competitive-ness of the former countries' export prices anda further deterioration in those of the UnitedKingdom. These figures, however, must be inter-preted with caution, as was stressed in last year'sAnnual Report.1 Between 1962 and 1964, the

1 See Annual Report, 1964, "Supplementary Note C,Export Performance of Manufacturing Countries," es-pecially pages 128-29.

price competitiveness of German exports of manu-factured goods appears to have improved aboutas much as that of U.S. goods. During the sameperiod the export prices for manufactured goodsof France, Italy, Sweden, and Switzerland appar-ently rose as much as, or more than, those ofU.K. manufactures.

Export Growth and Market Growth

In 1963 there was no very marked divergencein the rate of export expansion which each manu-facturing country would have achieved if it hadmaintained its share of total exports from manu-facturing countries to each of 22 market areas;under these conditions every country's exportswould have expanded by 8-10 per cent over their

TABLE 20. MANUFACTURING COUNTRIES: CHANGES INTHE RELATION BETWEEN EACH COUNTRY'S EXPORTUNIT VALUE AND THE AVERAGE UNIT VALUE OFOTHER COUNTRIES' EXPORTS, 1963-64

Percentage Changes1

1962 to 1963 1963 to 1964

Relativeimprovement

Little change

Relativedeterioration

Germany —2.5Japan —2.0United States —2.0Belgium-

Luxembourg —1.0Netherlands —1.0France —

Sweden 1.0United Kingdom 1.0Switzerland 3.0Italy 4.0

Japan —2.0United States —1.0Italy —1.0

Belgium-Luxembourg —

Germany —Netherlands 1.0United Kingdom 1.0France 2.0Sweden 2.0Switzerland 3.0

Source: Based on unit value indices for manufactured goodspublished in United Nations, Monthly Bulletin of Statistics.1 Percentage change in ratio of each country's index of unitvalue of manufactured goods exports (in U.S. dollars) to com-bined index for other manufacturing countries for which suchdata are available. No figures exist for Austria, Denmark, orNorway.

1962 value. By contrast, in 1964 there was arange of market growth over 1963 varying from10 per cent for Austria to 17 per cent for Norwayand 15 per cent for Belgium and Sweden—the lastthree countries all being considerably dependenton the U.K. market where (as described above)import demand rose rapidly.

The comparison of market growth and actualexport expansion from 1963 to 1964 made inTable 21 may be summed up as follows: Japanand the United States succeeded in increasingsubstantially their shares of markets; to a largeextent the counterpart of their success was the



failure of the United Kingdom to maintain itsshare of markets. The majority of the EEC coun-tries broadly maintained their shares of markets,but Italy and the Netherlands increased theirshares. The United Kingdom's loss of marketshares was concentrated in a few areas, especiallyAustralia, New Zealand, and South Africa (whereboth the United States and Japan greatly increasedtheir shares of trade), the U.S. market (whereJapan achieved a large part of its gains), andGermany and France (where the share of the EECcountries in trade increased).

TABLE 21. MANUFACTURING COUNTRIES: ACTUALGROWTH IN EACH COUNTRY'S EXPORTS RELATED TOAVERAGE GROWTH IN ITS EXPORT MARKETS, 1962-641

(Percentage change from preceding year)

1962 1963 1964

Market Export Market Export Market Exportgrowth growth growth growth growth growth

Countries which increased their shares of markets from1963 to 1964

JapanUnited States2

ItalyNetherlandsNorway

103887

164

1274

11788

10

1412141517

2214171720

Countries which broadly maintained their shares of markets

AustriaBelgium-

LuxembourgFranceGermany, Fed.Sweden

Countries

10

911

Rep. 86

from 19635

10257

to 196410

98

108

which failed to maintain theirfrom 1963 to 1964

5

12101010

shares

10 9

15 1511 1113 1215 15

of markets

DenmarkSwitzerlandUnited Kingdom

987

9103

8109

1497

141312

11104

Sources: Based on data in International Monetary Fund andInternational Bank for Reconstruction and Development, Directionof Trade, and in United Nations, Monthly Bulletin of Statistics.

1 For the purpose of this analysis the world has been dividedinto 23 markets, consisting of the 13 manufacturing countries,9 groups of primary producing countries, and the Sino-Sovietarea. The rate of growth in the market confronting each export-ing country is taken to be the growth in each market weightedaccording to the share of the country's exports taken by eachmarket in the preceding year. Except for the Soviet area, thegrowth in the market is taken to be the growth in exports tothe area from the manufacturing countries. The actual growthin each country's exports to the Sino-Soviet area has been in-cluded as a factor in the average growth of its export markets.2 Nonmilitary exports.

Development of World Trade During 1964

In the course of 1964, a marked differencedeveloped in the trends of export prices of manu-facturing countries and of primary producingcountries. In the last quarter of 1964 the exportunit values of manufacturing countries, exceptJapan, were higher than the average for the whole

year, but those of most primary producing coun-tries declined somewhat (Table 12, p. 53).

Although the growth of world trade from 1963to 1964 was greater than that from 1962 to 1963,there was actually a slowing down in the rate ofexpansion during 1964. As Chart 19 illustrates,

CHART 19. VOLUME OF WORLD EXPORTS AND SEASON-ALLY ADJUSTED VOLUME OF EXPORTS AND IMPORTSOF FOUR MAJOR AREAS, QUARTERLY, 1961-64

(1960 = 100)

98998



the volume of world exports in the last quarter of1964 was some 7 per cent higher than a yearearlier, following an 11 per cent increase betweenthe last quarters of 1962 and 1963. The'slowingdown occurred principally in Western Europe'strade, particularly its imports. The volume of im-ports of the European OECD countries in the lastquarter of 1964 was only about 4 per cent higherthan a year earlier, in contrast to an increase of\\l/2 per cent between the final quarters of 1962and 1963; the corresponding increases in thevolume of exports were 5 per cent and 10 percent, respectively. On the other hand (again com-paring growth between the last quarters of theyears), there was a somewhat greater expansionin the volume of imports into the United Statesand Canada, and a considerably greater expan-sion in the volume of imports of Australia, NewZealand, South Africa, and the less developedcountries, during 1964 than during 1963. Theexport section of the chart indicates that althougha slowing down of export growth was common toboth the North American and Western Europeangroups, exports from the United States and Can-ada continued to expand more rapidly than thoseof Western Europe, as they had done, in volumeterms, since the second quarter of 1963. In strik-ing contrast to the upward trend of importsinto Australia, New Zealand, and South Africa,the volume of these countries' exports declined inthe latter part of 1964. The increase in the volumeof the exports of the less developed countries be-tween the second half of 1963 and the secondhalf of 1964 was greater than that between thesame periods of 1962 and 1963.

Chart 20 illustrates the development of somemajor segments of Western Europe's trade. Itshows that the slowing down in the growth of thearea's imports indicated in Chart 19 reflected (1)a similar change in the imports of the EECcountries from the rest of the world until the finalquarter of the year, (2) the interruption of theexpansion of trade within the Community in thethird quarter, (3) the leveling off of the volume ofU.K. imports after the second quarter, and (4) adecline in the volume of other EFTA countries'imports between 1963 and 1964. EEC countries'exports to the rest of the world increased littlein volume terms until the final quarter of the year.

CHART 20. EEC COUNTRIES, UNITED KINGDOM, ANDOTHER EFTA COUNTRIES: VOLUME OF TRADE,

SEASONALLY ADJUSTED, QUARTERLY, 1961-64

(I960 = 100)

The exports of the other EFTA countries, how-ever, showed a strongly rising trend.

As Chart 21 shows, there was a lessening ofthe imbalance in various countries' external tradeduring 1964. Seasonally adjusted, the large com-bined deficit of the EEC countries other thanGermany was steadily reduced in the course of theyear, and the German trade surplus (measuredimports c.i.f., exports f.o.b.) was about $630 mil-lion smaller in the second half of 1964 than at itspeak in the second half of 1963. An exception tothe general improvement was the United Kingdom,but the deterioration in the U.K. trade balancewhich had continued throughout 1963 was slowerduring most of 1964 and was halted in the lastquarter of the year. The trade surplus of theUnited States was rising almost continuously dur-ing 1963 and 1964. It was higher in the finalquarter of 1964 than in any other quarter of thelast five years. However, the surplus may have


60

ANNUAL REPORT, 1965

CHART 21. MANUFACTURING COUNTRIES:SEASONALLY ADJUSTED TRADE BALANCES,

1961-FmsT QUARTER 19651

(Monthly averages in millions of U.S. dollars)

1 For the United States, both exports and imports aref.o.b.; for all other countries, exports are f.o.b. and im-ports are c.i.f. The trade balances in the first quarter of1965 are strongly influenced by the effects of the U.S.dock strike.

2 Exports exclude military shipments; imports refer togeneral imports.

3 Austria, Denmark, Norway, Sweden, Switzerland.

been somewhat inflated by a speeding up ofexport deliveries in anticipation of the dock strike.This strike led to a very sharp deterioration in thetrade balance in the first quarter of 1965. Thischange in the U.S. trade balance is, of course,reflected in the improvement of the trade balancesof other areas shown in Chart 21, especially forJapan and the EEC. There was a significant im-provement in the United Kingdom's balance oftrade in the first quarter of 1965, apart from thisfactor.

Private Capital Movements

In addition to the changes in trade discussedin the preceding section, the major influence onthe balance of payments positions of individualcountries and areas was exercised by movementsof private capital. This section summarizes thebroad changes in movements of private capitalfrom 1963 to 1964. However, in 1964, as inother years, the pattern of capital movements wasmuch more difficult to ascertain than changesin trade. Records of capital transactions are lesscomplete and accurate than those of currenttransactions, and the data reported on capitaltransactions by different countries do not makeup a fully consistent world picture. One dif-ficulty, which applies especially to short-term capi-tal movements, is that of determining the finaldestination of capital exports, and the initial originof capital imports, passing through international-ized markets such as the Euro-dollar market.

Among the major events in international capi-tal movements in 1964 were the following:

(1) A rise of about $1.8 billion in the netoutflow of U.S. private capital (seeTable 22), of which about two thirdsderived from short-term capital. Thischange was reinforced by a reduction inthe inflow of foreign long-term capitalinto the United States, but the total ad-verse change of $2.0 billion on these ac-counts was partly offset by an increaseof $900 million in the inflow of foreignshort-term capital, including liquid fundsheld mainly by foreign commercial banks.

(2) A rise of about $500 million in the netoutflow of private long-term capital fromthe United Kingdom. About half of thisrise was offset by an opposite change inmovements of short-term capital (seeTable 32, p. 83).

(3) A reduction of almost $400 million in theinflow of private long-term capital intoJapan, reinforced by a reduction of about$200 million in the inflow of short-termcapital (see Table 36, p. 90).

It is much more difficult to determine whichcountries benefited from an increase in inflows,or a reduction in outflows, of private capital



between 1963 and 1964. U.S. and U.K. statisticssuggest an increase of about $1.4 billion in thenet export of private capital by these two coun-tries to primary producing countries other thanCanada, but the preliminary statistics of thoseprimary producing countries show a much smallerincrease.

TABLE 22. NET OUTFLOWS OF PRIVATE U.S. CAPITAL!

(In millions of U.S.' dollars)

1964

First Second Third Fourth1963 1964 quarter quarter quarter quarter

Direct InvestmentWestern EuropeCanadaOther Western

HemisphereJapanOther

Total

Other Long-TermWestern EuropeCanadaOther Western


Total

Short-TermWestern EuropeCanadaOther Western


Total

TotalWestern EuropeCanadaOther Western


Total

—924—365

—236—68

—383—1,976

—750—547

9—304—98

—1,690

—87—6

—110—467—115—785

—1,761—918

—337—839—596

—4,451

—1,342—250

—290—73

—421—2,376

—520— 6682

—344—117—122

—1,771

—375—395

—604—522—215

—2,111

—2,237—1,313

—1,238—712—758

—6,258

—288—66

—38—30

2—420

—93—41

—43—44—33

—254

—18—254

—60—237

—56—625

—399—361

—141—311—87

—1,299

—38239

—88—12

—163—606

—76—186

—43—15—15

—335

—242—157

—95—70—33

—597

—700—304

—226y-j

—211—1,538

—303—15

—64—18—40

—440

—83_ 912

—56—18—50

—298

—1477

—175—41—49

—202

—400—29

—295—77

—139—940

—369—208

—100—13

—220—910

—268—350

—202—40

24

—884

—101—61

—274—174

—77—687

—738—619

—576—227—321

—2,481

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

1 No sign indicates net inflow; minus sign indicates net outflow.2 U.S. published figures have been adjusted to exclude that por-

tion of the Columbia River Consortium payment to Canada thatwas converted by the Canadian Government into nonmarketableU.S. Government securities.

U.S. statistics show an increase of about $400million in the net flow of capital into Canada,in the form of U.S. capital moving to Canadaminus Canadian long-term capital moving to theUnited States. Canadian statistics show a riseof only about $100 million in the total inflowof short-term and long-term capital from all coun-tries. The difference between the two figures,which results in part from the different treatmentof flows of Canadian short-term capital (which

are included in the Canadian statistics) and frompurely statistical discrepancies, may also reflectmovements of U.S. short-term capital to Europeanfinancial markets that have been recorded in U.S.statistics as directed toward Canada.

For the European Economic Community thereappears to have been a rise of $1.5 billion in thetotal inflow of private long-term and short-termcapital other than changes in commercial bankassets and liabilities (Table 23). This, however,was offset by an almost equivalent and oppositechange from a large inflow to a small outflow onaccount of commercial bank assets and liabilities,reflecting for the most part the change from netborrowing to net repayments by Italian com-mercial banks that took place under a series ofdirectives by the Italian monetary authorities.However, net inflows of private capital into otherindustrial countries in Europe appear to haverisen by almost $400 million from 1963 to 1964(Table 24).

In the year as a whole, while movements ofprivate capital were in many cases disequilibrat-ing, there were few examples of disruptivecapital movements attributable to speculation.For instance, there was in the aggregate an ap-parent net inflow of short-term capital into theUnited Kingdom, even though there was a verylarge outflow in the last quarter. While therewas probably a considerable speculative outflowof capital from Italy in the first quarter of 1964,there appears to have been during the remain-der of the year a return of funds that was atleast as large. The outflow of short-term capitalfrom the United States was substantial in allquarters of 1964, except the third, but there is noevidence that it was greatly influenced by specu-lation; almost half of the increase in this out-flow was directed to nonindustrial countries.There is also little evidence of large inflows ofcapital attributable to speculation in continentalEurope during 1964 as a whole, perhaps in partbecause the net inflows of capital into that areawere moderated by official measures in severalcountries.

Nevertheless, it is apparent that the patternof capital movements that developed during 1964was not consistent with equilibrium in the bal-ances of payments of several major countries,and that in particular a reduction in the net out-


62

ANNUAL REPORT, 19619655

TABLE 23. EEC COUNTRIES: BALANCE OF PAYMENTS SUMMARIES, 1963 AND 19641


Goods, OfficialServices, Transfers

and Private andTransfers Capital2

(1) (2)

Belgium-Luxembourg

France6

Germany,Fed. Rep. of

Italy

Netherlands

Grand Total

First Half 1963Second Half 1963

Total


Total


Total


Total


Total


Total


Total


Total


Total


Total


Total


Total

32—66

—34

—56102

46

342194

536

—244

149

307751

1,058

85932

891

—397—229

—626

—4061,091

685

—71153

82

—368205

—163

213803

1,016

271,474

1,501

34—42

g

8—26

—18

—143—311

—454

—76—69

—145

—307—546

—853

—669—618

—1,287

—23—41

—64

—5241

—11

—21—42

—63

—20—11

—31

—460—982

—1,442

—809—683

—1,492

Other Non- Extraor-monetary dinary

Long-Term Trans-Capital actions3

(3) (4)

1416

30

48114

162

290226

516

253279

548

270195

465

—81168

87

—183—103

—286

230172

402

47—63

—16

—1117

116

438271

709

449850

1,299

22

4

—61—220

—281

630

36

628

34

1—68

—67

11

2

—52—256

—308

729

36

BasicBalance

(Col.1+2+3minus

Col. 4)(5)

78—94

—16

190

190

550329

879

175254

552

264370

634

103—446

—343

—603—373

—976

—2281,304

1,076

—46116

70

—390310

—80

243348

591

—3401,612

1,272

Other Non-monetary Net

Short-Term CommercialCapital and BankErrors and Short-Term NetOmissions Assets4 Reserves4- 5

(6) (7) (8)

4

4

1412

26

59—3

56

197151

225

337—463

—126

527—14

513

—76—200

-276

18—317

—299

6872

140

9148

139

388—590

—202

847—120

727

58154

212

436

40

13567

202

57—19

38

—361532

171

—451464

13

536114

650

—344—98

—442

64-37

27

209—21

188

432830

1,262

—525362

—163

—138—66

—204

—18—238

—256

—683—173

—856

—429—386

—815

—246—469

—715

—185—32

—217

143459

602

554—889

-335

—87—83

—170

89—338

—249

—1,011—332

—1,343

11—1,883

—1,872

Source: Based on data reported to the International Monetary Fund. For 1964, the data for some countries are provisional and are notentirely comparable with those for 1963.

1 No sign indicates credit; minus sign indicates debit.2 Excluding capital movements considered as reserve movements; see footnote 5.3 Included in column 2; mainly advance debt repayments, but include also all repayments on post-EPU debts.4 Increase (—).5 Reserve movements generally cover changes in official holdings of gold and foreign exchange assets, in short-term liabilities of the central

monetary sector, and in IMF position. Repayments on post-EPU claims and debts are included with official transfers and capital.6 Transactions of overseas franc area settled through Metropolitan France are included with Other Nonmonetary Short-Term Capital. For

1964, half-yearly figures do not add to annual total since certain adjustments made to the latter are not yet distributable between half years.



flow of capital from the United States and theUnited Kingdom was needed. The outflow ofcapital from the United States and the UnitedKingdom continued on a considerable scale in theearly months of 1965, and both countries tookmeasures to reduce their capital exports. Theprograms adopted by these countries to adjusttheir balances of payments are discussed in Chap-ter 8. Developments in international capitalmarkets and in long-term and short-term interestrates are reviewed in Chapter 5.

each year, allowance is made as far as possiblefor seasonal factors):

(1) A sharp rise (of $2.6 billion) in the cur-rent surplus of the United States, to arecord figure of $7.7 billion. This waslargely a result of developments prior tothe first quarter of 1964; during the re-mainder of that year, the surplus did notchange much.

(2) A shift, by about $1.2 billion, from a cur-rent surplus to a current deficit in the

TABLE 24. OTHER MANUFACTURING COUNTRIES IN CONTINENTAL EUROPE: BALANCE OFPAYMENTS SUMMARIES, 1963 AND 19641


Austria

Denmark

Norway

Sweden

Switzerland

Total

19631964

19631964

19631964

19631964

19631964

19631964

Goods,Services,

and PrivateTransfers

21—4

30—196

—186—67

—381

—360—460

—533—726

OfficialTransfers

andCapital2

_

36

2923

3232

—14—2

1593

62182

Other Non-monetary

Long-TermCapital

8937

14696

202120

—5224

— 1395

— 805

246197

Other Non-monetary

Short-TermCapital andErrors andOmissions

7215

37185

12—29

89170

540 5

6605

7501,001

NetCommercial

BankShort-Term

Assets3

—46—2

—2760

—9—17

—297

—11148

NetReserves3-4

—136—82

—215—168

—51—39

44—200

—56—213

—414—702

Source: Based on data reported to the International Monetary Fund. For 1964, the data for some countries are provisional and are notentirely comparable with those for 1963.

1 No sign indicates credit; minus sign indicates debit.2 Excluding capital movements considered as reserve movements; see footnote 4.3 Increase (—).4 Reserve movements generally cover changes in official holdings of gold and foreign exchange assets, in short-term liabilities of the central

monetary sector, and in IMF position. Repayments on post-EPU claims and debts are included with official transfers and capital.5 Covers only issues and redemptions of foreign bonds in Switzerland. Other private long-term capital is included indistinguishably in

errors and omissions.

Balance of Payments Developments

Current Account and "Basic" Balances

The changes in the trade balances of the vari-ous countries and areas from 1963 to 1964, andduring each of these years, provide much of theexplanation of the changes in the net positionson total current account, defined here as thebalance on account of goods and services andprivate transfer payments. The main changes be-tween 1963 and 1964 were the following (seeChart 22; in the discussion of movements within

balance of payments of the United King-dom. Most of the deterioration had takenplace by the first quarter of 1964, al-though the low point was not reached untilthe third quarter.

(3) A rise of about $500 million in the cur-rent surplus of the EEC countries. Thisresulted exclusively from developmentsduring 1964. Indeed, the current surplusof the area fell sharply during 1963 andreached a low point in the last quarter ofthat year, after which it rose even moresharply.


64

ANNUAL REPORT, 1965

CHART 22. SELECTED AREAS AND COUNTRIES: BALANCES OF PAYMENTS, 1957-64


1 Basic balance includes errors and omissions and small amounts of nonmonetary sector short-term capital.



(4) A reduction of about $300 million in thecurrent deficit of Japan. The deficit roseduring 1963 and reached its maximum inthe first quarter of 1964, but was replacedby a surplus in the second half of the year.

(5) A rise of about $1.1 billion in the currentdeficit of the primary producing coun-tries, as a group. The absence of sea-sonally adjusted trade figures for thisgroup makes it difficult to determine theexact turning point between the improve-ment in the current balance that tookplace during most of 1963 and the de-terioration that took place during mostof 1964.

(6) An increase of about $0.2 billion in theaggregate current account deficit of EFTAcountries other than the United Kingdom.

The changes in the current balances of theUnited Kingdom, Japan, and the EEC countries,in particular, are closely related to the develop-ments in the domestic economies of the countriesconcerned, which are reviewed in Chapter 5. Thenet movement in the current balance of the EECarea as a whole is the product of rather diversemovements in the balances of individual mem-ber countries, particularly those of Germany,Italy, and France. Balance of payments develop-ments in these countries are noted in Chapter 8.The current balances of France (with countriesoutside the French franc area) and Germany de-teriorated from 1963 to 1964, but the changefrom a large deficit to a large surplus in Italy'scurrent transactions was much greater than theopposite changes in the current balances of theother countries. The current balance of the Neth-erlands also deteriorated, while that of Belgium-Luxembourg showed a small improvement. Thesharp rise in the area's current surplus betweenthe first and second halves of 1964, too, wasdominated by the swing in Italy's balance of pay-ments, which was reinforced by seasonal factors.During that period all the EEC countries, exceptGermany, improved their current balances (seeTable 23). The extent to which seasonal factorsaffect the balances of payments of individualmembers of the area is not known precisely, but itis apparent that the rise in the current surplusfrom the first to the second half of 1964 must in-

clude a considerable seasonal element. In 1963,when the current surplus of the area also rose be-tween the first and second half of the year, theseasonally adjusted trade balance moved in theopposite direction. A comparison of the figuresfor the second halves of 1963 and 1964 suggeststhat the intervening rise in the area's current ac-count surplus was of the order of $1.4 billion, atan annual rate.

It is thus apparent that the reduction in thecurrent surplus of the EEC area that began in1961 was interrupted during 1964. Certainly,much of the rise in the area's surplus in 1964is accounted for by Italy, whose surplus earlyin 1965 seems likely to be gradually reducedas a result of the measures introduced late in1964 and early in 1965 to reactivate the country'seconomy. However, since there is a close rela-tionship between the balances of payments of theindividual members of the area, the resulting re-duction in the area's current surplus would pre-sumably be much smaller. Some reduction inthe area's current surplus might also be inducedby an upswing in the French economy later in1965. It is not clear what further reduction inthe area's current surplus, from the high ratereached in the second half of 1964, would be re-quired to restore equilibrium in the area's over-all balance of payments. For 1964 as a whole,the area's current surplus was equal to the outflowon account of government transfer payments andcapital transactions, and the area's over-all sur-plus was about equivalent to the net inflow ofprivate capital. If the inflow of private capitalinto the area should be reduced, as seems alikely consequence of the program recently adopt-ed by the U.S. Government to reduce the out-flow of U.S. capital, and if private capital exportsfrom the area should increase, the reduction inthe current surplus needed to restore equilibriumin the area's over-all balance of payments mightbe rather limited.

As one indicator of the degree of imbalancein international transactions, Chart 22 shows so-called basic balances (balances on account ofcurrent and long-term capital transactions, ex-cluding advance repayments on government debt)for major countries and areas for 1957-64, to-gether with their current balances. While thepicture presented by this analysis is rather mixed,



it is apparent that the general progress towarda balanced pattern of international transactionsthat was recorded in 1963 was not continued in1964. One helpful development, however, wasthat the basic deficit of the United States wasreduced to a very low figure in 1964. This re-duction, in contrast to that which occurred during1959-61, has coincided with vigorous growth inthe domestic economy. It has resulted from twoopposite movements: a considerable rise in thecurrent surplus, partly offset by larger outflowsof capital.

A change in the direction of greater imbalancewas the rise in the basic surplus of the EECarea, much of which was due to the very sharpimprovement in Italy's balance of payments in1964. The extent to which this improvement re-lates to long-term capital transactions is difficultto ascertain, and most likely it is somewhat over-stated in Chart 22—as is, therefore, the rise inthe basic surplus of the EEC as a whole. Thisrise occurred after the first quarter of 1964, andat the end of the year the basic surplus was run-ning at a higher rate than the average for theyear.

Other major changes in basic balances between1963 and 1964 took place in the United Kingdomand in the primary producing countries as agroup. The basic balance of the United Kingdomchanged from near equilibrium to a large deficitas a result of the deterioration of the current ac-count in combination with the rise in the netoutflow of long-term capital, discussed above.The reduction in the aggregate basic surplus ofthe primary producing countries was due mainlyto a rise in the deficit on goods and services ac-count; developments in the trade and balancesof payments of these countries are reviewed inthe next chapter.

Over-All Surpluses and Deficits

Table 25 presents estimates of over-all sur-pluses or deficits for all countries for which bal-ance of payments statistics are available, basedon a broadly symmetrical definition. A surplus ordeficit is defined as the balance of all transac-tions other than "official settlements" (i.e., ex-cluding changes in official gold and foreignexchange assets, in net IMF positions, and in

liabilities to foreign monetary authorities, andadjusted for advance repayments of foreign debtby governments). The over-all surplus or deficitso defined is equal to the basic balance, unre-corded transactions, and all movements of short-term capital, excluding only those that constituteofficial settlements. The application of this con-cept to the U.S. balance of payments is discussedin Chapter 8.

In general, the changes between 1963 and 1964in over-all balances, so defined, were in the samedirection as those in basic balances. Thus theU.S. deficit fell by about $1 billion; this was,however, considerably less than the reduction inthe basic deficit, since there was an increase ofmore than $900 million in the net outflow onaccount of U.S. and foreign short-term capitaland unrecorded transactions (Item E of Table 30,p. 80). The over-all surplus of the EEC arearose a few hundred million dollars less thanits basic surplus as a result of the change inmovements of commercial bank assets and liabil-ities (mainly Italian) referred to above, sincethere was a rise in the inflow of other short-termcapital into the area (see Table 23). The over-all deficit of the United Kingdom rose by about$1.4 billion, a few hundred million dollars lessthan the rise in the basic deficit, movements ofshort-term capital (plus unrecorded transactions)being more favorable in 1964 than in 1963 (seeTable 32, p. 83).

The other manufacturing countries in Europeincreased their over-all surplus by $290 million(Table 24). Although this was due to increasedinflows of capital (the aggregate current deficit ofthese countries rose by about $200 million), itwould apparently not have occurred had it notbeen for the large deficit in the balance of pay-ments of the United Kingdom and the increase inexports to that country with which this deficit wasassociated. This group of countries and the moreindustrialized primary producing countries to-gether increased their aggregate reserves in eachof the years 1963 and 1964 by about $1.5 bil-lion. This is more than twice the average an-nual addition to world monetary gold holdingsduring the past decade, which is the amount bywhich total surpluses can normally exceed totaldeficits. The aggregate surplus of the less in-dustrialized primary producing countries, which



had reached approximately $1 billion in 1963,fell to about $200 million in 1964.

The comparison of over-all surpluses anddeficits in 1964 as a whole with those in 1963fails to reveal the major deterioration that tookplace in international payments last year. At thebeginning of 1964, the over-all positions of boththe United States and the EEC area were closeto equilibrium. In the second half of the year,

however, a major U.S. deficit and a major sur-plus for the Community reappeared. Moreover,the over-all deficit of the United Kingdom re-mained moderate during the first half of the year(when a large part of the basic deficit wasmatched by an inflow of short-term capital); buta net outflow of short-term capital raised theU.K. deficit to a very large amount in the sec-ond half of the year, particularly in the last

TABLE 25. OVER-ALL BALANCES OF INTERNATIONAL PAYMENTS, 1963 AND 19641


A.

B.

C.

D.

Firsthalf

1963Second

half YearFirsthalf

1964Second

half2 Year2

Countries exporting mainly manufactured productsUnited StatesUnited KingdomEuropean Economic Community countries

B elgium-LuxembourgFranceGermany, Federal Republic ofItalyNetherlands

AustriaDenmarkNorwaySwedenSwitzerlandJapan 3

Total, Group A

Countries exporting mainly primary productsAustraliaCanadaFinlandNew ZealandPortugalSouth AfricaSpain

Subtotal, more industrialized countries

Latin American RepublicsArgentinaBrazilMexicoVenezuelaOther

Miscellaneous sterling countriesOther EuropeOther

Subtotal, less industrialized countries

Total, Group B

Excess of surpluses1. Due to increase in world monetary gold2. Due to identifiable asymmetries 4

3. Due to errors and omissions

Memorandum itemsUnited States and CanadaContinental Europe in Group AGroup B, excluding Canada

—1,421—1331,028

722705254

—14390256052

—10—164

283—280

115155

—1465

—2479

—15361

4944

-82145221

15413

376592953

673255755203

—1,266991798

—859—347

62165

436437

-453136122155—1

—33367

—223

378—18

44—94

5940

116525

318100

16122104

—24

—212955

381906

909555

36318

—8771,231

924

—2,280—4801,649

7871,141

691—596

22614721551

—43203261

—277

49313730

—2935

119101886

367144

—66136156—3

13342

431973

1,859

1,582840221521

—2,1432,2221,722

—88—261

—80—4376205

-564—93

—8441454

—122—171—618

1332433

10322

—23117409

141—4

—733439

145

25—42116240649

31630

—70—529

—64—98625

—1,243—1,610

1,946242447

2389434097

13119

151248132

—129

—6631329

—8090

—40266512

165—67151

7755

—51

—14744

—87—25487

35895

—82345

—9302,592

174

—1,331—1,871

1,866238823228330247

8917533

205126

—39—747

673376223

112—63383921

306—77

781119494

—1222

29215

1,136

389725

-752—184

—9942,494

799

1 Adjusted for advance debt repayments. Over-all balances are measured here by changes in official gold and foreign exchange assets, innet IMF positions, in liabilities resulting from "swap" transactions with the United States, and, where data are available, in other short-term liabilities to foreign monetary authorities. This table is based on data on reserves, whereas Table 29 is based on balance of paymentsreports, which in general cover annual data only. Because of minor differences in the countries covered and between the half-yearly andthe annual data, the aggregate "over-all balances" for 1963 and 1964 for the less industrialized primary producers differ slightly from thetotals shown in Table 29. No sign indicates surplus; minus sign indicates deficit.

2 Preliminary.3 Adjusted for repayments on short-term credits negotiated by the Japanese authorities in connection with the 1961 balance of payments

crisis.4 Covers omissions from the table of one side of certain transactions, e.g., contra-entries necessary when Swiss franc proceeds of Roosa

Bonds held by the Swiss Government are utilized by the United States in purchases of U.S. dollars from the Swiss National Bank, becauseboth the bonds and the franc liabilities are included "above-the-line" in the Swiss figures; contra-entries to the adjustments to Japan'sfigures (see footnote 3); and contra-entries for advance debt repayments to international nonmonetary institutions (e.g., the IBRD).



quarter. Early in the year, certain imbalanceswithin the EEC area had been reduced—the largeGerman surplus and large Italian deficit thatexisted at the beginning of the year had beeneliminated. However, the Italian deficit was soonreplaced by an equally large surplus.

In the last quarter of the year, the total im-balance in world payments reached a very highfigure. Indeed, when measured as the sum ofthe deficits of all countries in deficit, the totalimbalance in world payments in that quarter wasthe highest ever recorded. This is illustrated inChart 23, which shows by quarters for the period1958-64 the aggregate deficit of all countries indeficit, and similar data for industrial and fornonindustrial countries. The very high figure forthe last quarter of 1964 reflects mainly the co-incidence of large deficits in the balances ofpayments of the United States and the UnitedKingdom.

Reserve Developments

The change in the pattern of over-all surplusesand deficits from 1963 to 1964 resulted in aslowing down in the growth of world reserves(Table 26). Aggregate reserves of countries

CHART 23. ALL COUNTRIES IN BALANCE OF PAYMENTSDEFICIT: AGGREGATE DEFICIT, 1958-

FIRST QUARTER 1965


outside the Sino-Soviet area increased by $2.5billion in 1964. Although this increase waslarger than in most postwar years, it was con-siderably less than the record increase of $3.4billion in 1963. The smaller increase was as-sociated with a marked reduction in the balanceof payments surpluses of the nonindustrial coun-tries. Within this group, the increase in reservesof the more developed countries fell from $0.8billion to $0.5 billion, while that of less developedcountries declined from $1.0 billion to about $0.1billion. In both years, the growth in total reserveswas considerably smaller than that in the valueof international transactions, which for the twoyears combined rose about three times as fastas reserves.

TABLE 26. COUNTRIES' OFFICIAL RESERVES, INCLUDINGRESERVE POSITIONS IN THE IMF, END OF CALENDAR

YEARS, 1961-641


1961 1962 1963 1964

Countries2

Industrial countriesUnited StatesUnited KingdomOther3

Other developed areas5

Other countries

49.0418.75

3.3226.97

4.678.96

48.9317.22

3.3128.40

5.358.81

50.5516.84

3.1530.56

6.189.78

52.3716.67

2.3233.38*

6.729.90

Total 62.67 63.09 66.51 68.99

CompositionGoldIMF positions — gold tranche

— loans underGAB*

Claims on United States7

Claims on United Kingdom8

Other10

38.894.16

—11.987.100.54

39.273.80

—12.556.2P1.26

40.233.94

13.946.531.87

40.863.75

0.4114.947.051.98

Source: International Monetary Fund, International FinancialStatistics, and staff estimates.

JThe data for other countries and the totals in the 1964 An-nual Report included residual estimates of reserves held bycertain countries for which direct reports are not available.These estimates have been excluded here, since it has been ascer-tained that they refer for the most part to unofficial holdings.2 Excluding the Sino-Soviet area.3 Austria, Belgium, Canada, Denmark, France, Germany, Italy,Japan, Netherlands, Norway, Sweden, Switzerland.4 Includes assets arising from Swiss assistance to the UnitedKingdom, held by the Swiss Confederation.5 Other Western Europe, Australia, New Zealand, and SouthAfrica.6 Sums borrowed by Fund under General Arrangements toBorrow.7 Covers short-term liquid liabilities to central banks and gov-ernments; foreign official holdings of U.S. Government market-able securities; and foreign official holdings of U.S. Govern-ment long-term nonmarketable securities for those countries thatare believed to include such holdings in their reserves figures.8 For 1961, covers net sterling liabilities to foreign official hold-ers; for 1962-64, covers gross liabilities to foreign central mone-tary authorities, including inter-central-bank assistance.

°The change in coverage described in footnote 8 reduces thefigure for sterling claims by about $0.6 billion and increasesthe residual ("other") by the same amount.10 Including claims on countries other than the United King-dom and the United States (including Euro-dollar claims), cur-rency deposits with the Bank for International Settlements, andnet errors and omissions.



The addition in 1964 to world monetary goldholdings (including the holdings of internationalmonetary organizations) was $725 million, some$115 million less than in the previous year. Goldproduction rose again and there was an apparentreduction in hoarding, but Soviet sales were lowerthan in 1963 (for details see Chapter 9). Countryholdings of gold rose by $635 million, or by$90 million less than total .monetary gold hold-ings. This was the result of a net inflow from theFund of $133 million (IMF gold sales for cur-rencies of $250 million less IMF gold receiptsfrom subscriptions and repurchases of $117 mil-lion) and a net outflow of $225 million to theBank for International Settlements and the Euro-pean Fund. The chief beneficiaries from theincrease in world monetary gold holdings wereagain the industrial countries other than theUnited States and the United Kingdom. The goldreserves of this group rose by $1,088 million in1964. Those of the United States and the UnitedKingdom fell by $125 million and $348 million,respectively, and the gold reserves of the non-industrial countries were virtually unchanged.

Of the total increase of $2.5 billion in nationalreserves, $1,630 million took the form of foreignexchange assets. About two thirds of the increasereferred to claims on the United States and aboutone third to claims on the United Kingdom, thelatter representing mainly the use of central bankassistance rather than changes in ordinary sterlingreserves. Of the total, the industrial countriesadded $1,085 million to their reserves, of which$220 million went to the United States and morethan $850 million to the other industrial countriesexcept the United Kingdom, whose holdings offoreign exchange were almost unchanged. Thenonindustrial countries in 1964 were able to add

only $545. million in foreign exchange to their re-serves, compared with $1,490 million in 1963,and most of the 1964 addition went to the moredeveloped nonindustrial countries.

The remaining component of reserves—reservepositions with the IMF—was also mainly affectedby the transactions of the industrial countries.The change in this component reflected primarilyreductions in the positions of the United Statesand the United Kingdom, resulting from theirdrawings on the IMF during the year, and thecorresponding rise in the IMF positions of theother industrial countries, including those arisingfrom the activation of the General Arrangementsto Borrow.

There was a slight reduction in the percentageof total gold and foreign exchange reserves heldin gold by the industrial countries other than theUnited States and the United Kingdom. The mainreason was that Italy increased its foreign ex-change holdings by $734 million while reducingits gold holdings by $236 million. This, in com-bination with the gold sales by the United King-dom, helped to keep the outflow of gold from theUnited States lower than could have been expectedin view of the size of the deficit requiring officialsettlement, and thus to maintain a higher rate ofincrease in world reserves than would otherwisehave been possible.

During the first quarter of 1965, world reservesdeclined by about $800 million. Part of this de-cline is explained by a reduction of about $210million in world monetary gold holdings, appar-ently associated with the developments in goldmarkets reviewed in Chapter 9. Another contrib-utory factor was the conversion of existing foreignexchange balances into gold by certain countries.


Chapter 7

Developments in Countries Exporting Primary Products

countries exporting primary products facedduring 1964 and the early part of 1965 were, onthe whole, more favorable than they had been fora number of years. The prices of most basiccommodities rose late in 1963 and early in 1964and then remained at, or close to, the levelsreached at that time. These relatively high pricesreflected generally strong international demand.Consequently, the export receipts of primary prod-uct exporting countries tended to rise in the earlypart of 1964 and to remain relatively stable.Capital flows and grants to the developing coun-tries continued on the same scale, so that the totalexchange receipts of these countries were high; asa group, these countries achieved a small increasein international reserves. Most of their increasedforeign receipts, however, were directed towardan expansion of imports. This reflected the strongneed for these countries to raise their livingstandards, both directly through higher presentconsumption and indirectly by more rapid capitalinvestment for future increases in domestic output.In some countries, however, the demand for im-ports was stimulated by excessive monetary ex-pansion.

Prices

On the average, the prices of primary productsin 1964 were 5 per cent higher than in 1963 and,in general, higher than they had been in any ofthe eight previous years. On the other hand,because of rising import prices, the terms of tradeof primary producing countries improved onlyslightly. If sugar prices, which fell sharply aftertheir steep advance in 1963, are excluded, the in-crease over the 1963 average was as much as 7per cent, against 4 per cent between 1962 and1963. However, as indicated in Table 27 andChart 24, this rise in the average in 1964 resultedfrom rather sharp increases starting in late 1963and continuing into early 1964, followed by rela-tive stability and even some declines, which weremost marked for agricultural raw materials. Metaland mineral prices continued to rise during theyear. As shown in Chart 25, 1964 was marked bywidespread price increases; however, in the latterhalf of the year they were generally less dramaticthan they had been earlier.

Prices for foodstuffs, excluding sugar but in-cluding the beverage crops, reached a peak in thefirst half of 1964 and declined thereafter. These

TABLE 27. COUNTRIES EXPORTING PRIMARY PRODUCTS: INDICES OF COMMODITY PRICES1

(7957 = 100)

19633

TotalTotal, excl. sugar

Food, excl. sugarRaw materials

AgricultureMetals and minerals

1962

888986

8399

Firsthalf

949289

8799

Secondhalf

989593

88101

19364

Firsthalf

102100101

91106

Secondhalf

99100100

86116

19655

Firstquarter

969899

82115

Sugar (world) 58 148 182 154 74 47

Source: Based on data from National Institute Economic Review (London), adjusted for copper by substitutingproducers' export prices for quotations on the London Metal Exchange.

1 Excluding petroleum.

70

HE international demand conditions thatT


DEVELOPMENTS IN COUNTRIES EXPORTING PRIMARY PRODUCTS 71

movements resulted primarily from variations inactual or anticipated supply, caused chiefly byvariations in crops and, to a lesser extent, by sup-port policies in the exporting countries. The sharpdownturn in sugar prices in 1964 reflected the re-covery of output in 1963-64 and expectations ofa further substantial rise in production in thecurrent season. Developments on the cocoa mar-ket followed a similar pattern, although they were

CHART 24. PRIMARY PRODUCING COUNTRIES: PRICES OFCOMMODITIES EXPORTED (EXCLUDING PETROLUEM),

1962-FiRST QUARTER 1965

(7957 = 100)

considerably less pronounced. The advance inmost coffee prices early in 1964 reflected antici-pation of a serious crop failure in Brazil; later on,prices were strengthened by the withholding ofsupplies by some major exporting countries withinthe framework of the coffee agreement. The pricepattern for agricultural raw materials also largelyreflected crop variations; for example, a poor cropin the Sudan has been largely responsible for therise in the prices of long-staple cotton. However,these raw materials—which include textile fibersand rubber—have been affected by the rapidlyincreasing use of synthetics, which had a dampen-ing effect on the demand for natural products.Metal prices followed a different course; they werelargely dominated by a sustained increase in de-mand, which could not be adequately met by theslow rise in output. The rise in prices startedlater than that for foods and raw materials butgained momentum and continued through most ofthe year and into 1965, when continued politicaltensions served to strengthen demand further. Theindex quoted in Table 27 reflects prices charged

by producers, which for some commodities (mostnotably copper) were held well below marketquotations. This policy, adopted primarily inorder to avoid a shift to substitutes, may also pre-vent a possibly short-lived boom from inducingoverexpansion of capacity.

Trade

As indicated in Table 28 (see also Chart 19,p. 58), the export earnings of the primary productexporting countries as a group expanded during1964 by a larger percentage than in 1963. How-ever, for the countries exporting mainly coffee,other tropical foods, and other agricultural prod-ucts, the percentage growth in export earnings,although large, was smaller in 1964 than in 1963.

Among individual countries, particularly largegains were made by Canada, Chile, Colombia,Finland, Hong Kong, Morocco, New Zealand,Nigeria, Peru, Saudi Arabia, Spain, and Thailand.In most of these countries, the increases followedrelatively large increases in export earnings during1963. However, for some (e.g., Chile, Peru,Spain, and ^Thailand) the increases represented acontrast to the small or nominal increases achievedin 1963. For Ceylon and Colombia, the expansionof export earnings in 1964 represented in part arecovery from the contraction suffered in 1963.

During the course of the year, the rate of ex-pansion tended to fall. While the exports of theentire group of countries during the first quarterof 1964 were 16 per cent higher than their exportsin the corresponding quarter of 1963, they wereonly 13 per cent, 8 per cent, and 7 per centhigher in the second, third, and fourth quarters,respectively. This deceleration in the rate of ad-vance was primarily the obverse of a decelerationin imports by the industrial countries (see alsoChart 19). It is unlikely that the value of exportsof primary products will rise as rapidly during1965 as it did in the preceding two years.

The continued increase in the exports ofthe primary product exporting countries inducedgreater economic activity in these countries in1964, which in turn resulted in a further expan-sion in their imports. For most of these countries,the expansion in 1964 was in addition to, andeven larger than, the expansion in imports in the


72

ANNUAL REPORT, 1965

CHART 25. SELECTED PRIMARY PRODUCTS: CHANGES IN AVERAGE PRICES IN 1963 AND 1964

(In per cent)



previous year. Part of this increase was the resultof rising export prices in the industrial countries.In the few countries where the 1964 expansionwas smaller than that of 1963, it was usuallybecause imports had increased rather sharply in1963, as in Kuwait and the United Arab Republic.However, imports contracted in a few countriesduring 1964.

Balance of Payments

The change in the over-all balance of paymentsposition of the primary producing countries from1963 to 1964 was in large part a reflection ofdevelopments in their exports and imports, re-viewed in the previous section. The fact thatexports continued to rise during 1964 at a sub-stantial, although declining, rate helped to mod-erate the effect of the rise in imports. Preliminarytrade statistics suggest that the aggregate tradedeficit of the primary producing countries in-creased by more than $0.6 billion from 1963 to1964, while preliminary balance of payments sta-tistics indicate an increase of some $1.1 billion intheir aggregate deficit on account of goods andservices and private transfer payments. This latterincrease is apparently attributable in part to highernet payments on account of services. An increaseof $0.6 billion in the inflow on account of eco-nomic aid and private capital (including unre-corded transactions) partly offset the deteriorationon current transactions, so that the group's aggre-gate over-all surplus fell from about $1.6 billionto $1.1 billion.

As in other recent years, the aggregate balanceof payments in 1964 of a limited number of moreindustrialized countries (Group A of Table 29)differed markedly from that of the other countries(see last line of Table 29). The more indus-trialized group had an over-all surplus of almost$900 million, not much lower than in 1963,whereas the aggregate surplus of the less indus-trialized countries, which had reached $700 mil-lion in 1963, amounted to less than $300 million

•in 1964. Even within the latter group, somecountries—in particular, certain oil exportingcountries—remained in relatively comfortable bal-ance of payments positions, but a number of theless industrialized countries were experiencing in-

creasing strains in their international transactions.Such strains are not always apparent from thestatistics, since heavy debt servicing burdens mayforce countries to restrict deficits or even to runsurpluses in other segments of the balance ofpayments.

More Industrialized Countries

Both exports and imports of the more indus-trialized group of countries rose rapidly (by 16per cent and 17 per cent, respectively) between1963 and 1964. These rates of increase wereeven higher than those of the manufacturing coun-tries. But since their aggregate imports rose morethan exports, there was a substantial rise in theircombined deficit on account of goods, services,and private transfers. The increase in the currentdeficit of the group was for the most part offsetby larger net inflows of both long-term and short-term capital, so that the over-all position re-mained comfortable. Much of the deteriorationin the goods and services account was concen-trated in Australia and South Africa; all the othercountries in the group improved their over-allbalance of payments position from 1963 to 1964.

Balance of payments developments in Australiaand Canada are reviewed in Chapter 8. Finland'scurrent account deteriorated in 1964, as the in-crease in imports far exceeded that of exports.There was, however, a large inflow of capital,mainly in the form of bond issues abroad, and thereserves showed a further increase. South Africa'sbalance of payments changed from surplus todeficit because of a sharp rise in imports, asso-ciated mainly with boom conditions in the domes-tic economy but also influenced by a relaxation ofimport controls. There was only a modest rise inexports, owing in part to adverse seasonal con-ditions. The decline in reserves accelerated in theearly months of 1965, and during that period theauthorities took measures to moderate the domes-tic expansion of credit, which had been substantialduring 1964. Spain increased its surplus from1963 to 1964 as exports rose sharply because ofan exceptionally favorable citrus crop, followinga relatively poor one in 1963, and increased ex-ports of manufactured products; net tourist re-ceipts continued to climb rapidly. There was alsoa substantial inflow of capital, particularly of a


74

ANNUAL REPORT, 1965

TABLE 28. PRIMARY PRODUCING COUNTRIES: TRADE IN 1963 AND 19641

(Value figures in millions of U.S. dollars)

Exports f.o.b. Imports c.i.f.

Percentagechange

Countries exporting mainlyCoffee

BrazilColombiaOthers

Other tropical foodsCeylonNigeriaPhilippinesOthers

Other agricultural productsArgentinaAustraliaNew ZealandPakistanThailandUnited Arab RepublicOthers

Metals and rubberChileIndonesiaMalaya2

Others

PetroleumKuwaitSaudi ArabiaVenezuelaOthers

Other major exportersCanadaFinlandHong KongIndiaMexicoMoroccoPeruSingapore2

South AfricaSpainYugoslavia

All other countries

Grand Total

19633

1,406446

1,0292,881

363531727

1,38553,006

1,3652,788

910417466522

2,3538,821

540696884

1,1083,228

1,1101,0502,6293,7608,549

6,7791,149

8731,629

985384540

1,1351,431

736790

16,431

4,388

47,3043

1964

1,433544

(1,215)3,192

394601742

1,5653,302

1,4103,0401,074

427599539

2,4659,554

623(670)910

(1,385)3,588

1,2181,1802,740

(4,465)9,603

8,0921,29111,01211,74911,055

434666903

1,4290954892

18,538

4,785

52,5623

1962-63

16-41512

-47

311112

12191452

268

13

22343

57175

94

14174

10

25

148

14

8

1963-64

2221811

9132

1310

39

182

28358

15-4

32511

10124

1912

19121677

1323

-204

301313

9

11

19363

1,487506

1,0183,011

315581687

1,7093,292

9812,776

903889610916

3,57710,652

520502828

1,0692,9199

324320950

2,6934,287

6,6181,20881,29772,4711,240

447552

1,3981,38531,96561,0577

20,097

7,133

51,391

1964

1,2633586

(1,235)3,084

415712868

1,9113,906

1,0773,315

961998667884

3,66411,566

609(630)818

1,3463,403

(330)(330)

1,155(3,017)4,832

7,5551,5051,4962,9151,493

459571

1,1362,3502,2591,321

23,060

(7,404)

57,255

Percentagechange

1962-63

1-712

3

-1025

105

-289

20209

2086

-2941

-3

123

-15-1-3

4-21148246

1725198

7

5

1963-64

-151621

2

3223261219

10196

129

-329

1725-12617

23

221213

1425151820

33

-1927152515

4

11

Source: Based on data from International Monetary Fund, International Financial Statistics.1 Data in parentheses are partly estimated.2 Consolidated data for the trade of Malaysia are not available.3 This total differs slightly from that for the two groups of primary producing countries shown in Table 13, owing

principally to adjustments for internal transport charges in the figures shown for certain countries in this table.



long-term nature, throughout the year. Since thelatter part of 1964, rising internal inflationarypressures have led to a leveling off in the growthof Spain's exports and a rise in imports. Therehas consequently been a slowing down in the riseof reserves, which at the end of 1964 amountedto more than $1.5 billion.

Less Industrialized Countries

The deterioration from 1963 to 1964 in thebalance of payments position of the less indus-trialized group of countries arose mainly from anincreased trade deficit. The deterioration wasprogressive during 1964, as the rise in exportsslowed down while that in imports appeared to bemaintained. There was, according to the prelim-inary figures shown in Table 29, an increase ofabout $100 million in the net inflow of privatecapital (including unrecorded transactions) and anincrease of about $200 million in official capitaland aid. The deterioration in the over-all positionwas, therefore, somewhat less than the rise in thegoods and services deficit.

The collective position of the less industrializedcountries in the overseas sterling area changedlittle, although there was. a marked deteriorationin the balance of payments of Pakistan, while forIndia a greatly increased current deficit was offsetby heavily expanded foreign aid. The balance ofpayments of India is reviewed in Chapter 8. Thechange from surplus to deficit in Pakistan's bal-ance of payments was brought about by a sharprise in imports (see Table 28) under the impactof a strong monetary expansion in the economy,combined with some liberalization of the importregime. Exports rose only slightly from 1963 to1964, while apparently foreign aid increasedsomewhat. The Government of Pakistan hastaken steps to limit the increase in bank credit andother measures to curtail the rise in imports; inMarch it concluded a stand-by arrangement withthe Fund for $37.5 million. The deficit inMalaysia's balance of payments was due in partto a further decline in rubber prices, the embargoimposed by Indonesia, and a considerable increasein expenditure for development and, to a lesserextent, for defense. When Malaysia's high re-serves are taken into account, the deficit was

moderate. Ghana's balance of payments is dis-cussed in Chapter 8.

More than half the Latin American Republicswere in over-all surplus in 1963, and again in1964, although in 1964 their aggregate surpluswas slightly reduced. There was a considerabledeterioration in the over-all position of Argentina,which in 1963 had been in surplus. (For a dis-cussion of developments in Argentina's balanceof payments during 1963, see the Annual Report,1964, page 96.) Argentina's exports rose slightlybeyond the substantial total attained in 1963, andthe current account remained in surplus. Reservesdeclined because of net repayments on foreigndebt and remained under pressure because of aheavy debt repayment schedule. The foreign re-serves of Argentina are lower than the foreignliabilities of the Central Bank. Exchange controlswere introduced in April 1964, and the Argentinepeso was progressively devalued from M$N 133= US$1 at the end of 1963 to M$N 172 = US$1at the end of May 1965. Developments inBrazil's balance of payments are reviewed inChapter 8.

Within the last group of countries in Table 29,much of the deterioration in the aggregate balanceof payments is accounted for by a reduction in thesurplus of Saudi Arabia, whose balance of pay-ments and reserve position nevertheless remainedcomfortable. Other major changes were an in-crease in China's surplus—in part influenced byhigh receipts for sugar during the first half of theyear—and shifts from surplus to deficit in bothIran and Iraq. Iran's deficit arose mainly fromnet capital outflows resulting from net disinvest-ment by the Petroleum Consortium and net repay-ments on government loans. Early in 1965,extraordinary receipts of about $185 million inconnection with the exploration of new oilfieldsreplenished its reserves. For Iraq, the unfavorablechange in the underlying balance of payments wasless than the change in the over-all balance. TheIraqi Government had received a loan of $84million from Kuwait late in 1963, without whichits reserves would have risen by only $15 millionduring that year. In 1964, an increase in govern-ment expenditures added to import demand, butthis was in part offset by an improvement in the



TABLE 29. PRIMARY PRODUCING COUNTRIES: BALANCE OF PAYMENTS SUMMARIES, 1963 AND 19641


A. More IndustrializedPrimary Producers

AustraliaCanadaFinlandNew ZealandPortugalSouth AfricaSpain

Total, Group A

3. Other Sterling AreaBurmaCeylonCyprusGhanaIcelandIndiaIrelandJordanLibyaMalaysiaNigeriaPakistanU.K. Colonial Territories

Total, Group B

C. Latin American RepublicsArgentinaBoliviaBrazilChileColombiaCosta RicaDominican RepublicEcuadorEl SalvadorGuatemalaHaitiHondurasMexicoNicaraguaPanamaParaguayPeruUruguayVenezuela

Total, Group C

D. Other CountriesChina, Republic ofEthiopiaGreeceIndonesiaIranIraqIsraelKoreaMoroccoNetherlands AntillesPhilippinesSaudi ArabiaSomaliaSudanSyrian Arab RepublicThailandTunisiaTurkeyUnited Arab RepublicViet-NamYugoslavia

Total, Group DGrand Total

Grand Total, excluding Group A

Goods,Services,

and PrivateTransferPayments

—83—458—20—28

21186

—244—668

19—44—18

—121—5

—766-86—97<•> -i'jie

— 106Af.\

—112—2,033

232AC

—218I O C

—137—30—47—8

14—21

—17215

—38—9

-59—5564

—259

—1—28—79

/}"?'7

35108

—84—351—108

6167158"M

—726

—110—109—243

278—201

89—1,521

—4,481—3,813

CentralGovern-

mentCapitaland Aid

—87—50

548

2224

—21—50

2325

—2606

8421063301855

45487

1,671

12536

176115159

3385

162

10853

287

5011

—111623

602237

11310

10956

24278

1362535

g4952

18721722079

1,620

3,8643,9144

1963

PrivateLong-Term

Capital

656159

54—150

2691,433

—1518

313

215446

124487739

401

too183010

12926333

2019

—29

21614134

36—6

—266186

20129410

—25—58

134422fj

—30133

4

793129

g2

464

2,4841,0511

OtherShort-Term

Capital(including

commercialbanks)and Net

Errors andOmissions Total2

.6083

—57

2169

111201

—6

14—5

—7769291186

—329Q1474

874

—12351

—817—2

81

—3—3—23713

—2g3

—24—242

—28—6

—379ft

—2—60

1118

—22

—83631

—3g

3414

—3943

1—15

—266—233—434

49013636

—2434

129115916

21—18

2—35

42047

—12613

—354128

113

1705

—13529

—74—2

17111211

—3

123116

193

163308

51

151241899

117—49—50

55264

3—36

1052

—12—66

262225

297

1,634

718

Goods,Services,

and PrivateTransferPayments

—331—356—169

220

—146—42

—1,062

—34—47

1—84

—8— 1,172

—99—59

crt*>i-i

-219cr-i

—100—2,667

180-40

88110

—148—23—58—24

AH

—40—9

-12•5Q-1

—13—22

—87

—9320

—369

18—17

—2111407824

—218—167—27

543

160. go—90

4—32

—125—95250

—233—213

—1,516—5,614-4,552

CentralGovern-

mentCapitaland Aid

—119—14

67—9

63—13

15

20526

46—2

1,323—690

81

902,202

62

5014219

14

10

1129

783

—9484

251274

—192587

15771

55

29

379525

195

1,424

4,125

4,1100

1964

PrivateLong-Term

Capital

624119

130—87359

1,595

3151428

1084

too196115*?nn40

518

^305"*11

7520106

eo

37

8A<JQ

1334

11—14

—215181

1311

12470

—113—3716710

—135

16• 89

"*03

14

632045

"•ifi

169291

2,585990

OtherShort-Term

Capital(including

commercialbanks)and Net

Errors andOmissions Total2

8329

10763

337

11—5

A

—43

—15436

—23

59

—22

6AC

347

146

51

—12

-̂ 71—2

—11—6

47

3

10—58—13

—2—82

—114

9

1—447

—1

—30350

—257

653374623

110—63367885

—3

6—27

725391250•1736633075

5012

16721114

—13311

—24

458

—19

25—22

85290

10311

—1070

—44—46

23—2

—51

71—10—49

in69

—142214

—39—44

—104

1446

261

For footnotes, see page 77.

515

30

94

2

77

2



trade accounts owing to a better harvest than in1963.

* * *The progress of the primary producing coun-

tries as a whole and of certain subgroups over aperiod of years is illustrated by Chart 26, wherebalances on account of goods, services, and pri-

accounts) with the basic balances for the years1957-64. In each of the last four years, the inflowof capital into the more industrialized primaryproducing countries has considerably exceeded thecurrent account deficit, resulting in sizable addi-tions to reserves. But although over-all surpluseswere achieved in both 1963 and 1964 by the less

CHART 26. PRIMARY PRODUCING COUNTRIES: BALANCES OF PAYMENTS, 1957-64


vate transfers are compared with balances onbasic account (i.e., current account plus govern-ment and private long-term capital). For the twomain groups of primary producers, Chart 27 com-pares the over-all balances (including movementsof short-term capital and errors and omissions, inaddition to the transactions entering the basic

industrialized countries, between 1957 and theend of 1962 these countries had an over-all sur-plus in only one year—1959. Chart 27 also showsthat, while the movements in the basic and in theover-all balances have in general been similar,there has in each year been an inflow on accountof short-term capital and unrecorded transactions

Footnotes to Table 29.

Source Based on data reported to the International Monetary Fund. For 1964, data for many countries are provisional and in someinstances involve estimates by the Fund staff.

*No sign indicates credit; minus sign indicates debit.- Represents net official reserve movements, including changes in reserve position in the Fund. No sign indicates an increase in assets,

a gold subscription to the Fund, a repayment of a drawing on the Fund, another reduction of Fund holdings, or a reduction of otherliabilities; minus sign indicates a decrease in assets, a drawing on the Fund, another increase in Fund holdings, or an increase in otherliabilities.


78

ANNUAL REPORT, 1965

for the more industrialized countries and an out-flow from the less industrialized ones.

Domestic Developments

Rising export incomes and increases in foreignreserves permitted the majority of the countriesexporting primary products to expand domesticbank credit more rapidly in 1964 than in earlieryears. This domestic expansion provided financefor rising imports consistent with increased exportreceipts and, in most countries, was part of thenormal adjustment process. There are grounds forthinking, however, that in some, even though largeforeign receipts permitted a rise in domestic credit,this monetary expansion may have gone too far.

CHART 27. PRIMARY PRODUCING COUNTRIES: BASIC ANDOVER-ALL BALANCES OF PAYMENTS, 1957-64


A number of countries were not able to preventtheir international reserves from falling, despite arise in export earnings. In others, the failure of

exports to respond to the high level of worlddemand can be explained, in part at least, by thepressures of domestic demand encouraged by ex-pansive domestic monetary policies. Relativelyeasy monetary policies, usually associated withbudget deficits, prevailed in a number of countries,including Argentina, Chile, Indonesia, Iran, Mali,Mauritania, Nigeria, and Uruguay; and the financ-ing of government requirements also inducedpressures, for example, in Greece and the UnitedArab Republic. In Brazil, the high level of thebudget deficit was reduced during the year.

Among the more important of the developingcountries, the domestic situation in India, wherethere was a sharp rise in prices during 1964, gaveground for special concern. Undoubtedly, a seriesof bad harvests and the requirements of increaseddefense expenditures contributed to its difficulties,and gave increased justification for a stand-byarrangement with the Fund, but these adversecircumstances were aggravated by monetary ex-pansion. However, as the rather rapid price in-creases have been under way for only a relativelyshort period, it may be less difficult to contain thesituation than it is in some other countries whereinflation has persisted for some time. It is to behoped that the corrective measures introducedearly in 1965 will prove to be effective in meetingthe situation.

A number of other countries took advantage ofthe rather favorable conditions in 1964 and theearly part of 1965 to halt actual or incipient in-flations. In Africa, stabilization programs wereinaugurated by Burundi, Somalia, and Tunisia.Israel and the Philippines were successful in re-ducing existing inflationary pressures by limitingthe size of government deficits, which made thecontrol of monetary policy easier. But the moresevere inflationary situations in Argentina, Brazil,Chile, Indonesia, Korea, and Uruguay persisted.Of these countries, Argentina, Brazil, Chile, andKorea announced plans toward the end of 1964 orearly in 1965 to bring their domestic financialsituations under control. These plans includemeasures to restrain increases in wages in order todamp down the wage-price spiral.


Chapter 8

Balances of Payments of Selected Countries

payments of several major industrial countriesduring the past year make it desirable to examinethese in more detail. In this chapter an analysisis given of the balances of payments of the UnitedStates, Canada, the United Kingdom, the FederalRepublic of Germany, France, Italy, and Japan.These are followed by a discussion of the balancesof payments of some nonindustrial countries—Australia, Brazil, Ghana, India, and Mexico—tosupplement the more general review in Chapter 7.

United States

When considered as a whole, 1964 was in manyrespects a good year for the balance of paymentsof the United States. The goods and servicessurplus was substantially larger than in 1963and, in spite of an almost equivalent rise in theoutflow of U.S. capital, an inflow of foreignshort-term capital and other factors helped tokeep sales of gold by the United States at a lowlevel. 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" usedby the U.S. Government the improvement wasless than $200 million. However, whereas 1963had been marked by improvement during theyear, the U.S. balance of payments deterioratedconsiderably in the course of 1964 (Table 30).In the last quarter the deficit was large, and inthe first quarter of 1965 it continued high, where-as a year earlier the accounts had been approxi-mately in equilibrium. In the first quarter of 1965the position appeared greatly improved, but somany special factors were involved that conclu-sions concerning trend were difficult to draw.

The most promising aspect of the U.S. balanceof payments in 1964 was the improvement inthe goods and services account (including remit-tances and pensions), the surplus on which roseby $2.6 billion compared with 1963, to a recordfigure 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 strengththrough the year. Imports rose considerably less,and altogether the balance of trade accountedfor about three fourths of the rise in the goods andservices surplus. The remainder of the improve-ment was derived mainly from investment income,which has been rising considerably in recent yearsas a result of the large outflow of capital, andfrom further savings in net military expenditures.Most of the improvement in the goods and serv-ices balance from 1963 to 1964 had, however,occurred by the first quarter of 1964; subse-quently there was little further advance. Whilethe strong position on this account in 1964 re-flected the rather prosperous state of the worldeconomy, the sharp rise in the trade surplus inrecent years was apparently in part attributableto the greater stability of prices and costs in theUnited States than in most of the other industrialcountries. An analysis of U.S. trade in particularmarkets suggests that the competitive position ofthe United States vis-a-vis these other countriescontinued to improve from 1963 to 1964 (seeTable 21, p. 58).

The rise in the goods and services surplus wasoffset for the most part by an increase in theoutflow of U.S. private capital, which at a littleover $6 billion also reached a record level, morethan 50 per cent above the 1963 figure. Abouttwo thirds of the rise took the form of short-term capital, but the outflow of long-term bankloans and direct investment also rose substan-tially. New foreign issues fell slightly from 1963to 1964 under the influence of the Interest Equal-ization Tax. The effect of this Tax had been feltimmediately after it was proposed in July 1963,although not all the subsequent decline in newissues may be attributable to it. Its enactmentin September 1964 removed uncertainty as to thetransactions that would be covered, and wasfollowed by a temporary upsurge in new issues,

79

MPORTANT developments in the balances ofI


80

ANNUAL REPORT, 1965

TABLE 30. UNITED STATES: BALANCE OF PAYMENTS SUMMARY, 1963-FrasT QUARTER 19651


1963 1964First

quarter

19644Secondquarter

Thirdquarter

Fourthquarter

19655First

quarter2

A. Goods, Services, Aid, and Long-Term CapitalMain categories, seasonally adjusted, excluding advance

debt repaymentsExports financed by government grants and capital 2,793Other exports f.o.b. 19,276Imports f.o.b. —16,992

Trade surplus 5,077Net military expenditures —2,270Investment income 3,383Other services, remittances, and pensions —1,110Total goods, services, remittances, and pensions 5,080Government grants and capital —3,907Private long-term capital —3,345

U.S. direct investment abroad —7,976New foreign security issues —1,250Transactions in outstanding foreign securities —49Redemptions and other U.S. long-term capital —396Foreign long-term capital 526

Total —2,172Seasonal influences —Advance debt repayments 326

Total —1,846

2,81222,476

—18,6196,669

—2,0624,053—9397,721

—3,685—4,241—2,376—1,063

193—1,105

110—205

122—83

6715,478

-4,4101,739—5381,055—2591,997—805—732—464—124

94—244

646030452816

6835,384

—4,5991,468-5291,050—2621,727—923—702—540—183

40—113

94102—883347

7425,640

—4,7091,673—5231,045—2031,992—925

—1,235—551—157

35—490—72—168—568

30—706

7165,974

—4,9011,789—472903

—2152,005

—1,032—1,572—821—599

24—258

82—5993527

—240

6154,974

—4,663926

—4851,180—2931,328—796

—1,442—1,003—299

51—436245

—91033910

—561

B. Unrecorded Transactions —401 —1,161 —72 —40 —352 -697 126

C. Short-Term Capital, n.i.e.U.S. private assetsPrepayments for military equipmentOther foreign nonliquid capitalForeign liquid capital

Total

-785 —2,111334 22271 371

157 114-223 —1,404

—625163

—51

-597—62

2832

—516 —599

—202—28269

—1821

—68714977

151—310

24955

—202

286

D. Liquid Liabilities to Foreign Commercial Banks

E. Total (B through D)

462

—162

1,440

-1,125

278

—310

82

-557

580

249

500

-507

168

580

F. Reserves and Related ItemsIMF position 30 266 131 118 135 —118 68Liquid liabilities to central banks and governments3 1,630 1,037 —455 207 387 898 —861U.S. convertible currency holdings (increase —) —113 —220 —228 258 —45 —205 —58Gold sales (purchases —) 461 125 46 —73 —20 172 832

Total 2,008 1,208 —506 510 457 747 —19

Memorandum item: reduction in monetary reserve assets andincrease in liquid liabilities, seasonally adjusted4 2,670 2,798 257 582 593 1,3666

Source: U.S. Department of Commerce, Survey of Current Business, June 1965.1 No sign indicates credit; minus sign indicates debit.- Preliminary.3 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 fourthquarter of 1963, $55 million for the first quarter, $8 million for the second quarter, $2 million for the third quarter, and credit of $29million for the fourth quarter of 1964) are included with liquid liabilities.

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

mainly of Canadian securities, for which an ex-pected exemption had been granted. Transactionsin outstanding foreign issues, for which no exemp-tions from the tax had been proposed, changedfrom a small outflow in 1963 to a somewhatlarger inflow in 1964.

The rise in the outflow of U.S. capital is diffi-cult to explain fully, although some of the under-lying factors can readily be seen. A major influ-ence appears to have been the divergence ineconomic policies between the United States anda number of other industrial countries. In the

United States, economic policies continued to bedirected broadly toward supporting expansion,with some shift in emphasis toward reliance onfiscal rather than monetary instruments. In anumber of the other industrial countries, fiscaland, even more, monetary policies were mademore restrictive—either on balance of paymentsconsiderations, or to contain upward pressureson wages and prices, or for both reasons. Thisdivergence influenced both interest rates andcredit availabilities in various markets and maywell explain much of the increase in U.S. external

3

668


BALANCES OF PAYMENTS OF SELECTED COUNTRIES 81

bank loans on both long term and short term.It may even have stimulated direct investment,in that some companies in countries with restric-tive monetary policies appear to have been in-duced by these policies to invite participation byU.S. or other foreign organizations. Another fac-tor stimulating a rise in the outflow of directinvestment capital from the United States was theevident progress made during the year towardeconomic integration in the European EconomicCommunity. The rise in the outflow of such capi-tal occurred in spite of indications that U.S. profitrates were rising in relation to those in most otherindustrial countries, particularly those in the EEC.

From 1963 to 1964 there was a reduction inthe inflow of foreign private long-term capital intothe United States but a sharp rise in that of short-term capital—in particular, liquid funds of foreigncommercial banks. As a result, the deficit settledthrough movements in U.S. reserves and in othercountries' reserves in the United States fell con-siderably. This helped to keep the net outflowof gold at a low level. Other factors having thesame tendency were net sales of gold by Italy,which reduced its gold holdings in spite of a con-siderable increase in its total reserves, and by theUnited Kingdom.

It is difficult to express the over-all balanceof payments position of the United States in asingle figure, and for 1964 estimates of the deficitvary widely, depending on the conceptual basisadopted; tjiis differs mainly in the role assigned tomovements of foreign liquid funds other thanexchange reserves. In official U.S. statistics suchmovements are counted as financing a deficit(whereas changes in U.S. liquid funds abroadother than reserves are included in the deficit it-self, "above the line"). Other methods of meas-urement, including that customarily used in theFund's analysis of world payments problems,treat the two symmetrically as part of the over-alldeficit "above the line." As the net inflow offoreign nonofficial liquid funds was very largein 1964, the official estimates of the U.S. deficitduring that year show much larger amounts thanthose in Table 25, and indeed show little changefrom 1963 to 1964. Both series, however, showa considerable worsening of the balance of pay-ments after the first quarter of 1964.

Several factors toward the end of 1964 and

early in 1.965 added to the pressures on the U.S.dollar. Among these were a dock strike, post-poned from October, which finally broke out inJanuary and brought about a considerable dete-rioration in the trade balance until it ended onFebruary 20; the announcement by the FrenchGovernment of plans for reducing its dollar hold-ings by purchasing gold; the expectation that theU.S. Government would soon take additional ac-tion to stem the outflow of capital; and the psy-chological effects of the announcement of veryhigh figures for the U.S. deficit at a time whenthe international monetary system was underpressure stemming from the most serious sterlingcrisis since 1947.

On February 10, the President of the UnitedStates announced a new program for dealing withthe balance of payments problem, mainly ad-dressed to the outflow of capital. This programincluded invoking statutory authority to applythe Interest Equalization Tax to bank loans withmaturities of one year or more, a two-year ex-tension of the tax to December 1967, and abroadening of it to cover nonbank credit grantedfor periods of one to three years. A voluntaryprogram was also announced under which finan-cial institutions were requested to limit the in-crease in their foreign credits so that by March1966, at the latest, they would not be more than5 per cent in excess of their December 1964levels. The ceiling of 5 per cent for expansion oflendings by financial institutions other than bankswas to apply only to loans and investments withmaturities of up to ten years. Within these over-all limits, absolute priority was to be given toexport financing; special care was to be exercisedto avoid possible adverse effects on Canada,Japan, and the United Kingdom, and credits toless developed countries were to be given highpriority. It has been estimated that this programwill lead to a reduction of capital exports reportedby banks from $2.5 billion in 1964 to less than$1 billion in 1965. Industrial concerns have beenasked to take steps to improve their individualbalances of payments—by expanding exports andother receipts from abroad, by transferring in-come receipts from developed countries otherthan Canada, and by limiting outflows of capitalto developed countries other than Canada; theyare to report on their results to the Secretary of


82

ANNUAL REPORT, 1965

Commerce. It is noteworthy that these programsinvolve no reductions in current payments forgoods and services.

Canada

The continued upswing in the Canadian econ-omy during 1964 was accompanied by a furtherimprovement in the balance of payments (Table31). After a comparatively unfavorable firstquarter, the balance of payments on current andcapital accounts combined strengthened consider-ably and progressively during the remainder ofthe year. Canada added $337 million to its foreignexchange reserves, mostly in the form of animprovement by $257 million in its position inthe Fund.

The current account deficit for the full yearwas the lowest in a decade, owing in part toextraordinary levels of wheat exports. Total ex-ports rose to the impressive extent of 16 per cent,

and although large shipments of wheat underbulk sales contracts with the U.S.S.R. and otherforeign governments were predominant in thegrowth of exports, a wide range of manufacturedgoods, as well as the traditional Canadian metals,minerals, and forest products, were also exportedin greatly expanded quantities. At the same timeimports rose by 15 per cent; a particularly largeincrease in imports of machinery and equipmentwas associated with a rapid rise in business in-vestment in plant and equipment. In the fourthquarter of 1964 and the first quarter of 1965 thecurrent account deficit recurred as wheat ship-ments declined to more normal levels.

The inflow of long-term capital was abnormallylow during the first three quarters of the year,but increased very sharply in the fourth quarterafter the enactment of the U.S. Interest Equaliza-tion Tax and the granting of the exemption fornew issues of Canadian securities. Short-termfunds, on the other hand, moved outward after

TABLE 31. CANADA: BALANCE OF PAYMENTS SUMMARY, 1963-FiRST QUARTER 19651


1963 19642First

quarter

19642

Secondquarter

Thirdquarter

Fourthquarter

19652

Firstquarter

A. Goods, Services, and Transfer PaymentsExportsImports

Trade balanceNonmonetary goldTransportationTravelInvestment incomeOther servicesTransfer payments

Total

6,551—6,086

465142

—7519

—598—381—87

—515

7,620—6,973

647133

—56—48

—623—386—86

—419

1,600—1,570

3031

—5—89

—160—105—19

—317

2,032—1,894

13838

—19—45—143—93—19

2,019—1,690

32932

—18111

—143—90—23

1,969—1,819

15032

—14—25—177—98—25

1,688—1,740—5232—8

—108—144—78—19

—143 198 —157 —377

B. Long-Term CapitalDirect investment in Canada 222 153 46 9 28 70 56Canadian direct investment abroad —102 —83 —37 —42 — —4 —32Transactions in Canadian securities

Special issues sold to U.S. insurance companies 116 — — — — — —Other new issues 780 974 131 290 92 461 229Other transactions and retirements —430 —349 —138 —83 —24 —104 —137

Transactions in foreign securities 21 —53 —6 —33 —5 —9 —31Columbia River Treaty (net) — 50 — — 50 — —Other loans b y Canadian Government (net) 6 — 2 2 1 — 6 5Other —46 4 —32 —37 58 15 48

Total 567 695 —34 106 200 423 138

C. Total (A plus B) 52 276 -351 -37 398 266 —239

D. Private Short-Term Capital (including net errors andomissions) 84 61 313 100 —253 -99 173

E Monetary MovementsIMF positionOfficial gold and foreign exchange (increase —)

Total

—80—56

—136

—257—80

—337'

—7911738

—6—57

—55—90

—117—50

—63 —145 —167

—4310966

Source: Based on data published by the Dominion Bureau of Statistics.1 No sign indicates credit; minus sign indicates debit.2 Preliminary.



midyear, following heavy inflows in the first sixmonths. Over all, the capital inflow for the yearwas about $100 million larger than in 1963. Anunusual feature of capital flows during the yearwas the receipt and disposition of $254 millionraised for the Columbia River Project; all but$50 million of this sum was invested in specialmedium-term nonmarketable U.S. Governmentsecurities maturing serially over a seven-yearperiod, which will be added to the official Cana-dian exchange reserves as the receipts mature.

United Kingdom

In the course of 1963 the balance of pay-ments of the United Kingdom on current accounthad been deteriorating, under the impact of aconsiderable rise in imports associated with theupswing in economic activity. In the first quarterof 1964, the seasonally adjusted current accountbalance swung into deficit after having been closeto equilibrium during the second half of 1963.It remained in deficit throughout 1964 (Table32). At the same time the outflow of long-term

TABLE 32. UNITED KINGDOM: BALANCE OF PAYMENTS SUMMARY, 1963-FiRST QUARTER 19651


19642

A. Goods, Services, and Transfer PaymentsExports f.o.b., seasonally adjusted 12,004 12,519 3,103Imports f.o.b., seasonally adjusted —12,228 —14,067 —3,455

Trade balance, seasonally adjusted —224 —1,548 —352Services and transfer payments, seasonally adjusted 493 501 137

Total, seasonally adjusted 269 —1,047 —215Seasonal influences — — 64

Total, unadjusted 269 —1,047 —151

3,116 3,108-3,517 —3,547

—439131

—401115

—286 —308118 —202

—168 —510

3,192—3,548

—356118

—23820

—218

1965*

1963 19642

Firstquarter

Secondquarter

Thirdquarter

Fourthquarter

Firstquarter

3,262—3,371

—109126

IT"—37

—20

B. Long-Term Capital Movements, n.i.e.Official long-termPrivate long-term

—294 —336 —78 —56 —79

Source: Central Statistical Office, Economic Trends.1 No sign indicates credit; minus sign indicates debit.2 Preliminary.

—123 —39

c.

Investment abroad (net)Investment in U.K. (net)

Total

Total (A plus B)

—946753

—487

—218

—1,184481

—1,039

—2,086

—291128

—241

-39222

—31653

—319

—487

—280166

—193

—703

—297134

—286

—504

—330117

—252

—272

Memorandum item: loan service, due to U.S. and Canada,

D.

E

F.

but not paidTotal (A plus B including loan service)

Errors and Omissions

Short-Term Capital Movements, n.i.e.Miscellaneous capitalForeign currency liabilities (net) of banksSterling liabilities (net) other than Group F

Sterling area countriesOther

Total

Official Monetary MovementsIMF positionCentral bank assistanceSterling liabilities (net) to overseas central

monetary institutionsSterling area countriesOther countries

U.K. gold and currency reserves (increase — )GoldForeign currencies

Total

—— 218

—205

—109—48

938

—56

13

384—66

9850

479

— 174—2,260

2

154386

—185—142

213

1,005605

61—141

348—7

1,871

——592

126

3198

28—101

56

11598

25—28

210

——487

47

98154

—31168

389

—215

232—149

20—65

51

——703

31

—6101

81174

350

2185

—5929

13728

322

—174—678

—202

3133

—263—383

—582

1,005405

—227— 119

16658

1,288

——272

—87

—14412

—17—154

227

—17414

—218—33

25—39

132

Memorandum item: waiver of loan service, due to U.S. andCanada

Total (Group F) including waiver 479174

2,045 210 51 522174

1,462 132



capital was much higher than usual, and a verysubstantial deficit on current and long-term capi-tal account was incurred during the year, com-pared with a near balance during the three pre-ceding years.

Early in 1964 the U.K. authorities attemptedto moderate the rate of increase in domestic ex-penditure, which had been rising faster thanproductive capacity in 1963. Nevertheless, totalexpenditure continued to outstrip production andthe volume of imports was appreciably higherthan in 1963; import prices were, on average,also much higher. Almost all available labor wasemployed, and there is evidence of some spill-over of demand into imports during the year. Theexport performance was also disappointing, ashas been the long-term trend in U.K. exports formany years. The failure of U.K. exports to riseat an adequate rate has been a major obstacle toreconciling the policy objectives of achieving asatisfactory rate of economic growth and of main-taining balance of payments equilibrium.

In the first half of 1964 the basic deficit wasnot reflected in a decrease of gold and convertiblecurrency holdings because there was a furtherlarge growth in the balances of the overseassterling area (OSA) and an inflow of short-termcapital. In the third quarter, the inflow of short-term capital continued, but OSA balances roseonly slightly and the United Kingdom drew onsome assistance from foreign central banks as wellas on its own reserves. In the fourth quarter,there was a considerable withdrawal of short-term funds; leads and lags were also unfavorableto the United Kingdom. For the year as a whole,the United Kingdom relied on external assistanceamounting to $1,605 million, of which the draw-ing on the Fund, under a stand-by arrangementconcluded in August 1964, represented $1,000million. In addition, relief was provided througha deferment of the debt service due on U.S. andCanadian postwar loans. Nevertheless, the UnitedKingdom's gold and foreign exchange reservesfell by $341 million, to $2,316 million on Decem-ber 31. The total financing through the use ofreserves and external assistance was a little lessthan the deficit on current and long-term capi-tal account; short-term capital movements andchanges in sterling reserves did not on the whole

add to the balance of payments problems during1964.

The new Government which took office in themiddle of October quickly introduced a seriesof measures to help to correct the external im-balance. As a temporary measure, a charge of15 per cent was levied on about one third oftotal imports; an export rebate was introduced;and duties on oil and petroleum were raised.The bank rate was raised from 5 per cent to 7per cent late in November, and credit facilitiestotaling $3 billion were negotiated with foreigncentral banks.

In the early months of 1965, the current ac-count of the balance of payments appeared, ona seasonally adjusted basis, to move into approxi-mate equilibrium, although part of this improve-ment was probably caused by some imports beingdelayed by the U.S. dock strike; exports in thefirst quarter were about 5 per cent higher invalue than in the same period of 1964, whileimports fell. There were further outflows of fundsfrom London at times in January and again be-fore the April budget; during this period heavyrecourse was again had to central bank assistance.A further drawing on the Fund in May for $1,400million was, for the most part, used to repaycentral banks.

The budget statement on April 6 stressed thatthe first priority of economic policy was the cor-rection of the balance of payments position. Thebudget provisions (discussed in Chapter 5) weredesigned to control the growth of domestic de-mand, and, by the use of exchange control and areorganization of the corporate tax structure, toreduce the outflow of long-term capital by about$300 million a year, in addition to the fall fromthe exceptionally high rate in 1964 that could inany case be expected. The Chancellor of theExchequer said that his aim was a basic equilib-rium (i.e., on the combined current and long-term capital accounts plus allowance for therelevant portion of the balancing item) by theend of 1966. He intended to get most of the waytoward closing the gap in 1965 and to completethe process in the course of 1966. He recog-nized the need to reduce further the importcharge and to abolish it as the external positionimproved. The charge was cut to 10 per cent onApril 27.



The prime objective of monetary policy at themoment is also to help to correct the externalimbalance. Interest rates have remained high,and bank credit, following the rapid increase in1964, tended to decline in the early months of1965. In his budget speech, the Chancellor saidthat further measures to reinforce control overbank lending would be taken if it proved neces-sary; the subsequent call for special deposits andlater changes in policy are noted in Chapter 5.The introduction of the budget and the relatedpolicy measures had a favorable effect on confi-dence in sterling.

The Government has also been taking a varietyof long-term measures to strengthen competitive-ness and thus to help the balance of payments.An incomes policy has been introduced; the mainprinciples and the machinery for the implementa-tion of this policy have been agreed at all stageswith the representatives of the Trades Unions andthe employers. Earlier attempts to evolve an in-comes policy lacked such a broad agreement. Adrive for the modernization and technical im-provement of industry has also been initiated.This involves the establishment of a number ofcouncils for particular industries to suggest spe-cific methods of improving efficiency.

Federal Republic of Germany

One of the most helpful developments in inter-national transactions during the past year wasthe return of the balance of payments of Ger-many to approximate equilibrium, from a strongsurplus position at the beginning of the year(Table 33). During the greater part of 1963 theGerman balance of payments had been in surplus.Initially the source of the surplus was an inflowof capital, largely representing purchases of long-term government securities yielding high rates ofinterest. Toward the end of the year, however,this was supported by a sharp rise in the surpluson goods and services account, attributable forthe most part to the rising inflationary pressuresin the other EEC countries, mainly Italy andFrance. The near elimination of the over-all sur-plus in the course of 1964 was aided by action bythe German authorities to discourage an inflow ofcapital. It also resulted in part from a reductionin the goods and services surplus, which may

be ascribed partly to measures taken by the otherEEC countries to restrain inflationary pressuresand partly to the increase in import demandassociated with a remarkable rise in economicactivity in Germany. The balance of paymentsremained in approximate equilibrium in the firstquarter of 1965.

The measures to discourage an inflow of capitalincluded the withholding tax on foreigners' in-come from German securities discussed in Chap-ter 5. An outflow was also indirectly encouragedby the U.S. Interest Equalization Tax, whichmade international borrowers interested in findingnew markets for their issues. Altogether, move-ments of long-term capital (including governmentas well as private capital) changed from a netinflow of about $530 million in 1963 to a netoutflow of about $230 million in 1964. The neteffect of this change on the balance of payments,however, was to a considerable extent offset byopposite changes in the flows of private short-term capital (other than changes in the net liquidposition of the commercial banks, but includingunrecorded transactions), even though the effortsof the German authorities to discourage an inflowof foreign short-term funds continued.

France

Like the German balance of payments, that ofFrance moved nearer to equilibrium between1963 and 1964. However, in France the progresstoward equilibrium was rather modest and it wasinterrupted early in 1964. After the first quarterof the year the tendency appeared to be againtoward a larger surplus (Table 34).

The official French balance of payments statis-tics cover transactions of metropolitan France andthe rest of the French franc area with the non-franc area. Between 1963 and 1964 the currentaccount surplus of metropolitan France with thenon-franc area fell from a little over $500 mil-lion to a little less than $100 million. There wasa net inflow of private long-term capital from thenon-franc area into metropolitan France in bothyears of well over $500 million. The surplusof metropolitan France on account of current andprivate long-term capital transactions with thenon-franc area was thus reduced by about $400million. At the same time, the surplus of the


TABLE 33. FEDERAL REPUBLIC OF GERMANY: BALANCE OF PAYMENTS SUMMARY, 1963-FiRST QUARTER 19651


A. Goods, Services, and Transfer PaymentsExports f.o.b.Imports c.i.f.Other merchandise

Trade balancePaid services to foreign troopsOther services

Total goods and servicesTransfer payments

Total

19642 19652

1963 19642First

quarterSecondquarter

Thirdquarter

Fourthquarter

Firstquarter

B. Long-Term CapitalBondsSharesOther private long-term capitalOther government long-term capitalRepayments on post-EPU claimsOther Bundesbank assets (increase —)3

Total

443153188

-295365

530

-12212

154-314

357_

-228

631436

-6632

52

—194—49

40—62

32_

—260

740

—9—66

252_

—1

27

87-120

41

—19

—88—52222

—4712

38

C. Total (A plus B)Total, excluding certain extraordinary transaction4

750709

-127-169

348343

-142-147

-260-257

—73—78

—9—12

D. Short-Term Capital, n.i.e. (including net errorsand omissions)

GovernmentCommercial bank credits (net)OtherNet errors and omissions

Total

—79326

-132—173

-1763943

471

—95— 154

166235

377 152

4—29

1410796

1990

—74190225

—104132

—63—61—96

21-266

45302102

E. Commercial Bank Liquid Capital (net)Foreign exchange (increase —)Foreigners' deposits

Total

—72215143

— 118

—27

—235—167—402

7263

135

—41—5

—46

86200286

—177—73

—250

F. IMF Position and Net ReservesIMF positionBundesbank liabilitiesForeign exchange (increase —)5

Monetary gold (increase —)Total

—35—29

—491— 165—720

—3604

538—405—223

—92

96-110—98

—559

85—128

—89

1—21

168—67

81

—2148

189—100—117

3216

1045

157

Source: Deutsche Bundesbank, Monthly Report, May 1965.1 No sign indicates credit; minus sign indicates debit.2 Preliminary.8 Covers IBRD bonds and notes and repayments received on consolidated credits and other Bundesbank assets of limited usability.4 This balance is intended to facilitate analysis of the more basic factors in the balance of payments. It excludes the following extraor-

dinary transactions: (a) advance debt redemption (none in period covered), (b) repayments on post-EPU claims, and (c) otherBundesbank assets, i.e., IBRD bonds and notes, repayments received on consolidated credits, and other Bundesbank assets of limitedusability. However, it includes private transactions in securities, which are likely to fluctuate widely in the short run. Such transactionsshould be taken into account in evaluating the balance. These figures do not agree with the basic balances shown in Table 23 becauseof certain conceptual differences; for instance, transactions in German securities are classified by the sector of domestic creditor ordebtor in Table 23, whereas, in this table, they are classified according to the sector of domestic transactor.

5 Covers freely usable foreign exchange and earmarked assets.

overseas franc area with the non-franc area roseby $130 million. In 1963, the French Govern-ment made advance repayments on foreign debtamounting to $280 million. No similar paymentswere made in 1964, and the increase in Frenchnet reserves over the year fell only slightly, from$856 million in 1963 to $815 million in 1964.

Toward the end of 1963 the current surplus ofmetropolitan France with the non-franc area wasbeing sharply reduced under the influence ofstrong pressures of domestic demand, and in the

first quarter of 1964 there was a small currentdeficit with the non-franc area, while the over-allbalance of payments of the franc area as a wholewas approaching equilibrium. However, a cur-rent surplus vis-a-vis the non-franc area wasre-established in the second quarter and main-tained during the remainder of the year. Therestoration of the surplus position on currentaccount may be associated with the measurestaken by the French Government to restrain in-flationary pressures, which brought the rise in

14,566—12,994—1031,4691,072

—1,0821,459

—1,239220

16,219—14,618— 1811,4201,055

—1,1691,306

—1,205101

3,888—3,272—55561251

—235577

—281296

4,052—3,542—22488255

—272471

—353118

3,866-3,672—52142260

—37032

—291—259

4,413—4,132—52229289

—292226

—280—54

4,343—4,038—42263—4

259—306—47

ANNUAL REPORT, 196586



TABLE 34. FRANCE: BALANCE OF PAYMENTS SUMMARY, 1963 AND 19641


1963 19642-3

Firstquarter

19642

Secondquarter

Thirdquarter

Fourthquarter

A. Goods,Services, and Transfer PaymentsExports f.o.b.Imports f.o.b.

Trade balanceServicesTransfer payments

Total

B. Private Long-Term CapitalForeign direct investment in FranceOther foreign capitalFrench direct investment abroadOther French capital

Total

C. Official Long-Term CapitalAdvance debt redemptionOther official

Total

D. Total (A through C)Total, excluding advance debt redemption

E. Private Short-Term Nonmonetary Capital

F. Total (D plus E)

G. Net Transactions of Overseas Franc Area

1,833-1,888

—557717_39

6164

—2947_

143

—11—11

171171

—23

148

50

1,830—1,752

78—65

1932

8052

—2424

132

—42—42

122122

—27

95

53

1,935—2,011

—765127

9849

—2323_

147

—17—17

132132

—24

108

76

H.

I.

J.

Net Errors and OmissionsOperations pending settlementsOther net errors and omissions

Total

Commercial Bank Short-Term Capital4

LiabilitiesAssets (increase — )

Total

Official Monetary MovementsIMF position (increase — )Other liabilitiesForeign exchange (increase — )Monetary gold (increase — )

Total

—4844

—4

391—189

202

— 12—39

-217—588—856

622

64

269—231

38

—168

-92—555—815

421860

—4837

—11

—51— 11

93—123—92

244771

132—64

68

-45—7

—132— 153—337

—123927

—12143

—78

32-19

4—114—97

83846

306—247

59

—10437

—57—165—289

Source: Data provided by the French authorities.1 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.2 Preliminary.

3 Quarterly figures do not add to annual data since certain adjustments made for the year cannot be distributed between the quarters.4 Commercial bank long-term capital is included in private long-term capital (Group B).

economic activity to a virtual halt in the courseof 1964.

The increase in the surplus of the overseasfranc area with the non-franc area was due inpart to the generally higher level of prices forprimary products in 1964 than in 1963, and tothat extent may be a temporary phenomenon.However, the surplus which the overseas francarea can realize in its transactions with the non-franc area depends to a considerable extent on

the pattern of its transactions with metropolitanFrance, on which complete statistical informationis not available. Usually the overseas franc areahas had a deficit with France on account of tradeand commercial services, which has been morethan offset by expenditures by the French Govern-ment, including military expenditures and eco-nomic aid. Private French investment in the over-seas franc area has in recent years presumablybeen rather smaller than the rather sizable inflow

6,745—6,568

17724589

511

212245—94153

516

—281—148

—429

598879

—72

526

132

7,587—7,700—11313664

87

308242

—126124

548

—82—82

553553

—100

453

260

1,825—1,950

—12533—193

4961

—1515110

— 13—13

44

—27

—23

66

2



of capital into France from that area, which hasbeen largely associated with the repatriation ofFrench settlers.

It is the aim of the French authorities that thebalance of payments of metropolitan Franceshould show a net outflow of private capital andeconomic aid extended, offset by a surplus ongoods and services account. Although the avail-able statistics do not permit an accurate appraisalof France's balance of payments with the world,it is apparent that it attained a substantial over-allsurplus in 1964, as in a number of other recentyears. The French Government has expressed adesire to see a reduction in the inflow of foreigncapital from the non-franc area; a reduction inthe over-all surplus could also be achievedthrough action to encourage an outflow of capital

to that area. Some reduction in the surplus,through adjustment of the current account, mightresult from steps taken by the French authoritiesto stimulate domestic investment. However, inthe early months of 1965 the large French over-all surplus still persisted, while the French author-ities accelerated their gold purchases from theUnited States. It is understood that they intendto reduce their holdings of foreign exchange,which totaled some $1.4 billion at the end of1964, and to convert current accruals of foreignexchange into gold.

Italy

The balance of payments of Italy made a dra-matic recovery during 1964 (Table 35). At the

TABLE 35. ITALY: BALANCE OF PAYMENTS SUMMARY, 1963 AND 19641


1964*

1963 19642First

quarterSecondquarter

Thirdquarter

Fourthquarter

A. Goods, Services, and Transfer PaymentsExports f.o.b.Imports f.o.b.

Trade balanceTransportation and merchandise insuranceTravelInvestment incomeWorkers' earningsOther servicesPrivate transfer paymentsCentral government transfer payments

Total, unadjustedTotal, seasonally adjusted

Exports f.o.b.Imports f.o.b.TravelOther services and transfer

payments

B.

C.

D.

E.

Capital Movements (excluding Groups D and E)and Net Errors and Omissions

Remittances of Italian banknotes3

Foreign investments in Italy3

Italian investments abroadCentral government capitalOther and net errors and omissions

Total

Total (A plus B)

Commercial Banks' CapitalLiabilitiesAssets (increase — )

Total

Official Monetary MovementsIMF positionMonetary gold (increase — )Other foreign assets of UIC and Bank of

Italy (increase — )Total

—1,4771,293—102

—33—276—595

—1,252

476174650

—23—100

725602

—5771,088

—10914

—299117

777

—287—155—442

79237

—651—335

—262246

—2915355

—435

—24043

—197

225200

207632

—142430

—13—52—18205

226

—1492

—147

——4

—75—79

—113199

—4425

—266-199

502

—14035

—105

— 12444

—317—397

—60213

—2326

—50106

484

242—235

7

—22—3

—466—491

Source: Ufficio Italian© del Cambi (UIC), Movimento Valutario, and Bank of Italy.1 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.2 Preliminary.3 Part of "Foreign investments in Italy" is believed to be financed from the proceeds of Italian banknotes remitted abroad and sub-

sequently repatriated; to that extent foreign investment in Italy is overstated.

4,969—6,777—1,808

— 172749

—11429999

321—31

—657—6574,969

—6,777749402

5,875—6,455

—580—195

825—95325105300

—25660660

5,575—6,455

825415

1,301—1,853

—552—69

90—22

58—365

—7—440—2301,318

—1,793172

73

1,440— 1,703

—263—38183

—45833276

—721

1271,471

—1,668192132

1,531—1,352

179—4352

—25981786

—2701455

1,537—1,400

204114

1,603—1,547

56—84200

~865973

—9378308

1,549—1,594

25796



beginning of the year Italy was the major deficitcountry in the world, but by the third quarter ithad become the major surplus country. Duringthe crisis in the first quarter of the year, theItalian authorities were supported by foreigncredits and similar facilities totaling about $1billion, including $450 million of medium-termcredits made available by the United States. Whena surplus had been recovered they acted to pre-vent this from having undesirable repercussionson international liquidity: they did not, on bal-ance, convert accruals of foreign currencies intogold but ordered the commercial banks to reducetheir net foreign liabilities. Toward the end of theyear, the Italian Government adopted economicpolicies that seemed likely to reduce, if not elimi-nate, the surplus.

The developments that led to the large balanceof payments deficit in 1963 were described inlast year's Annual Report. Essentially, rapideconomic growth over a number of years, sup-ported by steadily rising exports and large-scaleemigration of labor to neighboring countries, hadbrought about strong pressures on wages andprices as the economy was reaching full employ-ment conditions. These pressures were accom-panied by a substantial excess demand in theeconomy in 1963 and 1964, and by a consider-able shortfall of supply in domestic agriculture.Together, they both hampered the growth ofexports and stimulated the sharp rise in imports.At the same time, the sharply rising incomes ac-centuated various structural problems of economicadjustment. To deal both with the domesticinflationary pressures and with the balance ofpayments deficit, the Italian authorities appliedmonetary and fiscal measures of increasing re-straint, beginning in May 1963. In the course of1964 these measures proved effective in correct-ing the balance of payments, but appeared to besomewhat less effective in reducing pressures onprices and wages, although some progress in thatrespect was recorded. They also resulted in adecline in industrial production. The adjustmentin the balance of payments was undoubtedlyfacilitated by the generally buoyant internationaldemand.

The measures applied acted both on the cur-rent and the capital account. Exports rose at asubstantial rate throughout 1964, while imports

tended to fall until the last quarter. A betterharvest than in the two preceding years alsocontributed to the reduction in the trade deficit.Capital transactions (other than changes in com-mercial bank assets and liabilities) turned froma large outflow into a large inflow, under theinfluence of both the restrictive monetary policiesand the restoration of confidence, which had beenmuch impaired during the period of the largedeficits.

Even though the surplus in the second half of1964 was exceptionally large, there was no clearevidence that the Italian balance of payments wasreturning to a period of persistent surplus accom-panied by rapid economic growth.

Japan

In the postwar period Japan, while maintaininga very high rate of long-term growth, has experi-enced a series of domestic booms and recessions,which have had pronounced secondary effects onthe balance of payments. Severe difficulties in1961 were met by corrective measures whichslowed for a time the steep rise in domestic pro-duction. However, recovery was rapid, and bythe middle of 1963 a balance of payments prob-lem again began to emerge. On this occasionmeasures were taken to restrain the boom ratherearlier than had previously been done, and tightmoney measures were introduced at the end of1963 which markedly slowed the rate of increasein imports. A rapid rise in exports, supportedboth by strong international demand and by thehigh degree of competitiveness of Japanese in-dustry, helped to smooth the adjustment; during1964 the balance of payments recovered whileeconomic growth was moderated, but was notinterrupted, as it had been in 1958 and 1962.At the end of the year the Japanese authoritiesbegan to relax their policies of economic restraint.

Japan's deficit on account of goods and servicesand private transfers was much reduced from1963 to 1964 (Table 36). The improvementcame in the second half of the year; after allow-ing for seasonal factors there was then a smallsurplus on current transactions, compared witha seasonally adjusted deficit of about $450 mil-lion in the first half of the year. Exports ex-panded steadily throughout the year, totaling


90

ANNUAL REPORT, 1965

TABLE 36. JAPAN: BALANCE OF PAYMENTS SUMMARY, 1963-FmsT QUARTER 19651


A. Goods, Services, and Private Transfer PaymentsExports f.o.b.Imports f.o.b.

Trade balanceGovernment special receipts3

Other services and private transfer paymentsTotal

B. Private Long-Term CapitalDirect investmentOther

Total

C. Central Government Transfer Payments and Non-monetary Capital

Reparations and loans extendedIBRD loans received (net)Other4

Total

D. Total (A through C)

E. Net Errors and Omissions

F. Private Short-Term CapitalNonmonetary sectorCommercial banks

LiabilitiesAssets (increase —)

Total

G. Treasury and Bank of Japan Monetary Capital and GoldIMF positionLiabilities4

Payments agreement assetsOfficial reserves (increase — )

Total

-22614

—37-249

-4098

7956

— 16262

53—460

109

-216

—311

-40—43

—3—40

—126

3

-^51—59

Source: Data provided by the Japanese authorities.1 No sign indicates credit; minus sign indicates debit.2 Preliminary.3 Including sales to U.S. and UN forces under the special procurement program.4 Yen subscription, other than the amount immediately converted into dollars, to the International Development Association ($6.1 mil-

lion for 1963) and the corresponding increase in liabilities are excluded from this table.

about one fourth more than in 1963. Imports,which in the first half of the year had been run-ning 25 per cent above the figure for the sameperiod of 1963, were only 14 per cent higher forthe year as a whole. This resulted in a swing inthe trade balance from a deficit in 1963 to asubstantial surplus in 1964. The deficit on goodsand services account was nearly halved.

The inflow of private long-term capital intoJapan in 1964 was markedly reduced owing touncertainties concerning Japan's prospects ofobtaining exemption from the U.S. Interest Equal-ization Tax. During 1964 Japan did not placeany new issues in the U.S. market, but borrowedin Europe; the inflow of private capital fell byabout $370 million, more than offsetting the im-provement in the balance on current account. As

a result the deficit on current and long-term capi-tal account increased to $376 million. However,this deficit was for the most part matched by aninflow of short-term capital, reserves showinglittle change. Net borrowing by the commercialbanks played only a minor role; during the secondhalf of 1964, the commercial banks built up theirforeign assets by more than the rise in theirforeign liabilities, improving their net position byclose to $300 million. For the year as a wholetheir net positions deteriorated only by $71 mil-lion, compared with more than $400 million in1963. This development presumably reflectedboth the improved trade balance (some assetsrepresenting export credits, and a large part ofliabilities representing import usance bills) andmeasures of monetary policy.

19642

1963

5,391—5,557

—166356

—884—694

—21528507

—12532

—32—125

—312

44

107

848—438

517

19642

6,706—6,358

348329

—1,066—389

5477

131

—1081

—11—118

—376

—4

253

669—598

324

Firstquarter

1,317—1,621

—30477

—293—520

167995

—264

—27—49

—474

31

171

267—57381

Secondquarter

1,580—1,640

—6083

—270—247

203

23

—18

3517

—207

—34

—14

247—101

132

ThirdQuarter

1,736—1,488

24881

—24980

213758

—35

—23—58

80

45

36

45—217— 136

Fourthquarter

2,073—1,609

46488

—254298

—3—42—45

—29—3

4—28

225

—46

60

110—223—53

19652

Firstquarter

1,822—1,614

20871

—300—21

168

24

—332

—17—48

—45

20

— 10

144—50

84

1-5



The improvement in the balance of paymentscontinued into the early months of 1965, whenthe current account showed the lowest first-quarter deficit for several years. Although sea-sonal factors are adverse in this quarter, therewas a considerable increase in exports over thesame period in 1964. The inflow of private capi-tal was renewed, although at a much lower levelthan in the first quarter of the previous year, andthe reserve position improved by almost $60million.

Australia

The Australian balance of payments becameless favorable in the course of 1964, though itwas in surplus for the year as a whole (Table 37).A substantial increase in volume contributed toa 9 per cent increase in the value of exports

TABLE 37. AUSTRALIA: BALANCE OF PAYMENTSSUMMARY, 1961-641


1961 1962 1963 1964

A. Goods, Services, andTransfer Payments

Exports f.o.b.Wool (at current prices)Wool (at 1958 prices)Wheat (at current prices)Wheat (at 1958 prices)

2,314575768352370

Imports f.o.b. —2,003

Trade balanceInvestment incomeOther services and

transfers

Total

311—245

—282

—216

2,334827773284280

—2,178

156—248

—272

—364

2,761972766367367

—2,328

433—293

—315

—175

2,9951,006

793408385

—2,800

195—278

—338

—421

B. Private Capital (includingerrors and omissions)

C. Official Capital

D. Total (A through C)

E. Monetary MovementsIMF positionOfficial and banking

reserves (increase —)

Total

526

21

331

175

—506

469 671 513

35 —6 —27

140 490 65

-176 —26

36 —464 —65

—331 —140 —490 —65

Source: Based on data from the Commonwealth Statistician.1 No sign indicates credit; minus sign indicates debit.

over 1963, but imports rose throughout theyear and were more than 20 per cent higherin 1964 than in the previous year. As a result,the trade surplus was reduced by some $250 mil-lion. The current account deficit, at about $420

million, was the highest since 1960. There was,however, another heavy inflow of capital, so thatreserves rose for the fourth successive year, to$1,847 million. Export prices, which had risensharply in 1963, reached a peak in the firstquarter of 1964 but declined thereafter, largelybecause of a steady decline in wool and sugarprices after March and a fall in wheat prices inthe later part of the year. However, prices ofmeat and metals were higher in 1964 than in1963. Wheat exports to countries in the Sino-Soviet area again played an important role inexpanding exports.

The continued rise in export earnings has, overthe last two or three years, helped to support asubstantial rate of economic growth and a highlevel of employment; real gross national productrose by about 6 per cent in 1964 and unemploy-ment fell to about 1 per cent of the labor force.During the year demand pressures emerged insome areas of the economy, and since March 1964domestic prices have been rising at a rate of about4 per cent a year. The budget for the fiscal yearended June 1965 was designed to prevent anexcessive rise in domestic demand and included asubstantial increase in tax rates. In order tocontain the increase in the money supply and dis-courage any marked change in liquidity prefer-ence, action has been taken to raise interest rates,and reserve requirements for the commercialbanks at the Reserve Bank were increased onseveral occasions, although some reductions weresubsequently made to allow for seasonal move-ments in the banks' liquidity. In the first quarterof 1965 the balance of payments showed a con-siderable deficit. Exports were slightly below thelevel of the first quarter of 1964, while importsincreased still further. Reserves dropped sharplyand, at the end of the quarter, were $1,669 mil-lion.

Brazil

In most of the years since World War II, butparticularly in recent years, persistent inflation inBrazil was accompanied by great pressure on thebalance of payments. During 1964 the rate ofinflation moderated somewhat, while remaininghigh for the year as a whole, and in that year,for the first time in more than a decade, the cur-



rent account of the balance of payments wasbrought into surplus (Table 38). Within thecurrent account the trade surplus trebled, owingmainly to a reduction in imports by almost 17per cent, resulting in part from a further deprecia-tion of the cruzeiro; exports rose only slightly.

Despite the improvement in the merchandizeaccounts there was a further build-up of importpayment arrears until September 1964. Subse-quently these arrears were reduced, and by April1965 they had been eliminated.

The problems of servicing a rising foreign debtappear to have induced some further decline in1964 in the inflow of foreign capital. However,debt rescheduling agreements reached during theyear, together with other action taken by theauthorities, appear to have improved the climatefor a renewed capital inflow.

TABLE 38. BRAZIL: BALANCE OF PAYMENTS SUMMARY,1961-641


1961 1962 1963 19642


Exports of coffee f.o.b.Other exports f.o.b.Imports f.o.b.


710695

—1,292

113—416

15

643572

—1,304

—89—407

38

748658

—1,294

112—333

39

760670

—1,080

350—282

20

Total —288 —458 —182

B. Miscellaneous Capital andNet Errors and Omissions 124 46 —51

C. Total (A plus B) —164 —412 —233

D. Loans, Payments Agreementsand U.S.P.L. 480 Aid,Swaps, and ImportArrears

Drawings on loansRepayments on loansLines of credit and

swapsOther import financing

(including net paymentsagreements)

Import arrears

—41

3633

88

—41

47

331-286

—50

10436

Total 311 361 109 135

E. Monetary MovementsIMF positionCentral Bank net

foreign exchangeassets (increase — )

Monetary gold(increase — )

Commercial banks' netassets (increase — )

Total

40

—127

2

—62

—147

—18

19

60

—10

51

5

34

76

9

124

—28

—194

59

—19

—182

Source: Based on data from the Central Bank of Brazil.1 No sign indicates credit; minus sign indicates debit.2 Preliminary.

At the end of 1963, the outstanding principalon medium-term and long-term indebtedness reg-istered with the Brazilian monetary authoritiesamounted to approximately $2.5 billion. Sched-uled payments on these debts for 1964 and 1965,including interest, totaled about $1 billion. Thisprompted the authorities, early in 1964, to begina series of negotiations with the major creditorcountries for a rescheduling of repayments. Theresulting agreements provide that Brazil shouldmeet in full as they fall due in 1964 and 1965suppliers' credits guaranteed by the foreign Gov-ernments participating in the agreement, but that70 per cent of the total should be refinanced bythe Governments concerned. A comprehensivefinancial program, and important institutional re-forms, including the setting up of a central bank,were submitted to the Fund toward the end of1964. In the field of public finance, the programincluded new tax measures and restraint in ex-penditures, better administrative control overgovernment expenditure, and periodic adjustmentsin the rates for public utility services. Policiesfor the private sector included allowing the pricemechanism to play a wider role and thus gradu-ally eliminating the existing serious distortions, avigorous stimulus to exports, a firmer control ofbank credit, a flexible exchange rate to ensurea better performance of the balance of payments,liquidation of commercial arrears, and measuresdesigned to encourage an inflow of official andprivate foreign capital to assist in the developmentof Brazil's vast economic potential. In January1965 Brazil concluded a stand-by arrangementwith the Fund; details are given on page 109.

Ghana

The balance of payments deficit that has per-sisted in Ghana since 1959 reflects an excess ofdomestic demand originating largely in the publicsector. A part of this excess demand has beendeliberate, representing a preparedness to drawdown reserves for purposes of economic develop-ment; but another part has resulted from the factthat the Government's budgeted expenditureswere predicated on expectations regarding cocoaexport proceeds which did not materialize becauseof the fall in cocoa prices; the world price ofcocoa fell from an average of £336 a ton in

799—326

—38

—55—69

481—310

7

18165

445—364



1958 to £179 a ton in 1964 and to £122 inApril 1965. On the other hand, output of cocoain Ghana has increased substantially in recentyears—from 264,000 long tons in 1956/57 to aplateau of 400,000-450,000 tons in the early1960's and to some 550,000-600,000 tons today.In fact, Ghana's receipts from cocoa exports, asshown in Table 39, have remained relativelystable in recent years. The price paid to the cocoafarmers has not been reduced commensuratelywith the fall in world prices, and the income ofthe cocoa farmers has increased with the rise inoutput, expanding domestic demand.

TABLE 39. GHANA: BALANCE OF PAYMENTS SUMMARY,1961-641


1961 1962 1963 19642


Exports of cocoa f.o.b.Other exports f.o.b.3Imports f.o.b.


Total

194139

-385

—52—78—15

—145

188132

—310

10—73—14

—77

191114

—331

—26—78—16

—120

191130

—312

9—72—22

—85

Private Capital and NetErrors and Omissions -30

Central Government Misc.Capital (excl. Group D)

Loans and commercialcredits received (net) 32

Other —67

14

3510

325

16

396

Total —35 45 37 45

Monetary MovementsIMF positionSterling assets

(increase — )Commercial banks

(net)Cocoa Marketing

Board and otherofficial entities

Central governmentCentral bank and

currency reserves

Total

—

10

7892

30

210

14

14

2

—12

18

—

10

268

35

79

—

—6

.9—6

274

24

Source: Based on data from the Bank of Ghana.1 No sign indicates credit; minus sign indicates debit.2 Preliminary.3 Including nonmonetary gold.4 Including an increase in official liabilities (credit of

million).$22

Until 1962 the excess demand spilled over inhigher imports ($385 million in 1961). From1962 through 1964 imports were restricted to alevel only slightly in excess of $300 million. Thecontinuing current account deficits as well as, incertain years, a sizable capital outflow (e.g., to

Guinea, Mali, and Upper Volta), were financedby borrowing abroad (mainly suppliers' credits),by drawing down reserves, and—in 1964—byborrowing against securities held in the reserves.

The outcome has been that Ghana's interna-tional reserves declined from some $530 million in1957 to a total (net of securities pledged againstshort-term loans) of less than $70 million in thespring of 1965. In addition, Ghana has incurreda considerable foreign debt; suppliers' creditsdenominated in foreign currency arranged from1959 to April 1965 totaled some <£G 200 mil-lion ($560 million); by the latter date principaland interest totaling some «£G 35 million hadbeen paid.

Owing to a more rapid rise in expenditures(both recurrent and capital) than in revenue, theover-all deficit on the Government's budget roseto <£G 50 million in 1962/63; it was reduced to<£G 38 million in 1963/64, but is estimated at«£G 66 million in 1964/65. The deficits havebeen financed by drawing down the overseas hold-ings of the Government and by the issue of Treas-ury bills. The rise in prices, as measured by theofficial index, has been more than 20 per centover the last two years; there has been no appar-ent increase in wage rates. Shortages are occurringof certain essential foodstuffs, spare parts, andraw materials, reflecting the restrictiveness of theimport licensing system and inadequate priorities.

India

India's surplus in 1964 was little larger thanin 1963 (Table 40) despite greater use of ex-ternal assistance and the continued tight restric-tion on imports and overseas payments. Therewas a major deterioration in the current accountposition, which may in part be attributed to in-ternal developments, particularly the failure offoodgrain production during the last few years tomeet the increase in consumption, resulting in aneed for additional imports as domestic scarcitiesdeveloped. In addition, pressures on the balanceof payments were increased by import needs aris-ing from expanded defense expenditures during1962-64. In the second half of 1964, there was aparticularly marked upsurge in domestic pricesand a large increase in imports. Imports in 1964rose by some 19 per cent while exports rose by

4B.

C.

D.



TABLE 40. INDIA: BALANCE OF PAYMENTS SUMMARY,1961-641


A.

B.

C.

D.

E.

Goods, Services, and PrivateTransfers

Exports f.o.b.Imports mainly c.i.f.

Trade balanceServicesPrivate transfers3

Total

Private Capital and NetErrors and Omissions

Official Transfers andCapital

Transfers3

CapitalTotal

Total (A through C)

Monetary MovementsIMF positionCommercial banksCentral institutions

Other liabilitiesOther assets

(increase — )Total

1961

1,389—2,140

—751—41

57—735

— 1

35667702

24

126—25

—74

734

1962

1,412—2,288

—876—69

47—898

18

123620743

—137

29

g

116137

1963

1,625—2,455

—830—771

—766

—59

140702842

17

—206

13

—16—17

19642

1,717—2,915—1,198

—3258

—1,172

—126

2621,0611,323

25

—44,

1

18—25

Source: Based on data from the Indian authorities.*No sign indicates credit; minus sign indicates debit.2 Preliminary.3 Grants of U.S. surplus agricultural commodities through pri-

vate agencies are included with official transfers.

only 6 per cent, resulting in an increase of about$360 million in the trade deficit.

The deficit on current account, together withthe net debit for private capital and net errors andomissions, was more than offset by increases innet official receipts of capital and transfer pay-ments. Net official transfers received increasedby about $120 million to $260 million, a levelseven times that received three years earlier, whilenet official capital receipts increased by almost$360 million. In spite of these increases in aidreceipts, India continues to receive considerablyless aid per capita than most other developingcountries. Moreover, the heavy official borrowingof recent years has resulted in a debt servicingproblem; in 1964 such payments amounted toabout 12 per cent of exports.

The seriousness of the balance of paymentsposition necessitated the taking of several anti-inflationary steps towards the end of 1964, in-cluding an increase in the bank rate and a markupof interest rates generally. Despite this, the ex-ternal position deteriorated and by early in 1965reserves had fallen to the unprecedentedly low

total of $480 million. Two special factors ag-gravated the reserves position at that time. First,the inflow of foreign banking funds that normallyoccurs in the busy season in India's money mar-ket (November-April) was much smaller in1964/65. Second, there were delays in the nor-mal discounting of export bills abroad and in therepatriation of proceeds of bills that were dis-counted. (This is part of the explanation for theenlarged debit in 1964 on account of errors andomissions.)

Further steps, therefore, had to be taken inearly 1965 to restrain domestic monetary expan-sion and to ease the pressure on the balance ofpayments. The bank rate was further increased,and the budget for the fiscal year which beganon April 1 was designed to reduce greatly re-course to bank financing. An additional regula-tory duty of 10 per cent on all but the most essen-tial imports was also introduced. In March a$200 million stand-by with the Fund was ap-proved, against which several drawings have beenmade.

TABLE 41. MEXICO: BALANCE OF PAYMENTS SUMMARY,1961-641


A. Goods, Services, and Pri-vate Transfers

Exports f.o.b.Imports mainly c.i.f.

Trade balanceTravelOther servicesPrivate transfers

Total

1961

839—1,143

—304269

—180—14

—229

1962

941—1,155

—214275

—217—17

—173

19632

986—1,248

—262307

—244—16

—215

19643

1,071—1,499

—428324

—285—4

—393

B. Private Capital (includingcommercial bankloans) and NetErrors and Omissions 36 252 261

C. Official Transfers andCapital 134 —11 85

D. Total (A through C) —59 68 131

E. Commercial Banks' Short-Term Capital 32 —59 —8

358

—35

80

F. Reserve MovementsIMF positionBank of Mexico

Other liabilitiesOther assets

(increase — )Total

45

—3

—1527

—45

6

30—9

3

—120—123

3

—48—45

Source: Based on data from the Bank of Mexico.1 No sign indicates credit; minus sign indicates debit.- Provisional.3 Preliminary.



Mexico

Mexico's net international reserves (includingits position in the Fund) rose in 1964 for thethird successive year. There was again a large in-flow of capital, which more than offset the de-terioration in the balance on current account(Table 41). The latter was due mainly to a risein the trade deficit, although there was also adecline in the net surplus on invisibles. Invest-ment income payments abroad rose sharply in1964, while net travel receipts, which have shownsubstantial gains in the past decade, increased ata somewhat slower rate, as travel expendituresabroad by Mexican residents increased more rap-idly than receipts from tourism.

The increase in the trade deficit was caused bya 20 per cent growth in imports while exportsadvanced by 9 per cent. In large part, the expan-

sion of imports reflected the upsurge in the inflowof capital, including foreign loans to the Govern-ment and to government enterprises. There wasalso a substantial inflow of commercial bankshort-term capital. Increased exports of coffee,wheat, corn, sugar, and some minerals more thanoffset lower exports of cotton (the most impor-tant export product of Mexico) and of manufac-tures. The decline in cotton exports was causedby a reduction in output, but the reduction inexports of manufactures was due to a substantialexpansion in internal demand, which absorbedmore than the increase in domestic production.

Since 1961 Mexico has achieved an impressiveimprovement in the annual rate of growth in itsreal GNP—from 3.5 per cent to about 10 percent in 1964. Considering the sharp advance inthis rate of expansion, the increase in Mexicanprices has been quite moderate.


Chapter 9

Gold

Gold Production

ORLD output of gold, excluding the pro-duction of the U.S.S.R., Mainland China,

and countries associated with them, increased in1964 for the eleventh consecutive year. The in-crease of about 3.4 per cent carried total produc-tion to the highest figure ever reached, about 40million ounces, worth (at $35 a fine ounce)approximately $1,400 million (Table 42). Thiswas almost entirely the result of increased pro-duction in South Africa. The comparable figurefor the value of output in 1963 was $1,354 mil-lion; in 1962, $1,300 million; in 1961, $1,215million; and in 1960, $1,178 million. The goldmining industry in South Africa again establishednew records; its production increased by morethan 1.7 million ounces (6.2 per cent) to a totalof 29.1 million ounces, equivalent in value to$1,020 million. This output constituted approxi-mately 73 per cent of world production.

The number of tons of ore milled in SouthAfrica in 1964 was about 1.5 per cent greaterthan in 1963, and the average grade of ore per ton

milled rose from 6.861 dwt. in 1963 to 7.185dwt. in 1964. By 1951 the average grade of orehad fallen to 3.756 dwt., but it has improvedsteadily since that time. Combined working profitsfrom gold, uranium, and other products rose fromR 313.0 million ($438.2 million) in 1963 to arecord figure of R 332.6 million ($465.6 million)in 1964.

The value of production increased also in theDemocratic Republic of Congo by the equivalentof $2.0 million, to $9.5 million, and in Colombia,India, Japan, and Rhodesia by lesser amounts,raising the value of production in these countriesto the equivalents of $13.1 million, $5.2 million,$16.1 million, and $20.1 million, respectively.Gold production also increased sharply in thePhilippines, where output was 13.3 per cent higherthan in 1963, being equivalent to $14.9 million.This increase has been attributed mainly to theresumption of normal operations by a major com-pany which suffered loss of production because ofa prolonged strike in 1963, to the extension to1967 of the Gold Assistance Act, and to taxexemption granted to certain mines.

TABLE 42. GOLD: VALUE OF WORLD PRODUCTION, 1940, 1945, AND 1960-641

(In millions of U.S. dollars at US$35 a fine ounce)

1940 1945 1960 1961 1962 1963 1964

South AfricaCanadaUnited StatesAustraliaGhana

RhodesiaJapanPhilippinesColombiaCongo, Dem. Rep. ofMexico

Other2

Total2

4921861705731

293039222031

157

1,264

42895322319

203

—181217

69

736

748162593831

201214151111

57

1,178

803155553829

2013151489

56

1,215

892145553831

1915151478

61

1,300

961139513632

2015131178

61

1,354

1,020133513430

2016151397

52

1,400

Source: International Monetary Fund, International Financial Statistics.1 Excluding the output of countries in the Sino-Soviet area.2 These figures include estimates for data not available.

96

w


GOLD 97

Production in Canada declined again in 1964,falling to 3.8 million ounces, equivalent toUS$133.0 million; this was the smallest outputsince 1948, when it totaled 3.5 million ounces(US$123.9 million). The 1964 figure compareswith 4.0 million ounces (US$139.0 million) in1963 and 4.2 million ounces (US$145.5 million)in 1962. The year of peak output in Canada was1941, when 5.4 million ounces (US$188.0 mil-lion) were mined. In Canada, as elsewhere, costsof production in the gold mining industry havebeen rising. Production from new sources isthought unlikely to offset the declining outputresulting from the closure of mines that are reach-ing the end of their reserves.

In the United States, whose output is the nextlargest to that of Canada (if the U.S.S.R. is dis-regarded), production declined again, to approxi-mately 1.4 million ounces ($50.6 million), from1.5 million ounces ($51.4 million) in 1963, afterhaving been about 1.6 million ounces ($55 mil-lion) in both 1961 and 1962. The peak year forthe United States was 1940, when 4.9 millionounces, equivalent to $170 million, were pro-duced. Australia's gold production continued todecline in 1964, amounting to approximately 1million ounces ($34 million). In 1963, outputhad been 1.03 million ounces ($36 million) afterit had remained steady at about 1.09 millionounces ($38 million) in 1960, 1961, and 1962.Production also declined in Ghana, by the equiv-alent o{ $2.0 million, to $30.2 million; in Mexicoby $0.9 million, to $7.4 million; and in Nicaraguaby $0.2 million, to $6.9 million.

Gold has become Bolivia's fourth largest export,and production has increased steadily over thepast few years. A recent geological survey esti-mated the gold reserves in northeastern La Paz atbetween $1 billion and $3 billion. It has beenestimated that, with modern techniques, Boliviacould be producing gold valued at approximately$22 million yearly by 1972. In southern India,the Geological Department of Kerala State hasbegun investigations of gold deposits in parts ofthe Kozhikode district. It has also been reportedthat gold can be extracted on a profitable basisfrom the deposits in South Wynaad and Nilamburareas.

Sales of gold by the Soviet Union, totaling theequivalent of approximately $330 million in the

early months of 1964, have drawn further atten-tion to Russian gold production. These sales,understood to be prompted by a need for foreignexchange in connection with grain purchases, com-pare with sales equivalent to $550 million in 1963and $215 million in 1962. The official Russiannews agency, Tass, has asserted that Russian goldsales in 1963 did not deplete that country's goldreserves. A member of the Soviet State GeologicalCommittee has claimed that a large new goldfield, which has been discovered on the KolymaRiver in the Yakutsk region, could be the biggestin the world. Another report from the East Ger-man news agency, ADN, mentioned new golddiscoveries in Central Asia, Kazakhstan, andTranscaucasia, which are estimated to be able toproduce as much gold as all the east and northeastregions of Russia produce at present. It has alsobeen reported that modern machinery and miningmethods are now being employed to increaseproduction.

In general, the gold mining industry remainsconcerned by the decreasing gap between risingcosts of production and the fixed price of $35 afine ounce. Several governments have grantedassistance to their gold mining industries; in somecountries this assistance has taken the form ofsubsidies. These arrangements are mentionedbelow.

Gold Holdings

The monetary authorities of the world areestimated to have added about $725 million in1964 to their stocks of gold (Table 43 and Chart28); this compares with additions of about $840million in 1963, $330 million in 1962, $600 mil-Ion in 1961, and $225 million in 1951, the yearin which the smallest postwar increase was re-corded. The holdings of the Sino-Soviet areahave not been included in these figures, but thoseof the International Monetary Fund, the Bank forInternational Settlements, and the European Fundhave been taken into account. World reserves ofmonetary gold, thus defined, amounted to theequivalent of approximately $43 billion. Theimportant movements in the distribution of re-serves during 1964 are discussed in Chapter 6.

The amount of newly available gold in the



CHART 28. GOLD: ESTIMATED SUPPLY AND ABSORPTION, 1951-64



GOLD 99

TABLE 43. WORLD GOLD RESERVES:SOURCES OF CHANGES, 1962-64


1962 1963 1964

1,515 1,904 1,730

—1,185 —1,064 —1,005

Production 1,300 1,354 1,400Soviet sales 215 550 330

Total availableConsumption in industry and arts, and

private hoardingTotal added to world monetary

gold stock1

IMF gold transactionsSubscriptionsSales to countriesRepaymentsCharges

BIS and EF gold transactionsTotal added to countries' monetary

gold stock*. * 380 960 635

330

—25

—67—25165

840

—45

—49—24238

725

—71250—20—27—225

Sources: International Monetary 'Fund, International FinancialStatistics, and Fund staff estimates.

1 Excluding stocks held by countries in the Sino-Soviet area.2 Totals do not equal the sums of the items because of rounding.

Western world in 1964 was of the order of theequivalent of $1,730 million. Absorption by pri-vate holders, industry, and the arts in 1964 thusappears to have been in the region of $1,005 mil-lion, i.e., some $60 million less than in 1963.

Gold Markets and Prices

New York

As fiscal agent for the U.S. Treasury, the Fed-eral Reserve Bank of New York stands ready tobuy gold at the price of $34.9125 a fine ounceand to sell gold at $35.0875 a fine ounce forofficial monetary purposes. In 1964, it sold goldequivalent to $36.2 million (net) to foreigncountries and international institutions. In addi-tion, the equivalent of $89.0 million was solddomestically for industrial, professional, and artis-tic uses. The total decrease in the U.S. gold stockduring the calendar year 1964 thus amounted tosome $125.2 million (Table 44), compared with$460.7 million in 1963 and some $889.9 millionin 1962. Purchases of gold from foreign coun-tries in 1964 included the equivalent of $617.7million from the United Kingdom, of which ap-proximately $300 million resulted from the UnitedStates' 50 per cent share in the operations of theGold Pool, described in last year's Annual Report(p. 131).

The amount of gold held under earmark by theFederal Reserve Banks for account of foreign

central banks, governments, and international in-stitutions fell in 1964 by the equivalent of $255.3million, to $12.7 billion. This fall was due pri-marily to the fact that in 1964 France repatriatedin gold the equivalent of some $422 million.

TABLE 44. U.S. GOLD TRANSACTIONS, 1963 AND 1964


1963 1964

Purchases fromBrazilItalyUnited KingdomOther countries

Sales toAustriaBelgiumFranceGermany, Fed. Rep. ofNetherlandsSpainSwitzerlandOther countriesIndustrial, professional, artistic

Net decrease in stocks

72.2

329.336.7

438.2

82.1

517.7

130.0

100.169.0

898.9

460.7

54.2200.0617.735.0

906.9

55.440.1

405.1225.01

60.032.081.044.589.0

1,032.1

125.2

1 Two hundred million dollars of these sales formedpart of the transaction initiated by the purchase fromItaly shown.

London

Over the period May 1,1964 to April 30,1965,the dollar price of gold (converted at the buyingprice for dollars in London at the time of the dailyfixing) fluctuated within a range of about 11 Viecents—between a maximum of $35.17% a fineounce on March 5, 1965 and a minimum of$35.06iy16 a fine ounce on August 25, 1964(Chart 29). In the same 12-month period in1963/64 the corresponding range was 5%6 cents—between $35.11%6 and $35.05% a fine ounce.

On May 1, 1964, the equivalent price at the"fixing" was slightly above $35.07% a fine ounceand, although there was a steady demand for bargold, the price did not fluctuate by much morethan 1 cent either side of $35.08 until mid-September. During this period, the Gold Poolwas able to acquire a modest amount of goldbecoming available from new production. Theheavy sales of gold by the U.S.S.R. in the firstthree months of the year were not, however, re-



peated. At the beginning of August, the attackon U.S. naval craft in the Gulf of Tonkin causeda flurry in the gold market, and on August 6dealings were reported at about $35.10 a fineounce after the "fixing" at $35.08i%6 a fineounce. During the summer the exchange rate forthe pound sterling had been progressively easingand on August 27 the sterling price at the "fixing"was 252s. O^d. a fine ounce. This was the firsttime since July 25, 1961 that the sterling price ofgold had exceeded 252s.

Private demand for gold remained modest dur-ing August but increased sharply in Septemberand October, as the approach of elections in both

"fixing" to 252s. 4%d. a fine ounce, the highestpoint of the year, and the U.S. dollar equivalentprice to about $35.12%6 a fine ounce, the highestprice in U.S. dollar terms since the Cuban crisisin October 1962. While the authorities effectivelycontrolled the market through the operations ofthe Gold Pool, speculation against the poundsterling persisted, and on November 23 the bankrate in London was raised from 5 per cent to 7per cent. The sterling price at the "fixing" onNovember 23 was lower by 6*4d., reflecting animprovement in the dollar/sterling exchange rate,but speculation persisted and massive internationalsupport was mustered in defense of the existing

CHART 29. GOLD: PRICE IN LONDON MARKET, MONTHLY AVERAGES, MARCH 1954-ApRiL 1965

(In U.S. dollars a fine ounce)

the United States and the United Kingdom causedsome nervousness in the markets. This nervous-ness was accentuated in October by the politicalnews from Moscow, reports of a worsening situa-tion on the Malaysian/Indonesian border, and thenews of the success of Mainland China's firstatomic explosion. Following the results of theBritish elections on October 16, the demand forgold, coupled with a weakness of sterling in theexchange market, pushed the sterling price at the

parity of the pound. During this exchange crisis,the gold market had been fairly active but was notmuch affected by events in the exchange market.In mid-December, demand for hoarding was no-ticeable, and at the end of the year there was somecovering of positions for balance sheet purposes.

A strong wave of buying started in January1965, when there were rumors of the intention ofthe U.S. authorities to remove the gold reserverequirement against deposits in the Federal Re-


GOLD 101

serve Banks and against Federal Reserve notes,and some publicity was given to the French inten-tion to convert surplus dollars into gold. OnJanuary 8 there was a larger turnover of gold inLondon than on any day during the Cuban crisis.The "fixing" price was equivalent to nearly $35.15a fine ounce, and the authorities met demand laterin the day at prices up to $35.19 a fine ounce.Demand abated only after the U.S. Treasury is-sued a firm statement of its intention to maintainthe existing price of gold. For the remainder ofJanuary, the price remained at about $35.12 afine ounce, but demand again escalated early inFebruary, on the appearance of French proposalsfor a reform of the international monetary system.The deteriorating situation in Viet-Nam causedsome buying by speculators and others, and theprice increased steadily until March 5, when atthe "fixing" it reached, in U.S. dollar terms, apeak of slightly above $35.17% a fine ounce. OnMarch 3, President Johnson signed the bill elimi-nating the requirement of a gold cover for FederalReserve Bank deposits, thus freeing some $5billion of gold to meet potential foreign claims.This measure had little immediate impact on amarket overshadowed by events in Southeast Asia;nevertheless, with minor fluctuations, the price ofgold in London declined steadily until April 30,when the price, in U.S. dollar terms, at the "fix-ing" was $35.10% a fine ounce.

The Gold Pool continued to operate effectivelyand to exert a stabilizing influence in the marketduring 1964\ Increased new production, plus sub-stantial sales of gold by the U.S.S.R. in the firstthree months of the calendar year, enabled thePool to share out the equivalent of some $600

million of gold to its participants, an amountsimilar to that distributed in 1963. No contribu-tions to the Pool had to be made in 1964 byparticipating central banks.

During 1964, the United Kingdom importedsome 40.9 million ounces of gold bullion, equiva-lent to $1,429.8 million, compared with 34.3million ounces ($1,200.5 million) in 1963 and34.1 million ounces ($1,192.9 million) in 1962.Of the imports in 1964, the equivalent of $1,106.0million came from South Africa and the equivalentof $268.6 million from the U.S.S.R. These figurescompare with $816.1 million and $281.2 millionin 1963, and with $664.7 million and $106.9million in 1962. Exports from the United King-dom amounted to 17.6 million ounces, equivalentto $615.8 million, whereas in 1963 the total was19 million ounces ($664.5 million), and in 1962it was 29 million ounces ($1,013.8 million).

Other Developments

In markets where gold is bought and soldagainst local currencies (Table 45), the day-to-day movements of the U.S. dollar equivalentprices have varied from the London pattern be-cause of the special characteristics of each marketand the fluctuations in the intermediary rate ofexchange. Prices for bar gold and gold coins inlocal currencies in the period May 1, 1964 toApril 30, 1965 rose steadily under pressure fromspeculators because of the unsettled situation inSoutheast Asia and other political uncertainties.

In Bombay, the U.S. dollar equivalent price forbar gold fluctuated quite widely. From a low pointof $74.33 a fine ounce in the week ended May 8,

TABLE 45. GOLD: PRICES IN VARIOUS WORLD MARKETS, END OF APRIL 1964 AND 1965

(In U.S. dollars a fine ounce, at day's dollar rate)

Bar Gold Sovereign Napoleon

BeirutBombayBrusselsHong KongMilanParis

End ofApr. 1964

35.3274.051

35.1638.0935.4435.20

End ofApr. 1965

35.2884.3035.2139.8835.4535.27

End ofApr. 1964

41.55—41.08—42.15

41.35

End ofApr. 1965

42.33—41.90—42.15

42.02

End ofApr. 1964

45.26—

——50.58

46.24

End ofApr. 1965

46.37———51.45

48.18

1 Average for week ended April 24. This figure was obtained by conversion from quotations for 14-carat gold;transactions are limited to gold of that purity.



1964, it rose to $81.24 a fine ounce at the end ofAugust 1964, but then fell sharply to $74.23 afine ounce in the week ended September 18. Itwould appear that the reduced demand for goldat this point reflected the gold control measuresthat the Indian Government had previously intro-duced.1 (The number of dealers and refiners hadfallen from about 27,000 to some 12,000, thequantity of gold used for industrial purposes hadbeen reduced by approximately 50 per cent, andloans of scheduled banks against the security ofgold had dropped from a peak of Rs 420 million[$88 million] in October 1962 to Rs 180 million[$38 million] in June 1964.) After September 18,the price of bar gold fluctuated narrowly but withan upward tendency, reaching $84.30 a fine ouncein the week ended April 30, 1965.

The activity in the London gold market onJanuary 8, 1965 was reflected in Paris, where theintervention of the authorities brought the priceof the one-kilogram ingot down to F 5,640, froma peak of F 6,000, after what was described as anunprecedented demand for this type of bar gold.The turnover in Paris on January 8 was reportedto be in the region of F 22.5 million ($4.6million).

In Hong Kong, trading in gold was reported tohave been suspended temporarily at the end of thefirst week in March 1965 after the price had beenforced up to HK$271 an ounce, 0.945 fine, equiv-alent to about US$41 a fine ounce.

Gold Transactions Service

Since the inauguration of the Fund's gold trans-actions service in March 1952, the central banksof 26 member countries and 5 international or-ganizations have purchased or sold gold throughthe facilities provided by the Fund. In all, 120transactions, amounting to about $1,093 million,have taken place since March 1952. Althoughthe creation of the Gold Pool has had the effectof virtually eliminating the need for the service,one transaction for the equivalent of approxi-mately $10 million was completed in the yearunder review, and the Fund received two or threeinquiries as to whether it was aware of any sellersof gold.

Changes in National Policies AffectingGold

In Argentina, the Central Bank suspended trad-ing in gold coins and bullion on June 15, 1964.

In the United States, the Secretary of the Treas-ury issued an order, effective on April 25, 1964,removing the restrictions on the holding of U.S.gold certificates issued before January 30, 1934.These certificates, at the time of their issuance,were redeemable in gold. By his order of De-cember 28, 1933, as supplemented and amendedby his orders of January 15, 1934 and July 14,1954, the Secretary of the Treasury required thedelivery to the United States of gold bullion, goldcertificates, and gold coins situated in the UnitedStates, except gold coins having a recognizedspecial value to collectors of rare and unusualcoins. By virtue of a general license, all personssubject to the jurisdiction of the United States maynow acquire, hold, dispose of, export, and importU.S. gold certificates issued before January 30,1934, whether situated inside or outside theUnited States. Such certificates are not redeemablein gold, but may be exchanged at their dollar facevalue for other lawful U.S. coin or currency whichis legal tender.

As stated above (p. 101), the requirement of a25 per cent gold cover for deposits in FederalReserve Banks has been eliminated. The statutoryrequirement regarding a 25 per cent gold coverfor Federal Reserve notes was not affected, how-ever.

In Spain, the Government decreed in April 1965that gold bullion and gold coins required to besurrendered to the Government in 1937 could behanded back to private ownership because of thefavorable evolution of the Spanish economy inrecent years. Requests for the return of the goldare to be made to the Institute of Foreign Ex-change; however, owners have been given theoption of selling their gold to the Institute at thecurrent price.

Gold Subsidy Programs

The gold subsidy programs of the Governmentsof Canada,- the Philippines,3 South Africa,4 and

1 See Annual Report, 1964, page 108.

'2 Annual Report, 1959, pages 149-50; 1961, pages125-26; 1964, page 109.

3 Annual Report, 1962, page 164; 1963, page 181.4 Annual Report, 1964, page 109.


GOLD 103

Rhodesia5 discussed in previous Annual Reportshave continued in operation during the past year.The gold subsidy program for the Philippines wasextended, on the same terms and conditions, fora further three years until June 1967.

In Australia, as in most other gold-producingcountries, rising production costs in conjunctionwith a fixed official price for gold have continuedto create problems for the industry. The assistancewhich the Australian Government has been mak-ing available to the gold-mining industry in recentyears has taken the forms of subsidies and devel-opment allowances. As the legislation authorizingthis assistance was due to expire on June 30,1965, the Australian Government recently re-viewed the position of the industry and introducednew assistance arrangements. Under these ar-rangements the development allowance scheme

5 Annual Report, 1964, page 109.6 Annual Report, I960, page 144; 1963, page 181.

has not been renewed and future assistance to theindustry will be provided by continuing the sub-sidy scheme in a liberalized form. The liberaliza-tions were designed to absorb to some extent thedevelopment allowance scheme into the subsidyscheme and to take account of the deteriorationin the industry's general financial position sincethe Government last reviewed the question ofassistance three years earlier. The new measuresincreased the maximum rate of subsidy for largeproducers from £ A 3 5s. Od. to <£ A 4 Os. Od. perounce, and the flat rate subsidy for small pro-ducers from <£A 2 8s. Od. to <£A 3 Os. Od. perounce, with a consequential adjustment in the pro-vision relating to the rate of subsidy payable toproducers with an output of more than 500 ouncesa year who elect to be treated as small producers.The legislation introducing the new arrangementsprovides that they will operate for a period offive years.


SUPPLEMENTARY NOTE


Activities of the FundHIS note supplements the information givenin Chapter 4 about the activities of the Fund

during the past year.

Par Values

Initial par values were established by agree-ment between the Fund and three members dur-ing the fiscal year, as shown in Table 46.

TABLE 46. INITIAL PAR VALUES ESTABLISHED,FISCAL YEAR ENDED APRIL 30, 1965

TABLE 47. COUNTRIES THAT HAVE ACCEPTEDARTICLE VIII

MemberEffective Dateof Acceptance

AustraliaAustriaBelgiumCanadaCosta Rica

July 1, 1965August 1, 1962February 15, 1961March 25, 1952February 1, 1965

Dominican Republic August 1, 1963El Salvador November 6, 1946France February 15, 1961Germany, Federal Republic of February 15, 1961Guatemala January 27, 1947

Member

units otMember's

Currency perEffective Date U.S. Dollar

Burundi January 26, 1965Trinidad and

Tobago February 10, 1965Tunisia September 28, 1964

It was

Article VIII Countries

noted earlier (p. 31) that

87.50000

1.714290.52500

Australia,

HaitiHondurasIrelandItalyJamaica

JapanKuwaitLuxembourgMexicoNetherlands

NicaraguaPanamaPeruSaudi ArabiaSweden

United KingdomUnited States

December 22, 1953July 1, 1950February 15, 1961February 15, 1961March 8, 1963

April 1, 1964April 5, 1963February 15, 1961November 12, 1946February 15, 1961

July 20, 1964November 26, 1946February 15, 1961March 22, 1961February 15, 1961

February 15, 1961December 10, 1946

the countries 'that have accepted the obligationsof Article VIII, Sections 2, 3, and 4. The 27countries that had accepted these obligationsdown to July 1, 1965 are listed in Table 47.

Quotas

The quotas of 11 Fund members were in-creased during the fiscal year 1964/65. Thecountries concerned, their previous quotas, theirnew quotas, and the effective dates of theirquota increases are shown in Table 48.

The increases for Jordan, Luxembourg, andTunisia were the fifth, and final, installments oftheir quota increases by installments, to whichthey had consented under the 1959 Resolutionson the Enlargement of Fund Resources. The

increase for Malaysia was the first of three equalinstallments by which its quota will be increasedto $100 million. The increases for Ceylon, CostaRica, Ghana, Iraq, and Sudan were approvedunder the terms of the Fund's Decision on theCompensatory Financing of Export Fluctuations,which provides that the Fund is willing to givesympathetic consideration to requests for quotaadjustments from countries exporting primaryproducts, especially those with relatively smallquotas.1

During the fiscal year, four other quota in-creases under the terms of the CompensatoryFinancing Decision were approved by the Boardof Governors: Guatemala, from $15 million to$20 million; Saudi Arabia, from $55 million to

1 Selected Decisions, pages 40-43.

107

T

Cost Rica, and Nicaragua have been added to


108 A

TABLE 48. INCREASES IN QUOTAS, FISCAL YEARAPRIL 30, 1965

(In

Country

CeylonCosta RicaGhanaIraqItaly

JordanLuxembourgMalaysiaPanamaSudanTunisia

ANNUAL REPORT, 1965

ENDED

millions of U.S. dollars)

EffectiveDate

Apr. 7, 1965Jan. 11, 1965Feb. 23, 1965Mar. 4, 1965Aug. 10, 1964

July 13, 1964Sept. 17, 1964Apr. 7, 1965Feb. 10, 1965Mar. 17, 1965June 3, 1964

PreviousQuota

45.0015.0035.0015.00

270.00

9.6014.0037.500.50

15.0020.40

NewQuota

62.0020.0055.0055.00

500.00

11.2515.0058.3311.2545.0022.50

TABLE 49. PURCHASES OF CURRENCIES FROM THE FUND,FISCAL YEAR ENDED APRIL 30, 1965


Members Under Stand-By TotalPurchasing Arrangements Other Purchases

AfghanistanBrazilBurundiCeylonChile

ColombiaCosta RicaCyprusDominican RepublicEcuador

HaitiHondurasIndiaIranIsrael

LiberiaMaliMoroccoNicaraguaPakistan

PanamaSomaliaSudanSyrian Arab RepublicTunisia

TurkeyUnited Arab RepublicUnited KingdomUnited States

50.002.00

22.00

5.005.00

20.003.00

3.752.50

125.00

3.309.90

5.65

6.70

6.5011.25

16.0040.00

1,000.00475.00

5.63 5.6350.002.00

8.00 8.0022.00

5.005.00

1.95 1.9520.00

3.00

3.752.50

125.0017.50 17.5012.50 12.50

3.309.90

13.12 13.125.65

16.00 16.00

2.69 2.696.70

7.50 7.506.50

11.25

16.0040.00

1,000.00475.00

$72 million; the Syrian Arab Republic, from $25million to $30 million; and Thailand, from $45million to $76 million. These increases becomeeffective when the members concerned notify theFund that they consent to the increases. In theperiod May 1-June 30, 1965, notifications werereceived from Guatemala, Saudi Arabia, andThailand. In that same period the Board of Gov-ernors approved, under the terms of the Com-pensatory Financing Decision, increases in thequotas of Iraq, from $55 million to $64 million,and of Jordan, from $11.25 million to $12.25million.

Fund TransactionsTable 49 lists the purchases of currencies from

the Fund during the year, Table 50 the position

TABLE 50. POSITION OF PARTICIPANTS IN GENERALARRANGEMENTS TO BORROW


Participant

BelgiumCanadaFranceDeutsche BundesbankItalyJapanNetherlandsSveriges RiksbankUnited KingdomUnited States

Total

MaximumAmountsof Credit •Arrange-

ments

150200550

1,000550250200100

1,0002,000

6,000

Amounts Borrowedby Fund

Dec.1964

30.015.0

100.0180.0

5.020.040.015.0

405.0

May1965

37.535.0

140.0167.565.025.037.517.5

525.0

BalanceAvailable,

May 31, 1965,Under Credit

Arrange-ments

82.5150.0310.0652.5480.0205.0122.567.5

1,000.02,000.0

5,070.0

TABLE 51. CURRENCIES PURCHASED BY THE FUND WITHGOLD, DECEMBER 1964 AND MAY 1965


Totals 1,812.55 84.89 1,897.44

Equivalent of AmountPurchased

Members' Currencies

Austrian schillingsBelgian francsCanadian dollarsDanish kronerDeutsche markFrench francsItalian lireJapanese yenNetherlands guildersSpanish pesetasSwedish kroner

Dec. 1964

8.017.09.0

93.063.03.0

14.026.010.07.0

May 1965

27.527.55.0

132.592.532.522.532.515.012.5

Total 250.0 400.0


of each participant in the General Arrangementsto Borrow after the completion of the two trans-actions with the United Kingdom discussed inChapter 4, and Table 51 the currencies purchasedwith gold in connection with these transactions.

Table 52 gives details of stand-by arrange-ments in force during the fiscal year. Some par-ticulars of these arrangements follow.

ACTIVITIES OF THE FUND

Brazil

109

In January 1965, the Fund agreed to a stand-by arrangement with Brazil authorizing purchasesequivalent to $125 million; $75 million had beendrawn by June 30. The purpose of the arrange-ment is to support the efforts of the Brazilianauthorities to bring about a sharp reduction in

TABLE 52. FUND STAND-BY ARRANGEMENTS WITH MEMBERS, FISCAL YEAR ENDED APRIL 30, 1965


Member

Bolivia

BrazilBurundiChile

ColombiaCosta RicaDominican RepublicEcuador

El SalvadorHaiti

Honduras

India

IndonesiaJamaicaJapanKoreaLiberia

MaliNicaraguaPakistanParaguayPeru

Philippines

Somalia

Syrian Arab RepublicTunisiaTurkey

United Arab RepublicUnited Kingdom

United States

Total

Date ofInception

Sept. 4, 1963Sept. 1, 1964Jan. 13, 1965Jan. 26, 1965Feb. 14, 1964Jan. 6, 1965Feb. 14, 1964Feb. 1, 1965Aug. 1, 1964July 1, 1963July 1, 1964Sept. 13, 1963Oct. 1, 1963Oct. 1, 1964July 18, 1963Aug. 5, 1964July 9, 1963Mar. 22, 1965Aug. 1,-1963June 13, 1963Mar. 11, 1964Mar. 22, 1965June 1, 1963June 1, 1964July 1, 1964Apr. 1, 1964Mar. 16, 1965Nov. 23, 1964Mar. 1, 1964Apr. 8, 1965Apr. 12, 1964Apr. 12, 1965May 1, 1964Jan. 19, 1965Mar. 12, 1964Oct. 1, 1964Feb. 15, 1964Feb. 1, 1965May 23, 1964Aug. 8, 1963Aug. 8, 1964July 22, 1963July 22, 1964

Date ofExpiration

Sept. 3, 1964 'Aug. 31, 1965Jan. 12, 1966Jan. 25, 1966Feb. 13, 1965 2

Jan. 5, 1966Feb. 13, 1965Jan. 31, 1966July 31, 1965June 30, 1964June 30, 1965Sept. 12, 1964Sept. 30, 1964Sept. 30, 1965July 17, 1964Aug. 4, 1965July 8, 1964Mar. 21, 1966July 31, 1964June 12, 1964Mar. 10, 1965Mar. 21, 1966May 31, 1964May 31, 1965June 30, 1965Mar. 31, 1965Mar. 15, 1966Nov. 22, 1965Feb. 28, 1965Apr. 7, 1966Apr. 11, 1965Apr. 11, 1966Apr. 30, 1965 8

Jan. 18, 1966Dec. 31, 1964Sept. 30, 1965Dec. 31, 1964Dec. 31, 1965May 22, 1965Aug. 7, 1964Aug. 7, 1965July 21, 1964July 21, 1965

Amount

10.0012.00

125.004.00

25.0036.0010.0010.0025.00

6.0013.005.004.004.007.507.50

100.00200.0050.0010.00

305.009.305.704.409.90

11.2537.505.00

30.0030.0040.4040.404.705.60

18.5014.2521.5021.5040.00

1,000.001,000.00

500.00500.00

New or Renewedin 1964/65

12.00125.00

4.00—36.00—10.00

25.00—13.00

——4.00

7.50

200.00

9.30

4.409.90—37.505.00—30.00

40.404.705.60

—14.25

—21.5040.00

—1,000.00—500.00

2,159.05

AmountAvailable

April 30, 1965

12.0075.00

2.00

—24.00—5.005.00—10.00

——1.75

5.00

75.00

9.30__

1.10

——37.505.00—30.00

—40.40

—3.60

—3.00

—21.50

————150.00

516.15

1 Canceled on August 31, 1964.2 Canceled on January 5, 1965.3 Canceled on January 18, 1965.



the rate of inflation, to achieve a better balanceof external accounts, and to facilitate the coun-try's further economic development, as discussedin Chapter 8.

Burundi

Also in January 1965 a stand-by arrangementfor $4 million was agreed with Burundi in con-junction with the establishment of an initial parvalue for the Burundi franc and the introductionof a comprehensive set of stabilization measures.Under the stand-by arrangement, $2 million wasdrawn by Burundi in April.

Costa Rica

In conjunction with Costa Rica's acceptance ofthe obligations of Article VIII, Sections 2, 3, and4, the Fund agreed in February 1965 to a stand-by arrangement which permits Costa Rica topurchase from the Fund currencies equivalent to$10 million; the equivalent of $5 million hadbeen drawn by June 30. The arrangement wasdesigned to provide additional resources to sup-port the efforts of Costa Rica to maintain finan-cial stability and preserve the convertibility of thecolon.

Dominican Republic

A stand-by arrangement with the DominicanRepublic for the equivalent of $25 million wasintroduced in August 1964 to support the Gov-ernment's policies in the fields of exchange, taxa-tion, and monetary control, aimed at strengthen-ing the country's balance of payments, stabiliz-ing internal costs and prices, bringing about anearly settlement of outstanding payment arrears,and restoring full convertibility of the peso. Underthe arrangement, $20 million had been drawn byJune 30.

India

A stand-by arrangement with India, agreed inMarch 1965, authorizes purchases of currenciesequivalent to $200 million; $150 million had beendrawn by June 30. The arrangement was de-signed to strengthen India's reserve position andsupport the efforts being made by the authorities

to overcome the country's balance of paymentsdifficulties. These efforts include the introductionof higher rates of interest, restraints on the ex-pansion of bank credit, the imposition of aregulatory duty on certain imports, and the adop-tion of a budget aimed at providing a betterbalance in the Government's own financial ac-counts.

Korea

A stand-by arrangement with Korea, alsoentered into in March 1965, authorizes drawingsequivalent to $9.3 million, to reinforce Korea'sforeign exchange reserves and support the stepsbeing taken by the Korean authorities to reformthe present exchange system and relax restric-tions on trade and payments. No drawing underthis arrangement was made in the fiscal year.

Mali

A stand-by arrangement with Mali, introducedin July 1964, permits drawings equivalent to $9.9million and provides support for a comprehensivestabilization program introduced by the Mali au-thorities. The full amount available under thearrangement has been drawn.

Pakistan

In March 1965 the Fund entered into a stand-by arrangement with Pakistan, authorizing draw-ings up to a total of $37.5 million. Pakistan'sforeign exchange reserves had been declining asa result of a sharp rise in its imports, associatedwith an import liberalization program and alsoreflecting a substantial increase in bank credit,especially in the private sector. The stand-byarrangement will assist Pakistan to meet its tem-porary balance of payments difficulties whiletaking appropriate steps to restore external equi-librium. Nothing was drawn under this arrange-ment during the fiscal year.

Paraguay

A stand-by arrangement with Paraguay, agreedin November 1964, authorizes drawings equiva-lent to $5 million. It is intended to provide sup-port for the country's reserve position in theevent of temporary balance of payments difficul-


ACTIVITIES OF THE FUND 111

ties and to assist in the country's efforts to ac-celerate economic growth in conditions of mone-tary stability. Paraguay did not find it necessaryto draw under the arrangement during the fiscalyear.

Somalia

Under its first stand-by arrangement, effectivefrom May 1, 1964, Somalia drew a total of $4.7million, which was the full amount available.This arrangement was canceled on January 18,1965 and a new arrangement permitting drawingsequivalent to $5.6 million was agreed, effectivefrom January 19, under which the equivalent of$3 million had been drawn by June 30. Botharrangements were in support of a unified andliberal exchange and trade control system beingestablished by Somalia.

Tunisia

The stand-by arrangement with Tunisia, agreedin October 1964, authorizes drawings up to$14.25 million; the equivalent of $11.25 millionhad been drawn by June 30. The arrangementwill support stabilization measures introduced bythe Tunisian authorities, aimed at an improve-ment in the balance of payments and the restora-tion of financial stability while at the same timeallowing a satisfactory rate of growth of theTunisian economy. These measures accompaniedthe establishment of a par value which effectivelydevalued the dinar by some 20 per cent.

United Arab Republic

To provide financial support for the renewedefforts being made by the United Arab Republicto stabilize its economy, the Fund agreed to astand-by arrangement in May 1964 permittingpurchases equivalent to $40 million; the fullamount has been drawn.

In addition to the stand-by arrangements al-ready discussed, arrangements were agreed duringthe year with Bolivia, Chile, Ecuador, Haiti,Honduras, Liberia, Peru, the Philippines, andTurkey. All were in continuation of the financialsupport that the Fund had accorded in the pre-

ceding year. Those with Bolivia, Chile, and Ecua-dor replaced arrangements for smaller amounts;those with Haiti, Honduras, Peru, the Philippines,and Turkey replaced arrangements for similaramounts; and that with Liberia replaced a largerone.

The stand-by arrangements agreed during theyear were all for a period of one year, exceptthat with Turkey, which was for 11 months.

Any drawing or stand-by arrangement thatwould increase the Fund's holdings of a member'scurrency by more than 25 per cent of its quotawithin any 12-month period (except to the extentthat the Fund's holdings of the member's cur-rency are less than 75 per cent of its quota) re-quires a waiver under Article V, Section 4, ofthe Articles of Agreement. During the fiscalyear, waivers for this purpose were required forall the stand-by arrangements except those withTurkey and the United States. However, no pur-chases made during the year, other than thoseunder stand-by arrangements, required a waiver.

Repurchases

During 1964/65, 25 members made repurchas-es equivalent to $517 million (Table 53). Ofthese members, 12 were in the Western Hemi-sphere, 4 in Europe, 4 in the Middle East, 4 inAsia, and 1 in Africa. Article V, Section 7(fc),of the Articles of Agreement provides that amember shall repurchase annually an amount ofthe Fund's holdings of its currency in excessof 75 per cent of its quota, equivalent to onehalf of any increase in the Fund's holdings of itscurrency that has occurred during the Fund'sfinancial year, plus or minus one half of any in-crease or decrease in its monetary reserves dur-ing the same period. Repurchases effected pur-suant to Article V, Section 7(£), are discussedbelow (p. 113). Of the repurchases not madepursuant to Article V, Section 7(6), most weremade on dates when repayments became due,in accordance with schedules to which membershad committed themselves, either at the time oftheir purchases from the Fund or later. Improve-ments in the monetary reserves positions of sev-eral members enabled them to make repurchasesbefore the expiration of the period for whichtheir drawings had been made available, thus



TABLE 53. REPURCHASES OF CURRENCIES FROM THEFUND, FISCAL YEAR ENDED APRIL 30, 1965

(In millions of US. dollars)

MembersRepurchasing

ArgentinaBoliviaBrazilCanadaCeylon

ChileColombiaCosta RicaEcuadorHonduras

IndiaIrelandIsraelItalyJamaica

JordanMalaysiaNicaraguaParaguayPhilippines

SomaliaSyrian Arab RepublicTurkeyUnited Arab RepublicYugoslavia

Amount

50.002.75

44.00107.15

3.75

13.0022.002.076.582.50

100.000.40

12.4965.340.24

0.301.14 i0.50

11.25

0.022.50

16.0018.0035.00

Total2 516.97

1 Less than $5,000.2 Total does not equal sum of items because of

rounding.

strengthening their secondary line of reserves inthe form of potential recourse to the Fund's re-sources. The drawing by Italy in 1963/64 andthe drawing by Canada in 1962/63 have beencompletely reversed through repurchases by themembers and through sales of Italian lire andCanadian dollars by the Fund to other members.

On the other hand, because of balance of pay-ments difficulties, 6 members were unable to meettheir repurchase commitments to the Fund whenthey fell due. The Executive Board agreed tonew repurchase schedules for 5 of these members.Under these schedules, repurchases are to bemade not later than 5 years from the purchasedate. The commitments of 4 members were re-lated to purchases made under stand-by arrange-ments with undertakings to repurchase within 3years from the date of purchase. Those of thefifth member related to a purchase under a

stand-by arrangement and to another purchase,made initially with a 6-month repurchase com-mitment, to which postponements had beenagreed by the Executive Board on three previousoccasions. One member's payment of the repur-chase obligation that it had incurred under Ar-ticle V, Section 7 (ft), as at April 30, 1964 waspostponed until July 1965 to coincide with themember's commitment to repurchase in respectof a purchase made under a stand-by arrange-ment.

In addition, when the Fund's holdings of thecurrencies of 3 members that had undertakento repurchase within 3 to 5 years in compliancewith the Executive Board Decision on the Useof Fund's Resources and Repurchases, adopted onFebruary 13, 1952,2 had not been reduced corre-spondingly after 3 years, these members sub-mitted repurchase schedules providing for re-purchases within 5 years from each purchase, andthe Fund agreed to these schedules.

Purchases and Repurchases by Currency

Purchases and repurchases during the yearended April 30, 1965 are classified by currencyin Table 54, in which the largest drawings, theequivalent of $1,000 million by the United King-dom and of $475 million by the United States,and repurchases equivalent to $107.15 millionby Canada and $65.34 million by Italy are shownseparately. Mainly as a result of these transac-tions, the Fund's holdings of sterling rose to125.6 per cent of quota on April 30, 1965; itsholdings of U.S. dollars rose to 82.8 per cent;its holdings of Canadian dollars were reduced bythe equivalent of US$210 million, from 96 percent to 58 per cent; and its holdings of Italianlire were reduced by the equivalent of $120 mil-lion, to 64 per cent of quota. The Fund's hold-ings of Austrian schillings became proportionatelythe lowest Fund holdings of any currency, falling,by the equivalent of $25 million, to 3V4 per centof the member's quota by April 30, 1965, andthe Fund's holdings of deutsche mark fell by theequivalent of $59.4 million, to 11.4 per cent.During the year there was a net use of the equiva-

2 Decision No. 102-(52/ll); see Selected Decisions,pages 21-24.



TABLE 54. DRAWINGS AND REPURCHASES BY CURRENCY, FISCAL YEAR ENDED APRIL 30, 1965


Drawings Repurchases

Currency

GoldAustralian poundsAustrian schillingsBelgian francsCanadian dollars

French francsDeutsche markItalian lireJapanese yenMexican pesos

Netherland guildersSpanish pesetas 3

Swedish kronerPounds sterlingU.S. dollars

Total

UnitedKingdom

_—

28.057.069.0

163.0273.0

23.054.0

—66.040.027.0

—200.0

1,000.0

UnitedStates

_

—7.57.5

25.0

55.0290.0

25.0

——

57.5

—7.5

——

475.0

OtherCountries

_

25.09.0

12.053.0

75.053.335.320.05.0

6.010.010.018.990.0

422.4 2

Total

_

25.044.576.5

147.0

293.0616.3

83.374.05.0

129.550.044.518.9

290.0

1, 897.4 2

UnderArticle V,Sec. l(bY Canada

1.2 —

— —— —— —— —

— 82.2

— —— —— —

— 25.0

— —— —1.8 —0.1 —

3.1 107.2

Italy

_

—3.73.7—

15.335.2

———3.7

—3.7

——

65.3

OtherCountries

5.5

—7.87.8

20.5

63.7166.620.515.0—

28.8

—3.81.5

—

341.4 2

Total

6.6 2

—11.511.520.5

79.0283.9 2

20.515.0

—57.5

—7.53.30.1

517.0 2

1 Including discharges in respect of previous years.2 Total does not equal sum of items because of rounding.8 The peseta is not formally convertible and cannot be accepted for repurchases.

lent of $25 million of Australian pounds, $18million of Belgian francs, $48.6 million of Frenchfrancs, $25 million of Japanese yen, $5 millionof Mexican pesos, $6 million of Netherlandsguilders, $40 million of Spanish pesetas, and $15million of Swedish kroner.

Monetary Reserves and Repurchase Obligations

In accordance with Executive Board DecisionNo. 1510-(63/23), adopted on May 3, 1963,each member, the amount of whose currency heldby the Fund on any April 30 exceeds 75 per centof its quota, is required to report provisional mon-etary reserves data to the Fund not later than thefollowing May 31.3 Furthermore, Rule 1-6 ofthe Fund's Rules and Regulations requires allmembers to provide final monetary reserves datato the Fund within six months of the end of eachfinancial year of the Fund, i.e., by October 31.

3 This procedure was confirmed, after review by theExecutive Directors, by Decision No. 1813-(65/4),adopted on January 18, 1965 (reproduced in Appendix I,below, and in Selected Decisions, p. 53).

On April 30, 1964 the above-mentioned deci-sion applied to 39 members. Repurchase obliga-tions for 10 members were calculated on a provi-sional basis, arid the same 10 members subse-quently incurred repurchase obligations calculatedon a final basis. Their total amounted to theequivalent of $4,344,368.05, which was payablein gold and convertible currencies, as indicatedin Table 55. This table sets out the total net re-purchase obligations incurred by members underArticle V, Section 7(fc) , since the inception ofthe Fund. It reflects the fact that Canadian dol-lars, Salvadoran colones, Guatemalan quetzales,Honduran lempiras, Italian lire, and U.S. dollarscould not be accepted by the Fund in dischargeof repurchase obligations incurred on April 30,1964, since on that date the Fund's holdings ofeach of these currencies were above 75 per centof the respective member's quota. As a result, anamount equivalent to $20,292,923.73 was abated.Further, repurchase obligations in pounds sterlingcould be discharged only to the extent that theFund's holdings of that currency on April 30,1964 were below 75 per cent of the U.K. quota;



TABLE 55. REPURCHASE OBLIGATIONS UNDER ARTICLE V, SECTION 7(b), OF THE FUND AGREEMENT,AT APRIL 30, 1948-64

(In thousands of U.S. dollars)

Number ofMembers TotalAffected Amount

19481949195019511952

19531954195519561957

19581959196019611962

19631964

34674

5107

108

7888

10

1710

7,33627,29947,59468,60839,182

84,48480,525

195,79432,581

104,010

238,975308,754201,55068,31081,645

97,0524,344

Gold

9299,439

21,15619,12538,340

35,55434,44068,22211,11838,228

90,998142,994124,96853,63318,857

27,2421,850

U.S.Dollars

6,40717,86126.43849,483

842

48,92046,084

127,55421,45065,775

147,848165,71176,19214,36661,341

62,615—

Pounds CanadianSterling Dollars

_ __

— —— —— —— —

— 10

— —— 18— 13— 3

— 124— 48— 379— 298

7

7,011 —1,627 —

Deutsche French OtherMark Francs Currencies

_ _ _ _ _

— — —— — —— — —— — —

— — —— — —— — —— — —— — 5

— — 5

— — —— — 11— — 13

1,330 3 106 *

73 106 6318 14 536 2

1,688,043 737,093 938,887 8,638 900 1,721 123 682

Includes the equivalent of $22,000 in Italian lire, $49,000 in Netherlands guilders, and $28,000 in Swedishkroner.

2 Includes the equivalent of $56,000 in Austrian schillings, $148,000 in Belgian francs, and $332,000 in Nether-lands guilders.

of the repurchase obligations that accrued in thiscurrency an amount equivalent to $1,140,702.68was abated. Simultaneously, the limitation onrepurchase obligations imposed by Article V,Section 7(c)(i), which provides that repurchasesshall not be carried to a point at which therepurchasing member's monetary reserves arebelow its quota, has become applicable to a widerextent as members' quotas have been increased.Of the total gross repurchase obligations atApril 30, 1964, calculated on a final basis, noless than 83 per cent was abated.

At the end of October 1964, a total of 32members had not submitted monetary reservesdata. Most of these were new Fund members inthe process of establishing reporting systems tocollect the information necessary to comply withthe Fund's requirements. By the end of April1965, data from 9 members were still outstand-ing. None of these members could have incurreda repurchase obligation at April 30, 1964, asthe currencies of 8 members were not held by theFund on that date, and the Fund's holdings of

the ninth member's currency were below 75 percent of the member's quota.

Summary of Transactions, 1948-65

Between the inception of Fund operations andApril 30, 1965, 58 members purchased currencyfrom the Fund and 3 other members had stand-by arrangements without drawing under them.Of these 61 members, 20 were in Central andSouth America, 14 in Europe, 9 in Africa, 8 inthe Far East and Western Pacific, 7 in the MiddleEast, and 3 in North America. Total sales bythe Fund were equivalent to $9.37 billion. Thetransactions are summarized in Table 56. Draw-ings outstanding at April 30 in each year, to-gether with the amounts available (but not used)under stand-by arrangements on the same date,are shown in Chart 30.

By April 30, 1965, drawings made by 47members had been wholly or partly reversed,either through repurchases in gold or convertiblecurrencies or as a result of purchases of their



CHART 30. OUTSTANDING BALANCES OF DRAWINGS FROM THE FUND, AND UNUSED STAND-BY ARRANGEMENTS, ONAPRIL 30, 1948-65


1 United States included in 1964 and 1965 only.2 Belgium, Canada, Denmark, France, Italy, Japan, Netherlands, and Norway.



TABLE 56. SUMMARY OF FUND TRANSACTIONS, FISCALYEARS ENDED APRIL 30, 1948-65


19481949195019511952

19531954195519561957

19581959196019611962

196319641965

Total Purchasesby Members

606.04119.4451.8028.0046.25

66.12231.2948,7538.75

1,114.05

665.73263.52165.53577.00

2,243.20

579.97625.90

1,897.44

Total Stand-ByArrangements

in Forceat End of

Fiscal Year

_

————

53.0090.0090.0097.50

968.90

884.281,132.84

291.88338.62

1,942.88

1,287.251,970.15

516.15

TotalRepurchases

byMembers

__

—24.2119.0936.58

184.96145.11276.28271.6675.04

86.81537.32522.41658.60

1,260.00

807.25380.41516.97

Total' 9,368.78 5,802.68 *

1 Totals may not equal sums of items because ofrounding.

2 Including $281.6 million repurchased in excess ofdrawings. Of. this amount, $257.5 million representsrepurchases that reduced the Fund's holdings of mem-bers' currencies below the amounts originally paid onsubscription account, and $24.1 million represents re-purchases of members' currencies paid as charges. Re-purchases do not include sales of currencies equivalentto $1,067.2 million offset by adjustments of $8.7 mil-lion, making a net total of $1,058.5 million havingthe effect of repayment.

currencies by other members. On that date thetotal amount of members' purchases still out-standing was equivalent to US$2,789.3 million:the amounts drawn had been outstanding forthe following periods:

12 months or less13 to 18 months19 to 24 months25 to 30 months31 to 36 months37 to 42 months43 to 48 months49 to 54 months55 to 60 months

Amount inmillions ofU.S. dollars

1,725.746.2

214.0104.9162.888.7

349.373.224.5

Number ofmembersinvolved

288

1310115763

Fund Charges

Currently, 26 members are paying the chargeslevied by the Fund on its holdings of members'currencies in excess of their quotas; the amountof such charges incurred during the year totaled$35.9 million, compared with $31.5 million dur-ing the preceding year. Since the beginning ofthe Fund's operations, 48 members have beensubject to such charges. At present, part of thesecharges is paid by 4 members in their own cur-rencies, in accordance with Article V, Section 8(/),of the Fund Agreement, which permits such pay-ments if a member's monetary reserves are lessthan half of its quota. The present schedule ofcharges to be levied on the Fund's holdings ofa member's currency in excess of quota, whichhas been in effect from May 1, 1963, was re-viewed by the Executive Board and extended untilApril 30, 1966. The schedule is reproduced ineach issue of International Financial Statistics.Service charges on drawings totaled $9.5 millionduring the year under review, compared with$3.1 million in 1963/64. Charges collected onstand-by arrangements, after deduction of theamounts credited against service charges if andwhen drawings were made under the arrange-ments, and of refunds resulting from changes inthe level of the Fund's holdings of members'currencies that re-created or increased the mem-ber's gold tranche, totaled $0.9 million duringthe year ended April 30, 1965. These chargesare not considered as income until the expira-tion or cancellation of the stand-by arrangement;the income derived from them in the past fiscalyear was $2.1 million. Charges paid by theFund in accordance with paragraph 9(a) of theGeneral Arrangements to Borrow amounted to $2million, and interest paid by the Fund in accord-ance with paragraph 9(b) amounted to a totalof $2.5 million. Both charges and interest werepaid in gold.

Consultations with Members

Member countries that are availing themselvesof transitional arrangements in accordance withArticle XIV, Section 2, of the Fund Agreementare required by that Article to consult with theFund annually on the retention of their exchange



restrictions. These consultations have continuedto provide opportunities for the examination ofthe economic and financial problems that havegiven rise to restrictive and discriminatory prac-tices, and the Fund has again continued its en-deavors to help in the elimination of such prac-tices. Several of the consultations under ArticleXIV have been combined with discussions ofnew financial programs or have included reviewsof such programs already being implemented.During the fiscal year 1964/65, consultationsunder Article XIV were concluded with 43 coun-tries; with others, the procedure had been initi-ated but had not been completed by the end ofthe fiscal year.

Consultations were also held with 22 membersthat have accepted the obligations of Article VIII,Sections 2, 3, and 4, of the Fund Agreement.Consultations with one Article VIII country werestill in progress at the end of the fiscal year. TheExecutive Board Decision No. 1034-(60/27) ofJune 1, I9604 stressed the merit of holdingperiodic discussions between the Fund and itsmembers even if no question involving actionunder Article VIII should arise. These discus-sions include exchanges of views on monetaryand fiscal developments and enable the Fund tofurther the objective of securing the fullest pos-sible degree of consultation and collaboration oninternational monetary problems.

Relations with Other InternationalOrganizations

As in previous years, many of the organiza-tions which have responsibilities in fields relatedto the Fund's, and with which the Fund main-tains particularly close contacts—the United Na-tions (UN), the CONTRACTING PARTIES to theGeneral Agreement on Tariffs and Trade(GATT), the Organization for Economic Co-operation and Development (OECD), the Bankfor International Settlements (BIS), and theInter-American Development Bank (IDB)—were represented at the joint Annual Meetings inTokyo of the Fund and the International Bankfor Reconstruction and Development (IBRD),

4 Selected Decisions, pages 81-83.

with which the Fund has a special relationship.During the fiscal year, Fund representatives at-tended meetings of these organizations and con-tinued direct working relationships with theirstaffs.

The Managing Director of the Fund addressedthe 38th Session of the UN Economic and SocialCouncil (ECOSOC), at which the Annual Reportof the Fund was presented. Fund representa-tives attended, among other UN meetings, the19th Session of the General Assembly, the 37thand 38th Sessions of ECOSOC, the 13th and 14thSessions of the Governing Council of the SpecialFund, meetings of the Economic Commissionsfor Africa, Asia and the Far East, Europe, andLatin America, and the 1st Session of the newlycreated UN Trade and Development Board. TheManaging Director and the Deputy ManagingDirector attended meetings of the UN Adminis-trative Committee on Coordination, and Fundrepresentatives participated in meetings of itsPreparatory Committee and subsidiary Consulta-tive Committees. Members of the staff partic-ipated in meetings of the UN Inter-RegionalWorkshop on Problems of Budget Classificationand Management in Copenhagen, the Inter-Agency Meeting on Delected Management Prob-lems in Paris, and the Conference of EuropeanStatisticians' Working Group on National Ac-counts and Balances in Geneva. In the area ofcommodities, a Fund representative attended theInternational Tin Conference in New York andmeetings in Washington of the International Rub-ber Study Group's Management Committee andthe International Cotton Advisory Commitee.

The Fund, in cooperation with the IBRD,assisted the UN Economic Commission forAfrica in making arrangements for, and wasrepresented at, a meeting of African monetaryauthorities in Tokyo, held after the joint AnnualMeetings, and Fund representatives attended theinaugural meeting of the African DevelopmentBank in Lagos.

Following the extension of existing arrange-ments for cooperation with the OECD, Fundrepresentatives have attended meetings of itsEconomic Policy Committee's Working Party 3,which is concerned with policies for the promo-tion of better international payments equilibrium.



The Managing Director and other Fund repre-sentatives attended meetings of the BIS in Basle.

In Latin America, Fund representatives at-tended the third annual meetings in Lima of theOrganization of American States (OAS) Inter-American Economic and Social Council at theExpert and Ministerial Levels, the sixth annualmeeting of the Board of Governors of the IDB inAsuncion, and the first Regional Meeting of LatinAmerican"Bankers in Mar del Plata, Argentina;participated informally in an advisory capacityin a series of meetings of the Inter-AmericanCommittee on the Alliance for Progress (CIAP)held in Washington; and participated in the eighthoperational meeting of the Latin American Centerfor Monetary Studies (CEMLA) in Caracas.

A Fund staff member attended the 51st Con-ference of the International Law Association inTokyo.

Fund representatives have attended sessionsand other meetings of the CONTRACTING PARTIESto the GATT in Geneva. The CONTRACTINGPARTIES consulted the Fund in connection withtheir consideration of import restrictions main-tained by individual countries for balance of pay-ments reasons, as well as in other connectionswhere balance of payments or exchange matterswere involved. The Fund transmitted to theCONTRACTING PARTIES the decisions and back-ground material resulting from its own consulta-tions with various governments consulting underthe balance of payments provisions of the GATT;Fund representatives cooperated with the Com-mittee on Balance of Payments Restrictions andwith other GATT bodies dealing with relatedmatters.

Staff

At the end of the fiscal year, the Fund staffnumbered 674, including 19 temporary employeesand 1 on extended leave. This total representsa net increase of 79 over the total at the begin-ning of the year. During the year, 153 new staffmembers were appointed from 42 member coun-tries. Nationals of 64 countries are now on thestaff.

The Exchange Restrictions Department hasbeen reorganized and renamed the Exchange andTrade Relations Department, in consideration of

a number of changes in its role and responsibil-ities. It will continue to work in the field ofexchange restrictions and multiple currency prac-tices. In addition, it will study and evaluate theFund's activities with regard to exchange re-forms, stabilization policies, and stand-by ar-rangements and will be concerned with a numberof other matters, including regional paymentsarrangements and debt renegotiations. The De-partment will be primarily responsible for theFund's collaboration with the GATT and withthe United Nations Conference on Trade andDevelopment (UNCTAD), which was estab-lished in January 1965 as an organ of the UNGeneral Assembly.

Publications

The Fund's regular program of publicationswas continued in 1964-65: Annual Report of theExecutive Directors for the Fiscal Year EndedApril 30, 1964 (Nineteenth Annual Report),with shortened versions in French, German, andSpanish; Balance of Payments Yearbook, Volume16, 1959-63; Fifteenth Annual Report on Ex-change Restrictions; International Financial NewsSurvey, weekly; International Financial Statistics,monthly, Supplement to 1964/65 Issues, andSupplement on Money; Schedule of Par Values,38th and 39th issues; Staff Papers, Volume XI,Nos. 2 and 3, and Volume XII, No. 1; and Sum-mary Proceedings of the Nineteenth Annual Meet-ing of the Board of Governors.

In conjunction with the International Bankfor Reconstruction and Development, the Fundpublished Direction of Trade, monthly, andFinance and Development, quarterly (English,French, and Spanish editions).

Other publications of the Fund in 1964-65were Selected Decisions of the Executive Direc-tors and Selected Documents (third issue, Janu-ary 1965—previously entitled Selected Decisionsof the Executive Directors) and four pamphletsdescriptive of the Fund's activities: Introductionto the Fund; The International Monetary Fund:Its Form and Functions; The International Mone-tary Fund and Private Business Transactions:Some Legal Effects of the Articles of Agreement;



and The International Monetary Fund and Inter-national Law: An Introduction. All these pam-phlets have been published in English and somein French and Spanish; French and Spanish trans-lations of the others are in preparation.

All the above are available without charge ex-cept for the Balance of Payments Yearbook, In-ternational Financial Statistics (and Supple-ments), Staff Papers, and Direction of Trade,which are available by subscription. Hithertothese publications have cost a total of $33.50 ayear to general subscribers and $30.50 a year touniversities; they have now been made availableto university libraries, faculties, and students atthe special rate of $3 a year for any one of themor $10 a year for all four.

Administrative Finance

During the financial year, the Fund's operatingincome, equivalent to $47.7 million, exceeded itstotal expenditure by $25.5 million. This amountwas transferred provisionally to the General Re-serve pending action by the Board of Governors.The General Reserve now totals the equivalentof $141.8 million.

The Fund continued to invest a part of itsgold holdings in U.S. Government securities, withthe understanding that the same quantity of gold

can be reacquired whenever the investment isterminated. The amount so invested was $800million. The income therefrom amounted to$30.75 million for the financial year; it wascredited to a Special Reserve, which showed abalance of $148.3 million on April 30, 1965.

The administrative budget approved by theExecutive Directors for the period May 1, 1965-April 30, 1966 is presented in Appendix IV.Comparative income and expenditure figures forthe fiscal years ended 1963, 1964, and 1965 aregiven in Appendix V.

The Executive Board requested the Govern-ments of El Salvador, Thailand, and the UnitedKingdom to nominate members of the AuditCommittee for 1965. The following nominationswere made and confirmed: Mr. Juan SamuelQuinteros, Superintendent, Superintendency ofBanks and Other Financial Institutions, CentralBank of El Salvador; Mr. Panas Simasathien,Chief of Accounting and Fiscal Systems Division,Comptroller General's Department, Ministry ofFinance, Thailand; Mr. Ronald William Tizard,Deputy Director of Audit, Exchequer and AuditDepartment, United Kingdom. The report of theCommittee is submitted separately. Appendix VIgives the Auditors' Certificate, together with theaudited Balance Sheet as at April 30, 1965 andthe audited Statement of Income and Expendi-ture for the financial year.


APPENDICES


Appendix I. EXECUTIVE BOARD DECISIONS AND REPORTTO BOARD OF GOVERNORS

A. Calculation of Repurchase Obligations:

Prompt Reporting of Monetary Reserves Data

1. Where on any April 30 the Fund holds a member's currency in an amount ex-ceeding 75 per cent of the member's quota, the member shall make a provisionalmonetary reserves report to the Fund not later than May 31, preferably by cable.

2. The Fund will make a provisional calculation of the amount and distribution ofthe' repurchase obligations of such members and will inform them of the results of thecalculation not later than June 15. Members shall discharge within thirty days anyrepurchase obligations as thus provisionally calculated and agreed with the member.

3. All provisional repurchases shall be subject to adjustment by members and theFund in accordance with Rule 1-6 of the Fund's Rules and Regulations.

Decision No. 1813^(65/4)

January 18, 1965

B. Procedure for Drawings in the Gold Tranche

When a duly authenticated request to draw in the gold tranche is received from amember, the request shall be notified to the Executive Board on the day it is received,whenever possible, or on the next business day, and unless, by the close of that businessday, the Managing Director decides or an Executive Director requests that the matterbe placed on the Board's agenda for discussion, the Fund shall, at the close of the firstbusiness day following the date of the receipt of the request, instruct the appropriatedepository to make the transfer on the next business day after the instruction or assoon as possible thereafter.

Decision No. 1745-+64/46)

August 3, 1964

123


Appendix I (continued). EXECUTIVE BOARD DECISIONS AND REPORT

C. Increases in Quotas of Members—Fourth Quinquennial Review

Report of the Executive Directors to the Board of Governors

1. At its Nineteenth Annual Meeting in Tokyo, the Board of Governors adopted thefollowing Resolution:

RESOLVED:

That the Executive Directors proceed to consider the question of adjusting thequotas of members of the Fund and at an early date submit an appropriate proposalto the Board of Governors.

2. Pursuant to this Resolution, the Executive Directors have considered the question ofadjusting the quotas of members and have concluded that in a world in which incomeand trade have expanded rapidly and are expected to do so, the need for the type ofliquidity provided by the Fund, like the need for international liquidity in general, maybe expected to grow. A reasonable expansion in quotas would increase the Fund'sresources relative to the calls that are likely to be made upon them and enhance confi-dence in the Fund's ability to meet all justifiable requests for drawings. Provision ofadequate resources, enabling the Fund to meet needs with a greater margin of safety,may also reduce those needs by marshaling the resources and demonstrating the interna-tional cooperation that could deter speculation. Accordingly, the Executive Directorshave decided that proposals for increases in present quotas of 25 per cent, subject to theappropriate rounding of the resulting figures, and for larger increases for certain membersshould be submitted to the Board of Governors. For the purposes of this Report, presentquotas are quotas as of February 26, 1965 or the maximum amount to which quotascould be increased under Resolutions adopted by or submitted to the Board of Governorsbefore that date. The general increases of 25 per cent are provided for by the First oftwo Resolutions submitted to the Board of Governors with this Report. The formula forrounding the increased quotas is as follows: amounts below $500 million are roundedto the next higher multiple of one million, and amounts of $500 million or more arerounded to the next higher multiple of five million. The quotas to which members canconsent under the First Resolution are shown in the Annex to this Report. The SecondResolution submitted with this Report provides for the special (i.e., larger) increases. Ifthe Board of Governors agrees to propose a special increase for a member under theSecond Resolution, the member will be able to consent to that increase or to the smallerincrease under the First Resolution. When such a member consents, it should declareunder which Resolution it is choosing to consent, and its choice will then be final.

3. The increases in quotas under the attached Resolutions are without prejudice to theadjustment of quotas that members can request under the Fund's Decision on "Com-pensatory Financing of Export Fluctuations" (E.B. Decision No. 1477-(63/8), Febru-ary 27, 1963). In this connection, E.B. Decision No. 1529-(63/33), June 14, 1963will continue to be applicable.

4. The attached Resolutions are designed to enable the Board of Governors to vote atone time on all matters connected with the increases in quotas under the two Resolu-tions. Governors are requested to vote on both Resolutions. The First Resolution is to

124



be voted on as a whole. In the case of the Second Resolution, Governors may vote onall or each of the special increases. Under the Resolutions, it will be possible for in-creases in quotas to become eflfective without the need for further reference to the Boardof Governors. Attention is drawn to the requirement that, to be valid, votes must bereceived at the seat of the Fund on or before March 31, 1965.

5. If the Resolutions are adopted by the necessary majority of four-fifths of the totalvoting power, as required by Article III, Section 2 of the Articles of Agreement, amember may consent to the increase in its quota at any time on or before September 25,1965. Therefore, unless this period is extended by the Executive Directors, memberswill have until September 25, 1965 to take whatever action may be necessary undertheir laws to enable them to give their consent.

6. In view of the cooperative nature of the increase in quotas under the Resolutions,it is provided that increases will not become effective until the Fund has determinedthat members having two-thirds of the total of quotas on February 26, 1965 have con-sented to increases in their quotas. In determining whether this degree of participationhas been reached, the Fund will take into account all consents to increases, whetherthey be under the First or Second Resolutions and whether they be increases in full orby installments.

7. In view of past practice, any member consenting to a special increase under theSecond Resolution will be expected to request an increase in its subscription to thecapital of the International Bank for Reconstruction and Development corresponding tothe special part of the increase in quota.

8. Under the Resolutions, a member may pay its additional subscription in respect ofthe increase in its quota at any time before it is due. If a member pays before theincrease in its quota takes effect, the additional subscription will be kept in separateaccounts of the Fund and returned if it should be established that the increase cannottake effect. A member is required to pay its additional subscription not later than 30days after the later of the following events: (i) its consent to its quota increase, and(ii) the determination by the Fund, referred to in paragraph 6 above, that the conditionas to participation in quota increases has been satisfied.

9. Increases in members' quotas will take effect as follows:

(a) When a member pays its additional subscription before the later of the two eventsreferred to in the preceding paragraph, the increase in its quota will take effect on thehappening of the later of these events.

(b) If a member pays its additional subscription after the later of these two events,the increase in its quota will take effect on the day of payment.

10. Each member increasing its quota must pay an additional subscription equal to theincrease, of which 25 per cent shall be in gold and the balance in its currency. Paymentof both portions of the additional subscription must be made before the increase in themember's quota can become effective, even by those members which, in accordance withthe Articles of Agreement or Membership Resolutions, have not yet been required to paytheir original subscriptions.

125



11. The increase in quotas under the Resolutions is based on the idea of a cooperativeeffort by the members of the Fund to provide larger resources against contingenciesthat may affect any member. In order to preserve the general character of that effort, ithas been thought preferable not to exercise the discretion given to the Executive Direc-tors under Article III, Section 4 of the Articles of Agreement to reduce gold paymentsin connection with these Resolutions. However, the payment in gold of 25 per cent ofthe quota increase may cause hardship in some cases, and therefore the Executive Di-rectors have decided that the policies and practices described in the following paragraphsof this Report will be applied.

12. Under the Resolutions any member consenting to an increase in its quota may con-sent to an increase by installments. Each installment of the increase would correspondto the amount of additional subscription in gold and currency paid by the member. Anymember consenting to an increase by installments must pay an original installment ofadditional subscription, and an installment in each period of 12 months thereafter. Eachinstallment shall be one-fifth of the increase. Members may accelerate payment underthis installment schedule.

13. A member that wishes to have the full increase in its quota take effect immediatelyor to expedite the full increase in its quota if it is paying under the installment schedulemay find it a hardship to make prompt payment in gold of 25 per cent of the increasein its quota. In order to alleviate this hardship the member may request an exchangetransaction in accordance with paragraphs 14 through 19 below.

14. Where a member requests an exchange transaction within the gold tranche, the es-tablished gold tranche policy and procedure will apply.

15. A member consenting to an increase in its quota under the First Resolution mayrequest an exchange transaction beyond the gold tranche in an amount not in excess of25 per cent of the increase. This facility will be available where (a) the member repre-sents that it would encounter undue payments difficulties through the reduction in itsreserves by the payment of the 25 per cent gold subscription or of the outstandingbalance of that subscription; and (b) the member requests the exchange transactionwithin six months after the date of the consent to the increase or the determination bythe Fund that the condition as to participation in quota increases has been satisfied,whichever is later.

16. The Fund will expect that a member requesting an exchange transaction underparagraph 15 above will represent that it will make a repurchase corresponding to theexchange transaction in accordance with the principles of E.B. Decision No. 102-(52/ll)of February 13, 1952 and the following sub-paragraphs:

(i) The member will be expected to represent that it will make a repurchase corre-sponding to the exchange transaction in equal annual installments, to commence oneyear after the transaction and to be completed not later than five years after the trans-action.

(ii) If the member, when requesting the exchange transaction or at any time there-after, represents that, because of other repurchase commitments or for such otherreasons as it shall submit, the schedule referred to in (i) above would create unduepayments difficulties, the Fund may accept a representation that the member will repur-chase in accordance with the provisions of E.B. Decision No. 102-(52/11).

126



17. The representation of a member with respect to undue payments difficulties referredto in paragraphs 15 and 16 above would not be challenged by the Fund except where itwas clearly evident that the representation was without basis.

18. In order to facilitate the exchange transactions referred to in paragraph 15 above,the Fund will be prepared, where necessary, to grant a waiver of the quantitative limitsprescribed in Article V, Section 3 (a) (iii) of the Articles of Agreement. The Fund willalso be prepared to grant such a waiver, in appropriate cases, to the extent that an ex-change transaction in accordance with the preceding paragraphs is still outstanding.

19. A member requesting an exchange transaction in accordance with the precedingparagraphs will be expected to consult the Managing Director on the currency to bedrawn under E.B. Decision No. 1371-(62/36) of July 20, 1962. Many such membersare likely to use the currency drawn to purchase gold from the monetary authorities ofthe member whose currency was drawn either to pay their additional gold subscription orto restore the level of their gold holdings if they have already paid the additional sub-scription. Normally, these members would purchase the gold from a reserve currencymember. With a view to alleviating the impact on the gold holdings of the reservecurrency members that would result from such purchases, the Fund, in the course of theconsultation on the currency to be drawn, will suggest that certain of these exchangetransactions, up to the equivalent of $150 million, be made in currencies which the Fundwould then replenish by the sale of gold under Article VII, Section 2(ii) up to theamount of such transactions.

20. The exchange transactions and replenishment of currency referred to in the pre-ceding paragraphs will partially alleviate the impact of the additional gold subscriptionsof members on the gold holdings of the reserve currency members. However, it is ex-pected that, notwithstanding this alleviation and the likelihood that many members willmeet their additional gold subscription from their own gold holdings, other members willpurchase a substantial amount of gold from the reserve currency members, and inparticular the United States and the United Kingdom. In order to provide a measure offurther alleviation solely in connection with the quota increases provided for by theResolutions submitted with this Report, the Fund will make general deposits of gold withits gold depositories designated by the United States and the United Kingdom in a totalamount not exceeding the equivalent of $350 million. Approximately $250 million ingold will be placed on general deposit with the Fund's depository in the United Statesand approximately $100 million with the Fund's depository in the United Kingdom.Within the limit of $350 million or the reduced amount under paragraph 21 below,adjustments may be made in the amounts held on general deposit in these two deposi-tories on the basis of the actual impact on the gold holdings of each of the two membersof the sales of gold by them in connection with the additional subscriptions of othermembers.

21. If the Fund determines that the total sales of gold by the United States and theUnited Kingdom in connection with the additional subscriptions of other members areless than the equivalent of $350 million, the Fund will reduce its general depositsaccordingly.

127



22. The general deposits will be subject to the following principles:(a) A general deposit of gold by the Fund shall be a demand deposit. Accordingly,

the Fund shall be entitled, at its sole discretion and on its demand to the depository, tothe immediate transfer to an earmarked account in the sole name of the Fund at thedepository, free of any claims, liens or encumbrances in favor of any other party, of anamount of gold not in excess of the amount then held by the Fund on general depositwith the depository, which transfer shall be made without charge or cost to the Fund.

(b) Whenever a member that designated the depository with which a general depositis held so requests, the Fund shall demand that the depository transfer gold in theamount requested to an earmarked account.

(c) On the occasion of any use of gold, the Fund would normally use, in appropriateproportions, earmarked gold and gold on general deposit in accordance with the goodmanagement of its assets.

(d) The Managing Director will report periodically to the Executive Directors on theFund's general deposits, and the Executive Directors shall review the policy with respectto general deposits not later than five years after the first such deposit is made.

February 26, 7965

128



Annex to Report

1.2.3.4.5.6.7.8.9.

10.11.12.13.

14.15.16.17.18.19.20.

21.22.23.24.25.26.27.28.29.30.31.32.

33.34.35.36.37.38.39.40.41.42.43.44.45.46.47.48.49.50.51.

AfghanistanAlgeriaArgentinaAustraliaAustriaBelgiumBoliviaBrazilBurmaBurundiCameroonCanadaCentral African

RepublicCeylonChadChileChinaColombiaCongo (Brazzaville)Congo, Democratic

Republic ofCosta RicaCyprusDahomeyDenmarkDominican RepublicEcuadorEl SalvadorEthiopiaFinlandFranceGabonGermany, Federal

Republic ofGhanaGreeceGuatemalaGuineaHaitiHondurasIcelandIndiaIndonesiaIranIraqIrelandIsraelItalyIvory CoastJamaicaJapanJordanKenya

PresentQuota1

(Million

22.5060.00

280.00400.0075.00

337.5022.50

280.0030.0011.2515.00

550.00

7.5062.007.50

100.00550.00100.00

7.50

45.0020.0011.257.50

130.0025.0020.0020.0015.0057.00

787.507.50

787.5055.0060.0020.0015.0011.2515.0011.25

600.00165.0070.0055.0045.0050.00

500.0015.0020.00

500.0011.2525.00

IncreasedQuota

Under FirstResolution

U.S. dollars)

2975

35050094

42229

350381519

690

107810

125690125

10

57251510

1633225251972

98510

98569752519151915

750207

88695763

6251925

6251532

52.53.54.55.56.57.58.59.60.61.62.63.64.65.66.67.68.69.70.71.72.73.74.75.76.77.78.79.80.81.82.83.84.85.86.87.

88.89.90.91.

92.93.94.95.

96.97.98.99.

100.101.102.

KoreaKuwaitLaosLebanonLiberiaLibyaLuxembourgMalagasy RepublicMalaysiaMaliMauritaniaMexicoMoroccoNepalNetherlandsNew ZealandNicaraguaNigerNigeriaNorwayPakistanPanamaParaguayPeruPhilippinesPortugalRwandaConHi AruHiaSen e Pal

Somalia

Q|%Q|«

SudanSwedenSyrian Arab

TO n 7 Q 7i 1 aTViQila-nHTf\of\

Trinidad andTobago

TunisiaTurkeyUgandaUnited Arab

RepublicUnited KingdomT Tnif A/1 Qtof oounited otatesTinner VnltaI IniffiiavVenezuela.Viet-NamYugoslavia

PresentQuota1

(Million

18.7550.007.506.75

.11.2515.0015.0015.00

100.0013.007.50

180.0052.507.50

412.50125.0011.257.50

50.00100.00150.0011.2511.2537.5075.0060.0011.2572.0025.0011.2511.25

150.00150.0045.00

150.00

30.0025.0076.0011.25

20.0022.5086.0025.00

120.001,950.004,125.00

7.5030.00

150.0022.50

120.00

IncreasedQuota

Under FirstResolution

U.S. dollars)

2463109

15191919

1251710

2256610

520157151063

125188

15154794751590321515

18818857

188

38329515

2529

10832

1502,4405,160

1038

18829

150

1 As defined in paragraph 2 of the Report and paragraph l(a) of the First Resolution.

129

Republic

South Africa

Sierra Leone



Resolutions Submitted to the Board of Governors

WHEREAS the Executive Directors have considered the question referred to themby the Resolution of the Board of Governors of the International Monetary Fund at itsNineteenth Annual Meeting:

"That the Executive Directors proceed to consider the question of adjusting thequotas of members of the Fund and at an early date submit an appropriate pro-posal to the Board of Governors."

Have found that proposals to carry out increases in quotas should be submitted tothe Board of Governors; and

Have submitted to the Board of Governors a Report entitled "Increases in Quotasof Members—Fourth Quinquennial Review" and the following Resolutions of the Boardof Governors for a vote without meeting pursuant to Section 13 of the By-Laws of theFund, which Resolutions propose increases in the quotas of all members of the Fund,make provision for consents by members, and establish the conditions upon which theincreases shall take effect;

Now, THEREFORE, the Board of Governors, noting the said Report of the Execu-tive Directors, hereby resolves that:

First Resolution

1. (a) The International Monetary Fund proposes that, subject to the provisions ofthis First Resolution, the quotas of all members of the International Mone-tary Fund in effect on February 26, 1965 or the maximum quotas to whichmembers could consent under Resolutions adopted by or submitted to theBoard of Governors before that date shall be increased by 25 per cent,with the resulting amounts rounded according to the following formula:

amounts below $500 million shall be rounded to the next higher multipleof one million;

amounts of $500 million or more shall be rounded to the next higher mul-tiple of five million.

(b) When an increase in quota proposed in this First Resolution is calculatedon the basis of a quota that includes an increase to which a member canconsent under another Resolution adopted by or submitted to the Board ofGovernors before February 26, 1965 and there is no consent to such increase,the increase proposed in this First Resolution shall be 25 per cent of thequota in effect on February 26, 1965, rounded in accordance with para-graph l(a).

130



2. None of the increases in quotas proposed in this First Resolution shall becomeeffective unless:

(i) The member concerned has notified the Fund that it consents to the increasein its quota; and

(ii) The Fund determines that members having not less than two-thirds of thetotal of quotas on February 26, 1965 have consented to increases in theirquotas under the First or Second Resolution; and

(iii) The member concerned has paid the full increase in its quota.

Subject to paragraph 6(c), each increase in quota shall become effective uponthe date of the latest of these three events.

3. Notices in accordance with paragraph 2(i) shall be executed by a duly author-ized official of the member.

4. Notices in accordance with paragraph 2(i) shall be received in the Fund notlater than September 25, 1965, provided that the Executive Directors may ex-tend this period as they may determine.

5. Subject to paragraph 6(b), each member shall pay to the Fund within 30 daysafter the later of the two events in paragraph 2(i) and (ii), 25 per cent of theincrease in gold and the balance in its own currency.

6. (a) In giving notice in accordance with paragraph 2(i), any member may con-sent to the increase in its quota as an increase by installments.

(b) Notwithstanding paragraph 2(iii), a member increasing its quota by install-ments shall pay not less than one-fifth of the gold and currency prescribedin paragraph 5 within 30 days after the later of the two events in paragraph2(i) and (ii) and shall pay further installments of gold and currency of notless than one-fifth of the increase in each twelve months after the first pay-ment until the full amount prescribed in paragraph 5 has been paid.

(c) Subject to paragraph 2, on the completion of the payment of each install-ment of the increase, the member's quota shall be increased by an amountequal to the installment.

7. Since it is in the interests of the Fund and its members that the contemplatedincrease in its resources be expedited, members are invited to comply as soon aspossible with the procedure for notice and payments to the Fund under this FirstResolution. Any payment made by a member before the effective date of increasein its quota will be kept in separate accounts of the Fund. If the Fund decidesthat such increase cannot become effective under this First Resolution, the pay-ment will be returned to the member.

131


132

2. Paragraphs 2 through 7 of the First Resolution shall apply to this Second Reso-lution.

3. Members named in paragraph 1 of this Second Resolution shall be entitled toconsent under either the First or the Second Resolution but not under both.Any such member shall declare under which Resolution it is consenting, andsuch choice shall be final.

Board of Governors Resolutions Nos. 20-6 and 20-7

Adopted March 31,1965

725270150110200250225250

175740125

1,2001001258090

1. Austria2. Canada3. Finland4. Germany, Federal

Republic of5. Greece6. Iran7. Ireland8. Israel

MillionU.S. dollars

9. Japan10. Mexico11. Norway12. Philippines13. South Africa14. Spain15. Sweden16. Venezuela

MillionU.S. dollars

Appendix I (concluded). EXECUTIVE BOARD DECISIONS AND REPORT

Second Resolution

1. The International Monetary Fund proposes that, subject to the provisions of thisSecond Resolution, the quotas of the following members shall be increased tothe amounts shown against their names:


Appendix II. EXECUTIVE DIRECTORS AND VOTING POWER

on April 30, 1965

DirectorAlternate

APPOINTED

William B. DaleJohn S. Hooker

J. M. StevensJ. A. Kirby shire

Rene LarreGerard M. Teyssier

Ulrich BeelitzWalter Habermeier

J. J. AnjariaArun K. Ghosh

ELECTED

Ahmed Zaki Saad(United Arab Republic)

Albert Mansour(United Arab Republic)

Sergio Siglienti (Italy)Costa P. Caranicas (Greece)

J. M. Garland (Australia)Roy Daniel (Australia)

Gengo Suzuki (Japan)Chalong Pungtrakul

(Thailand)

Pieter Lieftinck (Netherlands)H. M.H.A. van der Valk

(Netherlands)

CastingVotes of

United States

United Kingdom

France

Federal Republicof Germany

India

AfghanistanEthiopiaIranIraqJordanKuwaitLebanonPakistanPhilippinesSaudi ArabiaSomaliaSyrian Arab RepublicUnited Arab Republic

GreeceItalyPortugalSpain

AustraliaNew ZealandSouth AfricaViet-Nam

BurmaCeylonJapanNepalThailand

CyprusIsraelNetherlandsYugoslavia

Votes byCountry

41,500

19,750

8,125

8,125

6,250

475400950800362750317

1,7501,000

800362500

1,450

8505,250

8501,750

4,2501,5001,750

475

550870

5,250325700

362750

4,3751,450

Total Per CentVotes1 of Total

41,500 22.48

19,750 10.70

8,125 4.40

8,125 4.40

6,250 3.39

9,916 5.37

8,700 4.71

7,975 4.32

7,695 4.17

6,937 3.76

133


Appendix II (continued). EXECUTIVE DIRECTORS AND VOTING POWER

on April 30, 1965

DirectorAlternate

VacantS. J. Handheld-Jones (Canada)

Andre van Campenhout (Belgium)Maurice Toussaint (Belgium)

Mauricio C. Bicalho (Brazil)Antonio de Abreu Coutinho

(Brazil)

Luis Escobar (Chile)Enrique Domenech (Argentina)

Semyano Kiingi (Uganda)Paul L. Faber (Guinea)

Enrique Tejera-Paris (Venezuela)Jorge Gonzalez del Valle

(Guatemala)

CastingVotes of

CanadaIrelandJamaica

AustriaBelgiumKoreaLuxembourgTurkey

BrazilColombiaDominican RepublicHaitiPanamaPeru

ArgentinaBoliviaChileEcuadorParaguayUruguay

BurundiCongo, Democratic Rep.GuineaKenyaLiberiaMaliNigeriaSierra LeoneSudanTanzaniaTrinidad and TobagoUganda

Costa RicaEl SalvadorGuatemalaHondurasMexicoNicaraguaVenezuela

Votes byCountry

5,750700450

1,0003,625

437400

1,110

3,0501,250

500362362625

3,050475

1,250450362550

362of 700

400500362380750362700500450500

450450400400

2,050362

1,750


6,900 3.74

6,572 3.56

6,149 3.33

6,137 3.32

5,966 3.23

5,862 3.18

134


Appendix II (concluded). EXECUTIVE DIRECTORS AND VOTING POWER

on April 30, 1965

DirectorAlternate

CastingVotes of

Votes byCountry


Beue Tann (China)1-Shuan Sun (China)

Kurt Eklof (Sweden)Otto Schelin (Denmark)

China 5,750 5,750 3.12

Denmark 1,550Finland 820Iceland 362Norway 1,250Sweden 1,750 5,732 3.11

Sumanang (Indonesia)Amon Nikoi (Ghana)

Algeria 8-50Ghana 800Indonesia 1,900Laos 325Libya 400Morocco 775Tunisia 475 5,525 2.99

Louis Kande (Senegal)Antoine W. Yameogo

(Upper Volta)

Cameroon 400Central African Republic 325Chad 325Congo (Brazzaville) 325Dahomey 325Gabon 325Ivory Coast 400Malagasy Republic 400Mauritania 325Niger 325Rwanda 362Senegal 500Togo 362Upper Volta 325 5,024 2.72

184,590* 100.001 Voting power varies on certain matters with use by members of the Fund's resources.2 This total does not include the votes of Malaysia, which was eligible to participate in the 1964

Regular Election of Executive Directors but abstained from voting.

135


Appendix III. CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

Changes in the membership of the Executive Board between May 1, 1964 and April30, 1965 were as follows:

Fernando Illanes (Chile) served as Temporary Alternate Executive Director toGuillermo Walter Klein (Argentina), May 1 to 11, 1964.

Alvin C. Lamb (Canada) served as Temporary Alternate Executive Director toA. F. W. Plumptre (Canada), May 1 and 22, July 10, and December 30, 1964, andJanuary 22 to 25, March 10, and April 7, 1965.

Gerard M. Teyssier (France) served as Temporary Alternate Executive Director toJean de Largentaye (France), May 1 to 13, 1964 and was appointed Alternate Execu-tive Director to Rene Larre (France), effective June 1, 1964.

Jorge Mejia-Palacio (Colombia) served as Temporary Alternate Executive Directorto Mauricio C. Bicalho (Brazil), May 13, 1964.

Jacques Waitzenegger (France) resigned as Alternate Executive Director to Jean deLargentaye (France), effective May 24, 1964.

John M. Garba (Nigeria) served as Temporary Alternate Executive Director to LouisKande (Senegal), June 3 and July 22 to August 5, 1964.

Joaquin Gutierrez Cano (Spain) served as Temporary Alternate Executive Director toSergio Siglienti (Italy), June 3 to 12, 1964 and January 6, 1965.

Julian Saenz Hinojosa (Mexico) served as Temporary Alternate Executive Director toPraxedes Reina Hermosillo (Mexico), June 3 to 12 and September 26, 1964.

Jean de Largentaye (France) resigned as Executive Director for France, effectiveJune 5, 1964.

Rene Larre (France) was appointed Executive Director for France, effective June 6,1964.

Manuel Valladares (Mexico) served as Temporary Alternate Executive Director toPraxedes Reina Hermosillo (Mexico), June 17 and September 30 to October 2, 1964.

S. L. N. Simha (India) resigned as Alternate Executive Director to J. J. Anjaria(India), effective June 30, 1964.

Arun K. Ghosh (India) was appointed Alternate Executive Director to J. J. Anjaria(India), effective July 1, 1964.

Louis Plum (Belgium) served as Temporary Alternate Executive Director to Andrevan Campenhout (Belgium), July 1 and 10, 1964 and April 21, 1965.

Carlos S. Brignone (Argentina) served as Temporary Alternate Executive Directorto Guillermo Walter Klein (Argentina), July 10, 1964.

David C. Keys (United Kingdom) served as Temporary Alternate Executive Direc-tor to Sir Eric Roll (United Kingdom), July 29, August 3 to 5, October 14 to 16,and November 20, 1964 and to J. M. Stevens (United Kingdom), February 24,March 15, and April 21, 1965.

L. Denis Hudon (Canada) resigned as Alternate Executive Director to A. F. W.Plumptre (Canada), effective July 31, 1964.

136


Appendix III (continued). CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

S. J. Handfield-Jones (Canada) was appointed Alternate Executive Director toA. F. W. Plumptre (Canada), effective August 1, 1964 and was reappointed, effec-tive November 1, 1964.

Sergio Bath (Brazil) served as Temporary Alternate Executive Director to MauricioC. Bicalho (Brazil), August 24 to 26, 1964.

Jean Malaplate (France) served as Temporary Alternate Executive Director to ReneLarre (France), August 24 and October 16, 1964, and March 31 and April 5, 1965.

Edgardo Sogno Rata del Vallino (Italy) served as Temporary Alternate ExecutiveDirector to Sergio Siglienti (Italy), August 26, 1964.

D. H. Boot (Netherlands) served as Temporary Alternate Executive Director toPieter Lieftinck (Netherlands), September 26 to 30, 1964.

Guillermo Walter Klein (Argentina) completed his term of service as Executive Di-rector for Argentina, Bolivia, Chile, Ecuador, Paraguay, and Uruguay, October 31, 1964.

Lennart Olofsson (Sweden) completed his term of service as Alternate Executive Di-rector to Karl Skjaeveland (Norway), October 31, 1964.

Praxedes Reina Hermosillo (Mexico) completed his term of service as ExecutiveDirector for Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, andVenezuela, October 31, 1964.

Carlos Sanson (Nicaragua) completed his term of service as Alternate ExecutiveDirector to Praxedes Reina Hermosillo (Mexico), October 31, 1964.

Karl Skjaeveland (Norway) completed his term of service as Executive Director forDenmark, Finland, Iceland, Norway, and Sweden, October 31, 1964.

William Tennekoon (Ceylon) completed his term of service as Alternate ExecutiveDirector to Gengo Suzuki (Japan), October 31, 1964.

Maurico C. Bicalho (Brazil) was re-elected Executive Director by Brazil, Colombia,the Dominican Republic, Haiti, Panama, and Peru, effective November 1, 1964.

Kurt Eklof (Sweden) was elected Executive Director by Denmark, Finland, Iceland,Norway, and Sweden, effective November 1, 1964.

Otto Schelin (Denmark) was appointed Alternate Executive Director to Kurt Eklof(Sweden), effective November 1, 1964.

Luis Escobar (Chile), formerly Alternate Executive Director to Guillermo WalterKlein (Argentina), was elected Executive Director by Argentina, Bolivia, Chile, Ecua-dor, Paraguay, and Uruguay, effective November 1, 1964.

Enrique Domenech (Argentina) was appointed Alternate Executive Director to LuisEscobar (Chile), effective November 1, 1964.

Alfonso Espinosa (Venezuela) was elected Executive Director by Costa Rica, ElSalvador, Guatemala, Honduras, Mexico, Nicaragua, and Venezuela, effective November1, 1964 and resigned, effective February 11, 1965.

Jorge Gonzalez del Valle (Guatemala) was appointed Alternate Executive Directorto Alfonso Espinosa (Venezuela), effective November 1, 1964 and to Enrique Tejera-Paris (Venezuela), effective March 2, 1965.

137


Appendix III (continued). CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

J. M. Garland (Australia) was re-elected Executive Director by Australia, New Zea-land, South Africa, and Viet-Nam, effective November 1, 1964.

Roy Daniel (Australia) was reappointed Alternate Executive Director to J. M.Garland (Australia), effective November 1, 1964.

Louis Kande (Senegal) completed his term of service as Executive Director forBurundi, Cameroon, the Central African Republic, Chad, Congo (Brazzaville), theDemocratic Republic of Congo, Dahomey, Gabon, Guinea, Ivory Coast, Liberia, theMalagasy Republic, Mali, Mauritania, Niger, Nigeria, Rwanda, Senegal, Sierra Leone,Tanzania, Togo, Trinidad and Tobago, Uganda, and Upper Volta, October 31, 1964and was elected Executive Director by Cameroon, the Central African Republic, Chad,Congo (Brazzaville), Dahomey, Gabon, Ivory Coast, the Malagasy Republic, Mauri-tania, Niger, Rwanda, Senegal, Togo, and Upper Volta, effective November 1, 1964.

Antoine W. Yameogo (Upper Volta) was appointed Alternate Executive Director toLouis Kande (Senegal), effective November 1, 1964.

Semyano Kiingi (Uganda), formerly Alternate Executive Director to Louis Kande(Senegal), was elected Executive Director by Burundi, the Democratic Republic ofCongo, Guinea, Kenya, Liberia, Mali, Nigeria, Sierra Leone, the Sudan, Tanzania,Trinidad and Tobago, and Uganda, effective November 1, 1964.

Paul L. Faber (Guinea) was appointed Alternate Executive Director to SemyanoKiingi (Uganda), effective November 1, 1964.

Pieter Lieftinck (Netherlands) was re-elected Executive Director by Cyprus, Israel,the Netherlands, and Yugoslavia, effective November 1, 1964.

H. M. H. A. van der Valk (Netherlands) was reappointed Alternate Executive Di-rector to Pieter Lieftinck (Netherlands), effective November 1, 1964.

A. F. W. Plumptre (Canada) completed his term of service as Executive Directorfor Canada and Ireland, October 31, 1964; he was elected Executive Director by Can-ada, Ireland, and Jamaica, effective November 1, 1964, and resigned, effective April13, 1965.

Ahmed Zaki Saad (United Arab Republic) completed his term of service as Exec-utive Director for Afghanistan, Ethiopia, Iran, Iraq, Jordan, Kuwait, Lebanon, Pakis-tan, the Philippines, Saudi Arabia, the Sudan, the Syrian Arab Republic, and theUnited Arab Republic, October 31, 1964 and was elected Executive Director by Af-ghanistan, Ethiopia, Iran, Iraq, Jordan, Kuwait, Lebanon, Pakistan, the Philippines,Saudi Arabia, Somalia, the Syrian Arab Republic, and the United Arab Republic,effective November 1, 1964.

Sergio Siglienti (Italy) was re-elected Executive Director by Greece, Italy, Portugal,and Spain, effective November 1, 1964.

Costa P. Caranicas (Greece) was reappointed Alternate Executive Director toSergio Siglienti (Italy), effective November 1, 1964.

Sumanang (Indonesia) completed his term of service as Executive Director forGhana, Indonesia, Laos, Libya, Malaysia, Morocco, and Tunisia, October 31, 1964and was elected Executive Director by Algeria, Ghana, Indonesia, Laos, Libya, Mo-rocco, and Tunisia, effective November 1, 1964.

138


Appendix III (concluded). CHANGES IN MEMBERSHIP OF EXECUTIVE BOARD

Gengo Suzuki (Japan) was re-elected Executive Director by Burma, Ceylon, Japan,Nepal, and Thailand, effective November 1, 1964.

Chalong Pungtrakul (Thailand) was appointed Alternate Executive Director toGengo Suzuki (Japan), effective November 1, 1964.

Beue Tann (China) was re-elected Executive Director for China, effective Novem-ber 1, 1964.

Andre van Campenhout (Belgium) was re-elected Executive Director by Austria,Belgium, Korea, Luxembourg, and Turkey, effective November 1, 1964.

Carlos Perez de la Cova (Venezuela) served as Temporary Alternate Executive Direc-tor to Alfonso Espinosa (Venezuela), November 30, 1964.

Sir Eric Roll (United Kingdom) resigned as Executive Director for the United King-dom, effective January 14, 1965.

J. M. Stevens (United Kingdom) was appointed Executive Director by the UnitedKingdom, effective January 15, 1965.

J. A. Kirbyshire (United Kingdom), formerly Alternate Executive Director to SirEric Roll (United Kingdom), was appointed Alternate Executive Director to J. M.Stevens (United Kingdom), effective January 15, 1965.

Rufino Gil (Costa Rica) served as Temporary Alternate Executive Director to JorgeGonzalez del Valle (Guatemala), February 24 to 26, 1965 and to Enrique Tejera-Paris (Venezuela), March 15, 1965.

W. Y. Hui (China) served as Temporary Alternate Executive Director to Beue Tann(China), February 26 to April 21, 1965.

Enrique Tejera-Paris (Venezuela) was elected Executive Director by Costa Rica, ElSalvador, Guatemala, Honduras, Mexico, Nicaragua, and Venezuela, effective March 2,1965.

S. J. Handfield-Jones (Canada) was elected Executive Director by Canada, Ire-land, and Jamaica, effective May 1, 1965.

139


Appendix IV. ADMINISTRATIVE BUDGET

Letter of Transmittal

July 2, 1965


The administrative budget of the Fund approved by the Executive Board for the FiscalYear ending April 30, 1966 is presented herewith, in accordance with Section 20 of theBy-Laws. The presentation also shows actual expenditures for the past two fiscal years.

I should like to reiterate that it is of course impossible to predict whether the amountsbudgeted will, in fact, meet the requirements of the Fund's program. The amountsshown are estimates of requirements on the basis of the expected level of activities.Should contingencies arise or present plans change materially, the managementwould recommend appropriate amendments to the Executive Board.

Yours sincerely,/s/

P.-P. SCHWEITZERChairman of the Executive Board

Chairman of the Board of GovernorsInternational Monetary Fund

140


Appendix IV (concluded)

ADMINISTRATIVE BUDGET AS APPROVED BY THE EXECUTIVE BOARD FOR THE FISCAL YEAR ENDINGAPRIL 30, 1966, COMPARED WITH ACTUAL EXPENDITURES FOR THE FISCAL YEARS

1963-64 AND 1964-65

Category of Expenditure

I. BOARD OF GOVERNORS

II. OFFICE OF EXECUTIVE DIRECTORSSalariesOther compensations and benefitsTravel

Total

III. STAFFSalariesOther compensations and benefitsTravel

Total

IV. SPECIAL SERVICES TO MEMBER COUNTRIES

V. OTHER ADMINISTRATIVE EXPENSESCommunicationsOffice occupancy expensesBooks and printingSupplies and equipmentMiscellaneous

Total

TOTAL

BudgetF.Y. 1965-66

$ 420,000

1,055,000197,000203,000

$ 1,455,000

$ 6,755,0002,163,0001,375,000

$10,293,000

$ 925,000

$ 347,000685,000320,000408,000307,000

$ 2,067,000

$15,160,000

F.Y. 1964-65

Budget

$ 874,000

1,018,500208,500269,000

$ 1,496,000

$ 5,744,0001,996,0001,375,000

$ 9,115,000

$ 682,000

$ 314,000548,000259,000241,000266,000

$ 1,628,000

$13,795,000

ActualExpenditures

$ 864,824

1,002,451189,568227,422

$ 1,419,441

$ 5,648,7981,901,0811,279,519

$ 8,829,398

$ 352,445

$ 304,250531,789247,930223,862237,535

$ 1,545,366

$13,011.474

ActualExpendituresF.Y. 1963-64

$ 367,657

956,715195,669180,363

$ 1,332,747

$ 4,770,5201,768,6251,199,041

$ 7,738,186

—

$ 297,165473,713177,954202,796285,905

$ 1,437,533

$10,876,123

141


Appendix V. COMPARATIVE STATEMENT OF INCOME AND EXPENDITURE

(Values expressed in U.S. dollars on the basis of established parities)

Year EndedApr. 30, 1963



INCOME *Service charges

Received in gold $ 2,774,861 $ 2,504,482 $ 1,274,187Received in members' currencies 125,000 625,000 8,213,000

Total $ 2,899,861 $ 3,129,482 $ 9,487,187

Charges on Fund's holdings of members' cur-rencies and securities in excess of quotas

Received in gold $19,940,415 $25,430,807 $26,167,091Received in members' currencies 4,533,900 6,068,948 9,738,818

Total $24,474,315 $31,499,755 $35,905,909

Other operational income $ 3,669,065 $ 1,721,254 $ 2,353,709Miscellaneous income 1,176 1,581 2,257

TOTAL INCOME $31,044,417 $36,352,072 $47,749,062

EXPENDITUREAdministrative $ 9,401,011 $10,876,123 $13,011,474Operational 1,655 115 Cr. 4,557,523Fixed property 167,038 2,182,015 4,635,295Contribution to The Per Jacobsson Foundation — 62,500 —

TOTAL EXPENDITURE $ 9,569,704 $13,120,523 $22,204,292

1 Excludes income from investments transferred to Special Reserve for the fiscal years endedApril 30, as follows:

1963 $25,094,2321964 27,485,4141965 30,750,435

142


Appendix VI

FINANCIAL STATEMENTS

Page

Letter of Transmittal 144

FINANCIAL STATEMENTS OF INTERNATIONAL MONETARY FUND

Memorandum by the Audit Committee 145Exhibit A—Balance Sheet as at April 30, 1965 146Exhibit B—Statement of Income and Expenditure for the Year Ended

April 30, 1965 148Exhibit C—Statement of Reserves for the Year Ended April 30, 1965 149

FINANCIAL STATEMENTS OF STAFF RETIREMENT FUND

Memorandum by the Audit Committee 150Exhibit I—Balance Sheet as at April 30, 1965 152

143


Appendix VI. FINANCIAL STATEMENTS OF INTERNATIONALMONETARY FUND AND STAFF RETIREMENT FUND

Letter of Transmittal

July 2, 1965


In accordance with Section 20(b) of the By-Laws of the Fund, I have the honorto submit for the consideration of the Board of Governors the audited financial state-ments of the International Monetary Fund, and the Staff Retirement Fund, for theyear ended April 30, 1965, together with two memoranda from the Audit Committee,which include the audit certificates.

In conformity with the By-Laws, the external audit of the Fund has been performedby an Audit Committee consisting of auditors nominated by three member countries.At the Fund's request, El Salvador, Thailand, and the United Kingdom nominatedauditors to serve on this Committee. They respectively nominated Mr. Juan SamuelQuinteros, Superintendent, Superintendency of Banks and Other Financial Institutions,Central Bank of El Salvador; Mr. Panas Simasathien, Chief of Accounting and FiscalSystems Division, Comptroller General's Department, Ministry of Finance, Thailand;and Mr. Ronald William Tizard, Deputy Director of Audit, Exchequer and Audit De-partment, United Kingdom. The Auditors thus nominated were confirmed by the Exec-utive Directors.

It will be noted that, in the period under review, ordinary income amounted to$47,749,062 and expenditure amounted to $22,204,292, resulting in a net incomeof $25,544,770, which has been transferred provisionally to General Reserve pendingBoard of Governors' action. In addition, income of $30,750,435 from the Fund's in-vestment program has been transferred to the Special Reserve.

The detailed report of the Audit Committee is being submitted separately to theBoard of Governors.

Yours sincerely,/s/

P.-P. SCHWEITZERChairman of the Executive Board

Chairman of the Board of GovernorsInternational Monetary Fund

144


Appendix VI (continued)

MEMORANDUM BY THE AUDIT COMMITTEE

June 22, 1965

To the Managing Directorand the Executive Directors


The report of the Audit Committee, dated June 22, 1965, submitted through youto the Board of Governors, on the audit of the financial records and transactions ofthe Fund for the fiscal year ended April 30, 1965, includes the following paragraphsrelating to the scope of the audit conducted, and the audit certificate given:

SCOPE OF THE AUDIT

The Audit Committee, in the conduct of its audit, took cognizance of the require-ments of Section 20 (b) of the By-Laws that the audit be comprehensive with respectto the examination of the financial records of the Fund; that it extend, insofar aspracticable, to the ascertainment that financial transactions consummated during theperiod under review were supported by the necessary authority; and that it deter-mine that there was adequate and faithful accounting for the assets of the Fund.In determining the authority for financial transactions, reference was made to theArticles of Agreement, the By-Laws and Rules and Regulations of the Fund, theminutes of the Executive Board and the General Administrative Orders of theFund. The Committee applied such tests to the accounting and other financial rec-ords as it considered necessary to provide a thorough review of the adequacy of thesystem of accounting and internal control operated by the Fund. In determiningits program of test examination, due regard was paid to the work performed bythe Internal Auditor, as reported by him to the Committee, and to the standard ofhis work performance as surveyed by the Committee.

AUDIT CERTIFICATEWe have made an independent examination of the Balance Sheet of the Inter-

national Monetary Fund as at April 30, 1965, of the Statements of Income andExpenditure and of Reserves for the fiscal year then ended and of the schedulesrelated to such financial statements. We have obtained from the officers and staffof the Fund all such information and representations as we have required in theconduct of our audit.

As the result of our examination, we report that, in our opinion, such Balance Sheetand related Statement of Income and Expenditure, together with the notes appearingthereon, present fairly the financial position of the International Monetary Fund as atApril 30, 1965, and the results of its operations for the fiscal year then ended, andhave been prepared in conformity with generally accepted accounting principlesapplied on a basis consistent with that of previous fiscal years.

AUDIT COMMITTEE:

/s/ Juan Samuel Quinteros, Chairman (El Salvador)

/s/ Panas Simasathien (Thailand)

/s/ R. W. Tizard (United Kingdom)

145



Exhibit ABALANCE

as at April

Values expressed in U.S. dollars on the

ASSETS

GOLD ACCOUNTGold with depositories (See Note 2) $2,217,252,733'

(63,350,078.086 fine ounces at $35 per ounce)

Investments (See Note 3)$823,532,000 U.S. Government

securities maturing within 12months, at cost $799,835,379

Funds awaiting investment 156,132 799,991,511 $ 3,017,244,244

CURRENCIES AND SECURITIESWith depositories

CurrenciesSecurities

(nonnegotiable, noninterest-bearing demand obligations,payable at face value bymembers in their currencies)

SUBSCRIPTIONS TO CAPITAL—RECEIVABLEBalances not due

$2,786,151,0519,953,189,074

WITHDRAWING MEMBER'S CURRENCY(redeemable by Cuba in gold, or convertible currencies acceptableto the Fund, in five equal annual installments commencing July 1, 1964)

OTHER ASSETS (See Note 4)(receivables, accruals, prepayments, and sundry cash)

TOTAL ASSETS

12,739,340,125

903,876,735

9,999,861

21,801,271

$16,692,262,236

NOTES:1. With the exception of the following currencies which, for bookkeeping purposes, are computed at the following

provisional rates per U.S. dollar:

Argentine pesoBolivian pesoBrazilian cruzeiroChilean escudo

83.000011.8750

470.0002.70000

Colombian pesoIndonesian rupiahKorean wonMali franc

9.00000315.000255.000246.853

Paraguayan guarani 122.000Peruvian sol 26.8150Vietnamese piastre 35.0000Yuglosav dinar 750.000

2. Excludes 10,597.227 fine ounces earmarked for members.

3. Made with the proceeds of the sale of 22,856,900.312 fine ounces of gold. Upon termination of the investment,the same quantity of gold can be reacquired.

4. The assets and liabilities of the Staff Retirement Fund are not included in this Balance Sheet.

5. A stand-by charge has, under certain circumstances, to be credited against the service charge for a drawing underthe stand-by arrangement; the maximum amount on April 30, 1965 is $868,959. A portion of the stand-by chargeis refundable to a member if the arrangement is canceled; the maximum amount on April 30, 1965 is $661,264.

146



Exhibit ASHEET

30, 1965

basis of established parities (See Note 1)

CAPITAL, RESERVES, AND LIABILITIES

CAPITALAuthorized subscriptions of members $15,993,083,333

RESERVES (Exhibit C)Special reserve $148,274,447General reserve 141,811,468 290,085,915

INDEBTEDNESS TO PARTICIPANTS UNDER GENERAL ARRANGEMENTS TO BORROW 405,000,000

PROVISION FOR POTENTIAL REFUNDS OF STAND-BY CHARGES (See Note 5) . . . . 868,959

OTHER LIABILITIES (See Note 4) 3,224,029(accruals, payables, and deferred credits)

TOTAL CAPITAL, RESERVES, AND LIABILITIES $16,692,262,236

/s/ Y. C. KooTreasurer

/s/ P.-P. SCHWEITZERManaging Director

/s/ C. M. POWELLComptroller and Assistant Treasurer

147



Exhibit B

STATEMENT OF INCOME AND EXPENDITURE

for the year ended April 30, 1965

INCOMEOperational charges $11,840,896Charges on balances in excess of quotas 35,905,909Other income 2,257

TOTAL INCOME (See Note 1) $47,749,062

EXPENDITUREAdministrative expenditure

Board of Governors $ 864,824

Office of Executive DirectorsSalaries $1,002,451Other compensations and benefits 189,568Travel 227,422 1,419,441

StaffSalaries $5,648,798Other compensations and benefits 1,901,081Travel 1,279,519 8,829,398

Special services to member countriesIMF Institute's Program $167,315Technical assistance to the Democratic

Republic of Congo 88,054Panel of Central Banking Experts 97,076 352,445

Other administrative expensesCommunications $304,250Office occupancy 531,789Books and printing (See Note 2) 247,930Supplies and equipment 223,862Miscellaneous (See Note 3) 237,535 1,545,366

Total administrative expenditure $13,011,474

Operational expenditureTransfer charges on amounts borrowed under

General Arrangements to Borrow $2,025,000Interest on indebtedness under General

Arrangements to Borrow 2,531,250Gold handling costs 1,630Exchange adjustments 357 cr.

Total operational expenditure 4,557,523

Fixed property expenditure 4,635,295

TOTAL EXPENDITURE 22,204,292

NET INCOME $25,544,770(Transferred provisionally to General Reserve pending —

Board of Governors' action) (Exhibit C)

NOTES :1. Excludes income from investments amounting to $30,750,435, transferred to Special Reserve

(Exhibit C).2. After deduction of $64,182 for sales of Fund's publications.3. After deduction of $115,069 for food service sales.

148



Exhibit C

STATEMENT OF RESERVES

for the year ended April 30, 1965

SPECIAL RESERVE (See Note)Balance, April 30, 1964 $117,524,012

AddIncome from investments in U.S. Government securities

for year 30,750,435

Balance, April 30, 1965 $148,274,447

GENERAL RESERVEBalance, April 30, 1964 $116,518,698

AddNet income for year (Exhibit B), transferred

provisionally pending Board of Governors' action .. 25,544,770

$142,063,468Deduct

Transfer to Staff Retirement Plan for past servicecost relating to previous fiscal years resulting fromFebruary 5, 1965 amendment to the Plan 252,000

Balance, April 30, 1965 141,811,468

TOTAL RESERVES (per Balance Sheet) $290,085,915

NOTE:Represents income from investments in U.S. Government securities from November 1, 1957.

149



STAFF RETIREMENT FUND

MEMORANDUM BY THE AUDIT COMMITTEE

June 22, 1965

To the Managing Directorand the Executive Directors


The report of the Audit Committee, dated June 22, 1965, submitted through you tothe Board of Governors, on the audit of the financial records and transactions of theInternational Monetary Fund for the fiscal year ended April 30, 1965, includes the fol-lowing paragraphs relating to the scope of the audit conducted, the audit certificate givenand the investments held with respect to the Staff Retirement Fund:

SCOPE OF THE AUDIT

The Audit Committee has examined the separate accounts and financial state-ments relating to the Staff Retirement Fund for the fiscal year ended April 30, 1965.In the course of the examination, the Committee referred to the Articles of the StaffRetirement Plan and to the decisions of the Pension, Administration and InvestmentCommittees created under the Plan. The Audit Committee made what it consideredan adequate test check of the various classes of transactions, taking into account theaudit coverage made by the Internal Auditor, as reported by him to the Committee.The report of the Internal Auditor, among other audit activities conducted byhis staff, showed that a detailed examination had been made of the Participants'Accounts.

AUDIT CERTIFICATE

As the result of our examination, we report that in our opinion the accompanyingBalance Sheet, Statement of Source and Application of Funds, and the related Sched-ules of Participants' Account, Accumulation Account, Retirement Reserve Account,and Reserve Against Investments present fairly the financial position of the StaffRetirement Fund as at April 30, 1965 and the results of its operations for the fiscalyear then ended, in conformity with generally accepted accounting principles appliedon a basis consistent with that of previous fiscal years.

INVESTMENTS

Two amendments of the General Rules on Investment were made by the PensionCommittee during the fiscal year 1965. On March 22, 1965 the Pension Committeeadopted the Investment Committee's recommendation that the ceiling on corporatestocks held in the Staff Retirement Plan portfolio be raised from 35 per cent to 40per cent of the original investment. And on April 12, 1965 the Pension Committeeapproved the bonds of the Inter-American Development Bank as securities eligiblefor investment.

A confirmation was received by the Audit Committee directly from the depositoryconcerning the investments it held, as at April 30, 1965, as custodian for the Staff

150



Retirement Fund of the International Monetary Fund. The Audit Committee con-firmed that the holdings of the various classes of investments were within the limitingpercentages prescribed by the Pension Committee, as follows:

AUDIT COMMITTEE:

/s/ Juan Samuel Quinteros, Chairman (El Salvador)

/s/ Panas Simasathien (Thailand)

/s/ R. W. Tizard (United Kingdom)

151

BondsU.S. GovernmentInternational Bank for Reconstruction and

Development and Inter-AmericanDevelopment Bank

Corporate (other than convertible)Corporate (convertible)

Total BondsCorporate stocks

Maximum 20Maximum 25Maximum 5

Maximum 40

Total Portfolio

12.6014.81

66.2533.75

100.00

1,900,8052,234,607

$ 9,993,2295,089,979

$15,083,208

A uthorizedPercentage

Minimum 30

ActualPercentage

38.84

OriginalInvestment

$ 5,857,817


Appendix VI (concluded)

Exhibit I

STAFF RETIREMENT FUND

BALANCE SHEET

as at April 30, 1965

ASSETS

CASH AT BANKS $ 77,203

INVESTMENTSBonds, at amortized value

United States Government (market value,$5,620,000) $5,632,034

International Bank for Reconstruction andDevelopment (market value, $1,841,780) 1,838,750

Corporate (market value, $2,063,940) 2,208,839 $9,679,623

Corporate stocks (common), at cost(market value, $9,291,490) 5,813,409 15,493,032

ACCRUED INTEREST ON BONDS 102,157

ACCRUED CONTRIBUTIONS FROM PARTICIPANTS AND EMPLOYER 10,621

TOTAL ASSETS $15,683,013

LIABILITIES AND RESERVES

ACCOUNTS PAYABLE $ 4,480

PARTICIPANTS' ACCOUNT 3,372,179

ACCUMULATION ACCOUNT 10,395,030

RETIREMENT RESERVE ACCOUNT 1,501,498

RESERVE AGAINST INVESTMENTS 409,826

TOTAL LIABILITIES AND RESERVES $15,683,013

/s/ Y. C. KooTreasurer

/s/ C. M. POWELLComptroller and Assistant Treasurer

/s/ P.-P. SCHWEITZERManaging Director

152


INDEX


INDEX

Numbers refer to pages. An asterisk (*) denotes a table, a dagger (t) denotes a chart.

AFGHANISTAN—Fund quota, proposedincrease in, 129*; transaction withFund, 108*

AFRICAN COUNTRIES—debt servicingproblems, 24*, 25*, 261; personaltaxes, 23; see also individual coun-tries

ALGERIA—Fund quota, proposed in-crease in, 129*

ARGENTINA—balance of payments andreserves, 67*, 74*, 75, 76*; debtservicing problems, 261, 29, 75; de-valuation of currency, 75; exchangecontrols, 75; Fund quota, proposedincrease in, 129*; gold policy, 102;inflation, 78; monetary policies, 78;public enterprises, 23; transactionwith Fund, 112*

ASIA, EAST—-debt servicing problems,24*, 25*, 26t

AUSTRALIA—balance of payments andreserves, 59, 67*, 73, 74*, 76*, 91;capital movements, 50, 91; currencyused in Fund transactions, 35, 113;economic expansion, 91; exportsand export markets, 53; Fund Arti-cle VIII, acceptance of, 31, 107;Fund quota, proposed increase in,129*; gold production, 96*, 97,102; gold subsidy program, 103;monetary policy, 91; prices, 91;unemployment, 91

AUSTRIA—balance of payments andreserves, 63*, 67*; currency pur-chased by Fund with gold, 108*;currency used in Fund transactions,35, 113*; exports and export mar-kets, 57, 58*; Fund Article VIII,acceptance of, 107*; Fund holdingof currency, 112; Fund quota, pro-posed increases in, 32*, 129*; goldpurchases from U.S., 99*

BALANCES OF PAYMENTS—4-6, 63-68;industrial countries, 79-90; primaryproducing countries, 71-78, 91-95

BANK FOR INTERNATIONAL SETTLE-MENTS—Fund relations with, 117;gold holdings, 69, 97, 99*; supportfor sterling, 4

BANKS—see Interest Rates; MonetaryPolicy

BELGIUM—currency purchased byFund with gold, 108*; currencyused in Fund transactions, 113;fiscal policy, 47; Fund Article VIII,acceptance of, 107*; Fund quota,proposed increase in, 129*; GeneralArrangements to Borrow, 108*;gold prices, 101*; gold purchasesfrom U.S., 99*; industrial produc-tion, 421; interest rates, 45, 46;monetary policy, 46; see also Bel-gium-Luxembourg

BELGIUM-LUXEMBOURG — balance ofpayments and reserves, 62*, 65,67*; exports and export markets,57, 58*; prices, 57

BOLIVIA—balance of payments and re-serves, 76*; debt servicing prob-lems, 261; Fund quota, proposed in-

crease in, 129*; gold production,97; transactions with Fund, 109*,111, 112*

BRAZIL—balance of payments and re-serves, 67*, 74*, 76*, 91-92; budgetdeficit, 78; capital movements, 92;debt servicing problems, 23, 261,29, 30, 92; Fund quota, proposedincrease in, 129*; gold sales toU.S., 99*; inflation, 78, 91, 110;monetary policies, 78, 92; publicenterprises, 23, 92; transactionswith Fund, 7, 108*, 109*, 110,112*

BURMA—balance of payments and re-serves, 76*; Fund quota, proposedincrease in, 129*

BURUNDI—Fund quota, proposed in-crease in, 129*; initial par valueagreed, 107*, 110; stabilizationmeasures, 78, 110; transactions withFund, 35, 108*, 109*, 110

CAMEROON—Fund quota, proposed in-crease in, 129*

CANADA—balance of payments and re-serves, 59, 67*, 74*, 76*, 82-83;capital movements, 50, 61, 82-83;currency purchased by Fund withgold, 108*; currency used in Fundtransactions, 35, 113*, 114*; ex-ports and export markets, 53, 59,71; Fund Article VIII, acceptanceof, 107*; Fund holding of dollars,112; Fund quota, proposed increasesin, 32*, 129*; General Arrange-ments to Borrow, 108*; gold pro-duction, 96*, 97; gold subsidy pro-gram, 102; gross national product,increases in, 42*; industrial produc-tion, 43*; interest rates, 45-46, 49;prices, 43-44, 53*; transactions withFund, 20, 112, 113*; unemploy-ment, 3; wages, 43

CAPITAL MARKETS—12-13, 50-52; indeveloping countries, 21

CAPITAL MOVEMENTS—6, 12-13, 60-63; see also balance of payments ofindividual countries

CENTRAL AFRICAN REPUBLIC—Fundquota, proposed increase in, 129*

CEYLON—balance of payments and re-serves, 71, 74*, 76*; Fund quota,increase in, 107, 108*; Fund quota,proposed increase in, 129*; publicenterprises, 23; transactions withFund, 108*, 112*

CHAD—Fund quota, proposed increasein, 129*

CHILE—balance of payments and re-serves, 71, 74*, 76*; debt servicingproblems, 261, 29; Fund quota, pro-posed increase in, 129*; inflation,78; monetary policies, 78; transac-tions with Fund, 108*, 109*, 111,112*

CHINA, REPUBLIC OF—balance of pay-ments and reserves, 75, 76*; Fundquota, proposed increase in, 129*

COCOA—71, 721, 92-93COFFEE—71, 721, 74*

155

COLOMBIA—balance of payments andreserves, 71, 74*, 76*; debt servic-ing problems, 261; Fund quota, pro-posed increase in, 129*; gold pro-duction, 96; transactions with Fund.108*, 109*, 112*

CONGO (BRAZZAVILLE)—Fund quota,proposed increase in, 129*

CONGO, DEMOCRATIC REPUBLIC OF—Fund quota, proposed increase m,129*; Fund technical assistance, 36;gold production, %

COPPER—72tCOSTA RICA—balance of payments

and reserves, 76*; Fund ArticleVIII, acceptance of, 31, 107, 110;Fund quota, increase in, 107, 108*;Fund quota, proposed increase in,129*; transactions with Fund, 108*,109*, 110, 112*

COTTON—71, 721CYPRUS—balance of payments and re-

serves, 76*; Fund quota, proposedincrease in, 129*; transaction withFund, 35, 108*

DAHOMEY—Fund quota, proposed in-crease in, 129*

DEBT MANAGEMENT—industrial coun-tries, 45-46

DEBT SERVICING PROBLEMS—in pri-mary producing countries, 7, 23-30;renegotiation, 26-30; repaymentschedules, 24-25; role of Fund, 29-30

DENMARK—balance of payments andreserves, 63*, 67*; capital move-ments, 51*; currency purchased byFund with gold, 108*; exports andexport markets, 58*; Fund quota,proposed increase in, 129*; interestrates, 45, 46; monetary policy, 46

DEVELOPING COUNTRIES—see PrimaryProducing Countries

DOMINICAN REPUBLIC — balance ofpayments and reserves, 76*; eco-nomic policies, 110; Fund ArticleVIII, acceptance of, 107*; Fundquota, proposed increase in, 129*;transactions with Fund, 108*, 109*,110

DRAWINGS—see Fund Transactions:currency purchases

ECUADOR—balance of payments andreserves, 76*; Fund quota, proposedincrease in, 129*; tax reform, 23;transactions with Fui:d, 108*, 109*,111, 112*

EL SALVADOR—balance of paymentsand reserves, 76*; Fund ArticleVIII, acceptance of, 107*; Fundquota, proposed increase in, 129*;transaction with Fund, 109*

ETHIOPIA—balance of payments andreserves, 76*; Fund quota, proposedincrease in, 129*

EURO-DOLLAR MARKET—12, 50, 60EUROPE—balance of payments and re-

serves, 12, 67*; capital markets, 50;


156 INDEX

capital movements, 12, 51*, 61;debt servicing problems in southernEurope, 24*, 25*, 26t; economicexpansion, 4; exports and exportmarkets, 56*, 59; prices, 6, 44; un?employment, 11; wages, 44; seealso individual countries

EUROPEAN ECONOMIC COMMUNITY—balance of payments and reserves,4, 59t, 60t, 62*, 63, 64t, 65, 66,67-68; capital movements, 61; ex-ports and export markets, 54, 55,56, 57*, 58, 59; industrial produc-tion, 411, 42; prices, 44, 53*; wages,431; see also individual membercountries

EUROPEAN FREE TRADE ASSOCIATION—balance of payments and reserves,591; prices, 53*; see also individualmember countries

EUROPEAN FUND—gold holdings, 69,97, 99*

EXCHANGE RATES—11, 36, 47EXCHANGE RESERVES—creation of ad-

ditional, 16, acceptability, 16-17,criteria, 16, distribution, 17-18, in-stitution for, 18, and transfer ofreal resources, 18, transferability,16-17, through the Fund, 18-19; re-serve center currencies, 9, 10, 13-14; see also Reserves, Gold andForeign Exchange

EXPORT PRICES—see PricesEXPORTS—performance of manufac-

turing countries, 53-60; perform-ance of primary producing coun-tries, 71

EXPORTS AND EXPORT MARKETS—54-58

FINANCIAL POLICIES—industrial coun-tries, 45-46

FINLAND—balance of payments andreserves, 67*, 71, 73, 74*, 76*; cap-ital movements, 51*; Fund quota,proposed increases in, 32*, 129*

FISCAL SYSTEMS—improvements, 22-23, budgetary control, 22, publicenterprises, 23, tax administration,23, tax reform, 22-23; in primaryproducing countries, 21-23

FOREIGN EXCHANGE MARKETS—50FOREIGN EXCHANGE RESERVES—see

Exchange Reserves; Reserves, Goldand Foreign Exchange

FOREIGN TRADE—see balance of pay-ments of individual countries andWorld Trade

FRANCE—balance of payments and re-serves, 62*, 64t, 67*, 85-88; capitalmarket, 51*, 52; capital movements,85-88; currency purchased by Fundwith gold, 108*; currency used inFund transactions, 35, 113, 114*;currency used in international trans-actions, 9; economic expansion, 42;economic policies, 3, 42; exchangerate, 471; exports and export mar-kets, 58*; fiscal situation and policy,47; Fund Article VIII, acceptanceof, 107*; Fund quota, proposed in-crease in, 129*; General Arrange-ments to Borrow, 108*; gold and

foreign exchange reserves, 88, 100;gold prices, 101*, 102; gold pur-chases from U.S., 88, 99*; industri-al production, 3, 42, 43*; inflation,42, 85, 86; interest rates, 45t, 49;monetary policy, 46; prices, 3, 42,57; transactions with Fund, 20;wages, 431

FUND ADMINISTRATIVE BUDGET ANDEXPENDITURE—119, 138

FUND ARTICLES OF AGREEMENT—9,10, 12, 15; Article I, 20; ArticleIII, Section 4, 33; Article V, Section3, 33, 35; Article V, Section 4,waivers under, 111; Article V, Sec-tion 7, 35, 111-12, 113, 114; Arti-cle V, Section 8, 116; Article VII,Section 2, 34; Article VIII, 12, 31,107*, 110, 117; Article XIV, 116-17

FUND AUDIT COMMITTEE—members,119

FUND BALANCE SHEET—146-47FUND CHARGES—116FUND CONSULTATIONS WITH MEM-

BERS—116-17FUND COOPERATION WITH OTHER IN-

TERNATIONAL ORGANIZATIONS—7, 8,36, 117-18

FUND DEPARTMENTS—Central Bank-ing Service, 8, 36; Exchange andTrade Relations Department, 118;Fiscal Affairs Department, 8, 22,36; IMF Institute, 37

FUND EXECUTIVE BOARD—election ofadditional Director, 31; membershipand voting power, 133-39

FUND EXECUTIVE BOARD DECISIONS—Article VIII and Article XIV, 116-17; compensatory financing of ex-port fluctuations, 7, 32, 33, 107,108; currencies to be used in trans-actions, 34, 35; gold subscriptions,8, 33-34; procedure for drawings inthe gold tranche, 10, 35, 119; re-porting of monetary reserves data,113; use of Fund's resources andrepurchases, 10, 33, 112

FUND FINANCIAL STATEMENTS—119,140-52

FUND GOLD HOLDINGS—investmentof, 119, 146

FUND GOLD TRANSACTIONS—5, 34, 35,48, 69, 99*, 113*

FUND MEMBERS—acceptance of obli-gations of Article VIII, 31, 107*;applications to become, 31; con-vertibility of currencies, 12; goldtranche positions, 10, 18, 33, 68*;number of, 31; par values, 107;reporting of monetary reservesdata, 113-14; repurchase obliga-tions, 35, 113-14

FUND PUBLICATIONS—118-19FUND QUOTAS—increases in, 8, 14-15,

31-33, 107-108, 124-32, and allevia-tions of gold payments, 8, 33-34,and installment facility, 33, andspecial drawing facility, 33; newmembers, 31

FUND RESOURCES—compensatory fi-nancing facility, 7, 32, 33, 107,108; conditional liquidity, 10, 14-15, 18; creation of international

liquidity, 15, 17, 18-19; debt rene-gotiations, 29; use of, see FundTransactions

FUND STAFF—118FUND TECHNICAL ASSISTANCE TO

MEMBERS—see Fund DepartmentsFUND TRAINING PROGRAM—37FUND TRANSACTIONS—amounts out-

standing, 115t; as reserve transfers,17; before establishment of parvalue, 36; currencies used, 35, 112-13; currency purchases by members,7, 20, 34-36, 108*, 109, 112*, 113*;currency purchases by Fund, 5, 34-35, 97*, 108*; currency repurchasesby members, 111-16; gold tranchedrawings, 10, 35; stand-by arrange-ments, 7, 34-36, 109-11, 115t;stand-by arrangements and debt re-negotiation, 29-30; summary, 114-16; see also General Arrangementsto Borrow

GABON—Fund quota, proposed in-crease in, 129*

GENERAL AGREEMENT ON TARIFFSAND TRADE—9, 12; Fund coopera-tion with, 117, 118

GENERAL ARRANGEMENTS TO BORROW—borrowings under, 4-5, 8, 34, 35,48, 108*, 109; charges paid byFund, 116; constitutes reserves, 10,17, 19, 68*, 69

GERMANY, FEDERAL REPUBLIC OF—balance of payments and reserves,59, 60t, 62*, 64t, 65, 67*, 68, 85,86*; capital market, 50, 51*, 52;capital movements, 85, 86*; cur-rency purchased by Fund with gold,108*; currency used in Fund trans-actions, 35, 113*, 114*; economicexpansion, 3, 4, 42, 85; exchangerate, 471; exports and export mar-kets, 54, 57, 58*; fiscal policy, 51-52, 85; Fund Article VIII, accep-tance of, 107*; Fund holdings ofdeutsche mark, 112; Fund quota,proposed increases in, 32*, 129*;General Arrangements to Borrow,108*; gold purchases from U.S.,99*; gross national product, in-creases in, 42*; industrial produc-tion, 421, 43*; interest rates, 45,49; monetary policy, 46; prices, 3,57; productivity, 43; wages, 43

GHANA—balance of payments and re-serves, 76*, 92-93; budget, 92-93;capital movements, 93; cocoa pro-duction, 92-93; Fund quota, in-crease in, 107, 108*; Fund quota,proposed increase in, 129*; goldand foreign exchange reserves, 93;gold production, 96*, 97; prices, 93;wages, 93

GOLD—absorption by private holders,industry, and arts, 8, 98t, 99; coins,prices of, 101*; Fund's holdings,97, 99, 146; markets and prices,99-102; national policies affecting,96, 100-101, 102-103; pool, 9-10,99, 100, 101, 102; price as basisfor monetary system, 10, 15, 99;production, 69, 96-97, 98t; reserves,


INDEX 157

68*, 69, 98t, 99*; Soviet produc-tion, reserves, and sales, 69, 981,99*; subsidy programs, 102-103;transactions service of Fund, 102;used in Fund transactions, 5, 34-35,99*, 108*, 113*, 114*

GOLD EXCHANGE STANDARD—14, 15GOLD STANDARD—11GREECE—balance of payments and

reserves, 76*; Fund quota, proposedincreases in, 32*, 129*; monetarypolicies, 78

GUATEMALA—balance of paymentsand reserves, 76*; Fund ArticleVIII, acceptance of, 107*; Fundquota, increase in, 107, 108; Fundquota, proposed increase in, 129*

GUINEA—Fund quota, proposed in-crease in, 129*

HAITI—balance of payments and re-serves, 76*; Fund Article VIII, ac-ceptance of, 107*; Fund quota, pro-posed increase in, 129*; transactionswith Fund, 108*, 109*, 111

HONDURAS—balance of payments andreserves, 76*; Fund Article VIII,acceptance of, 107*; Fund quota,proposed increase in, 129*; trans-actions with Fund, 108*, 109*, 111,112*

HONG KONG—balance of paymentsand reserves, 71, 74*; gold prices,101*, 102

ICELAND—balance of payments andreserves, 76*; Fund quota, proposedincrease in, 129*

INCOMES POLICIES—11, 44-45; seealso individual countries

INDIA—balance of payments and re-serves, 74*, 76*, 93-94; capitalmovements, 94; debt servicing prob-lems, 94; economic policies, 78,94, 110; Fund quota, proposed in-crease in, 129*; gold prices, 101-102; gold production, 96, 97; inter-est rates, 94; prices, 78, 93; ratioof taxes to national income, 22;surcharge on imports, 94, 110;transactions with Fund, 7, 94, 108*,109*, 112*

INDONESIA—balance of payments andreserves, 74*, 76*; debt servicingproblems, 29; Fund quota, pro-posed increase in, 129*; inflation,78; monetary policies, 78; transac-tion with Fund, 109*

INDUSTRIAL COUNTRIES—3-4, 41-52;balance of payments and reserves,4, 62*, 63-69; economic progress,1950-64, 11; employment, 11; fiscalpolicies, 46-47; industrial produc-tion, 3, 41-44

INDUSTRIAL PRODUCTION—3-4; indus-trial countries, 41-44

INTER-AMERICAN DEVELOPMENT BANK—Fund cooperation with, 117

INTEREST RATES—41, 45, 46, 47, 48t,49, 50; see also individual countries

INTERNATIONAL AND REGIONAL OR-GANIZATIONS—Fund cooperationwith, 117-18

INTERNATIONAL BANK FOR RECON-STRUCTION AND DEVELOPMENT—Fund cooperation with, 7, 8, 30,117

INTERNATIONAL CAPITAL MOVEMENTS—4-6, 12-13, 50-52, 81; discourage-ment of, 5, 13, 46, 49, 52, 81, 85

INTERNATIONAL INDEBTEDNESS—seeDebt Servicing Problems

INTERNATIONAL LIQUIDITY—14-19;conditional liquidity, 10, 14-15, 18-19; criteria for additional, 16; dis-tribution of additions to, 17-18; andthe Fund, 18-19; methods of crea-tion, 16; potential insufficiency of,8, 15; transferability, 16-17; un-conditional liquidity, 14-15; see alsoExchange Reserves; InternationalMonetary System

INTERNATIONAL MONETARY FUND—see Fund

INTERNATIONAL MONETARY SYSTEM—8, 9-14; finance for deficits, 10;need for evolution, 15; place ofgold, 15; swaps, 10, 14, 16, 46;see also Gold Exchange Standard;Gold Standard; Reserve CenterCurrencies

INTERNATIONAL TRADE—see WorldTrade

IRAN—balance of payments and re-serves, 75, 76*; economic expan-sion, 75; Fund quota, proposedincreases in, 32*, 129*; monetarypolicies, 78; transaction with Fund,35, 108*

IRAQ—balance of payments and re-serves, 75, 76*; Fund quota, in-crease in, 107, 108; Fund quota,proposed increase in, 129*; loanfrom Kuwait, 75

IRELAND—balance of payments andreserves, 76*; Fund Article VIII,acceptance of, 107*; Fund quota,proposed increases in, 32*, 129*;transaction with Fund, 112*

ISRAEL—balance of payments and re-serves, 76*; Fund quota, proposedincreases in, 32*, 129*; monetarypolicies, 78; transactions with Fund,35, 108*, 112*

ITALY—balance of payments and re-serves, 3, 4, 42, 46, 60t, 64t, 65,66, 67*, 68, 88-89; borrowingabroad, 46, 89; capital market, 51*,52; capital movements, 61, 88*,89; currency purchased by Fundwith gold, 108*; currency used inFund transactions, 112, 113*; eco-nomic expansion, 42; economicpolicies, 3, 89; exchange rate, 471;exports and export markets, 42, 54,58; fiscal policy, 47; Fund ArticleVIII, acceptance of, 107*; Fundquota, increase in, 108*; Fundquota, proposed increase in, 129*;General Arrangements to Borrow,108*; gold and foreign exchangereserves, 69; gold prices, 58*; goldsales to U.S., 81, 99*; gross nation-al product, increases in, 42*; in-dustrial production, 3, 42, 43*; in-flation, 85, 89; interest rates, 45, 49;monetary policy, 3, 46, 49, 89;prices, 3, 44, 57; transactions with

Fund, 46, 112, 113*; wages, 3,43

IVORY COAST—exports, 71; Fundquota, proposed increase in, 129*

JAMAICA—Fund Article VIII, accep-tance of, 107*; Fund quota, pro-posed increase in, 129*; transac-tions with Fund, 109*, 112*

JAPAN—balance of payments and re-serves, 3, 60t, 64t, 65, 67*, 89-90; capital movements, 50, 60, 61*,90; currency purchased by Fundwith gold, 108*; currency used inFund transactions, 35, 113; eco-nomic expansion, 3; economicpolicies, 3, 89; exports and exportmarkets, 53, 55, 57, 58; -FundArticle VIII, acceptance of, 107*;Fund quota, proposed increases in,32*, 129*; General Arrangementsto Borrow, 108*; gold production,96; industrial production, 3, 411,42; interest rates, 45, 46, 49; mone-tary policy, 3, 46, 49; prices, 44,53*, 57; productivity, 43; transac-tions with Fund, 20, 109*; wages,43t, 44

JORDAN—balance of payments and re-serves, 76*; Fund quota, increasein, 107, 108; Fund quota, proposedincrease in, 129*; transaction withFund, 112*

KENYA—Fund quota, proposed in-crease in, 129*

KOREA—balance of payments and re-serves, 76*; exchange rate, 36;Fund quota, proposed increase in,129*; inflation, 78; monetary poli-cies, 78; transaction with Fund, 35,36, 109*, 110

KUWAIT—balance of payments andreserves, 73, 74*; Fund ArticleVIII, acceptance of, 107*; Fundquota, proposed increase in, 129*;loan to Iraq, 75

LAOS—Fund quota, proposed increasein, 129*

LATIN AMERICA—balance of paymentsand reserves, 67*, 71t, 75, 76*;debt servicing problems, 24*, 25,26*; tax reforms, 22; see also indi-vidual countries

LEAD—72tLEBANON—Fund quota, proposed in-

crease in, 129*; gold prices, 101*LIBERIA—debt servicing problems, 29;

Fund quota, proposed increase in,129*; transaction with Fund, 108*,109*, 111

LIBYA—balance of payments and re-serves, 76*; Fund quota, proposedincrease in, 129*

LIQUIDITY—see International LiquidityLUXEMBOURG — capital market, 51;

Fund Article VIII, acceptance of,107*; Fund quota, increase in, 107,108*; Fund quota, proposed in-crease in, 129*; see also Belgium-Luxembourg


158 INDEX

MALAGASY REPUBLIC—Fund quota,proposed increase in, 129*

MALAWI—membership in Fund, ap-plication for, 31

MALAYA—balance of payments andreserves, 74*; see also Malaysia

MALAYSIA—balance of payments andreserves, 75, 76*; Fund quota, in-crease in, 107, 108*; Fund quota,proposed increase in, 129*; trans-action with Fund, 112*

MALI—exchange rate, 36; Fund quota,proposed increase in, 129*; mone-tary policies, 78; transactions withFund, 35, 36, 108*, 109*, 110

MANUFACTURING COUNTRIES—balanceof payments and reserves, 63*, 67*;exports, 53-60; see also IndustrialCountries

MAURITANIA—Fund quota, proposedincrease in, 129*; monetary poli-cies, 78

MEXICO—balance of payments and re-serves, 67*, 74*, 76*, 94*, 95; capi-tal movements, 94-95; currencyused in Fund transactions, 35, 113;Fund Article VIII, acceptance of,107*; Fund quota, proposed in-creases in, 32*, 129*; gold produc-tion, 96*, 97; gross national product,95; prices, 95; public enterprises,22-23

MONETARY POLICY—industrial coun-tries, 45-46, 48-49; problems of, 12;successes of, 12

MONETARY RESERVES—of Fund mem-bers, reporting of and repurchases,113-14; see also Reserves, Goldand Foreign Exchange

MOROCCO—balance of payments andreserves, 74*, 76*; Fund quota,proposed increase in, 129*; trans-action with Fund, 35, 108*

NEPAL—Fund quota, proposed in-crease in, 129*

NETHERLANDS—balance of paymentsand reserves, 62*, 65, 67*; capitalmarket, 51*; currency purchasedby Fund with gold, 108*; currencyused in Fund transactions, 35, 113;exports and export markets, 58; fis-cal policy, 47; Fund Article VIII,acceptance of, 107*; Fund quota,proposed increase in, 129*; GeneralArrangements to Borrow, 108*;gold purchases from U.S., 99*; in-terest rates, 45, 46, 491; monetarypolicy, 46; prices, 44, 57*; wages,43, 44

NETHERLANDS ANTILLES—balance ofpayments and reserves, 76*

NEW ZEALAND—balance of paymentsand reserves, 59, 67*, 74*, 76*;exports and export markets, 59, 71;Fund quota, proposed increase in,129*

NICARAGUA—balance of payments andreserves, 76*; Fund Article VIII,acceptance of, 31, 107; Fund quota,proposed increase in, 129*; goldproduction, 97; transactions withFund, 108*, 109*, 112*

NIGER—Fund quota, proposed in-crease in, 129*

NIGERIA—balance of payments andreserves, 71, 74*, 76*; Fund quota,proposed increase in, 129*; mone-tary policies, 78

NORWAY—balance of payments andreserves, 63*, 67*; capital move-ments, 51*; exports and exportmarkets, 54, 57, 58*; Fund quota,proposed increases in, 32*, 129*

OILSEEDS AND OILS—721ORGANIZATION FOR ECONOMIC CO-

OPERATION AND DEVELOPMENT—Fund cooperation with, 117

PAKISTAN—balance of payments andreserves, 75, 76*, 110; Fund quota,proposed increase in, 129*; mone-tary policy, 75; transactions withFund, 35, 75, 108*, 109*, 110

PANAMA—balance of payments andreserves, 76*; Fund Article VIII,acceptance of, 107*; Fund quota,increase in, 108*; Fund quota, pro-posed increase in, 129*; transac-tion with Fund, 35, 108*

PAR VALUES—see Fund Members andindividual countries

PARAGUAY—balance of payments andreserves, 76*, 110; Fund quota,proposed increase in, 129*; trans-actions with Fund, 109*, 110, 112*

PERU—balance of payments and re-serves, 71, 74*, 76*; debt servicingproblems, 26t; Fund Article VIII,acceptance of, 107*; Fund quota,proposed increase in, 129*; ratio oftaxes to national income, 22; trans-actions with Fund, 109*, 111

PETROLEUM EXPORTERS—balance ofpayments and reserves, 73, 74*;prices, 53 .

PHILIPPINES—balance of paymentsand reserves, 74*, 76*; Fund quota,proposed increases in, 32*, 129*;gold production, 96; gold subsidyprogram, 102-103; monetary poli-cies, 78; transactions with Fund,109*, 111, 112*

PORTUGAL—balance of payments andreserves, 67*, 76*; Fund quota,proposed increase in, 129*

PRICES—adjustment of, difficult, 13;cost of living, 441; in Europe, 6;in industrial countries, 6, 41-44; ofexports, 44t, 53, 57*, 58; of im-ports, 441; of metals and minerals,7, 70, 71; of primary products, 6,7, 20, 70-71, 72t, 75, 91, 92-93;wholesale, 44; see also individualcountries

PRIMARY PRODUCING COUNTRIES—6-8,11, 20-30, 53, 70-78; balance ofpayments and reserves, 4, 6, 7,63*, 64t, 65, 66, 68t, 68*, 71-78;capital movements, 6, 25, 70, 77-78; credit expansion, 77-78; debtburden and debt renegotiation, 23-30; economic developments andpolicies, 78; exports, 53*, 54*, 58*;fiscal problems, 20-23; inflation, 20,21, 24; prices of exports, 20, 53*,

70*; study of trade problems byUN, 7; terms of trade, 6-7, 70;wages, 21; see also individual coun-tries

PRIMARY PRODUCTS—70-71; see alsoPrices and individual countries

PUBLIC ENTERPRISES—pricing prob-lems, 23

PURCHASES OF CURRENCY—see FundTransactions

QUOTAS OF FUND MEMBERS—seeFund Quotas

REPURCHASES OF CURRENCY—seeFund Members; Fund Transactions

RESERVE CENTER CURRENCIES—8, 9,10, 13-14

RESERVES, GOLD AND FOREIGN EX-CHANGE—8, 13-14, 68-69; composi-tion, 68*; world's monetary goldholdings, 66, 69, 97-99; see alsoMonetary Reserves

RHODESIA—gold production, 96; goldsubsidy program, 103

RHODESIA AND NYASALAND—balanceof payments and reserves, 74*; seealso Malawi; Rhodesia; Zambia

RICE—72tRUBBER—72t, 75RUBBER EXPORTING COUNTRIES—74*RWANDA—Fund quota, proposed in-

crease in, 129*

SAUDI ARABIA—balance of paymentsand reserves, 71, 74*, 75, 76*;Fund Article VIII, acceptance of,107*; Fund quota, increase in, 107-108; Fund quota, proposed increasein, 129*

SECURITIES MARKETS—see CapitalMarkets

SENEGAL—Fund quota, proposed in-crease in, 129*

SIERRA LEONE—Fund quota, proposedincrease in, 129*

SINGAPORE—balance of payments andreserves, 74*; see also Malaysia

SINO-SOVIET AREA—trade, see WorldTrade; see also U.S.S.R.

SOMALIA—balance of payments andreserves, 76*; Fund quota, proposedincrease in, 129*; monetary poli-cies, 78; transactions with Fund,35, 108*, 109*, 111, 112*

SOUTH AFRICA—balance of paymentsand reserves, 59, 67*, 73, 74*, 76*;exports and export markets, 59;Fund quota, proposed increases in,32* 129*; g0id exports to U.K.,101; gold production, 96; gold sub-sidy program, 102

SOVIET AREA—trade, see WorldTrade; see also U.S.S.R.

SPAIN—balance of payments and re-serves, 67*, 71, 73, 74*, 75, 76*;capital movements, 73, 75; currencypurchased by Fund with gold, 108*;currency used in Fund transactions,113; Fund quota, proposed in-creases in, 32*, 129*; gold policy,


INDEX 159

102; gold purchases from U.S., 99*;inflation, 75

STAND-BY ARRANGEMENTS—see FundTransactions

STERLING AREA—balance of paymentsand reserves, 63*, 76*; see alsoUnited Kingdom

SUDAN—balance of payments and re-serves, 76*; Fund quota, increasein, 107, 108*; Fund quota, pro-posed increase in, 129*; transactionwith Fund, 108*

SUGAR—70, 71, 72t, 75SWEDEN—balance of payments and

reserves, 63*, 67*; currency pur-chased by Fund with gold, 108*;currency used in Fund transactions,113; exports and export markets,57, 58*; Fund Article VIII, accep-tance of, 107*; Fund quota, pro-posed increases in, 32*, 129*; Gen-eral Arrangements to Borrow, 108*;interest rates, 45, 46, 49; monetarypolicy, 46; prices, 57

SWITZERLAND—association with Fund'sGeneral Arrangements to Borrow,34, 35; balance of payments and re-serves, 63*, 67*; capital market,51*; exchange rates, 471; exportsand export markets, 58*; gold pur-chases from U.S., 99*; interestrates, 45, 46, 491; monetary policy,46-47; prices, 57

SYRIAN ARAB REPUBLIC—balance ofpayments and reserves, 76*; Fundquota, increase in, 108; Fund quota,proposed increase in, 129*; transac-tions with Fund, 108*, 109*, 112*

TANZANIA—Fund quota, proposed in-crease in, 129*; membership inFund, 31

TEA—72tTHAILAND—balance of payments and

reserves, 71, 74*, 76*; Fund quota,increase in, 108; Fund quota, pro-posed increase in, 129*

TIN—721TOGO—Fund quota, proposed increase

in, 129*TRADE—see balance of payments of

individual countries and WorldTrade

TRINIDAD AND TOBAGO—Fund quota,proposed increase in, 129*; initialpar value agreed, 107*

TUNISIA—balance of payments and re-serves, 76*, 111; Fund quota, in-crease in, 107, 108*; Fund quota,proposed increase in, 129*; initialpar value agreed, 107*, 111; mone-tary policies, 78; stabilization meas-ures, 111; transactions with Fund,35, 108*, 109*, 111

TURKEY—balance of payments and re-serves, 76*; debt servicing problems,29; Fund quota, proposed increase

in, 129*; transactions with Fund,108*, 109*, 111, 112*

UGANDA—Fund quota, proposed in-crease in, 129*

U.S.S.R.—gold production, reserves,and sales, 69, 97, 98t, 101; trade,see World Trade

UNITED ARAB REPUBLIC—balance ofpayments and reserves, 73, 74*,76*; Fund quota, proposed increasein, 129*; monetary policies, 78;transactions with Fund, 108*, 109*,111, 112*

UNITED KINGDOM—aid from foreignmonetary authorities, 4, 13, 47-48,84; balance of payments and re-serves, 3, 4-5, 48, 54, 59, 60t, 63,64t, 65, 66, 67, 68, 69, 83-85; capi-tal market, 51, 52; capital move-ments, 4, 60, 61, 63, 68, 83-84;claims on, 50t, 68*, 69; currencyused in Fund transactions, 113*,114*; currency used in internationaltransactions, 9; debt management,46; economic controls, 4, 48, 84, 85;economic expansion, 83; exchangecontrols, 84; exchange rates, 471;exports and export markets, 4, 54,55, 57-58, 59, 84; fiscal situationand policy, 4, 47, 48, 52, 84; FundArticle VIII, acceptance of, 107*;Fund holding of sterling, 112; Fundquota, proposed increase in, 129*;General Arrangements to Borrow,108*; gold and foreign exchangereserves, 4, 50t, 68*, 69, 83*, 84;gold imports and exports, 101; goldmarket and prices, 99-101; goldsales to U.S., 81, 99*; gross na-tional product, increases in, 42*;incomes policy, 43, 45, 85; indus-trial production, 3, 41t, 42, 43*,84; interest rates, 4, 45, 46, 48, 49,84, 85, 100; monetary policy, 46,48-49, 85; National Board forPrices and Incomes, 45; NationalEconomic Development Council,45; National Incomes Commission,45; prices, 441, 57; sterling bal-ances, 13; support for sterling, 4,13, 47, 84-85; transactions withFund, 4, 8, 20, 34, 35, 48, 84,108*, 109*, 112, 113*; unemploy-ment, 42; wages, 43, 44

UNITED KINGDOM COLONIAL TERRI-TORIES—balance of payments andreserves, 76*

UNITED NATIONS—Conference onTrade and Development, 7, 118;Fund cooperation with, 36, 117,118; Trade and DevelopmentBoard, 7, 117

UNITED STATES—balance of paymentsand reserves, 4, 5-6, 8, 12, 45, 51,59, 60t, 63, 64t, 66, 67-68, 79-82;capital market, 5, 50, 51, 79; capitalmovements, 5, 12, 60, 61, 63, 79,

80-81; claims on, 13-14, 50t, 68*,69; currency used in Fund trans-actions, 35, 113*, 114*; currencyused in international transactions,9, 10, 13-14; deficits financed, 13,14; economic expansion, 3, 4, 41,80; exchange rate, 471; exports andexport markets, 53, 55, 56, 57, 58,59, 79; fiscal situation and policy,46-47, 49; Fund Article VIII, ac-ceptance of, 107*; Fund holding ofdollars, 112; Fund quota, proposedincrease in, 129*; General Arrange-ments to Borrow, 108*; gold andforeign exchange reserves, 68*, 69,80*; gold held for account ofothers, 99; gold policy, 102; goldproduction, 96*, 97; gold pur-chases, 81, 99; gold sales, 79, 80*,99; gross national product, increasesin, 42*; industrial production, 41,42, 43*; Interest Equalization Tax,5, 13, 49, 51, 79, 81, 82, 85, 90;interest rates, 45-46, 49; monetarypolicy, 5, 46, 48; money market,13; pressures on the dollar, 81;prices, 6, 13, 44, 53*, 57, 79;transactions with Fund, 20, 34, 35,108*, 109*, 112, 113*; unemploy-ment, 3, 41; wages, 43

UPPER VOLTA—Fund quota, proposedincrease in, 129*

URUGUAY—balance of payments andreserves, 76*; debt servicing prob-lems, 261; Fund quota, proposedincrease in, 129*; inflation, 78;monetary policies, 78

VENEZUELA—balance of paymentsand reserves, 67*, 74*, 76*; Fundquota, proposed increases in, 32*,129*

VIET-NAM—balance of payments andreserves, 76*; Fund quota, pro-posed increase in, 129*

WAGE COSTS—industrial countries, 44;see also individual countries

WAGES—industrial countries, 4, 41-44;see also individual countries

WHEAT—72t, 91WOOL—72t, 91WORLD RESERVES—see Reserves, Gold

and Foreign ExchangeWORLD TRADE—3, 41, 53-68; direc-

tion, 53*, 54*

YUGOSLAVIA—balance of paymentsand reserves, 74*, 76*; Fund quota,proposed increase in, 129*; trans-action with Fund, 112*

ZAMBIA—membership in Fund, appli-cation for, 31

ZINC—72t
