Chapter

Chapter 6 Balance of Payments Developments

Author(s):
International Monetary Fund
Published Date:
September 1961
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Global Survey

IN 1960 there was a far greater contrast than in any other postwar year between the underlying strength (or weakness) of the balances of payments of certain major countries and their over-all surpluses (or deficits). Large-scale movements of short- term capital more than counterbalanced marked changes in trade and other transactions of a more basic character. Under these circumstances, it is less meaningful than in earlier years to describe balance of payments developments primarily in terms of the over-all surpluses and deficits of major countries and areas. Rather, attention should be directed to their basic balances of payments, excluding transitory short-term capital movements.

The contrasting development of the over-all balance of payments position and of the more basic payments accounts is evident in the experience in both of the two reserve centers. For the United States, the large outflow of short-term capital overshadowed the substantial improvement in the balance on current and long-term capital account, leaving its over-all deficit slightly larger at $3.7 billion (Table 9). Conversely, the large inflow of short-term capital into the United Kingdom more than offset the deterioration of its balance on current and long-term capital account, resulting in a change from deficit to surplus in its over-all balance. But for certain special capital transactions, discussed later, the over-all position would have been largely unchanged.

Table 9.World Balance of Payments Summary, 1959 and 1960(In billions of U.S. dollars)
Surplus or Deficit (—)

on Account of Identified

Current and Long-Term

Capital Transactions
Over-All Surplus

or Deficit (—)
1959196019591960
United States-4.3-1.9-3.4-3.7
United Kingdom-0.7-1.2-0.510.21
Other manufacturing countries3.72.53.424.22
Primary producing countries....3....31.2-0.4
Total........0.740.34
Sources: Based on data reported to the International Monetary Fund, and Fund staff estimates.

Reserve movements and changes in sterling liabilities, as shown in Table 11.

For comparability with the data for the United States and the United Kingdom, these figures have been derived as a residual from the known addition to world official gold holdings (Table 16, page 112) less the other items shown here. The combined surplus of “other manufacturing countries,” as measured by changes in official reserves, net IMF positions, and commercial bank assets, was about equal to the 1959 figure given here, and about $0.5 billion larger than the 1960 figure. Although part of the discrepancy may arise from errors in the estimates for the other items in the table, it seems likely that it reflects mainly an increase in bank and other short-term liabilities of “the other manufacturing countries” to one another.

Not available, but likely to be of the same order of magnitude as the entries for the over-all surplus or deficit.

Equals additions to world official gold holdings; see Table 16.

Sources: Based on data reported to the International Monetary Fund, and Fund staff estimates.

Reserve movements and changes in sterling liabilities, as shown in Table 11.

For comparability with the data for the United States and the United Kingdom, these figures have been derived as a residual from the known addition to world official gold holdings (Table 16, page 112) less the other items shown here. The combined surplus of “other manufacturing countries,” as measured by changes in official reserves, net IMF positions, and commercial bank assets, was about equal to the 1959 figure given here, and about $0.5 billion larger than the 1960 figure. Although part of the discrepancy may arise from errors in the estimates for the other items in the table, it seems likely that it reflects mainly an increase in bank and other short-term liabilities of “the other manufacturing countries” to one another.

Not available, but likely to be of the same order of magnitude as the entries for the over-all surplus or deficit.

Equals additions to world official gold holdings; see Table 16.

Since the improvement in the basic position of the United States was much greater than the worsening in that of the United Kingdom, the combined deficit of the two countries on account of goods and services, economic aid, and long-term capital showed a substantial improvement which continued into early 1961. When allowance is made for unidentified receipts from similar transactions, the combined deficit on these items may be estimated at perhaps $4½ billion in 1959, when it was concentrated in the United States, and at about $2½ billion in 1960, when it was more evenly divided. In the first quarter of 1961, the United States had a small basic surplus and the United Kingdom a somewhat larger basic deficit. The combined deficit of the two reserve centers (again with allowance for unidentified transactions) had been reduced to an annual rate of $½-1 billion.

For the other manufacturing countries, the over-all balance of payments surplus, measured on a basis comparable to that of the reserve centers,1 rose from slightly less than $3½ billion in 1959 to more than $4 billion in 1960. This rise in the over-all surplus, however, was attributable to a heavy inflow of short-term capital. The combined basic surplus of these countries (on goods and services, long-term capital, and aid) was reduced from about $3¾ billion in 1959 to about $2½ billion in 1960. In both years, most of this surplus was accounted for by countries in the European Economic Community (EEC). The basic surplus of Germany rose somewhat, but that of France, Italy, and the Netherlands together fell by about $1 billion. Japan’s basic surplus also fell, from about $0.4 billion to about $0.1 billion. The reduction in the underlying imbalance of the group accelerated in the second half of 1960 and continued into the first quarter of 1961.

The combined over-all balance of payments of primary producing countries changed from a surplus of over $1 billion in 1959 to a deficit of about $0.4 billion in 1960. Since the changes in the movements of short-term capital to and from the primary producing countries are believed to have been small, this shift presumably reflected a worsening of the same order of magnitude in their balance on goods and services, long-term capital, and economic aid.

The progress toward equilibrium in international payments that was made from 1959 to 1960, through reductions in the basic underlying deficit of the United States and in the basic surplus of the manufacturing countries in continental Europe and of Japan, was due in large measure to cyclical factors. Moreover, this progress was in part offset by the rise in the deficit of the United Kingdom and the worsening of the position of a number of primary producing countries. The situation in general, therefore, remained a cause for concern and continued to call for close attention and coordinated action by national authorities.

The development of international transactions in 1959 and 1960 has uncovered certain disparities in the assessment of balance of payments surpluses and deficits by individual countries. In the foregoing analysis, changes in liquid liabilities to foreign monetary institutions, whether official or private, have been included in the measure of the over-all deficits (or surpluses) of the two reserve countries. The over-all surpluses of the other manufacturing countries have been defined in symmetrical terms (i.e., to include changes in corresponding dollar or sterling assets). In these terms, the sum of over-all balance of payments surpluses and deficits (including those of the primary producing countries) is equal to the increase in world reserves resulting from additions to world monetary gold holdings. These totaled nearly $700 million in 1959 and more than $300 million in 1960 (Table 9).

In practice, however, no such symmetry exists within the present system of national estimates of balance of payments surpluses and deficits. For example, several countries, when measuring their over-all surpluses or deficits, do not include changes in commercial bank assets; therefore, an increase in the deficit of one of the reserve countries reflected in increased liabilities to foreign banks may have no counterpart in an increased surplus of any other country. Hence, at a time when commercial banks’ holdings of foreign exchange assets in the reserve centers are increasing, as they were in 1959, there may be a tendency for the sum of balance of payments deficits to exceed that of surpluses, as measured by the countries themselves.

In 1959, the excess of deficits over surpluses was particularly striking owing to inconsistencies in the treatment of EPU repayments by debtor and creditor countries, and to the inclusion by some countries of new subscriptions to the International Monetary Fund as long-term capital movements rather than as changes in the composition of reserves. In fact, as measured by the countries themselves, the combined surplus of the manufacturing countries, other than the United States and the United Kingdom, was about $1¼ billion smaller than the estimate in Table 9. It consequently appeared to be much smaller than the combined deficit of those two countries, instead of being of broadly the same order of magnitude. This difference of view may have been partly responsible for a difference of perspective, as between the deficit and surplus countries, regarding the need for balance of payments adjustments in 1959.

In 1960, however, the inconsistencies in the interpretation of surpluses and deficits had, fortuitously, much less effect because of a different distribution of changes in foreign exchange assets and liabilities among countries; the indirect estimate in Table 9 of the combined surplus of the manufacturing countries other than the United States and the United Kingdom is close to the sum of their own estimates of their over-all balance of payments.

United States

The U.S. deficit of $3.7 billion, as measured by net gold and dollar transfers to foreign official institutions and banks, was only slightly larger than in 1959 (Table 10). However, the pattern of payments was strikingly different in several respects. The U.S. trade surplus rose from an exceptionally low figure of less than $1 billion in 1959 to $4.7 billion, but this improvement was offset after mid-1960 by abnormally large capital outflows. In contrast to 1959, virtually all of the gold and dollar transfers in 1960 accrued to foreign official institutions, and U.S. gold sales to foreign countries were about $1 billion higher than in 1959 (Table 17, page 113). They expanded markedly in the second half of 1960, when the over-all deficit rose sharply and the increase in dollar holdings of commercial banks was reversed.

Table 10.United States: Balance of Payments Summary, 1958-First Quarter 19611(In millions of U.S. dollars)
19601961
195819591960Jan-

Mar
Apr-

Jun
Jul-

Sep
Oct-

Dec
Jan-

Mar
Goods and services2
Exports of merchandise f.o.b.16,26316,28219,4094,6074,9944,6765,1325,001
Imports of merchandise f.o.b.-12,951-15,294-14,722-3,830-3,857-3,550-3,485-3,406
Military expenditures-3,412-3,109-3,048-767-756-798-727-759
Other services21,6501,5021,48637629467749515
Total1,550-6193,1253866753951,6691,351
Government grants and capital-2,587-1,986-2,7503-605-8043-562-7793-910
Private long-term capital
U.S. direct investment-1,094-1,372-1,6944-303-331-327-7334-424
U.S. portfolio investment-1,444-926-850-258-229-149-214-68
Foreign capital2455529718715023-63119
Total-2,514-1,743-2,247-374-410-453-1,010-373
Balance on goods and services,2 long-term capital, and aid-3,551-4,348-1,872-593-539-620-12068
Balance, seasonally adjusted-491-481-360-540166
Short-term capital
U.S. private-306-77-1,312-90-164-448-610-445
Foreign private119330-236-107-4-63-62-107
International nonmonetary institutions28314439383619715255
Total96397-1,155-114-107-414-520-497
Net errors and omissions380528-64849-128-117-45269
Change in gold and liquid liabilities to foreign

official and banks
Liabilities to foreign banks481,1401054571325-489-13
Liabilities to foreign official holders7521,5521,86815154850966027
U.S. gold holdings (increase —)2,2757311,70250946379213465
Total3,0753,4233,6756587741,1511,0923605
Memorandum item: change in gold holdings

and liquid liabilities, seasonally adjusted
3,4773,8973,8326147061,1061,4062885
Sources: U.S. Department of Commerce, Survey of Current Business, and Fund staff estimates.

Excluding military aid and transfers financed by it. No sign indicates credit; minus sign indicates debit.

Including remittances and pensions.

Including subscriptions to the Inter-American Development Bank ($80 million) in the second quarter and the International Development Association ($74 million) in the fourth quarter.

Including transfer in connection with purchase by the Ford Motor Company of the minority interest in its U.K. subsidiary (debit of $370 million).

Including an increase (debit of $25 million) in convertible currency holdings of U.S. monetary authorities.

Sources: U.S. Department of Commerce, Survey of Current Business, and Fund staff estimates.

Excluding military aid and transfers financed by it. No sign indicates credit; minus sign indicates debit.

Including remittances and pensions.

Including subscriptions to the Inter-American Development Bank ($80 million) in the second quarter and the International Development Association ($74 million) in the fourth quarter.

Including transfer in connection with purchase by the Ford Motor Company of the minority interest in its U.K. subsidiary (debit of $370 million).

Including an increase (debit of $25 million) in convertible currency holdings of U.S. monetary authorities.

Although the over-all deficit was reduced in the first half of 1960 to a seasonally adjusted annual rate of about $2½ billion, it rose in the second half of the year to about $5 billion. The balance on current and long-term capital account (including U.S. Government aid), which comprises mainly the basic elements that determine the balance of payments in the longer run, showed a deficit of only $1.9 billion for 1960 as a whole (with little change between the first and the second half of the year when seasonally adjusted), compared with a deficit of $4.3 billion in 1959—an improvement of $2.4 billion.

On the other hand, the net movement in U.S. and foreign private short-term capital and unidentified transactions, which had been inward to the extent of $0.8 billion in 1959, was outward to the extent of about $2.2 billion in 1960. The outflow rose from quarter to quarter and reached an annual rate of $3.5 billion in the second half of the year.

The improvement in the balance of payments on goods and services (including military expenditures, pensions, and private remittances), which had begun in the second half of 1959, was strongly maintained in 1960. In 1959, a deficit of $0.6 billion on a seasonally adjusted basis in the first three quarters was followed by an approximate balance in the last quarter. Thereafter, the quarterly figures showed an increasing surplus, rising to seasonally adjusted annual rates of $5.3 billion in the last quarter of 1960 and $5.6 billion in the first quarter of 1961. The surplus of $3.1 billion for the year 1960 was twice that of 1958 and about the same as that of 1956, though $2.0 billion smaller than the surplus in 1957. This improvement in the goods and services balance was due predominantly to the recovery of the U.S. trade surplus from its exceptionally low figure in 1959 to about the same high figure as in 1956.

The improvement in the trade balance arose principally from a sharp increase in U.S. exports; after having fallen by over one sixth from 1957 to 1958 and scarcely changing from 1958 to 1959, the value of exports in 1960 exceeded that in 1957. In addition, imports in 1960 were some 4 per cent below their peak in 1959. In the first half of the year, exports were about 17 per cent higher, at a seasonally adjusted annual rate, than during 1959, while imports were about the same. In the second half, exports were some 23 per cent higher than during 1959, while imports were about 7 per cent lower. However, the rise in exports slowed down considerably after the second quarter of 1960; indeed, it virtually ceased if exports financed under aid programs are excluded. More than two thirds of the improvement in the seasonally adjusted trade balance between then and the first quarter of 1961 (amounting to some $2.7 billion on an annual basis) was due to the continued fall in imports.

Part of the improvement in the goods and services account was offset by an increased outflow of long-term capital and aid. The net outflow of private long-term capital, government loans, and nonmilitary aid totaled about $3.7 billion in 1959. It rose to an annual rate of about $4.4 billion in the first half of 1960 and to one of $5.6 billion in the second half of the year, partly under the impact of certain special factors and partly in response to the difference between the trade cycle position of the United States and that of other industrial countries.

The rise in the net outflow of private long-term capital in the second half of 1960 was due, to a considerable extent, to the cessation of net foreign investment in the United States. Foreigners purchased $300 million net of U.S. corporate securities in the first half of the year, but were net sellers after mid-year, as signs of recession appeared. Early in 1961 they were net purchasers once again. The recorded net outflow of U.S. private long-term capital increased by $250 million from 1959 to 1960. It rose sharply in the second half of 1960 as a result of the large transfer in connection with the purchase by the Ford Motor Company of the minority stockholdings in its British subsidiary. Exclusive of this transfer, total direct investment abroad remained unchanged between 1959 and 1960; direct investment in Western Europe rose by over $100 million, but that in Latin America declined. New issues of foreign securities on the U.S. market were smaller than in any year since 1956. Such issues have been reduced in recent years because of fewer flotations by the World Bank; in 1960, there was also less borrowing by Western Europe and Canada.

Government loans and nonmilitary aid totaled nearly $2.8 billion in 1960, compared with just under $2 billion in 1959 and $2.6 billion in 1958. Much of the increase from 1959 to 1960 was a reflection of the unusually small net government lending in 1959; but more than half of the change is explained by the nonrecurrence of large advance debt repayments to the United States made in the first and fourth quarters of 1959. The remainder of the increase is attributable in large part to the U.S. subscriptions in 1960 to the newly established Inter-American Development Bank and the International Development Association. Grants showed little change from 1959.

The balance of identified short-term capital movements changed from an inflow of $0.4 billion in 1959 to an outflow at an annual rate of $2.0 billion in the second half of 1960. Equally important was the change in the balance of “errors and omissions” (which is usually positive for the United States) from an inflow of $0.5 billion in 1959 to an outflow of $1.1 billion (on an annual basis) in the second half of 1960. These changes reflected differences in money market conditions in the United States and foreign countries and, toward the end of the year, uncertainty about exchange rates and the price of gold. The change in the balance of recorded short- term capital movements occurred mainly in transactions with Western Europe and Japan. A large part of the unidentified outflow also appears to have gone to European markets, including some, such as Switzerland, where interest rates were lower than in the United States. An increase of $470 million in bank claims on Japan in 1960 was largely a consequence of changes in Japanese exchange regulations, which broadened the use of dollar acceptance credits for financing imports and permitted the establishment of convertible yen accounts for foreigners. Short-term claims on Latin America rose by $200 million, mainly on account of bank lending to certain countries which suffered payments difficulties in 1960.

In the first quarter of 1961, the balance of goods and services, long-term capital, and aid showed a small surplus amounting, on a seasonally adjusted basis, to an annual rate of about $0.7 billion. This compared with a corresponding deficit of almost $2.0 billion in the same quarter of 1960. The improvement was mainly a reflection of a rise of $3.3 billion (annual rate) in the trade surplus, in part offset by an increase of $1.2 billion in the outflow of government grants and capital. About three fourths of this latter increase was connected with the financing of U.S. exports. Moreover, much of the improvement in the trade balance was attributable to the cyclical factors described in the preceding chapter. Imports were about $1.7 billion (annual rate) lower than during the same period of 1960, and may be expected to increase again as industrial activity expands.

While the recorded outflow of short-term capital continued at a high rate, there was a small inflow on account of unidentified transactions, in place of the large outflow in the fourth quarter of 1960; this suggests a change in capital movements of the type that reflect mainly confidence factors. As a result of this, and of the further improvement in the basic balance, there was a sharp reduction in the over-all deficit, as measured by the net gold and dollar transfers to foreign official institutions and banks. The over-all deficit of $360 million was approximately matched by sales of gold, but these occurred mainly during the month of January. The liquid dollar assets of foreign official institutions and banks declined by $330 million during that month and rose again during February and March.

United Kingdom and Sterling Area

The underlying balance of payments position of the United Kingdom weakened after the first half of 1959, as the surplus on current transactions gave way to increasing deficits, while the recorded net outflow of long-term capital, excluding certain special transactions, continued to exceed $500 million a year. The total deficit on these accounts rose by more than $1 billion, to about $1.5 billion, in 1960 (Table 11). This marked deterioration in the underlying position was not, however, reflected in the reserves. When the effect of special capital transactions is again excluded, the over-all deficit measured by changes in reserves (including IMF and EPU positions), net of increased liabilities in the form of overseas sterling holdings, was slightly less than in 1959. While the balance on current and recorded long-term capital account worsened, there was a greatly increased inflow of private short-term capital and unidentified credits, induced by the relatively high interest rates in the United Kingdom during 1960. However, there was a considerable weakening of foreign exchange liquidity, as the very large increase in the sterling holdings of non-sterling countries in 1960 substantially exceeded the rise in total reserves. At the same time, the overseas sterling countries, because of the marked deterioration of their balances of payments, drew increasingly upon their sterling holdings, whereas they had added considerably to these holdings in 1959. This combination of adverse balance of payments developments, for both the United Kingdom and the overseas sterling area, weakened the basic position of sterling during 1960.

Table 11.United Kingdom: Balance of Payments Summary, 1958-First Quarter 19611(In millions of U.S. dollars)
195919601961
195819591960First

Half
Second

Half
First

Half
Second

Half
First

Quarter
Goods, services, and donations
Exports f.o.b.9,4979,82510,390
Imports f.o.b.-9,324-10,018-11,4164,844-5,174-5,693-5,723-2,926
Trade balance173-193-1,026-11-182-354-672-162
Services and donations6413366225581132-706
Total814143-964244-101-222-742-156
Long-term capital
Repayment of Export-Import Bank loan-249-249
Other official long-term-137-1933280-62-187-106-174-65
Private long-term
Abroad (net)-904-888-767-456-432-381-386
-2053
In United Kingdom (net)54049085132552351766753
Total-501-840-196-207-633-311115-270
Balance on goods and services and long-term capital313-697-1,16037-734-533-627-426
Balance excluding two special transactions4313-448-1,52637-485-533-993-426
Private short-term capital62233367-45115218168
Net errors and omissions2771801,057186-6396661140
Changes in sterling holdings
Of non-sterling area4282531,310224122163509603253
Of sterling area-249518-627364154-84-543-104
Total179493683123370266417-79
Reserve movements (increase —)
Net IMF position-16-3785-423-356-225-90-333-13
EPU debit balance-282525
Official holdings
Nonconvertible currencies642262233
Gold and convertible currencies-795333-496-104437-157-339210
Total-7752-913-413415-244-669197
Memorandum item: change in reserves and

sterling balances plus two special transactions4
246136-29053622114118
Sources: United Kingdom Balance of Payments 1958 to 1960 (Cmnd. 1329), and Fund staff estimates. In Cmnd. 1329, a number of changes in sources and methods have been made which have led to substantial revisions of many of the previous estimates; in particular, the surpluses on account of goods, services, and donations, and the deficits on long-term capital, are now much smaller than previous estimates.

No sign indicates credit; minus sign indicates debit.

Excluding the conversion into a Treasury Bond of the balance of $104 million remaining in the German debt repayment account. The additional subscription ($650 million) to the IMF is excluded from long-term capital and included, together with the accompanying increase in sterling liabilities to the IMF (credit of $488 million), in net IMF position.

For comparability with the data for the United States in Table 10, the purchase by the Ford Motor Company of the minority interest in its U.K. subsidiary is treated as if it had been completed in December 1960. Accordingly, the accumulation of sterling balances for this purpose during December 1960 and their withdrawal to pay the stockholders during the first quarter of 1961 are omitted from the table.

Repayment of Export-Import Bank loan ($249 million in 1959) and the transaction mentioned in footnote 3.

See footnote 2.

Sources: United Kingdom Balance of Payments 1958 to 1960 (Cmnd. 1329), and Fund staff estimates. In Cmnd. 1329, a number of changes in sources and methods have been made which have led to substantial revisions of many of the previous estimates; in particular, the surpluses on account of goods, services, and donations, and the deficits on long-term capital, are now much smaller than previous estimates.

No sign indicates credit; minus sign indicates debit.

Excluding the conversion into a Treasury Bond of the balance of $104 million remaining in the German debt repayment account. The additional subscription ($650 million) to the IMF is excluded from long-term capital and included, together with the accompanying increase in sterling liabilities to the IMF (credit of $488 million), in net IMF position.

For comparability with the data for the United States in Table 10, the purchase by the Ford Motor Company of the minority interest in its U.K. subsidiary is treated as if it had been completed in December 1960. Accordingly, the accumulation of sterling balances for this purpose during December 1960 and their withdrawal to pay the stockholders during the first quarter of 1961 are omitted from the table.

Repayment of Export-Import Bank loan ($249 million in 1959) and the transaction mentioned in footnote 3.

See footnote 2.

The rapid deterioration in the U.K. trade balance was the principal cause of the worsening of the current account. In the second half of 1960, the trade deficit (on an f.o.b. basis for imports) was at an annual rate of about $1,350 million, compared with a deficit of $200 million in the whole of 1959 and a surplus of similar size in 1958. The widening of the trade gap was due to a 13 per cent expansion in the volume of imports, while the volume of exports rose by only 5 per cent.

About two thirds of the increase in imports consisted of basic materials and semimanufactures. This expansion was related to the high level of industrial production in 1960, and to a substantial rebuilding of stocks, which had been run down in 1958 and 1959. Imports of certain industrial materials, notably steel, rose because of excess pressure of demand on home capacity. The value of finished manufactures increased by nearly 40 per cent, as domestic demand for both investment and consumer goods was strong. This increase was facilitated by the liberalization measures of 1958 and 1959. A special factor was a large purchase of commercial aircraft from the United States.

The worsening of the trade balance occurred in trade with industrial countries. An increase by more than 50 per cent in U.K. imports from the United States, and a 10 per cent fall in exports to the United States, were responsible for about three fourths of the over-all change. The balance of trade with the rest of the sterling area, and of trade with non-sterling primary producing countries, remained unchanged.

The balance on service transactions also worsened during 1959 and 1960, and the customary surplus gave way to a small deficit in the second half of 1960. Principally as a result of larger military spending (reflecting, inter alia, a reduction of $34 million in German contributions), government expenditures increased by about $160 million, or more than 20 per cent. In addition, net investment income was reduced as income from abroad fell and payments abroad increased, principally because of the rise in interest rates in the United Kingdom.

Changes in long-term capital resulted mainly from two extraordinary transactions—the advance debt repayment to the Export- Import Bank of Washington, which raised the outflow by $249 million in 1959, and the Ford transaction mentioned above, which led to an inflow of about $370 million in the last quarter of 1960. Other changes roughly canceled out. There was some reduction in the net outflow of private long-term capital, owing mainly to the receipt of $67 million compensation from the United Arab Republic, but the outflow of official long-term capital increased by a similar amount. While foreign direct investment, excluding the Ford transaction, increased somewhat, there was an equivalent decrease in other foreign private long-term investment.

The worsening balance of payments position of the overseas sterling area countries was reflected principally in the reduction of their sterling holdings by nearly $100 million in the first half of 1960, and by well over $500 million in the second half, following an increase of about $500 million during 1959. The total fall in the reserves, including changes in net IMF positions, of the overseas sterling area (including the Persian Gulf territories) exceeded $600 million, compared with an increase of about $800 million in 1959. The deterioration in the overseas sterling area’s balance of trade, like that of the United Kingdom, occurred largely in trade with the United States, and was associated with a rapid increase in imports while exports to that country failed to rise.

The heavy inflow of funds into the United Kingdom was in part reflected in an increase in the sterling holdings of non-sterling countries; there were also increases in the recorded inflow of short- term capital from, and in unrecorded credits with, non-sterling countries. In 1959 there had been a small outward movement on account of recorded short-term capital transactions with non- sterling countries and a slight reduction in the sterling holdings of these countries,1 while unrecorded credits with non-sterling countries amounted to $150 million; in 1960 the recorded inflow of short-term capital totaled some $320 million, the sterling holdings of non-sterling countries rose by $1,310 million,2 and unrecorded credits with these countries totaled $770 million. About one quarter of the $370 million increase between 1959 and 1960 in the recorded inflow of private short-term capital from non-sterling countries was due to a sharp decline in the total of acceptances outstanding during the second half of the year. Roughly half the increase in the sterling holdings of non-sterling countries occurred in the third quarter, when the interest rate differentials between London and New York were greatest. Although the increase over the year was due predominantly to a rise in the private and official holdings of Western European countries, about $300 million of it was in private North American holdings. The large increase in the credit for unidentified transactions seems to have been associated with an unrecorded inflow of funds, which may not have comprised only short-term capital. Indirect evidence suggests that part of it may have taken the form of investment in stock exchange securities and hire-purchase companies.

In the first quarter of 1961 there was some improvement in the basic elements of the U.K. balance of payments. Seasonally adjusted imports declined for the first time since early in 1959, and the recovery of exports which had begun in the last quarter of 1960 continued through March. The deficit on goods and services was reduced to less than half the rate of the last six months of 1960, and in spite of a sharp rise in the net outflow of private long-term capital (excluding the Ford transaction), the basic balance on current and long-term capital transactions became somewhat more favorable. However, the deficit of over $400 million on these items was twice as large as in the first quarter of 1960.

The net inflow of funds on account of other recorded capital and unidentified transactions, and of changes in sterling holdings of non-sterling countries, was very much smaller than during the latter part of 1960, and reserves declined by nearly $200 million. The credit item for unidentified transactions was substantially lower than usual during the first quarter, suggesting a reversal of the unrecorded inflow of funds which took place in 1960. Apart from the Ford transaction, there was little change in the total sterling holdings of non-sterling countries, but there was a marked increase in official holdings.

Federal Republic of Germany

German official reserves of gold and freely usable foreign exchange assets (including the net IMF position) rose in 1960 by nearly 50 per cent (more than $2.2 billion—Table 12), after having declined slightly during 1959—for the only time in the 1950’s. If changes in commercial bank foreign exchange assets are included, the over-all surplus increased from about $200 million in 1959 to almost $2 billion in 1960. The greatly increased imbalance in the payments position was almost exclusively a reflection of the change from a large outflow to a large inflow of short-term capital. When special government payments in 1959 are excluded, there was little change in the balance of payments on current and long- term capital account, which in 1960 showed a surplus of $1.1 billion.

Table 12.Federal Republic of Germany: Balance of Payments Summary, 1958-First Quarter 19611(In millions of U.S. dollars)
19601961
195819591960Jan-

Mar
Apr-

Jun
Jul-

Sep
Oct-

Dec
Jan-

Mar
Goods, services, and private donations
Exports f.o.b.8,8039,80111,4102,7192,7392,7443,2082,966
Imports c.i.f.-7,576-8,478-10,101-2,376-2,520--2,455-2,750-2,485
Trade balance1,2271,3231,309343219289458481
Services to foreign troops9239811,021264239249269252
Other goods, services, and private donations-320-654-571-90-114-199-168-132
Total1,8301,6501,759517344339559601
Long-term capital and official donations
Official donations-346-569-562-118-159-126-159-129
Government long-term capital-259-534-303-51-83-92-77-58
Private long-term investment abroad2-244-366-345
-133
-4
-24
63
66
Foreign private long-term investment in Germany256240247
Repayment received on former EPU debt24427743341772363
Other Bundesbank assets (increase —)-611361533-2112-94
Total-854-849-671-226-233-53-159-54
Short-term capital (including net errors and omissions)
Government short-term capital53-278-179-2267631-60-12
Commercial bank credits extended (increase —)-80-14-30-35-344-52
Bundesbank and commercial bank liabilities3-113427910130913022
Other short-term capital264-1774852961171224184
Net errors and omissions-155-11830844226255-217145
Total-231-583863-17849047081287
Commercial bank foreign exchange assets (increase —)-63-2992923828342-71-441
Reserve movements (increase —)4-68281-2,243-151-884-798-410-393
Sources: Deutsche Bundesbank, Monthly Report, and Fund staff estimates.

No sign indicates credit; minus sign indicates debit.

Private long-term capital excludes, and other short-term capital includes, transactions in fixed-interest-bearing securities. However, the 1958 figure for private long-term investment abroad includes transactions in fixed-interest-bearing securities during the first half of the year, since separate data for such transactions are not available for that period.

Mainly short-term credits obtained abroad and deposits of private foreigners.

Covers gold, freely usable foreign exchange, EPU credit balance, and net IMF position.

Sources: Deutsche Bundesbank, Monthly Report, and Fund staff estimates.

No sign indicates credit; minus sign indicates debit.

Private long-term capital excludes, and other short-term capital includes, transactions in fixed-interest-bearing securities. However, the 1958 figure for private long-term investment abroad includes transactions in fixed-interest-bearing securities during the first half of the year, since separate data for such transactions are not available for that period.

Mainly short-term credits obtained abroad and deposits of private foreigners.

Covers gold, freely usable foreign exchange, EPU credit balance, and net IMF position.

The surplus on goods and services account rose by about $100 million, mainly as a result of a sharp rise in re-exports. Receipts for services to foreign troops and the balance of special trade showed only minor changes. While exports grew more rapidly from 1959 to 1960 than from 1958 to 1959, imports rose at an even higher rate. Rising exports of machinery reflected the growth of orders received in 1959, but deliveries in 1960 did not keep pace with fresh orders. Imports of industrial raw materials rose by one fifth, of semimanufactures by more than one third, and of finished manufactures by one quarter. Increasing shortages and delays in delivery of machinery, and of materials and components for capital goods, stimulated import demand in spite of the fact that foreign prices were sometimes higher than German prices. Imports of agricultural products rose much less than in 1959, as a result of the good harvest in 1960.

In both 1959 and 1960, German private long-term investment abroad exceeded foreign private long-term investment in Germany by about $100 million; the changes from 1959 to 1960 in both categories were small. The reduction by almost $200 million in 1960 in the outflow on account of long-term capital and official donations resulted largely from the nonrecurrence of certain special official payments that had taken place in 1959, i.e., advance repayment of debt and payments to France in connection with the transfer of the Saar. When these special transactions are excluded, the balance on current and long-term capital transactions was about $1.1 billion both in 1959 and in 1960. These amounts include, each year, about $250 million in repayments of bilateral claims, which Germany took over at the liquidation of the EPU, and on which the outstanding balance at the end of 1960 was about $500 million. Since these claims are scheduled to be repaid within a relatively short period, the repayments may perhaps be disregarded in an assessment of the basic balance of payments problem of Germany. If so, the hard core of this problem as it appeared in 1960 was an annual surplus of the order of $800- 900 million.

Most of the change in the German over-all balance of payments position from 1959 to 1960 resulted from movements of short- term capital, including fixed-interest-bearing securities. The total alteration on account of short-term capital movements, changes in commercial bank foreign exchange assets, and “errors and omissions” was more than $2 billion. The heavy inflow of short- term capital in the second and third quarters of the year was occasioned by the wide differential which developed between interest rates in the Federal Republic and other important centers, particularly the United States; by the restriction of liquidity, which caused banks to repatriate funds held abroad, especially in the second quarter of the year; and by speculation concerning possible changes in exchange rates. These factors led, at least temporarily, to a substantial inflow of foreign exchange, particularly through changes in the terms of payment, which seem to have been responsible for the large credit in the item for “errors and omissions” in the second and third quarters of the year.

The principal effect of the steps taken by the authorities to restrain the inflow of capital, as described in Chapter 5, seems to have been to change the form of the flow of capital into Germany. Much of the inflow in the second half of 1960 took the form of foreign purchases of German fixed-interest-bearing securities, which totaled more than $300 million over the year.

In the first quarter of 1961, the German surplus on current and long-term capital account was about $250 million higher than in the corresponding quarter of 1960. There was an increase of about $100 million in the surplus on goods and services account and a change of $200 million, from a net outflow to a net inflow, in private long-term capital excluding fixed-interest- bearing securities. There was again a substantial inflow on account of unrecorded transactions, and the large recorded inflow of private nonbank short-term capital continued. On March 6, the German authorities appreciated the deutsche mark by 5 per cent. Plans are also being formulated to increase substantially the amount of economic aid extended by Germany. These measures, and the significant rise in wages during 1960 and early in 1961, may help to reduce the persistent surplus in the German balance of payments.

Other Western European Manufacturing Countries and Japan

The other Western European manufacturing countries and Japan accounted for a large proportion of the balance of payments surpluses which arose in 1959. As measured by the change in their gold and foreign exchange holdings (including the holdings of commercial banks and the net IMF positions), this group of countries had a surplus of well over $3 billion in that year (Table 13). In 1960 there was a considerable reduction in the basic elements of imbalance which had given rise to the surpluses of 1959. Thus the surplus on goods and services account, which had amounted to nearly $2.8 billion in 1959, was reduced to a little over half that sum in 1960 and showed signs of further reduction early in 1961. As described in the following pages, the extraordinarily large over-all surpluses of France and Italy in 1959 were approximately halved in 1960, and the current account surpluses of the Netherlands and Japan were considerably reduced. Nevertheless (mainly as a result of the increased inflows of short- term capital, or of long-term capital induced by temporary factors, particularly into the last two countries and Switzerland), the total gold and foreign exchange holdings of the whole group again improved, by $2¾ billion. Of this total, however, about $500 million may have comprised claims on other countries in the group (see footnote 2 to Table 9). France, Italy, the Netherlands, and Japan, discussed below, recorded further large increases in holdings of gold and foreign exchange, but there were only slight changes in the holdings of Austria, Denmark, Norway, and Sweden. While the balance of payments of a few of the ten manufacturing countries listed in Table 13 weakened slightly from 1959 to 1960, the group as a whole was characterized by a combination of high economic activity and a comfortable balance of payments position.

Table 13.Other Manufacturing Countries of Western Europe, and Japan: Balance of Payments Summaries, 1959 and 19601(In millions of U.S. dollars)
19591960
Balances ofIncrease (—) or Decrease inBalances ofIncrease (—) or Decrease in
Goods,

services,

and

private

donations
Private

capital2
Official

grants

and

capital3
Commercial

bank

assets
Reserves4Goods,

services,

and

private

donations
Private

capital2
Official

grants

and

capital3
Commercial

bank

assets
Reserves4
Austria4833-53....-28-56111-36....-19
Belgium-Luxembourg232-200-2-10676144-686220-158
Denmark212016-35-103-7782-551535
France, Metropolitan684399-187....5-1,0215,6682285-404-194-5176
Italy781406-134-174-879360268-88-337-203
Netherlands488-186-59-247433193-2711-408
Norway-80149-461-24-106156-6-23-21
Sweden-10509-8132-9185557-56
Switzerland174-140-37....3552077........-262
Japan431191-60-120-4428223519-73-201-4688
Source: Based on data reported to International Monetary Fund. For 1960, the data for some countries are provisional and are not comparable with those for 1959.

No sign indicates credit; minus sign indicates debit.

This item is a residual and includes net errors and omissions.

Excluding capital movements considered as reserve movements; see footnote 4.

Reserve movements generally cover changes in gross official holdings of gold and convertible foreign exchange assets, in net payments agreements balances, and in net IMF, EPU, and European Fund positions. The changes in net EPU positions cover only the settlements. Made before January 15 1959, the date of the liquidation of the Union. The conversion of EPU balances outstanding on that date into bilateral claims between individual countries is not reflected in the table; the subsequent payments on these bilateral claims are included with official grants and capital.

Changes in commercial bank net assets are included in reserve movements.

Reserve movements include settlements by Metropolitan France on behalf of other franc area countries and differ by that amount from the total of transactions of Metropolitan France with the non-franc area. They are measured net of official short-term liabilities.

Official capital is included in private capital

Excluding gold holdings not previously counted as reserves.

Source: Based on data reported to International Monetary Fund. For 1960, the data for some countries are provisional and are not comparable with those for 1959.

No sign indicates credit; minus sign indicates debit.

This item is a residual and includes net errors and omissions.

Excluding capital movements considered as reserve movements; see footnote 4.

Reserve movements generally cover changes in gross official holdings of gold and convertible foreign exchange assets, in net payments agreements balances, and in net IMF, EPU, and European Fund positions. The changes in net EPU positions cover only the settlements. Made before January 15 1959, the date of the liquidation of the Union. The conversion of EPU balances outstanding on that date into bilateral claims between individual countries is not reflected in the table; the subsequent payments on these bilateral claims are included with official grants and capital.

Changes in commercial bank net assets are included in reserve movements.

Reserve movements include settlements by Metropolitan France on behalf of other franc area countries and differ by that amount from the total of transactions of Metropolitan France with the non-franc area. They are measured net of official short-term liabilities.

Official capital is included in private capital

Excluding gold holdings not previously counted as reserves.

The large goods and services surplus of France with countries outside the franc area remained, on a payments basis, the same as in 1959. Within the total of about $680 million, the net expenditures of foreign governments again amounted to $340 million. Although the value of French export shipments increased by more than one fourth, in line with that of imports from non-franc countries, the surplus on visible trade fell by some $400 million, to less than $50 million in 1960. This reduction reflected changes in “leads and lags,” which had been particularly favorable during 1959 following the devaluation at the end of 1958; it was also associated with the lengthening of the time accorded for repatriation of export proceeds, from three months in 1959 to six months in 1960. The deterioration on trade account was, however, offset by improvements in services—in particular foreign travel and miscellaneous transactions.

Despite the fact that the balance on goods and services in 1960 was similar to that in 1959, France’s over-all surplus in 1960 was about $500 million smaller than in the preceding year. As measured by the increase in official reserves (including the net IMF position and payments agreements liabilities) and in commercial bank foreign exchange holdings (net of an increase of $172 million in liabilities), it totaled about $550 million. The inflow of private long-term capital was about $100 million smaller than in 1959, although it was still high, amounting to about $300 million. The net outflow on account of official long-term capital transactions and grants, which had been about $200 million in 1959, doubled in 1960, partly as a result of the nonrecurrence of certain special receipts from the Federal Republic of Germany in connection with the transfer of the Saar. Official debt repayments, including those on the consolidated EPU debt, continued at a rate of about $300 million a year. The net balance of the overseas franc area with the world, excluding France, also worsened from 1959 to 1960.

Italy’s accumulation of reserves, which had been heavy in recent years, moderated in 1960. Total holdings of gold and foreign exchange rose by less than $550 million, following an increase of about $1 billion in 1959 and somewhat less in 1958 (when account is taken of changes in the net IMF and EPU positions during those years). In 1960 the Italian authorities authorized the commercial banks to participate on a large scale in the financing of foreign trade, and permitted them to hold much larger foreign exchange balances than formerly. In consequence, the holdings of commercial banks increased by more than $300 million in 1960.

The surplus on goods and services and private donations was reduced from about $780 million in 1959 to about $360 million in 1960. Net receipts from tourism rose by a further $100 million but, despite the continued rapid growth of exports, there was an increase of $500 million in the trade deficit, which had been unusually small in 1959. A very sharp rise in imports seems to have been due in part to liberalization measures, but mainly to the rapid expansion of the economy. There were large increases in imports of raw materials (notably cotton, metals, and timber), chemicals, and industrial equipment; in addition, wheat imports rose because of the poor cereal crop, and there were substantial purchases of jet aircraft from the United States.

The balance on private long-term capital movements appears to have remained about the same in 1960 as in 1959. On the one hand, the inflow of foreign capital increased by about $140 million; borrowing abroad by Italian enterprises was smaller than in either 1959 or 1958, but foreign direct investment and net purchases of Italian securities rose even more rapidly than in preceding years. On the other hand, private investment abroad increased from about $50 million in 1959 to more than $150 million in 1960, even though private purchases of foreign securities remained severely restricted. In addition, private export credits under government guarantee for the purchase of Italian capital goods, which were extended mainly to less developed countries, continued at a rate of about $100 million.

The surplus of the Netherlands on goods and services and private donations in 1960 was about $150 million smaller than in 1959, owing to a deterioration in the balance of trade. However, official reserves (including the net IMF position) rose by $400 million; the foreign exchange assets of commercial banks were almost unchanged. (In 1959 these assets rose by about $250 million while official reserves were unchanged.) There was a small net inflow of private long-term capital in 1960, following a slight outflow in 1959, but the principal cause of the greater accumulation of reserves in 1960 was the net inflow of short-term capital (including bank funds and unidentified transactions), in contrast to a very substantial outflow in 1959.

The surplus on goods and services account has in recent years been a higher percentage of GNP in the Netherlands than in any other industrial country, and in spite of the fall from 1959 to 1960 the ratio was still almost 3 per cent, compared with about 2¾ per cent for Germany. Heavy pressure of demand upon domestic resources has been generated mainly by the foreign surplus. When the appreciation of the deutsche mark by 5 per cent in March 1961 was believed likely to increase the pressure, the Netherlands authorities, in view of the country’s close economic ties with the Federal Republic, decided to revalue the guilder correspondingly.

Japan’s surplus on goods, services, and private donations, which was $500 million in 1958 and $430 million in 1959, fell to $220 million in 1960, while the net outflow on account of private long-term capital and official financing increased. Nevertheless, Japan’s official reserves (including the net IMF position but excluding gold not previously counted as reserves) increased by $470 million during 1960. This rise, which was even larger than that of 1959, was mainly the result of a net inflow of about $400 million of short-term bank funds (compared with $100 million in 1959), due in turn to a further and larger increase in import usance bills, a substantial rise in borrowing from foreign banks, and a considerable inflow into the nonresident free yen accounts established in July 1960. As in 1959, part of the increase in short-term liabilities was offset by an increase in the short-term assets of the banking system.

Much of the decline in the current account surplus was due to the deterioration in the balance of trade and the consequent increase in the deficit for transportation and insurance arising from the growth of imports. The deficit on service transactions was also increased by the substantial relaxation of restrictions on transactions in invisibles. Under the program adopted in June 1960, restrictions on invisibles are, in principle, to be abolished within two years, and liberalization of imports is to be extended within three years to 80 per cent of imports (or, if imports of coal and petroleum are liberalized, to 90 per cent). Japan’s exports rose steadily during 1960, helped by favorable conditions, including reduced discrimination, in a number of markets. But while the value of exports rose by 18 per cent, imports (f.o.b.) rose by 22 per cent, stimulated by rising domestic activity and the liberalization of trade. Moreover, exports to the United States, which had been rising rapidly up to the middle of 1960, ceased to expand in the third quarter and declined quite sharply in the last quarter of 1960. In the first quarter of 1961, total exports slackened, largely because of a further decrease in exports to the United States; and, as imports continued to increase, the trade balance again deteriorated. However, reserves increased further in that period, owing to the continuing large inflow of short-term bank funds.

Primary Producing Countries

The balance of payments of primary producing countries as a group tended to deteriorate from 1959 to 1960 (Table 14). Although commodity prices weakened after mid-1960, they were on the average about the same in the two years. A larger volume of exports therefore added to these countries’ earnings in 1960. However, imports tended to rise faster than exports, in delayed response to increased exports to the industrial countries in earlier years. Abnormal capital movements in 1960, as in 1959, subjected a few countries to additional strain.

Table 14.Primary Producing Countries: Balance of Payments Summaries, 1959 and 1960(In millions of U.S. dollars)
Balance of

Goods, Services,

and Private

Donations1
Balance of

Capital and

Official Grants1,2
Increase (—)

or Decrease in

Net Reserves3
Official

Reserves,

- End of

1960
195919601959196019591960
Latin American Republics
Argentina11-1151694376-180-261658
Brazil-250-470343644557254286
Chile-42-145117115-7530113
Colombia60-24137-14-7338153
Dominican Republic-673-9462126
Mexico-50-182112162-6220393
Peru-342266-5-32-1769
Uruguay-44-801849268318213
Venezuela-39436-305-550344114558
Other-196-24970121126128333
Total-690-734603605871292,944
Overseas Sterling Area9
Australia-374-941520582-146103591084310
Burma-13-263918-268125
Ceylon-52-541911334389
Ghana-28-7015281342381
India-428-763565688-13775670
Libya-25-824295-17-1381
Malaya and Singapore6318286-56-149-126775
New Zealand106-67-7627-3040177
Pakistan-102-139191154-89-15313
Rhodesia and Nyasaland-51-29654-14-25196
Union of South Africa22142-58-242-163200244
U.K. Colonial Territories11-370-493398423-28702,772
Other12-137-91136981-7332
Total-1,190-2,5311,9421,830-7527016,998
Other
Canada-1,484-1,2511,4731,21111401,836
Ethiopia-22-1317185-555
Indonesia25-6281118-106-56337
Iran13-106-8286162066184
Iraq30-12-22-29-841254
Spain-6136116323-102-384590
Sudan39-33136-70-33191
Thailand-64-277487-10-60368
Turkey-119-1171051031414252
United Arab Republic

Egyptian Region
-102-7233-126984291
Syrian Region-11-521836-71650
Other14-737-1,1011,0501,255-313-1542,943
Total-2,612-2,4313,1092,862-497-4317,351
Grand Total-4,4925,6965,6545,297-1,16239917,293
For footnotes, see page 101.

No sign indicates credit; minus sign indicates debit.

Including net errors and omissions.

Including change in net IMF position. Reserve movements are generally the changes in gross official holdings of gold and foreign exchange assets as reported in International Monetary Fund, International Financial Statistics. Minus sign indicates an increase in assets, a gold subscription to the Fund, or a repayment of a drawing on the Fund; no sign indicates a decrease in assets or a drawing on the Fund. These movements are not necessarily equal to the changes in the net foreign assets of the monetary system shown in Table 8. Reserve movements here are limited to changes in official gold and foreign exchange holdings. The changes in Table 8 show the net amounts paid out (or received) by the monetary system in acquiring (or disposing of) foreign holdings.

Including drawings of $79 million on special loans from the Export-Import Bank of Washington and other U.S. banks.

Including $115 million for 1959 and $180 million for 1960 of net receipts from swap transactions.

Including $210 million pledged as collateral.

Including drawings of $65 million on special loans from the Export-Import Bank of Washington and other U.S. banks.

Including changes in foreign liabilities.

Excluding Persian Gulf territories.

Including commercial banks.

Including Nigeria. Reserve figures cover all sterling assets.

Iceland, Ireland, and Jordan.

Data for 1959 refer to solar year beginning March 21; data for 1960 refer to calendar year.

China (Taiwan), Finland, Greece, Israel, Korea, Overseas French Franc Area, Philippines, Portugal, Viet-Nam, and Yugoslavia.

For footnotes, see page 101.

No sign indicates credit; minus sign indicates debit.

Including net errors and omissions.

Including change in net IMF position. Reserve movements are generally the changes in gross official holdings of gold and foreign exchange assets as reported in International Monetary Fund, International Financial Statistics. Minus sign indicates an increase in assets, a gold subscription to the Fund, or a repayment of a drawing on the Fund; no sign indicates a decrease in assets or a drawing on the Fund. These movements are not necessarily equal to the changes in the net foreign assets of the monetary system shown in Table 8. Reserve movements here are limited to changes in official gold and foreign exchange holdings. The changes in Table 8 show the net amounts paid out (or received) by the monetary system in acquiring (or disposing of) foreign holdings.

Including drawings of $79 million on special loans from the Export-Import Bank of Washington and other U.S. banks.

Including $115 million for 1959 and $180 million for 1960 of net receipts from swap transactions.

Including $210 million pledged as collateral.

Including drawings of $65 million on special loans from the Export-Import Bank of Washington and other U.S. banks.

Including changes in foreign liabilities.

Excluding Persian Gulf territories.

Including commercial banks.

Including Nigeria. Reserve figures cover all sterling assets.

Iceland, Ireland, and Jordan.

Data for 1959 refer to solar year beginning March 21; data for 1960 refer to calendar year.

China (Taiwan), Finland, Greece, Israel, Korea, Overseas French Franc Area, Philippines, Portugal, Viet-Nam, and Yugoslavia.

In some countries (e.g., Australia, Burma, Iraq, Malaya, and Pakistan), the rise in imports was attributable, at least in part, to a relaxation of restrictions. In others, the continuance of expansionary financial policies was a major factor in higher demand for imports. In several countries, increases in imports were associated with larger receipts of official grants and loans. The total financing provided to less developed countries through reparations, official grants, and loans, as reported to the Fund in balance of payments returns, was somewhat higher in 1960 than in 1959.

Nevertheless, the rising imports of the primary producing countries were, in part, financed by drawing on reserves; in the aggregate, these countries’ reserves, including net IMF positions, declined by about $400 million, in contrast to an increase of over $1,100 million in 1959. If the few primary producing countries that are industrially more advanced (Australia, Canada, New Zealand, and South Africa) are excluded, the remaining countries as a group were in surplus in both 1959 and 1960, but their combined surplus was reduced from about $830 million in the first year to about $240 million in the second.

Decreases in reserves were nevertheless widespread, while increases tended to be concentrated in a few countries. Thus, in Latin America, a minor decline in net official reserves concealed a total decrease of $419 million in 14 countries; there were increases, totaling $290 million, in only 4 countries, and Argentina alone accounted for $261 million of this figure. In the overseas sterling area excluding the Persian Gulf territories, net reserves declined more substantially; there was a rise totaling about $160 million for 5 countries (to which Malaya contributed $126 million) and a decline totaling about $860 million for 9 independent countries and the U.K. colonial territories, taken as a group. In the “other selected primary producing countries” shown in Table 14, net reserves increased on the whole. However, an increase of $384 million in Spain overshadowed the other surpluses, and there were declines in several countries.

Latin America

In Latin America, the two countries which showed the largest changes in reserves, though in opposite directions, were Argentina and Venezuela. The substantial increase in Argentina’s net reserves reflected a rising inflow of official and private capital from abroad, which more than covered a deficit of $115 million on current account. Imports revived from their depressed level in 1959, and, even though export receipts increased, there was a small trade deficit in contrast to approximate balance in the earlier year (Table 7, page 57). There was some evidence of short-term capital inflow, attributable largely to the return of confidence which followed the stabilization program. An opposite situation existed in Venezuela, where reserves fell for the third year in succession, mainly as a result of a flight of short-term capital caused by budgetary difficulties and by an erosion of confidence in the unrestricted convertibility of the bolivar. The merchandise trade balance improved. The value of exports was 3 per cent larger than in 1959, despite lower prices for petroleum, while imports declined by almost 24 per cent, mainly as a result of the reduction in economic activity and the imposition of higher customs tariffs and certain import prohibitions late in 1959. Nevertheless, the central bank’s net holdings of gold and foreign exchange declined by $114 million, and the balance of payments deficit was even greater when account is taken of a $200 million loan from foreign banks, utilized for covering the Government’s budget deficit. However, the decline in reserves was reversed after the imposition of exchange controls in November 1960.

The receipts of coffee exporters in Latin America changed little; those of Brazil and Colombia declined slightly, and those of the Central American Republics increased. The imports of the group, however, rose by 10 per cent, and their reserves generally declined. The stability in receipts stemmed from the maintenance of coffee prices at levels only fractionally lower than in 1959, by means of continued stockpiling. The accumulation and financing of stocks became increasingly burdensome, particularly for Brazil, which held most of the stocks. That country’s external position worsened markedly in 1960 as imports continued to rise; the current account deficit amounted to $470 million, to which contractual amortization added another $400 million. Despite a substantial inflow of both private and official long-term capital, and the use of reserves and of $48 million from Fund resources, short-term liabilities to foreigners, including those under swap contracts, rose by almost $350 million. In Colombia, a balance of payments deficit followed a surplus in 1959, imports rising by 15 per cent and exports slightly declining.

The balance of payments situation of Latin American countries exporting sugar was influenced by the changing pattern of the trade. While sugar from Cuba was being shipped to countries in the Soviet area at prices below those received previously in the U.S. market, a number of other countries, notably the Dominican Republic and Peru, benefited from increased U.S. purchases in the latter part of the year. An increase of 38 per cent in Peru’s export earnings was attributable to a sharp rise in copper and iron ore shipments following the opening of new mining installations and to an expansion of fish meal and other exports. This more than offset a rise in imports and a reduction in the net inflow of capital, and Peru’s reserves continued to increase, though at a slower rate than in 1959. The reserves of the Dominican Republic, on the other hand, declined faster than in 1959; while its current account balance improved, there were adverse changes in its capital account.

The experience of other countries in Latin America was not uniform. In Chile, rising imports and an apparent reversal in the direction of the flow of unidentified short-term capital led to a balance of payments deficit totaling $30 million for the year as a whole, following a surplus of $75 million in 1959. The decline in reserves continued at an accelerated rate into 1961. In February 1961, Chile adopted a stabilization program, which was supported by a stand-by arrangement with the Fund for $75 million. Mexico’s exports increased only slightly, while imports exceeded those in 1959 by 18 per cent. Although the rise in imports was confined primarily to machinery, vehicles, and construction materials and was associated in part with a larger inflow of long-term capital, the greater trade deficit resulted in a moderate decline in reserves; in the previous year, reserves had risen significantly. In Uruguay, the decrease in reserves in 1960 was larger than in the previous year; a rise in imports was not fully counterbalanced by a recovery in meat shipments (which had been affected by drought in 1959), some advance in other exports, and an increased inflow of capital.

Overseas Sterling Area

In the overseas sterling area, declines in reserves were widespread. They were especially large in Australia, the Union of South Africa, and India, in marked contrast to substantial increases in these countries in 1959. In Australia, the virtual elimination of import restrictions early in 1960 and the rapid pace of development led to a deterioration of more than $550 million in the balance of payments on current account. Imports were 28 per cent above those in 1959. Weakening prices of butter, meat, and metals, and lower wool prices in the latter half of 1960, combined to reduce export receipts by 2 per cent. The net official capital inflow was considerably smaller than in 1959. However, the apparent private capital inflow, including “net errors and omissions,” was larger, and the change from an over-all surplus of $146 million to a deficit of $359 million was only slightly less than the deterioration in the current account.

The balance of payments of the Union of South Africa suffered a substantial reversal in 1960, net reserves falling by $200 million. The current account surplus was reduced from $221 million to $42 million, mainly because of a buoyant demand for imports, which rose by 14 per cent while exports rose by only 2 per cent. But the outstanding adverse factor was the very large outflow of private capital. This was due in part to direct investment in the Federation of Rhodesia and Nyasaland and in part to some movement of short-term funds to London in response to interest rate differentials, but chiefly to sales of gold-mining shares and other securities by foreigners to Union residents, prompted by some loss of confidence associated with the Union’s internal difficulties.

Another country whose reserves declined for somewhat similar reasons, though on a much smaller scale, was the Federation of Rhodesia and Nyasaland. Although the current account deficit was reduced as a result of a considerable increase in export receipts (due, in the main, to larger earnings from copper), this was more than offset by a substantial decline in the net inflow of capital.

In India, a substantial rise in imports, owing in part to poor cotton and jute crops but mainly to the larger maintenance needs of a rapidly growing industrial sector, raised the goods and services deficit by about $300 million, to well over $800 million. Exports on the basis of trade returns rose at a slower rate than imports. The deficit was financed substantially by the inflow of some $600 million of official long-term capital. Official and private donations contributed another $150 million. India’s reserves declined by $144 million. During 1960 India repurchased $72.5 million from the Fund.

Among other sterling area countries whose reserves declined, the experience of New Zealand was somewhat similar to that of Australia. Ghana’s reserves continued to fall. As cocoa prices, following two consecutive large crops, were much lower than in 1959, a larger volume of exports, caused by restocking demand in importing countries, did not raise earnings sufficiently to finance the 1960 imports, which were much higher than those in 1959. In Ceylon, a larger export volume raised receipts despite somewhat lower prices for tea; but reserves declined, for the fourth successive year, as the current account deficit continued. In Burma, the deficit on current account increased as imports rose following some relaxation of restrictions in 1959. Export earnings increased only slightly; although the volume of rice shipments exceeded that in 1959, export prices were lower. A reduction in the net inflow of capital also contributed to the decline in reserves, the increase in official loans and grants received being more than counterbalanced by substantial outpayments, including the purchase of the majority stockholdings in a foreign-owned oil company.

Among the few countries of the overseas sterling area which showed increases in reserves, Malaya was the most prominent. Rubber and tin prices, on an annual average, were higher than in 1959, although rubber prices declined appreciably in the second half of 1960. These products contributed more than two thirds of the 18 per cent increase in exports; there was also a substantial expansion of minor exports, particularly iron ore. Malaya’s restrictive system was further liberalized, and, barring certain political restrictions, imports into the Federation are now free. Reserves also increased in Pakistan, although at a much slower rate than in 1959. A sharp rise in imports was only partly offset by a substantial increase in exports. As a result of short crops, jute prices in 1960 were nearly 30 per cent above the 1959 average, but the rise in export earnings was due mainly to some recovery of cotton shipments and to a substantial rise in other exports. Libya increased its reserves once again, as receipts from oil rose.

Other Countries

In Canada, the most important country among those grouped as “other primary producing countries,” a reduction in the inflow of capital offset improvements in the current account. The deficit on merchandise trade was reduced as an increase in exports to Western Europe exceeded the decline in those to the United States, and total imports were slightly lower than in 1959. However, the adverse balance on account of total current transactions was reduced by less than the improvement in the trade account. The net inflow of long-term capital fell by $264 million. Foreign direct investment was $140 million more than in 1959, but the inflow from securities transactions declined by $399 million, mainly as a result of a sharp fall in flotations by provincial and municipal authorities. Reserves showed a net decline of $40 million, and the Canadian dollar rate fell from an average of US$1.0504 in the first quarter of 1960 to $1.0178 in December.

In the Egyptian Region of the United Arab Republic, there was a considerable advance in exports, resulting from higher prices for extra-long-staple cotton and the resumption of rice shipments, but reserves declined considerably, owing to extraordinary capital payments, totaling $95.2 million, made to shareholders of the Suez Canal Company and to the Governments of the United Kingdom and the Sudan. There was also a significant decline in the net reserves of the Syrian Region, where imports rose sharply and exports were retarded by drought conditions for the third year in succession.

The current account deficit of Turkey changed little from 1959. Exports decreased because of the unfavorable 1959 cereal harvest and because of the poorer quality of the tobacco crop combined with lower external prices. In spite of continued substantial assistance from abroad, reserves declined. In Iraq, reserves were drawn down despite a moderate improvement in the foreign exchange income of the oil sector, as import controls were relaxed in an attempt to check rising prices and to permit restocking. To prevent a further decline in reserves, import restrictions were tightened again early in 1961. Reserves also decreased in Iran, where a stabilization program was adopted in October 1960 to restore equilibrium in the balance of payments (see page 31).

Among countries gaining reserves, Spain registered a spectacular rise of 45 per cent in exports in 1960. This was largely the effect of the devaluation, carried out in July 1959 in connection with a comprehensive stabilization program, although a bumper citrus crop and a large output of olive oil in 1959 contributed to the outcome. Imports declined by 9 per cent, reflecting the absence of inflationary demand as well as the devaluation.

In only two countries in this “other countries” group was the rise in reserves attributable to an improved trade balance. In Thailand, a 10 per cent improvement in receipts was accounted for mainly by larger earnings from rubber and tin. Imports rose at a slower rate, and net reserves increased by $60 million, compared with an increase of $10 million in 1959. The exports of Ethiopia rose by more than 19 per cent. Good crops of coffee were harvested and could be marketed without any limitations on volume as the country was outside the International Coffee Agreement. Other exports also earned more than in 1959, while imports, even though slightly higher, continued to be discouraged by an extensive use of advance deposits on imports. Reserves rose by about 10 per cent. In the Sudan the increase in reserves was smaller than in 1959. Imports rose by more than 25 per cent, while exports declined slightly, despite a good cotton crop and favorable prices, since, unlike 1959, there was no substantial carry-over to be disposed of. In Indonesia, also, the rise in reserves was at a slower rate than in 1959. A diminution in the output of rubber reduced the volume exported, but earnings were maintained by higher prices, especially in the first part of the year. Total exports were slightly lower than in 1959, but imports rose by 19 per cent, reflecting some liberalization of imports and the internal inflationary situation in the country. Several other countries with declining trade balances also achieved gains in reserves, attributable mainly to an enlarged inflow of official grants and long-term capital.

World Reserves

Gold and foreign exchange reserves held by national monetary authorities (excluding the U.S.S.R. and countries associated with it) increased by $2.7 billion in 1960, or by almost 5 per cent (Table 15). In the previous year there had been a small decline as the result of two large, nonrecurring transactions—subscriptions to the International Monetary Fund ($1.2 billion in gold) and the termination of the European Payments Union ($1.3 billion in foreign exchange). Other transactions in 1959, however, had added $1.0 billion in gold and $1.2 billion in foreign exchange to national reserves. In contrast, the 1960 increase took the form almost entirely of foreign exchange, net additions to the gold held by national authorities amounting to less than $0.2 billion.

Table 15.Official Gold and Foreign Exchange Reserves, 1957-60(In billions of U.S. dollars)
1957195819591960
Countries’ reserves at end of year
United States122.8620.5819.5117.80
Germany, Federal Republic of25.125.704.536.74
United Kingdom2.373.102.753.24
Italy1.352.082.953.08
Other exporters of industrial products6.598.589.3411.10
Exporters of primary products17.4716.6617.3617.19
Total official reserves55.7656.7056.4459.15
Composition of countries’ reserves at end of year
Gold337.3638.0837.8738.05
Dollars held in United States8.188.439.3810.52
Sterling held in United Kingdom46.686.396.776.95
Credit balances in EPU1.271.37
Currency deposits with BIS0.270.500.380.48
Other, including net errors and omissions2.001.932.043.15
55.7656.7056.4459/15
Source of changes in gold reserves during year
Production1.051.121.18
Soviet sales0.210.260.20
Total available1.261.381.38
Consumption in industry and arts and private hoarding5-0.59-0.69-1.04
Total additions to gold reserves60.670.690.34
Gold transactions with IMF
Subscriptions-0.06-1.20-0.19
Purchases by United States0.300.30
Repayments, etc.-0.09-0.17-0.14
Gold transactions with BIS and EPU/EF0.190.18-0.13
Additions to gold reserves of countries0.71-0.200.18
Source of changes in countries* foreign exchange reserves during year
Settlements between countries
Dollar transfers by United States to foreign reserves0.271.251.59
Sterling transfers by United Kingdom to foreign reserves-0.290.360.11
Other, including net errors and omissions70.08-0.021.17
Total0.061.592.87
Transactions with international institutions With EPU
Credit balances0.10-0.11
Final liquidation-1.27
With IMF
Drawings0.340.180.28
Repurchases-0.27-0.44-0.62
Total0.17-1.64-0.34
Additions to foreign exchange reserves of countries0.23-0.052.53
Total additions to gold and foreign exchange reserves of countries0.94-0.252.71
Of which transactions with IMF-0.08-1.34-037
Sources: International Monetary Fund, International Financial Statistics, and Fund staff estimates.

Gold reserves.

Gold, freely usable assets, and EPU credit balance.

Including gold deposits with the BIS.

Excluding German advance deposits for debt repayment and defense imports.

Calculated as a residual; the entries thus include net errors and omissions.

Additions to gold reserves of countries and international institutions.

Including the net creation (liquidation—) of assets denominated in U.S. dollars that do not represent direct claims on U.S. institutions (e.g., the so-called Euro-dollars); similar assets denominated in sterling that do not represent direct claims on U.K. institutions; other financial assets (other than EPU credit balances) held as reserves; and net errors and omissions.

Sources: International Monetary Fund, International Financial Statistics, and Fund staff estimates.

Gold reserves.

Gold, freely usable assets, and EPU credit balance.

Including gold deposits with the BIS.

Excluding German advance deposits for debt repayment and defense imports.

Calculated as a residual; the entries thus include net errors and omissions.

Additions to gold reserves of countries and international institutions.

Including the net creation (liquidation—) of assets denominated in U.S. dollars that do not represent direct claims on U.S. institutions (e.g., the so-called Euro-dollars); similar assets denominated in sterling that do not represent direct claims on U.K. institutions; other financial assets (other than EPU credit balances) held as reserves; and net errors and omissions.

The redistribution of the world’s official gold stock, which had been taking place on an important scale in 1958 and 1959, continued in 1960, as is shown by Chart 3 and Table 16. Because of an unusually large increase in private holdings,1 net additions to official holdings were smaller in 1960, in spite of record production, than in any postwar year except 1951 and 1952. The net gold outflow from the United States to other countries reached $2.0 billion in 1960, but this was partly offset by a sale of gold by the Fund, equivalent to $0.3 billion. As in previous years, virtually all of the addition to world reserves and the outflow from the United States went to increase the holdings of the European industrial countries, many of which maintain a high proportion of their total reserves in the form of gold. The rise in the gold holdings of Belgium, Germany, and the United Kingdom was appreciably smaller, in proportion to the increase in their total reserves,2 than in previous years. Italy, on the other hand, increased its gold holdings by $300 million more than the growth in its total reserves;2 and the whole of the increase in French reserves2 took the form of gold. For the other European industrial countries, gold holdings in 1960 rose in about the same proportion as other types of reserves. Countries exporting mainly primary products keep a much smaller percentage of their reserves in the form of gold, and their official stocks showed little change in 1960.

Chart 3.Estimated Official Gold Reserves, 1957-60

(In billions of U.S. dollars)

1 Distribution data are at end of year; changes are between year-end data.

2 Including Bank for International Settlements and European Payments Union/European Fund.

3 Excluding U.S.S.R. and associated countries.

Table 16.Changes in Official Gold Holdings, 1958-601(In millions of U.S. dollars)
195819591960
International monetary institutions
International Monetary Fund1521,07532
European Payments Union/European Fund-128-8615
Bank for International Settlements2-66-92115
Countries2
United States
Transactions with International Monetary Fund-443300
Other transactions-2,275-1,031-2,002
United Kingdom1,250-350300
France169540351
Germany, Federal Republic of97-2334
Italy634663454
Other European industrial exporters95427586
All other countries-117-5-145
World official gold holdings670695340
Source: Based on data from International Monetary Fund, International Financial Statistics.

Excluding gold holdings of the U.S.S.R. and countries associated with it. No sign indicates an increase; minus sign indicates a decrease.

For the BIS, the figures cover changes in holdings net of deposits. For most countries, the figures include deposits (if any) with the BIS.

Gold purchases ($300 million) less gold subscription payment ($344 million).

Source: Based on data from International Monetary Fund, International Financial Statistics.

Excluding gold holdings of the U.S.S.R. and countries associated with it. No sign indicates an increase; minus sign indicates a decrease.

For the BIS, the figures cover changes in holdings net of deposits. For most countries, the figures include deposits (if any) with the BIS.

Gold purchases ($300 million) less gold subscription payment ($344 million).

The foreign exchange reserves of national monetary authorities increased by over 13 per cent in 1960—by far the largest rise in any postwar year. Apart from its size, this increase was remarkable in that some 45 per cent of the net new claims that were created took an untraditional form, i.e., they represented in large part dollar or sterling deposits held in commercial banks other than those in the United States or the United Kingdom, respectively.

While total international settlements by the United States resulting in gold outflows and the creation of liquid liabilities to official and banking institutions increased from $3.1 billion in 1958 to $3.4 billion in 1959 and to $3.7 billion in 1960, the amount of direct dollar claims transferred to foreign countries’ official reserves rose much more—from $0.3 billion in 1958 to $1.2 billion in 1959 and $1.6 billion in 1960. As Table 17 shows, the principal reasons underlying the more rapid growth of such dollar transfers were the smaller proportions of settlements in gold after 1958, and the small increase in liabilities to foreign commercial banks in 1960, following an exceptionally large increase in 1959.

Table 17.United States: Settlement of Balance of Payments Deficit, 1958-60(In billions of U.S. dollars)
195819591960
Total U.S. deficit13.083.4223.68
Less Portion settled in gold-2.28-0.732-1.70
Increase in liquid liabilities to banks-0.05-1.14-0.11
Increase in liquid liabilities to institutions30.751.5521.87
Less Dollars sold to IMF for gold-0.30-0.30
Dollars held by BIS, EPU/EF, and other4-0.480.02
Dollars transferred to countries’ official reserves0.271.251.59
Less Net dollar repayments to IMF-0.02-0.30-0.45
Increase in countries’ official dollar reserves0.250.951.14
Sources: U.S. Department of Commerce, Survey of Current Business, and Fund staff estimates.

As measured by the outflow of gold and the increase in liquid liabilities to foreign official monetary institutions and banks.

Excluding the additional subscription to the IMF.

Official monetary institutions.

Liabilities to “other” included in this item are foreign government claims on the United States that are not counted by their holders as reserve assets, e.g., prepayments for defense imports and advance debt repayment.

Sources: U.S. Department of Commerce, Survey of Current Business, and Fund staff estimates.

As measured by the outflow of gold and the increase in liquid liabilities to foreign official monetary institutions and banks.

Excluding the additional subscription to the IMF.

Official monetary institutions.

Liabilities to “other” included in this item are foreign government claims on the United States that are not counted by their holders as reserve assets, e.g., prepayments for defense imports and advance debt repayment.

The increase of more than $1.0 billion in 1960 in official foreign exchange reserves held in forms other than direct dollar claims on the United States, direct sterling claims on the United Kingdom, and currency deposits with the Bank for International Settlements is unprecedented in the postwar period. Since the figures for these assets are derived indirectly, they must be regarded with some reservations as to their accuracy. Nevertheless, there is strong evidence, both qualitative and quantitative, that an increase of this magnitude actually did occur. This new type of asset does not, for the most part, appear to have taken the form of increased holdings of convertible currencies other than the dollar and the pound sterling. Instead, it seems to have represented the so-called “Euro-dollar” and “Euro-sterling” deposits, i.e., deposits denominated in those currencies with commercial banks, mainly those in the financial centers of Europe. The monetary authorities were able to obtain a return on such deposits that was higher than the return they could obtain by keeping their dollar assets in the form of U.S. Treasury securities or deposits with U.S. banks (or their sterling assets in similar forms in the United Kingdom). The commercial banks in turn re-lent the funds to customers who needed dollars or sterling to make payments, at interest rates lower than the going rates for similar borrowings in the United States and the United Kingdom.

When trends in world reserves are reviewed, countries’ drawing rights in the International Monetary Fund, which are increasingly coming to be regarded as part of members’ reserves, must also be considered. The Fund’s holdings of gold and currencies that are convertible within the meaning of the Fund Agreement amounted on April 30, 1961 to just under $9.8 billion. These holdings consisted of approximately $3.3 billion in gold and gold investments, $2.6 billion in U.S. dollars, $1.4 billion in sterling, and $2.5 billion in other currencies, mostly those of countries in Western Europe, which are widely used in making international payments. When a broader view is taken of the Fund’s role in supporting international liquidity, it would seem reasonable for each country to regard the unused portion of its drawing rights as part of the foreign exchange resources which it may utilize. Under the Fund’s Articles of Agreement, countries are entitled, when certain conditions are fulfilled, to purchase foreign exchange equivalent to their gold subscriptions plus 100 per cent of their quotas in the Fund. On the assumption that all members were eligible to purchase the full amounts, drawing rights in the Fund amounted, at year-ends, to the equivalent of $10.7 billion in 1957, $11.0 billion in 1958, $17.0 billion in 1959, and $18.1 billion in 1960. Drawing rights calculated in this way were thus almost as large at the end of 1960 as the total of all foreign exchange reserves held by national monetary authorities.

See footnote 2 to Table 9.

That is, after excluding the conversion into a Treasury Bond of $104 million remaining in the German debt repayment account.

The Ford transaction is included in long-term capital, as in Table 11.

See chapter 8, pages 126-29.

Gross official holdings of Gold and foreign exchange assets.

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