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Thursday, 4 May 1961


Mr HAROLD HOLT (HigginsTreasurer) - by leave - On Tuesday, 2nd May, the honorabie members for Yarra (Mr. Cairns) and Wills (Mr. Bryant) asked for information regarding undertakings given by the Australian Government to the International Monetary Fund in connexion with the drawing and standby credit arranged with that institution last week.

As 1 informed the House on 27th April, the Government has arranged a drawing from the International Monetary Fund of foreign currencies equivalent in value to 175,000,000 United States dollars, or £A.78,125,000 and a further "stand-by" credit equivalent to 100,000,000 United States dollars, or £A.45,000,000 available for a period of one year.

The drawing, which was completed on 28th April, took the form of the purchase of various foreign currencies from the fund in exchange for Australian pounds. The foreign currencies were received by the Reserve Bank of Australia and added to Australia's international reserves on that date and, on the same day, the fund's account with the Reserve Bank was credited with an equivalent amount of Australian pounds.

The stand-by credit entered into force on 1st May and gives the Government the right, should it choose to do so, to make further purchases of foreign currencies against Australian pounds equivalent to 100,000,000 United States dollars during the following twelve months. lt is customary to include in the fund's stand-by arrangements some limitations on the rate at which purchases of foreign currencies under the stand-by will be made. In the case of the stand-by obtained by Australia, it has been agreed that we will not seek to purchase foreign exchange exceeding the equivalent of 20,000,000 United States dollars in the first two months, 40,000,000 United States dollars in the first four months and 80,000,000 United States dollars in the first six months. This scheduled rate of drawing would permit the Government, if it so wished, to augment its reserves progressively over the next six months by drawing up to the full amount of the stand-by credit.

As 1 said in my earlier announcement, these transactions were arranged, not because of any real anxiety on the part of the Government that our first line reserves will prove insufficient, but because the normal seasonal trend of our overseas business will produce extra calls on our reserves during the slacker part of our export season. The Government believes it only prudent to put quite beyond doubt the strength and liquidity of our overseas resources in the period ahead.

As to the details of the transactions, I shall deal first with the drawing and then with the stand-by credit.

The formal request for the drawing was made, on behalf of the Commonwealth Government, in a letter dated 21st April from the Secretary to the Treasury, to the managing director of the fund. The text of that letter is contained in attachment A to the statement which has been circulated to honorable members.

The letter refers to the amount to be drawn and the relevant fund articles of agreement under which drawings by members are granted, including the waiver by the fund required because the drawing would have the effect of increasing the fund's holdings of Australian currency by an amount equivalent to more than 25 per cent, of Australia's quota.

The letter also contains the standard undertaking that the currencies drawn by Australia will be used for making payments which are consistent with the provisions of the fund agreement. The fund, of course, makes its resources available to its members for temporary support of their balance of payments.

The letter also includes the usual undertakings to place an amount of Australian pounds, equivalent to the drawing, to the credit of the fund's account with the Reserve Bank of Australia, Sydney, and to pay the service charge of one-half of one per cent, in gold to the fund's account with the Federal Reserve Bank of New York. Both the lodgment of Australian currency and the payment of the service charge were effected on 28th April, the day on which the foreign currencies were received from the fund. Finally, the letter contains the standard undertaking that the Government will comply with the principles set forth in sub-paragraphs a, b, c, and d of paragraph 2 of the decision of the executive board of the fund of 13th February, 1952. The full text of this decision is contained in an appendix to the fund's annual report for 1952 which is available to honorable members in the Parliamentary Library.

The decision referred to is concerned with the time within which drawings from the fund should be repaid, and states that repayment should take place " within an outside range of three to five years ". The decision also requires countries to consult the fund on repayment when the interest charges of their drawings reach 4 per cent, per annum. In Australia's case this point of consultation would be reached after three years if Australia had itself not already arranged repayment of the drawing before that time. The decision does, however, provide that when unforeseen circumstances beyond the member country's control make unreasonable the application of the principles of repayment to which I have referred, the fund will consider extensions of time. I should add that, although the letter does not refer directly to the payment of interest charges, under the fund articles of agreement Australia is required to pay charges on the amount of its drawing in excess of its gold subscription that is outstanding at the end of each quarter. The amount upon which Australia will have to pay interest charges until repayment of the drawing commences is 102,000,000 United States dollars or about £A.45,000,000. No charge, other than the initial service charge, is payable for the first three months, a charge of 2 per cent, per annum is payable for the next fifteen months, and from then on the charge rises by i per cent, per annum in each succeeding period of six months. If no repayments were made for three years the average effective rate of interest over that period, taking into account also the initial service charge of one-half of 1 per cent., would be 2i per cent, per annum.

Following receipt of the formal request for a drawing and stand-by credit the Board of Executive Directors of the fund met on 26th April, in Washington, lt agreed to the requested drawing equivalent to 175,000,000 United States dollars and granted the necessary waiver under article V, section 4 of the fund agreement to which I have already referred. The foreign currencies actually drawn on 28th April included 40,000,000 United States dollars, the equivalent of 10,000,000 United States dollars in Canadian dollars, the equivalent of 30.000,000 United States dollars in pounds sterling, the equivalent of 55,000,000 United States dollars in deutsche marks, the equivalent of 15,000,000 United States dollars in French francs, the equivalent of 15,000,000 United States dollars in Italian lire, and the equivalent of 10,000,000 United States dollars in Netherlands guilders. These foreign currencies and their amounts were suggested to Australia by the fund. They are all readily convertible into any other currency.

At the same time the fund board also agreed to the request of the Government for the stand-by credit requested for one year, and approved the terms of the standby arrangement. As in the case of the drawing, the board also granted the necessary waiver under article V, section 4, of the Articles of Agreement. Attachment B to the statement I have circulated contains the text of a letter dated 21st April from the Secretary to the Treasury to the managing director of the fund formally requesting the stand-by credit on behalf of the Government of the Commonwealth of Australia and enclosing a memorandum setting out the present policies and intentions of the Government. Attachment C to the circulated statement contains the full text of the stand-by arrangement agreed to by the fund board.

These are significant portions of the story, and indeed they form one section of the memorandum setting out the Government's present policies and intentions which, i think, probably will have the greatest interest for honorable members. I think it would be convenient if all honorable members had the full text of these documents before them. Therefore, with the concurrence of the House, I shall have them incorporated in " Hansard " at the conclusion of my statement.

The amount of the stand-by credit is to the value of 100,000,000 United States dollars or £A.45,000,000. lt is subject to a service charge of one quarter of 1 per cer.t. per annum. This amount was paid in dollars to the account of the fund with the Federal Reserve Bank of New York on 1st May. If subsequently a drawing is made under the stand-by the amount already paid would be credited against the service charge on the drawing, up to a maximum of one quarter of 1 per cent, of the transaction.

As honorable members will see, the memorandum stating the policies and intentions of the Government retraces in some detail the course of events in the Australian economy since the beginning of 1960, and gives an account of the various policy measures that have been adopted by the Government. It also states the Government's current broad intentions with regard to future policy. In doing so, it emphasizes that economic conditions in Australia are subject to rapid change and are influenced by a number of external factors outside the control of the Australian Government. The policy declarations as to our future intentions contained in the memorandum are therefore to be read as applying only to conditions as they now appear.

The Government's freedom of action to change its policies to meet changing circumstances is in no way limited; but it is provided, as it is only reasonable it should be, that, should any major shift in the direction or emphasis of policy become necessary during the currency of the stand-by credit, the Australian Government would, at the request of the managing director of the fund, be ready to consult with the fund and, if necessary, reach new understandings before any request for a further drawing under the stand-by was made.

The consultations with the fund confirmed that the fund strongly endorses the broad policy objective of tne Government, which is to promote the growth of the economy in an environment free from inflationary pressure. If changing circumstances should require any major change in the policy intentions outlined in the memorandum, any new measures will naturally be aimed at achieving the same general objective and, for that reason, they are likely to secure the continued approbation of the fund. The adoption of policies which might endanger our internal and external stability could, of course, be expected to lead to a suspension of our continued access to further drawings under the stand-by credit: but 1 can give the House, as well as the fund, a firm assurance that the present Government will continue to follow policies which will be dictated by an informed and responsible judgement of what is best calculated to achieve the objectives which we have se; for ourselves and which the fund has so handsomely supported.

I conclude with the observation that I believe it was recognized by the executive directors of the fund, when they came to consider Australia's application, that this was, in their view, a classic illustration of the way in which the fund and its resources should be employed. It would not be proper for me to give the House details of the discussions which took place at the meetings of the executive directors, but I can say that there was general commendation of the steps Australia had taken to put its own house in order, and the readiness with which the fund met these requests reflected, I believe, this common judgment that, while this was a good and indeed a classic illustration of the way in which the fund's resources should be employed, and represented a recognition that we ourselves had gone commendably about the business of meeting the difficulties connected with the level of our overseas reserves.

Finally, I pay tribute to the work performed in connexion with this matter by our very able Secretary to the Treasury, Sir Roland Wilson. He played a major part in the negotiations, and the smooth and successful outcome is a tribute to the ability he brought to bear on those negotiations.

The documents to which J referred earlier are as follows: -

COMMONWEALTH OF AUSTRALIA

Department of the Treasury 21st April, 1961.

Dear Mr. Jacobsson:

As fiscal agency of the Government of the Commonwealth of Australia, we desire to purchase from the International Monetary Fund currencies equivalent to US$ 175 million, in accordance with the terms of Article V, Sections 3 and 4 of the Fund Agreement.

The currencies to be drawn and the accounts to which they are to be credited will be specified by me in a communication prior to the meeting of the Executive Board.

We do hereby represent that the currencies are presently needed for making in such currencies payments which are consistent with the provisions of the Fund Agreement.

The equivalent of the amount of desired currencies in Australian pounds, namely £A78,125,000 will be placed to the credit of your No. 1 Account with the Reserve Bank of Australia, Sydney, on the value date to be specified by you.

With regard to the charges payable under Article V, Section 8 (a) of the Fund Agreement, we will instruct the Federal Reserve Bank of New York, New York, to earmark for your gold account approximately, but not less than, 25,000,000 fine ounces of gold.

We further state that this request is made in accordance with the arrangements described in paragraph 2 of the decision of the Exe-utive Board of the Fund at Meeting 52/11, February 13, 1952, and that we will comply with the principles set forth in sub-paragraphs a, b, c, and d of paragraph 2 of that decision.

Yours sincerely, (Roland Wilson)

Secretary to the Treasury.

Mr. PerJacobsson Managing Director International Monetary Fund 19th and H Streets N.W. Washington 25, D.C.

COMMONWEALTH OF AUSTRALIA

Department of the Treasury 21st April, 1961.

Dear Mr. Jacobsson:

On behalf of the Government of the Commonwealth of Australia, 1 wish to request that the International Monetary Fund agree to a stand-by arrangement in the amount of United States $100,000,000 and for the duration of twelve months.

A memorandum setting forth the policies and intentions of the Government of the Commonwealth of Australia is attached.

I shall appreciate it if you will submit this request, together with the request for a drawing contained in my other letter of today's date, to the Executive Directors at the earliest opportunity.

Yours sincerely, (Roland Wilson)

Secretary to the Treasury.

Mr. PerJacobsson Managing Director International Monetary Fund 19th and H Streets N.W. Washington 25, D.C.

POLICIES AND INTENTIONS OF THE GOVERNMENT OF THE COMMONWEALH OF AUSTRALIA

During the course of1960 the Australian economy felt the impact of a strong domestic boom. A rapid rise in fixed investment expenditures, coupled with increases in nonfarm stocks and in consumption expenditures led to a rise in total demand which outstripped the growing capacity of the economy.

As a consequence, the situation in the labor market became very strained, with . a high labor turnover, much overtime working, labor shortages and a substantial increase in earnings.

At the same time, the balance of payments position deteriorated. Imports, which had been running at an annual rate of about £A900 million in the second half of 1959, rose to an annual rate of over £A1,100 million in July-December 1960. Not only was there the normal rise in imports which was to be expected when output was rising rapidly but, with many domestic producers unable to give early delivery, purchases were turned to imported supplies even when those were dearer. In addition, certain exportable goods, such as steel, were diverted to the home market.

A fall in the world market price for some primary products, especially wool, adversely affected the value of exports which in the second half of 1960 was running at an annual rate of some £A100 million below that for the corresponding period of 1959. Notwithstanding the continuation of a high rate of capital inflow, gold and foreign exchange reserves fell in the second half of 1960, by £A136 million, to £A376 million.

* * * *

The basic aim of Australian economic policy is a sustained growth of population and production within a framework of a balance between domestic demand and available resources and between external receipts and payments. Since early in 1960 the economic policy of the Government has been directed to reducing the excessive rate of increase in demand and to arresting the rise in costs and prices. The main lines of policy were as follows:

(i)   In February 1960 the Goverment decided to terminate import licensing, except for a limited range of goods, in an effort to enlarge the volume of available supplies and to help to moderate the rise in costs and prices. The Government has since reiterated its intention to adhere to this policy.

(ii)   The Government intervened before the

Arbitration Commission in February 1960 when that body was hearing a claim for an increase in the basic wage. The Government contended that the economy needed time to absorb the effects of two wage increases made in earlier months and that a further increase would accelerate the rise in demand, and in costs and prices. The Commission essentially accepted this view in rejecting the claim.

(iii)   The Government made a particular effort to keep down expenditure commitments in its budget for the year ending June 30, 1961 and, by imposing additional taxation, provided for a surplus of £A15 million of cash receipts over cash expenditures (after taking into account loan raisings, redemptions and sinking fund transactions). The sales tax on passenger vehicles was raised in November 1960 but was then lowered in February 1961 to the previously prevailing level (this lowering does not affect the estimate of the surplus quoted above).

(iv)   The Reserve Bank of Australia, with the support of the Government, followed throughout 1960 an increasingly restrictive policy. At the beginning of the year policy was aimed at preventing any increase over the year 1959/60 in the liquid assets of the trading banks and the Reserve Bank asked the banks to avoid more than a moderate rise in advances. The Statutory Reserve Deposit ratio, which had been increased to 17.5 per cent. in February, was kept unchanged during the closing months of 1959/60 despite a sharp fall in liquid assets. Bank advances, however, continued to increase and in August banks were again asked to achieve an immediate and significant reduction in the rate of new lending. This was followed, in November, by a further request for a substantial reduction (on a selective basis) in the total of outstanding bank advances by the end of March 1961 and by continuing pressure on bank liquidity.

(v)   Bank interest rates were increased in

November 1960, the maximum overdraft rate being raised from 6 per cent to 7 per cent and the average of rates increased from 5½ per cent to 6 per cent in an effort to discourage the use of overdrafts which contributed to inflationary pressures or to sustaining the flow of imports. Rates on deposits were also increased in order to encourage the holding of deposits with banks rather than with other financial institutions through which funds might be channelled into consumer credit and land and share dealings. The rates on public issues late in 1960 and early in 1961 were also raised.

(vi)   The Government further enacted interim legislation designed to limit the ability of companies (other than banks, pastoral finance companies, approved dealers in the short-term money market, certain building societies and some public utilities) to deduct, as a business cost for tax purposes, the full amount of interest paid on borrowings made by them and announced its intention to introduce measures to encourage investment by life assurance and similar institutions of a minimum of 30 per cent of their assets in public securities. * * *

The aggregate effect of the policies outlined above has been to improve the balance between supply and demand. The extreme labor shortage has been relieved and overtime work reduced. In the building and motor vehicle industries, which led the boom, demand has fallen off; and there fc general evidence that the pace of advance in both fixed investment and consumption demand is slackening off. Bank advances have fallen since late in 1960 and the banks' liquidity will be under severe pressure in the quarter ending June 1961 as a result of the combined effects of the seasonal flow of tax payments to the Treasury, the expected fall in international reserves, and the repayment of advances made by the Rural Credits Department of the Reserve Bank.

There is, however, a considerable delay between the placing of orders overseas and the arrival of goods in Australia, and some speculative importing has been arranged against the possibility of a reimposition of quantitative restrictions (despite strong government statements to the contrary). Consequently, the impact of the internal measures on imports has only recently begun to show and although further reductions are expected, it is thought that the effects of this delayed impact, and of the seasonal pattern of Australian exports, will be such as to lead to a ontinued decline in reserves, at least until September 1961. It is in the light of these considerations that the Australian Government is requesting assistance from the Fund in the form of a drawing equivalent to $175 million and a stand-by arrangement for $100 million.

* * * »

The Australian Government wishes to promote the growth of the economy in an environment free from inflationary pressure and its general economic and financial policies will continue to be framed so as to maintain a balance between supply and demand. In present circumstances, the Government attaches particular importance to the objective of bringing the fall in reserves to a halt by restoring a sound balance of payments position.

Economic conditions in Australia are subject to rapid change and are influenced by a number of external factors outside the Government's control. Policy has therefore frequently to be adapted to meet a shift in conditions. The declarations of policy made here must therefore be understood as applying only to conditions as they now appear. Should any major shift in the direction or em phasis of policy become necessary during the currency of the standby arrangement the Australian Government would, at the request of the Managing Director, be ready to consult with the Fund and, if necessary, reach new understandings before any request for a further drawing under the standby arrangement is made. Subject to this, and having regard to current economic conditions, the present intentions of the Australian Government as to major areas of policy are as follows:

(1)   In the field of fiscal policy the Govern ment intends to make every effort to keep the growth of government expenditure under restraint. While the plans for the budget in the year ending 30th June 1962 will not be formulated before August, it is envisaged that programmes for expenditure on development will be given a special bias towards expansion of exports. On the present outlook it would be the overall aim of the Government to achieve at least a balance between cash receipts and cash expenditures and to finance expenditures from non-inflationary sources. Counterpart funds of any drawing made on the International Monetary Fund will be sterilised.

(2)   Some action will be necessary in the June quarter of 1961 to assist the banks in meeting the severe seasonal pressures that will fall on them. Seasonal needs apart, however, the monetary authorities intend to keep a firm control over the liquidity position of the banks, with a view to limiting during the year ending June 1962 the amount of outstanding bank advances to a total that would be consistent with the maintenance of financial stability. Under present conditions this should preclude more than a moderate increase in advances over the year and, so long as those conditions continue, the monetary authorities, while having regard to the need for a reasonable degree of flexibility within the interest rate structure to meet changes in market conditions, do not intend to take any action directed to a lowering of the general level of interest rates. It also remains the concern of the authorities as part of their overall responsibility for the control of credit to discourage, so far as lies within their power, any excessive flow of funds into financial institutions other than banks.

(3)   The Government has repeatedly stated and now reaffirms its intention not to reimpose restrictions on trade or current payments except in the event of a very serious balance of payments emergency necessitating a major shift in policy.

(4)   While the Government's main responsi bility in the maintenance of costs and price stability lies in the creation of an appropriate economic climate by means of general policy measures, it will, within the limits of its constitutional powers, also make such other endeavors as are necessary to promote cost and price stability. The Government has recently laid its views before the Arbitration Commission in connection with the hearing of a claim for an increase in the basic wage.

It is the view of the Australian authorities that, subject to what is said above as to changes in economic conditions, present policies, as indicated above, are adequate to restore domestic and external equilibrium in the near future. If further action were needed major reliance would be placed on fiscal and monetary measures. 21st April, 1961.







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