New Exchange Rates Apply to Agricultural by. Halbert Goolsby '.,_::' Reprint from FOREIGN AGRICULTURAL TRADE OF THE UNITED STATES April 1972 Statistics Branch Foreign Demand and Competition Division Economic Research Service U.S. Department of Agriculture ERS-Foreign-342 April 1972
SPECIAL 1n this ISSUe aeaeaeeeaasaaa:aaaeasesaaaeaeaeeaaaaeaae:aaauaaaaeaaaaaaa:aaaaaaaaaaaaaaasaaaaa NEW EXCHANGE RATES APPLY TO AGRICULTURAL TRADE by. Halbert Goolsby In a meeting on December 18, 1971, the 1 leading economic powers of the non-communist world (the Group of Ten) decided upon new rates of exchange for their currencies. This meeting represented the first time in modern history that exchange rates for major trading nations have been established within the framework of a multinational conference. Upon the announcement of the new rates, all but a few of the other member., of the International Monetary Fund (IMF) announced their intentions regarding foreign exchange practices. There were basically 3 decisions for all free world nations to make: 1) What was the new exchange rate to be? 2) Would a member avail itself of the wider margins devised by the Group of Ten? That is, would a country with a "fixed" exchange rate now permit the value of its currency to fluctuate in the foreign exchange market 2-1/4 percent above and below the established rate? Previously only 1 percent had been permitted by lmf rules. 3) What type of exchange rate or system was to exist? For example, was the new rate to be a par value, a central rate, or was the rate to be established as market forces dictated? The actions of 7 members are shown in table 1. One of the major objectives of the Group of Ten meeting was to devalue the dollar. Although the United States could unilaterally increase the dollar price of gold, the dollar would not necessarily be devalued. Other nations could nullifiy a U.S. devaluation simply by increasing to the same extent the price of gold in terms of their own currencies. Except for Canada, the foreign members of the Group of Ten decided to effectively let the dollar devalue. In subsequent weeks, 54 other nations decided to do likewise. However, 47 nations found it necessary to devalue along with the dollar. Some devaluations were formal and others were accomplished by letting a currency float in exchange markets, as was done for the Canadian dollar. As a direct result of a Economist, Foreign Demand and Competition Division. -5-
Table 1.--New exchange rates for free world currencies, percent change since May 1, 1971, permissible fluctuations, and type of exchange rate Country Currency unit per dollar Algeria................. 4.54729 Argentina........ Australia....82237 Austria......... 23.3 Barbados........... 1.842 dollars per currency unit.2199 1.216.4292.54286 Percent change Member in terms of Type using : Foreign: of U S wider doil~rs:curr~ncy: margins. rate : un~ts :.59-1.39 Jj Belgium... 44.8159 Bolivia..........875 Botswana............... 7 5 Brazil......... Burma............. 5.3487.O'Z231.8421 1. 33333.18696.57-4.76-1.97-1.37 5. 12.32 2) Burundi......... 87.5 Cameroon....... :255. 785 Canada....... Central African Republic.:255.785 Ceylon......... 43.391.391 Chad......... :255.785 Chile....... China.......... 4. Colombia........... Congo, People's Rep. of.. :255.785.391.25.391 Costa Rica........... Cyprus........... 383 77 Dahomey...... :255.785 Denmark.......... 6. 98 Dominican Republic...... 1. 2.6571.39.14327 1. 7.45-6.93 'l) Ecuador.......... Egypt.......... El Salvador....... Equatorial Guinea.... Ethiopia.... 25..43478 2.5 64.4737 2.3263.4 2.3.4.1551.43429 fi/ ]./ Fiji...........828 Finland...... 4.1 France............. 5.57 Gabon..... :255.785 Gambia, The.. 1.91886 1.24556.2439.19548.391 524 2.44-2.38 2..1 Germany............ 3.2225 Ghana..... 1.81818 Greece....... 3. Guatemala........ 1. Guinea.......... :227.365 Guyana....... Haiti......... 2. 5..3132.55.3333 1_". 439.so.2-6- 13.58-43.88 -.96 78.19 ']) Continued--
Table 1.--New exchange rates for free world currencies, percent change since May 1, 1971, permissible fluctuations, and type of exchange rate--continued Country Currency unit per dollar Honduras......... 2. Iceland...... 88. India............. 7.27927 Indonesia.......... :415. Iran......... 75.75 dollars per currency unit.so. 36.13738. 241. 132 Percent change Member in terms of using Type U.S. : Foreign: wider of dollars:curr~ncy: margins. rate 3.3 ; UnltS : -2.94 ]j _/ Iraq..................32895 Ireland...................38377 Israel................. 4. 2 Italy._....... :581.5 Ivory Coast...... :255.785 3.4 2. 6571.2381. 172.39-16.67 7.48 2. -6.96 Jamaica........... 767 54 Japan......... : 38. Jordan...............35714 Kenya.............. 7. 142 86 Khmer Republic....... 1.3286.325 2.8.14 16.88-14.44 Korea.......... Kuwait...... Laos......... Lebanon Lesotho.32895.75 3.4 1. 33333-4.76 5. ]j 'lj Liberia.......... 1. Libyan Arab Republic......32895 Luxembourg........ 44.8159 Malagasy Republic.... :255.785 Malawi...........76754 1. 3.4.2231.39 1.3286.57-1.37 Malaysia......... 2. 81955 Mali..... :5.57 Ma 1 ta......... 3 7 441 Mauritania.... :255.785 Mauritius........ 5.695.35467.195 2.6786.39.19543.29-1.14 2/ 1/ Mexico....... Morocco.... Nepal........... Netherlands.... New Zealand.......... 12.5 4.6698 1.125 3.2447.82237.8.21455.9877.3819 1.216.57-1.37 Nicaragua...... 7. Niger....... :255.785 Nigeria.......32895 rway...... : 6. 64 53 9 Pakistan......14286. 39 3.4.1548 7.49-6.97 2/ }/ Panama..... 1. aguay..... :126. 1..794-7- Continued--
Table 1.--New exchange rates for free world currencies, percent change since May 1, 1971, permissible fluctuations, and type of exchange rate--continued Country Currency unit per dollar dollars per currency unit Percent change in terms of : Foreign: U.S. dollars:curr~ncy: : un~ts : Member Type using of wider margins. rate Peru.... Philippines...... Portugal....... Rwanda............ Saudi Arabia...... 38.7 27.25 92.153 4.14475.2584.367.186.24127 5.5-5.21 1/ Senegal......... :255.785 Sierra Leone......76754 Singapore.... :.... : 2.81955 Somali....... 6.9252 South Africa....75.39 1.3286.35467.1444 1.33333 3.14-4.76-3.4 5. 1/ 'i! ]j Spain........... Sudan.......... Swaziland........ Sweden...... Switzerland 64.4737.3482.75 4.8129 3.84.1551 2.87156 1.33333.2777.2642-4.76 7.49 13.8 5. -6.79-12.13 ]j ll Syrian Arab Republic... Tanzania....... 7.14286 Thailand........ 2.8 Togo......... :255.785 Trinidad-Tobago.... 1.842.14.488.39.54286 ]) Tunisia..48355 Turkey...... 14. Uganda.... 7.14286 United Kingdom....38377 Upper Volta.. :255.785 2.683 7143.14 2. 6571.39 7.14-6.66 J) Uruguay...... Venezuela... 4.385 South Vietnam... Yemen Arab Republic..... Yemen, People's Dem. Rep...38377.2285 2.6571 2.28-2.23 -).89 Yugoslavia...... 17. Zaire....... 5 Zambia........ 71429.5882 2. 1.4 -.76 13.33 1/ Pegged to French franc which moves in wider margins. Z/ official decision communicated to International Monetary Fund. 3! Applicable to all trade except certain agricultural exports which are accorded a pre;ium of 35 percent. 4/ Pegged to Spanish peseta which moves in wider margins. S/ Pegged to pound sterling which moves in wider margins. 6! Applicable to all transactions except that a 1 percent surcharge tax is levied on ~ertain commodities exported. t a member of the International Monetary Fund and consequently not required to follow IMF regulations. -8-
general currency realignment of exchange rates, currencies floating in exchange markets do not change in value relative to the dollar. However, some secondary or indirect market forces may affect these rates. Consequently, the dollar might not remain exactly in the same relationship with a particular floating currency, but by and large not much change is likely. Eight nations took official actions to devalue against the dollar -- which in effect means the dollar appreciated relative to these currencies. Fortunately, these countries are not large markets for our farm products. Table 2 summarizes the actions taken. Table 2.--Monetary moves following Smithsonian Agreement and U.S. farm trade impact. farm exports,. farm imports, Monetary 197/?l 197/71 action :eountries: Percent Percent Value of Value of totral total Number Mil. dol. Percent Mil. dol. Percent I. Appreciated relative to the dollar... 62 4,738.9 64.2 2 '141.3 38.2 A. Appreciated against gold... 8 2,637.3 35.7 385.3 6.9 B. change against gold... 44 1,213.1 16.4 1,263.5 22.5 c. Depreciated against gold... 1 888.5 12. 492.5 8.8 II. official change relative to the dollar, or floating (incls. Can.)... 47 2,376.7 32.2 3,316.3 59.2 III. Depreciated relative to the dollar... 8 27.6 3.7 146.7 2.7 Total... 7 7,386.2 1. 5,64.3 1. These 7 countries account for about 96 percent of our agricultural trade. The 8 countries that appreciated against gold necessarily appreciated against the dollar by more than percent. The 44 countries that did not change their relationship to gold appreciated against the dollar by exactly percent since the dollar was adjusted downward relative to gold by this amount. The dollar was not permitted to devalue by the full percent against the currency of 1 nations. These nations partially offset the dollar devaluation by devaluing their own currencies against gold somewhat less than the percentage decline of the dollar against gold. Eight countries devalued relative to gold by a greater extent than the dollar was devalued and consequently the dollar was actually appreciated relative to these currencies. In table 1 the column g1v1ng the percent change in exchange rates in terms of dollars represents the increase in the price of imports (resulting from currency realignments only). For example, a German item Which sold for 1 marks previously cost an American $27.32. Subsequent to the dollar devaluation it takes $31.3 to purchase the same item -- an increase of 13.6 percent. -9-
To determine the change in export prices, the column giving the percent change in terms of foreign currency units should be used. A German importer can now buy a $1, item from an American exporter with only 32,225 marks which previously cost 36,6 marks -- a reduction of 12 percent. This assumes, of course, that the effects of the dollar devaluation are allowed to influence the price of imported goods. This is not always the case. For example, the reduction does not occur for agricultural commodities subject to the Common Market's variable-levy system. For these commodities, a compensatory tax on imports is imposed by the European Community to offset the currency realignment. Furthermore, the reduction in price in terms of foreign currencies (marks in this example) may increase the import demand for a commodity in short supply on the world market. Under these conditions there might be an increase in the dollar price of U.S. farm exports. Using the value of agricultural exports and imports as a basis of weighting,.the average price decline in agricultural exports caused by the currency realignments was 5.7 percent. When commercial exports only are considered, the weighted average was 6.4 percent. The average increase for agricultural imports was only 2.6 percent. Six different type of exchange rates are listed in the last column of table 1. A par value is an exchange rate which a country agrees to change only when (l) there is a basic disequilibrium in its international transactions and (2) upon formal notification to, and approval by, the IMF. A central rate () is a rate adopted by a number of nations as a result of the Smithsonian Agreement of December 18. It is a stable rate but can be changed with a lesser degree of formality than that required to change a par value. A unitary rate is a stable rate which a country is presently maintaining. However, no agreement, or only an informal agreement, is held with the IMF regarding its maintenance. As used here, a trade exchange rate means a rate that is stable and can be applied to agricultural trade. For France, members of the French franc area, and several other countries, the rate is also applicable to nonagricultural trade. A floating exchange rate is one that varies over time, in many cases daily. This rate may vary entirely as a result of market forces or may be influenced partially by government (Central Bank) actions. A multiple exchange rate denotes a system that contains more than one exchange rate applicable to agricultural trade. The distribution of nations using various rates is as follows: Rate Countries Percent of total Number Percent 35 3 Central rate. : 32 27.. o : 1. o : 22 19 Total 12 1 o ------------~~5 4~------------ 7 1-1-