UNITED KINGDOM: BALANCE OF PAYMENTS DEVELOPMENTS SINCE THE SMITHSONIAN AGREEMENT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700050046-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 18
• Document Creation Date: December 20, 2016
• Document Release Date: March 13, 2006
• Sequence Number: 46
• Publication Date: July 1, 1973
• Content Type: IM

 --- ri dlnrz/r.~t 7 s- -el q
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25X1
Confidential
F-- I
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
United Kingdom: Balance of Payments Developments
Since the Smithsonian Agreement
Confidential
ER IM 73-49
July 1973
Copy No. %
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July 1973
United Kingdom:
Balance-of-Payments Developments
Since the Smithsonian Agreement
Improvement in Britain's payments balance in 1973 will tend to make London more
receptive to joining the joint EC float. The adverse balance of trade, however, forecloses
any early re-pegging of sterling. Britain's stated conditions for joining the EC float -
especially its demand that the other EC countries assume responsibility for the overseas
sterling balances - remain unacceptable to the other EC countries. Improved trade
performance by the end of the year and a sharp reduction in the official settlements
deficit for 1973 will increase the likelihood of an accommodation between Britain and
the other EC countries. Moreover,a more favorable trade balance will bolster London's
traditionally liberal stance on trade and - by favoring sterling's inclusion in the joint
float - increase the probability of Britain's participating constructively in multilateral trade
negotiations.
When the British do re-peg, it will probably be not far from the present rate, which
gives sterling a trade-weighted depreciation of 13% from the exchange rates established
in the Smithsonian Agreement. Greater depreciation would encounter objections from
London's EC partners and intensify domestic inflation. Less depreciation would probably
not give the United Kingdom sufficient competitive edge to maintain desired export
expansion.
The improvement in Britain's official settlements balance has already begun, owing
primarily to a turnaround in the capital account balance from a deficit of US $500 million
in the last quarter of 1972 to a surplus of more than $600 million in the first quarter
of 1973. Inflows of capital for the North Sea oil projects and movements of funds to
London in response to higher interest rates prevailing there have been major factors
strengthening the capital account.
At some $2.7 billion, the estimated trade deficit in 1973 will be approximately
$1.0 billion larger than that in 1972, chiefly as a result of the pull exerted on imports
by domestic economic expansion and the initial, adverse effects of the June 1972 sterling
depreciation. In the second half of 1973, however, the influence of changed price
relationships on trade volume will begin to be felt, expanding exports and slowing import
growth. These effects, together with the tempering of import demand as domestic economic
growth levels off, will reduce monthly trade deficits and leave the current account in
approximate balance during late 1973. 25X1
Note: Comments and queries regarding this memorandum are welcomed. They may be
directed to F- I
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CONFIDENTIAL
Britain's bilateral trade surplus with the United States probably will not change
significantly in 1973. The rapid expansion of UK exports to the United States is roughly
matched by the rise in British demand for US products, particul&rly machinery and
equipment. At the same t'_ine, however, inflows of US capital - much of it related to
US oil companies' investments in the North Sea - will improve Britain's bilateral capital
balance with the United States.
CCNFIDENTIAL
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From Devaluation to Revaluation
I. From 1967 to 1971, Britain's balance of payments improved
sharply. In the year that followed the 14.3% devaluation of sterling in
November 1967, the payments balance worsened as the adverse price effects
of devaluation deepened the trade deficit, encouraging short-term capital
outflows. After 1968, however, the enhanced competitiveness of British
goods began to stimulate foreign demand, and the balance of payments
improved dramatically. In 1971 the official settlements balance reached a
record $8.2 billion surplus (see Table 1).
United Kingdom: Balance-of-Payments Summaryl
1. Because of rounding, components may not add to the totals shown. A more detailed balance of
payments, with quarterly data for 1971-72, is presented in Appendix Table A-1.
2. F.o.b./f.o.b. basis.
3. Including changes in commercial banks' foreign position; also net errors and omissions.
4. Including small payments to IMF gold fund.
1967
1968
1969
1970
1971
1972
Current account
balance
-0.9
-0.6
1.1
1.7
2.6
Negl.
Merchandise trade
2 -1.5
-1.6
-0.3
Negl.
0.8
-1.7
Services and
transfers
0.7
0.9
1.4
1.6
1.8
1.8
Long-term capital
movements
-0.3
-0.3
-0.3
-0.5
0.2
-2.1
Basic balance
-1.1
-1.0
0.8
1.1
2.8
-2
0
Short-term capital
movements3
-0.7
-2.4
1.0
2.0
5.1
.
-1.1
Allocation of SDRs
....
....
....
0.34
0.3
0.3
Official settlements
balance
-1.8
-3.4
1.8
3.4
4.2
-2.9
Change in official
reserves
-0.3
-0.3
0.1
0.3
3.7
-1.7
Other official
financing
-1.5
-3.1
1.7
3.1
4.4
-1.1
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2. The trade balance improved markedly from a $1,500 million
deficit in 1967 to an $800 million surplus in 1971. The dollar value of
exports grew by 52% during the period as volume rose by 35%. The sharp
drop in export prices (in dollar terms) following the devaluation provided
British exports with a competitive edge that lasted into 1971, when the
rising trend in domestic costs 'overtook the gain from devaluation, again
placing Britain in a weak competitive position. Import value increased by
only 32% in 1968-71, as import volume and prices rose 23% and 7%,
respectively. Stagnation of the domestic economy - real GNP rose an
average of only 2.2% yearly in 1968-71 - played a major role in the slow
import growth, although the ;nigher costs of imports resulting from the
sterling devaluation had some effect.
3. The usual invisibles surplus increased steadily after the devaluation
and by 1971 was more than two and one-half times as large as in 1967.
Nearly all of this increase occurred in the surplus on private services.
Increased receipts from ' financial services such as insurance and securities
brokerage provided by London banks and investment houses, in particular,
fueled the rise.
4. The capital balance also gained strength after 1967. Long-term
capital deficits gave way to a small surplus in 1971, when there was a
sharp rise in foreign investment in Britain, partly related to incipient North
Sea oil exploration. Short-term flows improved by $5.8 billion from 1967
to 1971 as the trade account improved, speculation on a second devaluation
of sterling declined, and higher London interest rates attracted short-term
funds. Weakness in other currencies, particularly the US dollar in 1971,
was also a major factor contributing to the large short-term inflows.
5. As the Smithsonian Agreement went into effect, Britain's
payments was, superficially, quite good. The year's huge payments surplus
had raised reserves to a record level ($8.8 billion at the end of 1971).
Underlying forces, however, augured a worsening trade balance. Large wage
settlements were pushing up unit labor costs and contributing to accelerated
inflation (see Figure 1). By this time, Britain had largely lost the
competitive advantage realized from the 1967 devaluation. Rising labor
problems were also impairing British competitiveness by reducing industry's
ability to meet firm delivery dates. Moreover, the sluggishness of the
domestic economy, largely responsible for the slow growth of imports since
1967, was giving way to fairly rapid domestic economic growth under the
stimulus of expansionary budgets. Consequently, Britain entered the
post-Smithsonian period with a rapidly weakening foreign sector, aggravated
by the psychological effects of sterling's appreciation relative to the US
dollar.
CONFIDENTIAL
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Factors Affecting
Export Performance
In Dollar Terms
Unit Labor Costs in Manufacturing
'Producer prices, intermediate goods.
1 *Non?ogricufural goods.
***Manufactured goods.
tintermediate goods.
Manulactured d goods, home market.
United Kingdom '
1967 68 69 70 71 72
Export Prices
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The Smithsonian Agreement and Developments in 1972
6. Under the terms of the Smithsonian Agreement, sterling
appreciated by 8.57% against the US dollar. Because other currencies
appreciated more, however, the global, trade-weighted appreciation of
sterling was held to about 1%. The percentage change in sterling's exchange
rate relative to selected currencies was as follows:
US dollar
8.6
Italian lira
1.0
French franc
No change
Belgian franc
-2.7
German mark
-4.4
Swiss franc
-4.7
Japanese yen
-7.1
7. The Smithsonian exchange rates appeared to be appropriate in
the months immediately following the Agreement, and sterling traded
slightly above its dollar central rate during March-May without Bank of
England intervention (see Figure 2). In mid-June 1972, however, sterling
suddenly weakened as a result of continuing rapid domestic inflation and
five consecutive monthly trade deficits. From 19 to 23 June, a heavy
speculative outflow of capital necessitated some $2.5 billion in support
operations by European central banks. Finally, on 23 June, London
announced that the pound would be allowed to float. The dollar rate for
sterling fell rapidly to about No under the Smithsonian central rate and
then, recovering slightly, stabilized at about $2.45. In the last quarter of
1972, sterling declined further, to about 10% below its Smithsonian central
rate. Since most other major currencies were approximately maintaining
their Smithsonian central rates with the dollar, the downward float resulted
in a global depreciation of more than 10% from mid-June to the end of
December 1972.
8. Although Britain's current account balance deteriorated sharply
from 1971 to 1972. the small and brief appreciation of sterling was only
a minor factor in the setback. The current account was in surplus in the
first half of 1972, as strong invisible receipts offset the declining trade
balance. After mid-year, however, the trade account decline steepened, and,
as a result, the current account balance for the year showed a surplus of
only $45 million, compared with a record surplus of $2.6 billion in 1971
(see Appendix Table A-1).
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 CONFIDENTIAL
Dollar-Sterling Exchange Rates in 1972
Deviation from Central Rate (In Percent)
Lower Limit
Smithsonian Band
--11
? Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
61643/6)J
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9. The trade balance shifted from an $800 million surplus in 1971 to
a $1.7 billion deficit in 1972 (see Appendix Table A-2). The drastic
turnaround resulted from a 10% rise in import volume combined with a
slight drop in export volume (see Figure 3). Movements in import and export
prices
e
h
b
,
ac
up a
out 8% in
dollar terms for the year as a
whole, had little net effect on
the trade balance. Altogether,
the value of imports shot up
19% in dollar terms while ex-
ports increased only 7%.
in contrast, were depressed by prolonged coal and dock strikes, which
disrupted the production and shipment of goods. Deterioration of the terms
of trade, as import prices increased faster than export prices following the
June float, contributed to the large deficit in the second half of the year.
11. Changes in Britain's trade balances with individual trading
partners varied widely. The bilateral surplus with the United States -
Britain's largest individual trading partner (see Figure 4) - increased from
$100 million in 1971 to $320 million in 1972 as rapid US growth exerted a
strong pull on UK exports. Lowered sterling costs of imports from the
United States resulting from the dollar's depreciation relative to sterling also
contributed to the increased surplus. The trade account with the EC of Six,
however, moved from only a small deficit in 1971 to a $750 million deficit
in 1972, led by a $400 million rise in the deficit with West Germany. An
increase of 38% in UK imports of EC machinery and equipment was a major
factor in the increased UK/EC deficit. The initial effects of the devaluation
of sterling against most of the EC currencies also hurt Britain's trade balance.
12. At $1.8 billion in 1972, the invisibles surplus was down slightly
from 1971. The decline resulted chiefly from an increased deficit on
government services and transfers. In addition there was a smaller surplus on
interest, profits, and dividends because rising UK interest rates and increased
1967 68
mand, especially for manu- 5VU306?77
factured goods. Export sales,
tributed to the severely wors-
ened trade balance in 1972. 1,.)
The resurgence of the domes-
tic ecunomy, growing at an
annual rate of 3.5% in late 110
1972 - compared with an
average of 2.2% in 1968-71 --
strongly stimulated import de- 100
United Kingdo?n:Indexes Figure 3
of Imports and Exports, by Volume
1987-100
140
10. Several factors con- 130
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profits led to growing payments
abroad. The private services accounts
continued to be strong, registering a
surplus of more than $2.1 billion -
some 8% above the 1971 figure.
Capital Flows
13. The capital account deteri-
orated sharply in 1972. Speculation
against sterling prior to its float pro-
duced a massive short-term capital
outflow in the second quarter (see
Appendix Table A-3), resulting in a
$1.1 billion short-term capital deficit
for the year. In the second half of
1972, high interest rates and de-
creased risk of further sterling depre-
ciation resulted in net short-term in-
flows. The long-term capital balance
weakened throughout the year, partly
because of the currency uncertainties
but mainly as a result of the chronic
problems of inflation and labor stop-
pages, which continued to discourage
foreign investment in Britain.
14. Britain's balance of pay-
ments will remain in deficit in 1973.
Indeed, deterioration in the trade ac-
count will result in the first annual
current account defich since 1968.
The worsening of the current account
balance will be checked in the second
United Kingdom:
Geographic Distribution
of Foreign Trade, 1972
United'., States
Rest of Workl :12 6%
24.016
914idI4 AV W
Refit of Word
24.1% .
EFTA OF Ton'"
22.5%
EC of Six?
24.6%
'Belgium, Franca, Italy, Luxembourg, Netherlands,
end West Germany.
Primarily countries with colonial ties to the
United Kingdom; the main trading partners
in this group are Australia, India, Now Zealand,
Nigeria, and South Africa.
"'Austria, Danmark, Finland, Iceland, Inland,
Norway. Portugal, Sweden, Switzerland, and
United Kingdom.
515431 8-73
half of the year as domestic growth levels off and the effects on trade
volume of sterling's 13% global depreciation since June 1972 begin to
improve trade performance. Despite the expected current account deficit,
more favorable capital flows should reduce the deficits in the basic balance
and the official settlements balance.
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Current Account
15. The trade deficit will increase to an estimated $2.7 billion in 1973
(see Table 2). About 60% of the deficit is expected to occur in the first
United':ingdom: Current Account Balances
Billion US $
Half-Year Figures
Projected
1972
Projected 1973
1972
1973
Jul-Dec
Jan-Jun
Jul-Dec
Visible trade balance
Exports
?1.7
22
8
-2.7
-1.2
-1.7
-1.
Imports
.
28.0
11.2
13.4
14.6
6
In
i
ibl
b
24.6
30.7
12.4
15.1
15
6
v
s
e
alance
1.8
1.7
0
9
0
.
Current account balance
N
l
.
.8
0.
eg
,
-1.0
-0.4
-0.9
-0.1
1
half of the year, with a $900 million deficit already having been recorded
in the first quarter. In Britain, import volume rises more strongly than GNP
in an economic upswing: for example, since die end of 1971 import volume
rose by 20% compared with a 9% rise for GNP. Continued expansion in
1973 will further boost import volume and, together with expected import
price rises, add significantly to the import bill.
16. Britain's trade balance in 1973 will be damaged to a minor degree
by sterling's depreciation since June 1972. (Despite the rise in the
dollar/sterling rate to about $2.58 since the February 1973 devaluation of
the US dollar, sterling remains depreciated by about 13% on a
trade-weighted basis.) The terms of trade were worsened by the depreciation,
and trade volume thus far has not been as greatly affected. At some point
after mid-year, however, the depreciation should begin to have a positive
effect on the trade balance, particularly through accelerated export growth.
17. Because Britain must import much of its raw material needs, the
sharp rice"in world 'commodity prices over the past 12 months has also
inflated the trade deficit. Increases in raw material supplies are expected
to moderate the price rises for some commodities. If such relief does not
occur, however, the trade deficit could exceed $3.0 billion.
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18. A projected surplus of $1.7 billion on services and transfers will
offset much of the trade deficit. This surplus, however, will be slightly
lower than its 1972 counterpart because of payments to the EC budget,
higher Interest payments on foreign-held securities, and increased sterling
costs of invisible imports resulting from the sterling depreciation. Most of
the decline in the invisibles surplus will occur in the first half of the year.
During the second half', the upward trend in the invisibles surplus will resume
as the demand for British services increases as a result of th. lower foreign
currency prices.
Capital Account
19. In contrast to the current account, the capital account's
performance should improve markedly, a $627 million surplus already
having been recorded in the first quarter. In particular, long-term capital
investments will be attracted by growth in the domestic economy, the
apparent slackening of labor stoppages, and -- assuming stringent Phase III
controls -- reduced wage inflation. Recent settlements of major labor
negotiations within the government guidelines, particularly in the key coal
industry, suggest an improvement in the investment rlimatc in Britain.
Another factor that will benefit the long-term capital balance in 1973 and
for several subsequent years is the upsurge of investment in the North Sea
oil projects. Although these investments are just beginning to be made on
a large scale, they will account for nearly $1.0 billion of long-term capital
inflow in 1973. The cumulative inflow associated with these projects is
expected to exceed $10 billion during the next decade.
20. The short-term capital balance should also register some
improvement over 1972. Following the pound's downward float, net
short-term inflows occurred in the second half' of 1972. This trend will
be underpinned in 1973 by the high interest rates prevailing in Britain.
UK/US Bilateral Balance
21. Britain's payments balance with the United States will improve
in 1973. Flows of long-term capital from the United States will move
upward in the light of US investment in the North Sea, the revival in the
UK domestic economy, and the UK's entry into the EC. Relatively higher
UK interest rates will contribute to increasing the flow of short-term capital
from the United States to Britain. Although some forms of British
investment in the United States are increasing, primarily purchases of stock
of US companies, the flow of UK capital to the United States probably
will not expand as much as US capital exports to Britain.
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22. Britain's bilateral trade surplus with the United States probably
will not change significantly in 1973. Exports to the United States have
expanded sharply, but rising British Imports of US products, especially
machinery and equipment (the United States accounts for 20% of Britain's
machinery and equipment imports), will roughly match those gains. The
February 1973 currency rehlignments, which have resulted in an
approximate 10% appreciation of sterling relative to the dollar since the
end of 1972, will not strongly affect the bilateral trade surplus in 1973.
CONFIDENTIAL
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APPENDIX
STATISTICAL TABLES
Table A-I
United i lnpdom: Dnlnnce?of?I'nyment Trends
Million US $1
Current
A
Long-Term
Short-Term
SDR
Official
Change in
Other
ccount
Balance
Capital
Movements
Basic
Balance
Capital
Movements2
Allocn-
cations
Settlements
Balance
Official
Reserves
Official
Financing
Year
1967
1968
-867
?278
-1,145
-702
?1,847
-317
?I,5'.0
1969
?650
?307
-957
?2,426
....
.3,383
?273
?3,110
1970
1,066
-25i
814
970
1,784
106
1,678
1971
1,651
?547
1,104
1,9853
3194
3,408
300
3.108
2,562
229
2,791
5,0773
305
8,173
3,744
4.429
1972
Quarters
45
?2,093
?2,048
?1,1153
310
?2,853
-1.730
-1,1 3
1971
111
2
d
312
346
658
1,677
300
2,635
490,
2,145
n
d
722
72
794
728
....
1,522
303
1.219
3r
880
.3
877
756
....
1,633
1,408
225
4th
651
-198
453
1,934
....
2,387
1
578
PO9
1972
,
1st
2
d
153
-347
.194
342
321
469
495
-20
n
299
-639
-340
-2,376
....
-2,716
-119
?2.597
3rd
-277
-389
-666
472
...
?194
?1,564
1.37G
4th
-102
.705
-807
333
469
469
1973
? .
1st
462
N.A.
N.A.
6276
N.A.
N.A.
N.A.
N.A.
I. Converted at overage exchange rate t'or the pekkd. Therefore, because of weighting implicit in average annual exchange rater. quarterly
figures will not add to annual figures.
2. Including changes In commercW banks' foreign positions, uct errors and omissions, and for quarterly figures, net ecasoncl adjustment
on current account.
3. Adjusted for exchange valuation discrepancy on SDR allocation.
4. Including a payment to IL.F gold fund subscription.
S. Current accoutit balances have been seasonally adjusted
6. Including lor, term balance.
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United RieBdom: Ctn
Account Treads
Maus us S,
Current
Account
Balance
Net
Bass noe
Exports
f.o.b.
Imports
f.o.b.
Net
Balance
Govern-
meat
Services
Private
Senz:es
Interest,
Profs.
D vidends
Govern-
meat
Tran?ers
Private
Trsasfers
Year
1967
-867
-1,533
14,106
15,639
666
-7,i7
1,019
1,043
-518
-121
1968
-650
-1,555
15458
16,613
905
-689
1,351
804
430
-132
1969
1,066
-343
16,951
17,294
1,409
-696
1,455
1,193
425
-118
1970
1,651
29
18,943
18,914
1,622
-754
1,685
1,186
413
-82
1971
2,562
773
21,439
20,666
1,789
-804
1,974
1,141
-488
-34
1972
45
-1,730
22,844
24,574
1,775
-898
2,126
1,092
-520
-25
Quarter
(Seasonally
adjusted)
1971
1st
312
-149
4,781
4,930
461
-184
434
314
-103
2nd
722
283
5,433
5,155
439
-190
449
302
-112
-10
3rd
880
442
5,592
5,150
438
-220
524
276
-132
-10
4th
651
200
5,637
5,437
451
-210
570
246
-140
-15
1972
1st
153
-316
5,658
5,974
469
-220
552
232
-137
-8
2nd
299
-138
5994
6,132
437
-218
525
270
-132
-8
3rd
-277
-695
5,038
5,733
418
-230
521
254
-122
-5
4th
-102
-551
6,119
6.670
449
-227
525
284
-128
-5
1973
1st
-462
-882
6,440
7.322
420
NA.
NA.
NA.
NA.
NA.
1. Converted at a'.erage ct:hange rate or the Penod. Therefore, because of weighting anp cit m average annu.. ez apes, q not
add to the annual figures.
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United Kingdom: Capital Flow Trends
Million US S1
Long-
Term
I;abnce
Official
Long-
'term
Overseas
Investment
in the UK
Year
1967
-278
-162
1.140
1968
-307
38
1.399
1969
-252
-237
1.615
1^70
,547
489
1.752
1971
229
.666
2.708
1972
-2.093
-608
1.891
ttartcr
1971
lit
346
-108
994
211d
72
?105
686
3rd
-3
86
4 9
4th
? 198
-373
539
1972
lit
-347
-10')
563
2nd
-639
-101
330
3rd
-389
42
501)
4th
-705
-343
483
1973
lit
N.A.
N.A.
NA.
tither
UK Short- Foreign Exchange Sterling Net
Investment Term Currency Reserves Liabil- Trade Uniden-
Overseas Balance'- Borrowing in Sterling its Credit tified
-1.256 -702 33 -518 -2-64 -509 556
-1.-44 -2.426 74 432 -307 -607 -1,154
-1.630 970 -86 754 -128 -386 816 -:
-1.810 1.985 1.150 463 633 4S9 1__3
-1.813 5,077 1,207 1.738 1,723 -636 1;(}45
-3376 -1.115 1,193 775 220 -185 -2.678
-- -
...;
-54G 1,824 216 540 144 -120 1 ? ? 9
-509 612 372 672 -12 -300 -120
-396 775 ^5 237 588 105 -251
-364 1.882 529 278 1.030 -323 368
-801 596 293
52; 8 35 -264
-868 -2525 -343 92 -337 -140 -11.697
-856 531 448 -223 313
-845 187 740 388 1S9 -80 -1.050
NA. 6273 S.A. NA. NA. NA. NA.
1. Coo+rrtrd at ivcr4T ezct arrjs tarn far tItc lartiod. i?terrforr. txcausr oC retttlttntg trrrpitit m average am=al e,chatartr rates, qu rtezir not
ada to the annual fttut=s-
L lactudtnq esrnri and umtutoen (unnknttfted). but emctudiag txt xasoatl -,djuuments to cntrent WLOUnt in t~ t
3. In d v lonr'Iertn b ftroved For Release 2006/04/19 : CIA-RDP85T00875R0017OD 0046